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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950137-01-500082.txt : 20010228
<SEC-HEADER>0000950137-01-500082.hdr.sgml : 20010228
ACCESSION NUMBER:		0000950137-01-500082
CONFORMED SUBMISSION TYPE:	N-30D
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010226

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			VAN KAMPEN HIGH INCOME TRUST II
		CENTRAL INDEX KEY:			0000846671
		STANDARD INDUSTRIAL CLASSIFICATION:	 []
		STATE OF INCORPORATION:			MA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		N-30D
		SEC ACT:		
		SEC FILE NUMBER:	811-05769
		FILM NUMBER:		1554162

	BUSINESS ADDRESS:	
		STREET 1:		ONE PARKVIEW PLZ
		STREET 2:		VAN KAMPEN INVESTMENTS INC
		CITY:			OAKBROOK TERRACE
		STATE:			IL
		ZIP:			60181
		BUSINESS PHONE:		6306846774

	MAIL ADDRESS:	
		STREET 1:		VAN KAMPEN INVESTMENTS INC
		STREET 2:		ONE PARKVIEW PLAZA
		CITY:			OAKBROOK TERRACE
		STATE:			IL
		ZIP:			60181

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	VAN KAMPEN AMERICAN CAPITAL LIMITED TERM HIGH INCOME
		DATE OF NAME CHANGE:	19960102

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	VAN KAMPEN MERRITT LIMITED TERM HIGH INCOME TRUST
		DATE OF NAME CHANGE:	19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<FILENAME>c59357n-30d.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>

<PAGE>   1

<TABLE>
<S>                                        <C>
                         Table of Contents

                                  OVERVIEW
                    LETTER TO SHAREHOLDERS       1
                         ECONOMIC SNAPSHOT       2

                       PERFORMANCE SUMMARY
                         RETURN HIGHLIGHTS       4

                     PORTFOLIO AT A GLANCE
                            CREDIT QUALITY       5
             TWELVE-MONTH DIVIDEND HISTORY       5
                          TOP FIVE SECTORS       6
          NET ASSET VALUE AND MARKET PRICE       6
          Q&A WITH YOUR PORTFOLIO MANAGERS       7
                         GLOSSARY OF TERMS      11

                            BY THE NUMBERS
                  YOUR TRUST'S INVESTMENTS      12
                      FINANCIAL STATEMENTS      19
             NOTES TO FINANCIAL STATEMENTS      24
            REPORT OF INDEPENDENT AUDITORS      28
                DIVIDEND REINVESTMENT PLAN      29
    TRUST OFFICERS AND IMPORTANT ADDRESSES      31
</TABLE>

Our generations
of money-
management
experience
may help you
pursue life's
true wealth.
              NOT FDIC INSURED  MAY LOSE VALUE  NO BANK GUARANTEE
<PAGE>   2

 OVERVIEW

LETTER TO SHAREHOLDERS
January 19, 2001

Dear Shareholder,

The year 2000 was an especially volatile one for the stock market. To manage
one's portfolio during such unpredictable times requires investment-management
experience, and the following pages should give you some insight into how we
have performed in this difficult environment.

In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your trust during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the trust's largest
investments, and you can examine the complete portfolio to see all of your
trust's holdings as of the end of your trust's reporting period.

At Van Kampen, we place a high priority on providing you and your financial
advisor with the information you need to help you
                  monitor your investments during all types of markets. With
                  nearly four generations of investment-management experience,
                  we've been around long enough to understand that by investing
                  with Van Kampen you're entrusting us with much more than your
                  money. Your investments may help make it possible to afford
your next house, keep up with rising college costs, or enjoy a comfortable
retirement.

No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.

Sincerely,

[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investment Advisory Corp.

                                        1
<PAGE>   3

ECONOMIC SNAPSHOT

ECONOMIC GROWTH
ECONOMIC GROWTH, WHICH SPED TOWARD NEAR-RECORD HIGHS IN 1999, SLOWED TO A MORE
SUSTAINABLE PACE IN 2000. GROSS DOMESTIC PRODUCT, THE PRIMARY MEASURE OF
ECONOMIC GROWTH, WAS UP A MODEST 2.2 PERCENT FOR THE THIRD QUARTER ON AN
ANNUALIZED BASIS--THE LATEST FIGURES AVAILABLE AT THE TIME THIS REPORT WAS
PRINTED. BOTH BUSINESS AND CONSUMER DEMAND AND SPENDING ON EXPORTS EASED AS
CONCERNS ABOUT THE COOLING ECONOMY MOUNTED--AND, IN DECEMBER, U.S. MANUFACTURING
ACTIVITY DROPPED TO ITS LOWEST MONTHLY LEVEL IN NEARLY 10 YEARS. ALL OF THESE
FACTORS POINTED TO A SLOWING ECONOMY, ALTHOUGH INDUSTRY ANALYSTS DISAGREE ABOUT
WHETHER THIS SUGGESTS A "SOFT LANDING" OR A RECESSION.

CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT A WEAKENING STOCK MARKET AND COOLING ECONOMY OVERSHADOWED THE
HOLIDAY SHOPPING PERIOD AS CONSUMER SPENDING EASED INTO A MORE MODERATE PACE.
THESE CONCERNS, COUPLED WITH RISING ENERGY PRICES, HELPED KEEP SPENDING IN CHECK
AND INFLATION WORRIES AT BAY.

THE JOBLESS RATE CONTINUED TO HOLD AT HISTORICALLY LOW LEVELS, REMAINING AT 4.0
PERCENT IN DECEMBER FOR THE SECOND CONSECUTIVE MONTH. GROWTH IN OVERALL
COMPENSATION COSTS (SUCH AS WAGES AND BENEFITS) CONTINUED TO SLOW, FURTHER
RELIEVING INFLATIONARY PRESSURES.

INTEREST RATES AND INFLATION
THE CONSUMER PRICE INDEX, A COMMON MEASURE OF THE INFLATION RATE, ROSE A
MODERATE 3.4 PERCENT FOR THE 12 MONTHS ENDED DECEMBER 31, 2000. AT THE BEGINNING
OF THE YEAR, IN AN EFFORT TO WARD OFF INFLATION, THE FEDERAL RESERVE ATTEMPTED
TO CURB ECONOMIC GROWTH WITH THREE INTEREST-RATE HIKES. BY THE LATTER HALF OF
THE YEAR, THE ECONOMY BEGAN TO SHOW SIGNS THAT THE FED'S EFFORTS HAD ACHIEVED
THE DESIRED EFFECTS. WITH INFLATION CONCERNS SUBSIDING, FED POLICYMAKERS
GATHERED FOR THEIR DECEMBER MEETING AND OPTED NOT TO CHANGE INTEREST RATES--BUT
THEY DID SUGGEST FUTURE RATE CUTS WERE POSSIBLE. (NOTE: THE FEDERAL RESERVE
SURPRISED MANY OBSERVERS ON JANUARY 3, 2001, BY ANNOUNCING AN INTEREST-RATE CUT
OF 0.50 PERCENT PRIOR TO ITS SCHEDULED LATE-JANUARY MEETING.)

                                        2
<PAGE>   4

U.S. GROSS DOMESTIC PRODUCT

SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]

<TABLE>
<S>                                                           <C>
                                                                      U.S. Gross Domestic Product
Sep 98                                                                                       3.80
Dec 98                                                                                       5.90
Mar 99                                                                                       3.50
Jun 99                                                                                       2.50
Sep 99                                                                                       5.70
Dec 99                                                                                       8.30
Mar 00                                                                                       4.80
Jun 00                                                                                       5.60
Sep 00                                                                                       2.20
</TABLE>

Source: Bureau of Economic Analysis

INTEREST RATES AND INFLATION

(December 31, 1998--December 31, 2000)

[LINE GRAPH]

<TABLE>
<S>                                                           <C>                                <C>
                                                                       Interest Rates                       Inflation
Dec 98                                                                           4.75                            1.60
                                                                                 4.75                            1.70
                                                                                 4.75                            1.70
Mar 99                                                                           4.75                            1.80
                                                                                 4.75                            2.30
                                                                                 4.75                            2.10
Jun 99                                                                           5.00                            2.00
                                                                                 5.00                            2.10
                                                                                 5.25                            2.30
Sep 99                                                                           5.25                            2.60
                                                                                 5.25                            2.60
                                                                                 5.50                            2.60
Dec 99                                                                           5.50                            2.70
                                                                                 5.50                            2.70
                                                                                 5.75                            3.20
Mar 00                                                                           6.00                            3.80
                                                                                 6.00                            3.10
                                                                                 6.50                            3.20
Jun 00                                                                           6.50                            3.70
                                                                                 6.50                            3.70
                                                                                 6.50                            3.40
Sep 00                                                                           6.50                            3.50
                                                                                 6.50                            3.40
                                                                                 6.50                            3.40
Dec 00                                                                           6.50                            3.40
</TABLE>

Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.

Source: Bloomberg

                                        3
<PAGE>   5

       PERFORMANCE SUMMARY

RETURN HIGHLIGHTS

(as of December 31, 2000)

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
<S>                                                         <C>     <C>
NYSE Ticker Symbol                                              VLT
- -----------------------------------------------------------------------
One-year total return on market price(1)                     12.13%
- -----------------------------------------------------------------------
One-year total return based on NAV(2)                        -5.69%
- -----------------------------------------------------------------------
Distribution rate as a % of closing common stock price(3)    12.97%
- -----------------------------------------------------------------------
Net asset value                                               $5.40
- -----------------------------------------------------------------------
Closing common stock price                                  $5.6900
- -----------------------------------------------------------------------
One-year high common stock price (08/02/00)                 $7.4375
- -----------------------------------------------------------------------
One-year low common stock price (11/22/00)                  $5.0625
- -----------------------------------------------------------------------
Preferred share rate(4)                                      6.550%
- -----------------------------------------------------------------------
</TABLE>

(1) Total return based on market price assumes an investment at the market price
    at the beginning of the period indicated, reinvestment of all distributions
    for the period in accordance with the Trust's dividend reinvestment plan,
    and sale of all shares at the closing stock price at the end of the period
    indicated.

(2) Total return based on net asset value (NAV) assumes an investment at the
    beginning of the period indicated, reinvestment of all distributions for the
    period, and sale of all shares at the end of the period, all at NAV.

(3) Distribution rate represents the monthly annualized distributions of the
    Trust at the end of the period and not the earnings of the Trust.

(4) See "Notes to Financial Statements" footnote #4, for more information
    concerning Preferred Share reset periods.

    Investing in high-yield, lower-rated securities involves certain risks,
    which may include the potential for greater sensitivity to general economic
    downturns and greater market price volatility.

    Past performance is no guarantee of future results. Investment return, stock
    price and net asset value will fluctuate and Trust shares, when sold, may be
    worth more or less than their original cost. As a result of recent market
    activity, current performance may vary from the figures shown.

                                        4
<PAGE>   6

                                                 PORTFOLIO AT A GLANCE

CREDIT QUALITY

(as a percentage of long-term investments)

<TABLE>
<CAPTION>
As of December 31, 2000
<S>                    <C>     <C>
- - BBB/Baa............   5.7%   [PIE CHART]
- - BB/Ba..............  36.7%
- - B/B................  54.9%
- - CCC/Caa............   2.7%
<CAPTION>
As of December 31, 1999
<S>                    <C>     <C>
- - BBB/Baa............   4.6%   [PIE CHART]
- - BB/Ba..............  36.5%
- - B/B................  54.6%
- - CCC/Caa............   4.3%
</TABLE>

Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.

TWELVE-MONTH DIVIDEND HISTORY

(for the period ended December 31, 2000, for common shares)
[BAR GRAPH]

<TABLE>
<CAPTION>
                                                                               DIVIDENDS
                                                                               ---------
<S>                                                           <C>
1/00                                                                            0.0720
2/00                                                                            0.0720
3/00                                                                            0.0720
4/00                                                                            0.0720
5/00                                                                            0.0720
6/00                                                                            0.0685
7/00                                                                            0.0685
8/00                                                                            0.0685
9/00                                                                            0.0645
10/00                                                                           0.0645
11/00                                                                           0.0645
12/00                                                                           0.0615
</TABLE>

The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.

                                        5
<PAGE>   7

TOP FIVE SECTORS

(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 2000                  DECEMBER 31, 1999
                                                                     -----------------                  -----------------
<S>                                                           <C>                                <C>
Printing, Publishing & Broadcasting                                        11.60                               8.60
Telecommunications                                                         11.50                              10.50
Oil & Gas                                                                  10.90                               7.70
Automobile                                                                  6.80                               7.00
Hotel, Motel, Inns & Gaming                                                 6.40                               4.40
</TABLE>

NET ASSET VALUE AND MARKET PRICE

(based upon quarter-end values--December 1990 through December 2000)

[INVESTMENT PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
                                                     NET ASSET VALUE              MARKET PRICE
                                                     ---------------              ------------
<S>                                             <C>                         <C>                         <C>
12/90                                                    5.9000                       5.2500
                                                         6.9500                       6.5000
                                                         7.3100                       6.8750
                                                         7.5900                       7.3750
12/91                                                    7.6200                       7.5000
                                                         8.2100                       8.2500
                                                         8.3400                       8.6250
                                                         8.5800                       9.1250
12/92                                                    7.9200                       9.3750
                                                         8.6100                       9.7500
                                                         8.8400                      10.1250
                                                         8.7400                      10.2500
12/93                                                    8.9800                       9.7500
                                                         8.4900                       9.8750
                                                         8.1200                       9.7500
                                                         7.7500                       8.8750
12/94                                                    7.3200                       7.5000
                                                         7.6700                       8.2500
                                                         7.9700                       8.6250
                                                         8.0300                       8.6250
12/95                                                    8.1200                       8.7500
                                                         8.0900                       8.8750
                                                         7.9400                       8.7500
                                                         8.1200                       9.1250
12/96                                                    8.3100                       9.3750
                                                         8.1300                       9.3750
                                                         8.3200                       9.8130
                                                         8.4700                      10.0630
12/97                                                    8.4400                       9.8130
                                                         8.5000                      10.0000
                                                         8.3800                       9.5630
                                                         7.6400                       8.5000
12/98                                                    7.5900                       8.6250
                                                         7.3700                       8.4380
                                                         7.0900                       8.3130
                                                         6.6500                       7.1880
12/99                                                    6.5600                       5.7500
                                                         6.2100                       6.3750
                                                         6.0900                       6.8125
                                                         5.9900                       6.4375
12/00                                                    5.4000                       5.6900
</TABLE>

The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.

                                        6
<PAGE>   8

                                                                   [EHRET PHOTO]

Q&A WITH YOUR PORTFOLIO MANAGERS

WE RECENTLY SPOKE WITH THE MANAGEMENT TEAM OF THE VAN KAMPEN HIGH INCOME
TRUST II ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE MARKETS AND
INFLUENCED THE TRUST'S RETURN DURING THE PAST 12 MONTHS. THE TEAM IS LED BY
PETER EHRET, SENIOR PORTFOLIO MANAGER, WHO HAS MANAGED THE TRUST SINCE JUNE 1999
AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE FOLLOWING DISCUSSION
REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE DURING THE 12-MONTH PERIOD ENDED
DECEMBER 31, 2000.

Q   HOW WOULD YOU DESCRIBE THE
    MARKET ENVIRONMENT IN WHICH THE TRUST OPERATED, AND HOW DID THE TRUST
    PERFORM IN THAT ENVIRONMENT?

A   The year 2000 goes down as one
of the worst ever in the high-yield bond market. Returns were negative for the
asset class overall this year, and high-yield securities significantly
underperformed other fixed-income investments. Expectations of credit
deterioration led to a decline in high-yield bond valuations, a trend that was
exacerbated by investors taking money out of the market by redeeming shares of
high-yield mutual funds. These mutual fund redemptions left insurance companies,
pension funds, and other large institutional investors to pick up the investment
slack, albeit at lower prices.

    Credit deterioration was an important theme in 2000, especially as default
rates rose during the period. Typically as the creditworthiness of an issuer
deteriorates, the bond price falls, resulting in a higher yield to compensate
investors for the higher risk. Defaults themselves are a lagging indicator of
credit deterioration, as the price of a bond expected to default typically
declines well before an actual default occurs.

    Credit risk continued to increase overall in 2000, although not for all
companies or all industries. For example, credit problems grew significantly for
telecommunications companies while decreasing generally for energy companies.
Some of the sources of increased credit risk were lower underlying equity
valuations reflecting the stock market's weak year and highly competitive
conditions in many industries.

    On the bright side, the high-yield market ended 2000 on a relatively strong
note. Bond returns in general for December were among the year's best, as
investors came back to a market that many feel was oversold during the year's
final quarter. In many cases, the prolonged sell-off in the high-yield market
whittled bond prices down to sharp discounts and boosted yields to record levels
(by some

                                        7
<PAGE>   9

measures) compared to U.S. Treasury note yields.

    The trust continued to provide shareholders with an attractive level of
income, despite the dividend reductions that were necessary to offset the rising
cost of leverage. The trust's monthly dividend of $0.0615 per
share translates to a distribution rate
of 12.97 percent based on the
trust's closing market price on December 31, 2000.

    For the 12 months through December 31, 2000, the trust
produced a total return of 12.13 percent based on market price. At the same
time, the trust's market price decreased from $5.7500 per share on December 31,
1999, to $5.6900 per share on December 31, 2000. While the trust's total return
for the year likely does not impress many shareholders
at first glance, we'd like to point out that your trust outperformed its
benchmark--the Chase High Yield Index--group during 2000. Of course, past
performance is no guarantee of future results. As a result of recent market
activity, current trust performance may vary from the figures shown. By
comparison, the Chase High Yield Index posted a total return of -6.73 percent
for the same period. This broad-based, unmanaged index, which reflects the
general performance of high yield securities, does not reflect any commissions
or fees that would be paid by an investor purchasing the securities it
represents. Such costs would lower performance. It is not possible to invest
directly in an index. For additional performance results, please refer to the
chart and footnotes on page 4.

Q   WHAT WERE SOME OF THE
    CHALLENGES YOU FACED IN MANAGING THE TRUST DURING THIS PERIOD?

A   In general, 2000 was a punishing
year for wrong calls on the credit quality of high-yield bonds. This market
environment intensified our research and slowed our normal investment process,
as we were especially thorough in evaluating the credit strength of available
bonds. Nonetheless, our caution was appropriate and rewarded this year.

    Given the difficult year, the trust experienced a number of significant
credit problems. One such situation involved Pillowtex, a U.S. manufacturer of
textiles for the home and maker of brands such as Fieldcrest and Cannon.
Pillowtex succumbed this year to competitive pressures and declared bankruptcy,
defaulting on its high-yield bonds. We also saw major downdrafts in Laidlaw, a
Canadian transportation company, and GS Technologies, a U.S. steel maker. But on
balance, the trust's credit problems were less severe than the market trend.

    Also, the trust had the benefit of several positive credit developments,
such as companies that were bought out or companies that tendered for their
bonds at premiums. Examples include Repap New Brunswick, a paper company; Grupo
Televisa, a Mexican telecommunications group; Biovail, a health-care concern;
and Engle
Homes, a homebuilder. Also, buy-out deals were announced for R&B Falcon, an
energy services company; Musicland,

                                        8
<PAGE>   10

a retailer; and Intermedia, a tele-
communications company.

Q   WHAT SPECIFIC STRATEGIES DID
    YOU EMPLOY IN POSITIONING THE PORTFOLIO?

A   Given the year's unfriendly market
environment, we focused on carefully monitoring the risk level of the portfolio.
To this end, we continued to enhance the portfolio's diversification and made
substantial progress in this regard despite market conditions. Throughout the
period, we improved diversification both in the number of investments the trust
owns, which now stands at 161, and in the range of industries represented.

    For example, we took profits from holdings in the chemical sector that had
accumulated strong gains and diversified these assets into other market sectors.
Chemical companies now represent about 5.1 percent of long-term investments,
down from 9.0 percent a year ago.

    We also added to the trust's allocation in the telecommunications industry.
Although this industry developed significant problems in the second half of the
year, we relied on our experienced credit analysts and extensive research to
steer us toward bonds with the best relative value, looking for situations with
the potential for attractive returns and limited downside.

    Another strategy involved using the trust's leveraged structure to enhance
the return on some shorter-term securities we felt confident in from a credit
perspective. This approach generally involved investing in the high-yield
securities of larger, more established companies, such as Sweetheart Cup, JPS
Automotive, Healthsouth, Meditrust, Triton Oil and Grupo Iusacell. By doing so,
the portfolio was able to lock in some attractive yield opportunities with a bit
less volatility (as short-term securities generally tend to be less volatile
than longer-term securities).

Q   WHAT IS YOUR OUTLOOK FOR THE
    MARKET AND THE TRUST IN THE MONTHS AHEAD?

A   We anticipate further slowing in
the economy, prompting the Federal Reserve Board to ease short-term interest
rates. (Note: On January 3, 2001, the Fed did lower interest rates by 0.50
percent.) If the economy weakens too much, however, a rough road could lie
ahead, because a recessionary period would make it more difficult for companies
to repay their high-yield debt.

    Still, we expect that many quality companies will continue to perform well,
providing the potential for improved returns in the overall high-yield market.
Default concerns are likely to remain, but, as a lagging indicator, their impact
on high-yield bond prices may be limited, especially given how much credit risk
has already been priced into the market.

    We will be watching the market and the economy closely over the next year
for appropriate opportunities to take on additional risk and return potential,
countering some of the conservative positioning that helped the trust during
2000. We want to do

                                        9
<PAGE>   11

our best to position the trust to perform well in whatever market environment we
encounter, including what might be a sustained high-yield rally made possible by
severely depressed prices. The historically wide spreads between the yields of
high-yield securities and Treasury securities suggest the potential for a
high-yield rebound in the near term.

    Clearly, opportunities to invest in well-run, high-quality companies arise
over time--even in the extremely difficult high-yield market we currently face.
We will be looking to new areas for investment during 2001 as we continue to
focus on adding value through our diligent research and prudent investment
process.

                                       10
<PAGE>   12

GLOSSARY OF TERMS

A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.

CREDIT RATING: An evaluation of a bond issuer's credit history and capability of
repaying debt obligations. Standard & Poor's Ratings Group and Moody's Investors
Service are two companies that assign credit ratings. Standard & Poor's ratings
range from a high of AAA to a low of D, while Moody's ratings range from a high
of Aaa to a low of C.

DEFAULT: The failure to make required debt payments on time.

DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.

LEVERAGE: An investment strategy that involves using borrowed money to finance
an investment. Leveraging involves certain risks, including the potential for
increased volatility.

YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.

                                       11
<PAGE>   13

                        BY THE NUMBERS

YOUR TRUST'S INVESTMENTS

December 31, 2000
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          CORPORATE BONDS  92.9%
          AEROSPACE & DEFENSE  2.2%
$1,350    Dyncorp.....................................     9.500%  03/01/07   $ 1,100,250
   735    Sequa Corp. ................................     9.000   08/01/09       733,162
                                                                              -----------
                                                                                1,833,412
                                                                              -----------
          AUTOMOBILE  6.4%
 1,150    Aetna Industries, Inc. .....................    11.875   10/01/06       603,750
   350    Aftermarket Technology Corp. ...............    12.000   08/01/04       334,250
   225    Cambridge Industries, Inc. (a) (b)..........    10.250   07/15/07        46,125
 1,935    JPS Automotive Products Corp. ..............    11.125   06/15/01     1,925,325
   430    Lear Corp. .................................     7.960   05/15/05       408,500
 1,600    Lear Corp. .................................     8.250   02/01/02     1,576,000
   110    Talon Automotive Group, Inc. (a)............     9.625   05/01/08        17,600
   465    Venture Holdings Trust......................     9.500   07/01/05       195,300
   470    Venture Holdings Trust......................    12.000   06/01/09       141,000
                                                                              -----------
                                                                                5,247,850
                                                                              -----------
          BEVERAGE, FOOD & TOBACCO  3.7%
   755    Chiquita Brands International, Inc. ........    10.000   06/15/09       265,194
   900    Coca Cola Femsa S.A. (Mexico)...............     8.950   11/01/06       915,750
   645    National Wine & Spirits, Inc. ..............    10.125   01/15/09       554,700
 1,300    Pepsi Gemex S.A. (Mexico)...................     9.750   03/30/04     1,332,500
                                                                              -----------
                                                                                3,068,144
                                                                              -----------
          BUILDINGS & REAL ESTATE  2.4%
   430    Beazer USA, Inc. ...........................     9.000   03/01/04       416,025
   325    Hovnanian K Enterprises, Inc., 144A Private
          Placement (c)...............................    10.500   10/01/07       299,000
   653    Intrawest Corp. (Canada)....................     9.750   08/15/08       659,530
   675    Webb (Del E.) Corp. ........................    10.250   02/15/10       581,344
                                                                              -----------
                                                                                1,955,899
                                                                              -----------
          CHEMICAL  4.7%
   265    Agriculture Minerals & Chemicals, Inc. .....    10.750   09/30/03       172,250
   650    Equistar Chemicals L.P. ....................     8.500   02/15/04       637,000
   125    Hercules, Inc., 144A Private Placement
          (c).........................................    11.125   11/15/07       123,750
 2,272    Huntsman Polymers Corp. ....................    11.750   12/01/04     1,897,120
</TABLE>

                                               See Notes to Financial Statements

                                       12
<PAGE>   14

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          CHEMICAL (CONTINUED)
$1,204    ISP Holdings, Inc...........................     9.750%  02/15/02   $   999,320
   260    Pioneer Americas Acquisition Corp. (a)......     9.250   06/15/07        54,600
                                                                              -----------
                                                                                3,884,040
                                                                              -----------
          CONTAINERS, PACKAGING & GLASS  2.0%
   700    Fonda Group, Inc. ..........................     9.500   03/01/07       549,500
 1,100    Radnor Holdings Corp. ......................    10.000   12/01/03       924,000
   205    Sweetheart Cup, Inc. .......................    10.500   09/01/03       180,400
                                                                              -----------
                                                                                1,653,900
                                                                              -----------
          DIVERSIFIED/CONGLOMERATE MANUFACTURING  1.5%
 1,050    Communications & Power Industries, Inc. ....    12.000   08/01/05       735,000
   495    Pacifica Papers, Inc. (Canada)..............    10.000   03/15/09       493,762
                                                                              -----------
                                                                                1,228,762
                                                                              -----------
          ELECTRONICS  0.9%
   650    Flextronics International Ltd.
          (Singapore).................................     8.750   10/15/07       627,250
   260    Globix Corp. ...............................    12.500   02/01/10       109,200
                                                                              -----------
                                                                                  736,450
                                                                              -----------
          FINANCE  4.0%
   740    Americredit Corp. ..........................     9.250   02/01/04       714,100
   240    Banco Nacional de Comercio Exterior
          (Mexico)....................................     7.250   02/02/04       232,800
   290    Labranche & Co., Inc........................    12.000   03/02/07       305,950
   220    Madison River Capital LLC...................    13.250   03/01/10       145,200
   480    Port Arthur Finance Corp. ..................    12.500   01/15/09       477,600
 1,450    Vicap S.A. (Mexico).........................    10.250   05/15/02     1,406,500
                                                                              -----------
                                                                                3,282,150
                                                                              -----------
          GROCERY  4.6%
   895    Disco S.A. (Argentina)......................     9.125   05/15/03       814,450
 1,100    Fleming Cos., Inc. .........................    10.500   12/01/04       891,000
   715    Fleming Cos., Inc. .........................    10.625   12/15/01       697,125
 1,180    Jitney Jungle Stores America, Inc. (a)
          (b).........................................    12.000   03/01/06        14,750
 1,405    Pantry, Inc. ...............................    10.250   10/15/07     1,320,700
                                                                              -----------
                                                                                3,738,025
                                                                              -----------
          HEALTHCARE  2.8%
   450    Fisher Scientific International, Inc. ......     7.125   12/15/05       407,250
   620    Fresenius Medical Care Capital Trust........     9.000   12/01/06       598,300
   850    Tenet Healthcare Corp. .....................     8.000   01/15/05       862,750
   430    Tenet Healthcare Corp. .....................     8.625   12/01/03       440,750
                                                                              -----------
                                                                                2,309,050
                                                                              -----------
          HOTEL, MOTEL, INNS & GAMING  6.0%
   195    Agrosy Gaming Co. ..........................    10.750   06/01/09       203,775
   460    Booth Creek Ski Holdings, Inc. .............    12.500   03/15/07       340,400
</TABLE>

See Notes to Financial Statements

                                       13
<PAGE>   15

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          HOTEL, MOTEL, INNS & GAMING (CONTINUED)
$  652    Boyd Gaming Corp. ..........................     9.250%  10/01/03   $   635,700
   210    Circus Circus Enterprises, Inc. ............     6.450   02/01/06       194,250
   430    Harvey's Casino Resorts.....................    10.625   06/01/06       451,500
   110    Horseshoe Gaming LLC........................     8.625   05/15/09       106,425
   230    Majestic Star Casino LLC....................    10.875   07/01/06       203,550
   430    Mandalay Resort Groups......................     9.500   08/01/08       432,150
   270    Mandalay Resort Groups......................    10.250   08/01/07       269,325
   220    MGM Grand, Inc. ............................     9.750   06/01/07       231,000
 1,100    Mohegan Tribal Gaming Authority.............     8.125   01/01/06     1,102,750
   380    Park Place Entertainment Corp. .............     7.875   12/15/05       374,775
   325    Park Place Entertainment Corp. .............     8.875   09/15/08       329,875
                                                                              -----------
                                                                                4,875,475
                                                                              -----------
          LEISURE/ENTERTAINMENT  1.1%
   905    Selmer Co., Inc. ...........................    11.000   05/15/05       918,575
                                                                              -----------

          MINING, STEEL, IRON & NON-PRECIOUS METAL  3.0%
   900    GS Technologies Operating, Inc. ............    12.250   10/01/05        76,500
 1,475    Kaiser Aluminum & Chemical, Inc. ...........     9.875   02/15/02     1,371,750
   140    Renco Steel Holdings, Inc. .................    10.875   02/01/05        56,700
 1,210    WCI Steel, Inc. ............................    10.000   12/01/04       919,600
                                                                              -----------
                                                                                2,424,550
                                                                              -----------
          OIL & GAS  10.2%
   760    Benton Oil & Gas, Inc. .....................    11.625   05/01/03       532,000
   430    Chesapeake Energy Corp. ....................     7.875   03/15/04       423,550
   220    Cliffs Drilling Co. ........................    10.250   05/15/03       226,600
   910    Frontier Oil Corp. .........................    11.750   11/15/09       916,825
   315    Giant Industries, Inc. .....................     9.000   09/01/07       286,650
 1,643    Giant Industries, Inc. .....................     9.750   11/15/03     1,626,570
   140    Grant Prideco, Inc., 144A Private Placement
          (c).........................................     9.625   12/01/07       144,550
 1,810    KCS Energy, Inc. (a) (b)....................    11.000   01/15/03     1,954,800
   425    Petroleos Mexicanos (Mexico)................     8.048   07/15/05       427,125
   800    Pride Petroleum Services, Inc. .............     9.375   05/01/07       828,000
   430    R & B Falcon Corp. .........................     6.500   04/15/03       417,100
   515    R & B Falcon Corp. .........................     9.500   12/15/08       566,500
                                                                              -----------
                                                                                8,350,270
                                                                              -----------
          PAPER  0.7%
   575    Repap New Brunswick, Inc. ..................     9.000   06/01/04       598,000
                                                                              -----------
</TABLE>

                                               See Notes to Financial Statements

                                       14
<PAGE>   16

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          PRINTING, PUBLISHING & BROADCASTING  10.9%
$1,100    Adelphia Communications Corp. ..............     9.250%  10/01/02   $ 1,075,250
   430    Century Communications Corp. ...............     9.750   02/15/02       428,925
   650    Charter Communication Holdings LLC..........     8.250   04/01/07       594,750
   150    Classic Cable, Inc. ........................     9.375   08/01/09        69,000
   470    CSC Holdings, Inc. .........................    10.500   05/15/16       512,300
   725    EchoStar Communications Corp. ..............     9.250   02/01/06       705,062
   850    International Cabletel, Inc. (d)............  0/12.750   04/15/05       807,500
   810    James Cable Partners L.P. ..................    10.750   08/15/04       510,300
 1,100    K-III Communications Corp. .................    10.250   06/01/04     1,100,000
   260    Northland Cable Television, Inc. ...........    10.250   11/15/07       176,800
   430    Price Communications Wireless, Inc. ........     9.125   12/15/06       434,300
   325    Sinclair Broadcast Group, Inc. .............    10.000   09/30/05       318,500
   860    Telewest PLC (United Kingdom)...............     9.625   10/01/06       746,050
   430    United Pan Europe Communications
          (Netherlands)...............................    10.875   08/01/09       278,425
   345    United Pan Europe Communications
          (Netherlands)...............................    11.250   02/01/10       225,975
   800    Young Broadcasting, Inc. ...................    11.750   11/15/04       812,000
   125    Ziff Davis, Inc., 144A Private Placement
          (c).........................................    12.000   07/15/10       100,000
                                                                              -----------
                                                                                8,895,137
                                                                              -----------
          PRODUCER MANUFACTURING  2.1%
   150    Associated Materials, Inc. .................     9.250   03/01/08       144,000
   465    Cemex S.A., 144A Private Placement (Mexico)
          (c).........................................     8.625   07/18/03       467,906
   455    Numatics, Inc. .............................     9.625   04/01/08       282,100
   870    Playtex Family Products Corp. ..............     9.000   12/15/03       835,200
                                                                              -----------
                                                                                1,729,206
                                                                              -----------
          RETAIL  3.6%
   205    Big 5 Corp. ................................    10.875   11/15/07       182,450
   500    Community Distributors, Inc. ...............    10.250   10/15/04       390,000
   500    Hosiery Corp. of America, Inc. .............    13.750   08/01/02       452,500
   260    K Mart Corp. ...............................     8.375   12/01/04       232,700
   170    Musicland Group, Inc. ......................     9.000   06/15/03       167,450
   675    Musicland Group, Inc. ......................     9.875   03/15/08       681,750
   540    Polaroid Corp. .............................     6.750   01/15/02       415,800
   540    Saks, Inc. .................................     7.000   07/15/04       391,500
                                                                              -----------
                                                                                2,914,150
                                                                              -----------
</TABLE>

See Notes to Financial Statements

                                       15
<PAGE>   17

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          TECHNOLOGY  0.8%
$  220    Exodus Communications, Inc., 144A Private
          Placement (c)...............................    11.625%  07/15/10   $   199,100
   495    PSI Net, Inc. ..............................    10.500   12/01/06       138,600
   325    Tektronix, Inc. ............................     7.625   08/15/02       325,406
                                                                              -----------
                                                                                  663,106
                                                                              -----------
          TELECOMMUNICATIONS  10.7%
   465    Airgate PCS, Inc. (d).......................  0/13.500   10/01/09       272,025
   190    Alamosa Holdings, Inc. (d)..................  0/12.875   02/15/10        92,150
   430    Asia Global, 144A Private Placement (c).....    13.380   10/15/10       371,950
   650    Filtronic PLC (United Kingdom)..............    10.000   12/01/05       500,500
   435    Focal Communications Corp...................    11.875   01/15/10       304,500
   650    Frontier Corp. .............................     6.000   10/15/03       581,750
   795    Global Crossing Holdings Ltd. (Bermuda).....     9.125   11/15/06       763,200
   440    Grupo Iusacell S.A. (Mexico) ...............    10.000   07/15/04       431,200
   960    GT Group Telecom, Inc. (Canada) (d).........  0/13.250   02/01/10       315,600
   940    Intermedia Communications, Inc. ............     8.600   06/01/08       662,700
   150    Intermedia Communications, Inc. ............     8.875   11/01/07       105,750
   430    IPCS, Inc., 144A Private Placement
          (c) (d).....................................  0/14.000   07/15/10       172,000
   875    Metromedia Fiber Network, Inc. .............    10.000   12/15/09       752,500
   220    MGC Communications, Inc.....................    13.000   10/01/04       111,100
   845    Nextel Communications, Inc. ................     9.375   11/15/09       794,300
   430    Nextlink Communications, Inc. ..............     9.625   10/01/07       339,700
   420    Nextlink Communications, Inc. ..............    10.500   12/01/09       336,000
   150    Philippine Long Distance Telephone
          (Philippines)...............................    10.500   04/15/09       125,310
   220    Philippine Long Distance Telephone
          (Philippines)...............................    10.625   06/02/04       210,804
   220    Pinnacle Holdings, Inc. (d).................  0/10.000   03/15/08       118,800
   325    Rural Cellular Corp. .......................     9.625   05/15/08       303,875
   325    Spectrasite Holdings, Inc., 144A Private
          Placement (c)...............................    12.500   11/15/10       324,188
   220    Telecorp PCS, Inc. .........................    10.625   07/15/10       224,125
   160    US Unwired, Inc. (d)........................  0/13.375   11/01/09        72,800
   575    Williams Communications Group, Inc. ........    11.700   08/01/08       457,125
                                                                              -----------
                                                                                8,743,952
                                                                              -----------
          TEXTILES  1.7%
   215    Anvil Knitwear, Inc. .......................    10.875   03/15/07       184,900
   875    Dan River, Inc. ............................    10.125   12/15/03       691,250
 1,575    Pillowtex Corp. (a) (b).....................    10.000   11/15/06        94,500
</TABLE>

                                               See Notes to Financial Statements

                                       16
<PAGE>   18

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
PAR
AMOUNT                                                                          MARKET
(000)     DESCRIPTION                                    COUPON    MATURITY      VALUE
<C>       <S>                                           <C>        <C>        <C>
          TEXTILES (CONTINUED)
$  450    Scovill Fasteners, Inc. ....................    11.250%  11/30/07   $   213,750
   220    Supreme International, Inc. ................    12.250   04/01/06       181,500
                                                                              -----------
                                                                                1,365,900
                                                                              -----------
          TRANSPORTATION  3.6%
   655    Cenargo International PLC (United
          Kingdom)....................................     9.750   06/15/08       514,175
 1,580    Greyhound Lines, Inc. ......................    11.500   04/15/07     1,161,300
   255    International Shipholding Corp. ............     9.000   07/01/03       255,638
   650    Laidlaw, Inc. (Canada) (a)..................     7.700   08/15/02       182,000
   433    Northwest Airlines Corp. ...................     8.375   03/15/04       415,680
   430    Stena AB (Sweden)...........................    10.500   12/15/05       389,150
                                                                              -----------
                                                                                2,917,943
                                                                              -----------
          UTILITIES  3.3%
   325    AES Corp. ..................................     8.750   12/15/02       326,625
 1,100    AES Corp. ..................................     9.500   06/01/09     1,133,000
   430    AES Drax Energy Ltd., 144A Private Placement
          (c).........................................    11.500   08/30/10       453,650
   430    Calpine Corp. ..............................     8.625   08/15/10       445,050
   325    Calpine Corp. ..............................     9.250   02/01/04       324,188
                                                                              -----------
                                                                                2,682,513
                                                                              -----------
TOTAL CORPORATE BONDS  92.9%...............................................    76,016,459
                                                                              -----------

          GOVERNMENT AND GOVERNMENT AGENCY OBLIGATION  0.4%
   300    United Mexican States (Mexico)..............     9.875   02/01/10       323,325
                                                                              -----------
EQUITIES  0.6%
Decisionone Corp. (2,450 common shares) (e)................................            35
Decisionone Corp. (5,386 common stock warrants) (e)........................         5,249
GT Group Telecom, Inc. (960 common stock warrants),   144A Private
Placement (c) (e)..........................................................        35,160
Hosiery Corp. of America, Inc. (500 common stock warrants) (e).............        20,250
Intermedia Communications, Inc. (1,494 common shares) (e)..................        10,738
IPCS, Inc. (430 common stock warrants),   144A Private Placement (c) (e)...        10,750
NTL, Inc. (1,187 common stock warrants),   144A Private Placement (c)
(e)........................................................................        21,962
Pathmark Stores, Inc. (22,672 common shares) (e)...........................       374,088
Star Gas Partners L.P. (220 limited partnership units).....................         3,850
                                                                              -----------
TOTAL EQUITIES.............................................................       482,082
                                                                              -----------
TOTAL LONG-TERM INVESTMENTS  93.9%
  (Cost $91,192,133).......................................................    76,821,866
</TABLE>

See Notes to Financial Statements

                                       17
<PAGE>   19

YOUR TRUST'S INVESTMENTS

December 31, 2000

<TABLE>
<CAPTION>
                                                                                    MARKET
DESCRIPTION                                                                          VALUE
<C>           <S>                                           <C>        <C>        <C>
REPURCHASE AGREEMENT  4.0%
State Street Bank and Trust (Collateralized by U.S. Treasury Bond, $3,270,000
  par, 7.50% coupon due 11/15/01, dated 12/29/00, to be sold on 01/02/01 at
  $3,287,172) (Cost $3,285,000)................................................   $ 3,285,000
                                                                                  -----------
TOTAL INVESTMENTS  97.9%
  (Cost $94,477,133)...........................................................    80,106,866
OTHER ASSETS IN EXCESS OF LIABILITIES  2.1%....................................     1,687,764
                                                                                  -----------

NET ASSETS  100.0%.............................................................   $81,794,630
                                                                                  ===========
</TABLE>

(a) Non-income producing as security is in default.

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

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

(d) Security is a "step-up" bond where the coupon increases or steps up at a
    predetermined rate.

(e) Non-income producing security.

                                               See Notes to Financial Statements

                                       18
<PAGE>   20

FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 31, 2000

<TABLE>
<S>                                                           <C>
ASSETS:
Total Investments (Cost $94,477,133)........................  $ 80,106,866
Interest Receivable.........................................     2,088,868
Other.......................................................        34,250
                                                              ------------
    Total Assets............................................    82,229,984
                                                              ------------
LIABILITIES:
Payables:
  Income Distributions--Preferred Shares....................       171,833
  Investment Advisory Fee...................................        45,635
  Custodian Bank............................................        11,786
  Affiliates................................................         1,123
Trustees' Deferred Compensation and Retirement Plans........       108,298
Accrued Expenses............................................        96,679
                                                              ------------
    Total Liabilities.......................................       435,354
                                                              ------------
NET ASSETS..................................................  $ 81,794,630
                                                              ============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, 100,000,000 shares
  authorized, 1,520 outstanding with liquidation preference
  of $25,000 per share).....................................    38,000,000
                                                              ------------
Common Shares ($.01 par value with an unlimited number of
  shares authorized, 8,109,000 shares issued and
  outstanding)..............................................        81,090
Paid in Surplus.............................................    68,101,593
Accumulated Distributions in Excess of Net Investment
  Income....................................................      (635,816)
Accumulated Net Realized Loss...............................    (9,381,970)
Net Unrealized Depreciation.................................   (14,370,267)
                                                              ------------
    Net Assets Applicable to Common Shares..................    43,794,630
                                                              ------------
NET ASSETS..................................................  $ 81,794,630
                                                              ============
NET ASSET VALUE PER COMMON SHARE ($43,794,630 divided by
  8,109,000 shares outstanding).............................  $       5.40
                                                              ============
</TABLE>

See Notes to Financial Statements

                                       19
<PAGE>   21

Statement of Operations
For the Year Ended December 31, 2000

<TABLE>
<S>                                                           <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $136).........  $  9,771,558
Dividends...................................................           506
Other.......................................................       144,559
                                                              ------------
    Total Income............................................     9,916,623
                                                              ------------
EXPENSES:
Investment Advisory Fee.....................................       684,421
Preferred Share Maintenance.................................       118,576
Legal.......................................................        17,720
Custody.....................................................        14,569
Trustees' Fees and Related Expenses.........................        10,066
Other.......................................................       153,665
                                                              ------------
    Total Expenses..........................................       999,017
                                                              ------------
NET INVESTMENT INCOME.......................................  $  8,917,606
                                                              ============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss...........................................  $ (3,815,549)
                                                              ------------
Unrealized Appreciation/Depreciation:
  Beginning of the Period...................................    (9,213,668)
  End of the Period.........................................   (14,370,267)
                                                              ------------
Net Unrealized Depreciation During the Period...............    (5,156,599)
                                                              ------------
NET REALIZED AND UNREALIZED LOSS............................  $ (8,972,148)
                                                              ============
NET DECREASE IN NET ASSETS FROM OPERATIONS..................  $    (54,542)
                                                              ============
</TABLE>

                                               See Notes to Financial Statements

                                       20
<PAGE>   22

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED           YEAR ENDED
                                                  DECEMBER 31, 2000    DECEMBER 31, 1999
                                                  --------------------------------------
<S>                                               <C>                  <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................   $  8,917,606         $  9,270,039
Net Realized Loss................................     (3,815,549)          (2,589,717)
Net Unrealized Depreciation During the Period....     (5,156,599)          (5,543,501)
                                                    ------------         ------------
Change in Net Assets from Operations.............        (54,542)           1,136,821
                                                    ------------         ------------

Distributions from and in excess of Net
  Investment Income:
    Common Shares................................     (6,309,638)          (7,289,187)
    Preferred Shares.............................     (2,562,945)          (2,220,961)
Return of Capital Distributions:
    Common Shares................................       (342,437)                 -0-
    Preferred Shares.............................       (139,097)                 -0-
                                                    ------------         ------------
Total Distributions..............................     (9,354,117)          (9,510,148)
                                                    ------------         ------------

NET CHANGE IN NET ASSETS FROM INVESTMENT
  ACTIVITIES.....................................     (9,408,659)          (8,373,327)

FROM CAPITAL TRANSACTIONS:
Redemption of Preferred Shares...................     (7,000,000)                 -0-
                                                    ------------         ------------
TOTAL DECREASE IN NET ASSETS.....................    (16,408,659)          (8,373,327)
NET ASSETS:
Beginning of the Period..........................     98,203,289          106,576,616
                                                    ------------         ------------
End of the Period (Including accumulated
  distributions in excess of net
  investment income of $635,816 and $358,543,
  respectively)..................................   $ 81,794,630         $ 98,203,289
                                                    ============         ============
</TABLE>

See Notes to Financial Statements

                                       21
<PAGE>   23

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

<TABLE>
<CAPTION>
                                                          ----------------------------
                                                           2000       1999       1998
                                                          ----------------------------
<S>                                                       <C>        <C>        <C>
NET ASSET VALUE, BEGINNING OF THE PERIOD (a)..........    $  6.56    $  7.59    $ 8.44
                                                          -------    -------    ------
  Net Investment Income...............................       1.10       1.14      1.18
  Net Realized and Unrealized Gain/Loss...............      (1.11)     (1.00)     (.77)
                                                          -------    -------    ------
Total from Investment Operations......................       (.01)       .14       .41
                                                          -------    -------    ------
Less:
  Distributions from and in excess of Net Investment
    Income:
    Paid to Common Shareholders.......................        .76        .90       .96
    Common Share Equivalent of Distributions Paid to
      Preferred Shareholders..........................        .33        .27       .30
  Return of Capital Distributions Paid to Common
    Shareholders......................................        .06        -0-       -0-
                                                          -------    -------    ------
Total Distributions...................................       1.15       1.17      1.26
                                                          -------    -------    ------
NET ASSET VALUE, END OF THE PERIOD....................    $  5.40    $  6.56    $ 7.59
                                                          =======    =======    ======

Market Price Per Share at End of the Period...........    $ 5.690    $ 5.750    $8.625
Total Investment Return at Market Price (b)...........     12.13%    -25.28%    -2.73%
Total Return at Net Asset Value (c)...................     -5.69%     -1.77%     1.22%
Net Assets at End of the Period (In millions).........    $  81.8    $  98.2    $106.6
Ratio of Expenses to Average Net Assets Applicable to
  Common Shares**.....................................      2.03%      1.97%     1.92%
Ratio of Net Investment Income to Average Net Assets
  Applicable to Common Shares (d).....................     12.66%     12.41%    10.85%
Portfolio Turnover....................................        40%        56%       65%

**Ratio of Expenses to Average Net Assets Including
  Preferred Shares....................................      1.07%      1.10%     1.14%
</TABLE>

(a) Net asset value at December 31, 1991 of $7.62 is adjusted for redemption
    costs associated with the 9.5% cumulative preferred shares and offering
    costs associated with the auction preferred shares of $.30 per share.

(b) Total return based on market price assumes an investment at the market price
    at the beginning of the period indicated, reinvestment of all distributions
    for the period in accordance with the Trust's dividend reinvestment plan,
    and sale of all shares at the closing common stock price at the end of the
    period indicated.

(c) Total return based on net asset value (NAV) assumes an investment at the
    beginning of the period indicated, reinvestment of all distributions for the
    period and sale of all shares at the end of the period, all at NAV.

(d) Net investment income is adjusted for the common share equivalent of
    distributions paid to preferred shareholders.

                                       22
<PAGE>   24

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------
      1997      1996     1995     1994      1993     1992     1991
- -------------------------------------------------------------------
<S>  <C>       <C>      <C>      <C>       <C>      <C>      <C>
     $  8.31   $ 8.12   $ 7.32   $  8.98   $ 7.92   $ 7.29   $ 5.88
     -------   ------   ------   -------   ------   ------   ------
        1.20     1.23     1.27      1.28     1.42     1.69     1.51
         .18      .21      .81     (1.53)    1.02      .42     1.69
     -------   ------   ------   -------   ------   ------   ------
        1.38     1.44     2.08      (.25)    2.44     2.11     3.20
     -------   ------   ------   -------   ------   ------   ------
         .96      .96      .96      1.18     1.20      .98      .92
         .29      .29      .32       .23      .18      .50      .54
         -0-      -0-      -0-       -0-      -0-      -0-      -0-
     -------   ------   ------   -------   ------   ------   ------
        1.25     1.25     1.28      1.41     1.38     1.48     1.46
     -------   ------   ------   -------   ------   ------   ------
     $  8.44   $ 8.31   $ 8.12   $  7.32   $ 8.98   $ 7.92   $ 7.62
     =======   ======   ======   =======   ======   ======   ======

     $9.8125   $9.375   $8.750   $ 7.500   $9.750   $9.375   $7.500
      15.34%   18.91%   30.33%   -12.94%   17.01%   39.58%   62.27%
      13.90%   15.15%   25.19%    -5.70%   30.08%   16.92%   46.26%
     $ 113.4   $112.4   $110.8   $ 104.4   $117.8   $109.2   $108.2
       1.83%    1.89%    1.96%     1.97%    1.72%    1.73%    2.73%
      10.93%   11.58%   12.09%    12.87%   14.41%   14.49%   13.59%
         98%      94%     124%      125%     140%     145%      97%

       1.10%    1.12%    1.15%     1.17%    1.05%    1.02%    1.52%
</TABLE>

See Notes to Financial Statements

                                       23
<PAGE>   25

NOTES TO
FINANCIAL STATEMENTS

December 31, 2000

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen High Income Trust II (the "Trust") is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Trust's investment objective is to provide high current
income, consistent with preservation of capital, by investing in a portfolio of
medium or lower grade fixed income securities, or non-rated securities of
comparable quality. As of April 1, 1999, through a resolution approved by the
Board of Trustees, the Trust may invest up to 35 percent of its total assets in
securities of foreign issuers. The Trust commenced investment operations on
April 28, 1989.

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

A. SECURITY VALUATION Investments are stated at value using market quotations or
indications of value obtained from an independent pricing service. For those
securities where quotations or prices are not available, valuations are obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Trustees. Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value.

    Trust investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuers ability to meet principal and
interest payments.

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

    The Trust may invest in repurchase agreements, which are short-term
investments in which the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
Repurchase agreements are fully collateralized by the underlying debt security.
The Trust will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of the custodian bank. The seller
is required to

                                       24
<PAGE>   26

NOTES TO
FINANCIAL STATEMENTS

December 31, 2000

maintain the value of the underlying security at not less than the repurchase
proceeds due the Trust.

C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
discount is accreted over the expected life of each applicable security.

    In November, 2000, the American Institute of Certified Public Accountants
(AICPA) issued a revised version of the AICPA Audit and Accounting Guide for
Investment Companies (the Guide). The revised version of the Guide is effective
for annual financial statements issued for fiscal years beginning after December
15, 2000 and will require investment companies to amortize premiums and accrete
discounts on fixed income income securities. The Trust currently does not
amortize premiums on fixed income securities. Upon adoption, the Trust will be
required to record a cumulative effect adjustment to reflect the amortization of
premiums. The adjustment will increase the accumulated distributions in excess
of net investment income and increase unrealized appreciation on securities and
therefore will not impact total net assets. At this time, the Trust has not
completed its analysis of the impact of this accounting change.

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

    The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 2000, the Trust had an accumulated capital loss
carryforward for tax purposes of $8,710,794, which expires between December 31,
2002 and December 31, 2008. Net realized gains or losses may differ for
financial reporting and tax purposes as a result of the deferral of losses
relating to wash sale transactions and post-October losses which may not be
recognized for tax purposes until the first day of the following fiscal year.

    At December 31, 2000, for federal income tax purposes, cost for long- and
short-term investments is $94,600,479, the aggregate gross unrealized
appreciation is $983,775 and the aggregate gross unrealized depreciation is
$15,477,388, resulting in net unrealized depreciation on long- and short-term
investments of $14,493,613.

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

                                       25
<PAGE>   27

NOTES TO
FINANCIAL STATEMENTS

December 31, 2000

    Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 2000 fiscal year have been identified and appropriately
reclassified. Permanent differences of $103,548 relating to fee income received
from tender offers was reclassified from accumulated net realized loss to
accumulated distributions in excess of net investment income, and $481,534
relating to return of capital distributions was reclassified from accumulated
distributions in excess of net investment income to capital.

2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .70% of the average
daily net assets of the Trust. This fee was reduced from .75% to .70% of the
average daily net assets of the Trust effective September 1, 2000.

    For the year ended December 31, 2000, the Fund recognized expenses of
approximately $5,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.

    Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each trust. For the year ended December
31, 2000, the Trust recognized expenses of approximately $23,600 representing
Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen")
cost of providing accounting and legal services to the Trust, which are reported
as part of other and legal expenses, respectively, in the statement of
operations.

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

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

                                       26
<PAGE>   28

NOTES TO
FINANCIAL STATEMENTS

December 31, 2000

3. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $34,430,664 and $40,082,943, respectively.

4. AUCTION PREFERRED SHARES

As of December 31, 2000, the trust has outstanding 1,520 Auction Preferred
Shares ("APS"). Dividends are cumulative and the dividend rate is currently
reset every 28 days through an auction process. The rate in effect on December
31, 2000, was 6.55%. During the year ended December 31, 2000, the rates ranged
from 5.19% to 6.60%.

    The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.

    The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.

    On November 7, 2000, the Trust redeemed 280 of its Auction Preferred Shares
with a liquidation value of $25,000 per share.

                                       27
<PAGE>   29

REPORT OF INDEPENDENT AUDITORS

To the Board of Trustees and Shareholders of Van Kampen High Income Trust II

We have audited the accompanying statement of assets and liabilities of Van
Kampen High Income Trust II (the "Trust"), including the portfolio of
investments, as of December 31, 2000, and the related statements of operations,
changes in net assets and the financial highlights for the year then ended.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The Trust's
financial statements and financial highlights for the periods ended prior to
December 31, 2000 were audited by other auditors whose report, dated February 4,
2000, expressed an unqualified opinion on those statements.

    We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2000, by correspondence with the Trust's
custodian, and through the performance of other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

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

DELOITTE & TOUCHE LLP
Chicago, Illinois
February 16, 2001

                                       28
<PAGE>   30

DIVIDEND REINVESTMENT PLAN

    The Trust offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders who are participants in the Plan may have all distributions
of dividends and capital gains automatically reinvested in Common Shares of the
Trust. All Common Shareholders are deemed to be participants in the Plan unless
they specifically elect not to participate. Common Shareholders who elect not to
participate in the Plan will receive all distributions of dividends and capital
gains in cash paid by check mailed directly to the Common Shareholder by the
Trust's dividend disbursing agent.

HOW THE PLAN WORKS

    State Street Bank and Trust Company, as your Plan Agent, serves as agent for
the Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.

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

COSTS OF THE PLAN

    The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.

TAX IMPLICATIONS

    You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.

                                       29
<PAGE>   31

RIGHT TO WITHDRAW

    All Common Shareholders of the Trust are deemed to be participants in the
Plan unless they specifically elect not to participate. You may withdraw from
the Plan at any time by calling 1-800-341-2929 or by writing State Street Bank
and Trust Company. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan, and a cash payment will be made for any fractional
Common Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:

         2800 Post Oak Blvd.
          Houston, TX 77056
        Attn: Closed-End Funds

                                       30
<PAGE>   32

TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN HIGH INCOME TRUST II

BOARD OF TRUSTEES

DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*

OFFICERS

RICHARD F. POWERS, III*
   President

STEPHEN L. BOYD*
   Executive Vice President and
   Chief Investment Officer

A. THOMAS SMITH III*
   Vice President and Secretary

JOHN L. SULLIVAN*
   Vice President, Treasurer
   and Chief Financial Officer

RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
   Vice Presidents

INVESTMENT ADVISER

VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555

CUSTODIAN AND TRANSFER AGENT

STATE STREET BANK AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011

LEGAL COUNSEL

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

INDEPENDENT AUDITORS

DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601

*  "Interested persons" of the Trust, as defined in the Investment Company Act
   of 1940, as amended.

(C)  Van Kampen Funds Inc. 2001 All rights reserved.

                                       31
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
