AMERICAN CAPITAL U S GOVERNMENT TRUST FOR INCOME, 497, 1995-02-03

AMERICAN CAPITAL U S GOVERNMENT TRUST FOR INCOME
497, 1995-02-03

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AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
January 31, 1995

American Capital U.S. Government Trust for Income (the "Fund") is a mutual
fund whose investment objective is to seek to provide investors with a high
level of current income. The Fund invests primarily in debt securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
including mortgage-related securities issued by instrumentalities of the U.S.
Government. In order to hedge against changes in interest rates, the Fund may
also purchase or sell options and engage in transactions involving futures
contracts and options on such contracts. The Fund does not engage in an option
writing program for the purpose of enhancing or supporting its monthly
distribution. See "Investment Practices and Restrictions" for more
information.

There is no assurance that the Fund will achieve its investment objective.

This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing
the Fund at the telephone number and address printed above. The Statement of
Additional Information is incorporated by reference into this Prospectus.

THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
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INVESTMENT ADVISER:
CUSTODIAN: Van Kampen American Capital
State Street Bank and Asset Management, Inc.
Trust Company 2800 Post Oak Boulevard
225 Franklin Street Houston, Texas 77056
Boston, Massachusetts 02110

DISTRIBUTOR:
SHAREHOLDER SERVICE AGENT: Van Kampen American Capital
Van Kampen/American Capital Distributors, Inc.
Shareholder Services, Inc. One Parkview Plaza
P.O. Box 418256 Oakbrook Terrace, Illinois 60181
Kansas City, Missouri 64141-9256
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................................................... 2
Expense Synopsis...................................................... 4
Financial Highlights.................................................. 5
Multiple Pricing System............................................... 5
Investment Objective and Policies..................................... 8
Investment Practices and Restrictions................................. 12
The Fund and Its Management........................................... 15
Purchase of Shares.................................................... 16
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Distribution Plans.................................................... 21
Shareholder Services.................................................. 22
Redemption of Shares.................................................. 25
Dividends, Distributions and Taxes.................................... 27
Prior Performance Information......................................... 28
Additional Information................................................ 29
Investment Holdings................................................... 31
</TABLE>

No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus or in the Statement of Additional Information, and, if
given or made, such other information or representations must not be
relied upon as having been authorized by the Fund or by the Distributor.
This Prospectus does not constitute an offering by the Distributor in any
jurisdiction in which such offering may not lawfully be made.

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PROSPECTUS SUMMARY
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SHARES OFFERED. Shares of Beneficial Interest.

MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").

TYPE OF COMPANY. Diversified, open-end management investment company.

INVESTMENT OBJECTIVE. The Fund seeks to provide a high level of current
income.

INVESTMENT POLICY. Invests primarily in debt securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, including mortgage-
related securities issued by instrumentalities of the U.S. Government. The
Fund may invest in high quality debt securities issued by foreign governments
and their political subdivisions, agencies and instrumentalities, certain debt
securities which are not U.S. Government securities or in any non-rated debt
security. The Fund may sell (write) and purchase call and put options, and may
purchase and sell interest rate futures contracts and options on such
contracts since such transactions are entered into for bona fide hedging
purposes. The Fund may purchase or sell debt securities on a forward
commitment basis and enter into interest rate swaps and may purchase or sell
interest rate caps, floors and collars. The Fund may lend portfolio
securities.

INVESTMENT RESULTS. The investment results of the Fund since its inception
are shown in the "Financial Highlights" table.

RISK FACTORS. The market prices of debt securities, including U.S. Government
securities, generally fluctuate with changes in interest rates so that the
Fund's net asset value can be expected to decrease as interest rates rise. As
interest rates fall, increases in the Fund's net asset value may be limited by
investments in mortgage-

2
<PAGE>

related securities and by the sale of options. Varying economic and market
conditions may affect the value of, and yields on, debt securities owned by
the Fund. The Fund may also purchase or sell debt securities on a forward
commitment basis, purchase or sell options and engage in transactions
involving interest rate futures contracts and options on such contracts, and
may lend its portfolio securities. The Fund may enter into interest rate swaps
and may purchase or sell interest rate caps, floors and collars. Each of such
activities may subject the Fund to additional risks. See "Investment Objective
and Policies--General, U.S. Government Securities and Mortgage-Related
Securities," "Investment Practices and Restrictions--Forward Commitments,
Lending of Securities, Options, Futures Contracts and Related Options and
Interest Rate Transactions." No assurance can be given as to the actual
maturity of a mortgage-related security because the mortgage loans underlying
the security may be prepaid by the obligor. Depending on market conditions,
the Fund may be able to reinvest prepayments passed through to it only at a
lower yielding investment rate. See "Investment Objective and Policies--
Mortgage-Related Securities." Shares of the Fund are not insured or guaranteed
by the U.S. Government, its agencies or instrumentalities or by any other
person or entity.

INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") serves as investment adviser to the Fund. The Adviser provides
investment advice to 45 investment company portfolios. See "The Fund and its
Management."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").

MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares,
Class B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple
Pricing System--Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares--Class A Shares" and
"Distribution Plans."

CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second year, declining each year thereafter to
0% after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares--Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing System--
Conversion Feature."

CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares--Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing System--
Conversion Feature."

DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid monthly; any net
short-term or long-term capital gains are distributed at least annually. The
Fund does not engage in an option writing program for the purpose of enhancing
or supporting its monthly distribution. All dividends and distributions are
automatically reinvested in shares of the Fund at net asset value per share
(without sales charge) unless payment in cash is requested. A portion of the
dividends and distributions paid may constitute a return of capital for
federal income tax purposes. See "Dividends, Distributions and Taxes."

3
<PAGE>
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EXPENSE SYNOPSIS
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The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
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<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge im-
posed on purchases (as
a percentage of
offering price)....... 4.75%(a) None None
Sales charge imposed on
dividend reinvest-
ments................. None None None
Deferred sales charge None* 4% during the first 1.0% during
(as a percentage of and second year, the first year(b)
original purchase 3% during the third year,
price or redemption 2.5% during the fourth year,
proceeds, whichever is 1.5% during the fifth year
lower)................ and 0% after the fifth year(b)
Exchange fee(c)......... $5.00 $5.00 $5.00
ANNUAL FUND OPERATING
EXPENSES (as a per-
centage of
average net assets)
Management fees (after
reimbursement)........ .60% .60% .60%
Rule 12b-1 fees(d)...... .25% 1.00%(f) 1.00%(f)
Other expenses(e) (after
reimbursement)........ .22% .22% .22%
Total fund operating
expenses................ 1.07% 1.82% 1.82%
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</TABLE>
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class
A Shares"--page 17.
(b) See "Purchase of Shares--Class B Shares" and "--Class C Shares"--page 20.
(c) Not charged in certain circumstances. See "Shareholder Services--
Systematic Exchange" and "--Automatic Exchange"--page 24.
(d) Up to .25% for Class A shares and 1% for Class B and C shares. See
"Distribution Plans"--page 21.
(e) See "The Fund and Its Management"--page 15.
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at
the time of purchase, but a contingent deferred sales charge of 1% may be
imposed on certain redemptions made within one year of the purchase.
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<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $47.50 front-end sales
charge and for Class B and Class C shares, a
contingent deferred sales charge assuming (1)
an operating expense ratio of 1.07% for Class
A shares, 1.82% for Class B shares and 1.82%
for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at
the end of the period:
Class A..................................... $58 $80 $104 $172
Class B..................................... $60 $90 $116 $176**
Class C..................................... $29 $57 $ 99 $214
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $58 $80 $104 $172
Class B..................................... $18 $57 $ 99 $176**
Class C..................................... $18 $57 $ 99 $214
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</TABLE>
** Based on conversion to Class A shares after six years.

The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption
is unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

4
<PAGE>

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FINANCIAL HIGHLIGHTS
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(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)

The following information for the fiscal periods ended September 30, 1993 and
1994, has been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------- --------------------------- ---------------------------
OCTOBER 6, OCTOBER 6, APRIL 12,
1992(/1/) 1992(/1/) 1993(/1/)
YEAR ENDED THROUGH YEAR ENDED THROUGH YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1993(/4/) 1994 1993(/4/) 1994 1993(/4/)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period.... $9.26 $9.43(/1/) $9.26 $9.43(/1/) $9.25 $9.41(/1/)
-------- ------------ --------- ------------- -------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Investment income....... .76 .91 .76 .86 .79 .41
Expenses................ (.09) (.11) (.15) (.17) (.16) (.083)
Expense
reimbursement(/5/)..... -- .01 -- .01 -- .003
-------- ------------ --------- ------------- -------- ------------
Net investment income... .67 .81 .61 .70 .63 .33
Net realized and
unrealized losses on
securities............. (1.0085) (.1795) (1.0205) (.1475) (1.0305) (.1561)
-------- ------------ --------- ------------- -------- ------------
Total from investment
operations............. (.3385) .6305 (.4105) .5525 (.4005) .1739
-------- ------------ --------- ------------- -------- ------------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.674) (.8005) (.602) (.7225) (.602) (.3339)
Distributions in excess
of book-basis net
realized gains on
securities............. (.0775) -- (.0775) -- (.0775) --
-------- ------------ --------- ------------- -------- ------------
Total distributions..... (.7515) (.8005) (.6795) (.7225) (.6795) (.3339)
-------- ------------ --------- ------------- -------- ------------
Net asset value, end of
period................. $8.17 $9.26 $8.17 $9.26 $8.17 $9.25
======== ============ ========= ============= ======== ============
TOTAL RETURN(/3/)....... (3.82%) 8.07%(/2/) (4.61%) 7.24%(/2/) (4.51%) 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (millions)...... $75.3 $92.4 $226.7 $242.8 $37.5 $37.8
Ratios to average assets
Expenses............... 1.07% 1.07%(/5/) 1.82% 1.81%(/5/) 1.82% 1.76%(/5/)
Expenses, without
expense reimbursement. 1.07% 1.15%(/5/) 1.82% 1.89%(/5/) 1.82% 1.83%(/5/)
Net investment income.. 7.89% 8.71%(/5/) 7.11% 7.70%(/5/) 7.08% 7.26%(/5/)
Net investment income,
without expense
reimbursement......... 7.89% 8.64%(/5/) 7.11% 7.62%(/5/) 7.08% 7.18%(/5/)
Portfolio turnover rate. 122% 281% 122% 281% 122% 281%
</TABLE>

(/1/)Commencment of operations..
(/2/)Total return from November 2, 1992 (date the Fund's investment strategy
was implemented) through September 30, 1993.
(/3/)Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(/4/)Based on average month-end shares outstanding.
(/5/)Annualized.

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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.

CLASS A SHARES. Class A Shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% at the time of purchase. Class A shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class A shares.
Certain purchases of Class A shares qualify for reduced initial sales charges.
See "Purchase of Shares--Class A Shares."

5
<PAGE>

CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up
to 0.25% of the Fund's aggregate average daily net assets attributable to the
Class B shares and an ongoing distribution fee at an annual rate of up to
0.75% of the Fund's aggregate average daily net assets attributable to the
Class B shares. Class B shares enjoy the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
distribution fee paid by Class B shares will cause such shares to have a
higher expense ratio and to pay lower dividends than those related to Class A
shares. See "Purchase of Shares-- Class B Shares." Class B shares will
automatically convert to Class A shares six years after the end of the
calendar month in which the shareholder's order to purchase was accepted. See
"Conversion Feature" below for discussion on applicability of the conversion
feature to Class B shares.

CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C
shares are subject to an ongoing service fee at an annual rate of up to 0.25%
of the Fund's aggregate average daily net assets attributable to the Class C
shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class C shares.
Class C shares enjoy the benefit of permitting all of the investor's dollars
to work from the time the investment is made. The ongoing distribution fee
paid by Class C shares will cause such shares to have a higher expense ratio
and to pay lower dividends than those related to Class A shares. See "Purchase
of Shares--Class C Shares." Class C shares will automatically convert to Class
A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Conversion Feature" herein
for discussion on applicability of the conversion feature to Class C shares.

CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end
of the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding
for a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares, as the case may be, from the burden of the ongoing distribution fee.

For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.

The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency
costs with respect to Class B shares and Class C shares does not result in the
Fund's dividends or distributions constituting "preferential dividends" under
the Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class
B shares or Class C shares would occur, and shares might continue to be
subject to the distribution fee for an indefinite period which may extend
beyond the period ending six years or ten years, respectively, after the end
of the calendar month in which the shareholder's order to purchase was
accepted.

FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on
Class B shares or Class C shares prior to conversion would be less than the
initial sales charge on Class A shares purchased at the same time, and to what
extent such differential would be offset by the higher dividends per share on
Class A shares. To assist investors in making this determination, the table
under the caption "Expense Synopsis" sets forth examples of the charges
applicable to each class of shares. In this regard, Class A shares may be more
beneficial to the investor who qualifies for reduced initial sales charges or
purchases at net asset value, as described herein under "Purchase of Shares--
Class A Shares." For these reasons, the Distributor will reject any order of
$250,000 or more for Class B shares or any order of $1 million or more for
Class C shares.

6
<PAGE>

Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors
in Class A shares do not have all their funds invested initially and,
therefore, initially own fewer shares. Other investors might determine that it
is more advantageous to purchase either Class B shares or Class C shares and
have all their funds invested initially, although remaining subject to ongoing
distribution fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class
A or Class B shares, rather than Class C shares.

Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class
A shares (see "Shareholder Services--Shareholder Services Applicable to Class
A Shareholders Only--Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish
to avoid a front-end sales charge, put 100% of their investment dollars to
work immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.

Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend
to have a slightly higher value upon liquidation than investments originally
made in either Class A or Class B shares if liquidated within approximately
the first six years after the date of the original investment and investments
originally made in Class B shares will tend to have a slightly higher value
upon liquidation than investments originally made in either Class A or Class C
shares for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B
shares if liquidated within approximately the first two to the first six years
after the date of the original investment, but investments originally made in
Class A and Class B shares will tend to have a slightly higher value upon
liquidation for investments held longer. The foregoing will not, however, be
true in all cases. Particularly, if the Fund experiences a consistently
negative or widely fluctuating total return, results may differ.

The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."

GENERAL. Dividends paid by the Fund with respect to Class A, Class B and
Class C shares will be calculated in the same manner at the same time on the
same day, except that the distribution fees and any incremental transfer
agency costs relating to Class B or Class C shares will be borne by the
respective class. See "Dividends, Distributions and Taxes." Shares of the Fund
may be exchanged, subject to certain limitations, for shares of the same class
of other mutual funds advised by the Adviser. See "Shareholder Services--
Exchange Privilege."

The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Trustees of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that
no such conflict arises.

7
<PAGE>

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

GENERAL. The investment objective of the Fund is to seek to provide investors
with a high level of current income. The Fund invests primarily in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including mortgage-related securities issued by
instrumentalities of the U.S. Government. Under normal circumstances, at least
65% of the total assets of the Fund are invested in such securities and in
repurchase agreements fully collateralized by U.S. Government securities. The
Fund may invest up to 35% of its total assets in high quality debt securities
issued by foreign governments and their political subdivisions, agencies and
instrumentalities, certain debt securities which are not U.S. Government
securities but which are rated at the time of purchase within the two highest
grades assigned by Moody's Investors Service or Standard & Poor's Corporation
or in any non-rated debt security considered by the Adviser to be of
comparable quality, and supranational issues. The Fund may lend portfolio
securities on a fully collateralized basis. See "Investment Practices and
Restrictions--Lending of Securities" herein. In order to hedge against changes
in interest rates, the Fund may purchase or sell options and engage in
transactions involving futures contracts and options on such contracts and
Eurodollar instruments. See "Investment Practices and Restrictions--Options,
Futures Contracts and Related Options and Eurodollar Instruments" herein, and
the Statement of Additional Information for discussion of options, futures
contracts and related options. The Fund may also purchase or sell debt
securities on a forward commitment basis and enter into interest rate swaps
and may purchase or sell interest rate caps, floors and collars. See
"Investment Practices and Restrictions--Forward Commitments and Interest Rate
Transactions" herein. Shares of the Fund are not insured or guaranteed by the
U.S. Government, its agencies or instrumentalities or by any other person or
entity. There is no assurance that the Fund's objective will be achieved.

In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline
in prices of debt securities due to rising interest rates is referred to
herein as "market risk." While the Fund has no policy limiting the maturities
of the debt securities in which it may invest, the Adviser seeks to moderate
market risk by generally maintaining a portfolio duration within a range of
two to six years. Duration is a measure of the expected life of a debt
security that was developed as a more precise alternative to the concept of
"term to maturity." Duration incorporates a debt security's yield, coupon
interest payments, final maturity and call features into one measure.

Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "price volatility" of the security).
However, "term to maturity" measures only the time until a debt security
provides its final payment taking no account of the pattern of the security's
payments of interest or principal prior to maturity. Duration is a measure of
the expected life of a debt security on a present value basis expressed in
years. It measures the length of the time interval between the present and the
time when the interest and principal payments are scheduled (or in the case of
a callable bond, expected to be received), weighing them by the present value
of the cash to be received at each future point in time. For any debt security
with interest payments occurring prior to the payment of principal, duration
is always less than maturity, and for zero coupon issues, duration and term to
maturity are equal. In general, the lower the coupon rate of interest or the
longer the maturity, or the lower the yield-to-maturity of a debt security,
the longer its duration; conversely, the higher the coupon rate of interest,
the shorter the maturity or the higher the yield-to-maturity of a debt
security, the shorter its duration.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but
current prepayment rates are more critical in determining the securities'
interest rate exposure. In these and other similar situations, the Adviser
will use more sophisticated analytical techniques that incorporate the
economic life of a security into the determination of its interest rate
exposure.

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The Fund may purchase debt securities at a premium over the principal or face
value in order to obtain higher current income. The amount of any premium
declines during the term of the security to zero at maturity. Such decline
generally is reflected in the market price of the security and thus in the
Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale,
such decline in value could be offset, in whole or part, or increased by
changes in the value of the security due to changes in interest rate levels.

The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its
potential for capital appreciation on debt securities if interest rates
decline. Thus if market prices of debt securities increase, the Fund receives
less total return from its optioned positions than it would have received if
the options had not been sold. The purpose of selling options is intended to
improve the Fund's total return and not to support or "enhance" monthly
distributions. During periods when the Fund has capital loss carry forwards
any capital gains generated from such transactions will be retained in the
Fund. See "Investment Practices and Restrictions--Options, Futures Contracts
and Related Options" and "Dividends, Distributions and Taxes" herein, and the
Statement of Additional Information for discussion of options, futures
contracts and related options.

The purchase and sale of options may result in a high portfolio turnover
rate. The Fund's turnover rate is shown in the Financial Highlights table. See
"Investment Practices and Restrictions--Portfolio Turnover" herein.

The investment objective of the Fund cannot be changed without shareholder
approval; however, the investment policies set forth in this section of the
Prospectus may be changed by the Trustees of the Fund without shareholder
approval.

U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), [including the principal components or
the interest components issued by the U.S. Government under the Separate
Trading of Registered Interest and Principal of Securities program (i.e.,
"STRIPS")] all of which are backed by the full faith and credit of the United
States; and (2) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, including government guaranteed mortgage-related
securities, some of which are backed by the full faith and credit of the U.S.
Treasury, some of which are supported by the right of the issuer to borrow
from the U.S. Government and some of which are backed only by the credit of
the issuer itself (as described below).

U.S. Government securities include obligations issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, and FHLMC, a federal corporation, are instrumentalities of the
United States. The securities and guarantees of FNMA and FHLMC are not backed,
directly or indirectly, by the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend FNMA up to $2.25 billion outstanding at any time, neither
the United States nor any agency thereof is obligated to finance FNMA's or
FHLMC's operations or to assist FNMA or FHLMC in any other manner. Securities
of GNMA, FNMA and FHLMC may include, but are not limited to, collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs") which are described below under "Mortgage-Related Securities."

MORTGAGE-RELATED SECURITIES. Mortgage loans made by banks, savings and loan
institutions, and other lenders are often assembled into pools, which are
issued by private entities. Interests in such pools are what this Prospectus
calls "Private Mortgage-Related Securities." Interests in pools of mortgage
loans are also issued or guaranteed by an agency or instrumentality of the
U.S. Government ("Government Mortgage-Related Securities").

Both Private and Government Mortgage-Related Securities are characterized by
monthly payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Fund), like the payments on the underlying
loans, represent

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<PAGE>

both principal and interest. Although the underlying mortgage loans are for
specified periods of time, such as 20 or 30 years, the borrowers can, and
typically do, pay them off sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part
of the regular monthly payment. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that in times of
declining interest rates, some of the Fund's higher yielding securities might
be converted to cash, and the Fund will be forced to accept lower interest
rates when that cash is used to purchase additional securities. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-related securities. If the Fund buys mortgage-related
securities at a premium, mortgage foreclosures or mortgage prepayments may
result in a loss to the Fund of up to the amount of the premium paid since
only timely payment of principal and interest is guaranteed.

The Fund may invest in private mortgage pass-through securities ("Private
Pass-Throughs") which are structured similarly to the GNMA, FNMA, and FHLMC
mortgage-related securities described above and are issued by originators of
and investors in mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Private Pass-Throughs are usually backed by a
pool of conventional fixed rate or adjustable rate mortgage loans. The Fund
intends to invest in such debt securities only if they are rated at the time
of purchase in the two highest grades by a nationally-recognized rating agency
or in any non-rated debt security considered by the Adviser to be of
comparable quality.

CMOs are debt obligations collateralized by Mortgage-Related Securities or by
whole loans. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. An issuer
of CMOs may elect to be treated, for federal income tax purposes, as a REMIC.
An issuer of CMOs issued after 1991 must elect to be treated as a REMIC or it
will be taxable as a corporation under rules regarding taxable mortgage pools.
CMOs are issued in a number of classes or series with different maturities.
The classes or series are retired in sequence as the underlying mortgages are
repaid. Prepayment may shorten the stated maturity of the obligation and can
result in a loss of premium, if any has been paid. Certain of these securities
may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security).

CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. The Fund will treat such
privately issued securities as U.S. Government securities only if they are
100% collateralized at the time of issuance by securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. The Fund intends to
invest in privately issued CMOs and REMICs only if they are rated at the time
of purchase in the two highest grades by a nationally-recognized rating
agency.

ZERO COUPON AND OTHER STRIPPED SECURITIES. The Fund may also invest in the
interest only or principal only components of debt securities described above.
This includes "zero coupon" Treasury securities and stripped securities.

The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes and bonds which have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations and coupons. A "zero coupon" security pays no
interest in cash to its holder during its life although interest is accrued
during that period. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value
(sometimes referred to as a "deep discount" price).

Currently the principal U.S. Treasury security issued without coupons is the
Treasury bill. The Treasury has also recently made wire transferable "zero
coupon" Treasury securities available. However, in the last few years a number
of banks and brokerage firms have separated ("stripped") the principal
portions ("corpus") from the coupon portions of the U.S. Treasury bonds and
notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). Such custodial
receipts or certificates are not considered by the Fund to be U.S. Government
securities.

"Zero coupon" Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and will be

10
<PAGE>

subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of
comparable maturities which make periodic distributions of interest. On the
other hand, because there are no periodic interest payments to be reinvested
prior to maturity, "zero coupon" securities eliminate the reinvestment risk
and lock in a rate of return to maturity. Current federal tax law requires
that a holder (such as the Fund) of a "zero coupon" security accrue a portion
of the discount at which the security was purchased as income each year even
though the Fund received no interest payment in cash on the security during
the year. For additional discussion of the tax treatment of "zero coupon"
Treasury securities, see "Dividends, Distributions and Taxes."

Stripped Mortgage-Related Securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortgage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.

Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will
have one class receiving some of the interest and most of the principal from
the mortgage assets, while the other class will receive most of the interest
and the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class).
The yield to maturity on an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the securities' yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may
fail to fully recoup its initial investment in these securities even if the
security is rated AAA or Aaa. Holders of PO securities are not entitled to any
periodic payments of interest prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and are subject
to greater fluctuations of market
value in response to changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. Current
federal tax law requires that a holder (such as the Fund) of such securities
accrue a portion of the discount at which the security was purchased as income
each year even though the holder receives no interest payment in cash on the
certificate during the year. Such securities may involve greater risk than
securities issued directly by the U.S. Government, its agencies or
instrumentalities.

Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may
not be readily marketable and will be considered illiquid for purposes of the
Fund's limitation on investments in illiquid securities. The Trustees of the
Fund will establish guidelines and standards for determining whether a
particular government-issued IO or PO backed by fixed-rate mortgages is
liquid. Generally, such a security may be deemed liquid if it can be disposed
of promptly in the ordinary course of business at a value reasonably close to
that used in the calculation of the net asset value per share. Stripped
Mortgage Securities, other than government-issued IO and PO securities backed
by fixed-rate mortgages, are presently considered by the staff of the SEC to
be illiquid securities and thus subject to the Fund's limitation on investment
in illiquid securities.

OTHER SECURITIES. The Fund may invest in high quality debt obligations of
supranational lending entities organized or supported by several national
governments. Such supranational entities in which the Fund may invest include
the following: International Bank for Reconstruction and Development (World
Bank), established to promote reconstruction and economic development in its
member nations; European Coal and Steel Community, a partnership of 12
European countries created to establish a common market for coal and steel and
to further the economic development of its member countries; European
Investment Bank, established to finance investment projects that contribute to
the balanced development of the European Economic Community; European Bank for
Reconstruction & Development, whose objectives are to foster the transition
toward open market economies and to promote private and entrepreneurial
initiative in countries of central and eastern Europe; Inter-American
Development Bank, established to further the development of its Latin American
member countries; African Development Bank, established to contribute to the
economic development and social progress of its African member countries;
Asian Development Bank, established to promote economic growth and cooperation
in Asia and the Far East.

The Fund may also invest in U.S. dollar denominated debt issues of foreign
governments, their agencies and instrumentalities, and other foreign issuers.

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<PAGE>

The Adviser believes that in many instances such foreign debt securities may
provide higher yields than securities of domestic issuers which have similar
maturities. Such securities may be subject to foreign government taxes which
would reduce the effective yield. Such securities may be less liquid than the
securities of U.S. corporations, and are certainly less liquid than securities
issued by the U.S. Government or its agencies.

The above-described foreign investments involve certain risks, which should
be considered carefully by an investor in the Fund. These risks include
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to
greater fluctuations in price than securities of U.S. corporations or of the
U.S. Government. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
There is generally less government regulation of stock exchanges, brokers and
listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect
investment in those countries. Finally, in the event of a default on any such
foreign debt obligations, it may be more difficult for the Fund to obtain or
to enforce a judgment against the issuers of such securities. Such investments
will be made only when the Adviser believes that higher yields justify the
attendant risks.

- -------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- -------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the holding period. Repurchase agreements
involve certain risks in the event of a default by the other party. The Fund
will not invest in repurchase agreements maturing in more than seven days if
any such investment, together with any other illiquid securities held by the
Fund, exceeds 15% of the value of its net assets. In the event of the
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible
lack of access to income on the underlying security during this period, and
(c) expenses of enforcing its rights. See the Statement of Additional
Information.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised
by the Adviser would otherwise invest separately into a joint account. The
cash in the joint account is then invested and the funds that contributed to
the joint account share pro rata in the net revenue generated. The Adviser
believes that the joint account produces greater efficiencies and economies of
scale that may contribute to reduced transaction costs, higher returns, higher
quality investments and greater diversity of investments for the Fund than
would be available to the Fund investing separately. The manner in which the
joint account is managed is subject to conditions set forth in the SEC order
obtained by the Fund authorizing this practice, which conditions are designed
to ensure the fair administration of the joint account and to protect the
amounts in that account.

FORWARD COMMITMENTS. The Fund may purchase or sell debt securities on a
"when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, frequently a month or more
after such transaction. The price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the
Forward Commitment until delivery and payment take place. At the time of
settlement, the market value of the securities may be more or less than the
purchase or sale price.

The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Fund may reinvest the proceeds
in another Forward Commitment. The Fund's use of Forward Commitments may
increase its overall investment exposure and thus its potential for gain or
loss. When engaging in Forward Commitments, the Fund relies on the other party
to complete the transaction, should the other party fail to do so, the Fund
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.

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<PAGE>

The Fund maintains a segregated account (which is marked to market daily) of
cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the
amount of its commitment as long as the obligation to purchase or sell
continues.

LENDING OF SECURITIES. In order to generate additional income, the Fund may
lend its portfolio securities in an amount up to 33 1/3% of total assets to
broker-dealers, major banks or other recognized domestic institutional
borrowers of securities not affiliated with the Adviser. The borrower at all
times during the loan must maintain cash, cash equivalent or high-grade liquid
debt securities as collateral or provide to the Fund an irrevocable letter of
credit equal in value to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the Fund
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. There are risks of delay in recovery and in
some cases even loss of rights in the collateral should the borrower of the
securities fail financially.

INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars. The Fund expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may also enter
into these transactions to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund does not
intend to use these transactions as speculative investments and will not enter
into interest rate swaps or sell interest rate caps or floors where it does
not own or have the right to acquire the underlying securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed-rate payments. 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 on a
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the party selling the interest rate floor. An interest rate collar combines
the elements of purchasing a cap and selling a floor. The collar protects
against an interest rate rise above the maximum amount but foregoes the
benefit of an interest rate decline below the minimum amount. Interest rate
swaps, caps, floors and collars will be treated as illiquid securities and
will, therefore, be subject to the Fund's investment restriction limiting
investment in illiquid securities. See the Statement of Additional Information
for further discussion on such interest rate transactions.

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 on a
daily basis and an amount of cash or high-quality liquid debt 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 an interest rate swap on other than a net basis, the Fund would
maintain a segregated account in the full amount accrued on a daily basis of
the Fund's obligations with respect to the swap.

PORTFOLIO TURNOVER. The Fund may experience a high rate of portfolio
turnover, which may vary from year to year. The rate of portfolio turnover is
not a limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
related options. A 100% turnover rate would occur, for example, if all the
securities held by the Fund were replaced in a period of one year. Higher
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund, and may result
in realization of short-term capital gains if securities are held for one year
or less which may be subject to applicable income taxes. See "Dividends,
Distributions and Taxes." Although no assurance can be given with respect to
future portfolio turnover rates, it is anticipated that the Fund's rate of
portfolio turnover will not generally exceed 400%.

USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies
of the Fund permit the Fund to engage in options, futures contracts and
related options.

The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of a Fund's
portfolio and the Adviser's expectations concerning the securities markets.
See the Statement of Additional Information for discussion of options, futures
contracts and related options.

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<PAGE>

Potential Risks of Options, Futures Contracts and Related Options. The
purchase and sale of options, futures contracts and related options involve
risks different from those involved with direct investments in securities.
While utilization of options, futures contracts and related options may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments,
which may increase the Fund's expenses and reduce its return. The Fund may
sell or purchase options in privately negotiated transactions ("OTC Options")
as well as listed options. OTC Options can be closed out only by agreement
with the other party to the transaction. Any OTC Options purchased by the Fund
will be considered an illiquid security. Any OTC Option written by the Fund
will be with a qualified dealer pursuant to an agreement under which the Fund
may repurchase the option at a formula price. Such options will be considered
illiquid to the extent that the formula price exceeds the intrinsic value of
the option. The Fund may not invest more than 15% of its net assets in
illiquid securities and repurchase agreements which have a maturity of longer
than seven days.

EURODOLLAR INSTRUMENTS. The Fund may invest in Eurodollar instruments for
hedging purposes. Eurodollar instruments are essentially U.S. dollar-
denominated futures contracts or options thereon that are linked to the London
Interbank Offered Rate ("LIBOR"). Eurodollar futures contracts enable
purchasers to obtain a fixed-rate for the lending of funds and sellers to
obtain a fixed-rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR to which many
short-term borrowings and floating rate securities are linked. Eurodollar
instruments are subject to the same limitations and risks as other futures
contracts and options thereon as described above and in the Statement of
Additional Information.

PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Fund. The debt securities in which the Fund invests are traded in the
over-the-counter market. Such securities are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the prices of the securities usually include a profit to
the dealers. It is the policy of the Fund to seek to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, the firm's risk in
positioning the securities involved, and the provision of supplemental
investment research by the firm. While the Fund seeks reasonably competitive
dealer spreads, the Fund will not necessarily be paying the lowest spread
available. Brokerage commissions are paid on transactions in listed options,
futures contracts and options thereon. The Adviser is authorized to place
portfolio transactions with broker-dealers participating in the distribution
of shares of the Fund and other American Capital funds if it reasonably
believes that the quality of the execution and any commissions are comparable
to that available from other qualified firms. The Adviser is authorized to pay
higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such service if the
Adviser determines that such commissions are reasonable in relation to the
overall services provided. The information received may be used by the Adviser
in managing the assets of other advisory accounts as well as in the management
of the assets of the Fund.

INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:

1. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any
one issuer.

2. Purchase or sell commodities or commodity contracts except that the Fund
may enter into transactions in options, futures contracts or related
options including forward commitments.

3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts, options on futures contracts,
forward commitments and other investment strategies and instruments that
would be considered "senior securities" but for the maintenance by the
Fund of a segregated account with its custodian or some other form of
"cover."

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<PAGE>

4. Borrow in excess of five percent of the market or other fair value of its
total assets; or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure
for extraordinary or emergency purposes. Margin deposits or payments in
connection with the writing of options, or in connection with the purchase
or sale of futures contracts and related options, are not deemed to be a
pledge or other encumbrance.

5. Make any investment which would cause more than 25% of the market or other
fair value of its total assets to be invested in the securities of
issuers, all of which conduct their principal business activities in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.

6. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (i) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (ii) purchase and sell options
to the extent that the premiums paid for all such options owned at any
time do not exceed ten percent of its total assets and (iii) engage in
transactions in interest rate futures contracts and related options
provided that such transactions are entered into for bona fide hedging
purposes (or that the underlying commodity value of the Fund's long
positions do not exceed the sum of certain identified liquid investments
as specified in CFTC regulations), provided further that the aggregate
initial margin and premiums do not exceed five percent of the fair market
value of the Fund's total assets, and provided further that the Fund may
not purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.

Additional investment restrictions are set forth in the Statement of
Additional Information.

- -------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- -------------------------------------------------------------------------------

The Fund is an open-end, diversified management investment company. A mutual
fund provides, for those who have similar investment goals, a practical and
convenient way to invest in a diversified list of securities by combining
their resources in an effort to achieve such goals.

Eight Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines
the investment of the Fund's assets, provides administrative services and
manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926. As of
December 31, 1994, the Adviser provides investment advice to 45 investment
company portfolios with total net assets of approximately $15.8 billion. The
Adviser and the Distributor are wholly owned subisidaireis of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substanital majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The
general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.

Mr. Don G. Powell is President and Trustee of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.

The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.60% of the Fund's average daily
net assets. Under the Advisory Agreement the Fund also reimburses the Adviser
for the costs of the Fund's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value.
Operating expenses paid by the Fund

15
<PAGE>

include shareholder service agency fees, service fees, distribution fees,
custodial fees, legal and accounting fees, the costs of reports and proxies to
shareholders, trustees' fees, and all other business expenses not specifically
assumed by the Adviser. Advisory (management) fee, and total operating
expense, ratios are shown under the caption "Expense Synopsis" herein.

From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.

Ted Mundy is primarily responsible for the day-to-day management of the
Fund's investment portfolio. Mr. Mundy is Vice President of the Fund and has
been primarily responsible for managing the Fund's investment portfolio since
June 30, 1994. From September, 1990 to June, 1994, Mr. Mundy was a portfolio
manager with AMR Investment Services, Inc. Prior to that he was a trader with
Howard, Weil, Labouisse and Friedrichs.

- -------------------------------------------------------------------------------
PURCHASE OF SHARES
- -------------------------------------------------------------------------------

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.

Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized investment dealers. Initial investments must
be at least $500 and subsequent investments must be at least $25. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any
order for the purchase of shares. The Fund also reserves the right to suspend
the sale of the Fund's shares to the public in response to conditions in the
securities markets or for other reasons.

Shares may be purchased on any business day through authorized dealers.
Shares may also be purchased by completing the application included in this
Prospectus and forwarding the application, through the designated dealer, to
the shareholder service agent, Van Kampen/American Capital Shareholder
Services, Inc. ("ACCESS"). When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A, Class B or Class C shares.

Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York
time) each day the Exchange is open. Net asset value per share for each class
is determined by dividing the value of the Fund's securities, cash and other
assets (including accrued interest) attributable to such class less all
liabilities (including accrued expenses) attributable to such class, by the
total number of shares of the class outstanding.

U.S. Government securities and Agency obligations are valued at the last
reported bid price. Listed options are valued at the last reported sale price
on the exchange on which such option is traded, or, if no sales are reported,
at the mean between the last reported bid and asked prices. Options for which
market quotations are not readily available are valued at a fair value under a
method approved by the Trustees.

Short-term investments with a maturity of 60 days or less when purchased are
valued at cost plus interest earned (amortized cost), which approximates
market value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
maturity becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost using the value of the investment on
the 61st day. See the notes to financial statements in the Statement of
Additional Information.

16
<PAGE>

Generally, the net asset values per share of the Class A, Class B, and Class
C shares are expected to be substantially the same. Under certain
circumstances, however, the per share net asset values of the Class A, Class B
and Class C shares may differ from one another, reflecting the daily expense
accruals of the distribution and the higher transfer agency fees applicable
with respect to the Class B and Class C shares and the differential in the
dividends paid on the classes of shares. The price paid for shares purchased
is based on the next calculation of net asset value (plus applicable Class A
sales charges) after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. Orders received by dealers after the close of the Exchange are
priced based on the next close provided they are received by the Distributor
prior to the Distributor's close of business on such day. It is the
responsibility of dealers to transmit orders received by them to the
Distributor so they will be received prior to such time. Orders of less than
$500 are mailed by the dealer and processed at the offering price next
calculated after acceptance by ACCESS.

Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services--Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fees. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.

Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.

The Distributor may from time to time implement programs under which a
broker, dealer or financial intermediary's sales force may be eligible to win
nominal awards for certain sales efforts or under which the Distributor will
reallow to any broker, dealer or financial intermediary that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor,
an amount not exceeding the total applicable sales charges on sales generated
by the broker or dealer during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established
by it, pay fees to, and sponsor business seminars for, qualifying brokers,
dealers or financial intermediaries for certain services or activities which
are primarily intended to result in sales of shares of the Fund. Such fees
paid for such services and activities with respect to the Fund will not exceed
in the aggregate 1.25% of the average total daily net assets of the Fund on
annual basis.

CLASS A SHARES

The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.

SALES CHARGE TABLE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS % OF NET AS % OF REALLOWED TO DEALERS
SIZE OF INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000...... 4.99% 4.75% 4.25%
$100,000 but less than
$250,000.............. 3.90% 3.75% 3.25%
$250,000 but less than
$500,000.............. 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000............ 2.04% 2.00% 1.75%
$1,000,000 and over..... (see herein) (see herein) (see herein)
</TABLE>
- -------------------------------------------------------------------------------

17
<PAGE>

No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one
year of the purchase. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1% on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million.

For full service participant directed profit sharing and money purchase plans
and qualified 401(k) retirement plans administered by Van Kampen American
Capital Trust Company's (k) Advantage Program, or similar recordkeeping
programs made available through the Van Kampen American Capital Trust Company,
no sales charge is payable at the time of purchase for plans with at least 50
eligible employees or investing at least $250,000 in American Capital funds,
which include Participating Funds as described herein under "Purchase of
Shares--Class A Shares--Volume Discounts," and American Capital Reserve Fund,
Inc. ("Reserve"). For such investments the Fund imposes a contingent deferred
sales charge of 1% in the event of certain redemptions within one year of the
purchase. The contingent deferred sales charge incurred upon redemption is
paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for such
purchases as follows: 1% on sales to $5 million, plus 0.50% on the next $5
million, plus 0.25% on the excess over $10 million.

In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or
other compensation, to dealers that sell shares of the Fund. The Distributor
is sponsoring a sales incentive program for A.G. Edwards & Sons, Inc. ("A.G.
Edwards"). The Distributor will reallow its portion of the Fund's sales
concessions to A.G. Edwards on sales of Class A shares of the Fund relating to
the "rollover" of any savings into an Individual Retirement Account ("IRA"),
the transfer of assets into an IRA and contributions to an IRA, commencing on
January 1, 1995 and terminating on April 15, 1995.

The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to
the level of the reallowance allowable to dealers described herein. Such
financial institutions, other industry professionals and dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The Distributor does not
believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund. State securities laws regarding
registration of banks and other financial institutions may differ from the
interpretations of federal law expressed herein, and banks and other financial
institutions may be required to register as dealers pursuant to certain state
laws.

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the
shares will not be resold except through redemption by the Fund, by (a)
current or retired Trustees of the Fund; current or retired employees of VK/AC
Holding, Inc. or any of its subsidiaries; spouses, minor children and
grandchildren of the above persons; and parents of employees and parents of
spouses of employees of VK/AC Holding, Inc. and any of its subsidiaries;
trustees, directors and employees of Clayton, Dubilier & Rice, Inc.; (b)
employees of an investment subadviser to any fund in the same "group of
investment companies" (as defined in Rule 11a-3 under the 1940 Act) as the
Fund or an affiliate of the Subadviser; employees and registered
representatives of Service Organizations with selling group agreements with
the Distributor; employees of financial institutions that have arrangements
with Service Organizations having selling group agreements with the
Distributor; and spouses and minor children of such persons; (c) any trust,
pension, profit sharing or other benefit plan for such persons; (d) trustees
or other fiduciaries purchasing shares for retirement plans of organizations
with retirement plan assets of $10 million or more; and (e) clients of Service
Organizations that are participating in such Service Organizations' wrap
accounts. Service Organizations must execute supplemental agreements to their
existing selling agreement with the Distributor in order to qualify for the
program. Shares are offered at net asset value to such persons because of
anticipated economies in sales efforts and sales related expenses. Such shares
are also offered at net asset value to (f) accounts opened for shareholders by
dealers where the amounts invested represent the redemption proceeds from
investment companies distributed by an entity other than the Distributor if
such redemption has occurred no more than 15 days prior to the purchase of
shares of the Fund and the shareholder

18
<PAGE>

===============================================================================

AMERICAN CAPITAL
FAMILY OF FUNDS

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

NEW ACCOUNT
APPLICATION*
FOR CLASS A, CLASS B, AND CLASS C SHARES

FOR ASSISTANCE CALL 1-800-421-5666

*IF YOU WISH TO OPEN A RETIREMENT PLAN WITH
AMERICAN CAPITAL TRUST COMPANY AS CUSTODIAN,
PLEASE CALL US FOR AN APPROPRIATE APPLICATION.

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

[AMERICAN CAPITAL LOGO APPEARS HERE]

999APL-007 REV 1294

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

AMERICAN CAPITAL'S CHECK-WRITING PRIVILEGE
(AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY)

American Capital offers a check-writing privilege to provide you with
quick liquidity for major purchases and emergency needs. Simply complete the
AUTHORIZATION FOR REDEMPTION BY CHECK below.

When your application for this privilege has been received and
processed, you will receive a supply of special checks which you may write
against your fund account made payable to any person in amounts of $100 or
more. When a check is presented to the Custodian for payment, full and
fractional shares required to cover the amount of the check will be redeemed
from your account at the next determined net asset value.

Please note that, since the share prices of the selected income funds
fluctuate daily, use of the check-writing privilege in these funds can result
in the liquidation of shares at a profit or a loss from the time of your
purchase and may be considered a taxable event. Consequently, while this
privilege can provide you with easy liquidity, it is not meant to be used as
a regular checking account.

- -If the amount of your check is greater than the value of your fund account
at the time the redemption is processed by ACCESS (the fund's service agent),
the check will be returned and you may be subject to additional charges.

- -You may not liquidate your entire account by means of a check.

- -No check will be accepted if written for an amount less than $100.

- -A "stop payment" system is not available with this privilege.

- -Checks will not be honored for redemption of shares held less than 15 days,
unless these shares were paid for by bank wire.

- -Any shares which are escrowed due to Letter of Intent requirements or which
are represented by outstanding certificates may not be redeemed by check.

- -If the shareholder is a corporation, partnership, trust, fiduciary, executor
or administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnership or trust agreements) must accompany the
Authorization Card. The documents must be certified in original form and the
certifications must be dated within 60 days of their receipt by ACCESS.

- -All signatures on the Authorization Card must be guaranteed if any of the
signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its
records.

- -This privilege is not available to accounts with missing social security
numbers, uncertified TIN numbers, accounts subject to backup withholding or
retirement plan accounts.

- -The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.

- -For additional information on the Check-Writing Privilege, call the American
Capital Service Line toll-free at 1-800-421-5666. This line is available from
7a.m. to 7p.m. central time any business day.

CUT ON PERFORATED LINE
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION BY CHECK - CLASS A SHARES, FIXED INCOME ACCOUNT
ONLY

- ----------------------------------- -------------------- ------------------
American Capital Fund Name ("Fund") Acct # (If Existing) # of signatures
required on checks

- --------------------------------------------------------------------------------
Name(s) of all authorized persons as they will appear on checks: (Please Print)

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

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

Signature(s) of all registrants as they appear on the account:

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

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

By signing, the signator(s) agrees to the conditions on the reverse side
hereof. If multiple signatures, each signatory guarantees the other's
signature. If the account has been established for more than 30 days or any
signator is not referenced in the account registration, all signatures must
be guaranteed.

SIGNATURE GUARANTEE
All signatures must be guaranteed.
GUARANTEE STAMP HERE

- ---------------------------------------------
SIGNATURE GUARANTEED BY (a Bank or Trust
Company; a Broker/Dealer; a Credit Union;
a National Securities Association or Clearing
Agency; a Savings and Loan Association; or a
Federal Savings Bank.)
<PAGE>

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

[AMERICAN CAPITAL LOGO APPEARS HERE]
<PAGE>

TELEPHONE TRANSACTION AUTHORIZATION

AUTHORIZATION AND AGREEMENT

The registrant hereby authorizes ACCESS to accept and act conclusively upon
telephone instructions from me, anyone other than me representing himself to
be me, or any person purporting to represent me in effecting a redemption of
specified share or dollar amount or in effecting exchanges of shares of one
(or more) American Capital managed fund(s) (the "Fund" or "Fund(s)" or
"Funds") for which such an exchange is available. American Capital Management
& Research, Inc. and its subsidiaries, including Access (collectively,
"American Capital"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither
American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. I understand and agree
to indemnify and hold harmless American Capital and the Funds from any
liability (including attorney's fees) arising directly or indirectly from any
act or omission to act hereunder not occasioned by their gross negligence or
willful misconduct. I understand that the redemption and/or exchange
privilege may be modified or terminated at any time. I also understand that
these privileges are subject to the conditions and provisions set forth
herein and in the current prospectuses of the Funds. For each exchange, I
will have received and perused a copy of the then current prospectus of the
Fund being purchased. In the case of a registrant other than an individual, I
certify that the organization has the authority to transact telephone
exchanges. I will notify ACCESS of any change in such authority. Telephone
Redemptions may be executed on all accounts other than retirement accounts.
This Authorization shall be effective upon receipt by ACCESS. It
shall in all respects be interpreted, enforced and governed under the laws of
the State of Missouri. Any suit, claim or action hereunder against American
Capital and the Funds shall have as its sole venue the County of Harris,
State of Texas.
If any provision of this Authorization is declared by any court to
be illegal or invalid, the validity of the remaining parts shall not be
affected thereby, and the illegal or invalid portion shall be deemed stricken
from this Authorization.

CONDITIONS
1. Telephone redemption and/or exchange instructions received before the
pricing of the Fund on any day on which the New York Stock Exchange is
open for business (a "Business Day"), but not later than 3:00 p.m. central
time, will be processed at that day's closing net asset value. For each
exchange my account shall be charged an exchange fee noted in the then
current prospectus. There is no fee for telephone redemption; however,
redemptions of Class B and Class C shares are subject to a contingent
deferred sales charge (See "Redemption of Shares" in the appropriate
Funds' prospectus.
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-421-5684.
3. A waiting period as described in each Fund's Prospectus may apply to
exchanges. Exchanges will not be requested prior to the expiration of any
waiting period or in violation of any of the terms and conditions of any
of the Funds' prospectuses and I agree to indemnify American Capital and
the Funds against any harm occasioned by their compliance with an improper
order under any of the Funds' prospectus.
4. Telephone redemption requests in excess of $50,000 will not be allowed.
To transact redemptions over this dollar amount, a written request must be
directed to ACCESS. (See "Redemption of Shares" in the appropriate
Funds' prospectus for any additional requirements.)
5. Telephone redemption requests must meet the following conditions to be
accepted by ACCESS:
(a) Proceeds of the redemption may be directly deposited into
predetermined bank account, or the current address on the
registration. This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption can be processed within a 30 day
period.
6. If the Fund to which an exchange of Class A Shares is made has a sales
charge greater than the Fund from which the exchange is made, either a
full, partial or no sales charge may be imposed depending on the
particular Fund from which such exchange has occurred. See the current
prospectus.
7. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Fund being acquired.
8. Any new account established through the exchange privilege will have
the same account information and options except as stated in the current
prospectus and be subject to this authorization.
9. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to ACCESS and deposited into the customer's account
before any transaction may be processed.
10. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares of
the Fund to be purchased on the exchange having the same aggregate net
asset value as the shares being exchanged shall be substituted in the
escrow account. Shares held in escrow may not be redeemed until the Letter
of Intent has expired and/or the appropriate adjustments have been made to
the account.
11. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to each Fund's current
prospectus.
12. I agree that my ability to exchange and/or redeem under this
authorization may be cancelled, modified or restricted at any time
indiscriminately at the sole discretion of American Capital or by the
Fund(s).

INFORMATION PERTAINING TO THIS LETTER OF INTENT
Subject to conditions specified below, each purchase of shares of the Fund or
shares of one or more of the Participating Funds within the American Capital
family of funds during the 13-month period subsequent to the effective date
of this Application will be made at the public offering price applicable to a
single transaction of the dollar amount indicated, as described in the then
effective prospectus. The offering price may be further reduced under the
Cumulative Purchase Discount if ACCESS is advised of any shares of this or
other American Capital fund(s) previously purchased and still owned. The
purchaser may at any time during the period revise upward the stated
intention by submitting a written request to this effect. Such revision shall
provide for the escrowing of additional shares. The original period of the
Letter, however, shall remain unchanged. Each separate purchase made pursuant
to the Letter is subject to the terms and conditions contained in the
prospectus in effect at the time of that particular purchase. It is
understood that the purchaser makes no commitment to purchase additional
shares, but that if those shares previously purchased at public offering
price under the Cumulative Purchase Discount, together with purchases so made
within thirteen months from this date do not aggregate the amount specified
when valued at the public offering price, the purchaser will pay the
increased amount of sales charge prescribed in the terms of escrow. The
purchaser(s) or the purchaser's dealer must refer to this Letter of Intent in
placing each future order for shares while this Letter is in effect. It is
understood that, when remitting funds directly to ACCESS for investment in an
account, specific reference must be made to this Letter. This cancels and
supersedes any previous instructions which the purchaser may have given
inconsistent with the above.

TERMS OF ESCROW
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase 5% of the dollar amount indicated on the
Application will be held in escrow in the form of shares (computed to the
nearest full share at the applicable public offering price) registered in
the purchaser's name. These shares will be held at ACCESS and be subject
to the terms of escrow.
2. If total purchases pursuant to this Letter equal the amount specified at
the expected aggregate purchases, escrow shares will be released from
restriction.
3. If the total purchases pursuant to this Letter are less than the amount
specified, the purchaser shall remit to ACCESS an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases
if all such purchases had been made at a single time. If ACCESS, within 10
business days after request, does not receive said difference in sales
charge, ACCESS will redeem an appropriate number of escrow shares to
realize such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to ACCESS for the difference. The
remaining shares after the redemption will be deposited to the purchaser's
account unless otherwise instructed.
4. The purchaser hereby irrevocably constitutes and appoints ACCESS as
attorney to surrender for redemption any or all shares on the books of the
Fund, under the conditions previously outlined, with full power of
substitutions in the premises.

PROVISIONS FOR PRICE ADJUSTMENT
If total purchases made under this Letter of Intent and the Cumulative
Purchase Discount are large enough to qualify for a lower sales charge than
that applicable to the amount initially specified, or if trades not initially
made under this Letter subsequently qualify for a lower sales charge through
the 90-day back-dating provisions, an adjustment will be made at the
expiration of this Letter to give effect to the lower charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareowner
at the applicable discount category.

CANCELLATION OR LIQUIDATION
If at any time prior to or after completion of this Letter of Intent the
purchaser wishes to cancel this Letter, the purchaser must notify ACCESS in
writing. If at any time prior to the completion of this Letter of Intent the
purchaser requests ACCESS to liquidate his total shares, a cancellation of
this Letter will be effected automatically. Under either of the above
conditions the total purchased pursuant to this Letter may be less than the
amount specified as the expected aggregate purchases. If so, ACCESS will
redeem at net asset value an appropriate number of escrow shares to remit to
the Distributor and to the appropriate dealer an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if
all such purchases would have been made at a single time.

REDUCED SALES CHARGES
Some defined individuals may qualify for a reduced sales charge. (See the
"Purchase of Shares -- Volume Discounts" in the prospectus.)

DEALER AGREEMENT
Under these plans, the dealer signing the application acts as principal in
all purchases of Fund shares and appoints ACCESS as its agent to execute the
purchases and to confirm each purchase to the investor. ACCESS remits monthly
to the dealer the amount of its commissions. The dealer hereby guarantees the
genuineness of the signature(s) on the application and represents that he is
a duly licensed dealer and may lawfully sell Fund shares in the state
designated by the investor's mailing address, and that he has entered into a
Selling Group Agreement with the Distributor with respect to the sale of Fund
shares. The dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.

CUT ON PERFORATED LINE
- -------------------------------------------------------------------------------

I/WE HAVE READ AND UNDERSTAND THE CONDITIONS THAT FOLLOW:
When a check is presented to the Bank for payment, the Bank will present
the check to the Fund as authority to redeem a sufficient number of shares
presently or hereafter registered in the previous account name on the
shareholder records of the Fund to cover the amount of the check. Checks may
not be for less than $100. The Fund is hereby authorized and directed to
accept and act upon checks presented by the Bank and to redeem a sufficient
number of shares presently or hereafter registered in the previous account
name on the shareholder records of the Fund and forward the proceeds of such
redemption to the Bank. The signator(s) understands and agrees that the Fund
and/or its agents will not be liable for any loss, expense or cost arising
out of check redemptions. The signator(s) will be subject to the terms of the
Fund's current offering prospectus and the Bank's rules and regulations, as
now in effect and as amended from time to time, including the right of the
Bank not to honor checks in amounts exceeding the value of the account at the
time the check is presented for payment. The Bank has reserved the right to
change, modify or terminate this check-writing privilege at any time. Checks
will not be honored for redemption of shares held less than fifteen (15) days
unless such shares have been paid for by bank wire.
I/We certify and agree that the certifications, authorizations and
appointments contained in this document will continue in effect until ACCESS,
the Fund's service agent, receives actual written notice of any change
thereof, and, to the extent of the amount of any check accepted by the Fund
for the purchase of shares or as authorization to redeem shares, the Fund
shall have a security interest in such shares.
<PAGE>

ALL SECTIONS ON THIS PAGE MUST BE COMPLETED FOR ACCOUNT TO BE ESTABLISHED.

AMERICAN CAPITAL FAMILY OF FUNDS [AMERICAN CAPITAL
NEW ACCOUNT APPLICATION LOGO APPEARS HERE]

SEND COMPLETED APPLICATION TO: AMERICAN CAPITAL COMPANIES SHAREHOLDER
SERVICES, INC., P.O. Box 419319, Kansas City, Missouri 64141-6319

================================================================================

1. ACCOUNT OWNER INFORMATION
TYPE OF ACCOUNT
(Check one only)

/ / INDIVIDUAL __________ ______________ ___________ _______________________
First Name Middle Initial Last Name Social Security Number
(first individual only)

/ / JOINT ______________ ______________ __________________________
TENANT Joint Tenant's Middle Initial Last Name
First Name

/ / GIFT/
TRANSFER
TO MINOR __________________________________ __________________________
Custodian's Name (one only) Minor's Name (one only)

/ / GUARDINSHIP/
CONSERVATOR-
SHIP ____________________ ___________________ ___________________
Guardian/Conservator Ward/Incompetent Ward/Incompetent
or Minor's Name or Minor's Social
(one only) Security Number

/ / CORPORATION,
PARTNERSHIP, __________________________________________ __________________
TRUST OR Exact Name of Corporation, Tax Identification
OTHER Partnership or other Organization Number
ORGANIZATION _______________________________________________________________
Trustee Accounts Only: Name of all Trustees required by trust
agreement to sell/purchase shares

______________ _________________ _________________________
Date of Trust Name of Trust Tax Identification Number

/ / OTHER _______________________________________________________________

/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING

================================================================================

2. MAILING ADDRESS
____________ ____________ ____________ ____________ ____________
Street Apartment City State Zip Code
Address Number

( ) ( )
______________ ____________ Citizenship ______________________
Business Phone Home Phone / / U.S. / / Other Indicate County

================================================================================

3. FUND SECTION

PLEASE INDICATE DOLLAR AMOUNT IN SPACE PROVIDED, $500 MINIMUM FOR EACH
FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNTS MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS.

FIXED INCOME FUNDS
$________ AC Corporate Bond Fund
$________ AC Federal Mortgage Trust
$________ AC Global Government Securities Fund
$________ AC Government Securities
$________ AC High Yield Investments
$________ AC Municipal Bond Fund
$________ AC Reserve Fund (A shares only)
$________ AC Tax-Exempt Trust High Yield Municipal Portfolio
$________ AC Tax-Exempt Trust Insured Municipal Portfolio
$________ AC Texas Municipal Securities
$________ AC U.S. Government Trust for Income
$________ Other ______
$________ TOTAL AMOUNT ENCLOSED

EQUITY FUNDS
$________ AC Comstock Fund
$________ AC Emerging Growth Fund
$________ AC Enterprise Fund
$________ AC Equity Income Fund
$________ AC Global Equity Fund
$________ AC Global Managed Assets Fund
$________ AC Growth & Income Fund
$________ AC Harbor Fund
$________ AC Pace Fund
$________ AC Real Estate Securities Fund
$________ AC Utilities Income Fund
$________ Other
$________ TOTAL AMOUNT ENCLOSED

CLASS OF SHARES
(Must select one only)

/ / A SHARES
(front-end sales charge)

/ / B SHARES
(contingent deferred sales charge)

Class B shares are not available for
purchases of $250,000 or more

/ / C SHARES
(contingent deferred sales charge)

Class C shares are not available for
purchases of $1 million or more

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

MAKE CHECK PAYABLE TO THE SPECIFIC AMERICAN CAPITAL FUND. IF MORE
THAN ONE FUND IS SELECTED, MAKE CHECK PAYABLE TO "AMERICAN CAPITAL
FAMILY OF FUNDS."

================================================================================

4. DISTRIBUTION OPTIONS

(Check one only) -- If no option is selected, all distributions will be
reinvested into the Fund that pays them.

/ / Reinvest all dividend and capital gains into the Fund that pays them.

/ / Reinvest all dividends and capital gains into an existing account in
another American Capital Fund. (Must be like class of shares.)

__________________________________ _____________________________________
Fund Name Account Number

/ / Pay all dividends and reinvest capital gains.
OR
/ / Pay all dividends and capital gains.
(IF EITHER PAY OPTION IS SELECTED,
COMPLETE INFORMATION AT RIGHT)

I request the payable distributions be: (Check one.)

/ / Sent to the address in Section 2.

/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.) If voided check is not enclosed, will be sent to address in
Section 2.

/ / Sent to special payee listed in Section 10.

===============================================================================

5. INVESTMENT PROFESSIONAL

____________________________________ ______________________________________
Broker/Dealer Name Investment Professional's Name

____________________________________ ______________________________________
Branch Office Address Investment Professional's
Representative Number

____________________________________ ________________ __________________
City State Zip Code

____________________________________ ______________________________________
Investment Professional's Phone Authorized Signature of Broker/dealer

===============================================================================

6. SIGNATURES

I have read the prospectus and application for the Fund in which I am
investing and agree to its terms. I am also aware that a Telephone
Exchange Privilege exists and that this privilege is automatically
available unless affirmatively declined. I also understand that if the
Fund fails to follow the procedures outlined in the prospectus and in the
Telephone Transaction Authorization hereto, it may be liable for any
losses due to unauthorized or fraudulent instructions. See Telephone
Transaction Authorization section for procedures. I am of legal age.
Sign below exactly as printed in registration. For joint registration,
both must sign. Under penalty of perjury, I certify with my signature
below that the number shown in section one is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
__________________________________________________________________________
Signature Date

__________________________________________________________________________
Signature Date

ATTACH VOIDED CHECK HERE _____________________
(IF APPROPRIATE)

For Corporations, Trusts, or Partnerships: We hereby certify that each of
the persons listed below has been duly elected, and is now legally holding
the office set forth opposite his/her name and has the authority to make
this authorization.

Please print titles below if signing on behalf of a business or trust to
establish this account.

__________________________________________________________________________
President, Trustee, General Partner or Title

__________________________________________________________________________
Co-owner, Secretary of Corporation, Co-trustee, etc.

================================================================================

7. ACCOUNT OPTIONS

For account options, please complete the reverse side of this account
application. Account options are:

- Cumulative Purchase Discount
- Letter of Intent
- Automatic Investment Plan (AIP)
- Systematic Exchange
- Telephone Exchange
- Checkwriting (Available on Class A shares, Fixed Income Accounts Only)
- Dividend Mail
- Interested Party Mail
- Systematic Withdrawal (for Class B and Class C shares see prospectus)
- Telephone Redemption

================================================================================

THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.
<PAGE>

================================================================================
8. PURCHASE OPTIONS

CUMULATIVE PURCHASE DISCOUNT

/ / I qualify for cumulative discount with the account(s) listed below.

_____________________________________ _____________________________________
Fund Name Account Number

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

LETTER OF INTENT (Check one only)

/ / I wish to establish a new letter of intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)

/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.

/ / Please amend my existing Letter of Intent with the new amount indicated
below.

If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus.
The aggregate amount of these purchases will be at least equal to the amount
listed below:

/ / $50,000* / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
*Equity Funds Only

_____________________________________ _____________________________________
Fund Name Account Number

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

AUTOMATIC INVESTMENT PLAN (AIP)--AUTOMATIC MONTHLY INVESTING

/ / I wish to invest on a monthly basis, directly from my checking account into
the following fund(s).
(PLEASE ATTACH A VOIDED CHECK TO SECTION 6.)

____________________ ____________________ _____________________
Fund Name Fund Name Fund Name

Amount $____________, to start _____________ of _____________, _____________
Minimum $25 Day Month Year

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

STEP UP PLAN OPTION -- THIS OPTION IS AVAILABLE WHEN AN AUTOMATIC INVESTMENT
PLAN IS SELECTED. (ALL SECTIONS MUST BE COMPLETED TO ESTABLISH OPTION)

A. I wish to increase my AIP / / Quarterly / / Semi-Annually / / Annually
B. To start ______________ of ___________.
Month Year
C. Check one only:
Amount Increase / / $10 / / $25 / / $50 Other (Specify amount-
min. $10) _________________
OR
Percentage Increase / / 10% / / 25% / / 50% Other (Specify percentage-
min. 10%) _________________

===============================================================================

9. ADDITIONAL OPTIONS

SYSTEMATIC EXCHANGE--ACCOUNTS MUST HAVE THE SAME CLASS OF SHARES.

/ / I wish to establish a systematic monthly exchange
from ______________ into the ______________ Fund.
Fund Name Fund Name

/ / Exchange $___________ monthly into my existing account ______________.
Minimum $25 Account Number

/ / Exchange $____________ monthly into a new account.
Minimum $100

Start the exchanges on _______________ of _______________, _______________.
Day Month Year

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

TELEPHONE EXCHANGE--IF ACCEPTED ACCOUNTS MUST HAVE THE SAME ACCOUNT
INFORMATION, OPTIONS AND CLASS OF SHARES.

/ / I decline telephone exchange, and do not want this privilege. (See
Telephone Transaction Authorization section for procedures.)

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

SYSTEMATIC WITHDRAWAL PLAN--FOR CLASS B AND CLASS C SHARE LINITATIONS,
SEE PROSPECTUS.
(Minimum account balance for monthly SWP is $10,000 and quaterly SWP is
$5,000.)

/ / I wish to automatically withdraw $_____________ from this account.
Minimum $25

/ / Monthly / / Quarterly / / Semi-Annually / / Annually

I request this distribution be: (Check One)

/ / Sent to the address listed in Section 2. To begin ____________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Sent to the special payee listed in Section 10. to begin __________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Directly deposited in my bank account. (PLease attach a voided check
to Section 6.) To begin __________ of __________, __________.
Day Month Year

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

TELEPHONE REDEMPTION--AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.

/ / I wish to redeem shares by telephone and request that the redemption
proceeds be sent to the address listed in Section 2.

/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided
check to Section 6.) (if voided check is not enclosed, will be sent
to address in Section 2.)

/ / I decline telephone redemption, and do not want this privilege.

See Telephone Authorization section for procedures.

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

CHECKWRITING--AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY.

/ / I wish to redeem shares by check ($100 minimum per check).

Please complete the Authorization for Redemption by Check (on back
cover) and attach to the application in Section 6.

================================================================================

10. INTERESTED PARTY MAIL/DIVIDENDS MAIL

/ / I wish to have my distributions sent to the address listed below.

/ / I wish to have duplicate confirmation statements sent to the
interested party listed below.

___________________________________________________________________________
Name of Individual

___________________________________________________________________________
Street Address

___________________________ _____________________ ___________________
City State Zip Code

===============================================================================

THIS APPLICATION IS NOT A PART OF THIS PROSPECTUS.
<PAGE>

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

[AMERICAN CAPITAL LOGO APPEARS HERE]
<PAGE>

paid an initial sales charge and was not subject to a deferred sales charge on
the redeemed account. Shares are also offered at net asset value to (g)
registered investment advisers, trust companies and bank trust departments
exercising discretionary investment authority with respect to the money to be
invested in the Fund, provided that the aggregate amount invested in the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital funds as described herein under "Purchase of
Shares--Class A Shares--Volume Discounts", during the 13-month period
commencing with the first investment pursuant hereto at net asset value,
equals at least $1 million. Purchase orders made pursuant to clause (g) may be
placed either through authorized dealers as described above or directly with
ACCESS by the investment adviser, trust company or bank trust department,
provided that ACCESS receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer or financial institution may charge a transaction fee for
placing an order to purchase shares pursuant to this provision or for placing
a redemption order with respect to such shares. Service Organizations will be
paid a service fee as described herein under "Distribution Plans" on purchases
made on behalf of registered investment advisers, trust companies and bank
trust departments described in clause (g) above, retirement plans described in
clasue (d) above and for registered representatives' accounts.

The Distributor may pay commissions of up to 1% for purchases described in
clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (g) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a twelve
month period following the pertinent transaction. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.

Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc. ("Emerging Growth"), American Capital Enterprise Fund, Inc.,
American Capital Equity Income Fund, Inc., American Capital Federal Mortgage
Trust ("Federal Mortgage"), American Capital Global Managed Assets Fund, Inc.
("Global Managed"), American Capital Government Securities, Inc., American
Capital Government Target Series ("Government Target"), American Capital
Growth and Income Fund, Inc., American Capital Harbor Fund, Inc., American
Capital High Yield Investments, Inc. ("High Yield"), American Capital
Municipal Bond Fund, Inc. ("Municipal Bond"), American Capital Pace Fund,
Inc., American Capital Real Estate Securities Fund, Inc. ("Real Estate"),
American Capital Tax-Exempt Trust ("Tax-Exempt"), American Capital Texas
Municipal Securities, Inc. ("Texas Municipal"), American Capital U.S.
Government Trust for Income, ("Government Trust"), American Capital Utilities
Income Fund, Inc. ("Utilities Income"), and American Capital World Portfolio
Series, Inc. ("World Portfolio"). A person eligible for a volume discount
includes an individual; members of a family unit comprising husband, wife and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares
of the Participating Funds plus the current offering price of all shares of
the Participating Funds which have been previously purchased and are still
owned. Shares previously purchased are only taken into account, however, if
the Distributor is notified by the investor or the investor's dealer at the
time an order is placed for a purchase which would qualify for a reduced sales
charge on the basis of previous purchases and if sufficient information is
furnished to permit confirmation of such purchases.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-
month period to determine the sales charge as outlined in the preceding table.
The size of investment shown in the preceding table also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute
the 13-month period starting up to 90 days before the date of execution of a
Letter of Intent. Each investment made during the period receives the reduced
sales charge applicable to the total amount of the investment goal. If the
goal is not achieved within the period, the investor must pay the difference
between the charges

19
<PAGE>

applicable to the purchases made and the charges previously paid. The initial
purchase must be for an amount equal to at least five percent of the minimum
total purchased amount of the level selected. If trades not initially made
under a Letter of Intent subsequently qualify for a lower sales charge through
the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustments in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application form included in this Prospectus.

CLASS B SHARES

Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.

The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------------------------------------------
<S> <C>
First.......................................... 4%
Second......................................... 4%
Third.......................................... 3%
Fourth......................................... 2.5%
Fifth.......................................... 1.5%
Sixth.......................................... None
</TABLE>
- -------------------------------------------------------------------------------

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the
redemption is first of any shares in the shareholder's Fund account that are
not subject to a contingent deferred sales charge, second, of shares held for
over five years or shares acquired pursuant to reinvestment of dividends or
distributions and third, of shares held longest during the five-year period.
The charge is not applied to dollar amounts representing an increase in the
net asset value since the time of purchase.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
ten additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), ten shares
will not be subject to charge because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds is subject to a deferred sales
charge at a rate of 4% (the applicable rate in the second year after
purchase).

A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional
promotional incentives, in the form of cash or other compensation, to Service
Organizations that sell Class B shares of the Fund.

CLASS C SHARES

Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.

20
<PAGE>

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the
redemption is first, of any shares in the shareholder's Fund account that are
not subject to a contingent deferred sales charge and second, of shares held
for more than one year or shares acquired pursuant to reinvestment of
dividends or distributions.

A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.65% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives, in the form of cash or other compensation, to Service
Organizations that sell Class C shares of the Fund.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code)
of a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and
(iv) effected pursuant to the right of the Fund to liquidate a shareholder's
account as described herein under "Redemption of Shares." The contingent
deferred sales charge is also waived on redemptions of Class C shares as it
relates to the reinvestment of redemption proceeds in shares of the same class
of the Fund within 120 days after redemption. See the Statement of Additional
Information for further discussion of waiver provisions.

- -------------------------------------------------------------------------------
DISTRIBUTION PLANS
- -------------------------------------------------------------------------------

Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment
company to directly or indirectly pay expenses associated with the
distribution of its shares ("distribution expenses") and servicing of its
shareholders in accordance with a plan adopted by the investment company's
board of directors and approved by its shareholders. Pursuant to such Rule,
the Trustees of the Fund, and the sole shareholder of each class have adopted
three Distribution Plans hereinafter referred to as the "Class A Plan", the
"Class B Plan" and the "Class C Plan." Each Distribution Plan is in compliance
with the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. ("NASD Rules") applicable to mutual fund sales charges. The NASD
Rules limit the annual distribution charges that a mutual fund may impose on a
class of shares. The NASD Rules also limit the aggregate amount which the Fund
may pay for such distribution costs. Under the Class A Plan, the Fund pays a
service fee to the Distributor at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Under
the Class B Plan and the Class C Plan, the Fund pays a service fee to the
Distributor at an annual rate of up to 0.25% and a distribution fee at an
annual rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B shares or Class C shares to reimburse the
Distributor for service fees paid by it to Service Organizations and for its
distribution costs.

The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance
of shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-
dealers and other Service Organizations, and (ii) other distribution expenses
as described in the Statement of Additional Information. Under the Class C
Plan, the Distributor receives additional payments from the Fund in the form
of a distribution fee at the annual rate of up to 0.75% of the net assets of
the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.65% of the average daily
net assets of the Fund's Class C shares, and (ii) other distribution expenses
as described in the Statement of Additional Information.

In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with
respect to distribution and service revenues and expenses is presented to the
Trustees each year for their

21
<PAGE>

consideration in connection with their deliberations as to the continuance of
the Distribution Plans. In their review of the Distribution Plans, the
Trustees are asked to take into consideration expenses incurred in connection
with the distribution and servicing of each class of shares separately. The
sales charge and distribution fee, if any, of a particular class will not be
used to subsidize the sale of shares of the other classes.

Service expenses accrued by the Distributor in one fiscal year may not be
paid from the Class A service fees received from the Fund in subsequent fiscal
years. Thus, if the Class A Plan were terminated or not continued, no amounts
(other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor.

The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-
end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the
Class A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.

Actual distribution expenses paid by the Distributor with respect to Class B
or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant
to contingent deferred sales charges. Such excess will be carried forward
without interest charges unless permitted under applicable SEC regulations,
and may be reimbursed by the Fund or its shareholders from payments received
through contingent deferred sales charges in future years and from payments
under the Class B Plan and Class C Plan so long as such Plans are in effect.
For example, if in a fiscal year the Distributor incurred distribution
expenses under the Class B Plan of $1 million, of which $500,000 was recovered
in the form of contingent deferred sales charges paid by investors and
$400,000 was reimbursed in the form of payments made by the Fund to the
Distributor under the Class B Plan, the balance of $100,000 would be subject
to recovery in future fiscal years from such sources. For the plan year ended
June 30, 1994, the unreimbursed expenses incurred by the Distributor under the
Class B Plan and carried forward were approximately $11.9 million or 5.1% of
the Class B shares' net assets. For the plan year ended June 30, 1994, the
unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $840,000 or 2.0% of the Class C shares' net
assets.

If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.

- -------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------

The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is
a description of such services.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Share certificates are not issued except upon
shareholder requests. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds listed under "Purchase of Shares--Class A Shares--Volume
Discounts," or Reserve, may receive statements quarterly from ACCESS showing
any reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.

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<PAGE>

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge)
on the record date. Unless the shareholder instructs otherwise, the
reinvestment plan is automatic. The investor may, on the initial application
or prior to any declaration instruct that dividends be paid in cash and
capital gains distributions be reinvested at net asset value, or that both
dividends and capital gains distributions be paid in cash.

AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.

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

FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B
or Class C account in any of the Participating Funds listed under "Purchase of
Shares--Class A Shares--Volume Discounts" or Reserve.

Both accounts must be of the same class and of the same type, either non-
retirement or retirement. Any two non-retirement accounts can be used. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would
be invested. Distributions are invested into the selected fund at its net
asset value as of the payable date of the distribution only if shares of such
selected fund have been registered for sale in the investor's state.

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
above under "Purchase of Shares--Class A Shares--Volume Discounts"), other
than Government Target, may be exchanged for shares of the same class of any
other fund without sales charge, provided that shares of the Fund and shares
of Corporate Bond, Federal Mortgage, Global Managed, High Yield, Municipal
Bond, Real Estate, Tax-Exempt, Texas Municipal, Utilities Income and the
Global Government Securities Fund of World Portfolio are subject to a 30-day
holding period requirement. Shares of Government Target may be exchanged for
Class A shares of the Fund without sales charge. Shares of Reserve may be
exchanged for Class A shares of any Participating Fund upon payment of the
excess, if any, of the sales charge rate applicable to the shares being
acquired over the sales charge rate previously paid. Shares of any
Participating Fund or Reserve may be exchanged for shares of any other
Participating Fund if shares of that Participating Fund are available for
sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of
the Participating Fund. Additional funds may be added from time to time as a
Participating Fund.

Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption
of the original shares. For purposes of computing the contingent deferred
sales charge payable upon a disposition of the new shares, the holding period
for the original shares is added to the holding period of the new shares.
Class B and Class C shareholders may exchange their shares for shares of
Reserve without incurring the contingent deferred sales charge that otherwise
would be due upon redemption of such Class B or Class C shares. Class B or
Class C shareholders would remain subject to the contingent deferred sales
charge imposed by the original fund upon their redemption from the American
Capital complex of funds. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of shares
of a Participating Fund without incurring a contingent deferred sales charge.

23
<PAGE>

Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described below under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable
to confirm that instructions communicated by telephone are genuine. Such
procedures include requiring certain personal identification information prior
to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. Van Kampen American
Capital and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Exchanges
are effected at the net asset value per share next calculated after the
request is received in good order with adjustment for any additional sales
charge. See both "Purchase of Shares" and "Redemption of Shares." If the
exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gains options (except fund to fund dividends) and dealer
of record as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In order to establish a systematic withdrawal
plan for the new account or reinvest dividends from the new account into
another fund, however, an exchanging shareholder must file a specific written
request. The Fund reserves the right to reject any order to acquire its shares
through exchange, or otherwise to modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.

A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.

SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any
Participating Fund by systematically exchanging from the Fund into such other
fund account ($25 minimum for existing account, $100 minimum for establishing
new account). Both accounts must be of the same type and class. The exchange
fee as described above under "Shareholder Services--Exchange Privilege" will
be waived for such systematic exchanges. Additional information on how to
establish this option is available from the Distributor.

AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services--Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the
American Capital Service Department at (800) 421-5666 for further information
on how to utilize this option.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose
shares in a single account total $5,000 or more may establish a withdrawal
plan on a quarterly, semiannual or annual basis. This plan provides for the
orderly use of the entire account, not only the income but also the capital,
if necessary. Each withdrawal constitutes a redemption of shares on which any
capital gain or loss will be recognized. The planholder may arrange for
monthly, quarterly, semiannual, or annual checks in any amount not less than
$25. Such a systematic withdrawal plan may also be maintained by an investor
purchasing shares for a retirement plan established on a form made available
by the Fund. See "Shareholder Services--Retirement Plans."

Class B and Class C shareholders who establish a withdrawal plan may redeem
up to 12% annually of the shareholder's initial account balance without
incurring a contingent deferred sales charge. Initial account balance means
the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares--Waiver
of Contingent Deferred Sales Charge" and the Statement of Additional
Information.

24
<PAGE>

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional
shares at the next determined net asset value. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Withdrawals made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder
because of the duplication of sales charges. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status
may appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY
CHECK form and the appropriate section of the application and returning the
form and the application to ACCESS. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street
Bank and Trust Company ("State Street Bank") will be sent to the Class A
shareholder. These checks may be made payable by the shareholder to the order
of any person in any amount of $100 or more.

When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are
redeemed from the shareholder's Class A account by ACCESS at the next
determined net asset value. Check writing redemptions represent the sale of
Class A shares. Any gain or loss realized on the sale of shares is a taxable
event. See "Redemption of Shares."

Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be
redeemed by check. If the amount of the check is greater than the proceeds of
all uncertificated shares held in the shareholder's Class A account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or State Street Bank. Retirement Plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks. See the Statement of Additional Information
for further information regarding the establishment of the privilege.

- -------------------------------------------------------------------------------
REDEMPTION OF SHARES
- -------------------------------------------------------------------------------

REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form
must be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-
9256. Shareholders may also place redemption requests through an authorized
investment dealer. Orders received from dealers must be at least $500 unless
transmitted via the FUNDSERV network. The redemption price for such shares is
the net asset value next calculated after an order is received by a dealer
provided such order is transmitted to the Distributor prior to the
Distributor's close of business on such day. It is the responsibility of
dealers to transmit redemption requests received by them to the Distributor so
they will be received prior to such time.

As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. A contingent
deferred sales charge of 1% may be imposed on certain redemptions of Class A
shares made within one year of purchase for investments of $1 million or more
and for certain qualified 401(k) retirement plans. The contingent deferred
sales charge incurred upon redemption is paid to the Distributor in
reimbursement for distribution-related expenses. See "Purchase of Shares." A
custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if
the record address has changed within the previous 60 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-
dealer; a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank.

25
<PAGE>

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, and the name and
title of the individual(s) authorizing such redemption is not shown in the
account registration, a copy of the corporate resolution or other legal
documentation appointing the authorized signer and certified within the prior
60 days must accompany the redemption request. IRA redemption requests should
be sent to the IRA custodian to be forwarded to ACCESS. Where Van Kampen
American Capital Trust Company serves as custodian, special IRA, 403(b)(7), or
Keogh distribution forms must be obtained from and be forwarded to Van Kampen
American Capital Trust Company, P.O. Box 944, Houston, Texas 77001-0944.
Contact the custodian for information.

In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any
other necessary documents in proper order. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. If the
shares to be redeemed have been recently purchased by check, ACCESS may delay
mailing a redemption check until it confirms that the purchase check has
cleared, usually a period of up to 15 days. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.

The Fund may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum initial investment as
specified by the Trustees. The Fund would redeem a shareholder's account
falling below the minimum initial investment only if this results from
shareholder withdrawals and not from market decline. Three months advance
notice of any such involuntary redemption is required and the shareholder is
given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any applicable
contingent deferred sales charges will be deducted from the proceeds of this
redemption.

TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account
of record as described below. To establish such privilege a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares
contact the telephone transaction line at (800) 421-5684. Van Kampen American
Capital and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such
procedures include requiring certain personal identification information prior
to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. Van Kampen American
Capital and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other
reason; in such case, a shareholder would have to use the Fund's regular
redemption procedure previously described. Requests received by ACCESS prior
to 4:00 p.m., New York time, on a regular business day will be processed at
the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates.
If an account has multiple owners, ACCESS may rely on the instructions of any
one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be
wired on the next business day following the date of redemption. The Fund
reserves the right at any time to terminate, limit or otherwise modify this
redemption privilege.

REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of
such redemption in Class A shares of the Fund. A Class C

26
<PAGE>

shareholder who has redeemed shares of the Fund may reinstate any portion or
all of the net proceeds of such redemption in Class C shares of the Fund with
credit given for any contingent deferred sales charge paid upon such
redemption. Such reinstatement is made at the net asset value (without sales
charge except as described under "Shareholder Services--Exchange Privilege")
next determined after the order is received, which must be within 120 days
after the date of the redemption. See "Purchase of Shares--Waiver of
Contingent Deferred Sales Charge" and the Statement of Additional Information.
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.

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DIVIDENDS, DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------

DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid each business day, and
distributed monthly. The daily dividend is a fixed amount determined for each
class at least monthly. Shares become entitled to dividends on the day ACCESS
receives payment for the shares, and remain entitled to dividends through the
day before the day such shares are priced for redemption purposes, which is
the day a valid redemption request with respect to such shares is received by
ACCESS. Therefore, if a dealer delays forwarding to ACCESS payment for shares
which an investor has made to the dealer, this will in effect cost the
investor money because it will delay the date upon which he becomes entitled
to dividends.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.

Any taxable net realized short-term or long-term capital gains will be
distributed to shareholders at least annually.

Unless the shareholder instructs otherwise, dividends and capital gains
distributions are automatically applied to purchase additional shares of the
Fund at the next determined net asset value. See "Shareholder Services--
Reinvestment Plan." In computing interest income the Fund does not amortize
premiums paid on the purchase of debt securities. Thus in the case of
mortgage-related and other U.S. Government securities purchased at a premium,
interest income is greater than it would be if the premiums were amortized.

Dividends and distributions paid by the Fund have the effect of reducing the
net asset value per share on the record date by the amount of the dividend or
distribution. Therefore, a dividend or distribution paid shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder (to the extent it is paid on the shares so
purchased), even though it would be subject to income taxes, as discussed
below.

TAXES. The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code. By qualifying as a regulated investment company, the
Fund is not subject to federal income taxes to the extent it distributes
substantially all of its net investment income and net realized capital gains
to shareholders. However, shareholders normally are subject to federal income
taxes, and any applicable state or local income taxes, on the dividends and
distributions received from the Fund.

There are differences between federal income tax regulations and the
generally accepted accounting principles followed by the Fund. For example,
year-end marking to market on certain options and futures contracts generally
are recognized as realized gains or losses for tax purposes but not for
accounting purposes and certain adjustments are made for tax purposes for
repayments on mortgage-related securities. Since dividends and distributions
may, from time to time, be paid by the Fund based on earnings recognized for
accounting purposes, a portion of such dividends and distributions may
constitute a return of capital for federal income tax purposes. If the amount
of distributions paid by the Fund for any fiscal year exceeds its investment
company taxable income plus net realized capital gains for the year, the
excess is treated as a return of capital. Shareholders are not subject to
current federal income tax on the part which is treated as a return of
capital, but their basis in Fund shares would be reduced by that amount. This
reduction of basis would operate to increase capital gain (or decrease capital
loss) upon subsequent sale or redemption of shares.

Current federal tax law requires that a holder (such as the Fund) of a
stripped security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no

27
<PAGE>

interest payment in cash on the security during the year. As an investment
company, the Fund must pay out substantially all of its net investment income
each year. Accordingly, the Fund may be required to pay out as an income
distribution each year an amount which is greater than the total amount of
cash interest the Fund actually received. Such distributions will be made from
the cash assets of the Fund or by liquidation of portfolio securities, if
necessary. If a distribution of cash necessitates the liquidation of portfolio
securities, the Adviser will select which securities to sell. The Fund may
realize a gain or loss from such sales. In the event the Fund realizes net
capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.

Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions. Long-term capital gains distributions constitute
long-term capital gains for federal income tax purposes. However, shareholders
not subject to tax on their income will not be required to pay tax on amounts
distributed to them.

To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with
a certification of their correct taxpayer identification number.

Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the
Fund from writing over-the-counter options constitute short-term capital gains
or losses unless the option is exercised, in which case the character of the
gain or loss is determined by the holding period of the underlying security.
The Code contains certain "straddle" rules which require deferral of losses
incurred in certain transactions involving hedged positions to the extent the
Fund has unrealized gains in offsetting positions and generally terminate the
holding period of the subject position. Additional information is set forth in
the Statement of Additional Information.

The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. investors should consult their tax advisers for more
detailed tax advice including state and local tax considerations. Foreign
investors should consult their own counsel for further information as to the
U.S. and their country of residence or citizenship tax consequences of receipt
of dividends and distributions from the Fund.

- -------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------

From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five years and for the life of the Fund. Other total
return quotations, aggregate or average, over other time periods may also be
included.

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are
reinvested in Fund shares at net asset value; and that any applicable
contingent deferred sales charge has been paid. The Fund's total return will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and unrealized net capital gains or
losses during the period. Total return is based on historical earnings and
asset value fluctuations and is not intended to indicate future performance.
No adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.

Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the
period that would equate the initial amount invested to the ending redeemable
value.

In addition to total return information, the Fund may also advertise its
current "yield". Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by

28
<PAGE>

analyzing the Fund's net income per share for a 30-day (or one-month) period
(which period will be stated in the advertisement), and dividing by the
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.

For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.

The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.

Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.

To increase the Fund's yield the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.

Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge
of 4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.

In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the ratings or rankings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds, with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's
Personal Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, do not reflect sales charges,
the inclusion of which would reduce Fund performance. The Fund will include
performance data for Class A, Class B and Class C shares of the Fund in any
advertisement or information including performance data of the Fund.

The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.

The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.

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

ORGANIZATION OF THE FUND. The Fund was organized on June 24, 1992, under the
laws of the Commonwealth of Massachusetts and is a business entity commonly
known as a "Massachusetts business trust." It is authorized to issue an
unlimited number of Class A, Class B and Class C shares of beneficial interest
of $.01 par value, respectively. Other classes of shares may be established
from time to time in accordance with provisions of the Fund's Agreement and
Declaration of Trust ("Declaration").

29
<PAGE>

Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interests in the assets of the
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that the distribution fees and/or service
fees related to each class of shares are borne solely by that class, and each
class of shares has exclusive voting rights with respect to provisions of the
Fund's Class A Plan, Class B Plan and Class C Plan which pertain to that
class. An order has been received from the SEC permitting the issuance and
sale of multiple classes of shares representing interests in the Fund's
existing portfolio. Shares issued are fully paid, non-assessable and have no
preemptive or conversion rights. There will normally be no annual meetings of
shareholders for the purpose of electing Trustees unless and until such time
as less than a majority of the Trustees holding office have been elected by
the shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the Declaration, cause a meeting of shareholders to be held
for the purpose of voting on the removal of Trustees. Except as set forth
below, the Trustees shall continue to hold office and appoint successor
Trustees.

The Declaration establishing the Fund, dated June 24, 1992, a copy of which
together with all amendments thereto is on file in the office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "American Capital
U.S. Government Trust for Income" refers to the Trustees under the Declaration
collectively as Trustees, not as individuals or personally; and provides that
no Trustee, officer or shareholder of the Fund shall be held to any personal
liability, nor shall resort be had to their private property for the
satisfaction of any obligation or liability of the Fund but the assets of the
Fund only shall be liable.

PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and
the Adviser and its employees. The Codes permit directors, officers and
employees to buy and sell securities for their personal accounts subject to
preclearance and other procedures designed to prevent conflicts of interest.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.

LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse, LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.

30
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
September 30, 1994

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- --------------------------------------------------------------------------------
UNITED STATES TREASURY OBLIGATIONS
United States Treasury Notes
<C> <S>
$ 13,000,000 8.50%, 5/15/95
*200,000,000 9.25%, 1/15/96
*85,000,000 11.25%, 5/15/95
COLLATERALIZED MORTGAGE OBLIGATIONS
5,301,787 Capstead Security
Corp., Series 93-2C,
9.7556%, 8/25/23
Prudential Home
Mortgage Securities
5,326,519 Series 93-23 A7, 10%,
6/25/08
8,098,394 Series 93-30 A7, 10%,
8/25/23
10,000,000 Salomon Brothers
Mortgage Securities,
Series 93-5 A3,
7.374%, 10/25/23
SHORT-TERM INVESTMENTS
415,000 Federal National
Mortgage Association,
Discount Notes, 4.65%
10/7/94
</TABLE>

* A portion of these securities with a market value of approximately $247.2
million were placed as collateral for forward commitments.

31
<PAGE>

BACKUP WITHHOLDING INFORMATION

STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with the
following guidelines:

<TABLE>
<C> <C>
Account Type Give Social Security Number or Tax Identification Number of:
- ---------------------------------------------------------------------------------------
Individual | Individual
- ---------------------------------------------------------------------------------------
Joint (or Joint Tenant) | Owner who will be paying tax
- ---------------------------------------------------------------------------------------
Uniform Gifts to Minors | Minor
- ---------------------------------------------------------------------------------------
Legal Guardian | Ward, Minor or Incompetent
- ---------------------------------------------------------------------------------------
Sole Proprietor | Owner of Business
- ---------------------------------------------------------------------------------------
Trust, Estate, Pension |
Plan Trust | Trust, Estate, Pension Trust (not personal TIN of fiduciary)
- ---------------------------------------------------------------------------------------
Corporation, Partnership,
Other Organization | Corporation, Partnership, Other Organization
- ---------------------------------------------------------------------------------------
Broker/Nominee | Broker/Nominee
- ---------------------------------------------------------------------------------------
</TABLE>

STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application for
Employer Identification Number) from your local Social Security or IRS office
and apply for one. Write "Applied For" in the space on the application.

STEP 3. If you are one of the entities listed below, you are exempt from backup
withholding and should not check the box on the Application in Section 2,
Taxpayer Identification.

. A corporation
. Financial institution
. Section 501 (a) exempt organization (IRA, Corporate Retirement Plan, 403(b),
Keogh)
. United States or any agency or instrumentality thereof
. A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof
. International organization or any agency or instrumentality thereof
. Registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
. Real estate investment trust
. Common trust fund operated by a bank under section 584(a)
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1)

If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.

STEP 4. IRS Penalties--If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause and
not willful neglect. If you fail to report interest, dividend or patronage
dividend income on your federal income tax return, you will be treated as
negligent and subject to an IRS 5% penalty tax on any resulting underpayment of
tax unless there is clear and convincing evidence to the contrary. If you
falsify information on this form or make any other false statement resulting in
no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
<PAGE>

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| |
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AMERICAN CAPITAL
U.S. GOVERNMENT
TRUST FOR INCOME

-------------------------------------------------------------------------
| |
-------------------------------------------------------------------------

NATIONAL DISTRIBUTOR
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza Prospectus
Oakbrook Terrace, IL 60181 January 31,

INVESTMENT ADVISER 1995
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056

TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
Van Kampen/American Capital
Shareholder Services, Inc.
P.O, Box 418256
Kansas City, MO 64141-9256

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002

CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Inquiries concerning transfer of registration, distributions, redemptions
and shareholder service should be directed to the Shareholder Service Agent, Van
Kampen/American Capital Companies Shareholder Services, Inc. (ACCESS), P.O. Box
418256, Kansas City, MO 64141-9256.

Inquiries concerning sales should be directed to the Distributor, Van Kampen
American Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, IL
60181.

American Capital C/O ACCESS
U.S. Government P.O. Box 418256
Trust for Income Kansas City, MO 64141-9256

For investors seeking high current
income through government securities.
-------------------------------------
| |
-------------------------------------

[LOGO OF AMERICAN CAPITAL
APPEARS HERE]

PRINTED MATTER
Printed in U.S.A./039 PRO-001

<PAGE>

AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
January 31, 1995

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated January 31,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
GENERAL INFORMATION.......................................................... 2
INVESTMENT OBJECTIVE AND POLICIES............................................ 2
INVESTMENT RESTRICTIONS..................................................... 12
TRUSTEES AND EXECUTIVE OFFICERS............................................. 13
INVESTMENT ADVISORY AGREEMENT............................................... 16
DISTRIBUTOR................................................................. 17
DISTRIBUTION PLANS.......................................................... 17
TRANSFER AGENT.............................................................. 19
PORTFOLIO TURNOVER.......................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 19
DETERMINATION OF NET ASSET VALUE............................................ 21
PURCHASE AND REDEMPTION OF SHARES........................................... 21
EXCHANGE PRIVILEGE.......................................................... 25
CHECK WRITING PRIVILEGE..................................................... 26
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................. 26
PRIOR PERFORMANCE INFORMATION............................................... 28
OTHER INFORMATION........................................................... 29
FINANCIAL STATEMENTS........................................................ 29
</TABLE>

1
<PAGE>

GENERAL INFORMATION

The Fund was organized as a trust under the laws of Massachusetts on June 24,
1992.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and Van
Kampen/American Capital Shareholder Services, Inc. ("ACCESS") are wholly owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled,
through the ownership of a substantial majority of its common stock, by The
Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc. a New York based private investment firm. The General Partner of C&D
L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates
L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B.
Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of VKAC own, in the aggregate, not more than
6% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 10% of the common
stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail broker-
dealer affiliate of the Distributor, is a wholly owned subsidiary of VK/AC
Holding, Inc.

As of January 18, 1994, no person was known to own beneficially or to hold of
record five percent or more of the outstanding Class A, Class B or Class C
shares of the Fund except for the following: Smith Barney, Inc. ("Smith
Barney"), 388 Greenwich Street, 11th Floor, New York, New York 10013-2375, owned
of record 8.77%, 10.74% and 22.88% of the outstanding Class A, Class B and Class
C shares, respectively. Merrill Lynch Pierce Fenner & Smith Inc., 4800 Deer
Lake Dr. East, 3rd Floor, Jacksonville, Florida 32246-6484, owned of record
6.68% and 13.61% of the outstanding Class B shares and Class C shares,
respectively; National Financial Services, 200 Liberty, One World Financial
Center, New York, New York 10281-1003, owned of record 15.54% and 5.55% of the
outstanding Class B shares and Class C shares, respectively; and American
Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056, acting as
custodian for certain employee benefit plans and individual retirement accounts,
owned of record 7.58% of the outstanding Class B shares.

INVESTMENT OBJECTIVE AND POLICIES

The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.

One type of mortgage-related security in which the Fund invests is that which
is issued or guaranteed by an agency or instrumentality of the U.S. Government,
though not necessarily by the U.S. Government itself. One such type of
mortgage-related security is a Government National Mortgage Association ("GNMA")
Certificate. GNMA Certificates are backed as to principal and interest by the
full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Fund may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is
backed by FHMLC as to payment of principal and interest but, like a FNMA
security, it is not backed by the full faith and credit of the U.S. Government.

GNMA CERTIFICATES

Government National Mortgage Association. The Government National Mortgage
----------------------------------------
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.

2
<PAGE>

Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
---------------------------
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified pass-
through type. Modified pass-through Certificates entitle the holder to receive
all interest and principal payments owned on the mortgage pool, net of fees paid
to the GNMA Certificate issuer and GNMA, regardless of whether or not the
mortgagor actually makes the payment.

GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Fund will be
reinvested in additional GNMA Certificates or in other permissible investments.

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
--------------
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.

Life of GNMA Certificates. The average life of a GNMA Certificate is likely
-------------------------
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.

As prepayment rates of individual mortgage pools will vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA are normally used as an
indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.

Yield Characteristics of GNMA Certificates. The coupon rate of interest of
------------------------------------------
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which will be
earned on the Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount, rather than at
par.

2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.

3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.

4. The actual yield of each GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying the Certificate. If mortgagors
prepay their mortgages, the principal returned to Certificate holders may
be reinvested at higher or lower rates.

In quoting yields for GNMA Certificates, the customary practice is to assume
that the Certificates will have a twelve-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of one percent

3
<PAGE>

more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools
may vary widely, however, the actual yield earned on any issue of GNMA
Certificates may differ significantly from the yield estimated on the assumption
of a twelve-year life.

Market for GNMA Certificates. Since the inception of the GNMA mortgage-backed
----------------------------
securities program in 1970, the amount of GNMA Certificates outstanding has
grown rapidly. The size of the market and the active participation in the
secondary market by securities dealers and many types of investors make GNMA
Certificates highly liquid instruments. Quotes for GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.

FNMA SECURITIES

The Federal National Mortgage Association ("FNMA") was established in 1938 to
create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and
credit of the United States.

FHLMC SECURITIES

The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. The FHMLC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.

COLLATERALIZED MORTGAGE OBLIGATIONS

Collateralized mortgage obligations are debt obligations issued generally by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgages which are secured by mortgage-related securities,
including GNMA Certificates, FHLMC Certificates and FNMA Certificates, together
with certain funds and other collateral. Scheduled distributions on the
mortgage-related securities pledged to secure the collateralized mortgage
obligations, together with certain funds and other collateral and reinvestment
income thereon at an assumed reinvestment rate, will be sufficient to make
timely payments of interest on the obligations and to retire the obligations not
later than their stated maturity. Since the rate of payment of principal of any
collateralized mortgage obligation will depend on the rate of payment (including
prepayments) of the principal of the mortgage loans underlying the mortgage-
related securities; the actual maturity of the obligation could occur
significantly earlier than its stated maturity. Collateralized mortgage
obligations may be subject to redemption under certain circumstances. The rate
of interest borne by collateralized mortgage obligations may be either fixed or
floating. In addition, certain collateralized mortgage obligations do not bear
interest and are sold at a substantial discount (i.e., a price less than the
principal amount). Purchases of collateralized mortgage obligations at a
substantial discount involves a risk that the anticipated yield on the purchase
may not be realized if the underlying mortgage loans prepay at a slower than
anticipated rate, since the yield depends significantly on the rate of
prepayment of the underlying mortgages. Conversely, purchases of collateralized
mortgage obligations at a premium involve additional risk of loss of principal
in the event of unanticipated prepayments of the mortgage loans underlying the
mortgage-related securities since the premium may not have been fully amortized
at the time the obligation is repaid. The market value of collateralized

4
<PAGE>

mortgage obligations purchased at a substantial premium of discount is extremely
volatile and the effects of prepayments on the underlying mortgage loans may
increase such volatility.

Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest on the loaned securities, while at
the same time earning interest on the collateral which will be invested in
short-term obligations. The Fund pays lending fees and custodial fees in
connection with loans of its securities. There is no assurance as to the extent
to which securities loans can be effected.

A loan may be terminated by the borrower on one business day's notice, or by
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. The Fund
would not lend any portfolio securities to brokers affiliated with the Adviser.
On termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.

When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with domestic banks or broker-
dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The
seller under a repurchase agreement will be required to maintain the value of
the underlying securities marked to market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year.
The Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices and Restrictions - Repurchase Agreements" in the Prospectus for
further information.

5
<PAGE>

FORWARD COMMITMENTS

Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, U.S. Government securities or
other high quality liquid debt securities (which may have maturities which are
longer than the term of the Forward Commitment) with the Fund's custodian in an
aggregate amount equal to the amount of its commitment as long as the obligation
to purchase continues. Since the market value of both the securities subject to
the Forward Commitment and the securities held in the segregated account may
fluctuate, the use of Forward Commitments may magnify the impact of interest
rate changes on the Fund's net asset value.

A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash, U.S. Government securities
or other high quality liquid debt securities (which may have maturities which
are longer than the term of the Forward Commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its commitment as long as the
obligation to sell continues. By entering into a Forward Commitment sale
transaction, the Fund forgoes or reduces the potential for both gain and loss in
the holding which is being hedged by the Forward Commitment sale.

INTEREST RATE TRANSACTIONS

The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, 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 on a daily basis and an amount of cash or high-quality liquid debt
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 an interest rate swap on other than a net basis, the Fund
would maintain a segregated account in the full amount accrued on a daily basis
of the Fund's obligations with respect to the swap. Interest rate transactions
do not constitute senior securities under the 1940 Act when the Fund segregates
assets to cover the obligations under the transactions. The Fund will enter
into interest rate swap, cap or floor transactions only with counterparties
approved by the Trustees. The Adviser will monitor the creditworthiness of
counterparties to its interest rate swap, cap, floor and collar transactions on
an ongoing basis. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction. To the extent the Fund sells (i.e., writes) caps,
floors and collars, it will maintain in a segregated account cash or high-
quality liquid debt securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's net
obligations with respect to the caps, floors or collars. The use of interest
rate swaps is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its forecasts of the market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. The use of interest rate swaps, caps,
collars and floors may also have the effect of shifting the recognition of
income between current and future periods.

These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.

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<PAGE>

OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS

CALL AND PUT OPTIONS

Call and put options on various U.S. Treasury notes and U.S. Treasury bonds
are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on mortgage-related securities are currently
written or purchased only in over-the-counter transactions.

SELLING CALL AND PUT OPTIONS

Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater return than would be realized on the underlying
securities alone.

Selling Options. The purchaser of a call option pays a premium to the seller
(i.e., the writer) for the right to buy the underlying security from the seller
at a specified price during a certain period. The Fund sells call options
either on a covered basis, or for cross-hedging purposes. A call option is
covered if the Fund owns or has the right to acquire the underlying securities
subject to the call options at all times during the option period. Thus, the
Fund may sell options on forward commitments or on mortgage-related or other
U.S. Government securities. An option is for cross-hedging purposes if it is
not covered, but is designed to provide a hedge against a security which the
Fund owns or has the right to acquire. In such circumstances, the Fund
collateralized the option by maintaining in a segregated account with the Fund's
Custodian, cash or U.S. Government securities in an amount not less than the
market value of the underlying security, marked to market daily, while the
option is outstanding.

The purchaser of a put option pays a premium to the seller (i.e., the writer)
for the right to sell the underlying security to the writer at a specified price
during a certain period. The Fund would sell put options only on a secured
basis, which means that, at all times during the option period, the Fund would
maintain in a segregated account with its Custodian cash, cash equivalents or
high grade debt securities in an amount of not less than the exercise price of
the option, or would hold a put on the same underlying security at an equal or
greater exercise price.

Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously sold by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.

The Fund could sell options that are listed on an exchange as well as options
which are privately negotiated in over-the-counter transactions. The Fund could
close out its position as a seller of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a seller, but would provide an asset of equal value to
its obligation under the option sold. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has sold, it will be required to maintain the securities subject to
the call or the collateral securing the option until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.

Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market prices.

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<PAGE>

PURCHASING CALL AND PUT OPTIONS

The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.

Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. The Fund will not purchase call or put
options on securities if as a result, more than ten percent of its net assets
would be invested in premiums on such options.

The Fund may purchase either listed or over-the-counter options.

RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES

Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the Exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.

Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.

Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options
are only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.

8
<PAGE>

INTEREST RATE FUTURES CONTRACTS

The Fund could engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund would be exempt from
registration as a "commodity pool."

An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA Certificates)
at a specified future time and at a specified price. Interest rate futures
contracts also include cash settlement contracts based upon a specified interest
rate such as the London interbank offering rate for dollar deposits or LIBOR.

Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the brokers' name an amount of cash, cash equivalents or liquid
high grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract, which
is returned to the Fund upon termination of the futures contract and
satisfaction of its contractual obligations. Subsequent payments to and from
the broker, called variation margin, will be made on a daily basis as the price
of the underlying securities fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as marking to
market.

For example, when the Fund has purchased a futures contract and the price of
the underlying security has risen, that position will have increased in value,
and the Fund will receive from the broker a variation margin payment equal to
that increase in value. Conversely, where the Fund has purchased a futures
contract and the value of the underlying security has declined, the position
would be less valuable, and the Fund would be required to make a variation
margin payment to the broker.

At any time prior to expiration of the futures contract, the Fund may elect to
terminate the position by taking an opposite position. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.

Futures Strategies. When the Fund anticipates a significant market or market
sector advance, the purchase of a futures contract affords a hedge against not
participating in the advance at a time when the Fund is not fully invested
("anticipatory hedge"). Such purchase of a futures contract would serve as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security, the sale of futures contracts would
substantially reduce the risk to the Fund of a market decline and, by so doing,
provide an alternative to the liquidation of securities positions in the Fund.
Ordinarily commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of mortgage-related and U.S. Government
securities.

In the event of the bankruptcy of a broker through which the Fund engages in
transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker.
Transactions would be entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Adviser.

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<PAGE>

Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.

There may be an imperfect correlation (or no correlation) between movements in
the price of the futures contracts and of the securities being hedged. The risk
of imperfect correlation increases as the composition of the securities being
hedged diverges from the securities upon which the futures contract is based.
If the price of the futures contract moves less than the price of the securities
being hedged, the hedge will not be fully effective. To compensate for the
imperfect correlation, the Fund could buy or sell futures contracts in a greater
dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that
the value of futures contracts held by the Fund could decline at the same time
as portfolio securities being hedged; if this occurred, the Fund would lose
money on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.

There is also the risk that the price of futures contracts may not correlate
perfectly with movements in the securities underlying the futures contract due
to certain market distortions. First, all participants in the futures market
are subject to margin depository and maintenance requirements. Rather than meet
additional margin depository requirements, investors may close futures contracts
through offsetting transactions, which could distort the normal relationship
between the futures market and the securities underlying the futures contract.
Second, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the securities
markets. Therefore, increased participation by speculators in the futures
markets may cause temporary price distortions. Due to the possibility of price
distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.

There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.

Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.

CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to minimize leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of

10
<PAGE>

the obligation under the futures contracts (less any related margin deposits)
will be maintained in a segregated account with the Custodian.

OPTIONS ON FUTURES CONTRACTS

The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option
on a futures contract, the Fund would be subject to initial margin and
maintenance requirements similar to those applicable to futures contracts. In
addition, net option premiums received by the Fund are required to be included
as initial margin deposits. When an option on a futures contract is exercised,
delivery of the futures position is accompanied by cash representing the
difference between the current market price of the futures contract and the
exercise price of the option. The Fund could purchase put options on futures
contracts in lieu of, and for the same purpose as, it could sell a futures
contract. The purchase of call options on futures contracts would be intended
to serve the same purpose as the actual purchase of the futures contract.

Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of an
option on a future would result in a loss to the Fund when the use of a future
would not.

ADDITIONAL RISKS RELATING TO OPTIONS AND FUTURES TRANSACTIONS

Each of the Exchanges has established limitations governing the maximum number
of call or put options on the same underlying security or futures contract
(whether or not covered) which may be written by a single investor, whether
acting along or in concert with others (regardless of whether such options are
written on the same or different Exchanges or are held or written on one or more
accounts or through one or more brokers). Option positions of all investment
companies advised by the Adviser are combined for purposes of these limits. An
Exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. These position
limits may restrict the number of listed options which the Fund may write.

Although the Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described in the Prospectus,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.

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<PAGE>

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:

1. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts, options on futures contracts,
forward commitments and other investment strategies and instruments that
would be considered "senior securities" but for the maintenance by the
Fund of a segregated account with its custodian or some other form of
"cover".

2. Borrow in excess of five percent of the market or other fair value of its
total assets; or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a temporary
measure for extraordinary or emergency purposes. Margin deposits or
payments in connection with the writing of options, or in connection with
the purchase or sale of futures contracts and related options, are not
deemed to be a pledge or other encumbrance.

3. Make any investment in real estate except that the Fund may purchase or
sell securities which are secured by real estate.

4. Make any investment which would cause more than 25% of the market or other
fair value of its total assets to be invested in the securities of issuers
all of which conduct their principal business activities in the same
industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.

5. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any
one issuer.

6. Purchase or sell commodities or commodity contracts except that the Fund
may enter into transactions in options, futures contracts or related
options including forward commitments.

7. Underwrite securities of other companies, except insofar as the Fund might
be deemed to be an underwriter for purposes of the Securities Act of 1933
(the "1933 Act") in the resale of any securities owned by the Fund.

8. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase and sell options
to the extent that the premiums paid for all such options owned at any
time do not exceed ten percent of its total assets and (c) engage in
transactions in interest rate futures contracts and related options
provided that such transactions are entered into for bona fide hedging
purposes (or that the underlying commodity value of the Fund's long
positions do not exceed the sum of certain identified liquid investments
as specified in CFTC regulations), provided further that the aggregate
initial margin and premiums do not exceed five percent of the fair market
value of the Fund's total assets, and provided further that the Fund may
not purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.

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<PAGE>

9. Make loans of money or securities, except (a) by investment in repurchase
agreements in accordance with applicable requirements set forth in the
Fund's Prospectus or (b) by lending its portfolio securities in amounts
not to exceed 33% of the Fund's total assets, provided that such loans
are secured by cash collateral that is at least equal to the market value.
See "Repurchase Agreements" and "Lending of Securities" herein and
"Investment Practices and Restrictions" in the Prospectus.

The Fund has adopted additional investment restrictions, which may be changed
by the Trustees without a vote of shareholders, as follows:

1. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing, the Fund
may make short sales by entering into forward commitments for hedging or cross-
hedging purposes and engage in transactions in options, futures contracts and
related options.

2. Purchase securities on margin, except that the Fund may obtain such short-
term credits as may be necessary for the clearance of purchases and sales of
securities. Transactions in forward commitments, options, interest rate futures
contracts and options on such contracts, including deposits or payments by the
Fund of initial or maintenance margin in connection with any such transaction,
are not considered to be purchases of securities on margin.

3. Invest in securities of any company if any officer or director of the Fund
or of the Adviser owns more than one-half of one percent of the outstanding
securities of such company, and such officers and directors own in the aggregate
more than five percent of the outstanding securities of such issuer.

4. Invest in interests in oil, gas, or other mineral exploration or
development programs.

5. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.

6. Purchase an illiquid security if, as a result of such purchase, more than
15% of the Fund's net assets would be invested in such securities. Illiquid
securities include securities subject to legal or contractual restrictions on
resale, which include repurchase agreements which have a maturity of longer than
seven days.

7. Invest in warrants or rights except where acquired in units or attached to
other securities. This restriction does not apply to options, futures contracts
or related options.

8. Purchase securities of unseasoned issuers, including their predecessors or
sponsors, which have been in operation for less than three years, and equity
securities of issuers which are not readily marketable if by reason thereof the
value of its aggregate investment in such classes of securities will exceed 5%
of its total assets.

The Fund has made an undertaking to certain states that the Fund shall not
purchase securities of issuers which the Fund is restricted from selling to the
public without registration under the 1933 Act, as amended, if by any reason
thereof the value of its aggregate investment in such classes of securities will
exceed 10% of its total assets.

TRUSTEES AND EXECUTIVE OFFICERS

The Fund's trustees and executive officers and their principal occupations for
the past five years are listed below. All persons named as Trustees also serve
in similar capacities for other funds advised by the Adviser as indicated below.

FERNANDO SISTO, Chairman of the Board and Trustee. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. George M.
Bond Professor and formerly Dean of Graduate School and

13
<PAGE>

Chairman, Department of Mechanical Engineering, Stevens Institute of
Technology; Director, Dynalysis of Princeton (engineering research).(1)

J. MILES BRANAGAN, Trustee. 2300 205th Street, Torrance, California 90501-
1452. Co-founder, Chairman and President, MDT Corporation (medical
equipment).(1)

RICHARD E. CARUSO, Trustee. Two Radnor Station, Suite 314, 290 King of Prussia
Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra Life Sciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of
Art (community art school); Founder and Director, Uncommon Individual
Foundation (youth development); Director, International Board of Business
Performance Group, London School of Economics; formerly Director, First
Sterling Bank; formerly Director and Executive Vice President, LFC Financial
Corporation (leasing financing).(1)

ROGER HILSMAN, Trustee. 251-1 Hamburg Cove, Lyme, Connecticut 06371. Formerly
Professor of Government and International Affairs, Columbia University.(1)

*DON G. POWELL, President and Trustee. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of
VK/AC Holding, Inc., VKAC and the Adviser; Chairman, Chief Executive Officer
and Director of the Distributor.(1)(2)(4)

DAVID REES, Trustee. 1601 Country Club Dr., Glendale, California 91208. Senior
Editor, Los Angeles Business Journal.(1)(3)

**LAWRENCE J. SHEEHAN, Trustee. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner (1969-
1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)

*WILLIAM S. WOODSIDE, Trustee. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food
catering); formerly Director, Primerica Corporation (currently known as
Travelers); formerly Chairman of the Board and Chief Executive Officer, old
Primerica Corporation (American Can Company); formerly Director, James River
Corporation (paper products); Trustee and formerly President, Whitney Museum
of American Art; Chairman, Institute for Educational Leadership, Inc., Board
of Visitors, Graduate School of The City University of New York, Academy of
Political Science; Committee for Economic Development; Director, Public
Education Fund Network, Fund for New York City Public Education; Trustee,
Barnard College; Member, Dean's Council, Harvard School of Public Health;
Mental Health Task Force, Carter Center.(1)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate
Secretary of the Adviser.(4)

TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant
Controller.(4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)

TED MUNDY, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Portfolio Manager of the Adviser. Mr. Mundy also serves as Vice President of
American Capital Mortgage Trust. Formerly Portfolio Manager with AMR
Investment Services, Inc. and trader with Howard, Weil, Labovisse and
Friedrichs.

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<PAGE>

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President-Chief Investment Officer/Fixed Income Department and
Director of the Adviser.(4)

J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and
Compliance Review Officer of the Adviser.(4)

PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President of the Adviser; President, Chief Operating Officer and
Director of Van Kampen American Capital Services, Inc.; Executive Vice
President, Chief Operating Officer and Director of Van Kampen American
Capital Trust Company; Executive Vice President and Director of ACCESS.(4)

* Trustee who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of his affiliation with the Adviser.

** Trustee who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act by virtue of his
affiliation with legal counsel of the Fund.

(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets Fund, Inc., American Capital Government Securities, Inc.,
American Capital Government Target Series, American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc., American Capital Life Investment Trust, American
Capital Municipal Bond Fund, Inc., American Capital Pace Fund, Inc.,
American Capital Real Estate Securities Fund, Inc., American Capital Reserve
Fund, Inc., American Capital Small Capitalization Fund, Inc., American
Capital Tax-Exempt Trust, American Capital Texas Municipal Securities, Inc.,
American Capital Utilities Income Fund, Inc. and American Capital World
Portfolio Series, Inc.

(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for eight of the
portfolios.

(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.

(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.

(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc., investment companies not advised by the Adviser, and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.

The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Trustees between Board meetings except where board action
is required by law.

The trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ended September
30, 1994, the Trustees who were not affiliated with the Adviser or its parent
received as a group $12,823 in trustees' fees from the Fund in addition to
certain out-of-pocket expenses. Such trustees also receive compensation for
serving as trustees or directors of other investment companies advised by the
Adviser as identified in the notes to the foregoing table. For legal services
rendered during the fiscal year ended September 30, 1994, the Fund paid legal
fees of $9,188 to the law firm of O'Melveny & Myers of which Mr. Sheehan is Of
Counsel. The firm also serves as legal counsel to the American Capital funds
listed in Footnote 1 above.

15
<PAGE>

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates economic, statistical, and
financial information to formulate and implement the Fund's investment programs.

The Adviser also furnishes the services of the Fund's President and such other
executive and clerical personnel as are necessary to prepare the various reports
and statements and conduct the Fund's day-to-day operations. The Fund, however,
bears the cost of its accounting services, which include maintaining its
financial books and records and calculating its net asset value. The costs of
such accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser.
A portion of these amounts will be paid to the Adviser or its parent in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders, and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted without bad faith, negligence or reckless disregard of its obligations.

Under the Advisory Agreement, the Fund pays to the Adviser as compensation for
the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed at the annual rate of 0.60% of average daily net assets
of the Fund.

The Fund's average net assets are determined by taking the average of all of
the determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. in connection with the purchase and sale of portfolio investments
of the Fund, less any direct expenses incurred by such subsidiary of VK/AC
Holding, Inc. in connection with obtaining such commissions, fees, brokerage or
similar payments. The Adviser agrees to use its best efforts to recapture
tender solicitation fees and exchange offer fees for the Fund's benefit and to
advise the Trustees of the Fund of any other commissions, fees, brokerage or
similar payments which may be possible for the Adviser or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc. to receive in
connection with the Fund's portfolio transactions or other arrangements which
may benefit the Fund.

The Advisory Agreement also provides that, in the event the ordinary business
expenses of the Fund for any fiscal year should exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the Adviser's monthly compensation will be reduced by the
amount of such excess and that, if the amount of such excess exceeds the
Adviser's monthly compensation, the Adviser will pay the Fund an amount
sufficient to make up the deficiency, subject to readjustment during the Fund's
fiscal year. Ordinary business expenses include the investment advisory fee and
other operating costs paid by the Fund except (1) interest and taxes, (2)
brokerage commissions, (3) certain litigation and indemnification expenses as
described in the Advisory Agreement and (4) payments made by the Fund pursuant
to the Distribution Plans. See "Distributor - Distribution Plans". The
Advisory Agreement also provides that the Adviser shall not be liable to the
Fu1nd for any actions or omissions if it acted in good faith without negligence
or misconduct.

Currently, the most restrictive applicable limitations are 2 1/2% of the first
$30 million, 2% of the next $70 million, and 1 1/2% of the remaining average net
assets.

16
<PAGE>

The Advisory Agreement has an initial term of two years and thereafter may be
continued from year to year if specifically approved at least annually (a)(i) by
the Fund's Trustees or (ii) by vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of the Trustees
who are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days' written notice.

During the fiscal years ended September 30, 1993 and 1994, the Adviser
received $878,332 and $2,302,231, respectively, in advisory fees from the Fund.
For such periods, the Fund paid $64,216 and $91,803, respectively, for
accounting services. A substantial portion of these amounts was paid to the
Adviser in reimbursement of personnel, facilities and equipment costs
attributable to the provision of accounting services to the Fund.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of
the Fund through affiliated and unaffiliated dealers. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay for only such shares of the Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Trustees or by a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Underwriting Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Underwriting
Agreement provides that it will terminate if assigned, and that it may be
terminated without penalty by either party on 60 days' written notice.
Advantage Capital Corporation is an affiliated dealer of the Distributor.

During the fiscal years ended September 30, 1993 and 1994, total underwriting
commissions on the sale of shares of the Fund were $1,900,503 and $536,272,
respectively. Of such totals, the amount retained by the Distributor was
$171,990 and $81,152, respectively. The remainder was reallowed to dealers. Of
such dealer reallowances, $328,330 and $64,575, respectively, was received by
Advantage Capital Corporation, an affiliated dealer of the Distributor.

DISTRIBUTION PLANS

The Fund adopted a Class A distribution plan, a Class B distribution plan and
a Class C distribution plan (the "Class A Plan", "Class B Plan" or "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").

The Trustees have authorized payments by the Fund under the Plans to reimburse
the Distributor for its payments to certain financial institutions (which may
include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service

17
<PAGE>

Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to broker-
dealers and other Service Organizations in an amount up to 0.65% of the average
daily net assets of the Fund's Class C shares, (2) out-of-pocket expenses of
printing and distributing prospectuses and annual and semi-annual shareholder
reports to other than existing shareholders, (3) out-of-pocket and overhead
expenses for preparing, printing and distributing advertising material and sales
literature, (4) expenses for promotional incentives to broker-dealers and
financial and industry professionals, and (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the National Association
of Securities Dealers, Inc. ("NASD") for asset-based charges.

Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.

As required by Rule 12b-1 under the 1940 Act, each Plan and the form of
servicing agreements and selling group agreements were approved by the Trustees,
including a majority of the Trustees who are not affiliated persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the directors determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.

Each Plan requires the Distributor to provide the Fund's Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner
terminated in accordance with its terms, the Plans will continue in effect so
long as such continuance is specifically approved at least annually by the
Trustees, including a majority of Independent Trustees.

Each Plan may be terminated by vote of a majority of the Independent Trustees,
or by vote of a majority of the outstanding voting securities of the Fund. Any
change in any of the Plans that would materially increase the distribution or
service expenses borne by the Fund requires shareholder approval, voting
separately by class; otherwise, it may be amended by a majority of the Trustees,
including a majority of the Independent Trustees, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. So long as the
Plans are in effect, the selection or nomination of the Independent Trustees is
committed to the discretion of the Independent Trustees.

For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $211,959 or .25% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. For the fiscal year ended September 30, 1994, the Fund's
aggregate expenses under the Class B Plan were $2,522,178 or 1.00% of the Class
B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $1,891,634 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class B shares of the Fund and $630,544 for fees paid to
Service Organizations for servicing Class B shareholders and for administering
the Class B Plan. For the fiscal year ended September 30,

18
<PAGE>

1994, the Fund's aggregate expenses under the Class C Plan were $448,146 or
1.00% of the Class C shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $336,110 for commissions
and transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class C shares of the Fund and $112,036 for fees paid to
Service Organizations for servicing Class C shareholders and for administering
the Class C Plan.

TRANSFER AGENT

During the fiscal year ended September 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund. received fees aggregating
$262,040. These services are provided at cost plus a profit.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of purchases
or sales of portfolio securities for a fiscal year by the average monthly value
of the Fund's portfolio securities during such fiscal year. Securities which
mature in one year or less at the time of acquisition are not included in this
computation. The turnover rate may vary greatly from year to year as well as
within a year. The turnover rate will fluctuate over time depending upon the
Adviser's investment strategy and the higher volatility of the market for
government securities.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions, if any, paid on such transactions. It is the policy of the Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. Consistent with the Rules of Fair Practice
of the NASD and subject to seeking best execution and such other policies as the
Trustees may determine, the Adviser may consider sales of shares of the Fund as
a factor in the selection of firms to execute portfolio transactions for the
Fund.

Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment adviser, under certain circumstances, to cause an account to pay a
broker or dealer who supplies brokerage and research services, a commission for
effecting a securities transaction in excess of the amount of commission another
broker or dealer would have charged for effecting the transaction. Brokerage
and research services include (a) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).

Pursuant to provisions of the investment advisory agreement, the Fund's
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Fund. The Adviser undertakes that such higher commissions will not be paid
by the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other

19
<PAGE>

applicable state and federal laws, and (c) in the opinion of the Adviser, the
total commissions paid by the Fund are reasonable in relation to the expected
benefits to the Fund over the long term. The investment advisory fee paid by
the Fund under the investment advisory agreement is not reduced as a result of
the Adviser's receipt of research services.

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.

The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In
making such allocations among the Fund and other advisory accounts, the main
factors considered by the Adviser are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.

The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser.

During the fiscal year ended September 30,1994, the Fund paid $5,502 in
brokerage commissions.

Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
Travelers. Such affiliated persons included Smith Barney and Robinson Humphrey.
Effective December 20, 1994, Smith Barney and Robinson Humphrey ceased to be
affiliates of the Adviser. The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a non-
affiliated broker in a similar transaction. The Fund paid the following
commission to these brokers during the periods shown:

<TABLE>
<CAPTION>
Robinson
Smith Barney Humphrey
------------- --------
<S> <C> <C>
Commissions Paid:

Fiscal 1993 -0- -0-
Fiscal 1994 $2,750 -
Fiscal 1994 Percentages:
Commissions with affiliate
to total commissions 50% -
Value of brokerage transactions
with affiliate to total
transactions 50% -

</TABLE>

20
<PAGE>

DETERMINATION OF NET ASSET VALUE

The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

The types of mortgage-related securities in which the Fund invests, as well as
U.S. Government securities, are traded in the over-the-counter market and are
valued at the last available bid price. Such valuations are based on quotations
of one or more dealers that make markets in the securities as obtained from such
dealers or from a pricing service. Options, futures contracts and options
thereon, which are traded on exchanges, are valued at their last sale or
settlement price as of the close of such exchanges or if no sales are reported,
at the mean between the last reported bid and asked prices. Securities with a
remaining maturity of 60 days or less are valued on an amortized cost basis,
which approximates market value.

Securities (as well as over-the-counter options) and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Trustees of the Fund. Such
valuations and procedures are reviewed periodically by the Trustees.

The assets belonging to the Class A shares, the Class B shares and the Class C
shares will be invested together in a single portfolio. The net asset value of
each class will be determined separately by subtracting the expenses and
liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").

PURCHASE AND REDEMPTION OF SHARES

The following information supplements that set forth in the Fund's prospectus
under the heading "Purchase of Shares."

PURCHASE OF SHARES

Shares of the Fund are sold in a continuous offering and may be purchased on
any business day through authorized dealers, including Advantage Capital
Corporation.

MULTIPLE PRICING SYSTEM

The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.

During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the 1933 Act.

INVESTMENTS BY MAIL

A shareholder investment account may be opened by completing the application
included in the Prospectus and forwarding the application, through the
designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri 64141-
6319. The account is opened only upon acceptance of the application by ACCESS.
The minimum initial

21
<PAGE>

investment of $500 or more, in the form of a check payable to the Fund, must
accompany the application. This minimum may be waived by the Distributor for
plans involving continuing investments. Subsequent investments of $25 or more
may be mailed directly to ACCESS. All such investments are made at the public
offering price of Fund shares next computed following receipt of payment by
ACCESS. Confirmations of the opening of an account and of all subsequent
transactions in the account are forwarded by ACCESS to the investor's dealer of
record, unless another dealer is designated.

In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases
to act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.

CUMULATIVE PURCHASE DISCOUNT

The reduced sales charges reflected in the sales charge table as shown in the
Prospectus under "Sales Charge Table" apply to purchases of Class A shares of
the Fund where the aggregate investment is $100,000 or more. For purposes of
determining eligibility for volume discounts, spouses and their minor children
are treated as a single purchaser, as is a director or other fiduciary
purchasing for a single fiduciary account. An aggregate investment includes all
shares of the Fund and all shares of certain other participating American
Capital mutual funds described in the Prospectus (the "Participating Funds"),
which have been previously purchased and are still owned, plus the shares being
purchased. The current offering price is used to determine the value of all
such shares. If, for example, an investor has previously purchased and still
holds shares of the Fund and shares of other Participating Funds having a
current offering price of $40,000, and that person purchases $65,000 of
additional Class A shares of the Fund, the charge applicable to the $65,000
purchase would be 3.75% of the offering price. The same reduction is applicable
to purchases under a Letter of Intent as described in the next paragraph. THE
DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE
WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES.
SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY
MAIL. The reduced sales charge will not be applied if such notification is not
furnished at the time of the order. The reduced sales charge will also not be
applied should a review of the records of the Distributor or ACCESS fail to
confirm the investor's representations concerning his holdings.

LETTER OF INTENT

Purchases of Class A shares of the Participating Funds described above under
"Cumulative Purchase Discount", made pursuant to the Letter of Intent and still
owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter
of Intent may be back-dated up to 90 days in order that any investments made
during this 90-day period, valued at the investor's cost, can become subject to
the Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded
in an amount which qualifies for a lower sales charge, a price adjustment is
made by refunding to the investor in shares of the Fund, the amount of excess
sales charges, if any, paid during the 13-month period.

VOLUME DISCOUNTS

The schedule of volume discounts in the Prospectus applies to purchases of
shares made at one time by any purchaser, which term includes (1) an individual
- -- or an individual, his or her spouse and children under the age

22
<PAGE>

of 21 -- purchasing securities for his or her or their own account; (2) a
trustee or other fiduciary of a single trust estate or a single fiduciary
account (including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal Revenue
Code (the "Code")), although more than one beneficiary is involved; and (3) tax-
exempt organizations enumerated in Section 501(c)(3) or (13) of the Code.

REDEMPTION OF SHARES

Redemptions are not made on days during which the New York Stock Exchange is
closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may
be postponed for more than seven days during any period when (a) the New York
Stock Exchange is closed for other than customary weekends or holidays; (b)
trading on the New York Stock Exchange is restricted; (c) an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund to
fairly determine the value of its net assets; or (d) the Securities and Exchange
Commission, by order, so permits.

CONTINGENT DEFERRED SALES CHARGE - CLASS A

For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC-Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC-Class A is imposed upon
redemption, the amount of the CDSC-Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.

The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., retirement plans qualified under Section 401(a) of the Code and deferred
compensation plans under Section 457 of the Code) required to obtain funds to
pay distributions to beneficiaries pursuant to the terms of the plans. Such
payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a CDSC-
Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.

Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of American Capital Reserve
Fund, Inc. with shares of certain other participating American Capital mutual
funds described as "Participating Funds" in the Prospectus.

As described in the Prospectus under "Purchase of Shares," redemption of Class
B and Class C shares will be subject to a contingent deferred sales charge.

WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C")

The CDSC - Class B and C may be waived on redemptions of Class B and Class C
shares in the circumstances described below:

23
<PAGE>

(a) Redemption Upon Disability or Death
-----------------------------------

The Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not
specifically adopt the balance of the Code's definition which pertains to
furnishing the Secretary of Treasury with such proof as he or she may require,
the Distributor will require satisfactory proof of death or disability before it
determines to waive the CDSC-Class B and C.

In cases of disability or death, the CDSC-Class B and C will be waived where
the decedent or disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC-Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.

(b) Redemption in Connection with Certain Distributions from Retirement
-------------------------------------------------------------------
Plans
-----

The Fund will waive the CDSC-Class B and C when a total or partial redemption
is made in connection with certain distributions from Retirement Plans. The
charge may be waived upon the tax-free rollover or transfer of assets to another
Retirement Plan invested in one or more of American Capital Funds; in such
event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption
which results from the return of an excess contribution pursuant to Section
408(d)(4) or (5) of the Code, the return of excess deferral amounts pursuant to
Code Section 401(k)(8) or 402(g)(2), or from the death or disability of the
employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the
charge will be waived on any minimum distribution required to be distributed in
accordance with Code Section 401(a)(9).

The Fund does not intend to waive the CDSC-Class B and C for any distributions
from IRAs or other Retirement Plans not specifically described above.

(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
----------------------------------------------------------

A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.

The amount of the shareholder's investment in a Fund at the time the election
to participate in the Plan is made with respect to the Fund is hereinafter
referred to as the "initial account balance." The amount to be systematically
redeemed from such Fund without the imposition of a CDSC-Class B and C may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Fund reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.

(d) Involuntary Redemptions of Shares in Accounts That Do Not Have the
------------------------------------------------------------------
Required Minimum Balance
------------------------

The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a

24
<PAGE>

specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC - Class B and C
upon such involuntary redemption.

(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
---------------------------------------------------------------------
120 Days After Redemption
-------------------------

A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.

(f) Redemption by Adviser
---------------------

The Fund may waive the CDSC-Class B and C when a total or partial redemption
is made by the Adviser with respect to its investments in the Fund.

EXCHANGE PRIVILEGE

The following supplements the discussion of "Shareholder Services - Exchange
Privilege" in the prospectus:

By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.

For purposes of determining the sales charge rate previously paid on Class A
shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.

Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.

25
<PAGE>

CHECK WRITING PRIVILEGE

To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.

The privilege does not carry over to accounts established through exchanges or
transfers. It must be requested separately for each fund account.

DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES

DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A, Class B and Class C shares. The
daily dividends are a fixed amount determined for each class at least monthly.
The per share dividends on Class B and Class C shares will be lower than the per
share dividends on Class A shares as a result of the distribution fees and
higher transfer agency fees applicable to the Class B and Class C shares. The
total of the Class A, Class B and Class C dividend is expected not to exceed the
net investment income of the Fund for the month. Net investment income for
dividend purposes consists of interest earned less expenses of the Fund accrued
for that dividend period. Any taxable net realized short-term or long-term
capital gains will be distributed to shareholders at least annually. Dividends
and distributions are automatically reinvested in shares of the Fund at the next
determined net asset value without sales charge except that any shareholder may
elect in writing to receive any such dividends or distributions, or both, in
cash. Dividends and distributions are taxable to shareholders as discussed
below whether they are reinvested in shares of the Fund or received in cash.

As described below under "Tax Treatment of Options and Futures Transactions,"
60% of any gain or loss realized by the Fund from transactions in listed
options, futures and options on futures generally constitutes long-term capital
gains or losses and the balance constitutes short-term capital gains or losses.

Dividends and distributions declared to shareholders of record after September
30th of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even if paid in the
following January.

TAX STATUS OF THE FUND

Through payment of all or substantially all of its taxable net investment
income and net realized capital gains to shareholders and by meeting certain
diversification of assets and other requirements of the Code, the Fund expects
to qualify as a regulated investment company, under Subchapter M of the Code.
This enables the Fund to be relieved from payment of income taxes on that
portion of its taxable net investment income and net realized capital gains
distributed to shareholders.

If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).

26
<PAGE>

Dividends paid by the Fund from its net investment income, and distributions
of the Fund's net realized short-term capital gains, are taxable to shareholders
as ordinary income. Any distributions designated as being made from the Fund's
net realized long-term capital gains are taxable to shareholders as long-term
capital gains, regardless of the length of the period that a shareholder has
held his shares. Not later than 60 days after the end of each fiscal year, the
Fund will send to its shareholders a written notice required by the Code
designating the amount of any distributions made during such year which are
long-term capital gains distributions. Such notice may be included in the
annual report to shareholders. A dividend or capital gains distribution
received after the purchase of the Fund's shares reduces the net asset value of
the shares by the amount of the dividend or distribution and will be subject to
income taxes. A loss on the sale of shares held for less than six months
attributable to a long-term capital gains distribution is treated as a long-term
capital loss for Federal income tax purposes.

If for any fiscal year of the Fund, the amount of distributions paid or deemed
paid for such year exceeds its net investment income plus net realized capital
gains for such year, the amount of such excess is expected to be treated as a
return of capital. In such case, distributions paid would be treated in part as
a distribution of taxable income and in part as a return of capital.
Shareholders would incur no current Federal income tax on the portion of such
distributions which are treated as a return of capital, but each shareholder's
basis in the Fund's shares would be reduced by that amount. This reduction of
basis would operate to increase the shareholder's capital gain (or decrease its
capital loss) upon redemption of Fund shares.

One of the requirements for qualification as a regulated investment company is
that less than 30% of the Fund's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in utilizing certain option and futures
trading strategies, including the extent to which it may write options on
securities which have been held less than three months, write options which
expire in less than three months, effect closing purchase transactions with
respect to options which have been written less than three months prior to such
transactions and effect closing transactions in futures contracts which have
been open for less than three months. Another requirement for qualification is
that at least 90% of the Fund's gross income in each fiscal year be derived from
dividends, interest and gains from the sale or other disposition of securities.

The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary income for the
twelve months ended December 31, plus 98% of its capital gain net income for the
twelve months ended October 31 of such calendar year. The Fund intends to
distribute sufficient amounts to avoid liability for the excise tax.

If shares of the Fund are sold or exchanged within 90 days of acquisition, and
shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.

Since none of the Fund's net investment income arises from dividends on common
or preferred stock, none of its distributions are eligible for the 70% dividends
received deduction for corporations.

Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the Unites States withholding tax.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.

27
<PAGE>

Dividends and capital gains distributions may also be subject to state and
local taxes.

Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.

BACK-UP WITHHOLDING

The Fund is required to withhold and remit to the United States Treasury 31%
of (i) reportable taxable dividends and distributions and (ii) the proceeds of
any redemptions of Fund shares with respect to any shareholder who is not exempt
from withholding and who fails to furnish the Fund with a correct taxpayer
identification number, who fails to report fully dividend or interest income, or
who fails to certify to the Fund that he has provided a correct taxpayer
identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Code includes special rules applicable to listed options, futures
contracts and options on futures contracts which the Fund may write, purchase or
sell. Such options and contracts are classified as Section 1256 contracts under
the Code. The character of gain or loss resulting from the sale, disposition,
closing out, expiration or other termination of Section 1256 contracts is
generally treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market"). Over-
the-counter options are not classified as Section 1256 contracts and are not
subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transaction in over-the-counter
options generally constitute short-term capital gains or losses. If over-the-
counter call options written, or over-the-counter put options purchased, by the
Fund are exercised, the gain or loss realized on the sale of the underlying
securities may be either short-term or long-term, depending on the holding
period of the securities. In determining the amount of gain or loss, the sales
proceeds are reduced by the premium paid for over-the-counter puts or increased
by the premium received for over-the-counter calls.

A substantial portion of the Fund's transactions in options, futures contracts
and options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain identification requirements are met.

The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.

The Code provides that certain elections may be made for mixed straddles that
can alter the character of the capital gain or loss recognized upon disposition
of positions which form part of a straddle. Certain other elections are also
provided in the Code. No determination has been reached to make any of these
elections.

PRIOR PERFORMANCE INFORMATION

The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year and the two-year
periods ended September 30, 1994 was -8.47% and -0.51%,

28
<PAGE>

respectively. The average annual total return (computed in the manner described
in the Prospectus) for Class B shares of the Fund for the one-year and the two-
year periods ended September 30, 1994 was -8.25% and -0.65%, respectively. The
average annual total return (computed in the manner described in the Prospectus)
for Class C shares of the Fund for the one-year and the 17 month periods (the
initial offering of Class C shares) ended September 30, 1994 was -5.60% and -
1.71%, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objective and
policies as well as the risks incurred in the Fund's investment practices.

The Fund's annualized current yield for Class A shares, Class B shares and
Class C shares of the Fund for the 30-day period ending September 30, 1994, was
4.60%, 4.05% and 4.05%, respectively. The yield for Class A shares, Class B
shares and Class C shares is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by the Fund, portfolio maturity and the
Fund's expenses.

Yield and total return are computed separately for Class A, Class B and Class
C shares.

From time to time VKAC will announce the results of its monthly polls of U.S.
investor intentions - the American Capital Index of Investor Intentions and the
American Capital Mutual Fund Index - which polls measure how Americans plan to
use their money.

From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.

The Funds may, from time to time: (1) illustrate the benefits of tax-deferral
by comparing taxable investments to investments made through tax-deferred
retirement plans; (2) illustrate in graph or chart form, or otherwise, the
benefits of dollar cost averaging by comparing investments made pursuant to a
systematic investment plan to investments made in a rising market; (3)
illustrate allocations among different types of mutual funds for investors at
different stages of their lives; and (4) in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Funds.

OTHER INFORMATION

CUSTODY OF ASSETS - All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.

SHAREHOLDER REPORTS - Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.

INDEPENDENT ACCOUNTANTS - Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.

FINANCIAL STATEMENTS

Financial Statements including Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets, Notes
to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report previously filed with the SEC on or about December
1, 1994.
29
<PAGE>

The following information is not included in the Annual Report. This example
assumes a purchase of Class A shares of the Fund aggregating less than $100,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of Class A shares of the Fund.

<TABLE>
<CAPTION>
September 30,
1994
----
<S> <C>
Net Asset Value per Class A Share $8.17

Class A Per Share Sales Charge - 4.75%
of offering price (4.99%
of net asset value per share) $.41
----

Class A Per Share Offering Price to
the Public $8.58
</TABLE>