VAN KAMPEN PRIME RATE INCOME TRUST, 497, 2000-12-01

VAN KAMPEN PRIME RATE INCOME TRUST
497, 2000-12-01

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

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

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

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

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

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

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

The Fund continuously offers its Shares through Van Kampen Funds Inc., as
principal underwriter, and through selected broker-dealers and financial
services firms, at a price per Share equal to net asset value. There is no
initial sales charge or underwriting discount on purchases of Shares. Van Kampen
Funds Inc. will pay the broker-dealers and financial services firms
participating in the continuous offering. The minimum initial investment is
$1,000. The minimum initial investment for tax sheltered retirement plans is
$250.

The Fund's investment adviser is Van Kampen Investment Advisory Corp. This
prospectus sets forth the information about the Fund that you should know before
investing. You should keep it for future reference. More information about the
Fund, including a Statement of Additional Information dated November 30, 2000,
has been filed with the Securities and Exchange Commission. This information is
available upon written or oral request without charge. The Fund's Statement of
Additional Information is incorporated herein by reference. You may get a copy
of it by calling 1-800-341-2911. A table of contents for the Statement of
Additional Information is on page 29. The SEC maintains a web site at
http://www.sec.gov that contains the Statement of Additional Information,
material incorporated by reference and other information about SEC registrants.

VAN KAMPEN FUNDS LOGO

THIS PROSPECTUS IS DATED NOVEMBER 30, 2000.
<PAGE> 2

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................... 3
Prospectus Summary.......................................... 4
Financial Highlights........................................ 7
The Fund.................................................... 8
Investment Objective and Policies........................... 8
Special Risk Considerations................................. 12
Investment Practices and Special Risks...................... 15
Taxation.................................................... 18
Management of the Fund...................................... 19
Distributions............................................... 20
Dividend Reinvestment Plan.................................. 20
Repurchase of Shares........................................ 21
Description of Common Shares................................ 23
Purchasing Shares of the Fund............................... 25
Communications With Shareholders............................ 27
Custodian, Dividend Disbursing and Transfer Agent........... 27
Legal Opinions.............................................. 27
Independent Auditors........................................ 27
Additional Information...................................... 28
Table of Contents for the Statement of Additional
Information............................................... 29
Appendix A.................................................. A-1
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISER OR VAN KAMPEN FUNDS INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

2
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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................................................ 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)............ 1.18%
Interest Payments on Borrowed Funds....................... 0.00%
Other Expenses............................................ 0.16%
----------
Total Annual Operating Expenses....................... 1.34%
</TABLE>

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

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

EXAMPLE

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

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming no tender of Shares................................ $14 $42 $73 $161
Assuming tender and repurchase of Shares on last day of
period and imposition of maximum applicable early withdrawal
charge...................................................... $44 $62 $83 $161
</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. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND THE FUND'S
ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

3
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PROSPECTUS SUMMARY
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This summary is qualified by reference to the more detailed information
included elsewhere in this Prospectus and in the Statement of Additional
Information.

THE FUND. Van Kampen Prime Rate Income Trust is a non-diversified, closed-end
management investment company. The Fund completed an initial public offering of
its common shares of beneficial interest in October, 1989. Since November, 1989
the Fund has continuously offered its Shares through Van Kampen Funds Inc.
("VKF") as principal underwriter. As of October 30, 2000, the Fund had
628,908,816 Shares outstanding and had net assets of $5,798,539,284.

THE OFFERING. The Fund continuously offers Shares through VKF and through
selected broker-dealers and financial services firms at net asset value. There
is no initial sales charge or underwriting discount on purchases of Shares. VKF
pays the broker-dealers and financial services firms participating in the
continuous offering. The minimum initial investment is $1,000 and minimum
subsequent investment is $100. The minimum initial investment for tax sheltered
retirement plans is $250.

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
Although the Fund seeks capital preservation, it is not a money market fund or
CD, and differs substantially from these products with respect to risks and
liquidity, among other factors. There is no assurance that the Fund will achieve
its investment objective. You should carefully consider the risks of investing
in the Fund. See "Special Risk Considerations."

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

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

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

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

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

4
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Fund has repurchased Shares every quarter since it began operations. The Fund
will impose an early withdrawal charge payable to VKF on most Shares accepted
for repurchase that have been held for less than five years. There is no
assurance that the Fund will in fact offer to repurchase any of its Shares. If
the Fund does offer to repurchase Shares there is no guarantee that all or any
Shares tendered will be purchased. The Fund may borrow to finance repurchases of
Shares. Borrowings entail additional risks.

INVESTMENT ADVISER. Van Kampen Investment Advisory Corp. (the "Adviser") is
the Fund's investment adviser. The Adviser also serves as investment adviser to
Van Kampen Senior Income Trust, a closed-end investment company listed on the
New York Stock Exchange, and to Van Kampen Senior Floating Rate Fund, a
closed-end investment company engaged in a continuous offering. These funds also
invest primarily in Senior Loans. As of October 30, 2000, the Fund together with
these funds had over $9.4 billion in managed assets. See "Management of the
Fund."

ADMINISTRATOR. VKF, the Fund's principal underwriter, also serves as the
Fund's Administrator (in such capacity, the "Administrator"). See "Management of
the Fund."

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

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

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

SPECIAL RISK CONSIDERATIONS

NO TRADING MARKET FOR SHARES. The Fund is a closed-end investment company
designed primarily for long-term investors and not as a trading vehicle. The
Fund does not intend to list the Shares for trading on any national securities
exchange. There is no secondary trading market for Shares. An investment in the
Shares is illiquid. If the Fund's Board of Trustees does not authorize the Fund
to repurchase its Shares, you will not be able to sell your Shares. Even if the
Fund does make repurchases, there is no guarantee that you will be able to sell
all of the Shares that you desire to sell.

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

Senior Loans are not listed on any national securities exchange or automated
quotation system and no active trading market exists for many Senior Loans. As a
result, many Senior Loans are illiquid, meaning that the Fund may not be able to
sell them quickly at a fair price. The market for illiquid securities is more
volatile than the market for liquid securities. The market could be disrupted in
the event of an economic downturn or a substantial increase or decrease in
interest rates. Although the Fund believes that investing in adjustable rate
Senior Loans should limit fluctuations in net asset value as a result of changes
in interest rates, extraordinary and sudden changes in interest rates could
nevertheless disrupt the market for Senior Loans and result in fluctuations in
the Fund's net asset value. However, many Senior Loans are of a large principal
amount and are held by a large number of owners. In the Adviser's opinion, this
should enhance their liquidity. In addition, in recent years the number of
institutional investors purchasing Senior Loans has increased. The risks of
illiquidity are particularly important when the Fund's operations require cash,
and may in certain circumstances require that the Fund borrow to meet short-term
cash requirements. Illiquid securities are also difficult to value. See
"Investment Objective and Policies."

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

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

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

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

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

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

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

6
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FINANCIAL HIGHLIGHTS (for one Share of the Fund outstanding throughout the
periods indicated)
--------------------------------------------------------------------------------

The following schedule presents financial highlights for one common share of the
Fund outstanding throughout the periods indicated. The financial highlights for
the fiscal year ended July 31, 2000 have been audited by Deloitte & Touche LLP,
independent auditors, and their report thereon appears in the Fund's related
Statement of Additional Information. The information for the fiscal year ended
July 31, 1999 and for the periods presented prior to July 31, 1999 were audited
by KPMG LLP. This information should be read in conjunction with the financial
statements and related notes included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $ 9.85 $ 9.98 $ 9.96 $ 10.00 $ 10.05 $ 10.05 $ 10.00
-------- -------- -------- -------- -------- -------- --------
Net Investment Income............. .68 .64 .68 .70 .73 .76 .62
Net Realized and Unrealized
Gain/Loss....................... (.36) (.13) .01 (.04) (.03) (.00) .01
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations........................ .32 .51 .69 .66 .70 .75 .63
-------- -------- -------- -------- -------- -------- --------
Less Distributions from Net
Investment Income................. .67 .64 .67 .70 .75 .76 .59
Distributions in Excess of Net
Investment Income............. -0- -0- -0- -0- -0- -0- -0-
-------- -------- -------- -------- -------- -------- --------
Total Distributions................ .67 .64 .67 .698 .75 .76 .58
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of Period..... $ 9.50 $ 9.85 $ 9.98 $ 9.96 $ 10.00 $ 10.05 $ 10.05
======== ======== ======== ======== ======== ======== ========
Total Return(2).................... 3.15% 5.23% 7.22% 6.79% 7.22% 7.82% 6.52%
Net Assets at End of Period (in
millions)......................... $6,458.0 $8,136.4 $7,312.9 $6,237.0 $4,865.8 $2,530.1 $1,229.0
Ratio of Expenses to Average Net
Assets............................ 1.34% 1.35% 1.41% 1.42% 1.46% 1.49% 1.53%
Ratio of Net Investment Income to
Average Net Assets................ 6.97% 6.48% 6.81% 7.02% 7.33% 7.71% 6.16%
Portfolio Turnover(3).............. 36% 44% 73% 83% 66% 71% 74%

<CAPTION>
YEAR ENDED JULY 31
-----------------------------
1993 1992 1991(1)
---- ---- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $ 10.00 $ 9.99 $ 10.08
-------- ------ -------
Net Investment Income............. .60 .70 .91
Net Realized and Unrealized
Gain/Loss....................... .01 .004 (.01)
-------- ------ -------
Total from Investment
Operations........................ .61 .70 .90
-------- ------ -------
Less Distributions from Net
Investment Income................. .60 .69 .91
Distributions in Excess of Net
Investment Income............. .002 -0- .012
-------- ------ -------
Total Distributions................ .60 .69 .92
-------- ------ -------
Net Asset Value, End of Period..... $ 10.00 $10.00 $ 9.99
======== ====== =======
Total Return(2).................... 6.17% 7.25% 9.41%
Net Assets at End of Period (in
millions)......................... $ 966.7 $928.3 $ 997.5
Ratio of Expenses to Average Net
Assets............................ 1.53% 1.55% 1.56%
Ratio of Net Investment Income to
Average Net Assets................ 5.96% 6.98% 8.91%
Portfolio Turnover(3).............. 67% 59% 41%
</TABLE>

----------------
(1) If certain expenses had not been assumed by the investment adviser in 1991,
total return would have been lower and the ratios would have been
as follows: Ratio of Expenses to Average Net Assets (Annualized) 1.58%; Ratio
of Net Investment Income to Average Net Assets
(Annualized) 8.89%.

(2) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at
the end of the period indicated, excluding payment of 3.00% imposed on most
shares accepted by the Trust for repurchase within the first year and
declining thereafter to 0.00% after the fifth year. If the withdrawal charge
were included, total return would be lower.

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

See Financial Statements and Notes to Financial Statements.

7
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THE FUND
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Van Kampen Prime Rate Income Trust (the "Fund") is a non-diversified,
closed-end management investment company. It was organized as a Massachusetts
business trust on July 14, 1989. It commenced investment operations on October
4, 1989 and on July 17, 1998 adopted its current name. The Fund completed an
initial public offering of its common shares of beneficial interest ("Shares")
in October, 1989. Since November, 1989, the Fund has continuously offered its
Shares through Van Kampen Funds Inc. ("VKF") as principal underwriter. The net
proceeds from the sale of the Shares will be invested in accordance with the
Fund's investment objective and policies or used for other operating purposes
contemplated by this prospectus. The Fund expects that it ordinarily will be
able to invest the net proceeds from the sale of Shares within approximately 30
days of receipt. The Fund's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555 and its telephone number is
1-800-421-5666.

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INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------

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

DESCRIPTION OF SENIOR LOANS

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

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

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

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

8
<PAGE> 9

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

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

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

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

The capital structure of a Borrower may include Senior Loans, senior and
junior subordinated debt, preferred stock and common stock. Senior Loans
typically have the most senior claim on Borrower's assets and common stock the
most junior claim. The proceeds of Senior Loans that the Fund will purchase
usually will be used by Borrowers to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes.

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

The Fund invests in a Senior Loan only if, in the Adviser's judgment, the
Borrower can meet its payment obligations. The Adviser performs its own
independent credit analysis of the Borrower in addition to utilizing information
prepared and supplied by the Agent or other Lenders. When evaluating a Borrower
the Adviser considers many factors, including the Borrower's past and future
projected financial performance. The Adviser also considers a Borrower's
management, collateral and industry. The Fund acquires a collateralized Senior
Loan only if the Adviser believes that the collateral coverage equals or exceeds
the outstanding principal amount of the Senior Loan. The Adviser continues to
monitor a
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<PAGE> 10

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

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

The following table sets forth the percentage of the Fund's net assets
invested in rated and unrated obligations (using the higher of Standard & Poor's
or Moody's Investors Service, Inc. rating categories), based on valuations as of
July 31, 2000:

<TABLE>
<S> <C>
Rated Obligations........................................... 69.5%
BBB/Baa: 1.9%; BB/Ba: 40.6%; B/B: 22.4%; CCC/Caa: 4.4%; D/D:
0.2%
Unrated Obligations......................................... 30.5%
</TABLE>

THE SENIOR LOAN PROCESS

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

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

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

The Fund may be required to pay and may receive various fees and commissions
in connection with purchasing, selling and holding interests in Senior Loans.
The fees normally paid by Borrowers include three primary types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to Lenders when
a Senior Loan is originated. Commitment fees are paid to Lenders on an ongoing
basis based on the unused portion of a Senior Loan commitment. Lenders may
receive prepayment penalties when a Borrower prepays a Senior Loan. The Fund
receives these fees directly from the Borrower if the Fund is an Original Lender
(as defined below) or, in the case of commitment fees and

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<PAGE> 11

prepayment penalties, if the Fund acquires an Assignment. Whether the Fund
receives a facility fee in the case of an Assignment, or any fees in the case of
a Participation, depends on negotiations between the Fund and the Lender selling
such interests. When the Fund buys an Assignment, it may be required to pay a
fee to the Lender selling the Assignment, or to forgo a portion of interest and
fees payable to the Fund. Occasionally, the assignor pays a fee to the assignee.
A person selling a Participation to the Fund may deduct a portion of the
interest and any fees payable to the Fund as an administrative fee. The Fund may
be required to pass along to a person that buys a Senior Loan from the Fund a
portion of any fees that the Fund is entitled to.

The Fund may have obligations under a Loan Agreement, including the obligation
to make additional loans in certain circumstances. The Fund intends to reserve
against such contingent obligations by segregating cash, liquid securities and
liquid Senior Loans as a reserve. The Fund will not purchase a Senior Loan that
would require the Fund to make additional loans if, as a result of such
purchase, all of the Fund's additional loan commitments in the aggregate would
exceed 20% of the Fund's total assets or would cause the Fund to fail to meet
the asset composition requirements set forth under the heading "Investment
Restrictions" in the Statement of Additional Information.

TYPES OF SENIOR LOAN INVESTMENTS

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

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

ASSIGNMENTS. The purchaser of an Assignment typically succeeds to all the
rights and obligations under the Loan Agreement of the assigning Lender and
becomes a Lender under the Loan Agreement. Assignments may, however, be arranged
through private negotiations, and the rights and obligations acquired by the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.

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

The Fund has taken the following measures in an effort to minimize these
risks. The Fund will only acquire Participations if the Lender selling the
Participation and any other persons positioned between the Fund and the Lender
(i) has, at the time of investment, outstanding debt or deposit obligations
rated investment grade by a rating agency or that are 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.

The Fund generally will not have the right to enforce compliance by the
Borrower with the Loan Agreement, nor rights to any funds acquired by other
Lenders through set-off against the Borrower. In addition, when the Fund holds a
Participation in a Senior Loan it may not have the right to vote on whether to
waive enforcement of any restrictive covenant breached by a Borrower. Lenders
voting in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund and may not consider the interests of
the Fund. The Fund may not benefit directly from the collateral supporting a
Senior Loan in which it has purchased the Participation, although Lenders that

11
<PAGE> 12

sell Participations generally are required to distribute liquidation proceeds
received by them pro rata among the holders of such Participations.

OTHER SENIOR DEBT SECURITIES. The Fund may invest up to 5% of its total
assets in certain senior debt securities that are in the form of notes 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 other 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 other Senior Loans of such Borrower. There may be no person
performing the role of the Agent for senior debt securities. As a result, the
Fund may be more dependent on the ability of the Adviser to monitor and
administer these Senior Loans. Senior debt securities will be treated as Senior
Loans for purposes of the Fund's policy of normally investing at least 80% of
its total assets in Senior Loans.

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

OTHER IMPORTANT INVESTMENT POLICIES

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

During normal market conditions, the Fund may invest up to 20% of its total
assets in high quality, short-term debt securities with remaining maturities of
one year or less. These may include commercial paper rated at least in the top
two rating categories, or unrated commercial paper considered by the Adviser to
be of similar quality; interests in short-term loans of Borrowers having
short-term debt obligations rated or a short-term credit rating at least in such
top two rating categories, or having no rating but determined by the Adviser to
be of comparable quality; certificates of deposit and bankers' acceptances; and
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. These securities may pay interest at adjustable rates or at
fixed rates. If the Adviser determines that market conditions temporarily
warrant a defensive investment policy, the Fund may invest, subject to its
ability to liquidate its relatively illiquid portfolio of Senior Loans, up to
100% of its assets in cash and such high quality, short-term debt securities.

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

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

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

12
<PAGE> 13

rather than on any available independent sources. As a result, the Fund is
particularly dependent on the analytical abilities of the Adviser.

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

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

Selling Lenders and other persons positioned between the Fund and the Borrower
will likely conduct their principal business activities in the banking, finance
and financial services industries. The Fund may be more at risk to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible to, among other things,
fluctuations in interest rates, changes in the Federal Open Market Committee's
monetary policy, governmental regulations concerning such industries and
concerning capital raising activities generally and fluctuations in the
financial markets generally.

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

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

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

The Fund may acquire Senior Loans of Borrowers that are experiencing, or are
more likely to experience, financial difficulty, including Senior Loans of
Borrowers that have filed for bankruptcy protection. Borrowers may have
outstanding debt obligations that are rated below investment grade. More
recently, rating agencies have begun rating Senior Loans, and Senior Loans in
the Fund's portfolio may themselves be rated below investment grade. The Fund
may invest a substantial portion of its assets in Senior Loans of Borrowers that
have outstanding debt obligations rated below investment

13
<PAGE> 14

grade or that are unrated but of comparable quality to such securities. Debt
securities rated below investment grade are viewed by the rating agencies as
speculative and are commonly known as "junk bonds." Senior Loans generally are
not rated at the time that the Fund purchases them. If a Senior Loan is rated at
the time of purchase, the Adviser may consider the rating when evaluating the
Senior Loan but, in any event, does not view ratings as a determinative factor
in investment decisions. As a result, the Fund is more dependent on the
Adviser's credit analysis abilities. Because of the protective terms of Senior
Loans, the Adviser believes that the Fund is more likely to recover more of its
investment in a defaulted Senior Loan than would be the case for most other
types of defaulted debt securities. The values of Senior Loans of Borrowers that
have filed for bankruptcy protection or that are experiencing payment difficulty
will reflect, among other things, the Adviser's assessment of the likelihood
that the Fund ultimately will receive repayment of the principal amount of such
Senior Loans, the likely duration, if any, of a lapse in the scheduled payment
of interest and repayment of principal and prevailing interest rates. As of
October 30, 2000, the Fund held in its portfolio and has reduced the value of 17
Senior Loans (the aggregate value of which represented approximately 5.5% of the
value of the Fund's net assets on such date) of Borrowers that were subject to
protection under the federal bankruptcy laws.

In the case of collateralized Senior Loans, there is no assurance that sale of
the collateral would raise enough cash to satisfy the Borrower's payment
obligation or that the collateral can or will be liquidated. In the event of
bankruptcy, liquidation may not occur and the court may not give Lenders the
full benefit of their senior positions. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Fund will be exposed to the risk
that the value of the collateral will not at all times equal or exceed the
amount of the Borrower's obligations under the Senior Loans. To the extent that
a Senior Loan is collateralized by stock in the Borrower or its subsidiaries,
such stock may lose all of its value in the event of bankruptcy of the Borrower.
Uncollateralized Senior Loans involve a greater risk of loss.

EQUITY SECURITIES AND JUNIOR DEBT SECURITIES. Warrants, equity securities and
junior debt securities have a subordinate claim on a Borrower's assets as
compared with Senior Loans. As a result, the values of warrants, equity
securities and junior debt securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans and thus may increase the volatility of the Fund's net
asset value.

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

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

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<PAGE> 15

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

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

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

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

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

The Fund may enter into interest rate swaps or purchase or sell interest rate
caps or floors. The Fund will not sell interest rate caps or floors that it does
not own. Interest rate swaps involve the exchange by the Fund with another party
of their respective obligations to pay or receive interest, e.g., an exchange of
an obligation to make floating rate payments for an 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

15
<PAGE> 16

the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The Fund will not enter into swaps, caps or floors if,
on a net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the Fund.

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

The successful use of swaps, caps and floors to preserve the rate of return on
a portfolio of financial instruments depends on the Adviser's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates in incorrect, the Fund's overall
performance would be worse than if it had not entered into any such
transactions. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.

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

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

16
<PAGE> 17

and would be required to be secured continuously by collateral, including cash,
cash equivalents or U.S. Treasury bills maintained on a current basis at an
amount at least equal to the market value of the financial instruments loaned.
The Fund would have the right to call a loan and obtain the financial
instruments loaned at any time on five days' notice. For the duration of a loan,
the Fund would continue to receive the equivalent of the interest paid by the
issuer on the financial instruments loaned and also would receive compensation
from the investment of the collateral. The Fund would not have the right to vote
any financial instruments having voting rights during the existence of the loan,
but the Fund could call the loan in anticipation of an important vote to be
taken among holders of the financial instruments or in anticipation of the
giving or withholding of their consent on a material matter affecting the
financial instruments. As with other extensions of credit, risks of delay in
recovery or even loss of rights in the collateral exist should the borrower of
the financial instruments fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
loans of this type justifies the attendant risk. The creditworthiness of firms
to which the Fund lends its portfolio holdings will be monitored on an ongoing
basis by the Adviser pursuant to procedures adopted and reviewed, on an ongoing
basis, by the Board of Trustees of the Fund. No specific limitation exists as to
the percentage of the Fund's assets which the Fund may lend.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interests or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a financial instrument at an agreed upon
price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the New York Stock Exchange. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreements are deemed to be collateralized loans of money by the Fund
to the seller. In evaluating whether to enter into a repurchase agreement, the
Adviser will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions 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
17
<PAGE> 18

the security back to the Fund at an agreed upon price on an agreed upon date.
The Fund will maintain in a segregated account with its custodian cash or liquid
securities in an amount sufficient to cover its obligations with respect to
reverse repurchase agreements. The Fund receives payment for such securities
only upon physical delivery or evidence of book entry transfer by its custodian.
Regulations of the SEC require either that securities sold by the Fund under a
reverse repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing described in the Statement of Additional Information under "Investment
Restrictions." The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.

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

The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). If the Fund so qualifies
and distributes each year to its shareholders at least 90% of its investment
company taxable income (including, among other things, interest and net
short-term capital gain, but not net capital gain, which is the excess of net
long-term capital gain over net short-term capital loss) in each year, and meets
certain other requirements, 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 gain 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 a 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 investment company taxable income
are taxable to shareholders as ordinary income, whether paid in cash or
reinvested in additional Shares. Distributions of the Fund's net capital gain
("capital gain dividends"), if any, are taxable to holders of 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 Shares and the amount received. If such Shares are
held as a capital asset, the gain or loss will be a capital gain or loss. 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 Shares pursuant to tender offers will be disclosed in the related
offering documents. Any loss recognized upon a taxable disposition of Shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such Shares. For
purposes of determining whether Shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.

Capital Gains Rates. The maximum tax rate applicable to net capital gain
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%.

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<PAGE> 19

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

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

BOARD OF TRUSTEES

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

THE ADVISER

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

Van Kampen is a diversified asset management company that administers more
than three million retail investor accounts, has extensive capabilities for
managing institutional portfolios, and has more than $100 billion under
management or supervision, as of September 30, 2000. Van Kampen has more than 50
open-end funds, 38 closed-end funds and more than 2,700 unit investment trusts
that are professionally distributed by leading financial advisers nationwide.

Morgan Stanley Dean Witter & Co. is a preeminent global financial services
firm that maintains leading market positions in each of its three primary
businesses: securities, asset management and credit services.

INVESTMENT ADVISORY AGREEMENT. Subject to the authority of the Board of
Trustees, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Adviser and the Fund requires the Adviser to supply
investment research and portfolio management. The Adviser's responsibilities
include, but are not limited to:

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

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

- furnishing offices, necessary facilities and equipment, and

- permitting the use of its officers and employees to serve without
compensation as Trustees and officers of the Fund.

For the services provided by the Adviser under the Advisory Agreement, the
Fund will pay the Adviser an annualized fee (accrued daily and paid monthly)
equal to the percentage of the Fund's average net assets shown in the table
below. The advisory fee is higher than the fees paid by most management
investment companies, although it is comparable to the 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>

The Adviser may in its sole discretion from time to time waive all or a
portion of the investment advisory fee or reimburse the Fund for all or a
portion of its other expenses.

PORTFOLIO MANAGEMENT. Howard Tiffen, Senior Vice President of the Adviser and
Vice President of the senior loan funds advised by the Adviser, is primarily
responsible for the day-to-day management of the Fund. Mr. Tiffen assumed
portfolio management responsibilities for the Fund in December 1999. Mr. Tiffen
also has primary responsibility for the

19
<PAGE> 20

day-to-day management of the portfolio of the Van Kampen Senior Floating Rate
Fund, a continuously offered closed end investment company, and Van Kampen
Senior Income Trust, a closed end investment company listed on the New York
Stock Exchange, both investing primarily in Senior Loans and having investment
objectives and policies substantially similar to those of the Fund. Mr. Tiffen
has over 25 years of investment experience and manages, as of October 30, 2000,
over $11.1 billion in senior loan assets for Van Kampen. Mr. Tiffen is also
Senior Vice President of Van Kampen Asset Management Inc. and Van Kampen
Management Inc. Prior to joining the Adviser, Mr. Tiffen was senior portfolio
manager for Pilgrim Investments' Senior Floating Rate Investment Management
business from 1995 to 1999, where he managed the Pilgrim Prime Rate Trust and
other structured senior loan portfolios. From 1982 to 1995, Mr. Tiffen held
positions in the lending and capital markets functions at Bank of America, and
its predecessor, Continental Bank. Mr. Tiffen received a bachelor's degree from
Northwestern University, Chicago, Illinois. He also is an associate of the
Chartered Institute of Bankers and a member of the Economic Club of Chicago.

THE ADMINISTRATOR. VKF, the Fund's principal underwriter, also serves as the
Fund's Administrator (in such capacity, the "Administrator"). Its principal
business address is 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555. The
Administrator is the parent company of the Adviser.

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement"), the Administrator (i) monitors
provisions of Loan Agreements and any Participations and Assignments and is
responsible for recordkeeping for Senior Loans; (ii) arranges for the printing
and dissemination of reports to holders of Shares; (iii) arranges for
dissemination of the Fund's proxy and any tender offer materials to holders of
Shares, and oversees the tabulation of proxies by the Fund's transfer agent;
(iv) negotiates the terms and conditions under which custodian services are
provided to the Fund and the fees to be paid by the Fund in connection
therewith; (v) negotiates the terms and conditions under which dividend
disbursing services are provided to the Fund, and the fees to be paid by the
Fund in connection therewith and reviews the provision of dividend disbursing
services to the Fund; (vi) provides the Fund's dividend disbursing agent and
custodian with such information as is required for them to effect payment of
dividends and distributions and to implement the Fund's dividend reinvestment
plan; (vii) makes such reports and recommendations to the Board of Trustees as
the Trustees reasonably request; and (viii) provides shareholder services to
holders or potential holders of the Fund's securities.

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

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

The Fund's present policy is to declare daily and pay monthly distributions to
holders of Shares of substantially all of the Fund's net investment income.
Distributions cannot be assured, and the amount of each monthly distribution is
likely to vary. The Fund's net capital gain, if any, generally will be
distributed at least annually. You may elect to have distributions automatically
reinvested in additional Shares. See "Dividend Reinvestment Plan."

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

You may choose to have your dividend and capital gain distributions reinvested
in additional Shares at net asset value (without a sales charge). If you do not
make this election, all distributions will be made in cash. You may withdraw
from the dividend reinvestment plan at any time by contacting the Plan Agent at
the address or telephone number listed below. Your withdrawal will become
effective for dividends and declarations that occur after, and have a record
date of at least ten days after, the Plan Agent's receipt of your notice to
withdraw from the dividend reinvestment plan.

All correspondence concerning the dividend reinvestment plan should be
directed to the State Street Bank and Trust Company, as Plan Agent, c/o Van
Kampen Investor Services Inc., P.O. Box 218256, Kansas City, MO 64121-8256.
Please call (800) 341-2911 between the hours of 7:00 a.m. and 7:00 p.m. Central
Time if you have questions regarding the Plan. See "Dividend Reinvestment Plan"
in the Statement of Additional Information.

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

20
<PAGE> 21

other distributions paid on Shares invested into shares of certain mutual funds
advised by the Adviser or its affiliates, so long as a pre-existing account for
such shares exists for the shareholder. A shareholder may call the phone numbers
shown above to obtain a list of the mutual funds available and to request
current prospectuses.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the distribution payment
date. Purchases may be made only if shares of the selected fund are available
for sale in the investor's state.
--------------------------------------------------------------------------------
REPURCHASE OF SHARES
--------------------------------------------------------------------------------
The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to repurchase Shares through a tender offer for all or a
portion of the Fund's then outstanding Shares. Such repurchases would be made at
the net asset value of the Shares on the expiration date of the tender offer.
Management of the Fund expects to recommend that the Board of Trustees approve
such repurchases quarterly. Although tender offers, if undertaken and completed,
will provide some liquidity for holders of the Shares, there is no assurance
that tender offers will in fact be undertaken or completed or, if completed,
that they will provide sufficient liquidity for all holders of Shares who may
desire to sell such Shares. As such, investment in the Shares should be
considered illiquid. As of the date of this Prospectus, the Fund has commenced
and consummated tender offers in each quarter since the commencement of
investment operations. An early withdrawal charge payable to VKF will be imposed
on most Shares accepted for tender by the Fund which have been held for less
than five years, as described below.

Although the Board of Trustees believes that tender offers for the Shares
generally would increase the liquidity of the Shares, the repurchase of Shares
by the Fund will decrease the total assets of the Fund and, therefore, increase
the Fund's expense ratio. Because of the nature of the Fund's portfolio, the
Adviser anticipates potential difficulty in disposing of portfolio securities in
order to consummate tender offers for the Shares. As a result, the Fund may be
required to increase the amount of its portfolio invested in cash or short-term
investments in anticipation of tender offers or borrow money in order to finance
repurchases. Cash and short-term investments generally produce a lower return
than investment in Senior Loans and borrowing involves costs and expenses.

Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Fund cannot accept tenders if (1) in
the reasonable judgment of the Trustees, there is not sufficient liquidity of
the assets of the Fund; (2) such transactions, if consummated, would (a) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's taxable income to be taxed at
the Fund level, as more fully described in "Taxation") or (b) result in a
failure to comply with applicable asset coverage requirements; or (3) there is,
in the Board of Trustees' reasonable judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on any United States national securities
exchange or in the over-the-counter market, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States or New York State, (d) limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition which would have a
material adverse effect on the Fund or the holders of its Shares if Shares were
repurchased. The Trustees may modify these conditions in light of experience.
Any tender offer made by the Fund for its Shares will be at a price equal to the
net asset value of the Shares determined at the close of business on the day the
offer ends.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Shares, to borrow money in an amount up to 33 1/3% of the Fund's
total assets, for the purpose of, among other things, obtaining short-term
credits in connection with tender offers by the Fund for Shares. In this
connection, the Fund may issue notes or other evidence of indebtedness or secure
any such borrowings by mortgaging, pledging or otherwise subjecting as security
the Fund's assets. Under the requirements of the 1940 Act, the Fund, immediately
after any such borrowing, must have an "asset coverage" of at least 300%. With
respect to any such borrowing, asset coverage means the ratio which the value of
the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of such borrowing by the Fund. The rights of lenders to the
Fund to receive interest on and repayment of principal of any such borrowings
will be senior to those of the holders of Shares, and the terms of any such
borrowings may

21
<PAGE> 22

contain provisions which limit certain activities of the Fund, including the
payment of dividends to holders of Shares in certain circumstances. Further, the
terms of any such borrowing may and the 1940 Act does (in certain circumstances)
grant to the lenders to the Fund certain voting rights in the event of default
in the payment of interest on or repayment of principal. In the event that such
provisions would impair the Fund's status as a regulated investment company, the
Fund, subject to its ability to liquidate its relatively illiquid portfolio,
intends to repay the borrowings. Any borrowing will likely rank senior to or
pari passu with all other existing and future borrowings of the Fund. Interest
payments and fees incurred in connection with borrowings will reduce the amount
of net income available for payment to the holders of Shares. The Fund does not
intend to use borrowings for long-term financial leverage purposes. Accordingly,
the Fund will not purchase additional portfolio securities at any time that
borrowings, including the Fund's commitments, pursuant to reverse repurchase
agreements, exceed 5% of the Fund's total assets (after giving effect to the
amount borrowed).

The Fund has entered into a Third Amendment and Restatement of Credit
Agreement, dated as of September 13, 2000 (the "Credit Agreement") among the
Fund and Van Kampen Senior Floating Rate Fund, as borrowers, the banks party
thereto (the "Financial Institutions"), and Bank of America, N.A. ("BofA"), as
agent, pursuant to which the Financial Institutions have committed to provide a
joint credit facility of up to $500,000,000 to the Fund and Van Kampen Senior
Floating Rate 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 Shares pursuant to any tender offer that the
Fund may make. The credit facility provided pursuant to the Credit Agreement
will terminate on September 12, 2001, unless extended by its terms. As of the
date of this Prospectus, the Fund has not drawn any of the funds available under
the Credit Agreement. See "Repurchase of Shares" in the Statement of Additional
Information.

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

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

EARLY WITHDRAWAL CHARGE. An early withdrawal charge designed to recover
offering expenses will be charged in connection with most Shares held for less
than five years which are accepted by the Fund for repurchase pursuant to tender
offers. The early withdrawal charge will be imposed on a number of Shares
accepted for cash tender from a record holder of Shares the value of which
exceeds the aggregate value at the time the tender is accepted of (a) all Shares
owned by such holder that were purchased more than five years prior to such
acceptance, (b) all Shares owned by such holder that were acquired through
reinvestment of distributions, and (c) the increase, if any, of value of all
other Shares owned by such holder (namely those purchased within the five years
preceding the acceptance) over the purchase price of such Shares. The early
withdrawal charge will be paid to VKF. For the fiscal years ended July 31, 1998,
1999 and 2000, VKF received payments totalling $16,169,200, $13,808,700 and
$21,203,800 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

22
<PAGE> 23

offer would be made from the earliest purchase of Shares. Any early withdrawal
charge which is required to be imposed will be made in accordance with the
following schedule.

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

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

The prospectus for each VK Fund describes its investment objectives and
policies. Shareholders can obtain, without charge, a prospectus by calling
1-800-341-2911 and should consider these objectives and policies carefully
before requesting an exchange. Tendering shareholders may purchase Class B
Shares of a VK Fund only if shares of such VK Fund are available for sale, and
shareholders establishing a new Class B Share account of a VK Fund must invest
net tender proceeds from Shares which have a value at or above the new account
minimum of such VK Fund. An exchange is still deemed to be a tender of Shares
causing a taxable event and may result in a taxable gain or loss for tendering
shareholders.
--------------------------------------------------------------------------------
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"). In connection with the
offering of 250,000,000 common shares pursuant to this Prospectus, the Fund
incurred and expensed approximately $847,245, in registration fees and other
expenses of issuance and distribution. The Declaration of Trust provides that
the Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of Shares. The
Declaration of Trust also authorizes the Fund to borrow money or otherwise
obtain credit and in this connection issue notes or other evidence of
indebtedness. The Fund does not intend to hold annual meetings of the holders of
Shares.

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

23
<PAGE> 24

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

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

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------- -------- --------
<S> <C> <C>
September 30, 2000.......................................... $ 9.52 $ 9.35
June 30, 2000............................................... 9.56 9.50
March 31, 2000.............................................. 9.71 9.56

December 31, 1999........................................... $ 9.78 $ 9.70
September 30, 1999.......................................... 9.90 9.78
June 30, 1999............................................... 9.93 9.89
March 31, 1999.............................................. 9.93 9.91

December 31, 1998........................................... 9.98 9.91
September 30, 1998.......................................... 9.98 9.93
June 30, 1998............................................... 9.99 9.96
March 31, 1998.............................................. 9.99 9.96

December 31, 1997........................................... $ 9.98 $ 9.96
September 30, 1997.......................................... 9.98 9.96
June 30, 1997............................................... 9.98 9.97
March 31, 1997.............................................. 9.99 9.97

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>

24
<PAGE> 25

As of October 30, 2000, the net asset value per Share was $9.22. The following
table sets forth certain information with respect to the Shares as of October
30, 2000:

<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 0 629,175,641
</TABLE>

To the knowledge of the Fund, as of October 30, 2000, no person held 5% or
more of the Fund's Shares either beneficially or of record, except that Van
Kampen Trust Company, 2800 Post Oak Blvd., Houston, TX 77056, owned of record
6.682%. Further, as of such date, officers and trustees of the Fund as a group
owned less than 1% of the Shares.

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

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

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

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

The Fund offers continuously its Shares through VKF, the principal
underwriter, whose offices are located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555. The Shares will also be offered through members of the
National Association of Securities Dealers, Inc. ("NASD") or eligible non-NASD
members who are acting as brokers or agents for investors ("broker-dealers").
The Fund reserves the right to terminate or suspend the continuous offering of
its Shares at any time without prior notice.

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

The Shares will be offered by the Fund at the public offering price next
computed after the Fund receives the order. Because the Fund determines the
public offering price once daily on each business day as of 5:00 p.m. Eastern
time, orders placed through an investor's broker-dealer must be transmitted to
the Fund by the broker-dealer prior to such time for the investor's order to be
executed at the public offering price to be determined that day. Payment for
Shares purchased directly through the Fund's shareholder service agent
ordinarily must be received at the time the order is placed.

25
<PAGE> 26

Shareholders purchasing Shares through their broker-dealers should consult with
such broker-dealers concerning payment requirements. Any change in price due to
the failure of the Fund to receive an order prior to such time must be settled
between the investor and the broker-dealer placing the order. The public
offering price is equal to the net asset value per Share. There will be no
initial sales charge or underwriting discount on purchases of Shares.

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

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

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

The Fund has agreed to indemnify VKF and hold VKF harmless against, or
contribute to losses arising out of, certain liabilities, including liabilities
under the Securities Act of 1933, as amended, except for any liability to the
Fund or its security holders to which VKF would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by its reckless disregard of its obligations and duties under its
agreement with the Fund.

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 VKF. Once the transfer agent has
received this application, such investor's checking account at his designated
bank will be debited each month in the amount authorized by such investor to
purchase shares of the Fund. Once enrolled in the Automatic Investment Program,
an investor may change the monthly amount or terminate participation at any time
by writing the transfer agent. Investors in the automatic investment program
will receive a confirmation of these transactions from the Fund quarterly and
their regular bank account statements will show the debit transaction each
month.

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

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

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

26
<PAGE> 27

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

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

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

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications and may include information regarding other short
term money market rates, including, but not limited to, the Prime Rate quoted by
U.S. money center commercial bank(s), the three-month Treasury Bill Rate and/or
the three-month London Inter-Bank Offered Rate from creditworthy international
bank(s).

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
Share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per Share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.

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

State Street Bank and Trust Company, 225 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 218256, Kansas City, Missouri 64121-8256 is the
dividend disbursing and transfer agent of the Fund.
--------------------------------------------------------------------------------
LEGAL OPINIONS
--------------------------------------------------------------------------------

Certain legal matters in connection with the Shares offered hereby have been
passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP.
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS
--------------------------------------------------------------------------------

The financial statements for the period ended July 31, 2000, included in the
Statement of Additional Information, have been so included in reliance on the
report of Deloitte & Touche LLP, independent auditors, given on the authority of
said firm as experts in auditing and accounting.

27
<PAGE> 28

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

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

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

28
<PAGE> 29

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B- 2
Investment Restrictions..................................... B- 2
Trustees and Officers....................................... B- 4
Portfolio Transactions...................................... B- 8
Management of the Fund...................................... B- 9
Dividend Reinvestment Plan.................................. B-10
Net Asset Value............................................. B-11
Taxation.................................................... B-12
Repurchase of Shares........................................ B-15
Independent Auditors........................................ B-17
Report of Independent Auditors.............................. F-1
Audited Financial Statements for the Year Ended July 31,
2000...................................................... F-2
Notes to Audited Financial Statements....................... F-32
</TABLE>

29
<PAGE> 30

APPENDIX A

MOODY'S INVESTORS SERVICE

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

1. LONG-TERM DEBT

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

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

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

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

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

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

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

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

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

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

2. SHORT-TERM DEBT

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

A-1
<PAGE> 31

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

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

-- Leading market positions in well-established industries.

-- High rates of return on funds employed.

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

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

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

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

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

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

STANDARD & POOR'S

A Standard & Poor's ("S&P") issue credit rating is a current opinion of the
credit worthiness of an obligor with respect to a specific obligation. This
opinion may take into consideration obligors such as guarantors, insurers, or
lessees. The credit rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

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

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

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

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.

INVESTMENT GRADE

AAA An obligation rated 'AAA' has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

A An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

A-2
<PAGE> 32

BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

SPECULATIVE GRADE

Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

B An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

CC An obligation rated 'CC' is currently highly vulnerable to nonpayment.

C A subordinated debt or preferred stock obligation rated 'C' is currently
highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A 'C' also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.

D An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

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

N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.

COMMERCIAL PAPER RATING DEFINITIONS

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. Ratings are
graded into several categories, ranging from 'A-1' for the highest quality
obligations to 'D' for the lowest. These categories are as follows:

A-1 A short-term obligation rated 'A-1' is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.

A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

A-3
<PAGE> 33

A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.

C A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.

D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

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

A-4
<PAGE> 34

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 VAN KAMPEN INVESTOR
SERVICES, INC.'S TOLL FREE
NUMBER--1-800-231-7166

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-421-2833

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-847-2424
VAN KAMPEN PRIME RATE INCOME TRUST
1 Parkview Plaza
Oakbrook Terrace, IL 60181-5555

Investment Adviser

VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
Oakbrook Terrace, IL 60181-5555

Principal Underwriter

VAN KAMPEN FUNDS INC.
1 Parkview Plaza
Oakbrook Terrace, IL 60181-5555

Dividend Disbursing and Transfer Agent

VAN KAMPEN INVESTOR
SERVICES INC.
P.O. BOX 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Prime Rate Income Trust

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 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 Auditors

Deloitte & Touche LLP
180 North Stetson
Chicago, IL 60601
<PAGE> 35

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

VAN KAMPEN
PRIME RATE
INCOME TRUST

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

P R O S P E C T U S

NOVEMBER 30, 2000

[VAN KAMPEN FUNDS LOGO]
PRIT PRO 11/00
<PAGE> 36

VAN KAMPEN
PRIME RATE INCOME TRUST

STATEMENT OF ADDITIONAL INFORMATION

Van Kampen Prime Rate Income Trust (the "Fund") is a non-diversified,
closed-end management investment company whose investment objective is to
provide a high level of current income, consistent with preservation of capital.
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the Prospectus for the Fund dated November 30, 2000 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling 1-800-341-2911, or for Telecommunications Device for the Deaf,
1-800-421-2833. This Statement of Additional Information incorporates by
reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B-2
Investment Restrictions..................................... B-2
Trustees and Officers....................................... B-4
Portfolio Transactions...................................... B-8
Management of the Fund...................................... B-9
Dividend Reinvestment Plan.................................. B-10
Net Asset Value............................................. B-11
Taxation.................................................... B-12
Repurchase of Shares........................................ B-15
Independent Auditors........................................ B-17
Report of Independent Auditors.............................. F-1
Audited Financial Statements for the Year Ended July 31,
2000...................................................... F-2
Notes to Audited Financial Statements....................... F-32
</TABLE>

The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED NOVEMBER 30, 2000.

PRIT SAI 11/00

B-1
<PAGE> 37

INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK CONSIDERATIONS

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans. Although the Fund's net asset value
will vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans should minimize the fluctuations in the Fund's net asset value as a
result of changes in interest rates. The Fund's net asset value may be affected
by changes in the credit quality of Borrowers 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. For further discussion of the characteristics of Senior Loan
interests and associated special risk considerations, see "Investment Objective
and Policies" and "Special Risk Considerations" in the Prospectus.

INVESTMENT RESTRICTIONS

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

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets would then be invested
in securities of a single issuer or if as a result the Fund would hold
more than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer. For
purposes of this restriction, the term issuer includes both the Borrower
under a Loan Agreement and the Lender selling a Participation to the Fund
together with any other persons interpositioned between such Lender and
the Fund with respect to a Participation.

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

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

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

B-2
<PAGE> 38

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

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

7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Fund.

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

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

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

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

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

For purposes of investment restriction number 2, the Fund has adopted
supplementally a more restrictive non-fundamental investment policy that in
effect changes the phrase "more than 25%" to "25% or more." For purposes of
investment restriction number 2 and the supplement just described, the Fund will
consider all relevant factors in determining whether to treat the Lender selling
a Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders.

FUND STRUCTURE. The Fund's fundamental investment policies and restrictions
give the Fund the flexibility to pursue its investment objective through a fund
structure commonly known as a "master-feeder" structure. If the Fund converts to
a master-feeder structure, the existing shareholders of the Fund would continue
to hold their shares of the Fund and the Fund would become a feeder-fund of the
master-fund. The value of a shareholder's shares would be the same immediately
after any conversion as the value immediately before such conversion. Use of
this master-feeder structure potentially would result in increased assets
invested among the collective investment vehicle of which the Fund would be a
part, thus allowing operating expenses to be spread over a larger asset base,
potentially achieving economies of scale. The Fund's Board of Trustees presently
does not intend to affect any conversion of the Fund to a master-feeder
structure.

B-3
<PAGE> 39

TRUSTEES AND OFFICERS

The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five (5) years and their affiliations, if
any, with Van Kampen Investments Inc. ("Van Kampen"), Van Kampen Investment
Advisory Corp. (the "Adviser"), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc., the distributor of the Fund's shares
("VKF"), Van Kampen Management Inc., Van Kampen Advisors Inc., Van Kampen
Investor Services Inc., Van Kampen Insurance Agency of Illinois Inc., Van Kampen
Insurance Agency of Texas Inc., Van Kampen Recordkeeping Services Inc., American
Capital Contractual Services, Inc., Van Kampen Trust Company and Van Kampen
Exchange Corp. The Adviser and Asset Management sometimes are referred to herein
collectively as the "Advisers." For purposes hereof, the term "Fund Complex"
currently consists of 39 investment companies (including the Fund) advised by
the Adviser or its affiliates that have the same members on each investment
company's Board of Trustees. Unless otherwise noted the address of each of the
Trustees and Officers is 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL
60181-5555.

RICHARD F. POWERS III,* DATE OF BIRTH 02/02/46, AGE: 54, CHAIRMAN OF THE BOARD,
PRESIDENT AND TRUSTEE. Chairman, President and Chief Executive Officer of Van
Kampen Investments. Chief Sales and Marketing Officer, Morgan Stanley Dean
Witter Asset Management. Chairman, Director and Chief Executive Officer of the
Advisers, VKF, Van Kampen Advisors, Inc. and Van Kampen Management Inc. Director
and Officer of certain other subsidiaries of Van Kampen Investments.
Trustee/Managing General Partner, President and Chairman of the Board of each of
the funds in the Fund Complex. Trustee/Director and President of other
investment companies advised by the Advisers and their affiliates, and Chief
Executive Officer of Van Kampen Exchange Fund. Prior to May 1998, Executive Vice
President and Director of Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty. Prior to 1996, Director of
Dean Witter Reynolds Inc.

THEODORE A. MYERS, DATE OF BIRTH 08/03/30, AGE: 70, TRUSTEE. Mr. Myers is a
financial consultant. Prior to 1998, he was Senior Financial Advisor and prior
to 1997, Executive Vice President, Chief Financial Officer and a Director of
Qualitech Steel Corporation, a producer of high quality engineered steel for
automotive, transportation and capital goods industries. Mr. Myers is a Director
of COVA Series Trust of COVA Financial Life Insurance (formerly known as Xerox
Life). Prior to 1997, Mr. Myers was a Director of McClouth Steel and a member of
the Arthur Andersen Chief Financial Officer Advisory Committee. Mr. Myers is
also a Trustee/Managing General Partner of each of the funds in the Fund
Complex. His address is 550 Washington Avenue, Glencoe, Illinois 60022.

ROD DAMMEYER, DATE OF BIRTH 11/05/40, AGE: 60, TRUSTEE. Mr. Dammeyer is Vice
Chairman and Director of Anixter International Inc., the world-leading
communication products distribution company (employed by Anixter since 1985). He
is also a member of the Board of Directors of TeleTech Holdings Inc.,
Stericycle, Inc., GATX Corporation effective October 22, 1999, IMC Global Inc.
and Antec Corporation. Prior to July 2000, Mr. Dammeyer was a Managing Partner
of Equity Group Corporate Investments (EGI), a company that makes private equity
investments in other companies and a member of the Board of Trustees of Allied
Riser Communications Corporation, Matria Healthcare, Inc., Transmedia Networks,
Inc., CNA Surety, Corp. and Groupo Azcarero Mexico (GAM). Prior to April 1999,
Mr. Dammeyer was a Director of Metal Management, Inc. Prior to 1998, Mr.
Dammeyer was a Director of Lukens, Inc., Capsure Holdings Corp., Revco D.S.,
Inc., the Chase Manhattan Corporation National Advisory Board and Sealy, Inc.
Prior to 1997, Mr. Dammeyer was President, Chief Executive Officer and a
Director of Great American Management & Investment, Inc., a diversified
manufacturing company, and a Director of Falcon Building Products, Inc. Mr.
Dammeyer is also a Trustee/Managing Partner of each of the funds in the Fund
Complex. His address is Two North Riverside Plaza, Suite 600 Chicago, IL 60606.

DAVID C. ARCH, DATE OF BIRTH 07/17/45, AGE: 55, TRUSTEE. Mr. Arch is Chairman
and Chief Executive Officer of Blistex Inc., a consumer health care products
manufacturer, and Director of the World Presidents Organization -- Chicago
Chapter. Mr. Arch is also a Trustee/Managing General Partner of each of the
funds in the Fund Complex. His address is 1800 Swift Drive, Oak Brook, Illinois
60523.

HOWARD J KERR, DATE OF BIRTH 11/17/35, AGE: 65, TRUSTEE. Prior to 1998, Mr.
Kerr was President and Chief Executive Officer of Pocklington Corporation, Inc.,
an investment holding company. Mr. Kerr is a Director of
B-4
<PAGE> 40

Canbra Foods, Ltd., a Canadian oilseed crushing, refining, processing and
packaging operation and the Marrow Foundation. Mr. Kerr is a Trustee/Managing
General Partner of each of the funds in the Fund Complex. His address is 736
North Western Ave., P.O. Box 317, Lake Forest, Illinois 60045.

HUGO F. SONNENSCHEIN, DATE OF BIRTH 11/14/40, AGE: 60, TRUSTEE. Mr.
Sonnenschein is the Charles L. Hutchinson Distinguished Service Professor in the
Department of Economics at the University of Chicago. He is also a visiting
Professor in the Department of Economics at Princeton University for the Fall
2000 semester. He was President of the University of Chicago until June 2000 and
now holds the title President Emeritus and Honorary Trustee of the University.
Mr. Sonnenschein is a member of the Board of Trustees of the University of
Rochester and a member of its investment committee. Mr. Sonnenschein is a member
of the National Academy of Sciences and a fellow of the American Academy of Arts
and Sciences. Mr. Sonnenschein is also a Trustee/Managing General Partner of
each of the funds in the Fund Complex. His address is 5801 South Ellis Avenue,
Suite 502, Chicago, Illinois 60637.

WAYNE W. WHALEN,* DATE OF BIRTH 08/22/39, AGE: 61, TRUSTEE. Mr. Whalen is a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom (Illinois),
legal counsel to each of the funds in the Fund Complex and other investment
companies advised by the Adviser or its affiliates. He is a Trustee/Managing
General Partner of each of the funds in the Fund Complex. He is a
Trustee/Director of other funds advised by the Adviser or its affiliates. His
address is 333 West Wacker Drive, Chicago, Illinois 60606.

A. THOMAS SMITH III, DATE OF BIRTH 12/14/56, AGE: 43, VICE PRESIDENT AND
SECRETARY. Mr. Smith is Executive Vice President, General Counsel, Secretary
and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc.,
Van Kampen Management Inc., VKF, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping Services Inc., Investor
Services, Van Kampen Insurance Agency of Illinois Inc. and Van Kampen System
Inc. Vice President and Secretary of each of the funds in the Fund Complex and
Vice President and Secretary/Vice President, Principal Legal Officer and
Secretary of other investment companies advised by the Advisers or their
affiliates. Prior to January 1999, Vice President and Associate General Counsel
to New York Life Insurance Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to December 1993, Assistant
General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior
Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of Investment Management,
Office of Chief Counsel.

MICHAEL H. SANTO, DATE OF BIRTH 10/22/55, AGE: 45, VICE PRESIDENT. Mr. Santo is
Executive Vice President, Chief Administrative Officer and Director of Van
Kampen Investments, the Advisers, VKF, Van Kampen Advisors Inc., Van Kampen
Management Inc. and Van Kampen Investor Services Inc., and serves as a Director
or Officer of certain other subsidiaries of Van Kampen Investments. Vice
President of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers and their affiliates. Prior to 1998, Senior
Vice President and Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994. From 1990-1994, First
Vice President and Assistant Controller in Dean Witter's Controller's
Department.

STEPHEN L. BOYD, DATE OF BIRTH 11/16/40, AGE: 60, EXECUTIVE VICE PRESIDENT AND
CHIEF INVESTMENT OFFICER. Mr. Boyd is Executive Vice President and Chief
Investment Officer of Van Kampen, and President and Chief Operating Officer of
the Advisers. He is Executive Vice President and Chief Investment Officer of
each of the funds in the Fund Complex and certain other investment companies
advised by the Advisers or their affiliates. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity Investments of the Advisers.
Prior to October 1998, Vice President and Senior Portfolio Manager with AIM
Capital Management, Inc. Prior to February 1998, Senior Vice President and
Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Investment Advisory Corp. and Van Kampen American
Capital Management, Inc. Mr. Boyd is located at 2800 Post Oak Blvd., Houston, TX
77056.

RICHARD A. CICCARONE, DATE OF BIRTH 06/15/52, AGE: 48, VICE PRESIDENT. Mr.
Ciccarone is Senior Vice President and Co-head of the Fixed Income Department of
the Advisers, Van Kampen Management Inc. and Van Kampen Advisors Inc. He is Vice
President of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers or their affiliates. Prior to May 2000, he
served as Co-head of
B-5
<PAGE> 41

Municipal Investments and Director of Research of the Advisers, Van Kampen
Management Inc. and Van Kampen Advisors Inc. Mr. Ciccarone first joined the
Adviser in June 1983, and worked for the Adviser until May 1989, with his last
position being a Vice President. From June 1989 to April 1996 he worked at
EVEREN Securities (formerly known as Kemper Securities), with his last position
at EVEREN being as Executive Vice President. Since April 1996, Mr. Ciccarone has
been a Senior Vice President of the Advisers, Van Kampen Management Inc. and Van
Kampen Advisors Inc.

JOHN R. REYNOLDSON, BIRTH DATE 05/15/53, AGE: 47, VICE PRESIDENT. Mr.
Reynoldson is Senior Vice President and Co-head of the Fixed Income Department
of the Advisers, Van Kampen Management Inc. and Van Kampen Advisors Inc. He is
Vice President of each of the funds in the fund Complex and certain other
investment companies advised by the Advisers or their affiliates. Prior to May
2000, he managed the investment grade taxable group for the Adviser since July
1999. From July 1988 to June 1999, he managed the government securities bond
group for Asset Management. Mr. Reynoldson has been with Asset Management since
April 1987, and has been a Senior Vice President of Asset Management since July
1988. He has been a Senior Vice President of the Adviser and Van Kampen
Management Inc. since June 1995 and Senior Vice President of Van Kampen Advisors
Inc. since June 2000.

HOWARD TIFFEN, DATE OF BIRTH 04/21/48, AGE: 52, VICE PRESIDENT. Mr. Tiffen is
Senior Vice President of the Advisers, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Senior Vice President and Director of Senior Loans of the Adviser,
and is primarily responsible for the day-to-day management of the Senior Loan
funds advised by the Adviser since December 1999. Prior to December 1999, Mr.
Tiffen was senior portfolio manager for Pilgrim Investments' Senior Floating
Rate Investment Management business from 1995 to 1999, where he managed the
Pilgrim Prime Rate Trust and other structured senior loan portfolios. From 1982
to 1995, Mr. Tiffen held positions in the lending and capital markets functions
at Bank of America and its predecessor, Continental Bank.

JOHN H. ZIMMERMANN, III, DATE OF BIRTH 11/25/57, AGE: 43, VICE PRESIDENT. Mr.
Zimmermann is Senior Vice President and Director of Van Kampen, President and
Director of VKF and President of Van Kampen Insurance Agency of Illinois Inc. He
is Vice President of each of the funds in the Fund Complex. From November 1992
to December 1997, Senior Vice President of VKF.

JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, AGE: 45, VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND TREASURER. Mr. Sullivan is Senior Vice President of Van
Kampen Investments and the Advisers. Vice President, Chief Financial Officer and
Treasurer of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers or their affiliates for the last five years.

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

The officers and Trustees hold the same positions with other funds in the Fund
Complex. The officers and Trustees as a group own less than 1% of the Fund's
outstanding Shares. The compensation of the officers and trustees who are
affiliated persons (as defined in the 1940 Act) of the Adviser, VKF or Van
Kampen is paid by the respective entity. The Fund pays the compensation of all
other officers and trustees of the Fund. Funds in the Fund Complex, including
the Fund, pay the Trustees who are not affiliated persons of the Adviser, VKF or
Van Kampen, an annual Fund Complex retainer (generally equal to the product of
$2,500 times the number of funds in the Fund Complex), which retainer is then
allocated among the funds in the Fund Complex based on their relative net
assets, and $250 per fund per meeting of the Board of Trustees, as well as
reimbursement of expenses incurred in connection with such meetings. Under the
Fund's retirement plan, trustees who are not affiliated with the Adviser, VKF or
Van Kampen, have at least ten years of service (including years of service prior
to adoption of the retirement plan) and retire at or after attaining the age of
60, are eligible to receive a retirement benefit equal to $2,500 for each of the
ten years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, VKF or Van
Kampen can elect to defer receipt of all or a portion of the trustee's fees
earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
funds in the Fund Complex selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other funds in the Fund
Complex in order to match the deferred compensation

B-6
<PAGE> 42

obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund. Subject to certain exceptions and limitations, as fully described in
Section 5.3 of the Fund's Declaration of Trust on file with the SEC, the Fund
indemnifies every Trustee and officer of the Fund against liabilities and
expenses reasonably incurred or paid in connection with any claim, action, suit
or proceeding in which he becomes involved by virtue of his being or having been
a Trustee or officer. Such indemnification is unavailable for any Trustee or
officer who is deemed to have engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of his duties or to not have acted in good
faith in the reasonable belief that his action was in the best interest of the
Fund.

COMPENSATION TABLE

<TABLE>
<CAPTION>
FUND COMPLEX
--------------------------------------------------------------
TOTAL
AGGREGATE ESTIMATED AGGREGATE COMPENSATION
YEAR OF COMPENSATION PENSION OR RETIREMENT ESTIMATED AGGREGATE BEFORE DEFERRAL
ELECTION/ BEFORE DEFERRAL BENEFITS ACCRUED ANNUAL BENEFITS FROM THE
NAME(1) APPOINTMENT FROM THE FUND(2) AS PART OF EXPENSES(3) UPON RETIREMENT(4) FUND COMPLEX(5)
------- ----------- ---------------- ---------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
David C. Arch......... 1989 $43,088 $12,579 $95,000 $153,250
Rod Dammeyer.......... 1989 43,088 22,866 95,000 153,250
Howard J Kerr......... 1992 43,088 44,415 94,000 153,250
Theodore A. Myers..... 1989 43,088 81,668 81,750 153,250
Hugo F.
Sonnenschein........ 1994 43,088 22,642 95,000 153,250
Wayne W. Whalen....... 1989 43,088 25,974 95,000 153,250
</TABLE>

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

(1) Mr. Powers is an affiliated person of the Adviser, VKF and Van Kampen, and
does not receive compensation or retirement benefits from the Fund.

(2) The amounts shown in this column are the Aggregate Compensation of the Fund
before deferral by the trustees under the deferred compensation plan during
its last completed fiscal year ended July 31, 2000. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 2000: Mr. Dammeyer $43,088; Mr. Sonnenschein
$43,088 and Mr. Whalen $43,088. The cumulative deferred compensation
(including interest) accrued with respect to each trustee from the Fund as
of July 31, 2000 is as follows: Mr. Dammeyer $134,384; Mr. Sonnenschein
$128,421; Mr. Kerr $47,233; and Mr. Whalen $126,079. The deferred
compensation plan is described above the table. Amounts deferred are
retained by the Fund and earn a rate of return determined by reference to
either the return on the Common Shares of the Fund or other funds in the
Fund Complex as selected by the respective trustee. To the extent permitted
by the 1940 Act, the Fund may invest in securities of these funds selected
by the trustees in order to match the deferred compensation obligation.

(3) The amounts shown in this column represent the sum of the estimated Pension
or Retirement Benefit Accruals expected to be accrued by the funds in the
Fund Complex for their respective fiscal year ends in 1999. The retirement
plan is described above the table.

(4) The amounts shown in this column represent the sum of the estimated annual
benefits payable per year by the funds in the Fund Complex as of December
31, 1999 for each year of the 10-year period commencing in the year of such
trustee's anticipated retirement. The Fund is expected to pay benefits of
$2,500 per year for each of the 10-year period commencing in the year of
such trustee's retirement to those trustees who retire at or over the age
of 60 and with at least ten years of service to the Fund. The retirement
plan is described above the compensation table.

(5) The amounts shown in this column are accumulated from the Aggregate
Compensation of the investment companies in the Fund Complex for the year
ended December 31, 1999 before deferral by the trustees under the deferred
compensation plan. Amounts deferred are retained by the respective fund and
earn a rate of return determined by reference to either the return on the
Common Shares of the Fund or common shares of other funds in the Fund
Complex as selected by the respective trustee. To the extent permitted by
the 1940 Act, the respective fund may invest in securities of the funds
selected by the trustees in order to match the deferred compensation
obligation. The Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. Whalen and
Powers, the Trustees are not trustees of other investment companies.
Combining the Fund Complex with other investment companies advised by the
Adviser or its affiliates, Mr. Whalen received Total Compensation of
$279,250 for the year ended December 31, 1999.

B-7
<PAGE> 43

The Fund, the Adviser and VKF have adopted Codes of Ethics (collectively, the
"Code of Ethics") that set forth general and specific standards relating to the
securities trading activities of their employees. The Code of Ethics does not
prohibit employees from acquiring securities that may be purchased or held by
the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of the Fund or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

PORTFOLIO TRANSACTIONS

With respect to interests in Senior Loans, the Fund generally will engage in
privately negotiated transactions for purchase or sale in which the Adviser will
negotiate on behalf of the Fund, although a more developed market may exist for
certain Senior Loans. The Fund may be required to pay fees, or forgo a portion
of interest and any fees payable to the Fund, to the Lender selling
Participations or Assignments to the Fund. The Adviser will determine the
Lenders from whom the Fund will purchase Assignments and Participations by
considering their professional ability, level of service, relationship with the
Borrower, financial condition, credit standards and quality of management.
Although the Fund intends generally to hold interests in Senior Loans until
maturity or prepayment of the Senior Loan, the illiquidity of many Senior Loans
may restrict the ability of the Adviser to locate in a timely manner persons
willing to purchase the Fund's interests in Senior Loans at a fair price should
the Fund desire to sell such interests. See "Special Risk Considerations" in the
Prospectus. Affiliates of the Adviser may participate in the primary and
secondary market for Senior Loans. Because of certain limitations imposed by the
1940 Act, this may restrict the Fund's ability to acquire some Senior Loans. The
Adviser does not believe that this will have a material effect on the Fund's
ability to acquire Senior Loans consistent with its investment policies.

With respect to investments other than in Senior Loans, the Adviser will place
orders for portfolio transactions for the Fund with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services. These services include execution, clearance procedures, wire service
quotations and statistical and other research information provided to the Fund
and the Adviser, including quotations necessary to determine the value of the
Fund's net assets. Any research benefits so obtained are available for all
clients of the Adviser. Because statistical and other research information only
supplements the research efforts of the Adviser and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
reduce materially its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration the fact that certain firms have sold Shares of the Fund and that
certain firms provide market, statistical or other research information to the
Fund and the Adviser and may select firms that are affiliated with the Fund, the
Adviser, VKF or Van Kampen. The Fund paid brokerage fees of $0 for each of the
fiscal years ended July 31, 1998, 1999 and 2000.

If it is believed to be in the best interest of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if the Adviser did not
consider the broker's furnishing of such services. This will be done, however,
only if, in the opinion of the Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.

If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed

B-8
<PAGE> 44

equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. In this regard allocations of Senior Loans by the
Adviser will be made taking into account a variety of factors, including the
assets of such clients then available for investment in Senior Loans, such
clients' relative net asset value and such clients' investment objectives,
policies and limitations. Although in some cases this procedure could have a
detrimental effect on the price paid by the Fund for the financial instrument or
the volume of the financial instrument purchased by the Fund, the ability to
participate in volume transactions and to negotiate lower commissions, fees and
expenses possibly could benefit the Fund.

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

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

MANAGEMENT OF THE FUND

THE ADVISER

The Adviser was incorporated as a Delaware corporation in 1982. The Adviser is
a wholly-owned subsidiary of Van Kampen. Van Kampen is an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555.

Van Kampen is a diversified asset management company that administers more
than three million retail investor accounts, has extensive capabilities for
managing institutional portfolios, and has more than $100 billion under
management or supervision as of September 30, 2000. Van Kampen has more than 50
open-end funds, 38 closed-end funds and more than 2,700 unit investment trusts
that are professionally distributed by leading financial advisers nationwide.

INVESTMENT ADVISORY AGREEMENT

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund was approved by the shareholders of the Fund at a
shareholders meeting held on May 25, 1997. The Advisory Agreement continues from
year to year, unless earlier terminated as described below, if approved annually
(a) by the Trustees of the Fund or by a majority of the Fund's Shares and (b) by
a majority of the Trustees who are not parties to the agreement or interested
persons of any such party, in compliance with the requirements of the 1940 Act.
The Advisory Agreement may be terminated without penalty upon 60 days written
notice by either party (in the case of the Fund, such termination may be
effected by the Board of Trustees or by a majority of the Shares) and will
automatically terminate in the event of assignment. The Adviser may in its sole
discretion from time to time waive all or a portion of the advisory fee or
reimburse the Fund for all or a portion of its other expenses.

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase, hold or sell and the selection of financial institutions through whom
the Fund's portfolio transactions are executed. The Adviser also furnishes
necessary facilities and equipment, and permits its officers and employees to
serve without compensation as trustees and officers of the Fund if duly
B-9
<PAGE> 45

elected to such positions. For the fiscal years ended July 31, 1998, 1999 and
2000, the Fund recognized investment advisory fees pursuant to the Advisory
Agreement of $63,011,682, $72,850,479 and $69,830,499, respectively.

The Advisory Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement.

The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities.

THE ADMINISTRATOR

VKF, the Fund's principal underwriter and an affiliate of the Adviser, serves
as the Fund's Administrator (in such capacity, the "Administrator"). For the
fiscal years ended July 31, 1998, 1999 and 2000, the Fund recognized
administrative fees pursuant to the Administration Agreement of $16,947,689,
$19,708,066 and $18,860,527, respectively.

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

OTHER AGREEMENTS

LEGAL SERVICES AGREEMENT. The Fund and certain other funds advised by the
Adviser or its affiliates have entered into a Legal Services Agreements pursuant
to which Van Kampen provides legal services, including without limitation:
accurate maintenance of the funds' minute books and records, preparation and
oversight of the funds' regulatory reports, and other information provided to
shareholders, as well as responding to day-to-day legal issues on behalf of the
funds. Payment by the funds for such services is made on a cost basis for the
salary and salary related benefits, including but not limited to bonuses, group
insurances and other regular wages for the employment of personnel, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Of the total costs for legal services
provided to funds advised by the Adviser or its affiliates, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.

DIVIDEND REINVESTMENT PLAN

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

State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for Shareholders in administering the Plan. Participants in the Plan
will receive Shares valued on the valuation date, at net asset

B-10
<PAGE> 46

value. The valuation date will be the dividend or distribution payment date or,
if that date is not a business day, the next preceding business day.

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

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

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

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

All registered Shareholders (other than brokers or nominees) will be mailed
information regarding the Plan, including a form with which they may elect to
participate in the Plan. Shareholders who intend to hold their Shares through a
broker or nominee should contact such person to confirm that they may
participate in the Plan and to determine the effect, if any, that a transfer of
the account by the shareholder to another broker or nominee will have on
continued participation in the Plan. A Shareholder may withdraw from the Plan at
any time by contacting the Plan Agent at the address or telephone number set
forth below. There is no penalty for non-participation in or withdrawal from the
Plan, and Shareholders who have previously withdrawn from the Plan may rejoin it
at any time. Changes in elections should be directed to the Plan Agent and
should include the name of the Fund and the Shareholder's name and address as
registered. An election to withdraw from the Plan will, until such election is
changed, be deemed to be an election by a Shareholder to take all subsequent
dividends and distributions in cash. Elections will only be effective for
dividends and distributions declared after, and with a record date of at least
ten days after, such elections are received by the Plan Agent. When a
participant withdraws from the Plan or upon termination of the Plan as provided
above, certificates for whole Shares credited to his or her account under the
Plan will be issued and a cash payment will be made for any fraction of a Share
credited to such account. All correspondence concerning the dividend
reinvestment plan should be directed to the State Street Bank and Trust Company,
as Plan Agent, c/o Van Kampen Investor Services Inc., P.O. Box 218256, Kansas
City, MO 64121-8256. Please call (800) 341-2911 between the hours of 7:00 a.m.
and 7:00 p.m. Central Time if you have questions regarding the Plan.

NET ASSET VALUE

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

Senior Loans will be valued by the Fund following valuation guidelines
established and periodically reviewed by the Fund's Board of Trustees. Under the
valuation guidelines, Senior Loans and securities for which reliable market
quotes are readily available are valued at the mean of such bid and ask quotes
and all other Senior Loans, securities and assets of the Fund are valued at fair
value in good faith following procedures established by the Board of Trustees.
Subject to criteria established by the Fund's Board of Trustees about the
availability and reliability of market indicators obtained from independent
pricing sources approved by the Board, certain Senior Loans will be valued on
the basis of such indicators. Other Senior Loans will be valued by independent
pricing sources approved by the Fund's Board of Trustees based upon pricing
models
B-11
<PAGE> 47

developed, maintained and operated by those pricing sources or valued by the
Adviser by considering a number of factors including consideration of market
indicators, transactions in instruments which the Adviser believes may be
comparable (including comparable credit quality, interest rate, interest rate
redetermination period and maturity), the credit worthiness of the Borrower, the
current interest rate, the period until next interest rate redetermination and
the maturity of such Senior Loan interests. Consideration of comparable
instruments may include commercial paper, negotiable certificates of deposit and
short-term variable rate securities which have adjustment periods comparable to
the Senior Loan interests in the Fund's portfolio. The fair value of Senior
Loans are reviewed and approved by the Fund's Valuation Committee and by the
Fund's Trustees. To the extent that an active secondary trading market in Senior
Loan interests develops to a reliable degree, the Fund may rely to an increasing
extent on market prices and quotations in valuing Senior Loan interests in the
Fund's portfolio. The Fund and Trustees will continue to monitor developments in
the Senior Loan market and will make modifications to the current valuation
methodology as deemed appropriate.

It is expected that the Fund's net asset value will fluctuate as a function of
interest rate and credit factors. Because of the short-term, adjustable rate
nature of such instruments held by the Fund, however, the Fund's net asset value
is expected to fluctuate less in response to changes in interest rates than the
net asset values of investment companies with portfolios consisting primarily of
traditional longer-term, fixed-income securities. In light of the senior nature
of Senior Loan interests that may be included in the Fund's portfolio and taking
into account the Fund's access to non-public information with respect to
Borrowers relating to such Senior Loan interests, the Fund does not currently
believe that consideration on a systematic basis of ratings provided by any
nationally recognized statistical rating organization or price fluctuations with
respect to long- or short-term debt of such Borrowers subordinate to the Senior
Loans of such Borrowers is necessary for a determination of the value of such
Senior Loan interests. Accordingly, the Fund generally will not systematically
consider (but may consider in certain instances) and, in any event, will not
rely upon such ratings or price fluctuations in determining the value of Senior
Loan interests in the Fund's portfolio.

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

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

TAXATION

FEDERAL INCOME TAXATION

The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must, among other
things: (a) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or certain other related income; and (b) diversify its
holdings so that at the end of each quarter of the Fund's taxable year (i) at
least 50% of the value of the Fund's assets is represented by cash, U.S.
government securities, securities of other regulated investment companies, and
other securities which, with respect to any one issuer, do not represent more
than 5% of the value of the Fund's assets or more than 10% of the voting
securities of such issuer, and

B-12
<PAGE> 48

(ii) not more than 25% of the value of the Fund's assets is invested in the
securities of any one issuer (other than U.S. government securities or the
securities of other regulated investment companies).

If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its investment company taxable income (which includes, among other
things, interest and net short-term capital gain, but not net capital gain,
which is the excess of net long-term capital gain over net short-term capital
loss), and meets certain other requirements, it will not be required to pay
federal income taxes on any income distributed to Shareholders. The Fund intends
to distribute at least the minimum amount necessary to satisfy the 90%
distribution requirement. The Fund will not be subject to federal income tax on
any net capital gains distributed to Shareholders. As a Massachusetts business
trust, the Fund will not be subject to any excise or income taxes in
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes.

To avoid a 4% excise tax, the Fund will be required to distribute, by December
31 of each year, at least an amount equal to the sum of (a) 98% of its ordinary
income for such year and (b) 98% of its capital gain net income (which generally
is computed on the basis of the one-year period ending on October 31 of such
year), plus any amounts that were not distributed in previous taxable years. For
purposes of the excise tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. In addition, if the
Fund failed to qualify as a regulated investment company for its first taxable
year or, if immediately after qualifying as a regulated investment company for
any taxable year, it failed to qualify for a period greater than one taxable
year, the Fund would be required to recognize unrealized gains, pay taxes and
interest charges and make distributions before requalifying for taxation as a
regulated investment company.

Some of the Fund's investment practices are subject to special provisions of
the Code that may, among other things, (i) disallow, suspend or otherwise limit
the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. To generate sufficient cash to make distributions necessary to satisfy
the 90% distribution requirement and to avoid income and excise taxes, the Fund
may have to dispose of securities that it would otherwise have continued to
hold.

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

DISTRIBUTIONS

Distributions of the Fund's investment company taxable income are taxable to
Shareholders as ordinary income, whether paid in cash or reinvested in
additional Shares. Distributions of the Fund's net capital gain ("capital gain
dividends"), if any, are taxable to Shareholders at the rates applicable to
long-term capital gains, regardless of the length of time Shares of the Fund
have been held by such Shareholders. Distributions

B-13
<PAGE> 49

in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's Shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such Shares are
held as capital assets). For a summary of the tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below. It is
not expected that any portion of the distributions from the Fund will be
eligible for the dividends received deduction for corporations. The Fund will
inform Shareholders of the source and tax status of all distributions promptly
after the close of each calendar year.

Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value of such shares on the distribution date.

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.

The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications, or who are otherwise subject to backup
withholding. Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions (whether
received in cash or shares) at a rate of 30% or such lower rate as prescribed by
an applicable income tax treaty.

Final United States Treasury regulations, effective for payments made after
December 31, 2000, modify the withholding, backup withholding and information
reporting rules applicable to payments made to foreign shareholders, including
the procedures to be followed by foreign shareholders in establishing foreign
status. Prospective investors should consult their tax advisors concerning the
applicability and effect of such Treasury regulations on an investment in the
Fund.

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 Shares and the amount received. If such Shares are held as capital assets,
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 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 Shares pursuant to a
tender offer will be disclosed in the related offering documents. Any loss
recognized upon a taxable disposition of Shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such Shares. For purposes of determining
whether Shares have been held for six months or less, the holding period is
suspended for any periods during which the Shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

CAPITAL GAINS RATES

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

B-14
<PAGE> 50

GENERAL

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

REPURCHASE OF SHARES

The Fund may from time to time enter into one or more credit agreements to
provide the Fund with additional liquidity to meet its obligations to purchase
Common Shares pursuant to any tender offer it may make. The Fund has entered
into a Third Amendment and Restatement of Credit Agreement dated as of September
13, 2000 (the "Credit Agreement") among the Fund and Van Kampen Senior Floating
Rate Fund (the "Co-Borrower") as borrowers, the banks party thereto (the
"Financial Institutions"), and Bank of America, N.A. ("BofA"), as agent,
pursuant to which the Financial Institutions have committed to provide a credit
facility of up to $500,000,000 to the Fund and the Co-Borrower, which is not
secured by the assets of the Fund or Co-Borrower or other collateral. As of the
date hereof neither the Fund nor the Co-Borrower has drawn any of the funds
available under the Credit Agreement. The proceeds of any amounts borrowed under
the Credit Agreement may be used to provide the Fund with additional liquidity
to meet its obligations to purchase Common Shares pursuant to any tender offer
that it may make. The Credit Agreement has terms and conditions substantially
similar to the following:

a. Each of the Fund and the Co-Borrower is entitled to borrow money ("Loans")
from the Financial Institutions in amounts which in the aggregate do not
exceed the amount of the Credit Facility Commitment, provided that the
aggregate amount of Loans to the Fund or the Co-Borrower on an individual
basis cannot exceed twenty-five percent (25%) of the net asset value of the
Fund or Co-Borrower, as the case may be (defined as total assets minus
total liabilities minus assets subject to liens).

b. Loans made under the Credit Agreement, if any, will bear interest daily at
the option of the Fund or Co-Borrower, as applicable, (i) at a rate per
annum equal to the federal funds rate from time to time plus 0.50%, or (ii)
at a rate per annum equal to a reserve-adjusted interbank offered rate
offered by BofA's Grand Cayman Branch ("IBOR") plus 0.50% per annum. Each
of the Fund and Co-Borrower will bear the expenses of any borrowings
attributable to it under the Credit Agreement. Such interest will be due,
in arrears, on the outstanding principal amount of each Loan (i) as to any
federal funds rate Loan on the last business day of each calendar quarter
and (ii) as any offshore rate Loan, from one (1) day to sixty (60) days
from the date of the Loan, as selected by the Fund or Co-Borrower, as
applicable, in advance. Interest on the outstanding principal of the Loans
will also be due on the date of any prepayment of any offshore rate Loan
and on demand during the existence of an event of default under the Credit
Agreement payable by the borrower subject to such event of default. Overdue
payments of principal and interest will bear interest, payable upon demand,
at a penalty rate. No Loan shall be outstanding for a period of more than
sixty (60) days, and there shall be no more than three Interest Periods as
defined in the Credit Agreement in effect.

c. The Fund paid arrangement fees and expenses to BofA or its affiliates on
the date the Credit Agreement was executed. In addition, during the term of
the Credit Agreement, the Fund is obligated to pay its pro rata share
(based on the relative net assets of the Fund and Co-Borrower) of a
commitment fee computed at the rate of 0.09% per annum on the average daily
unused amount of the facility.

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

e. The Credit Agreement provides for BofA to elect to make swingline loans to
each Borrower in amounts which in the aggregate do not exceed $25,000,000,
provided that the aggregate amount of such

B-15
<PAGE> 51

swingline loans to the Fund or the Co-Borrower on an individual basis
cannot exceed the lesser of (a) BofA's commitment under the Credit
Agreement, (b) the combined commitment of all Financial Institutions under
the Credit Agreement or (c) twenty-five percent (25%) of the net asset
value of the Fund or Co-Borrower, as the case may be. Such swingline loans
are due no later than the seventh business day following the day the
swingline loan was made, bear interest at a rate per annum equal to the
federal funds rate from time to time plus 0.50% due upon the repayment of
such loan and, if unpaid when due or the Borrower otherwise elects, may
convert to a traditional federal funds rate Loan under the Credit
Agreement funded by BofA and all of the other Financial Institutions in
accordance with the Credit Agreement's commitment schedule.

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

The drawdown of each Loan or swingline loan, if any, is further conditioned
upon the satisfaction of additional conditions, including, without
limitation, (i) the providing of notice with respect to the Loan; (ii) the
asset coverage ratio for the applicable borrower being at least 4 to 1;
(iii) there being no default or event of default in existence with respect
to the applicable borrower; (iv) the representations and warranties with
respect to the applicable borrower made in the Credit Agreement continuing
to be true; and (v) there being no Loans outstanding with respect to the
applicable borrower for more than sixty (60) days on the day preceding the
proposed borrowing.

g. The Credit Agreement contains various affirmative and negative covenants
of the Fund and Co-Borrower, including, without limitation, obligations:
(i) to provide periodic financial information; (ii) with limited
exceptions, to not consolidate with or merge into any other entity or have
any other entity merge into it and to not sell all or any substantial part
of its assets; (iii) to continue to engage in its current type of business
and to maintain its existence as a business trust; (iv) to comply with
applicable laws, rules and regulations; (v) to maintain insurance on its
property and business; (vi) to limit the amount of its debt based upon 25%
of the net asset value of the applicable borrower; and (vii) to not create
any lien on any of its assets, with certain exceptions.

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

i. The credit facility provided pursuant to the Credit Agreement will
terminate on September 12, 2001 (the "Commitment Termination Date"), unless
extended or earlier terminated pursuant to the terms thereof, and all
accrued interest and principal will be due thereon.

Pursuant to guidelines applicable to the Fund and the Co-Borrower, any Loans
to the Fund and Co-Borrower will be made on a first-come, first-serve basis. If,
at any time, the demand for borrowings by the Fund and Co-Borrower exceeds
amounts available under the Credit Agreement, such borrowing will be allocated
on a fair and equitable basis, taking into consideration factors, including
without limitation, relative net assets of the Fund and Co-Borrower, amounts
requested by the Fund and Co-Borrower, and availability of other sources of cash
to meet each parties needs.

B-16
<PAGE> 52

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

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

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

If the Fund must liquidate portfolio securities in order to repurchase Shares
tendered, the Fund may realize gains and losses.

INDEPENDENT AUDITORS

Independent auditors for the Fund perform an annual audit of the Fund's
financial statements. The Fund's Board of Trustees has engaged Deloitte & Touche
LLP, located at Two Prudential Plaza, 180 North Stetson, Chicago, Illinois
60601-6710, to be the Fund's independent auditors.

KPMG LLP, located at 303 West Wacker Drive, Chicago, Illinois 60601 ("KPMG"),
ceased being the Fund's independent accountants effective April 14, 2000. The
cessation of the client-auditor relationship between the Fund and KPMG was based
solely on a possible future business relationship by KPMG with an affiliate of
the Fund's investment adviser.

B-17
<PAGE> 53

REPORT OF INDEPENDENT AUDITORS

To the Board of Trustees and Shareholders of Van Kampen Prime Rate Income Trust

We have audited the accompanying statement of assets and liabilities of Van
Kampen Prime Rate Income Trust (the "Trust"), including the portfolio of
investments as of July 31, 2000, and the related statements of operations, cash
flows, changes in net assets, and the financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The Trust's financial statements and financial highlights for the periods
ended prior to July 31, 2000, were audited by other auditors whose report, dated
September 14, 1999, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 2000, by correspondence with the Trust's
custodian, brokers and selling or agent banks; where replies were not received,
we performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Prime Rate Income Trust as of July 31, 2000, the results of its
operations, cash flows, changes in net assets, and financial highlights for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.

As discussed in Note 1A, the portfolio of investments includes certain loan
interests for which, fair values are determined by the Trust's investment
adviser under procedures approved by the Board of Trustees. Determination of
fair values involves subjective judgment, as the actual market value of a
particular security can be established only by negotiations between parties in a
transaction. We have reviewed the procedures established by the Board of
Trustees and applied by the investment adviser in determining the fair values of
such loan interests and inspected the underlying documentation. We believe that,
in the circumstances, the procedures are reasonable and the documentation
appropriate.

DELOITTE & TOUCHE LLP
Chicago, Illinois
September 15, 2000

F-1
<PAGE> 54

BY THE NUMBERS

YOUR TRUST'S INVESTMENTS

July 31, 2000
THE FOLLOWING PAGES DETAIL THE PORTFOLIO OF INVESTMENTS OF YOUR TRUST AT THE END
OF THE REPORTING PERIOD.(1)

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
VARIABLE RATE** SENIOR LOAN INTERESTS
AEROSPACE/DEFENSE 0.6%
$ 15,337 Aerostructures Corp.,
Term Loan............... NR BB- 12/31/03 to 09/06/04 $ 15,163,163
8,010 Aircraft Braking
Systems, Inc., Term
Loan.................... NR NR 10/15/05 8,010,323
12,849 Decrane Finance Co.,
Term Loan............... B2 B+ 9/30/05 to 12/17/06 12,837,371
3,370 United Defense
Industries, Inc., Term
Loan.................... Ba3 BB- 10/06/05 to 10/06/06 3,351,875
--------------
39,362,732
--------------
AUTOMOTIVE 3.2%
33,955 American Axle and
Manufacturing, Inc.,
Term Loan............... Ba3 BB 04/30/06 33,884,618
56,343 Breed Technologies,
Inc., Term Loan (a)
(b)..................... NR NR 04/27/04 to 04/27/06 25,917,629
3,988 Breed Technologies,
Inc., Revolving Credit
Agreement (a) (b)....... NR NR 04/27/04 1,834,291
3,009 Breed Technologies,
Inc., Debtor in
Possession (b).......... NR NR 09/30/00 3,009,090
4,975 CSK Auto, Inc., Term
Loan.................... Ba2 BB- 10/31/03 4,927,325
14,963 Dura Operating Corp,
Term Loan............... Ba3 BB- 03/31/06 14,974,186
39,771 Federal Mogul Corp.,
Term Loan............... Ba2 BB 03/24/05 39,766,614
12,998 Global Metal
Technologies, Term
Loan.................... NR NR 03/13/05 12,998,375
9,385 Insilco Corp., Term
Loan.................... Ba3 B+ 11/24/05 9,384,801
9,900 Metalforming
Technologies, Inc., Term
Loan.................... NR NR 06/30/06 9,899,956
</TABLE>

See Notes to Financial Statements

F-2
<PAGE> 55

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
AUTOMOTIVE (CONTINUED)
$ 16,368 Safelite Glass Corp.,
Term Loan (a) (b)....... Caa1 NR 12/23/04 to 12/23/05 $ 8,994,564
35,469 SPX Corp., Term Loan.... Ba2 BB+ 09/30/04 to 09/30/06 35,564,128
5,000 Tenneco Automotive,
Inc., Term Loan......... Ba3 BB 09/30/05 4,917,500
--------------
206,073,077
--------------
BEVERAGE, FOOD AND TOBACCO 1.2%
40,395 Agrilink Foods, Term
Loan.................... B1 B+ 09/30/04 to 09/30/05 40,394,808
5,602 Amerifoods Cos., Inc.,
Term Loan (f)........... NR NR 06/30/01 56
9,250 B & G Food Holdings,
Term Loan............... B1 B+ 03/31/06 9,245,946
9,370 Edwards Baking Corp.,
Term Loan............... NR NR 09/30/03 to 09/30/05 9,372,257
7,350 Leon's Bakery, Inc.,
Term Loan............... NR NR 05/02/05 7,350,232
3,990 Merisant Co., Term
Loan.................... Ba3 BB- 03/31/07 4,008,286
4,975 New World Pasta Co.,
Term Loan............... B1 B 01/28/06 4,975,540
--------------
75,347,125
--------------
BROADCASTING--CABLE 5.5%
13,995 Adelphia Cable
Partnership, Revolving
Credit Agreement........ Ba2 BB+ 12/31/03 13,680,198
9,800 CC VIII Operating LLC,
Term Loan............... Ba3 BB+ 01/29/08 9,804,087
153,000 Charter Communications,
Inc., Term Loan......... Ba3 BB+ 03/17/08 152,148,861
46,431 Chelsea Communications,
Inc., Term Loan......... Ba2 NR 12/31/04 46,438,205
9,880 Encore Investments, Term
Loan.................... NR NR 06/30/04 9,880,000
3,000 Encore Investments,
Revolving Credit
Agreement............... NR NR 06/30/04 3,000,034
6,486 Fairchild Holding Corp.,
Term Loan............... Ba3 BB- 04/30/06 6,485,850
</TABLE>

See Notes to Financial Statements

F-3
<PAGE> 56

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
BROADCASTING--CABLE (CONTINUED)
$ 43,833 Falcon Communications,
Inc., Term Loan......... Ba3 BB 12/31/07 $ 43,599,662
14,907 Frontiervision Operating
Partners, L.P.,
Term Loan............... Ba2 BB 03/31/06 14,863,142
19,861 Garden State
Cablevision, L.P.,
Revolving Credit
Agreement............... NR NR 06/30/05 19,860,618
35,000 Insight Kentucky
Partners, Term Loan..... Ba3 BB+ 12/31/07 35,018,226
--------------
354,778,883
--------------
BROADCASTING--DIVERSIFIED 0.4%
5,000 AMFM, Inc., Term Loan... Ba1 NR 11/19/01 4,993,750
14,925 Muzak Audio
Communications, Inc.,
Term Loan............... B1 B+ 12/31/06 14,806,839
4,550 White Knight
Broadcasting, Inc., Term
Loan.................... NR NR 06/30/07 4,549,982
--------------
24,350,571
--------------
BROADCASTING--TELEVISION 2.0%
19,840 Black Entertainment
Television, Inc., Term
Loan.................... NR NR 06/30/06 19,616,800
9,442 LIN Television Corp.,
Term Loan............... Ba3 BB- 03/31/07 9,419,940
7,960 Quorum Broadcasting,
Inc., Term Loan......... NR NR 09/30/07 7,959,965
58,300 Sinclair Broadcast
Group, Inc., Term
Loan.................... Ba2 BB- 09/15/05 58,289,019
31,760 TLMD Acquisition Co.,
Term Loan............... NR NR 03/31/07 31,754,028
--------------
127,039,752
--------------
BUILDINGS & REAL ESTATE 1.4%
19,717 Builders Firstsource,
Term Loan............... NR BB- 12/30/05 19,713,321
14,678 Crescent Real Estate,
Term Loan............... NR NR 02/01/04 14,641,040
</TABLE>

See Notes to Financial Statements

F-4
<PAGE> 57

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
BUILDINGS & REAL ESTATE (CONTINUED)
$ 14,937 Prison Realty Trust,
Inc., Term Loan......... B3 B 12/31/02 $ 14,622,174
41,667 Walter Industries, Inc.,
Term Loan............... NR NR 10/15/03 41,660,186
--------------
90,636,721
--------------
CHEMICAL, PLASTICS & RUBBER 3.7%
11,057 Cedar Chemicals Corp.,
Term Loan............... NR NR 10/30/03 11,056,957
9,843 Foamex, L.P., Term
Loan.................... B3 B 06/30/05 to 06/30/06 9,667,325
5,276 Foamex, L.P., Revolving
Credit Agreement........ B3 B 06/12/03 5,275,902
6,497 GenTek, Inc., Term
Loan.................... Ba3 BB 04/30/07 6,496,841
34,980 Huntsman Group Holdings,
Term Loan............... Ba2 NR 12/31/02 to 12/31/05 34,900,230
4,667 Huntsman Group
Holdings, Revolving
Credit Agreement........ Ba2 NR 12/31/02 4,667,067
34,650 Huntsman ICI Chemical
LLC, Term Loan.......... Ba3 BB 06/30/07 to 06/30/08 34,911,850
5,298 Jet Plastica Industries,
Inc., Term Loan......... NR NR 12/31/02 to 12/31/04 5,298,000
300 Jet Plastica Industries,
Inc., Revolving Credit
Agreement............... NR NR 12/31/02 300,048
54,636 Lyondell Petrochemical
Corp., Term Loan........ Ba3 NR 06/30/05 to 05/17/06 55,979,225
14,925 MetoKote Corp., Term
Loan.................... NR NR 11/02/05 14,925,969
10,000 Nutrasweet Co., Term
Loan.................... B1 NR 05/25/07 to 05/25/09 9,984,567
9,700 Pioneer Americas
Acquisition Corp., Term
Loan.................... NR B 12/31/06 9,678,058
4,988 Sybron Corp., Term
Loan.................... NR NR 03/28/07 4,972,039
10,427 Texas Petrochemicals
Corp., Term Loan........ B1 NR 06/30/01 to 06/30/04 10,428,042
</TABLE>

See Notes to Financial Statements

F-5
<PAGE> 58

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
CHEMICAL, PLASTICS & RUBBER (CONTINUED)
$ 267 Texas Petrochemicals
Corp., Revolving Credit
Agreement............... B1 NR 12/31/02 $ 267,112
6,266 TruSeal Technologies,
Inc., Term Loan......... NR NR 06/30/04 6,266,111
8,020 Vinings Industries,
Inc., Term Loan......... NR NR 03/31/05 8,020,812
4,531 West American Rubber,
Term Loan............... NR NR 06/30/05 3,171,700
--------------
236,267,855
--------------
CONSTRUCTION MATERIALS 1.2%
4,984 BSI Holdings, Term
Loan.................... NR NR 09/30/05 4,984,472
14,963 Encompass Service Co.,
Term Loan............... Ba3 BB 05/10/07 14,887,996
7,253 Flextek Components,
Inc., Term Loan (a)..... NR NR 08/31/03 3,989,029
2,993 Formica Corp., Term
Loan.................... B1 B+ 04/30/06 2,996,938
6,010 Magnatrax Corp., Term
Loan.................... NR NR 11/15/05 6,009,514
11,970 Mueller Group, Inc.,
Term Loan............... B1 B+ 08/16/06 to 08/16/07 11,965,565
14,210 Peebles, Inc., Term
Loan.................... NR NR 06/09/02 14,210,858
6,451 Reliant Building
Products, Inc., Term
Loan (a) (b)............ NR NR 03/31/04 4,704,330
1,688 Reliant Building
Products, Inc., Debtor
in Possession (a) (b)... NR NR 01/15/01 1,679,510
14,625 Werner Holding Co., Term
Loan.................... Ba3 B+ 11/30/04 to 11/30/05 14,553,201
--------------
79,981,413
--------------
CONTAINERS, PACKAGING & GLASS 2.5%
8,425 ACX Technologies, Term
Loan.................... NR NR 08/01/00 8,326,006
14,143 Dr. Pepper/Seven Up Co.,
Inc, Term Loan.......... NR NR 10/07/07 14,149,999
7,678 Fleming Packaging Corp.,
Term Loan............... NR NR 08/30/04 7,679,021
</TABLE>

See Notes to Financial Statements

F-6
<PAGE> 59

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
CONTAINERS, PACKAGING & GLASS (CONTINUED)
$ 14,737 Graham Packaging Co.,
Term Loan............... B1 B+ 01/31/06 to 01/31/07 $ 14,713,210
3,000 Huntsman Packaging
Corp., Term Loan........ B1 BB- 05/31/08 3,013,275
20,428 IPC, Inc., Term Loan.... NR B+ 10/02/04 19,925,602
7,444 Mediapak Corp., Term
Loan.................... NR NR 12/31/05 to 12/31/06 7,444,250
4,911 Packaging Dynamics, Term
Loan.................... NR NR 11/20/05 4,909,652
73,334 Stone Container Corp.,
Term Loan............... Ba3 B+ 10/01/03 73,562,427
7,792 Stronghaven, Inc., Term
Loan.................... NR NR 05/15/04 7,402,732
--------------
161,126,174
--------------
DIVERSIFIED MANUFACTURING 2.0%
3,186 Advanced Accessory
Systems, LLC, Term
Loan.................... B1 B+ 10/30/04 3,185,804
4,987 Blount Inc., Term
Loan.................... B1 B+ 06/30/06 5,015,492
28,728 Chart Industries, Inc.,
Term Loan............... NR NR 03/31/06 28,728,543
7,568 CII Carbon, LLC, Term
Loan.................... NR NR 06/25/08 7,517,832
14,043 Desa International, Term
Loan.................... B2 B+ 11/26/03 to 12/26/04 14,044,439
18,197 Neenah Foundry Co., Term
Loan.................... B1 BB- 09/30/05 18,095,329
25,647 Spalding Holdings, Inc.,
Term Loan............... B3 B- 09/30/03 to 03/30/06 25,633,091
8,820 Spalding Holdings, Inc.,
Revolving Credit
Agreement............... B3 B- 09/30/03 8,819,040
10,963 UCAR International,
Inc., Term Loan......... Ba3 BB- 12/31/07 10,959,913
3,471 United Fixtures Co.,
Term Loan............... NR NR 12/15/02 3,470,928
</TABLE>

See Notes to Financial Statements

F-7
<PAGE> 60

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
DIVERSIFIED MANUFACTURING (CONTINUED)
$ 200 United Fixtures Co.,
Revolving Credit
Agreement............... NR NR 12/31/04 $ 200,002
5,517 Western Industries,
Inc., Term Loan......... NR NR 06/23/06 5,517,399
--------------
131,187,812
--------------
ECOLOGICAL 3.5%
165,000 Allied Waste North
America, Inc., Term
Loan.................... Ba3 BB 07/23/06 to 07/23/07 159,000,600
6,000 Casella Waste System,
Term Loan............... B1 BB- 12/14/06 5,999,997
9,898 IT Group, Inc., Term
Loan.................... B1 BB 06/11/06 9,787,521
70,735 Safety-Kleen Corp., Term
Loan (a) (b)............ NR NR 04/03/05 to 04/03/06 48,099,732
454 Safety-Kleen Corp.,
Revolving Credit
Agreement (a) (b)....... NR NR 06/12/00 308,851
4,682 Stericycle, Inc., Term
Loan.................... B1 BB- 11/10/06 4,703,089
--------------
227,899,790
--------------
EDUCATION & CHILD CARE 0.2%
8,514 Kindercare Learning
Centers, Inc., Term
Loan.................... Ba3 B+ 03/21/06 8,486,066
4,781 La Petite Academy, Inc.,
Term Loan............... B2 B 05/11/05 4,781,365
--------------
13,267,431
--------------
ELECTRONICS 3.5%
31,417 Amphenol Corp., Term
Loan.................... Ba2 BB 05/19/04 to 05/19/06 31,126,864
2,858 Caribiner International,
Term Loan............... NR NR 09/30/03 2,657,502
9,899 Chatham Technologies
Acquisition, Inc., Term
Loan.................... NR NR 08/18/03 to 08/18/05 9,602,016
6,858 Communications
Instruments, Inc., Term
Loan.................... Ba3 BB- 03/15/04 6,862,222
</TABLE>

See Notes to Financial Statements

F-8
<PAGE> 61

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
ELECTRONICS (CONTINUED)
$ 22,869 DecisionOne Corp., Term
Loan.................... NR NR 04/18/05 $ 22,866,429
9,914 EG&G Technical Services,
Inc., Term Loan......... B1 NR 08/20/07 9,913,772
5,336 Fisher Scientific
International, Inc.,
Term Loan............... Ba3 B+ 01/21/05 to 01/21/06 5,348,081
22,367 General Cable Corp.,
Term Loan............... NR NR 06/30/07 22,283,311
4,435 Rowe International,
Inc., Term Loan......... NR NR 12/31/03 3,947,538
8,017 Sarcom, Inc., Term
Loan.................... NR NR 12/31/02 7,615,972
50,000 Semiconductor Components
Industries, Term Loan... NR NR 08/04/06 to 08/04/07 50,393,750
7,387 Stoneridge, Inc., Term
Loan.................... Ba3 BB 12/31/05 7,389,638
9,844 Stratus Computer, Inc.,
Term Loan............... NR NR 02/26/05 9,856,055
22,002 Superior Telecom Corp.,
Term Loan............... Ba3 B+ 11/27/05 21,935,119
12,000 Viasystems, Inc., Term
Loan.................... B1 BB- 03/31/07 11,994,372
4,839 Wilson Greatbatch, Inc.,
Term Loan............... NR NR 07/30/04 4,838,209
--------------
228,630,850
--------------
ENTERTAINMENT/LEISURE 3.7%
13,176 American Skiing Comp.,
Term Loan............... NR NR 05/31/06 13,176,471
24,229 AMF Group, Inc., Term
Loan.................... B2 CCC+ 03/31/03 to 03/31/04 24,217,625
7,433 Bally Total Fitness
Corp., Term Loan........ B1 B+ 11/10/04 7,434,020
24,776 Fitness Holdings
Worldwide, Term Loan.... NR B+ 11/02/06 to 11/02/07 24,547,440
7,760 KSL Recreation Group,
Inc., Term Loan......... Ba3 B+ 04/30/04 to 04/30/06 7,685,636
</TABLE>

See Notes to Financial Statements

F-9
<PAGE> 62

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
ENTERTAINMENT/LEISURE (CONTINUED)
$ 1,255 KSL Recreation Group,
Inc., Revolving Credit
Agreement............... Ba3 B+ 04/30/04 $ 1,254,549
54,000 Metro-Goldwyn-Mayer,
Inc., Term Loan......... Baa3 BBB- 03/31/05 to 03/31/06 53,301,258
10,000 Playcore Wisconsin, Term
Loan.................... NR NR 07/01/07 9,959,512
19,933 SFX Entertainment, Inc.,
Term Loan............... B1 NR 06/30/06 19,953,267
6,700 Sportcraft, Ltd., Term
Loan.................... NR NR 12/31/02 6,698,702
3,185 True Temper, Term Loan.. B1 BB- 09/30/05 3,184,045
4,892 United Artists Theatre,
Inc., Term Loan (h)..... Caa3 D 04/21/06 to 04/21/07 4,108,860
31,184 Viacom, Inc., Term
Loan.................... Baa1 BBB+ 04/01/02 to 04/02/02 30,833,185
923 Viacom, Inc., Revolving
Credit Agreement........ Baa1 BBB+ 04/01/02 923,179
15,000 WestStar Cinemas, Inc.,
Term Loan (a) (b)....... NR NR 09/30/05 9,900,000
21,760 WFI Group, Inc., Term
Loan.................... Baa3 NR 07/14/04 21,758,221
--------------
238,935,970
--------------
FARMING & AGRICULTURE 0.2%
10,835 Doane Pet Care Cos.,
Term Loan............... B1 B+ 12/31/05 to 12/31/06 10,888,348
--------------

FINANCE 6.4%
20,826 Alliance Data Systems,
Inc., Term Loan......... NR NR 07/25/03 20,827,057
3,286 Alliance Data Systems,
Inc., Revolving Credit
Agreement............... NR NR 07/25/03 3,285,663
29,220 Bridge Information
Systems, Inc., Term
Loan.................... NR NR 05/29/05 29,224,748
24,500 Mafco Finance Corp.,
Term Loan............... NR NR 08/31/00 24,501,012
</TABLE>

See Notes to Financial Statements

F-10
<PAGE> 63

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
FINANCE (CONTINUED)
$ 5,045 Mafco Finance Corp.,
Revolving Credit
Agreement............... NR NR 08/31/00 $ 5,044,944
26,500 Metris Cos., Inc., Term
Loan.................... Ba3 NR 06/30/03 26,458,377
37,790 Outsourcing Solutions,
Term Loan............... B2 BB- 12/01/05 to 06/01/06 37,725,032
65,000 Paul G. Allen, Term
Loan.................... NR NR 06/10/03 64,944,851
69,658 Rent-A-Center, Inc.,
Term Loan............... Ba3 BB- 01/31/06 to 01/31/07 69,309,732
34,000 Sovereign Bancorp, Term
Loan.................... Ba3 NR 11/14/03 34,127,500
97,629 Ventas Realty Ltd.,
Inc., Term Loan......... NR NR 12/31/07 94,700,773
--------------
410,149,689
--------------
GROCERY 1.3%
4,938 Big V Supermarkets,
Inc., Term Loan......... NR B+ 08/10/03 4,884,012
15,771 Eagle Family Foods,
Inc., Term Loan......... B1 B 12/31/05 15,779,938
15,149 Fleming Cos., Inc., Term
Loan.................... Ba3 BB 07/25/04 14,467,393
29,559 Fleming Cos., Inc.,
Revolving Credit
Agreement............... Ba3 BB 07/25/03 28,229,195
19,697 The Pantry, Inc., Term
Loan.................... B1 BB- 01/31/06 19,697,002
--------------
83,057,540
--------------
HEALTH CARE & BEAUTY AIDS 1.1%
14,789 Mary Kay, Inc., Term
Loan.................... NR NR 03/06/04 14,798,575
1,495 Mary Kay, Inc.,
Revolving Credit
Agreement............... NR NR 03/06/04 1,495,146
24,251 Playtex Products, Inc.,
Term Loan............... Ba2 BB 09/15/03 24,013,785
29,213 Revlon Consumer Products
Corp., Term Loan........ B3 B 05/30/02 to 05/31/02 29,213,566
--------------
69,521,072
--------------
</TABLE>

See Notes to Financial Statements

F-11
<PAGE> 64

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HEALTHCARE 7.2%
$ 4,969 Caremark Rx, Inc., Term
Loan.................... B1 BB- 05/31/01 $ 4,968,803
2,427 Caremark Rx, Inc.,
Revolving Credit
Agreement............... B1 BB- 05/31/01 2,426,703
3,119 Charter Behavioral,
Revolving Credit
Agreement (b)........... NR NR 06/17/02 3,056,413
22,000 Columbia/HCA Healthcare
Corp., Term Loan........ Ba2 BB+ 09/13/01 21,999,748
9,897 Columbia Healthone,
Inc., Term Loan......... Ba2 BB+ 06/30/05 9,867,683
92,740 Community Health
Systems, Inc., Term
Loan.................... NR NR 12/31/03 to 12/31/05 92,275,851
29,887 Dade Behring, Inc., Term
Loan.................... Ba3 B+ 06/30/06 to 06/30/07 29,362,037
25,357 Genesis Healthcare
Ventures, Inc., Term
Loan (b)................ Caa2 NR 09/30/04 to 06/01/05 20,032,381
147,375 Integrated Health
Services, Inc.,
Term Loan (a) (b)....... Caa2 NR 09/15/03 to 09/15/05 95,697,952
43,141 Magellan Health
Services, Inc., Term
Loan.................... B2 B+ 02/12/05 43,140,762
23,497 Mariner Post-Acute
Network, Inc., Term Loan
(a) (b)................. Caa2 NR 03/31/05 to 03/31/06 10,338,850
17,223 Multicare Companies,
Inc., Term Loan (a)
(b)..................... Caa3 NR 09/30/04 to 06/01/05 12,056,228
27,360 Quest Diagnostics, Inc.,
Term Loan............... Ba3 BB 08/16/06 to 08/16/07 27,451,393
46,322 Sun Healthcare Group,
Inc., Term Loan (a)
(b)..................... NR NR 11/12/04 to 11/12/05 33,815,301
</TABLE>

See Notes to Financial Statements

F-12
<PAGE> 65

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HEALTHCARE (CONTINUED)
$ 9,888 Unilab Corp., Term
Loan.................... B1 B+ 11/23/06 $ 9,890,183
55,365 Vencor, Inc., Term Loan
(a) (b)................. NR NR 01/15/05 48,167,118
--------------
464,547,406
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES
& DURABLE CONSUMER PRODUCTS 1.6%
45,215 Dal-Tile Group, Inc.,
Term Loan............... NR NR 12/31/02 to 12/31/03 44,499,737
2,665 Dal-Tile Group, Inc.,
Revolving Credit
Agreement............... NR NR 12/31/02 2,664,846
1,786 Decorate Today.Com
(g)..................... NR NR 12/31/05 1,786,179
4,975 Holmes Products Corp.,
Term Loan............... B1 B+ 02/05/07 4,962,301
23,110 Imperial Home Decor
Group, Inc., Term Loan
(a) (b)................. NR NR 03/12/04 to 03/13/06 13,403,635
7,714 Imperial Home Decor
Group, Inc., Revolving
Credit Agreement (a)
(b)..................... NR NR 03/12/04 4,473,061
6,875 Medical Arts Press,
Inc., Term Loan......... NR NR 01/13/06 6,775,118
22,640 World Kitchen, Inc.,
Term Loan............... B1 BB- 10/09/06 to 04/09/07 22,630,196
--------------
101,195,073
--------------
HOTELS, MOTELS, & GAMING 3.8%
41,000 Aladdin Gaming, LLC,
Term Loan............... B2 NR 02/26/08 40,999,980
59,840 Felcor Suite Hotels,
Term Loan............... Ba2 BB 03/31/04 59,590,647
5,985 Isle of Capri Casino,
Inc., Term Loan......... Ba2 BB- 03/02/06 to 03/02/07 6,018,133
5,000 Jazz Casino Co., Term
Loan.................... NR NR 01/06/06 5,002,603
9,099 Las Vegas Sands, Inc.,
Term Loan............... NR B+ 11/30/03 9,099,765
</TABLE>

See Notes to Financial Statements

F-13
<PAGE> 66

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
HOTELS, MOTELS, & GAMING (CONTINUED)
$ 754 Las Vegas Sands, Inc.,
Revolving Credit
Agreement............... NR B+ 11/30/03 $ 754,490
25,000 Meditrust Corp., Term
Loan.................... NR NR 07/17/01 25,003,063
1,375 Starwood Hotels and
Resorts, Inc.,
Term Loan............... Ba1 NR 02/23/03 1,380,156
100,000 Wyndham International,
Inc., Term Loan......... NR NR 06/30/06 97,525,000
--------------
245,373,837
--------------
INSURANCE 0.6%
17,150 BRW Acquisition, Inc.,
Term Loan............... NR NR 07/10/06 to 07/10/07 17,148,429
21,250 Willis Corroon, Inc.,
Term Loan............... Ba2 NR 11/19/05 to 11/19/07 21,214,576
--------------
38,363,005
--------------
MACHINERY 0.7%
9,500 Alliance Laundry
Systems, LLC,
Term Loan............... B1 B+ 06/30/05 9,452,500
7,323 Gleason Corp., Term
Loan.................... NR NR 02/18/08 7,305,005
15,000 Ocean Rig (Norway), Term
Loan.................... NR NR 06/01/08 14,999,312
15,000 United Rentals, Term
Loan.................... Ba2 BB+ 06/30/09 14,821,875
--------------
46,578,692
--------------
MEDICAL PRODUCTS & SUPPLIES 3.0%
30,000 Alliance Imaging, Inc.,
Term Loan............... B1 NR 11/02/07 to 11/02/08 29,775,000
11,286 ConMed Corp., Term
Loan.................... B1 BB- 12/30/04 to 06/30/05 11,291,584
27,276 Kinetic Concepts, Inc.,
Term Loan............... Ba3 B 12/31/04 to 12/31/05 27,270,478
6,714 Medical Specialties
Group, Inc.,
Term Loan............... NR NR 06/30/01 to 06/30/04 6,579,364
</TABLE>

See Notes to Financial Statements

F-14
<PAGE> 67

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
MEDICAL PRODUCTS & SUPPLIES (CONTINUED)
$ 10,816 Mediq/PRN Life Support
Services, Inc.,
Term Loan............... NR NR 06/30/06 $ 8,328,203
38,925 National Medical Care,
Inc., Term Loan......... Ba1 BB 09/30/03 38,922,659
3,399 Stryker Corp.,
Term Loan............... Ba2 BB 12/04/05 to 12/04/06 3,415,282
70,222 Total Renal Care
Holdings, Inc., Term
Loan.................... B1 NR 03/31/08 70,225,138
--------------
195,807,708
--------------
MINING, STEEL, IRON, & NON-PRECIOUS METALS 1.4%
19,950 Carmeuse Lime, Inc.,
Term Loan............... NR NR 03/31/06 19,950,000
8,284 Earle M. Jorgensen, Term
Loan.................... B1 NR 03/31/04 8,208,310
8,985 Fairmont Minerals, Ltd.,
Term Loan............... NR NR 02/25/05 8,985,512
52,193 Ispat Inland,
Term Loan............... Ba3 BB 07/16/05 to 07/16/06 51,955,096
--------------
89,098,918
--------------
NATURAL RESOURCES--COAL 0.0%
4,712 Centennial Resources,
Inc., Term Loan (a)
(b)..................... NR NR 03/31/02 to 03/31/04 47
781 Centennial Resources,
Inc., Debtor in
Possession (a) (b)...... NR NR 10/01/00 101,504
--------------
101,551
--------------
PAPER & FOREST PRODUCTS 0.8%
2,622 Bear Island Paper Co.,
LLC, Term Loan.......... B1 B+ 12/31/05 2,623,036
20,163 Crown Paper Co., Term
Loan (b)................ Caa1 NR 08/23/02 20,163,433
6,181 Crown Paper Co.,
Revolving Credit
Agreement (b)........... Caa1 NR 08/23/02 6,181,151
7,819 Crown Paper Co., Debtor
in Possession (b)....... Caa1 NR 09/14/02 7,789,442
2,880 CST/Office Products,
Inc., Term Loan......... NR NR 12/31/01 to 01/31/02 633,538
</TABLE>

See Notes to Financial Statements

F-15
<PAGE> 68

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
PAPER & FOREST PRODUCTS (CONTINUED)
$ 4,963 Havco Wood Products,
Inc., Term Loan......... NR NR 06/30/06 $ 4,961,212
8,745 Pacifica Papers, Inc.,
Term Loan............... Ba2 BB 03/12/06 8,788,725
--------------
51,140,537
--------------
PERSONAL & MISCELLANEOUS SERVICES 1.0%
9,172 Accessory Network Group,
Term Loan............... NR NR 07/31/05 9,172,547
7,797 Arena Brands, Inc., Term
Loan.................... NR NR 06/01/02 7,796,952
1,297 Arena Brands, Inc.,
Revolving Credit
Agreement............... NR NR 06/01/02 1,297,298
4,022 Boyds Collection, Ltd.,
Term Loan............... Ba1 B+ 04/21/06 3,994,854
6,238 Burns International,
Revolving Credit
Agreement............... Ba3 BB- 03/31/02 6,238,488
13,500 DIMAC Corp.,
Term Loan (b)........... Caa1 NR 06/30/06 to 12/30/06 10,964,050
6,750 Mitel Corp.,
Term Loan............... NR NR 12/26/03 6,749,070
9,525 Telespectrum Worldwide,
Inc., Term Loan......... NR NR 12/31/01 to 12/31/03 9,524,221
9,950 Weight Watchers
International,
Term Loan............... Ba2 B+ 09/30/06 9,949,354
--------------
65,686,834
--------------
PHARMACEUTICALS 0.4%
6,983 Bergen Brunswig Corp.,
Term Loan............... NR BB 03/31/06 6,944,372
16,590 Endo Pharmaceuticals,
Inc., Term Loan......... NR NR 06/30/04 16,592,522
--------------
23,536,894
--------------
</TABLE>

See Notes to Financial Statements

F-16
<PAGE> 69

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
PRINTING & PUBLISHING 3.4%
$ 14,722 Advanstar
Communications, Term
Loan.................... Ba3 B+ 04/30/05 $ 14,722,321
12,250 American Media
Operations, Inc., Term
Loan.................... Ba3 B+ 04/01/06 to 04/01/07 12,264,800
23,968 Big Flower Press, Term
Loan.................... B1 NR 12/06/05 to 12/06/08 24,039,871
4,898 Check Printers, Inc.,
Term Loan............... NR NR 06/30/05 4,897,963
67,932 Journal Register Co.,
Term Loan............... Ba1 BB+ 09/30/06 67,337,595
3,990 Mail-Well Corp., Term
Loan.................... Ba2 BB 02/22/07 4,008,548
29,425 Morris Communications,
Inc., Term Loan......... NR NR 03/31/04 to 06/30/05 29,425,000
17,100 PRIMEDIA, Inc., Term
Loan.................... Ba3 BB- 06/30/04 17,100,000
5,000 Trader.com,
Term Loan............... NR NR 12/31/06 to 12/31/07 4,950,000
6,104 TWP Capital Corp., Term
Loan.................... NR NR 10/01/04 6,103,991
14,313 Von Hoffman Press, Inc.,
Term Loan............... B1 B+ 05/30/03 to 05/30/05 14,180,721
3,168 Von Hoffman Press, Inc.,
Revolving Credit
Agreement............... B1 B+ 05/30/03 3,167,777
9,982 Ziff-Davis Media, Inc.,
Term Loan............... Ba3 B+ 03/31/07 9,996,201
9,775 21st Century Newspaper,
Inc., Term Loan......... NR NR 09/15/05 9,775,559
--------------
221,970,347
--------------
RESTAURANTS & FOOD SERVICE 1.7%
8,289 Applebee's
International, Inc.,
Term Loan............... NR NR 03/31/06 8,288,791
2,443 Carvel Corp.,
Term Loan............... NR NR 06/30/01 2,442,656
33,755 Domino's Pizza, Term
Loan.................... B1 B+ 12/12/04 to 12/21/07 33,876,301
</TABLE>

See Notes to Financial Statements

F-17
<PAGE> 70

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
RESTAURANTS & FOOD SERVICE (CONTINUED)
$ 41,403 S.C. International
Services, Inc.,
Term Loan............... Ba3 NR 08/28/02 $ 41,397,818
17,273 Shoney's, Inc.,
Term Loan............... B2 NR 04/30/02 17,267,724
7,028 Volume Services America,
Term Loan............... B1 B+ 12/01/06 7,029,168
--------------
110,302,458
--------------
RETAIL--OFFICE PRODUCTS 0.8%
6,930 Identity Group, Inc.,
Term Loan............... NR NR 05/11/07 6,938,839
46,220 U.S. Office Products
Co., Term Loan.......... Caa1 CCC+ 06/09/06 43,909,024
--------------
50,847,863
--------------
RETAIL--OIL & GAS 0.4%
6,000 Kwik Trip, Term Loan.... NR NR 07/27/07 5,985,000
5,000 Port Arthur Coker Co.,
Term Loan............... Ba3 NR 07/15/07 4,743,876
11,756 TravelCenters of
America, Inc., Term
Loan.................... Ba2 BB- 03/31/05 11,792,988
--------------
22,521,864
--------------
RETAIL--SPECIALTY 0.7%
16,377 Hollywood Entertainment
Corp., Revolving Credit
Agreement............... B1 B+ 09/05/02 16,376,667
19,000 Jostens, Inc.,
Term Loan............... B1 BB- 05/31/08 19,061,351
4,990 Mitchells Management,
Term Loan............... NR NR 12/31/07 4,939,133
7,660 Murray's Discount Auto
Stores, Inc.,
Term Loan............... NR NR 06/30/03 7,659,522
--------------
48,036,673
--------------
RETAIL--STORES 1.0%
11,408 Advance Stores Co., Term
Loan.................... B1 NR 04/15/06 11,408,000
3,646 Duane Reade, Inc., Term
Loan.................... B1 B+ 02/15/04 3,645,405
5,779 Kirkland's Holdings,
Term Loan............... NR NR 06/30/02 5,779,417
</TABLE>

See Notes to Financial Statements

F-18
<PAGE> 71

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
RETAIL--STORES (CONTINUED)
$ 12,067 Nebraska Book Co., Inc.,
Term Loan............... B1 B+ 03/31/06 $ 12,068,275
10,111 Payless Cashways, Inc.,
Term Loan............... NR NR 11/30/02 10,112,811
20,000 Rite Aid Corp., Term
Loan.................... Ba3 B 08/01/02 19,900,005
4,766 Vitamin Shoppe
Industries, Inc., Term
Loan.................... NR NR 05/15/04 4,765,071
--------------
67,678,984
--------------
TELECOMMUNICATIONS--LEC'S 2.0%
15,000 Alaska Communication,
Inc., Term Loan......... B1 BB 11/14/07 to 05/14/08 15,009,293
13,000 Crown Castle Operating,
Term Loan............... Ba3 BB- 03/15/08 13,039,468
14,941 Dynatech LLC, Term
Loan.................... NR B+ 09/30/07 14,920,632
7,000 McLeod USA, Inc., Term
Loan.................... Ba2 BB- 05/31/08 7,015,624
19,572 Orius Corp., Term
Loan.................... NR B+ 12/14/06 19,573,543
50,000 Teligent, Inc.,
Term Loan............... B3 B- 06/30/06 49,990,754
12,500 Winstar Communications,
Inc., Term Loan......... B2 B+ 09/30/07 12,191,413
--------------
131,740,727
--------------
TELECOMMUNICATIONS--LONG DISTANCE 0.5%
30,000 Pacific Crossing Ltd.,
Term Loan............... NR NR 07/28/06 30,000,000
--------------

TELECOMMUNICATIONS--PAGING 0.6%
9,240 Arch Paging, Inc., Term
Loan.................... B2 B 12/31/02 9,235,654
11,197 Paging Network, Inc.,
Revolving Credit
Agreement............... B2 CC 12/31/04 10,355,470
</TABLE>

See Notes to Financial Statements

F-19
<PAGE> 72

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TELECOMMUNICATIONS--PAGING (CONTINUED)
$ 9,460 Teletouch
Communications, Inc.,
Term Loan............... NR NR 11/30/05 $ 9,460,320
10,973 TSR Wireless LLC, Term
Loan.................... NR NR 06/30/05 10,972,500
--------------
40,023,944
--------------
TELECOMMUNICATIONS--WIRELESS 8.5%
28,000 American Cellular
Wireless, Inc.,
Term Loan............... Ba3 B+ 03/31/08 to 03/31/09 28,002,184
30,000 BCP SP Ltd.,
Term Loan............... NR NR 03/31/02 to 03/31/05 29,747,525
1,902 Centennial Cellular,
Inc., Term Loan......... B1 B+ 11/30/07 1,907,190
10,000 Cook Inlet/Voice Stream
Operating Co. LLC, Term
Loan.................... B2 B 12/31/08 9,975,000
14,963 Dobson Operating Co.,
Term Loan............... NR NR 03/31/08 14,962,500
63,813 Iridium Operating LLC,
Term Loan (a) (b)....... NR D 12/29/00 14,147,595
73,500 Nextel Finance Co., Term
Loan.................... Ba2 BB- 06/30/08 to 03/31/09 73,731,933
10,000 Nextel Finance Co., Term
Loan (Argentina)........ NR NR 03/31/03 10,001,498
42,500 Nextel Partners Co.,
Term Loan............... B2 B- 11/01/07 to 07/29/08 42,599,865
4,785 Powertel PCS, Inc., Term
Loan.................... NR NR 03/31/06 4,786,105
10,785 Powertel PCS, Inc.,
Revolving Credit
Agreement............... NR NR 03/31/06 10,777,811
30,000 Rural Cellular Corp.,
Term Loan............... B1 B+ 10/03/08 to 04/03/09 29,966,250
33,629 Sygnet Wireless, Inc.,
Term Loan............... B3 NR 03/23/07 to 12/23/07 33,659,510
17,000 Telecorp PCS, Inc., Term
Loan.................... B2 NR 12/05/07 16,982,286
40,000 Tritel Holding Corp.,
Term Loan............... B2 NR 12/31/07 40,160,000
</TABLE>

See Notes to Financial Statements

F-20
<PAGE> 73

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TELECOMMUNICATIONS--WIRELESS (CONTINUED)
$ 42,000 Triton PCS, Inc., Term
Loan.................... B1 B 05/04/07 $ 42,000,634
140,250 VoiceStream Wireless
Corp., Term Loan........ B1 B+ 02/25/08 to 06/30/09 139,474,135
6,000 Western Wireless Corp.,
Term Loan............... Ba2 BB 09/30/08 6,025,500
--------------
548,907,521
--------------
TEXTILES & LEATHER 1.5%
10,983 American Marketing
Industries, Inc., Term
Loan.................... NR NR 11/30/02 10,980,459
8,976 Galey & Lord, Inc., Term
Loan.................... Caa2 BB- 04/02/05 to 04/01/06 7,716,034
2,540 Galey & Lord, Inc.,
Revolving Credit
Agreement............... Caa2 BB- 03/27/04 2,184,377
7,402 GFSI, Inc., Term Loan... Ba3 NR 03/31/04 7,329,030
18,955 Glenoit Corp.,
Term Loan (h)........... Caa1 D 12/31/03 to 06/30/04 16,680,107
9,600 Humphrey's, Inc., Term
Loan.................... NR NR 01/15/03 6,814,136
10,081 Jo-Ann Fabrics Corp.,
Term Loan............... Ba3 BB- 06/30/05 10,031,069
12,910 Norcorp, Inc., Term
Loan.................... NR NR 03/31/06 to 11/30/06 12,909,927
13,755 Norcross Safety Prod.,
Term Loan............... NR NR 10/02/05 13,746,273
6,696 William Carter Co., Term
Loan.................... Ba3 BB- 10/30/03 6,693,208
--------------
95,084,620
--------------
TRANSPORTATION--CARGO 1.4%
22,555 Atlas Freighter Leasing,
Inc., Term Loan......... NR NR 04/20/05 to 04/20/06 22,471,384
27,848 Evergreen International
Aviation, Inc., Term
Loan.................... NR NR 05/31/02 to 05/31/03 27,604,283
6,419 Gemini Leasing, Inc.,
Term Loan............... B1 NR 08/12/05 6,419,853
14,925 North American Van
Lines, Inc., Term
Loan.................... B1 B+ 11/18/07 14,925,000
</TABLE>

See Notes to Financial Statements

F-21
<PAGE> 74

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
PRINCIPAL BANK LOAN
AMOUNT RATINGS+
(000) BORROWER MOODY'S S&P STATED MATURITY* VALUE
<C> <S> <C> <C> <C> <C>
TRANSPORTATION--CARGO (CONTINUED)
$ 8,018 OmniTrax Railroads, LLC,
Term Loan............... NR NR 05/14/05 $ 8,011,951
8,955 RailAmerica, Inc., Term
Loan.................... Ba3 BB- 12/31/06 9,004,253
--------------
88,436,724
--------------
TRANSPORTATION--PERSONAL 2.1%
46,936 Avis Rent A Car, Inc.,
Term Loan............... Ba3 BB+ 06/30/06 to 06/30/07 46,977,216
41,624 Continental Airlines,
Inc., Term Loan......... Ba1 BB 07/31/02 to 07/31/04 41,618,979
39,600 Motor Coach Industries,
Term Loan............... Ba3 BB- 06/16/06 39,602,849
9,900 NationsRent, Inc., Term
Loan.................... B1 BB- 07/20/06 9,813,375
--------------
138,012,419
--------------
TRANSPORTATION--RAIL MANUFACTURING 0.0%
2,993 Railworks Corp., Term
Loan.................... B1 BB- 09/30/06 2,992,511
--------------

UTILITIES 0.2%
5,000 AES Texas Funding, Term
Loan.................... Ba1 NR 01/24/01 5,000,563
9,887 Northeast Utilities,
Term Loan............... NR BB+ 02/28/01 9,838,747
--------------
14,839,310
--------------
</TABLE>

<S> <C>
TOTAL VARIABLE RATE (**) SENIOR LOAN INTERESTS 88.9%....... $5,741,329,225
--------------
</TABLE>

See Notes to Financial Statements

F-22
<PAGE> 75

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
FIXED INCOME SECURITIES 0.6%
London Fog Industries, Inc. ($13,541,264 par, 10.00% coupon,
maturing 02/27/03) 144A Private Placement (a) (b) (e)
(g)....................................................... $ 9,614,297
Satelites Mexicanos ($29,296,000 par, 9.06% coupon, maturing
06/30/04) 144A Private Placement (e)...................... 29,335,135
--------------

TOTAL FIXED INCOME SECURITIES............................... 38,949,432
--------------

EQUITIES 2.0%
AFC Enterprises, Inc. (604,251 common shares) (c) (d)....... 6,018,340
Best Products Co., Inc. (297,480 common shares) (d)......... 0
Best Products Co., Inc. (Warrants for 28,080 common shares)
(d)......................................................... 0
Bruno's, Inc. (2,593,713 common shares) (c) (d)............. 48,346,810
Bruno's Supermarkets (259,371 common shares) (c) (d)........ 4,834,675
Classic Cable, Inc. (Warrants for 760 common shares) (d).... 0
CST/Star Products, Inc. (.3 common shares) (c) (d).......... 557
Dan River, Inc. (192,060 common shares) (d)................. 864,270
DecisionOne Corp. (605,299 common shares) (c) (d)........... 7,433,072
Decorate Today.Com (198,600 common shares) (c) (d) (g)...... 1,725,834
Flagstar Cos., Inc. (8,755 common shares) (d)............... 22
Fleer/Marvel Entertainment, Inc. (617,446 preferred shares)
(g)......................................................... 4,939,566
Fleer/Marvel Entertainment, Inc. (891,340 common shares) (d)
(g)......................................................... 4,958,079
London Fog Industries, Inc. (1,083,301 common shares) (c)
(d) (g)................................................... 0
London Fog Industries, Inc. (Warrants for 66,580 common
shares) (c) (d) (g)....................................... 0
Murray's Discount Auto Stores, Inc. (Warrants for 289 common
shares) (c) (d)........................................... 3
Payless Cashways, Inc. (1,024,159 common shares) (d) (g).... 1,664,258
Rowe International, Inc. (91,173 common shares) (c) (d)
(g)......................................................... 0
Sarcom, Inc. (43 common shares) (c) (d)..................... 0
Trans World Entertainment Corp. (3,789,962 common shares)
(c) (d) (g)................................................. 45,716,417
United Fixtures Holdings, Inc. (196,020 common shares) (c)
(d)......................................................... 0
United Fixtures Holdings, Inc. (53,810 preferred shares) (c)
(d)......................................................... 535,410
--------------

TOTAL EQUITIES.............................................. 127,037,313
--------------

TOTAL LONG-TERM INVESTMENTS 91.5%
(Cost $6,230,682,742)....................................... 5,907,315,970
--------------
</TABLE>

See Notes to Financial Statements

F-23
<PAGE> 76

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
SHORT-TERM INVESTMENTS 7.9%
COMMERCIAL PAPER 7.1%
Armstrong World Industries, Inc. ($20,000,000 par, maturing
08/15/00 to 08/16/00, yielding 6.72%)..................... $ 19,945,867
Autoliv ASP, Inc. ($50,200,000 par, maturing 08/10/00 to
08/22/00, yielding 6.74% to 6.75%)........................ 50,062,965
Bank of Nova Scotia, Inc. ($30,000,000 par, maturing
08/18/00, yielding 6.48%)................................. 29,908,200
Bridgestone/Firestone ($10,000,000 par, maturing 08/01/00,
yielding 6.49%)........................................... 10,000,000
ConAgra, Inc. ($37,000,000 par, maturing 08/08/00 to
08/11/00, yielding 6.65% to 6.68%)........................ 36,942,636
Cox Communications, Inc. ($10,000,000 par, maturing
08/22/00, yielding 6.70%)................................. 9,960,917
Federated Department Stores ($10,000,000 par, maturing
08/02/00, yielding 6.67%)................................. 9,998,147
Fedex Corp. ($7,000,000 par, maturing 08/21/00, yielding
6.72%).................................................... 6,973,867
Glencore Funding, Inc. ($50,000,000 par, maturing 08/02/00
to 08/08/00, yielding 6.67% to 6.75%)..................... 49,949,531
Illinois Power Co. ($10,000,000 par, maturing 08/04/00,
yielding 6.62%)........................................... 9,994,483
Mallinckrodt Group, Inc. ($20,000,000 par, maturing
08/01/00, yielding 6.75%)................................. 20,000,000
Nabisco, Inc. ($14,000,000 par, maturing 08/03/00, yielding
6.63%).................................................... 13,994,843
RPM, Inc. ($16,990,000 par, maturing 08/09/00 to 08/28/00,
yielding 6.73% to 6.75%).................................. 16,928,921
Safeway, Inc. ($20,000,000 par, maturing 08/22/00 to
08/23/00, yielding 6.70%)................................. 19,919,972
Sprint Capital Corp. ($20,000,000 par, maturing 08/02/00 to
08/17/00, yielding 6.70%)................................. 19,968,361
Temple Inland, Inc. ($10,000,000 par, maturing 08/01/00,
yielding 6.78%)........................................... 10,000,000
Texas Utilities Co. ($50,000,000 par, maturing 08/01/00 to
08/11/00, yielding 6.70%)................................. 49,936,722
TRW, Inc. ($36,700,000 par, maturing 08/03/00 to 08/16/00,
yielding 6.65% to 6.68%).................................. 36,655,424
Visteon Corp. ($15,000,000 par, maturing 08/03/00 to
08/23/00, yielding 6.66% to 6.70%)........................ 14,957,206
Xtra, Inc. ($25,562,000 par, maturing 08/03/00 to 08/17/00,
yielding 6.69% to 6.75%).................................. 25,525,875
--------------

TOTAL COMMERCIAL PAPER...................................... 461,623,937
--------------
</TABLE>

See Notes to Financial Statements

F-24
<PAGE> 77

YOUR TRUST'S INVESTMENTS

July 31, 2000

<TABLE>
<CAPTION>
DESCRIPTION VALUE
<S> <C>
SHORT-TERM LOAN PARTICIPATIONS 0.7%
Asland, Inc. ($10,000,000 par, maturing 08/24/00, yielding
6.77%).................................................... $ 10,000,000
Cabot Corp. ($8,000,000 par, maturing 08/18/00, yielding
6.80%)...................................................... 8,000,000
Mead Corp. ($5,000,000 par, maturing 08/16/00, yielding
6.76%)...................................................... 5,000,000
Praxair, Inc. ($15,000,000 par, maturing 08/15/00, yielding
6.76%)...................................................... 15,000,000
Visteon Corp. ($9,800,000 par, maturing 08/08/00, yielding
6.83%)...................................................... 9,800,000
--------------

TOTAL SHORT-TERM LOAN PARTICIPATIONS........................ 47,800,000
--------------

TIME DEPOSIT 0.1%
State Street Bank & Trust Corp. ($4,600,000 par, 6.50%
coupon, dated 07/31/00, to be sold on 08/01/00 at
$4,600,831)................................................. 4,600,000
--------------

TOTAL SHORT-TERM INVESTMENTS 7.9%
(Cost $514,023,937)......................................... 514,023,937
--------------

TOTAL INVESTMENTS 99.4%
(Cost $6,744,706,679)....................................... 6,421,339,907

OTHER ASSETS IN EXCESS OF LIABILITIES 0.6%................. 36,625,388
--------------

NET ASSETS 100.0%.......................................... $6,457,965,295
==============
</TABLE>

NR--Not Rated

+ Loans rated below Baa by Moody's Investor Service, Inc. or BBB by Standard &
Poors Group are considered to be below investment grade. (Unaudited)

1 Industry percentages are calculated as a percentage of net assets.

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

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

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

(e) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally
transactions with qualified institutional buyers.

(f) Interest is accruing at less than the stated coupon.

(g) Affiliated company. See notes to financial statements.

(h) Subsequent to July 31, 2000, this borrower has filed for protection in
federal bankruptcy court.

See Notes to Financial Statements

F-25
<PAGE> 78

YOUR TRUST'S INVESTMENTS

July 31, 2000

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

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

See Notes to Financial Statements

F-26
<PAGE> 79

FINANCIAL STATEMENTS
Statement of Assets and Liabilities
July 31, 2000

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $6,744,706,679)..................... $6,421,339,907
Cash........................................................ 557,269
Receivables:
Interest and Fees......................................... 52,344,165
Investments Sold.......................................... 4,612,887
Fund Shares Sold.......................................... 1,946,464
Dividends................................................. 121,794
Other....................................................... 216,212
--------------
Total Assets............................................ 6,481,138,698
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 7,890,985
Investment Advisory Fee................................... 5,264,192
Investments Purchased..................................... 4,721,794
Administrative Fee........................................ 1,415,221
Distributor and Affiliates................................ 1,171,387
Fund Shares Repurchased................................... 382,570
Accrued Expenses............................................ 1,842,834
Trustees' Deferred Compensation and Retirement Plans........ 484,420
--------------
Total Liabilities....................................... 23,173,403
--------------
NET ASSETS.................................................. $6,457,965,295
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 679,708,950 shares issued and
outstanding).............................................. $ 6,797,090
Paid in Surplus............................................. 6,850,206,625
Accumulated Undistributed Net Investment Income............. 19,971,616
Accumulated Net Realized Loss............................... (95,643,264)
Net Unrealized Depreciation................................. (323,366,772)
--------------
NET ASSETS.................................................. $6,457,965,295
==============
NET ASSET VALUE PER COMMON SHARE ($6,457,965,295 divided by
679,708,950 shares outstanding)........................... $ 9.50
==============
</TABLE>

See Notes to Financial Statements

F-27
<PAGE> 80

Statement of Operations
For the Year Ended July 31, 2000

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 616,130,236
Fees........................................................ 1,479,724
Dividends ($455,701 received as dividend income from
affiliates)............................................... 455,701
Other....................................................... 8,292,209
-------------
Total Income............................................ 626,357,870
-------------
EXPENSES:
Investment Advisory Fee..................................... 69,830,499
Administrative Fee.......................................... 18,860,527
Shareholder Services........................................ 5,550,758
Legal....................................................... 1,920,741
Custody..................................................... 991,140
Trustees' Fees and Related Expenses......................... 275,925
Other....................................................... 3,601,004
-------------
Total Expenses.......................................... 101,030,594
Less: Credits Earned on Cash Balances................... 245,523
-------------
Net Expenses............................................ 100,785,071
-------------
NET INVESTMENT INCOME....................................... $ 525,572,799
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (28,679,370)
-------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (66,177,805)
End of the Period......................................... (323,366,772)
-------------
Net Unrealized Depreciation During the Period............... (257,188,967)
-------------
NET REALIZED AND UNREALIZED LOSS............................ $(285,868,337)
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 239,704,462
=============
</TABLE>

See Notes to Financial Statements

F-28
<PAGE> 81

Statement of Changes in Net Assets
For the Years Ended July 31, 2000 and 1999

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999
--------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income............................. $ 525,572,799 $ 510,587,206
Net Realized Loss................................. (28,679,370) (39,696,960)
Net Unrealized Depreciation During the Period..... (257,188,967) (60,996,583)
-------------- --------------
Change in Net Assets from Operations.............. 239,704,462 409,893,663
Distributions from Net Investment Income.......... (521,005,157) (506,562,808)
-------------- --------------

NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES...................................... (281,300,695) (96,669,145)
-------------- --------------

FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold.................. 433,298,300 1,681,564,508
Net Asset Value of Shares Issued Through Dividend
Reinvestment.................................... 271,508,075 268,516,058
Cost of Shares Repurchased........................ (2,101,931,358) (1,029,903,851)
-------------- --------------

NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................... (1,397,124,983) 920,176,715
-------------- --------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS........... (1,678,425,678) 823,507,570
NET ASSETS:
Beginning of the Period........................... 8,136,390,973 7,312,883,403
-------------- --------------
End of the Period (Including accumulated
undistributed net investment income of
$19,971,616 and $14,841,151, respectively)...... $6,457,965,295 $8,136,390,973
============== ==============
</TABLE>

See Notes to Financial Statements

F-29
<PAGE> 82

Statement of Cash Flows
For the Year Ended July 31, 2000

<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 239,704,462
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Decrease in Investments at Value.......................... 1,669,721,962
Increase in Interest and Fees Receivables................. (454,145)
Increase in Receivable for Investments Sold............... (2,288,950)
Increase in Dividends Receivable.......................... (121,794)
Decrease in Other Assets.................................. 114,061
Decrease in Investment Advisory Fee Payable............... (1,193,296)
Decrease in Administrative Fee Payable.................... (335,744)
Decrease in Distributor and Affiliates Payable............ (1,247,797)
Increase in Payable for Investments Purchased............. 4,721,794
Decrease in Accrued Expenses.............................. (2,068,107)
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 120,497
---------------
Total Adjustments....................................... 1,666,968,481
---------------

NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,906,672,943
---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 448,990,115
Payments on Shares Repurchased.............................. (2,101,548,788)
Change in Intra-day Credit Line with Custodian Bank......... (1,276,982)
Cash Dividends Paid......................................... (252,280,019)
---------------
Net Cash Used for Financing Activities.................... (1,906,115,674)
---------------
NET INCREASE IN CASH........................................ 557,269
Cash at Beginning of the Period............................. -0-
---------------
CASH AT END OF THE PERIOD................................... $ 557,269
===============
</TABLE>

See Notes to Financial Statements

F-30
<PAGE> 83

Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.

YEAR ENDED JULY 31,
2000 1999 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 9.85 $ 9.98 $ 9.96 $ 10.00 $ 10.05
-------- -------- -------- -------- --------
Net Investment Income............. .68 .64 .68 .70 .73
Net Realized and Unrealized
Gain/Loss....................... (.36) (.13) .01 (.04) (.03)
-------- -------- -------- -------- --------
Total from Investment Operations.... .32 .51 .69 .66 .70
Less Distributions from Net
Investment Income................. .67 .64 .67 .70 .75
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 9.50 $ 9.85 $ 9.98 $ 9.96 $ 10.00
======== ======== ======== ======== ========
Total Return (a).................... 3.15% 5.23% 7.22% 6.79% 7.22%
Net Assets at End of the Period (In
millions)......................... $6,458.0 $8,136.4 $7,312.9 $6,237.0 $4,865.8
Ratio of Expenses to Average Net
Assets............................ 1.34% 1.35% 1.41% 1.42% 1.46%
Ratio of Net Investment Income to
Average Net Assets................ 6.97% 6.48% 6.81% 7.02% 7.33%
Portfolio Turnover (b).............. 36% 44% 73% 83% 66%
</TABLE>

(a) Total return assumes an investment at the beginning of the period indicated,
reinvestment of all distributions for the period and tender of all shares at
the end of the period indicated, excluding payment of 3.00% imposed on most
shares accepted by the Trust for repurchase within the first year and
declining thereafter to 0.00% after the fifth year. If the early withdrawal
charge were included, total return would be lower.

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

See Notes to Financial Statements

F-31
<PAGE> 84

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

1. SIGNIFICANT ACCOUNTING POLICIES

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

The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

A. SECURITY VALUATION The Trust's Variable Rate Senior Loan interests and Other
Loan interests (collectively "Loan interests") are valued by the Trust following
guidelines established and periodically reviewed by the Trust's Board of
Trustees. Subject to criteria established by the Trust's Board of Trustees about
the availability and reliability of market indicators obtained from independent
pricing sources, certain Loan interests are valued at the mean of bid and ask
market indicators supplied by independent pricing sources approved by the
Trust's Board of Trustees. All other Loan interests are valued by considering a
number of factors including consideration of market indicators, transactions in
instruments which Van Kampen Investment Advisory Corp. (the "Adviser") believes
may be comparable (including comparable credit quality, interest rate, interest
rate redetermination period and maturity), the credit worthiness of the
borrower, the current interest rate, the period until next interest rate
redetermination and the maturity of such Loan interests. Consideration of
comparable instruments may include variable rate securities which have
adjustment periods comparable to the Loan interests in the Trust's portfolio.
The fair value of Loan interests are reviewed and approved by the Trust's
Valuation Committee and by the Trust's Board of Trustees. The fair value of a
Loan interest may differ significantly from the market value that would have
been used had there been a ready and reliable market for the Loan interest.

F-32
<PAGE> 85

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

Equity securities are valued on the basis of prices furnished by pricing
services or as determined in good faith by the Adviser under the direction of
the Board of Trustees.

Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. Short-term loan
participations are valued at cost in the absence of any indication of
impairment.

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

C. INVESTMENT INCOME Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Facility fees on senior loans
purchased are treated as market discounts. Market premiums are amortized and
discounts are accreted over the stated life of each applicable security.

Other income is comprised primarily of amendment fees. Amendment fees are
earned as compensation for agreeing to changes in loan agreements.

D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.

The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At July 31, 2000, the Trust had an accumulated capital loss carryforward
for tax purposes of $58,142,159, which will expire between July 31, 2004 and
July 31, 2008. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of wash sales, post October losses
which may not be recognized for tax purposes until the first day of the
following fiscal year and losses that were recognized for book purposes but not
for tax purposes at the end of the fiscal year.

At July 31, 2000, for federal income tax purposes cost of long- and
short-term investments is $6,744,720,032, the aggregate gross unrealized
appreciation is $38,920,250 and the aggregate gross unrealized depreciation is
$362,300,375 resulting in net unrealized depreciation on long- and short-term
investments of $323,380,125.

E. DISTRIBUTION OF INCOME AND GAINS The Trust declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed at

F-33
<PAGE> 86

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

least annually. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.

Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 2000 fiscal year have been identified and appropriately
reclassified. Permanent differences relating to expenses which are not
deductible for tax purposes totaling $562,823 were reclassified from capital to
accumulated undistributed net investment income.

F. CREDITS EARNED ON CASH BALANCES During the year ended July 31, 2000, the
Trust's custody fee was reduced by $245,523 as a result of credits earned on
overnight cash balances.

2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES

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

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

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

For the year ended July 31, 2000, the Trust recognized expenses of
approximately $343,700 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.

For the year ended July 31, 2000, the Trust recognized expenses of
approximately $86,600 representing Van Kampen Funds Inc. or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Trust.

F-34
<PAGE> 87

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Trust. For the year ended July 31, 2000,
the Trust recognized expenses for these services of approximately $4,504,500.
Shareholder servicing fees are determined through negotiations with the Trust's
Board of Trustees and are based on competitive market benchmarks.

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

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

During the period, the Trust owned shares of the following affiliated
companies. Affiliated companies are defined by the Investment Company Act of
1940 as those companies in which a fund holds 5% or more of the outstanding
voting securities.

<TABLE>
<CAPTION>
REALIZED DIVIDEND MARKET VALUE
NAME SHARES* GAIN/(LOSS) INCOME 7/31/00
<S> <C> <C> <C> <C>
Decision One Corp................... 605,299 0 0 $ 7,433,072
Decorate Today.Com. ................ 198,600 0 0 1,725,834
London Fog Industries, Inc.......... 1,083,301 0 0 0
Fleer/Marvel Entertainment, Inc..... 1,508,786 0 $455,701 9,897,645
Payless Cashways, Inc............... 1,024,159 0 0 1,664,258
Rowe International, Inc............. 91,173 0 0 0
Trans World Entertainment Corp...... 3,789,962 0 0 45,716,417
United Fixtures Holdings, Inc....... 249,830 0 0 535,410
</TABLE>

* Shares were acquired through the restructuring of Senior loan interests.

3. CAPITAL TRANSACTIONS

At July 31, 2000 and July 31, 1999, paid in surplus aggregated $6,850,769,448
and $8,246,435,399, respectively.

F-35
<PAGE> 88

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

Transactions in common shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 2000 JULY 31, 1999
<S> <C> <C>
Beginning Shares...................................... 825,612,225 733,069,022
------------ ------------
Shares Sold......................................... 44,598,159 169,386,633
Shares Issued Through Dividend Reinvestment......... 28,154,985 27,059,241
Shares Repurchased.................................. (218,656,419) (103,902,671)
------------ ------------
Net Increase/Decrease in Shares Outstanding......... (145,903,275) 92,543,203
------------ ------------
Ending Shares......................................... 679,708,950 825,612,225
============ ============
</TABLE>

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $2,332,815,340 and
$3,550,089,366, respectively.

5. TENDER OF SHARES

The Board of Trustees currently intends, each quarter, to consider authorizing
the Trust to make tender offers for all or a portion of its then outstanding
common shares at the net asset value of the shares on the expiration date of the
tender offer. For the year ended July 31, 2000, 218,656,419 shares were tendered
and repurchased by the Trust.

6. EARLY WITHDRAWAL CHARGE

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

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

F-36
<PAGE> 89

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

For the year ended July 31, 2000, Van Kampen received early withdrawal
charges of approximately $21,203,800 in connection with tendered shares of the
Trust.

7. COMMITMENTS/BORROWINGS

Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $217,648,397 as of July
31, 2000. The Trust generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.

The Trust, along with the Van Kampen Senior Floating Rate Fund, has entered
into a revolving credit agreement with a syndicate led by Bank of America for an
aggregate of $500,000,000, which will terminate on September 12, 2001. The
proceeds of any borrowing by the Trust under the revolving credit agreement
shall be used for temporary liquidity purposes and funding of shareholder tender
offers. Annual commitment fees of .09% are charged on the unused portion of the
credit line. Borrowings under this facility will bear interest at either the
LIBOR rate or the Federal Funds rate plus .50%. There have been no borrowings
under this agreement to date.

8. SENIOR LOAN PARTICIPATION COMMITMENTS

The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
corporations, partnerships, and other entities. When the Trust purchases a
participation of a Senior Loan interest, the Trust typically enters into a
contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Trust assumes
the credit risk of the borrower, selling participant or other persons
interpositioned between the Trust and the borrower.

F-37
<PAGE> 90

NOTES TO
FINANCIAL STATEMENTS

July 31, 2000

At July 31, 2000, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
<S> <C> <C>
Bankers Trust............................................... $ 45,079 $ 44,881
Societe Generale............................................ 21,760 21,758
Goldman Sachs............................................... 10,714 10,613
Bank of Boston.............................................. 9,900 9,813
Chase Securities, Inc....................................... 8,960 8,939
Bank One.................................................... 6,000 5,985
Morgan Guaranty Trust....................................... 5,000 5,001
Donaldson Lufkin Jenrette................................... 4,938 4,884
Canadian Imperial Bank of Commerce.......................... 3,442 3,444
-------- --------
Total....................................................... $115,793 $115,318
======== ========
</TABLE>

F-38