Oppenheimer Capital Income Fund
6803 South Tucson Way, Centennial, Colorado 80112-3924
1.800.CALL OPP (225.5677)

Statement of Additional Information dated November 24, 2006

     This Statement of Additional Information is not a Prospectus. This document
contains  additional  information about the Fund and supplements  information in
the  Prospectus  dated  November 24, 2006.  It should be read  together with the
Prospectus,  which may be  obtained  by writing to the  Fund's  Transfer  Agent,
OppenheimerFunds  Services,  at P.O. Box 5270,  Denver,  Colorado  80217,  or by
calling  the  Transfer  Agent  at  the  toll-free  number  shown  above,  or  by
downloading    it   from    the    OppenheimerFunds    Internet    website    at
www.oppenheimerfunds.com.

Contents
                                                                         Page
About the Fund
Additional Information About the Fund's Investment Policies and Risks..     2
     The Fund's Investment Policies.....................................    2
     Other Investment Techniques and Strategies.........................   10
     Investment Restrictions............................................   26
     Disclosure of Portfolio Holdings...................................   28
How the Fund is Managed ................................................   32
     Organization and History............................................. 32
     Board of Trustees and Oversight Committees..........................  33
     Trustees and Officers of the Fund...................................  34
     The Manager.........................................................  44
Brokerage Policies of the Fund............................................ 47
Distribution and Service Plans...........................................  50
Payments to Fund Intermediaries..........................................  55
Performance of the Fund..................................................  59

About Your Account
How To Buy Shares......................................................... 64
How To Sell Shares.......................................................  74
How To Exchange Shares..................................................   78
Dividends, Capital Gains and Taxes.......................................  82
Additional Information About the Fund..................................    87

Financial Information About the Fund
Report of Independent Registered Public Accounting Firm................... 88
Financial Statements.......................................................89

Appendix A: Ratings Definitions...........................................A-1
Appendix B: Industry Classifications..................................... B-1
Appendix C: Special Sales Charge Arrangements and Waivers.................C-1




ABOUT THE FUND

Additional Information About the Fund's Investment Policies and Risks

     The investment  objectives,  the principal investment policies and the main
risks of the Fund are described in the Prospectus.  This Statement of Additional
Information ("SAI") contains  supplemental  information about those policies and
risks  and  the  types  of  securities  that  the  Fund's  investment   Manager,
OppenheimerFunds,  Inc.  (the  "Manager"),  can select for the Fund.  Additional
information is also provided  about the strategies  that the Fund can use to try
to achieve its objective.

     The Fund's Investment Policies. The composition of the Fund's portfolio and
the  techniques  and  strategies  that the Fund's  Manager may use in  selecting
portfolio securities will vary over time. The Fund is not required to use any of
the investment techniques and strategies described below at all times in seeking
its goals. It can use some of the special  investment  techniques and strategies
at some times or not at all.

     |X| Investments in Equity  Securities.  In selecting equity investments for
the Fund's  portfolio,  the portfolio  manager  currently uses a value investing
style.  In using a value  approach,  the  manager  looks  for  stock  and  other
securities that appear to be temporarily undervalued,  by various measures, such
as  price/earnings  ratios.  This  approach  is  subject  to change  and may not
necessarily  be used in all cases.  Value  investing  seeks stocks having prices
that are low in  relation to their real worth or future  prospects,  in the hope
that the Fund will realize  appreciation in the value of its holdings when other
investors realize the intrinsic value of the stock.

     Using  value  investing  requires  research as to the  issuer's  underlying
financial  condition and prospects.  Some of the measures used to identify these
securities include, among others:

     o Price/Earnings  ratio, which is the stock's price divided by its earnings
per share.  A stock  having a  price/earnings  ratio  lower than its  historical
range,  or lower  than the market as a whole or that of  similar  companies  may
offer attractive investment opportunities.

     o  Price/book  value  ratio,  which is the stock price  divided by the book
value of the  company  per share.  It  measures  the  company's  stock  price in
relation to its asset value.

     o Dividend Yield,  which is measured by dividing the annual dividend by the
stock price per share.

     o Valuation of Assets,  which  compares the stock price to the value of the
company's underlying assets,  including their projected value in the marketplace
and liquidation value.

     While the Fund  currently  focuses on securities  of issuers  having mid-to
large capitalizations, it does not limit its investments in equity securities to
issuers  having  a market  capitalization  of a  specified  size or  range,  and
therefore  can invest in  securities  of small-,  mid- and  large-capitalization
issuers.  At times,  the Fund can focus its equity  investments in securities of
one or more  capitalization  ranges,  based upon the Manager's judgment of where
the best market opportunities are to seek the Fund's objective.

     At times,  the  market  may favor or  disfavor  securities  of issuers of a
particular  capitalization range, and securities of small capitalization issuers
may be subject to greater price  volatility in general than securities of larger
companies.  Therefore,  if the  Fund  has  substantial  investments  in  smaller
capitalization  companies at times of market volatility,  the Fund's share price
may fluctuate more than that of funds focusing on larger capitalization issuers.

     |_| Rights and  Warrants.  Warrants  are options to  purchase  stock at set
prices.  They are generally valid for a limited period of time.  Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are  similar  to  warrants  and  generally  have  a  short  duration.  They  are
distributed directly by the issuer to its shareholders.

     As a  non-fundamental  policy,  the Fund cannot  invest more than 5% of its
total assets in warrants or rights, and not more than 2% of its total assets may
be  invested  in  warrants  and rights that are not listed on The New York Stock
Exchange or The  American  Stock  Exchange.  That  limitation  does not apply to
warrants and rights the Fund acquires attached to other securities or as part of
investments in units of securities that are issued with other securities. Rights
and warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.

     |_| Preferred  Stock.  Preferred  stock,  unlike common stock, has a stated
dividend rate payable from the corporation's earnings. Preferred stock dividends
may  be  cumulative   or   non-cumulative,   participating,   or  auction  rate.
"Cumulative"  dividend  provisions  require  all or a  portion  of prior  unpaid
dividends to be paid before  dividends can be paid to the issuer's common stock.
"Participating"  preferred  stock may be  entitled to a dividend  exceeding  the
stated dividend in certain cases.

     If interest rates rise, the fixed dividend on preferred  stocks may be less
attractive,  causing the price of preferred  stocks to decline.  Preferred stock
may have mandatory sinking fund provisions,  as well as provisions  allowing the
stock to be called or redeemed prior to its maturity,  which can have a negative
impact on the  stock's  price  when  interest  rates  decline.  Preferred  stock
generally  has  a  preference  over  common  stock  on  the  distribution  of  a
corporation's assets in the event of liquidation of the corporation.  The rights
of preferred stock on  distribution of a corporation's  assets in the event of a
liquidation  are  generally   subordinate  to  the  rights   associated  with  a
corporation's debt securities.

     |_| Convertible Securities. Convertible securities are debt securities that
are  convertible  into an issuer's  common stock.  Convertible  securities  rank
senior to common stock in a  corporation's  capital  structure and therefore are
subject to less risk than common  stock in case of the  issuer's  bankruptcy  or
liquidation.

     The value of a convertible security is a function of its "investment value"
and its  "conversion  value." If the  investment  value  exceeds the  conversion
value,  the security will behave more like a debt  security,  and the security's
price will likely  increase when interest  rates fall and decrease when interest
rates rise. If the conversion  value exceeds the investment  value, the security
will behave more like an equity security. In that case, it will likely sell at a
premium over its conversion value, and its price will tend to fluctuate directly
with the price of the underlying security.

     While some  convertible  securities  are a form of debt  security,  in many
cases their  conversion  feature  (allowing  conversion into equity  securities)
caused them to be regarded by the  Manager  more as "equity  equivalents."  As a
result,  the rating  assigned to the security  has less impact on the  Manager's
investment decision than in the case of non-convertible fixed-income securities.

     To determine whether  convertible  securities should be regarded as "equity
equivalents," the Manager examines the following factors:

     o whether, at the option of the investor,  the convertible  security can be
exchanged for a fixed number of shares of common stock of the issuer,

     o whether  the  issuer  of the  convertible  securities  has  restated  its
earnings per share of common stock on a fully  diluted  basis  (considering  the
effect of conversion of the convertible securities), and

     o the extent to which the convertible  security may be a defensive  "equity
substitute,"  providing the ability to  participate in any  appreciation  in the
price of the issuer's common stock.

     |X| Investments in Bonds and Other Debt Securities.  The Fund can invest in
bonds,  debentures  and other debt  securities to seek current income as part of
its investment objective.

     The   Fund's   debt   investments   can   include    investment-grade   and
non-investment-grade   bonds   (commonly   referred   to   as   "junk   bonds").
Investment-grade  bonds  are bonds  rated at least  "Baa" by  Moody's  Investors
Service,  Inc., or at least "BBB" by Standard & Poor's Corporation or Fitch,
Inc., or that have comparable  ratings by another  nationally-recognized  rating
organization.

     In making  investments  in debt  securities,  the  Manager can rely to some
extent on the ratings of ratings organizations or it can use its own research to
evaluate a security's  credit-worthiness.  If the  securities  the Fund buys are
unrated,  to be  considered  part of the  Fund's  holdings  of  investment-grade
securities,  they must be judged by the Manager to be of  comparable  quality to
bonds rated as investment grade by a rating organization.

     |_| Interest Rate Risk.  Interest rate risk refers to the  fluctuations  in
value of debt securities  resulting from the inverse  relationship between price
and yield.  For  example,  an  increase in general  interest  rates will tend to
reduce the market  value of  already-issued  debt  securities,  and a decline in
general  interest  rates will tend to increase  their value.  In addition,  debt
securities with longer maturities, which tend to have higher yields, are subject
to potentially greater fluctuations in value from changes in interest rates than
obligations with shorter maturities.

     Fluctuations  in the market  value of debt  securities  after the Fund buys
them will not affect the interest income payable on those securities (unless the
coupon rate is a floating  rate pegged to an index or other  measure) . However,
those price  fluctuations will be reflected in the valuations of the securities,
and   therefore   the  Fund's  net  asset  values  will  be  affected  by  those
fluctuations.

     |X| U.S.  Government  Securities.  The Fund can buy  securities  issued  or
guaranteed  by the  U.S.  government  or  its  agencies  and  instrumentalities.
Securities  issued by the U.S.  Treasury are backed by the full faith and credit
of the U.S.  government and are subject to very little credit risk.  Obligations
of U.S.  government  agencies or  instrumentalities  (including  mortgage-backed
securities)  may or may not be  guaranteed  or  supported by the "full faith and
credit"  of the  United  States.  Some are  backed by the right of the issuer to
borrow from the U.S.  Treasury;  others, by discretionary  authority of the U.S.
government  to purchase the  agencies'  obligations;  while others are supported
only by the credit of the  instrumentality.  If a security  is not backed by the
full faith and credit of the United States,  the owner of the security must look
principally  to the agency issuing the obligation for repayment and might not be
able to assert a claim against the United States in the event that the agency or
instrumentality does not meet its commitment.

     |_|  U.S.  Treasury  Obligations.  These  include  Treasury  bills  (having
maturities of one year or less when issued),  Treasury notes (having  maturities
of from one to ten years),  and Treasury  bonds (having  maturities of more than
ten years).  Treasury  securities are backed by the full faith and credit of the
United  States as to timely  payments of interest and  repayments  of principal.
Other  U.S.  Treasury  securities  the  Fund  can buy  include  U.  S.  Treasury
securities that have been "stripped" by a Federal Reserve Bank, zero-coupon U.S.
Treasury   securities   described  below,   and  Treasury   Inflation-Protection
Securities ("TIPS").

     |_| Treasury  Inflation-Protection  Securities. The Fund can buy these U.S.
Treasury  securities,  called "TIPS," that are designed to provide an investment
vehicle that is not  vulnerable to inflation.  The interest rate paid by TIPS is
fixed. The principal value rises or falls  semi-annually based on changes in the
published  Consumer Price Index. If inflation occurs, the principal and interest
payments on TIPS are adjusted to protect  investors from  inflationary  loss. If
deflation occurs, the principal and interest payments will be adjusted downward,
although the principal will not fall below its face amount at maturity.

     |_|  Obligations  Issued  or  Guaranteed  by U.S.  Government  Agencies  or
Instrumentalities.   These  include  direct  obligations  and  mortgage  related
securities  that have different  levels of credit  support from the  government.
Some are supported by the full faith and credit of the U.S. government,  such as
Government  National Mortgage  Association  pass-through  mortgage  certificates
(called "Ginnie Maes").  Some are supported by the right of the issuer to borrow
from the U.S.  Treasury under certain  circumstances,  such as Federal  National
Mortgage  Association  bonds  ("Fannie  Maes") and  Federal  Home Loan  Mortgage
Corporation obligations ("Freddie Macs").

     |_| Special Risks of Lower-Grade Securities.  The Fund can invest up to 25%
of its  total  assets in  "lower  grade"  debt  securities.  "Lower-grade"  debt
securities  are those rated below  "investment  grade,"  which means they have a
rating lower than "Baa" by Moody's or lower than "BBB" by Standard &  Poor's
or Fitch,  Inc., or similar ratings by other rating  organizations.  If they are
unrated,  and are determined by the Manager to be of comparable  quality to debt
securities rated below investment  grade, they are included in the limitation on
the  percentage  of the  Fund's  assets  that  can be  invested  in  lower-grade
securities.  The Fund can  invest  in  securities  rated as low as "C" or "D" or
which may be in default  at the time the Fund buys them.  The Fund may invest no
more than 10% of its total assets in lower-grade  debt  securities  that are not
convertible

     Some of the special credit risks of lower-grade securities are discussed in
the  Prospectus.  There is a greater  risk that the  issuer  may  default on its
obligation to pay interest or to repay  principal than in the case of investment
grade securities.  The issuer's low  creditworthiness may increase the potential
for its  insolvency.  An overall decline in values in the high yield bond market
is also more likely during a period of a general economic downturn.  An economic
downturn or an increase in interest rates could severely  disrupt the market for
high yield bonds, adversely affecting the values of outstanding bonds as well as
the  ability of  issuers  to pay  interest  or repay  principal.  In the case of
foreign  high yield  bonds,  these risks are in addition to the special  risk of
foreign  investing  discussed  in  the  Prospectus  and  in  this  Statement  of
Additional Information.

     However,  the Fund's limitations on buying these investments may reduce the
effect of those risks to the Fund, as will the Fund's policy of diversifying its
investments.  Additionally,  to the extent  they can be  converted  into  stock,
convertible  securities  may be  less  subject  to  some  of  these  risks  than
non-convertible  high  yield  bonds,  since  stock may be more  liquid  and less
affected by some of these risk factors.

     While securities  rated "Baa" by Moody's or "BBB" by Standard &  Poor's
or Fitch,  Inc. are investment  grade and are not regarded as junk bonds,  those
securities  may  be  subject  to  special  risks,   and  have  some  speculative
characteristics. Definitions of the debt security ratings categories of Moody's,
S&P  and  Fitch,  Inc.  are  included  in  Appendix A to this  Statement  of
Additional Information.

     |_|  Zero  Coupon  Securities.  The Fund can buy  zero-coupon  and  delayed
interest  securities,  and "stripped"  securities.  Stripped securities are debt
securities  whose  interest  coupons are  separated  from the  security and sold
separately.  The Fund can buy the  following  types of  zero-coupon  or stripped
securities,  among others:  U.S. Treasury notes or bonds that have been stripped
of their interest coupons,  U.S. Treasury bills issued without interest coupons,
and certificates representing interests in stripped securities.

     Zero-coupon  securities do not make periodic interest payments and are sold
at a deep discount from their face value.  The buyer recognizes a rate of return
determined by the gradual  appreciation  of the  security,  which is redeemed at
face value on a  specified  maturity  date.  This  discount  depends on the time
remaining until maturity, as well as prevailing interest rates, the liquidity of
the security and the credit quality of the issuer.  In the absence of threats to
the issuer's credit quality,  the discount  typically  decreases as the maturity
date approaches.  Some zero-coupon securities are convertible,  in that they are
zero-coupon securities until a predetermined date, at which time they convert to
a security with a specified coupon rate.

     Because zero-coupon  securities pay no interest and compound  semi-annually
at the rate fixed at the time of their issuance, their prices are generally more
volatile  than the prices of other debt  securities.  Their  value may fall more
dramatically than the value of  interest-bearing  securities when interest rates
rise. When prevailing interest rates fall,  zero-coupon  securities tend to rise
more rapidly in value because they have a fixed rate of return.

     The  Fund's  investment  in  zero-coupon  securities  may cause the Fund to
recognize income and make  distributions to shareholders  before it receives any
cash payments on the zero-coupon  investment.  To generate cash to satisfy those
distribution  requirements,  the Fund may have to sell portfolio securities that
it  otherwise  might  have  continued  to hold or to use cash  flows  from other
sources such as the sale of Fund shares.

     |X| Real  Estate  Investment  Trusts  (REITs).  The Fund can invest in real
estate  investment  trusts,  as well as real estate  development  companies  and
operating  companies.  It can also buy shares of companies engaged in other real
estate  businesses.  REITs are trusts that sell shares to investors  and use the
proceeds to invest in real  estate.  A REIT may focus on a  particular  project,
such as a shopping  center or apartment  complex,  or may buy many properties or
properties located in a particular geographic region.

     |X|Event-Linked  Bonds.  The  Fund  may  invest  in  "event-linked  bonds."
Event-linked bonds, which are sometimes referred to as "catastrophe  bonds," are
fixed  income  securities  for which the  return of  principal  and  payment  of
interest is contingent on the non-occurrence of a specific "trigger" event, such
as a  hurricane,  earthquake,  or other  occurrence  that leads to  physical  or
economic loss. For some  event-linked  bonds,  the trigger event may be based on
company-wide  losses,  index-portfolio  losses,  industry  index  or  parametric
(readings of  scientific  instruments)  loss.  If a trigger  event causes losses
exceeding a specific amount in the time period specified in a bond, the Fund may
lose a portion or all of its  investment.  If no trigger event occurs,  the Fund
will recover its principal plus interest.

     Event-linked  bonds  may  be  issued  by  government  agencies,   insurance
companies,  reinsurers,  special  purpose  corporations  or  other  on-shore  or
off-shore  entities.  Often event-linked bonds provide for mandatory or optional
extensions of maturity, at the discretion of the issuer, in order to process and
audit loss claims in those cases when a trigger  event has occurred or is likely
to have occurred. An extension of maturity may increase a bond's volatility.

     Event-linked  bonds may expose the Fund to certain  other risks,  including
issuer default, adverse regulatory or jurisdictional interpretations,  liquidity
risk and adverse  tax  consequences.  Event-linked  bonds may also be subject to
liquidity risk. Lack of a liquid market may result in higher  transaction  costs
and the possibility  that the Fund may be forced to liquidate  positions when it
would not be  advantageous to do so.  Event-linked  bonds are typically rated by
one or more nationally  recognized  statistical rating organization and the Fund
will only invest in event-linked bonds that meet the credit quality requirements
for the Fund.

     |X| Publicly Traded Partnerships; Master Limited Partnerships. The Fund may
invest  in  publicly  traded  limited   partnerships   such  as  master  limited
partnerships ("MLPs"). MLPs issue units that are registered with the SEC and are
freely tradable on a securities exchange or in the  over-the-counter  market. An
MLP is not  considered  to be a  separate  entity.  It  consists  of one or more
general  partners,  who conduct the business,  and one or more limited partners,
who  contribute  capital.  The  general  partner or  partners  are  jointly  and
severally  responsible  for the  liabilities  of the MLP.  The Fund invests as a
limited partner, and normally would not be liable for the debts of an MLP beyond
the  amounts the Fund has  contributed  but it would not be shielded to the same
extent that a shareholder  of  corporation  would be. In certain  circumstances,
creditors  of an MLP would have the right to seek a return of  capital  that had
been  distributed to a limited  partner.  This right of an MLP's creditors would
continue even after the Fund had sold its  investment in the  partnership.  MLPs
are typically real estate,  oil and gas and equipment  leasing  businesses,  but
they also finance movies, research and development, and other projects.

     The Fund  currently  invests  in MLPs  that are taxed as  corporations  for
United  States  federal tax purposes and that make  distributions  in additional
shares rather than cash.  Because these  distributions of additional shares will
be made proportionately to all owners of shares, the receipt of these additional
shares  will not be  includable  in the gross  income of an owner of shares  for
United  States  federal  income tax  purposes.  When the Fund as an owner of the
shares  of such an MLP  receives  additional  shares,  it  will be  required  to
allocate its tax basis in its shares of the MLP equally  between shares that the
Fund  already  owns  and  the  new  additional  shares  received.  Gain  or loss
recognized by the Fund as an owner of shares,  on the sale or other  disposition
of a share will generally be taxable as capital gain or loss.

     As a regulated  investment company, the Fund is required to derive at least
90% of its gross income for every  taxable year from  qualifying  income.  As an
owner of shares of an MLP, the Fund will not report on its United States federal
income tax return any of an MLP's  items of income,  gain,  loss and  deduction.
Thus,  ownership  of shares by the Fund will not  result in income  which is not
qualifying  income to the fund that elects to qualify as a regulated  investment
company for federal tax purposes.  Furthermore,  any gain from the sale or other
disposition  of the  shares  of an MLP that the Fund  owns,  and the  associated
purchase rights,  will qualify for purposes of that 90% test.  Finally,  shares,
and the associated purchase rights, will constitute  qualifying assets to mutual
funds  which  also  must own at least 50%  qualifying  assets at the end of each
quarter.

     |X| Derivatives. The Fund can invest in a variety of derivative investments
for income,  for capital  appreciation or for hedging purposes.  Some derivative
investments the Fund can use are the hedging instruments described below in this
Statement of Additional Information.

     The Fund can invest in  "index-linked"  notes.  Principal  and/or  interest
payments  on these  notes  depend on the  performance  of an  underlying  index.
Currency-indexed  securities are another  derivative the Fund can use. Typically
these are  short-term  or  intermediate-term  debt  securities.  Their  value at
maturity or the rates at which they pay income are  determined  by the change in
value of the U.S. dollar against one or more foreign  currencies or an index. In
some cases,  these  securities may pay an amount at maturity based on a multiple
of the amount of the relative  currency  movements.  This type of index security
offers the potential for increased income or principal payments but at a greater
risk of loss  than a typical  debt  security  of the same  maturity  and  credit
quality.

     Other  derivative  investments the Fund can use include "debt  exchangeable
for common stock" of an issuer or "equity-linked  debt securities" of an issuer.
At maturity, the debt security is exchanged for common stock of the issuer or it
is payable in an amount based on the price of the  issuer's  common stock at the
time of maturity.  Both  alternatives  present a risk that the amount payable at
maturity will be less than the principal amount of the debt because the price of
the issuer's common stock might not be as high as the Manager expected.

     |X| Foreign  Securities.  The Fund can purchase  equity and debt securities
issued or  guaranteed  by  foreign  companies  or foreign  governments  or their
agencies.  "Foreign  securities" include equity and debt securities of companies
organized  under the laws of  countries  other than the  United  States and debt
securities  of foreign  governments.  They may be traded on  foreign  securities
exchanges or in the foreign over-the-counter  markets. The debt obligations of a
foreign  government  and its  agencies and  instrumentalities  may or may not be
supported by the full faith and credit of the foreign government.

     Securities of foreign issuers that are  represented by American  Depository
Receipts or that are listed on a U.S.  securities exchange or traded in the U.S.
over-the-counter markets are not considered "foreign securities" for the purpose
of the Fund's  investment  allocations.  That is because they are not subject to
many of the special  considerations  and risks,  discussed below,  that apply to
foreign securities traded and held abroad.

     Investing in foreign  securities  offers  potential  benefits not available
from  investing  solely in  securities  of domestic  issuers.  They  include the
opportunity to invest in foreign issuers that appear to offer growth  potential,
or in foreign countries with economic policies or business cycles different from
those of the  U.S.,  or to  reduce  fluctuations  in  portfolio  value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets.  The Fund  will  hold  foreign  currency  only in  connection  with the
purchase or sale of foreign securities.

     |_| Risks of Foreign Investing. Investments in foreign securities may offer
special  opportunities  for investing but also present special  additional risks
and  considerations  not  typically  associated  with  investments  in  domestic
securities. Some of these additional risks are: o reduction of income by foreign
taxes;

     o fluctuation  in value of foreign  investments  due to changes in currency
rates or currency control regulations (for example, currency blockage);

     o transaction charges for currency exchange;

     o lack of public information about foreign issuers;

     o lack of uniform accounting, auditing and financial reporting standards in
foreign countries comparable to those applicable to domestic issuers;

     o less volume on foreign exchanges than on U.S. exchanges;

     o greater  volatility  and less  liquidity  on foreign  markets than in the
U.S.;

     o less  governmental  regulation of foreign  issuers,  stock  exchanges and
brokers than in the U.S.;

     o greater difficulties in commencing lawsuits;

     o higher brokerage commission rates than in the U.S.;

     o increased risks of delays in settlement of portfolio transactions or loss
of certificates for portfolio securities;

     o possibilities in some countries of expropriation,  confiscatory taxation,
political,  financial or social instability or adverse diplomatic  developments;
and

     o unfavorable differences between the U.S. economy and foreign economies.

     In the past, U.S.  government policies have discouraged certain investments
abroad by U.S.  investors,  through  taxation or other  restrictions,  and it is
possible that such restrictions could be re-imposed.

     |X| Passive Foreign Investment  Companies.  Some securities of corporations
domiciled  outside  the U.S.  which  the Fund may  purchase,  may be  considered
passive foreign  investment  companies  ("PFICs") under U.S. tax laws. PFICs are
those foreign corporations which generate primarily passive income. They tend to
be growth  companies  or  "start-up"  companies.  For  federal tax  purposes,  a
corporation is deemed a PFIC if 75% or more of the foreign  corporation's  gross
income for the income year is passive income or if 50% or more of its assets are
assets that produce or are held to produce  passive  income.  Passive  income is
further defined as any income to be considered  foreign personal holding company
income within the subpart F provisions defined by IRCss.954.

     Investing in PFICs involves the risks  associated with investing in foreign
securities,  as described above.  There are also the risks that the Fund may not
realize  that a foreign  corporation  it  invests in is a PFIC for  federal  tax
purposes.  Federal tax laws impose  severe tax penalties for failure to properly
report  investment income from PFICs.  Following  industry  standards,  the Fund
makes every  effort to ensure  compliance  with  federal tax  reporting of these
investments.  PFICs are  considered  foreign  securities for the purposes of the
Fund's minimum  percentage  requirements  or limitations of investing in foreign
securities.

     Subject  to the  limits  under  the  Investment  Company  Act of 1940  (the
"Investment  Company  Act"),  the Fund may also invest in foreign  mutual  funds
which are also deemed PFICs (since  nearly all of the income of a mutual fund is
generally passive income).  Investing in these types of PFICs may allow exposure
to various  countries  because some foreign  countries  limit, or prohibit,  all
direct foreign investment in the securities of companies domiciled therein.

     In  addition  to bearing  their  proportionate  share of a fund's  expenses
(management fees and operating expenses), shareholders will also indirectly bear
similar  expenses  of such  entities.  Additional  risks of  investing  in other
investment  companies are described below under  "Investment in Other Investment
Companies."

     |X| Portfolio  Turnover.  "Portfolio  turnover" describes the rate at which
the Fund  traded its  portfolio  securities  during its last  fiscal  year.  For
example,  if a fund sold all of its  securities  during the year,  its portfolio
turnover  rate would have been 100%.  The Fund's  portfolio  turnover  rate will
fluctuate  from  year to  year.  Increased  portfolio  turnover  creates  higher
brokerage  and  transaction  costs for the Fund,  which may reduce  its  overall
performance.  Additionally,  the  realization  of  capital  gains  from  selling
portfolio  securities may result in distributions of taxable  long-term  capital
gains to  shareholders,  since  the Fund  will  normally  distribute  all of its
capital  gains  realized  each year,  to avoid  excise  taxes under the Internal
Revenue Code. The Financial  Highlights table at the end of the Prospectus shows
the Fund's portfolio turnover rates during prior fiscal years.

     Other Investment Techniques and Strategies.  In seeking its objective,  the
Fund  can from  time to time  employ  the  types of  investment  strategies  and
investments  described  below. It is not required to use all of these strategies
at all times and at times may not use them.

     |X|  Investing  in  Small,  Unseasoned  Companies.  The Fund can  invest in
securities of small, unseasoned companies. These are companies that have been in
operation  for  less  than  three  years,   including  the   operations  of  any
predecessors.  Securities  of these  companies  may be subject to  volatility in
their prices. They may have a limited trading market, which may adversely affect
the Fund's ability to dispose of them and can reduce the price the Fund might be
able to obtain for them.  Other investors that own a security issued by a small,
unseasoned  issuer for which there is limited liquidity might trade the security
when the Fund is attempting to dispose of its holdings of that security. In that
case the Fund might receive a lower price for its holdings than might  otherwise
be obtained.

     |X| "When-Issued" and "Delayed-Delivery"  Transactions. The Fund can invest
in securities on a "when-issued"  basis and can purchase or sell securities on a
"delayed-delivery"  basis. When-issued and delayed-delivery are terms that refer
to securities  whose terms and indenture  have been created,  but the securities
are not available for immediate delivery even though the market for them exists.

     When  such  transactions  are  negotiated,  the price  (which is  generally
expressed in yield terms) is fixed at the time the commitment is made.  Delivery
and payment for the  securities  take place at a later date.  The securities are
subject  to change in value from  market  fluctuations  during the period  until
settlement.  The value at  delivery  may be less than the  purchase  price.  For
example,  changes in interest  rates in a direction  other than that expected by
the Manager before  settlement  will affect the value of such securities and may
cause a loss to the Fund. During the period between purchase and settlement,  no
payment is made by the Fund to the issuer,  and no interest  accrues to the Fund
from the investment until it receives the security at settlement.

     The Fund can engage in when-issued  transactions to secure what the Manager
considers to be an advantageous price and yield at the time the Fund enters into
the  obligation.  When the Fund enters into a  when-issued  or  delayed-delivery
transaction,  it relies on the other  party to  complete  the  transaction.  Its
failure  to do so may  cause  the Fund to lose the  opportunity  to  obtain  the
security at a price and yield the Manager considers to be advantageous.

     When the Fund engages in when-issued and delayed-delivery  transactions, it
does so for the purpose of acquiring or selling  securities  consistent with its
investment  objective and policies or for delivery pursuant to options contracts
it has entered into,  and not for the purpose of investment  leverage.  Although
the Fund will enter into  delayed-delivery or when-issued purchase  transactions
to acquire  securities,  it can dispose of a commitment prior to settlement.  If
the Fund chooses to dispose of the right to acquire a when-issued security prior
to its  acquisition or to dispose of its right to delivery or receive  against a
forward commitment, it may incur a gain or loss.

     At the time the Fund makes the commitment to purchase or sell a security on
a when-issued or delayed-delivery basis, it records the transaction on its books
and reflects the value of the security  purchased in determining  the Fund's net
asset value. In a sale transaction,  it records the proceeds to be received. The
Fund will  identify  on its books  liquid  assets at least equal in value to the
value of the Fund's purchase commitments until the Fund pays for the investment.

     When issued and delayed-delivery  transactions can be used by the Fund as a
defensive  technique to hedge against  anticipated changes in interest rates and
prices.  For instance,  in periods of rising  interest rates and falling prices,
the Fund might sell securities in its portfolio on a forward commitment basis to
attempt to limit its  exposure  to  anticipated  falling  prices.  In periods of
falling  interest  rates  and  rising  prices,  the Fund  might  sell  portfolio
securities  and  purchase the same or similar  securities  on a  when-issued  or
delayed-delivery basis to obtain the benefit of currently higher cash yields.

     |X|  Repurchase  Agreements.  The Fund can  acquire  securities  subject to
repurchase agreements. It might do so for liquidity purposes to meet anticipated
redemptions of Fund shares, or pending the investment of the proceeds from sales
of Fund shares, or pending the settlement of portfolio securities transactions.

     In  a  repurchase   transaction,   the  Fund  buys  a  security  from,  and
simultaneously  resells it to, an approved vendor for delivery on an agreed-upon
future  date.  The resale  price  exceeds the  purchase  price by an amount that
reflects an agreed-upon  interest rate effective for the period during which the
repurchase  agreement is in effect.  Approved  vendors  include U.S.  commercial
banks,  U.S.  branches  of  foreign  banks,  or  broker-dealers  that  have been
designated as primary  dealers in government  securities.  They must meet credit
requirements set by the Fund's Manager from time to time.

     The  majority  of these  transactions  run from  day to day,  and  delivery
pursuant to the resale typically occurs within one to five days of the purchase.
Repurchase  agreements  having a maturity  beyond  seven days are subject to the
Fund's limits on holding  illiquid  investments.  The Fund will not enter into a
repurchase  agreement  having a maturity beyond seven days that causes more than
10% of its net assets to exceed  that limit  subject  to  repurchase  agreements
having a  maturity  beyond  seven  days.  There is no limit on the amount of the
Fund's net assets that may be subject to repurchase agreements having maturities
of seven days or less.

     Repurchase agreements,  considered "loans" under the Investment Company Act
of 1940 (the  "Investment  Company Act"), are  collateralized  by the underlying
security.  The Fund's repurchase  agreements require that at all times while the
repurchase  agreement is in effect,  the value of the  collateral  must equal or
exceed the repurchase  price to fully  collateralize  the repayment  obligation.
However,  if the vendor fails to pay the resale price on the delivery  date, the
Fund may incur costs in disposing of the collateral and may experience losses if
there is any  delay in its  ability  to do so.  The  Manager  will  monitor  the
vendor's  creditworthiness  to confirm that the vendor is financially  sound and
will continuously monitor the collateral's value.

     Pursuant  to an  Exemptive  Order  issued by the  Securities  and  Exchange
Commission  (the  "SEC"),  the Fund,  along with other  affiliated  mutual funds
managed by the Manager,  may transfer  uninvested cash balances into one or more
joint repurchase accounts. These balances are invested in one or more repurchase
agreements,  secured by U.S. government securities.  Securities that are pledged
as collateral for  repurchase  agreements are held by a custodian bank until the
agreements mature.  Each joint repurchase  arrangement  requires that the market
value  of the  collateral  be  sufficient  to cover  payments  of  interest  and
principal; however, in the event of default by the other party to the agreement,
retention or sale of the collateral may be subject to legal proceedings.

     |X| Illiquid and Restricted  Securities.  Under the policies and procedures
established  by the  Fund's  Board  of  Trustees,  the  Manager  determines  the
liquidity of certain of the Fund's illiquid or restricted investments. To enable
the Fund to sell its holdings of a restricted  security not registered under the
Securities  Act of 1933,  the Fund may  have to  cause  those  securities  to be
registered.  The expenses of registering restricted securities may be negotiated
by the Fund with the issuer at the time the Fund buys the  securities.  When the
Fund must arrange  registration  because the Fund wishes to sell the security, a
considerable period may elapse between the time the decision is made to sell the
security and the time the security is registered so that the Fund could sell it.
The Fund would bear the risks of any  downward  price  fluctuation  during  that
period.

     The Fund can acquire  restricted  securities  through  private  placements.
Those  securities have  contractual  restrictions on their public resale.  Those
restrictions  might  limit the  Fund's  ability  to value or to  dispose  of the
securities and might lower the amount the Fund could realize upon the sale.

     The Fund has limitations that apply to purchases of restricted  securities,
as  stated  in the  Prospectus.  Those  percentage  restrictions  do  not  limit
purchases  of  restricted  securities  that are  eligible  for sale to qualified
institutional purchasers under Rule 144A of the Securities Act of 1933, if those
securities have been determined to be liquid by the Manager under Board-approved
guidelines.  Those  guidelines  take into account the trading  activity for such
securities and the  availability of reliable  pricing  information,  among other
factors.  If there is a lack of  trading  interest  in a  particular  Rule  144A
security, the Fund's holdings of that security may be considered to be illiquid.

     Illiquid  securities  include repurchase  agreements  maturing in more than
seven days and participation  interests that do not have puts exercisable within
seven days.

     |X|  Loans of  Portfolio  Securities.  The  Fund  can  lend  its  portfolio
securities  to certain  types of  eligible  borrowers  approved  by the Board of
Trustees. It might do so to try to provide income or to raise cash for liquidity
purposes.  These  loans  are  limited  to not more  than 25% of the value of the
Fund's total assets. There are some risks in connection with securities lending.
The Fund might experience a delay in receiving additional collateral to secure a
loan, or a delay in recovery of the loaned  securities.  The Fund presently does
not intend to lend its  securities in the coming year, but if it does, the value
of the loaned securities is not expected to exceed 5% of the value of the Fund's
total assets.

     The Fund must  receive  collateral  for a loan.  Under  current  applicable
regulatory  requirements (which are subject to change), on each business day the
loan collateral must be at least equal to the value of the loaned securities. It
must consist of cash, bank letters of credit,  securities of the U.S. government
or its agencies or  instrumentalities,  or other cash  equivalents  in which the
Fund is permitted to invest.  To be acceptable as collateral,  letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. The terms of the letter of credit and the issuing bank both
must be satisfactory to the Fund.

     When it lends securities,  the Fund receives amounts equal to the dividends
or interest on loaned securities. It also receives one or more of (a) negotiated
loan fees, (b) interest on securities  used as  collateral,  and (c) interest on
any short-term debt securities purchased with such loan collateral.  Either type
of interest may be shared with the  borrower.  The Fund may also pay  reasonable
finder's,  custodian and administrative fees in connection with these loans. The
terms of the Fund's loans must meet applicable  tests under the Internal Revenue
Code and must  permit  the Fund to  reacquire  loaned  securities  on five days'
notice or in time to vote on any important matter.

     |X|  Hedging.  The Fund can use  hedging  to  attempt  to  protect  against
declines  in the  market  value of the Fund's  portfolio,  to permit the Fund to
retain  unrealized  gains  in the  value  of  portfolio  securities  which  have
appreciated,  or to facilitate selling securities for investment  reasons. To do
so, the Fund could:

     o sell futures contracts,

     o buy puts on futures or on securities, or

     o write covered  calls on securities or futures.  Covered calls can also be
used to increase  the Fund's  income,  but the Manager does not expect to engage
extensively in that practice.

     The Fund might use hedging to establish a position in the securities market
as a temporary substitute for purchasing  particular  securities.  In that case,
the Fund would  normally seek to purchase the securities and then terminate that
hedging  position.  The Fund  might  also use this type of hedge to  attempt  to
protect against the possibility that its portfolio securities would not be fully
included in a rise in value of the market. To do so the Fund could:

         o    buy futures, or
         o    buy calls on such futures or on securities.

     The Fund is not  obligated  to use hedging  instruments,  even though it is
permitted to use them in the Manager's discretion,  as described below. The Fund
uses  futures and other  instruments  to  maintain  the  desired  interest  rate
exposure.  The  particular  hedging  instruments  the Fund can use are described
below. The Fund can employ new hedging  instruments and strategies when they are
developed, if those investment methods are consistent with the Fund's investment
objective and are permissible under applicable regulations governing the Fund.

     |_| Futures. The Fund can buy and sell futures contracts that relate to (1)
debt  securities  (these are referred to as  "interest  rate  futures"),  (2) an
individual  stock  ("single stock  futures"),  (3)  broadly-based  stock indices
(these are referred to as "stock index  futures") or other indices  (referred to
as  "financial  futures"),  (4)  foreign  currencies  (these are  referred to as
"forward  contracts"),  or (5) commodities  (these are referred to as "commodity
futures").

     |_| Stock Index  Futures,  Financial  Futures and Interest Rate Futures.  A
broadly-based  stock index is used as the basis for trading stock index futures.
They may in some cases be based on stocks of issuers in a particular industry or
group of industries.  A stock index assigns relative values to the common stocks
included  in the index and its value  fluctuates  in  response to the changes in
value of the  underlying  stocks.  A stock  index  cannot be  purchased  or sold
directly.  Financial  futures are similar contracts based on the future value of
the basket of securities that comprise the index.  These contracts  obligate the
seller  to  deliver,  and the  purchaser  to take,  cash to settle  the  futures
transaction.  There is no delivery made of the  underlying  securities to settle
the futures obligation. Either party may also settle the transaction by entering
into an offsetting contract.

     An interest rate future  obligates the seller to deliver (and the purchaser
to take)  cash or a  specified  type of debt  security  to  settle  the  futures
transaction.  Either party could also enter into an offsetting contract to close
out the  position.  Similarly,  a single  stock future  obligates  the seller to
deliver  (and the  purchaser  to take) cash or a  specified  equity  security to
settle the futures transaction. Either party could also enter into an offsetting
contract to close out the position. Single stock futures trade on a very limited
number of exchanges, with contracts typically not fungible among the exchanges.

     No  money is paid or  received  by the  Fund on the  purchase  or sale of a
future. Upon entering into a futures  transaction,  the Fund will be required to
deposit an initial  margin  payment with the futures  commission  merchant  (the
"futures  broker").  Initial  margin  payments will be deposited with the Fund's
custodian bank in an account  registered in the futures broker's name.  However,
the  futures  broker  can gain  access  to that  account  only  under  specified
conditions.  As the future is marked to market (that is, its value on the Fund's
books is  changed) to reflect  changes in its market  value,  subsequent  margin
payments,  called  variation  margin,  will be paid to or by the futures  broker
daily.

     At any time prior to expiration of the future,  the Fund can elect to close
out  its  position  by  taking  an  opposite  position,  at  which  time a final
determination  of variation  margin is made and any additional cash must be paid
by or released to the Fund.  Any loss or gain on the future is then  realized by
the Fund for tax  purposes.  All futures  transactions  are  effected  through a
clearinghouse associated with the exchange on which the contracts are traded.

     |_|  Commodity  Futures.  The Fund can  invest a portion  of its  assets in
commodity  futures  contracts.  They may be based upon  commodities in five main
commodity groups: energy, livestock, agriculture, industrial metals and precious
metals, on individual  commodities within these groups, or on other commodities.
For hedging  purposes,  the Fund can buy and sell commodity  futures  contracts,
options on  commodity  futures  contracts,  and options and futures on commodity
indices.

     Under a commodity futures contract,  the buyer agrees to take delivery of a
specified amount of a commodity at a future date at a price agreed upon when the
contract  is made.  In the  United  States,  commodity  contracts  are traded on
futures exchanges. The exchanges offer a central marketplace for transactions, a
clearing  corporation to process trades,  standardization  of contract sizes and
expiration dates, and the liquidity of a secondary market.  Futures markets also
regulate the terms and conditions of delivery and the maximum  permissible price
movement of a contract  during a trading  session.  The exchanges  have rules on
position limits.  Those rules limit the amount of futures contracts that any one
party may hold in a particular  commodity at one time.  Those rules are designed
to prevent any one party from controlling a significant portion of the market.

     Despite  the  daily  price  limits   imposed  by  the  futures   exchanges,
historically the short-term price volatility of commodity  futures contracts has
been greater than that for stocks and bonds. To the extent that the Fund invests
in  these  futures  contracts,  its  share  price  may  be  subject  to  greater
volatility.

     |_| Put and Call  Options.  The Fund can buy and sell certain  kinds of put
options  ("puts")  and  call  options  ("calls").  The  Fund  can buy  and  sell
exchange-traded  and  over-the-counter  put and call  options,  including  index
options, securities options, currency options,  commodities options, and options
on the other types of futures described above.

     |_|  Writing  Covered  Call  Options.  The Fund can write  (that is,  sell)
covered calls. If the Fund sells a call option,  it must be covered.  That means
the  Fund  must  own  the  security  subject  to the  call  while  the  call  is
outstanding,  or, for certain types of calls,  the call may be covered by liquid
assets  identifying  on the  Fund's  books to  enable  the Fund to  satisfy  its
obligations  if the call is exercised.  Up to 25% of the Fund's total assets can
be subject to calls the Fund writes.

     When the Fund writes a call on a security,  it receives  cash (a  premium).
The  Fund  agrees  to  sell  the  underlying   security  to  a  purchaser  of  a
corresponding  call on the  same  security  during  the call  period  at a fixed
exercise price  regardless of market price changes  during the call period.  The
call period is usually not more than nine months.  The exercise price may differ
from the market price of the underlying security.  The Fund has the risk of loss
that the price of the  underlying  security may decline  during the call period.
That risk may be offset to some extent by the premium the Fund receives.  If the
value of the  investment  does not rise above the call price,  it is likely that
the call will lapse  without being  exercised.  In that case the Fund would keep
the cash premium and the investment.

     When the Fund writes a call on an index,  it receives cash (a premium).  If
the buyer of the call exercises it, the Fund will pay an amount of cash equal to
the  difference  between the closing  price of the call and the exercise  price,
multiplied by a specified  multiple that  determines the total value of the call
for each point of difference. If the value of the underlying investment does not
rise above the call price,  it is likely that the call will lapse  without being
exercised. In that case the Fund would keep the cash premium.

     The  Fund's  custodian  bank,  or a  securities  depository  acting for the
custodian bank,  will act as the Fund's escrow agent,  through the facilities of
the Options  Clearing  Corporation  ("OCC"),  as to the investments on which the
Fund has written  calls  traded on exchanges  or as to other  acceptable  escrow
securities.  In that way, no margin will be required for such transactions.  OCC
will release the  securities  on the  expiration  of the option or when the Fund
enters into a closing transaction.

     When the Fund writes an over-the-counter ("OTC") option, it will enter into
an  arrangement  with a primary  U.S.  government  securities  dealer which will
establish  a formula  price at which the Fund  will have the  absolute  right to
repurchase  that OTC option.  The  formula  price will  generally  be based on a
multiple of the premium  received  for the option,  plus the amount by which the
option is exercisable  below the market price of the  underlying  security (that
is, the option is "in the money").  When the Fund writes an OTC option,  it will
treat  as  illiquid  (for  purposes  of  its  restriction  on  holding  illiquid
securities)  the  mark-to-market  value of any OTC  option it holds,  unless the
option is subject to a buy-back agreement by the executing broker.

     To terminate its obligation on a call it has written, the Fund can purchase
a corresponding  call in a "closing  purchase  transaction."  The Fund will then
realize a profit or loss,  depending  upon  whether the net of the amount of the
option  transaction costs and the premium received on the call the Fund wrote is
more or less  than the  price of the call the Fund  purchases  to close  out the
transaction.  The Fund may  realize  a profit if the call  expires  unexercised,
because the Fund will retain the underlying security and the premium it received
when it wrote the call. Any such profits are considered short-term capital gains
for federal  income tax  purposes,  as are the  premiums on lapsed  calls.  When
distributed by the Fund they are taxable as ordinary income.  If the Fund cannot
effect a closing purchase  transaction due to the lack of a market, it will have
to hold the callable securities until the call expires or is exercised.

     The Fund can also  write  calls on a futures  contract  without  owning the
futures contract or securities  deliverable under the contract. To do so, at the
time the call is  written,  the  Fund  must  cover  the call by  identifying  an
equivalent  dollar amount of liquid  assets on the Fund's  books.  The Fund will
identify  additional  liquid assets on its books if the value of the  identified
assets  drops  below 100% of the current  value of the  future.  Because of this
segregation  requirement,  in no  circumstances  would the Fund's  receipt of an
exercise  notice  as to that  future  require  the  Fund to  deliver  a  futures
contract.  It would simply put the Fund in a short  futures  position,  which is
permitted by the Fund's hedging policies.

     |_| Writing Put  Options.  The Fund can sell put  options.  A put option on
securities  gives the purchaser the right to sell, and the writer the obligation
to buy,  the  underlying  investment  at the  exercise  price  during the option
period.  The Fund  will not write  puts if,  as a  result,  more than 25% of the
Fund's net assets would be required to be segregated to cover such put options.

     If the  Fund  writes  a put,  the put  must be  covered  by  liquid  assets
identified on the Fund's books. The premium the Fund receives from writing a put
represents a profit, as long as the price of the underlying  investment  remains
equal to or above the exercise price of the put. However,  the Fund also assumes
the obligation  during the option period to buy the underlying  investment  from
the buyer of the put at the exercise price,  even if the value of the investment
falls  below  the  exercise  price.  If a  put  the  Fund  has  written  expires
unexercised,  the Fund  realizes  a gain in the amount of the  premium  less the
transaction costs incurred.  If the put is exercised,  the Fund must fulfill its
obligation to purchase the  underlying  investment at the exercise  price.  That
price will usually  exceed the market value of the  investment  at that time. In
that case, the Fund may incur a loss if it sells the underlying investment. That
loss will be equal to the sum of the sale price of the underlying investment and
the premium  received  minus the sum of the exercise  price and any  transaction
costs the Fund incurred.

     When writing a put option on a security,  to secure its  obligation  to pay
for the underlying security the Fund will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the underlying  securities.
The Fund therefore forgoes the opportunity of investing the segregated assets or
writing calls against those assets.

     As long as the Fund's  obligation  as the put writer  continues,  it may be
assigned an exercise notice by the broker-dealer through which the put was sold.
That notice will require the Fund to take  delivery of the  underlying  security
and pay the exercise price. The Fund has no control over when it may be required
to purchase the underlying security, since it may be assigned an exercise notice
at any time prior to the termination of its obligation as the writer of the put.
That obligation terminates upon expiration of the put. It may also terminate if,
before it receives  an  exercise  notice,  the Fund  effects a closing  purchase
transaction by purchasing a put of the same series as it sold. Once the Fund has
been  assigned  an  exercise  notice,   it  cannot  effect  a  closing  purchase
transaction.

     The Fund can decide to effect a closing  purchase  transaction to realize a
profit on an outstanding  put option it has written or to prevent the underlying
security  from being put.  Effecting a closing  purchase  transaction  will also
permit  the Fund to write  another  put option on the  security,  or to sell the
security and use the proceeds from the sale for other investments. The Fund will
realize  a profit  or loss  from a closing  purchase  transaction  depending  on
whether the cost of the  transaction  is less or more than the premium  received
from  writing  the put option.  Any profits  from  writing  puts are  considered
short-term  capital gains for federal tax purposes,  and when distributed by the
Fund, are taxable as ordinary income.

     |_|  Purchasing  Calls and Puts.  The Fund can  purchase  calls to  protect
against the  possibility  that the Fund's  portfolio will not  participate in an
anticipated rise in the securities market. When the Fund buys a call (other than
in a closing  purchase  transaction),  it pays a premium.  The Fund then has the
right to buy the underlying  investment from a seller of a corresponding call on
the same investment  during the call period at a fixed exercise price.  The Fund
benefits  only if it sells the call at a profit or if,  during the call  period,
the market price of the underlying investment is above the sum of the call price
plus  the  transaction  costs  and the  premium  paid  for the call and the Fund
exercises  the call.  If the Fund does not exercise the call or sell it (whether
or not at a profit),  the call will become  worthless at its expiration date. In
that case the Fund will have paid the premium but lost the right to purchase the
underlying investment.

     The Fund can buy puts whether or not it holds the underlying  investment in
its portfolio.  When the Fund purchases a put, it pays a premium and,  except as
to puts on indices, has the right to sell the underlying  investment to a seller
of a put on a corresponding investment during the put period at a fixed exercise
price.  Buying a put on  securities or futures the Fund owns enables the Fund to
attempt to protect  itself during the put period  against a decline in the value
of the underlying  investment below the exercise price by selling the underlying
investment  at the  exercise  price to a seller of a  corresponding  put. If the
market  price of the  underlying  investment  is equal to or above the  exercise
price and, as a result,  the put is not exercised or resold, the put will become
worthless  at its  expiration  date.  In that  case the Fund  will have paid the
premium but lost the right to sell the underlying investment.  However, the Fund
can  sell  the put  prior to its  expiration.  That  sale may or may not be at a
profit.

     Buying a put on an  investment  the Fund  does not own (such as an index or
future)  permits the Fund to resell the put or to buy the underlying  investment
and sell it at the exercise  price.  The resale price will vary inversely to the
price of the  underlying  investment.  If the  market  price  of the  underlying
investment  is  above  the  exercise  price  and,  as a  result,  the put is not
exercised, the put will become worthless on its expiration date.

     When the Fund  purchases  a call or put on an  index or  future,  it pays a
premium,  but  settlement  is in cash rather than by delivery of the  underlying
investment to the Fund. Gain or loss depends on changes in the index in question
(and thus on price movements in the securities  market generally) rather than on
price movements in individual securities or futures contracts.

     The Fund can buy a call or put only if,  after the  purchase,  the value of
all call and put options held by the Fund will not exceed 5% of the Fund's total
assets.

     |_| Buying and Selling Options on Foreign Currencies.  The Fund can buy and
sell  calls and puts on foreign  currencies.  They  include  puts and calls that
trade on a securities or commodities exchange or in the over-the-counter markets
or are quoted by major  recognized  dealers in such options.  The Fund could use
these calls and puts to try to protect  against  declines in the dollar value of
foreign  securities  and increases in the dollar cost of foreign  securities the
Fund wants to acquire.

     If the Manager anticipates a rise in the dollar value of a foreign currency
in which securities to be acquired are denominated,  the increased cost of those
securities may be partially  offset by purchasing  calls or writing puts on that
foreign currency.  If the Manager anticipates a decline in the dollar value of a
foreign  currency,  the  decline in the  dollar  value of  portfolio  securities
denominated  in that  currency  might be  partially  offset by writing  calls or
purchasing  puts on that foreign  currency.  However,  the currency  rates could
fluctuate in a direction adverse to the Fund's position. The Fund will then have
incurred option premium  payments and transaction  costs without a corresponding
benefit.

     A call the Fund writes on a foreign  currency is "covered" if the Fund owns
the  underlying  foreign  currency  covered by the call or has an  absolute  and
immediate  right to  acquire  that  foreign  currency  without  additional  cash
consideration  (or it can do so for  additional  cash  consideration  held  in a
segregated  account by its custodian  bank) upon conversion or exchange of other
foreign currency held in its portfolio.

     The Fund  could  write a call on a  foreign  currency  to  provide  a hedge
against a decline in the U.S.  dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option.  That decline might be one that occurs due to an expected adverse change
in the exchange  rate.  This is known as a  "cross-hedging"  strategy.  In those
circumstances,  the Fund covers the option by maintaining cash, U.S.  government
securities or other liquid, high grade debt securities in an amount equal to the
exercise price of the option, in a segregated  account with the Fund's custodian
bank.

     |_|  Risks  of  Hedging  with  Options  and  Futures.  The  use of  hedging
instruments requires special skills and knowledge of investment  techniques that
are  different  than what is required for normal  portfolio  management.  If the
Manager uses a hedging  instrument at the wrong time or judges market conditions
incorrectly,  hedging  strategies may reduce the Fund's  return.  The Fund could
also experience  losses if the prices of its futures and options  positions were
not correlated with its other investments.

     The Fund's option  activities could affect its portfolio  turnover rate and
brokerage commissions. The exercise of calls written by the Fund might cause the
Fund to sell related  portfolio  securities,  thus increasing its turnover rate.
The exercise by the Fund of puts on securities will cause the sale of underlying
investments,  increasing  portfolio  turnover.  Although the decision whether to
exercise a put it holds is within the Fund's control,  holding a put might cause
the Fund to sell the related investments for reasons that would not exist in the
absence of the put.

     The Fund could have to pay a brokerage  commission each time it buys a call
or put,  sells a call or put,  or buys or  sells  an  underlying  investment  in
connection with the exercise of a call or put. Those commissions could be higher
on a relative basis than the  commissions  for direct  purchases or sales of the
underlying  investments.  Premiums paid for options are small in relation to the
market value of the underlying investments.  Consequently,  put and call options
offer large  amounts of  leverage.  The  leverage  offered by trading in options
could  result in the Fund's net asset value being more  sensitive  to changes in
the value of the underlying investment.

     If a covered call written by the Fund is  exercised on an  investment  that
has increased in value,  the Fund will be required to sell the investment at the
call  price.  It will not be able to realize  any profit if the  investment  has
increased in value above the call price.

     An  option  position  may be  closed  out  only on a market  that  provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular  option.  The Fund might
experience  losses if it could not close out a position  because of an  illiquid
market for the future or option.

     There is a risk in using  short  hedging by selling  futures or  purchasing
puts on broadly-based  indices or futures to attempt to protect against declines
in the value of the Fund's portfolio securities.  The risk is that the prices of
the futures or the applicable index will correlate imperfectly with the behavior
of the cash prices of the Fund's  securities.  For example,  it is possible that
while the Fund has used hedging  instruments in a short hedge,  the market might
advance  and the value of the  securities  held in the  Fund's  portfolio  might
decline. If that occurred,  the Fund would lose money on the hedging instruments
and also experience a decline in the value of its portfolio securities. However,
while this could occur for a very brief period or to a very small  degree,  over
time the value of a diversified portfolio of securities will tend to move in the
same direction as the indices upon which the hedging instruments are based.

     The risk of  imperfect  correlation  increases  as the  composition  of the
Fund's portfolio diverges from the securities  included in the applicable index.
To  compensate  for the imperfect  correlation  of movements in the price of the
portfolio  securities  being  hedged and  movements  in the price of the hedging
instruments,  the Fund might use hedging  instruments in a greater dollar amount
than the dollar amount of portfolio  securities being hedged.  It might do so if
the historical volatility of the prices of the portfolio securities being hedged
is more than the historical volatility of the applicable index.

     The ordinary  spreads  between  prices in the cash and futures  markets are
subject to  distortions,  due to  differences  in the  nature of those  markets.
First,  all participants in the futures market are subject to margin deposit and
maintenance   requirements.   Rather  than  meeting  additional  margin  deposit
requirements,   investors  may  close  futures  contracts   through   offsetting
transactions  which could distort the normal  relationship  between the cash and
futures  markets.  Second,  the  liquidity  of the  futures  market  depends  on
participants entering into offsetting  transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery,  liquidity
in the futures market could be reduced, thus producing  distortion.  Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities markets.  Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions.

     The Fund  can use  hedging  instruments  to  establish  a  position  in the
securities  markets as a temporary  substitute  for the  purchase of  individual
securities  (long  hedging)  by buying  futures  and/or  calls on such  futures,
broadly-based  indices or on securities.  It is possible that when the Fund does
so the  market  might  decline.  If the Fund  then  concludes  not to  invest in
securities  because of concerns that the market may decline further or for other
reasons,  the Fund will  realize a loss on the hedging  instruments  that is not
offset by a reduction in the price of the securities purchased.

     |_| Forward  Contracts.  Forward  contracts are foreign  currency  exchange
contracts.  They are used to buy or sell foreign currency for future delivery at
a fixed  price.  The Fund  uses  them to "lock  in" the U.S.  dollar  price of a
security  denominated in a foreign currency that the Fund has bought or sold, or
to protect  against  possible  losses from changes in the relative values of the
U.S.  dollar and a foreign  currency.  The Fund  limits its  exposure in foreign
currency  exchange  contracts in a particular  foreign currency to the amount of
its assets denominated in that currency or a  closely-correlated  currency.  The
Fund can also use  "cross-hedging"  where the Fund  hedges  against  changes  in
currencies other than the currency in which a security it holds is denominated.

     Under a forward contract,  one party agrees to purchase,  and another party
agrees to sell, a specific currency at a future date. That date may be any fixed
number of days from the date of the  contract  agreed upon by the  parties.  The
transaction  price  is set at the time  the  contract  is  entered  into.  These
contracts are traded in the inter-bank market conducted  directly among currency
traders (usually large commercial banks) and their customers.

     The Fund can use forward  contracts to protect  against  uncertainty in the
level of future exchange rates. The use of forward  contracts does not eliminate
the risk of  fluctuations  in the prices of the  underlying  securities the Fund
owns or intends  to  acquire,  but it does fix a rate of  exchange  in  advance.
Although  forward  contracts  may  reduce the risk of loss from a decline in the
value of the hedged currency,  at the same time they limit any potential gain if
the value of the hedged currency increases.

     When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign  currency,  or when it anticipates  receiving  dividend
payments in a foreign  currency,  the Fund might  desire to  "lock-in"  the U.S.
dollar  price of the  security or the U.S.  dollar  equivalent  of the  dividend
payments.  To do so,  the Fund  could  enter  into a  forward  contract  for the
purchase or sale of the amount of foreign  currency  involved in the  underlying
transaction, in a fixed amount of U.S. dollars per unit of the foreign currency.
This is called a  "transaction  hedge." The  transaction  hedge will protect the
Fund against a loss from an adverse change in the currency exchange rates during
the period  between the date on which the  security is  purchased  or sold or on
which the payment is  declared,  and the date on which the  payments are made or
received.

     The Fund could also use forward  contracts to lock in the U.S. dollar value
of  portfolio  positions.  This is  called  a  "position  hedge."  When the Fund
believes that foreign  currency might suffer a substantial  decline  against the
U.S.  dollar,  it could enter into a forward  contract to sell an amount of that
foreign currency  approximating the value of some or all of the Fund's portfolio
securities denominated in that foreign currency. When the Fund believes that the
U.S.  dollar may suffer a substantial  decline  against a foreign  currency,  it
might enter into a forward  contract to buy that  foreign  currency  for a fixed
dollar amount.  Alternatively,  the Fund might enter into a forward  contract to
sell a different  foreign  currency for a fixed U.S.  dollar  amount if the Fund
believes that the U.S. dollar value of the foreign  currency to be sold pursuant
to its forward contract will fall whenever there is a decline in the U.S. dollar
value of the currency in which portfolio securities of the Fund are denominated.
That is referred to as a "cross hedge."

     The Fund will cover its short  positions in these cases by  identifying  on
its custodian  bank assets  having a value equal to the aggregate  amount of the
Fund's commitment under forward contracts.  The Fund will not enter into forward
contracts or maintain a net exposure to such  contracts if the  consummation  of
the contracts  would obligate the Fund to deliver an amount of foreign  currency
in  excess of the  value of the  Fund's  portfolio  securities  or other  assets
denominated  in that  currency  or another  currency  that is the subject of the
hedge. However, to avoid excess transactions and transaction costs, the Fund can
maintain  a net  exposure  to  forward  contracts  in excess of the value of the
Fund's portfolio securities or other assets denominated in foreign currencies if
the excess amount is "covered" by liquid securities denominated in any currency.
The cover must be at least equal at all times to the amount of that  excess.  As
one  alternative,  the Fund can  purchase a call option  permitting  the Fund to
purchase the amount of foreign  currency being hedged by a forward sale contract
at a price no higher than the forward  contract price.  As another  alternative,
the Fund can  purchase  a put option  permitting  the Fund to sell the amount of
foreign currency  subject to a forward  purchase  contract at a price as high or
higher than the forward contact price.

     The precise  matching of the amounts under forward  contracts and the value
of the securities  involved  generally  will not be possible  because the future
value  of  securities  denominated  in  foreign  currencies  will  change  as  a
consequence of market movements between the date the forward contract is entered
into and the date it is sold. In some cases the Manager might decide to sell the
security  and  deliver  foreign   currency  to  settle  the  original   purchase
obligation.  If the  market  value of the  security  is less than the  amount of
foreign  currency  the Fund is  obligated  to  deliver,  the Fund  might have to
purchase  additional  foreign  currency on the "spot"  (that is, cash) market to
settle the security trade.  If the market value of the security  instead exceeds
the amount of foreign  currency  the Fund is  obligated to deliver to settle the
trade,  the Fund  might  have to sell on the  spot  market  some of the  foreign
currency  received  upon  the sale of the  security.  There  will be  additional
transaction costs on the spot market in those cases.

     The  projection  of  short-term  currency  market  movements  is  extremely
difficult,  and the  successful  execution of a short-term  hedging  strategy is
highly uncertain.  Forward contracts involve the risk that anticipated  currency
movements will not be accurately  predicted,  causing the Fund to sustain losses
on these contracts and to pay additional  transactions costs. The use of forward
contracts  in this  manner  might  reduce  the Fund's  performance  if there are
unanticipated  changes in currency  prices to a greater  degree than if the Fund
had not entered into such contracts.

     At or before the maturity of a Forward Contract  requiring the Fund to sell
a currency,  the Fund might sell a portfolio  security and use the sale proceeds
to make delivery of the currency.  In the  alternative the Fund might retain the
security  and offset its  contractual  obligation  to deliver  the  currency  by
purchasing a second contract.  Under that contract the Fund will obtain,  on the
same  maturity  date,  the same amount of the  currency  that it is obligated to
deliver.  Similarly, the Fund might close out a forward contract requiring it to
purchase a specified currency by entering into a second contract entitling it to
sell the same  amount of the same  currency  on the  maturity  date of the first
contract.  The Fund would  realize a gain or loss as a result of  entering  into
such an offsetting forward contract under either circumstance.  The gain or loss
will  depend on the  extent  to which the  exchange  rate or rates  between  the
currencies  involved moved between the execution dates of the first contract and
offsetting contract.

     The costs to the Fund of engaging in forward  contracts varies with factors
such as the  currencies  involved,  the  length of the  contract  period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal  basis,  no  brokerage  fees or  commissions  are  involved.
Because these  contracts  are not traded on an exchange,  the Fund must evaluate
the credit and performance risk of the counterparty under each forward contract.

     Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign  currencies into U.S. dollars on a
daily basis.  The Fund can convert foreign  currency from time to time, and will
incur  costs in doing  so.  Foreign  exchange  dealers  do not  charge a fee for
conversion, but they do seek to realize a profit based on the difference between
the prices at which they buy and sell various  currencies.  Thus, a dealer might
offer to sell a foreign  currency  to the Fund at one  rate,  while  offering  a
lesser  rate of  exchange  if the Fund  desires to resell  that  currency to the
dealer.

     |_| Interest Rate Swap Transactions.  The Fund can enter into interest rate
swap  agreements.  In an interest rate swap, the Fund and another party exchange
their right to receive or their  obligation  to pay interest on a security.  For
example,  they might swap the right to receive  floating rate payments for fixed
rate  payments.  The Fund can enter into swaps only on securities  that it owns.
The Fund will not enter into  swaps  with  respect to more than 25% of its total
assets. Also, the Fund will identify liquid assets on its books (such as cash or
U.S.  government  securities) to cover any amounts it could owe under swaps that
exceed the amounts it is  entitled  to  receive,  and it will adjust that amount
daily, as needed.

     Swap agreements  entail both interest rate risk and credit risk. There is a
risk that, based on movements of interest rates in the future, the payments made
by the  Fund  under a swap  agreement  will be  greater  than  the  payments  it
received.  Credit risk arises from the possibility  that the  counterparty  will
default. If the counterparty  defaults,  the Fund's loss will consist of the net
amount of contractual interest payments that the Fund has not yet received.  The
Manager  will  monitor  the  creditworthiness  of  counterparties  to the Fund's
interest rate swap transactions on an ongoing basis.

     The Fund can  enter  into swap  transactions  with  certain  counterparties
pursuant to master netting agreements.  A master netting agreement provides that
all swaps done between the Fund and that counterparty shall be regarded as parts
of an integral  agreement.  If amounts are payable on a  particular  date in the
same currency in respect of one or more swap transactions, the amount payable on
that date in that  currency  shall be the net amount.  In  addition,  the master
netting  agreement  may provide that if one party  defaults  generally or on one
swap,  the  counterparty  can terminate all of the swaps with that party.  Under
these  agreements,  if a default results in a loss to one party,  the measure of
that  party's  damages is  calculated  by  reference  to the  average  cost of a
replacement  swap for each swap. It is measured by the  mark-to-market  value at
the time of the  termination of each swap. The gains and losses on all swaps are
then netted, and the result is the  counterparty's  gain or loss on termination.
The  termination of all swaps and the netting of gains and losses on termination
is generally referred to as "aggregation."

     Swaption  Transactions.  The Fund may enter  into a  swaption  transaction,
which is a  contract  that  grants  the  holder,  in return  for  payment of the
purchase price (the "premium") of the option, the right, but not the obligation,
to enter into an interest  rate swap at a preset rate within a specified  period
of time,  with the writer of the contract.  The writer of the contract  receives
the premium and bears the risk of unfavorable  changes in the preset rate on the
underlying  interest  rate  swap.  Unrealized   gains/losses  on  swaptions  are
reflected  in  investment  assets  and  investment  liabilities  in  the  Fund's
statement of financial condition.

     |_| Regulatory  Aspects of Hedging  Instruments.  The  Commodities  Futures
Trading  Commission  (the "CFTC")  recently  eliminated  limitations  on futures
trading by certain regulated entities including registered  investment companies
and consequently registered investment companies may engage in unlimited futures
transactions and options thereon provided that the Fund claims an exclusion from
regulation as a commodity pool operator.  The Fund has claimed such an exclusion
from registration as a commodity pool operator under the Commodity  Exchange Act
("CEA").  The Fund may use futures  and  options  for  hedging  and  non-hedging
purposes to the extent consistent with its investment  objective,  internal risk
management  guidelines  adopted by the Fund's investment advisor (as they may be
amended from time to time), and as otherwise set forth in the Fund's  prospectus
or this Statement of Additional Information.

     Transactions in options by the Fund are subject to limitations  established
by the option exchanges.  The exchanges limit the maximum number of options that
may be  written or held by a single  investor  or group of  investors  acting in
concert.  Those limits apply  regardless  of whether the options were written or
purchased on the same or different exchanges or are held in one or more accounts
or through one or more different exchanges or through one or more brokers. Thus,
the number of options that the Fund may write or hold may be affected by options
written or held by other entities,  including other investment  companies having
the same  advisor as the Fund (or an advisor  that is an affiliate of the Fund's
advisor). The exchanges also impose position limits on futures transactions.  An
exchange  may order the  liquidation  of  positions  found to be in violation of
those limits and may impose certain other sanctions.

     Under the Investment Company Act, when the Fund purchases a future, it must
maintain cash or readily  marketable  short-term  debt  instruments in an amount
equal to the market  value of the  securities  underlying  the future,  less the
margin deposit applicable to it.

     |_| Tax Aspects of Certain Hedging  Instruments.  Certain foreign  currency
exchange  contracts  in which the Fund may invest are treated as  "Section  1256
contracts" under the Internal Revenue Code. In general, gains or losses relating
to Section 1256 contracts are  characterized as 60% long-term and 40% short-term
capital  gains or losses  under the Code.  However,  foreign  currency  gains or
losses arising from Section 1256 contracts that are forward contracts  generally
are treated as ordinary income or loss. In addition, Section 1256 contracts held
by the  Fund  at the  end of  each  taxable  year  are  "marked-to-market,"  and
unrealized  gains or losses are  treated  as though  they were  realized.  These
contracts also may be  marked-to-market  for purposes of determining  the excise
tax applicable to investment company  distributions and for other purposes under
rules prescribed  pursuant to the Internal Revenue Code. An election can be made
by the Fund to exempt those transactions from this marked-to-market treatment.

     Certain  forward  contracts the Fund enters into may result in  "straddles"
for federal income tax purposes. The straddle rules may affect the character and
timing  of gains  (or  losses)  recognized  by the Fund on  straddle  positions.
Generally,  a loss  sustained  on the  disposition  of a  position  making  up a
straddle is allowed  only to the extent that the loss  exceeds any  unrecognized
gain in the  offsetting  positions  making up the straddle.  Disallowed  loss is
generally  allowed  at the  point  where  there is no  unrecognized  gain in the
offsetting  positions  making up the  straddle,  or the  offsetting  position is
disposed of.

     Under the Internal  Revenue Code, the following gains or losses are treated
as ordinary income or loss:

     (1) gains or losses  attributable  to  fluctuations  in exchange rates that
occur between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities, and

     (2) gains or losses  attributable to fluctuations in the value of a foreign
currency  between the date of  acquisition  of a debt security  denominated in a
foreign  currency  or  foreign  currency  forward  contracts  and  the  date  of
disposition.

     Currency  gains and losses are offset  against  market  gains and losses on
each  trade  before  determining  a net  "Section  988"  gain or loss  under the
Internal Revenue Code for that trade,  which may increase or decrease the amount
of the Fund's investment income available for distribution to its shareholders.

     |X| Credit Derivatives.  The Fund may enter into credit default swaps, both
directly ("unfunded swaps") and indirectly in the form of a swap embedded within
a structured note ("funded swaps"),  to protect against the risk that a security
will  default.  Unfunded  and  funded  credit  default  swaps may be on a single
security,  or on a basket of  securities.  The Fund pays a fee to enter into the
swap and receives a fixed payment during the life of the swap. The Fund may take
a short  position  in the  credit  default  swap (also  known as "buying  credit
protection"),  or may take a long position in the credit default swap note (also
known as "selling credit protection").

     The  Fund  would  take a short  position  in a  credit  default  swap  (the
"unfunded  swap")  against a long  portfolio  position to  decrease  exposure to
specific  corporate  issuers.  If the short  credit  default  swap is  against a
corporate issue, the Fund must own that corporate issue.

     However,  if the short credit default swap is against  sovereign  debt, the
Fund may own either:  (i) the reference  obligation,  (ii) any sovereign debt of
that foreign  country,  or (iii)  sovereign debt of any country that the Manager
determines is closely correlated as an inexact bona fide hedge.

     If the Fund takes a short  position in the credit default swap, if there is
a credit  event  (including  bankruptcy,  failure  to  timely  pay  interest  or
principal,  or a  restructuring),  the Fund will deliver the defaulted bonds and
the swap  counterparty  will pay the par amount of the bonds. An associated risk
is adverse pricing when purchasing bonds to satisfy the delivery obligation.  If
the  swap is on a basket  of  securities,  the  notional  amount  of the swap is
reduced by the par amount of the defaulted bond, and the fixed payments are then
made on the reduced notional amount.

     Taking a long  position in the credit  default swap note (i.e.,  purchasing
the "funded  swap")  would  increase the Fund's  exposure to specific  corporate
issuers.  The goal would be to increase  liquidity in that market sector via the
swap note and its associated increase in the number of trading instruments,  the
number and type of market participants, and market capitalization.

     If the Fund takes a long position in the credit default swap note, if there
is a credit  event  the Fund  will pay the par  amount of the bonds and the swap
counterparty  will deliver the bonds.  If the swap is on a basket of securities,
the  notional  amount of the swap is reduced by the par amount of the  defaulted
bond, and the fixed payments are then made on the reduced notional amount.

     The Fund will  invest no more than 25 % of its total  assets in  "unfunded"
credit default swaps.

     The Fund will limit its  investments in "funded"  credit default swap notes
to no more than 10% of its total assets.

     Other risks of credit  default  swaps include the cost of paying for credit
protection if there are no credit events,  pricing  transparency  when assessing
the cost of a credit default swap,  counterparty  risk, and the need to fund the
delivery  obligation  (either cash or the defaulted bonds,  depending on whether
the Fund is long or short the swap, respectively).

     |X|  Temporary  Defensive and Interim  Investments.  In times of adverse or
unstable  market,  economic or political  conditions,  the Fund can invest up to
100% of its  assets in  temporary  investments  that are  inconsistent  with the
Fund's  principal   investment   strategies.   The  Fund's  temporary  defensive
investments  can include debt  securities  such as: (i) U.S.  Treasury  bills or
other obligations issued or guaranteed by the U.S.  government,  its agencies or
instrumentalities;  (ii) commercial  paper rated A-3 or higher by Standard &
Poor's or P-3 or higher by Moody's;  (iii)  certificates  of deposit or bankers'
acceptances or other  obligations of domestic banks with assets of $1 billion or
more; and (iv) repurchase agreements.

     |X| Investment in Other Investment  Companies.  The Fund can also invest in
the securities of other investment companies,  which can include open-end funds,
closed-end funds and unit investment trusts,  subject to the limits set forth in
the  Investment  Company  Act  that  apply to those  types of  investments.  For
example,  the Fund can  invest in  Exchange-Traded  Funds,  which are  typically
open-end funds or unit investment trusts,  listed on a stock exchange.  The Fund
might do so as a way of  gaining  exposure  to the  segments  of the  equity  or
fixed-income  markets  represented by the Exchange-Traded  Funds' portfolio,  at
times when the Fund may not be able to buy those portfolio securities directly.

     Investing  in  another  investment  company  may  involve  the  payment  of
substantial  premiums  above the value of such  investment  company's  portfolio
securities and is subject to limitations  under the Investment  Company Act. The
Fund does not intend to invest in other investment  companies unless the Manager
believes that the potential  benefits of the  investment  justify the payment of
any premiums or sales charges.  As a shareholder of an investment  company,  the
Fund  would  be  subject  to its  ratable  share  of that  investment  company's
expenses,  including its advisory and administration expenses. The Fund does not
anticipate  investing a substantial  amount of its net assets in shares of other
investment companies.

Investment Restrictions

     |X|  What  Are  "Fundamental  Policies?"  Fundamental  policies  are  those
policies that the Fund has adopted to govern its investments that can be changed
only by the vote of a "majority" of the Fund's  outstanding  voting  securities.
Under the  Investment  Company Act, a "majority"  vote is defined as the vote of
the holders of the lesser of:

     o 67%  or  more  of  the  shares  present  or  represented  by  proxy  at a
shareholder  meeting,  if the holders of more than 50% of the outstanding shares
are present or represented by proxy, or

     o more than 50% of the outstanding shares.

     The Fund's investment objectives are fundamental  policies.  Other policies
described in the  Prospectus  or this  Statement of Additional  Information  are
"fundamental"  only if they are identified as such. The Fund's Board of Trustees
can change  non-fundamental  policies  without  shareholder  approval.  However,
significant  changes to investment  policies will be described in supplements or
updates to the  Prospectus  or this  Statement  of  Additional  Information,  as
appropriate.  The Fund's most significant  investment  policies are described in
the Prospectus.

     |X| Does the Fund  Have  Additional  Fundamental  Policies?  The  following
investment restrictions are fundamental policies of the Fund.

     o The Fund cannot buy securities  issued or guaranteed by any one issuer if
more than 5% of its total assets would be invested in  securities of that issuer
or if it would then own more than 10% of that issuer's voting  securities.  That
restriction  applies to 75% of the Fund's total assets. The limit does not apply
to  securities  issued  by  the  U.S.  government  or any  of  its  agencies  or
instrumentalities or securities of other investment companies.

     o The Fund cannot  invest in  physical  commodities  or physical  commodity
contracts.  However,  the  Fund can buy and sell  hedging  instruments  that are
permitted  by any of its other  investment  policies.  The Fund can also buy and
sell options,  futures and other instruments  backed by physical  commodities or
the  investment  return from which is linked to changes in the price of physical
commodities.

     o The Fund cannot concentrate investments.  That means it cannot invest 25%
or more of its total assets in any industry.

     o The Fund  cannot  borrow  money in excess of  33-1/3% of the value of its
total assets.  The Fund may borrow only from banks and/or affiliated  investment
companies.  With respect to this fundamental policy, the Fund can borrow only if
it  maintains a 300% ratio of assets to borrowing at all times in the manner set
forth in the Investment Company Act.

     o The Fund cannot make loans except (a) through lending of securities,  (b)
through the purchase of debt  instruments or similar  evidence of  indebtedness,
and (c) through repurchase agreements.

     o The Fund cannot  invest in real estate or in  interests  in real  estate.
However,  the Fund can  purchase  securities  of issuers  holding real estate or
interests  in  real  estate  (including  securities  of real  estate  investment
trusts).

     o The Fund cannot  underwrite  securities of other  companies.  A permitted
exception is in case it is deemed to be an underwriter  under the Securities Act
of 1933 when reselling any securities held in its own portfolio.

     o The Fund cannot  issue  "senior  securities,"  but this does not prohibit
certain  investment  activities  for which assets of the Fund are  designated as
segregated,  or margin,  collateral or escrow  arrangements are established,  to
cover the related  obligations.  Examples of those activities  include borrowing
money,   reverse  repurchase   agreements,   delayed-delivery   and  when-issued
arrangements for portfolio securities transactions, and contracts to buy or sell
derivatives, hedging instruments, options or futures.

     o The Fund  cannot  make loans,  except to the extent  permitted  under the
Investment  Company Act, the rules or  regulations  thereunder  or any exemption
therefrom that is applicable to the Fund, as such statute,  rules or regulations
may be amended or interpreted from time to time.

     |X| Unless the  Prospectus  or this  Statement  of  Additional  Information
states that a percentage  restriction  applies on an ongoing  basis,  it applies
only at the time the Fund makes an  investment  (except in the case of borrowing
and  investments in illiquid  securities).  The Fund need not sell securities to
meet  the  percentage  limits  if the  value  of  the  investment  increases  in
proportion to the size of the Fund.

     |X| Does the Fund Have Additional  Restrictions  That Are Not "Fundamental"
Policies? The Fund has an additional operating policy that is not "fundamental,"
and which can be changed by the Board of Trustees without shareholder approval:

     For purposes of the Fund's policy not to  concentrate  its  investments  as
described above, the Fund has adopted the industry  classifications set forth in
Appendix  B  to  this  Statement  of  Additional  Information.  This  is  not  a
fundamental policy.

     o The Fund cannot invest in the securities of other  registered  investment
companies or registered unit investment  trusts in reliance on sub-paragraph (F)
or (G) of section 12(d)(1) of the Investment Company Act.

     Disclosure  of  Portfolio  Holdings.  The Fund  has  adopted  policies  and
procedures  concerning  the  dissemination  of  information  about its portfolio
holdings by employees, officers and/or directors of the Manager, Distributor and
Transfer   Agent.   These  policies  are  designed  to  assure  that  non-public
information  about  portfolio  securities is  distributed  only for a legitimate
business  purpose,  and is done in a manner that (a) conforms to applicable laws
and regulations and (b) is designed to prevent that  information from being used
in a way that could negatively  affect the Fund's  investment  program or enable
third parties to use that information in a manner that is harmful to the Fund.

     o Public  Disclosure.  The  Fund's  portfolio  holdings  are made  publicly
available  no later than 60 days  after the close of each of the  Fund's  fiscal
quarters in semi-annual and annual reports to shareholders, or in its Statements
of  Investments  on Form  N-Q,  which  are  publicly  available  at the SEC.  In
addition,  the top 10 or  more  holdings  are  posted  on the  OppenheimerFunds'
website  at  www.oppenheimerfunds.com  in the  "Fund  Profiles"  section.  Other
general  information about the Fund's portfolio  investments,  such as portfolio
composition  by asset  class,  industry,  country,  currency,  credit  rating or
maturity, may also be posted with a 15-day lag.

     Until publicly  disclosed,  the Fund's portfolio  holdings are proprietary,
confidential business information. While recognizing the importance of providing
Fund shareholders with information about their Fund's  investments and providing
portfolio  information  to a  variety  of  third  parties  to  assist  with  the
management,  distribution and administrative  process, the need for transparency
must be  balanced  against  the risk that third  parties  who gain access to the
Fund's portfolio  holdings  information could attempt to use that information to
trade ahead of or against the Fund, which could negatively affect the prices the
Fund is able to obtain in  portfolio  transactions  or the  availability  of the
securities that portfolio managers are trading on the Fund's behalf.

     The Manager and its subsidiaries and affiliates,  employees,  officers, and
directors,   shall  neither  solicit  nor  accept  any   compensation  or  other
consideration  (including  any  agreement  to maintain  assets in the Fund or in
other investment  companies or accounts managed by the Manager or any affiliated
person  of the  Manager)  in  connection  with  the  disclosure  of  the  Fund's
non-public portfolio holdings.  The receipt of investment advisory fees or other
fees and  compensation  paid to the  Manager  and its  subsidiaries  pursuant to
agreements approved by the Fund's Board shall not be deemed to be "compensation"
or "consideration"  for these purposes.  It is a violation of the Code of Ethics
for any  covered  person to  release  holdings  in  contravention  of  portfolio
holdings disclosure policies and procedures adopted by the Fund.

     A list  of the top 10 or  more  portfolio  securities  holdings  (based  on
invested  assets),  listed by security or by issuer, as of the end of each month
may be disclosed to third parties  (subject to the  procedures  below) no sooner
than 15 days after month-end.

     Except under special limited circumstances discussed below, month-end lists
of the Fund's  complete  portfolio  holdings  may be  disclosed  no sooner  than
30-days after the relevant  month-end,  subject to the procedures  below. If the
Fund's complete portfolio holdings have not been disclosed publicly, they may be
disclosed pursuant to special requests for legitimate business reasons, provided
that:

     o The third-party recipient must first submit a request for release of Fund
portfolio holdings, explaining the business reason for the request;

     o Senior  officers  (a Senior  Vice  President  or above) in the  Manager's
Portfolio and Legal  departments must approve the completed  request for release
of Fund portfolio holdings; and

     o The  third-party  recipient  must sign the Manager's  portfolio  holdings
non-disclosure agreement before receiving the data, agreeing to keep information
that is not publicly  available  regarding the Fund's holdings  confidential and
agreeing not to trade directly or indirectly based on the information.

     The Fund's  complete  portfolio  holdings  positions may be released to the
following  categories of entities or individuals  on an ongoing basis,  provided
that such entity or  individual  either (1) has signed an agreement to keep such
information  confidential  and not trade on the basis of such information or (2)
is subject to fiduciary  obligations,  as a member of the Fund's Board, or as an
employee,  officer  and/or  director of the  Manager,  Distributor,  or Transfer
Agent,  or their  respective  legal  counsel,  not to disclose such  information
except in conformity  with these  policies and  procedures  and not to trade for
his/her personal account on the basis of such information:

     o Employees of the Fund's Manager,  Distributor and Transfer Agent who need
to have access to such  information  (as  determined by senior  officers of such
entity),

     o The Fund's independent registered public accounting firm,

     o Members of the Fund's Board and the Board's legal counsel,

     o The Fund's custodian bank,

     o A proxy voting service designated by the Fund and its Board,

     o Rating/ranking organizations (such as Lipper and Morningstar),

     o Portfolio  pricing services  retained by the Manager to provide portfolio
security prices, and

     o Dealers, to obtain bids (price quotations if securities are not priced by
the Fund's regular pricing services).

     Portfolio holdings  information of the Fund may be provided,  under limited
circumstances,  to  brokers  and/or  dealers  with whom the Fund  trades  and/or
entities  that  provide  investment   coverage  and/or  analytical   information
regarding the Fund's portfolio,  provided that there is a legitimate  investment
reason for  providing  the  information  to the broker,  dealer or other entity.
Month-end portfolio holdings information may, under this procedure,  be provided
to vendors providing research  information and/or analytics to the fund, with at
least a 15-day delay after the month end,  but in certain  cases may be provided
to a broker or analytical  vendor with a 1-2 day lag to facilitate the provision
of requested  investment  information  to the manager to facilitate a particular
trade or the  portfolio  manager's  investment  process for the Fund.  Any third
party  receiving  such  information  must  first  sign the  Manager's  portfolio
holdings   non-disclosure   agreement  as  a  pre-condition  to  receiving  this
information.

     Portfolio holdings information (which may include information on individual
securities  positions  or multiple  securities)  may be provided to the entities
listed below (1) by portfolio traders employed by the Manager in connection with
portfolio  trading,  and (2) by the members of the Manager's  Security Valuation
Group and Accounting  Departments in connection with portfolio  pricing or other
portfolio evaluation purposes:

     o Brokers and dealers in connection with portfolio transactions  (purchases
and sales)

     o Brokers and dealers to obtain bids or bid and asked prices (if securities
held by the Fund are not priced by the fund's regular pricing services)

     o Dealers to obtain price  quotations  where the fund is not  identified as
the owner.

     Portfolio holdings information (which may include information on the Fund's
entire  portfolio or  individual  securities  therein) may be provided by senior
officers  of the  Manager  or  attorneys  on the  legal  staff  of the  Manager,
Distributor, or Transfer Agent, in the following circumstances:

     o Response to legal  process in  litigation  matters,  such as responses to
subpoenas or in class action matters where the Fund may be part of the plaintiff
class (and seeks recovery for losses on a security) or a defendant,

     o Response to regulatory  requests for  information  (the SEC, NASD,  state
securities regulators, and/or foreign securities authorities,  including without
limitation  requests for  information in  inspections or for position  reporting
purposes),

     o To potential  sub-advisers  of  portfolios  (pursuant to  confidentiality
agreements),

     o To consultants for retirement plans for plan  sponsors/discussions at due
diligence meetings (pursuant to confidentiality agreements),

     o Investment  bankers in connection  with merger  discussions  (pursuant to
confidentiality agreements).

     Portfolio  managers and analysts may, subject to the Manager's  policies on
communications with the press and other media, discuss portfolio  information in
interviews  with members of the media,  or in due diligence or similar  meetings
with  clients  or  prospective  purchasers  of Fund  shares  or their  financial
intermediary representatives.

     The Fund's shareholders may, under unusual circumstances (such as a lack of
liquidity  in the Fund's  portfolio  to meet  redemptions),  receive  redemption
proceeds of their Fund shares paid as pro rata shares of securities  held in the
Fund's  portfolio.  In such  circumstances,  disclosure of the Fund's  portfolio
holdings may be made to such shareholders.

     The Chief  Compliance  Officer  (the  "CCO")  of the Fund and the  Manager,
Distributor,  and Transfer  Agent shall  oversee the  compliance by the Manager,
Distributor,  Transfer  Agent,  and their  personnel  with  these  policies  and
procedures.  At least annually, the CCO shall report to the Fund's Board on such
compliance  oversight and on the categories of entities and individuals to which
disclosure of portfolio holdings of the Funds has been made during the preceding
year  pursuant to these  policies.  The CCO shall report to the Fund's Board any
material violation of these policies and procedures during the previous calendar
quarter and shall make  recommendations  to the Board as to any amendments  that
the CCO  believes are  necessary  and  desirable  to carry out or improve  these
policies and procedures.

     The Manager and/or the Fund have entered into ongoing  arrangements to make
available  information about the Fund's portfolio  holdings.  One or more of the
Oppenheimer funds may currently disclose portfolio holdings information based on
ongoing arrangements to the following parties:


A.G. Edwards & Sons
ABG Securities
ABN AMRO
Advest
AG Edwards
American Technology Research
Auerbach Grayson
Banc of America Securities
Barclays
Baseline
Bear Stearns
Belle Haven
Bloomberg
BNP Paribas
BS Financial Services
Buckingham Research Group
Caris & Co.
CIBC World Markets
Citigroup
Citigroup Global Markets
Collins Stewart
Craig-Hallum Capital Group LLC
Credit Agricole Cheuvreux N.A. Inc.
Credit Suisse First Boston
Daiwa Securities
Davy
Deutsche Bank
Deutsche Bank Securities
Dresdner Kleinwort Wasserstein
Emmet & Co
Empirical Research
Enskilda Securities
Essex Capital Markets
Exane BNP Paribas
Factset
Fidelity Capital Markets
Fimat USA Inc.
First Albany
First Albany Corporation
Fixed Income Securities
Fortis Securities
Fox-Pitt, Kelton
Friedman, Billing, Ramsey
Fulcrum Global Partners
Garp Research
George K Baum & Co.
Goldman
Goldman Sachs
HSBC
HSBC Securities Inc
ING Barings
ISI Group
Janney Montgomery
Jefferies
Jeffries & Co.
JP Morgan
JP Morgan Securities
JPP Eurosecurities
Keefe, Bruyette & Woods
Keijser Securities
Kempen & Co. USA Inc.
Kepler Equities/Julius Baer Sec
KeyBanc Capital Markets
Leerink Swan
Legg Mason
Lehman
Lehman Brothers
Lipper
Loop Capital Markets
MainFirst Bank AG
Makinson Cowell US Ltd
Maxcor Financial
Merrill
Merrill Lynch
Midwest Research
Mizuho Securities
Morgan Stanley
Morningstar
Natexis Bleichroeder
Ned Davis Research Group
Nomura Securities
Pacific Crest
Pacific Crest Securities
Pacific Growth Equities
Petrie Parkman
Pictet
Piper Jaffray Inc.
Plexus
Prager Sealy & Co.
Prudential Securities
Ramirez & Co.
Raymond James
RBC Capital Markets
RBC Dain Rauscher
Research Direct
Robert W. Baird
Roosevelt & Cross
Russell Mellon
Ryan Beck & Co.
Sanford C. Bernstein
Scotia Capital Markets
SG Cowen & Co.
SG Cowen Securities
Soleil Securities Group
Standard & Poors
Stone & Youngberg
SWS Group
Taylor Rafferty
Think Equity Partners
Thomas Weisel Partners
UBS
Wachovia
Wachovia Corp.
Wachovia Securities
Wescott Financial
William Blair
Yieldbook



How the Fund is Managed

     Organization and History. The Fund is an open-end,  diversified  management
investment  company with an unlimited number of authorized  shares of beneficial
interest.  The Fund was  organized  as a  Maryland  Corporation  in 1967 but was
reorganized as a Massachusetts business trust in August 1986.

     |X| Classes of Shares.  The Trustees are  authorized,  without  shareholder
approval,  to create new series and classes of shares,  to  reclassify  unissued
shares into additional  series or classes and to divide or combine the shares of
a class  into a  greater  or  lesser  number  of  shares  without  changing  the
proportionate  beneficial  interest of a shareholder in the Fund.  Shares do not
have cumulative voting rights,  preemptive rights or subscription rights. Shares
may be voted in person or by proxy at shareholder meetings.

     The Fund  currently has four classes of shares:  Class A, Class B, Class C,
and  Class  N.  All  classes  invest  in the  same  investment  portfolio.  Only
retirement plans may purchase Class N shares. Each class of shares:

     o has its own dividends and distributions,

     o pays certain expenses which may be different for the different classes,

     o will generally have a different net asset value,

     o will generally have separate  voting rights on matters in which interests
of one class are different from interests of another class, and

     o votes as a class on matters that affect that class alone.

     Shares are freely  transferable,  and each share of each class has one vote
at  shareholder  meetings,  with  fractional  shares voting  proportionally,  on
matters  submitted to a vote of shareholders.  Each share of the Fund represents
an  interest  in the Fund  proportionately  equal to the  interest of each other
share of the same class.

     |X| Meetings of Shareholders.  As a Massachusetts  business trust, the Fund
is not required to hold, and does not plan to hold,  regular annual  meetings of
shareholders,  but may hold shareholder  meetings from time to time on important
matters  or  when  required  to do so by the  Investment  Company  Act or  other
applicable  law.  Shareholders  have the right,  upon a vote or  declaration  in
writing of two-thirds of the outstanding shares of the Fund, to remove a Trustee
or to take other action described in the Fund's Declaration of Trust.

     The Trustees will call a meeting of  shareholders to vote on the removal of
a  Trustee  upon  the  written  request  of  the  record  holders  of 10% of its
outstanding  shares.  If the  Trustees  receive  a  request  from  at  least  10
shareholders  stating that they wish to communicate  with other  shareholders to
request a meeting to remove a Trustee,  the  Trustees  will then either make the
Fund's shareholder list available to the applicants or mail their  communication
to all other shareholders at the applicants'  expense.  The shareholders  making
the request  must have been  shareholders  for at least six months and must hold
shares of the Fund valued at $25,000 or more or  constituting at least 1% of the
Fund's outstanding  shares. The Trustees may also take other action as permitted
by the Investment Company Act.

     |X|  Shareholder  and Trustee  Liability.  The Fund's  Declaration of Trust
contains an express  disclaimer  of  shareholder  or Trustee  liability  for the
Fund's  obligations.  It also provides for  indemnification and reimbursement of
expenses out of the Fund's property for any shareholder  held personally  liable
for its obligations. The Declaration of Trust also states that upon request, the
Fund shall  assume the defense of any claim made against a  shareholder  for any
act or  obligation  of the Fund and shall  satisfy  any  judgment on that claim.
Massachusetts  law permits a shareholder  of a business trust (such as the Fund)
to be  held  personally  liable  as a  "partner"  under  certain  circumstances.
However,  the risk that a Fund  shareholder will incur financial loss from being
held  liable as a  "partner"  of the Fund is  limited to the  relatively  remote
circumstances in which the Fund would be unable to meet its obligations.

     The Fund's  contractual  arrangements  state that any person doing business
with the Fund (and each shareholder of the Fund) agrees under its Declaration of
Trust to look solely to the assets of the Fund for  satisfaction of any claim or
demand that may arise out of any  dealings  with the Fund and that the  Trustees
shall have no personal  liability to any such person, to the extent permitted by
law.

     Board of Trustees and Oversight Committees. The Fund is governed by a Board
of Trustees,  which is responsible  for protecting the interests of shareholders
under  Massachusetts law. The Trustees meet periodically  throughout the year to
oversee the Fund's activities, review its performance, and review the actions of
the Manager.

     The Board of Trustees  has an Audit  Committee,  a Review  Committee  and a
Governance Committee. Each committee is comprised solely of Trustees who are not
"interested   persons"  under  the  Investment  Company  Act  (the  "Independent
Trustees"). The members of the Audit Committee are Edward L. Cameron (Chairman),
George C.  Bowen,  Robert J.  Malone  and F.  William  Marshall,  Jr.  The Audit
Committee  held 6 meetings  during the Fund's fiscal year ended August 31, 2006.
The Audit  Committee  furnishes  the Board with  recommendations  regarding  the
selection of the Fund's  independent  registered  public  accounting  firm (also
referred to as the  "independent  Auditors").  Other main functions of the Audit
Committee, outlined in the Audit Committee Charter, include, but are not limited
to: (i)  reviewing the scope and results of financial  statement  audits and the
audit fees charged;  (ii) reviewing reports from the Fund's independent Auditors
regarding  the  Fund's  internal  accounting  procedures  and  controls;   (iii)
reviewing reports from the Manager's  Internal Audit Department;  (iv) reviewing
certain  reports from and meet  periodically  with the Funds'  Chief  Compliance
Officer;  (v)  maintaining a separate line of  communication  between the Fund's
independent   Auditors  and  the  Independent   Trustees;   (vi)  reviewing  the
independence of the Fund's  independent  Auditors;  and (vii)  pre-approving the
provision of any audit or non-audit services by the Fund's independent Auditors,
including tax services,  that are not prohibited by the  Sarbanes-Oxley  Act, to
the Fund, the Manager and certain affiliates of the Manager.

     The Review  Committee is comprised  solely of  Independent  Directors.  The
members of the Review  Committee are Jon S. Fossel  (Chairman),  Robert G. Avis,
Sam  Freedman  and Beverly L.  Hamilton.  The Review  Committee  held 6 meetings
during the Fund's fiscal year ended August 31, 2006. Among other duties,  as set
forth in the Review Committee's  Charter, the Review Committee reports and makes
recommendations  to the Board  concerning  the fees paid to the Fund's  transfer
agent and the Manager  and the  services  provided  to the Fund by the  transfer
agent and the Manager.  The Review Committee also reviews the Fund's  investment
performance as well as the policies and procedures adopted by the Fund to comply
with the Investment Company Act and other applicable law.

     The Governance Committee is comprised solely of Independent  Trustees.  The
members of the  Governance  Committee are Robert J. Malone  (Chairman),  William
Armstrong,  Beverly L.  Hamilton and F.  William  Marshall,  Jr. The  Governance
Committee  held 5 meetings  during the Fund's fiscal year ended August 31, 2006.
The  Governance  Committee  has adopted a charter  setting  forth its duties and
responsibilities.  Among other  duties,  the  Governance  Committee  reviews and
oversees the Fund's governance  guidelines,  the adequacy of the Fund's Codes of
Ethics and the  nomination  of Trustees,  including  Independent  Trustees.  The
Governance  Committee  has  adopted  a process  for  shareholder  submission  of
nominees for board  positions.  Shareholders  may submit  names of  individuals,
accompanied  by complete  and properly  supported  resumes,  for the  Governance
Committee's   consideration  by  mailing  such  information  to  the  Governance
Committee  in care of the Fund.  The  Governance  Committee  may  consider  such
persons at such time as it meets to consider possible  nominees.  The Governance
Committee,  however,  reserves sole discretion to determine which candidates for
Trustees  and  Independent  Trustees  it  will  recommend  to the  Board  and/or
shareholders  and it may  identify  candidates  other  than those  submitted  by
Shareholders.  The Governance  Committee may, but need not,  consider the advice
and  recommendation of the Manager and/or its affiliates in selecting  nominees.
The full Board elects new Trustees except for those instances when a shareholder
vote is required.

     Shareholders  who  desire  to  communicate  with the Board  should  address
correspondence  to the Board or an individual  Board member and may submit their
correspondence  electronically  at  www.oppenheimerfunds.com  under the  caption
"contact us" or by mail to the Fund at the address below.

     Trustees  and  Officers  of the Fund.  Except for Mr.  Murphy,  each of the
Trustees is an  Independent  Trustee.  All of the Trustees are also  trustees or
directors of the following  Oppenheimer/Centennial  funds (referred to as "Board
II Funds"):

Oppenheimer Cash Reserves                                      Oppenheimer Principal Protected Trust II
Oppenheimer Capital Income Fund                                Oppenheimer Principal Protected Trust III
Oppenheimer Champion Income Fund                               Oppenheimer Real Asset Fund
Oppenheimer Equity Fund, Inc.                                  Oppenheimer Senior Floating Rate Fund
Oppenheimer Integrity Funds                                    Oppenheimer Strategic Income Fund
Oppenheimer International Bond Fund                            Oppenheimer Variable Account Funds
Oppenheimer Limited-Term Government Fund                       Panorama Series Fund, Inc.
Oppenheimer Main Street Funds, Inc.                            Centennial California Tax Exempt Trust
Oppenheimer Main Street Opportunity Fund                       Centennial Government Trust
Oppenheimer Main Street Small Cap Fund                         Centennial Money Market Trust
Oppenheimer Municipal Fund                                     Centennial New York Tax Exempt Trust
Oppenheimer Principal Protected Trust                          Centennial Tax Exempt Trust

     Present or former  officers,  directors,  trustees and employees (and their
immediate  family  members) of the Fund,  the Manager  and its  affiliates,  and
retirement  plans  established  by them for their  employees  are  permitted  to
purchase Class A shares of the Fund and the other Oppenheimer funds at net asset
value  without  sales  charge.  The sales charge on Class A shares is waived for
that group because of the reduced sales efforts realized by the Distributor.

     Messrs.Gillespie,  Levine, Murphy, Petersen, Szilagyi, Vandehey, Wixted and
Zack and Mss.  Bloomberg and Ives,  who are officers of the Fund,  hold the same
offices  with one or more of the other  Board II Funds.  As of November 3, 2006,
the  Trustees  and  officers  of the  Fund,  as a  group,  owned  of  record  or
beneficially  less than 1% of any class of  shares  of the Fund.  The  foregoing
statement  does not  reflect  ownership  of shares held of record by an employee
benefit plan for  employees of the Manager,  other than the shares  beneficially
owned under that plan by the officers of the Board II Funds.  In addition,  none
of the  Independent  Trustees (nor any of their  immediate  family members) owns
securities of either the Manager or the Distributor or of any entity directly or
indirectly  controlling,  controlled by or under common control with the Manager
or the Distributor of the Board II Funds.

     Biographical  Information.  The Trustees and officers, their positions with
the Fund, length of service in such position(s),  and principal  occupations and
business  affiliations  during at least the past  five  years are  listed in the
charts  below.  The  charts  also  include   information  about  each  Trustee's
beneficial  share ownership in the Fund and in all of the registered  investment
companies  that  the  Trustee  oversees  in  the  Oppenheimer  family  of  funds
("Supervised  Funds"). The address of each Trustee in the chart below is 6803 S.
Tucson  Way,  Centennial,  Colorado  80112-3924.  Each  Trustee  serves  for  an
indefinite term, or until his or her resignation, retirement, death or removal.

- ---------------------------------------------------------------------------------------------------------------------------------------
                                                         Independent Trustees
- ---------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Name, Position(s) with the     Principal Occupation(s) During the Past 5 Years; Other                Dollar Range of      Aggregate
                                                                                                                        Dollar Range
                                                                                                                          of Shares
                                                                                                                        Beneficially
                                                                                                         Shares         Owned in All
                               Trusteeships/Directorships Held; Number of Portfolios in the Fund      Beneficially       Supervised
Fund, Length of Service, Age   Complex Currently Overseen                                           Owned in the Fund       Funds
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- -----------------------------------
                                                                                                         As of December 31, 2005
- ------------------------------ -------------------------------------------------------------------- -----------------------------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
William L. Armstrong,          President, Colorado Christian University (since 2006);Chairman of          None         Over $100,000
Chairman of the Board of       the following private mortgage banking companies: Cherry Creek
Trustees since 2003, Trustee   Mortgage Company (since 1991), Centennial State Mortgage Company
since 1999                     (since 1994), and The El Paso Mortgage Company (since 1993);
Age: 69                        Chairman of the following private companies: Ambassador Media
                               Corporation (since 1984) and Broadway Ventures (since 1984);
                               Director of the following: Helmerich & Payne, Inc. (oil and gas
                               drilling/production company) (since 1992), Campus Crusade for
                               Christ (since 1991) and The Lynde and Harry Bradley Foundation,
                               Inc. (non-profit organization) (since 2002); former Chairman of
                               the following: Transland Financial Services, Inc. (private
                               mortgage banking company) (1997-2003), Great Frontier Insurance
                               (insurance agency) (1995-2000), Frontier Real Estate, Inc.
                               (residential real estate brokerage) (1994-2000) and Frontier Title
                               (title insurance agency) (1995-2000); former Director of the
                               following: UNUMProvident (insurance company) (1991-2004), Storage
                               Technology Corporation (computer equipment company) (1991-2003)
                               and International Family Entertainment (television channel)
                               (1992-1997); U.S. Senator (January 1979-January 1991). Oversees 37
                               portfolios in the OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Robert G. Avis,                Director and President of A.G. Edwards Capital, Inc. (General              None         Over $100,000
Trustee since 1993             Partner of private equity funds) (until February 2001); Chairman,
Age: 75                        President and Chief Executive Officer of A.G. Edwards Capital,
                               Inc. (until March 2000); Director of A.G. Edwards & Sons, Inc.
                               (brokerage company) (until 2000) and A.G. Edwards Trust Company
                               (investment adviser) (until 2000); Vice Chairman and Director of
                               A.G. Edwards, Inc. (until March 1999); Vice Chairman of A.G.
                               Edwards & Sons, Inc. (until March 1999); Chairman of A.G. Edwards
                               Trust Company (until March 1999) and A.G.E. Asset Management
                               (investment adviser) (until March 1999). Oversees 37 portfolios in
                               the OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
George C. Bowen,               Assistant Secretary and Director of Centennial Asset Management       $10,001-$50,000   Over $100,000
Trustee since 1998             Corporation (December 1991-April 1999); President, Treasurer and
Age: 70                        Director of Centennial Capital Corporation (June 1989-April 1999);
                               Chief Executive Officer and Director of MultiSource Services, Inc.
                               (March 1996-April 1999); Mr. Bowen held several positions with the
                               Manager and with subsidiary or affiliated companies of the Manager
                               (September 1987-April 1999). Oversees 37 portfolios in the
                               OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Edward L. Cameron,             Member of The Life Guard of Mount Vernon (George Washington           $10,001-$50,000   Over $100,000
Trustee since 1999             historical site) (since June 2000); Director of Genetic ID, Inc.
Age: 68                        (biotech company) (March 2001-May 2002); Partner at
                               PricewaterhouseCoopers LLP (accounting firm) (July 1974-June
                               1999); Chairman of Price Waterhouse LLP Global Investment
                               Management Industry Services Group (accounting firm) (July
                               1994-June 1998). Oversees 37 portfolios in the OppenheimerFunds
                               complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Jon S. Fossel,                 Director of UNUMProvident (insurance company) (since June 2002);           None         Over $100,000
Trustee since 1990             Director of Northwestern Energy Corp. (public utility corporation)
Age: 64                        (since November 2004); Director of P.R. Pharmaceuticals (October
                               1999-October 2003); Director of Rocky Mountain Elk Foundation
                               (non-profit organization) (February 1998-February 2003 and since
                               February 2005); Chairman and Director (until October 1996) and
                               President and Chief Executive Officer (until October 1995) of the
                               Manager; President, Chief Executive Officer and Director of the
                               following: Oppenheimer Acquisition Corp. ("OAC") (parent holding
                               company of the Manager), Shareholders Services, Inc. and
                               Shareholder Financial Services, Inc. (until October 1995).
                               Oversees 37 portfolios in the OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Sam Freedman,                  Director of Colorado Uplift (charitable organization) (since          $10,001-$50,000   Over $100,000
Trustee since 1996             September 1984). Mr. Freedman held several positions with the
Age: 66                        Manager and with subsidiary or affiliated companies of the Manager
                               (until October 1994). Oversees 37 portfolios in the
                               OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Beverly L. Hamilton,           Trustee of Monterey Institute for International Studies                    None         Over $100,000
Trustee since 2002             (educational organization) (since February 2000); Board Member of
Age: 60                        Middlebury College (educational organization) (since December
                               2005); Director of The California Endowment (philanthropic
                               organization) (since April 2002); Director (February 2002-2005)
                               and Chairman of Trustees (since 2006) of the Community Hospital of
                               Monterey Peninsula; Director (October 1991-2005) and Vice Chairman
                               (since 2006) of American Funds' Emerging Markets Growth Fund, Inc.
                               (mutual fund); President of ARCO Investment Management Company
                               (February 1991-April 2000); Member of the investment committees of
                               The Rockefeller Foundation (since 2001) and The University of
                               Michigan (since 2000); Advisor at Credit Suisse First Boston's
                               Sprout venture capital unit (venture capital fund) (1994-January
                               2005); Trustee of MassMutual Institutional Funds (investment
                               company) (1996-June 2004); Trustee of MML Series Investment Fund
                               (investment company) (April 1989-June 2004); Member of the
                               investment committee of Hartford Hospital (2000-2003); and Advisor
                               to Unilever (Holland) pension fund (2000-2003). Oversees 37
                               portfolios in the OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
Robert J. Malone,              Director of Jones International University (educational                    None         Over $100,000
Trustee since 2002             organization) (since August 2005); Chairman, Chief Executive
Age: 62                        Officer and Director of Steele Street State Bank (commercial
                               banking) (since August 2003); Director of Colorado UpLIFT
                               (charitable organization) (since 1986); Trustee of the Gallagher
                               Family Foundation (non-profit organization) (since 2000); Former
                               Chairman of U.S. Bank-Colorado (subsidiary of U.S. Bancorp and
                               formerly Colorado National Bank) (July 1996-April 1999); Director
                               of Commercial Assets, Inc. (real estate investment trust)
                               (1993-2000); Director of Jones Knowledge, Inc. (2001-July 2004);
                               and Director of U.S. Exploration, Inc. (oil and gas exploration)
                               (1997-February 2004). Oversees 37 portfolios in the
                               OppenheimerFunds complex.
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
F. William Marshall, Jr.,      Trustee of MassMutual Select Funds (formerly MassMutual                    None         Over $100,000
Trustee since 2000             Institutional Funds) (investment company) (since 1996) and MML
Age: 64                        Series Investment Fund (investment company) (since 1996); Trustee
                               (since 1987) and Chairman (1994-2005) of the Investment Committee
                               of the Worcester Polytech Institute (private university);
                               President and Treasurer of the SIS Funds (private charitable fund)
                               (since January 1999); Chairman of SIS & Family Bank, F.S.B.
                               (formerly SIS Bank) (commercial bank) (January 1999-July 1999);
                               and Executive Vice President of Peoples Heritage Financial Group,
                               Inc. (commercial bank) (January 1999-July 1999). Oversees 39
                               portfolios in the OppenheimerFunds complex.*
- ------------------------------ -------------------------------------------------------------------- ------------------ ----------------
     * Includes two open-end investment  companies:  MassMutual Select Funds and
MML Series  Investment  Fund. In accordance with the instructions for Form N-1A,
for  purposes  of this  section  only,  MassMutual  Select  Funds and MML Series
Investment  Fund are  included  in the  "Fund  Complex."  The  Manager  does not
consider  MassMutual  Select Funds and MML Series  Investment Fund to be part of
the OppenheimerFunds' "Fund Complex" as that term may be otherwise interpreted.

     The  address  of Mr.  Murphy is Two World  Financial  Center,  225  Liberty
Street,  11th Floor,  New York,  New York  10281-1008.  Mr.  Murphy  serves as a
Trustee for an indefinite term or until his  resignation,  retirement,  death or
removal  and as an officer for an  indefinite  term,  or until his  resignation,
retirement,  death or removal.  Mr. Murphy is an "Interested Trustee" because he
is  affiliated  with the  Manager by virtue of his  positions  as an officer and
director of the Manager,  and as a shareholder of its parent company. Mr. Murphy
was elected as a Trustee of the Fund with the understanding that in the event he
ceases to be the chief  executive  officer of the  Manager,  he will resign as a
Trustee of the Fund and the other Board II Funds (defined above) for which he is
a director or trustee.


- ---------------------------------------------------------------------------------------------------------------------------
                                              Interested Trustee and Officer
- ---------------------------------------------------------------------------------------------------------------------------
- ------------------------------ ---------------------------------------------------------- ---------------- ----------------
Name, Position(s) Held with    Principal Occupation(s) During the Past 5 Years; Other     Dollar Range     Aggregate
                                                                                                           Dollar Range
                                                                                                           Of Shares
                                                                                          of Shares        Beneficially
                                                                                          Beneficially     Owned in All
the Fund, Length of Service,   Trusteeships/Directorships Held; Number of Portfolios in   Owned in the     Supervised
Age                            the Fund Complex Currently Overseen                        Fund             Funds
- ------------------------------ ---------------------------------------------------------- ---------------- ----------------
- ------------------------------ ---------------------------------------------------------- ---------------------------------
                                                                                              As of December 31, 2005
- ------------------------------ ---------------------------------------------------------- ---------------------------------
- ------------------------------ ---------------------------------------------------------- ---------------- ----------------
John V. Murphy,                 Chairman, Chief Executive Officer and Director (since          None        Over $100,000
President, Principal           June 2001) and President (since September 2000) of the
Executive Officer, and         Manager; President and director or trustee of other
Trustee since 2001             Oppenheimer funds; President and Director of OAC and of
Age: 57                        Oppenheimer Partnership Holdings, Inc. (holding company
                               subsidiary of the Manager) (since July 2001); Director
                               of OppenheimerFunds Distributor, Inc. (subsidiary of the
                               Manager) (since November 2001); Chairman and Director of
                               Shareholder Services, Inc. and of Shareholder Financial
                               Services, Inc. (transfer agent subsidiaries of the
                               Manager) (since July 2001); President and Director of
                               OppenheimerFunds Legacy Program (charitable trust
                               program established by the Manager) (since July 2001);
                               Director of the following investment advisory
                               subsidiaries of the Manager: OFI Institutional Asset
                               Management, Inc., Centennial Asset Management
                               Corporation, Trinity Investment Management Corporation
                               and Tremont Capital Management, Inc. (since November
                               2001), HarbourView Asset Management Corporation and OFI
                               Private Investments, Inc. (since July 2001); President
                               (since November 2001) and Director (since July 2001) of
                               Oppenheimer Real Asset Management, Inc.; Executive Vice
                               President of Massachusetts Mutual Life Insurance Company
                               (OAC's parent company) (since February 1997); Director
                               of DLB Acquisition Corporation (holding company parent
                               of Babson Capital Management LLC) (since June 1995);
                               Member of the Investment Company Institute's Board of
                               Governors (since October 3, 2003); Chief Operating
                               Officer of the Manager (September 2000-June 2001);
                               President and Trustee of MML Series Investment Fund and
                               MassMutual Select Funds (open-end investment companies)
                               (November 1999-November 2001); Director of C.M. Life
                               Insurance Company (September 1999-August 2000);
                               President, Chief Executive Officer and Director of MML
                               Bay State Life Insurance Company (September 1999-August
                               2000); Director of Emerald Isle Bancorp and Hibernia
                               Savings Bank (wholly-owned subsidiary of Emerald Isle
                               Bancorp) (June 1989-June 1998). Oversees 91 portfolios
                               in the OppenheimerFunds complex.
- ------------------------------ ---------------------------------------------------------- ---------------- ----------------

     The  addresses  of the  officers  in the chart  below are as  follows:  for
Messrs.  Gillespie,  Levine  and Zack and Ms.  Bloomberg,  Two  World  Financial
Center, 225 Liberty Street, New York, New York 10281-1008, for Messrs. Petersen,
Szilagyi,  Vandehey  and Wixted and Ms.  Ives,  6803 S. Tucson Way,  Centennial,
Colorado 80112-3924.  Each officer serves for an indefinite term or until his or
her resignation, retirement death or removal.




- ----------------------------------------------------------------------------------------------------------------------
                                             Other Officers of the Fund
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Name, Position(s) Held with the     Principal Occupation(s) During Past 5 Years
Fund, Length of Service, Age
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Michael S. Levine                   Vice  President of the Manager  since June 1998; an officer of 1 portfolio in the
Vice President and Portfolio        OppenheimerFunds   complex.  Formerly  Assistant  Vice  President  and  Portfolio
Manager since June 1999             Manager of the Manager (April 1996 - June 1998).
Age: 39
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Mark S. Vandehey,                   Senior Vice President and Chief Compliance Officer of the Manager (since March
Vice President and Chief            2004); Vice President of OppenheimerFunds Distributor, Inc., Centennial Asset
Compliance Officer since 2004       Management Corporation and Shareholder Services, Inc. (since June 1983); Vice
Age: 56                             President and Director of Internal Audit of the Manager (1997-February 2004). An
                                    officer of 91 portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Brian W. Wixted,                    Senior Vice President and Treasurer of the Manager (since March 1999); Treasurer
Treasurer and Principal Financial   of the following: HarbourView Asset Management Corporation, Shareholder
& Accounting Officer since since    Financial Services, Inc., Shareholder Services, Inc., Oppenheimer Real Asset
1999                                Management Corporation, and Oppenheimer Partnership Holdings, Inc. (since March
Age: 47                             1999), OFI Private Investments, Inc. (since March 2000), OppenheimerFunds
                                    International Ltd. and OppenheimerFunds plc (since May 2000), OFI Institutional
                                    Asset Management, Inc. (since November 2000), and OppenheimerFunds Legacy
                                    Program (since June 2003); Treasurer and Chief Financial Officer of OFI Trust
                                    Company (trust company subsidiary of the Manager) (since May 2000); Assistant
                                    Treasurer of the following: OAC (since March 1999), Centennial Asset Management
                                    Corporation (March 1999-October 2003) and OppenheimerFunds Legacy Program (April
                                    2000-June 2003); Principal and Chief Operating Officer of Bankers Trust
                                    Company-Mutual Fund Services Division (March 1995-March 1999). An officer of 91
                                    portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Brian Petersen,                     Assistant Vice President of the Manager (since August 2002); Manager/Financial
Assistant Treasurer since 2004      Product Accounting of the Manager (November 1998-July 2002). An officer of 91
Age: 36                             portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Brian C. Szilagyi,                  Assistant Vice President of the Manager (since July 2004); Director of Financial
Assistant Treasurer since 2005      Reporting and Compliance of First Data Corporation (April 2003-July 2004);
Age: 36                             Manager of Compliance of Berger Financial Group LLC (May 2001-March 2003). An
                                    officer of 91 portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Robert G. Zack,                     Executive Vice President (since January 2004) and General Counsel (since March
Vice President and Secretary        2002) of the Manager; General Counsel and Director of the Distributor (since
since 2001                          December 2001); General Counsel of Centennial Asset Management Corporation
Age: 58                             (since December 2001); Senior Vice President and General Counsel of HarbourView
                                    Asset Management Corporation (since December 2001); Secretary and General
                                    Counsel of OAC (since November 2001); Assistant Secretary (since September 1997)
                                    and Director (since November 2001) of OppenheimerFunds International Ltd. and
                                    OppenheimerFunds plc; Vice President and Director of Oppenheimer Partnership
                                    Holdings, Inc. (since December 2002); Director of Oppenheimer Real Asset
                                    Management, Inc. (since November 2001); Senior Vice President, General Counsel
                                    and Director of Shareholder Financial Services, Inc. and Shareholder Services,
                                    Inc. (since December 2001); Senior Vice President, General Counsel and Director
                                    of OFI Private Investments, Inc. and OFI Trust Company (since November 2001);
                                    Vice President of OppenheimerFunds Legacy Program (since June 2003); Senior Vice
                                    President and General Counsel of OFI Institutional Asset Management, Inc. (since
                                    November 2001); Director of OppenheimerFunds (Asia) Limited (since December
                                    2003); Senior Vice President (May 1985-December 2003), Acting General Counsel
                                    (November 2001-February 2002) and Associate General Counsel (May 1981-October
                                    2001) of the Manager; Assistant Secretary of the following: Shareholder
                                    Services, Inc. (May 1985-November 2001), Shareholder Financial Services, Inc.
                                    (November 1989-November 2001), and OppenheimerFunds International Ltd.
                                    (September 1997-November 2001). An officer of 91 portfolios in the
                                    OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Lisa I. Bloomberg,                  Vice President and Associate Counsel of the Manager (since May 2004); First Vice
Assistant Secretary since 2004      President (April 2001-April 2004), Associate General Counsel (December
Age: 38                             2000-April 2004), Corporate Vice President (May 1999-April 2001) and Assistant
                                    General Counsel (May 1999-December 2000) of UBS Financial Services Inc.
                                    (formerly, PaineWebber Incorporated). An officer of 91 portfolios in the
                                    OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Kathleen T. Ives,                   Vice President (since June 1998) and Senior Counsel and Assistant Secretary
Assistant Secretary since 2001      (since October 2003) of the Manager; Vice President (since 1999) and Assistant
Age: 41                             Secretary (since October 2003) of the Distributor; Assistant Secretary of
                                    Centennial Asset Management Corporation (since October 2003); Vice President and
                                    Assistant Secretary of Shareholder Services, Inc. (since 1999); Assistant
                                    Secretary of OppenheimerFunds Legacy Program and Shareholder Financial Services,
                                    Inc. (since December 2001); Assistant Counsel of the Manager (August
                                    1994-October 2003). An officer of 91 portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------
Phillip S. Gillespie,               Senior Vice President and Deputy General Counsel of the Manager (since September
Assistant Secretary since 2004      2004); First Vice President (2000-September 2004), Director (2000-September
Age: 42                             2004) and Vice President (1998-2000) of Merrill Lynch Investment Management. An
                                    officer of 91 portfolios in the OppenheimerFunds complex.
- ----------------------------------- ----------------------------------------------------------------------------------

     |X|  Remuneration  of the  Officers  and  Trustees.  The  officers  and the
interested Trustee of the Fund, who are affiliated with the Manager,  receive no
salary or fee from the Fund. The Independent  Trustees received the compensation
shown below from the Fund for serving as a Trustee and member of a committee (if
applicable),  with respect to the Fund's fiscal year ended August 31, 2006.  The
total  compensation,  including accrued retirement  benefits,  from the Fund and
fund  complex  represents  compensation  received  for  serving as a Trustee and
member of a committee (if  applicable) of the Boards of the Fund and other funds
in the  OppenheimerFunds  complex  during the calendar  year ended  December 31,
2005.



- ------------------------------------------------ ----------------------------------- ---------------------------------
Name of Trustee and Other Fund Position(s) (as    Aggregate Compensation From the      Total Compensation From the
applicable)                                                   Fund(1)                    Fund and Fund Complex(2)
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
William L. Armstrong                                           $8,764                            $178,000
Chairman of the Board and
Governance Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Robert G. Avis                                                 $5,840                            $118,500
Review Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
George C. Bowen                                                $5,840                            $118,500
Audit Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Edward L. Cameron                                              $6,918                            $136,000
Audit Committee Chairman
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Jon S. Fossel                                                  $6,192                            $124,100
Review Committee Chairman
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Sam Freedman                                                   $5,840                            $118,500
Review Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Beverly Hamilton                                             $5,387(3)                           $107,175
Review Committee Member and
Governance Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
Robert J. Malone                                             $6,712(4)                           $134,868
Governance Committee Chairman and
Audit Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
- ------------------------------------------------ ----------------------------------- ---------------------------------
F. William Marshall, Jr.                                       $5,840                         $169,500((5))
Audit Committee Member and Governance
Committee Member
- ------------------------------------------------ ----------------------------------- ---------------------------------
1.       "Aggregate Compensation From the Fund" includes fees and deferred compensation, if any.

     2. In accordance with SEC  regulations,  for purposes of this section only,
"Fund Complex"  includes the  Oppenheimer  funds,  the MassMutual  Institutional
Funds,  the  MassMutual  Select Funds and the MML Series  Investment  Fund,  the
investment  adviser  for which is the  indirect  parent  company  of the  Fund's
Manager. The Manager also serves as the Sub-Advisor to the following: MassMutual
Premier   International  Equity  Fund,  MassMutual  Premier  Main  Street  Fund,
MassMutual   Premier   Strategic   Income  Fund,   MassMutual   Premier  Capital
Appreciation  Fund,  and  MassMutual  Premier  Global Fund. The Manager does not
consider MassMutual  Institutional Funds, MassMutual Select Funds and MML Series
Investment Fund to be part of the OppenheimerFunds'  "Fund Complex" as that term
may be otherwise interpreted.

     3.  Includes   $5,387   deferred  by  Ms.   Hamilton  under  the  "Deferred
Compensation Plan" described below.

     4. Includes $1,979 deferred by Mr. Malone under the "Deferred  Compensation
Plan" described below.

     5.  Includes  $51,000  compensation  paid to Mr.  Marshall for serving as a
Trustee for MassMutual Select Funds and MML Series Investment Fund.

     |X|  Compensation  Deferral  Plan For  Trustees.  The Board of Trustees has
adopted a Compensation  Deferral Plan for Independent Trustees that enables them
to elect to defer  receipt  of all or a  portion  of the  annual  fees  they are
entitled to receive from the Fund. Under the plan, the compensation  deferred by
a Trustee  is  periodically  adjusted  as though an  equivalent  amount had been
invested in shares of one or more Oppenheimer funds selected by the Trustee. The
amount  paid to the  Trustee  under the plan will be  determined  based upon the
amount of compensation deferred and the performance of the selected funds.

     Deferral of Trustees'  fees under the plan will not  materially  affect the
Fund's assets,  liabilities or net income per share.  The plan will not obligate
the Fund to retain the services of any Trustees or to pay any  particular  level
of  compensation  to any  Trustees.  Pursuant to an Order issued by the SEC, the
Fund may invest in the funds  selected by the  Trustees  under the plan  without
shareholder  approval for the limited  purpose of  determining  the value of the
Trustees' deferred compensation account.

     |X| Major  Shareholders.  As of  November  3,  2006,  the only  persons  or
entities who owned of record or were known by the Fund to own beneficially 5% or
more of any class of the Fund's outstanding shares were:

     Wilmington  Trust Co., TR, Cumulus Media Inc. 401K,  1100 N. Market Street,
Wilmington, DE 19801-1243,  which owned 189,851.053 Class N shares (6.54% of the
Class N shares then outstanding).

     Hartford Life Insurance  Company,  P O Box 2999,  Hartford,  CT 06104-2999,
which  owned  158,635.066  Class N shares  (5.46%  of the  Class N  shares  then
outstanding).


     The Manager. The Manager is wholly-owned by Oppenheimer  Acquisition Corp.,
a holding company  controlled by Massachusetts  Mutual Life Insurance Company, a
global, diversified insurance and financial services organization.

     |X| Code of Ethics.  The Fund, the Manager and the Distributor  have a Code
of Ethics.  It is designed to detect and prevent  improper  personal  trading by
certain employees, including portfolio managers, that would compete with or take
advantage of the Fund's portfolio transactions.  Covered persons include persons
with  knowledge of the  investments  and  investment  intentions of the Fund and
other funds  advised by the  Manager.  The Code of Ethics does permit  personnel
subject to the Code to invest in securities,  including  securities  that may be
purchased or held by the Fund, subject to a number of restrictions and controls.
Compliance  with the Code of Ethics is carefully  monitored  and enforced by the
Manager.

     The Code of Ethics is an exhibit to the Fund's registration statement filed
with the SEC and can be reviewed and copied at the SEC's Public  Reference  Room
in Washington,  D.C. You can obtain  information about the hours of operation of
the Public  Reference  Room by calling  the SEC at  1.202.942.8090.  The Code of
Ethics can also be viewed as part of the Fund's  registration  statement  on the
SEC's EDGAR database at the SEC's Internet website at www.sec.gov. Copies may be
obtained, after paying a duplicating fee, by electronic request at the following
E-mail address: publicinfo@sec.gov., or by writing to the SEC's Public Reference
Section, Washington, D.C. 20549-0102.

     |X| Portfolio  Proxy Voting.  The Fund has adopted  Portfolio  Proxy Voting
Policies and Procedures,  which include Proxy Voting Guidelines, under which the
Fund votes proxies  relating to  securities  ("portfolio  proxies")  held by the
Fund.  The  Fund's  primary  consideration  in voting  portfolio  proxies is the
financial  interests of the Fund and its shareholders.  The Fund has retained an
unaffiliated  third-party as its agent to vote  portfolio  proxies in accordance
with  the  Fund's  Proxy  Voting  Guidelines  and to  maintain  records  of such
portfolio  proxy voting.  The  Portfolio  Proxy Voting  Policies and  Procedures
include  provisions to address  conflicts of interest that may arise between the
Fund and the Manager or the Manager's affiliates or business relationships. Such
a conflict of interest may arise, for example, where the Manager or an affiliate
of the  Manager  manages or  administers  the assets of a pension  plan or other
investment  account of the portfolio  company  soliciting  the proxy or seeks to
serve in that capacity.  The Manager and its affiliates  generally seek to avoid
such conflicts by maintaining  separate  investment decision making processes to
prevent the sharing of business  objectives  with  respect to proposed or actual
actions regarding  portfolio proxy voting decisions.  Additionally,  the Manager
employs the following two procedures: (1) if the proposal that gives rise to the
conflict is specifically  addressed in the Proxy Voting Guidelines,  the Manager
will vote the portfolio  proxy in accordance  with the Proxy Voting  Guidelines,
provided  that they do not provide  discretion  to the Manager on how to vote on
the matter; and (2) if such proposal is not specifically  addressed in the Proxy
Voting  Guidelines  or the Proxy Voting  Guidelines  provide  discretion  to the
Manager on how to vote, the Manager will vote in accordance with the third-party
proxy voting agent's  general  recommended  guidelines on the proposal  provided
that the Manager has reasonably determined that there is no conflict of interest
on the part of the proxy voting agent. If neither of the previous two procedures
provides  an  appropriate  voting  recommendation,  the  Manager  may  retain an
independent  fiduciary  to advise the Manager on how to vote the proposal or may
abstain from voting.  The Proxy Voting  Guidelines'  provisions  with respect to
certain routine and non-routine proxy proposals are summarized below:

     o The  Fund  generally  votes  with  the  recommendation  of  the  issuer's
management  on  routine  matters,  including  ratification  of  the  independent
registered public accounting firm, unless circumstances indicate otherwise.

     o The Fund  evaluates  nominees for director  nominated by  management on a
case-by-case basis, examining the following factors,  among others:  Composition
of the board and key board committees,  attendance at board meetings,  corporate
governance  provisions and takeover activity,  long-term company performance and
the nominee's investment in the company.

     o In general,  the Fund opposes  anti-takeover  proposals  and supports the
elimination,  or the  ability of  shareholders  to vote on the  preservation  or
elimination, of anti-takeover proposals, absent unusual circumstances.

     o The Fund supports  shareholder  proposals to reduce a super-majority vote
requirement,  and opposes  management  proposals  to add a  super-majority  vote
requirement.

     o The Fund opposes proposals to classify the board of directors.

     o The Fund supports proposals to eliminate cumulative voting.

     o  The  Fund  opposes  re-pricing  of  stock  options  without  shareholder
approval.

     o The Fund generally  considers  executive  compensation  questions such as
stock option plans and bonus plans to be ordinary  business  activity.  The Fund
analyzes  stock option  plans,  paying  particular  attention to their  dilutive
effect. While the Fund generally supports management proposals, the Fund opposes
plans it considers to be excessive.

     The Fund is  required to file Form N-PX,  with its  complete  proxy  voting
record  for the 12 months  ended June 30th,  no later than  August  31st of each
year. The Fund's Form N-PX filing is available (i) without charge, upon request,
by calling the Fund toll-free at 1.800.525.7048 and (ii) on the SEC's website at
www.sec.gov.

     |X| The Investment  Advisory  Agreement.  The Manager  provides  investment
advisory  and  management  services  to the Fund  under an  investment  advisory
agreement  between the Manager and the Fund. The Manager selects  securities for
the Fund's portfolio and handles its day-to-day business.  The portfolio manager
of the Fund is  employed  by the  Manager  and is the person who is  principally
responsible for the day-to-day management of the Fund's portfolio. Other members
of the Manager's Equity Portfolio Department provide the portfolio managers with
counsel and support in managing the Fund's portfolio.

     The  agreement  requires the Manager,  at its expense,  to provide the Fund
with  adequate  office space,  facilities  and  equipment.  It also requires the
Manager to provide  and  supervise  the  activities  of all  administrative  and
clerical  personnel  required to provide effective  administration for the Fund.
Those  responsibilities  include the compilation and maintenance of records with
respect to its operations,  the preparation and filing of specified reports, and
composition of proxy materials and registration statements for continuous public
sale of shares of the Fund.

     The Fund pays  expenses  not  expressly  assumed by the  Manager  under the
advisory  agreement.  The advisory  agreement lists examples of expenses paid by
the Fund. The major categories relate to interest, taxes, brokerage commissions,
fees to certain Trustees legal and audit expenses,  custodian and transfer agent
expenses,  share issuance costs,  certain  printing and  registration  costs and
non-recurring expenses,  including litigation costs. The management fees paid by
the Fund to the Manager are calculated at the rates described in the Prospectus,
which are applied to the assets of the Fund as a whole.  The fees are  allocated
to each class of shares  based upon the  relative  proportion  of the Fund's net
assets  represented by that class.  The management  fees paid by the Fund to the
Manager during its last three fiscal years were:


Fiscal Year ended 2006:        Management Fees Paid to OppenheimerFunds, Inc.

      2004                                      $14,972,144

      2005                                      $15,950,286

      2006                                      $16,153,003


     The  investment  advisory  agreement  states that in the absence of willful
misfeasance,  bad faith,  gross  negligence in the  performance of its duties or
reckless  disregard of its obligations and duties under the investment  advisory
agreement,  the  Manager  is not  liable  for any  loss  the  Fund  sustains  in
connection with matters to which the agreement relates.

     The  agreement  permits  the Manager to act as  investment  advisor for any
other  person,  firm  or  corporation  and  to use  the  name  "Oppenheimer"  in
connection  with other  investment  companies for which it may act as investment
advisor or general distributor. If the Manager shall no longer act as investment
advisor to the Fund,  the Manager may  withdraw the right of the Fund to use the
name "Oppenheimer" as part of its name.

     Portfolio  Manager.  The Fund's  portfolio  is managed by Michael S. Levine
(the "Portfolio  Manager") who is responsible  for the day-to-day  management of
the Fund's investments.

     Other  Accounts  Managed.  As of August 31, 2006, Mr. Levine did not manage
any other fund or account.  At the current time,  the Fund's  Portfolio  Manager
does not manage any other fund or account.  However,  he may be responsible  for
the management of another fund or account in the future.  Potentially, at times,
those  responsibilities  could conflict with the interests of the Fund. That may
occur whether the  investment  objectives  and strategies of the other funds and
accounts are the same as, or different  from, the Fund's  investment  objectives
and  strategies.  For  example  the  Portfolio  Manager  may  need  to  allocate
investment  opportunities  between the Fund and another  fund or account  having
similar  objectives or strategies,  or he may need to execute  transactions  for
another  fund or  account  that  could  have a  negative  impact on the value of
securities  held by the Fund. Not all funds and accounts  advised by the Manager
have the same management fee. If the management fee structure of another fund or
account is more  advantageous to the Manager than the fee structure of the Fund,
the Manager could have an incentive to favor the other fund or account. However,
the Manager's  compliance  procedures and Code of Ethics recognize the Manager's
fiduciary obligation to treat all of its clients, including the Fund, fairly and
equitably,  and are designed to preclude the Portfolio Manager from favoring one
client over another. It is possible, of course, that those compliance procedures
and the Code of Ethics may not always be adequate to do so. At different  times,
the Fund's Portfolio  Manager may manage other funds or accounts with investment
objectives and  strategies  similar to those of the Fund, or he may manage funds
or accounts with different investment objectives and strategies.

     Compensation of the Portfolio  Managers.  The Fund's  Portfolio  Manager is
employed and  compensated  by the  Manager,  not the Fund.  Under the  Manager's
compensation  program for its portfolio managers and portfolio  analysts,  their
compensation  is based  primarily on the investment  performance  results of the
funds and accounts  they  manage,  rather than on the  financial  success of the
Manager.  This is  intended  to align  the  portfolio  managers'  and  analysts'
interests  with the success of the funds and accounts and their  investors.  The
Manager's  compensation  structure  is  designed  to attract  and retain  highly
qualified investment management  professionals and to reward individual and team
contributions  toward  creating  shareholder  value.  As of August 31, 2006, the
Portfolio Manager's  compensation consisted of three elements: a base salary, an
annual discretionary bonus and eligibility to participate in long-term awards of
options and  appreciation  rights in regard to the common stock of the Manager's
holding  company  parent.  Senior  portfolio  managers  may also be  eligible to
participate in the Manager's deferred compensation plan.

     The base pay component of each portfolio  manager is reviewed  regularly to
ensure that it reflects the performance of the individual,  is commensurate with
the requirements of the particular  portfolio,  reflects any specific competence
or specialty of the individual manager, and is competitive with other comparable
positions,   to  help  the  Manager  attract  and  retain  talent.   The  annual
discretionary  bonus is  determined  by senior  management of the Manager and is
based on a number of factors, including a fund's pre-tax performance for periods
of up to five  years,  measured  against an  appropriate  benchmark  selected by
management.  During the Fund's  fiscal  year  ended  August 31,  2006 the Lipper
benchmark  with  respect to the Fund was Lipper - Income  Funds.  Other  factors
include management quality (such as style consistency,  risk management,  sector
coverage,  team  leadership and coaching) and  organizational  development.  The
Portfolio  Manager's  compensation is not based on the total value of the Fund's
portfolio assets,  although the Fund's investment performance may increase those
assets. The compensation  structure is also intended to be internally  equitable
and serve to reduce  potential  conflicts of interest between the Fund and other
funds managed by the Portfolio Manager. The compensation  structure of the other
funds managed by the Portfolio Manager is the same as the compensation structure
of the Fund, described above.

     Ownership of Fund  Shares.  As of August 31, 2006,  the  Portfolio  Manager
beneficially owned shares of the Fund as follows:

   --------------------------------------------------------------------------
      Portfolio Manager                   Range of Shares Beneficially
                                          Owned in the Fund
    -------------------------------------------------------------------------

      Michael S. Levine                    $500,000 to $1,000,000
 ----------------------------------------------------------------------------

Brokerage Policies of the Fund

     Brokerage  Provisions  of the  Investment  Advisory  Agreement.  One of the
duties of the Manager under the investment  advisory agreement is to arrange the
portfolio  transactions for the Fund. The advisory agreement contains provisions
relating to the  employment  of  broker-dealers  to effect the Fund's  portfolio
transactions.  The Manager is  authorized  by the  advisory  agreement to employ
broker-dealers,  including  "affiliated brokers," as that term is defined in the
Investment  Company Act, that the Manager thinks,  in its best judgment based on
all  relevant  factors,  will  implement  the policy of the Fund to  obtain,  at
reasonable expense,  the "best execution" of the Fund's portfolio  transactions.
"Best execution" means prompt and reliable execution at the most favorable price
obtainable  for the services  provided.  The Manager  need not seek  competitive
commission bidding.  However, it is expected to be aware of the current rates of
eligible brokers and to minimize the commissions  paid to the extent  consistent
with the  interests  and  policies  of the Fund as  established  by its Board of
Trustees

     Under the investment  advisory  agreement,  in choosing  brokers to execute
portfolio  transactions for the Fund, the Manager may select brokers (other than
affiliates)  that provide both brokerage and research  services to the Fund. The
commissions  paid to those brokers may be higher than another  qualified  broker
would  charge,  if  the  Manager  makes  a good  faith  determination  that  the
commission is fair and reasonable in relation to the services provided.

     Brokerage  Practices  Followed  by  the  Manager.   The  Manager  allocates
brokerage  for the Fund subject to the  provisions  of the  investment  advisory
agreement and other applicable rules and procedures described below.

     The   Manager's   portfolio   traders   allocate   brokerage   based   upon
recommendations  from  the  Manager's  portfolio  managers,  together  with  the
portfolio  traders'  judgment as to the  execution  capability  of the broker or
dealer. In certain  instances,  portfolio managers may directly place trades and
allocate  brokerage.  In either case, the Manager's executive officers supervise
the allocation of brokerage.

     Transactions  in  securities  other than those for which an exchange is the
primary  market  are  generally  done  with  principals  or  market  makers.  In
transactions  on  foreign  exchanges,  the Fund  may be  required  to pay  fixed
brokerage  commissions  and  therefore  would not have the benefit of negotiated
commissions that are available in U.S. markets.  Brokerage  commissions are paid
primarily for  transactions  in listed  securities  or for certain  fixed-income
agency  transactions  executed in the  secondary  market.  Otherwise,  brokerage
commissions  are paid only if it appears likely that a better price or execution
can be obtained by doing so. In an option transaction,  the Fund ordinarily uses
the same broker for the  purchase or sale of the option and any  transaction  in
the securities to which the option relates.

     Other accounts  advised by the Manager have investment  policies similar to
those of the Fund. Those other accounts may purchase or sell the same securities
as the Fund at the same time as the Fund,  which  could  affect  the  supply and
price of the securities. If two or more accounts advised by the Manager purchase
the same security on the same day from the same dealer,  the transactions  under
those combined  orders are averaged as to price and allocated in accordance with
the purchase or sale orders actually placed for each account. When possible, the
Manager tries to combine concurrent orders to purchase or sell the same security
by more than one of the accounts  managed by the Manager or its affiliates.  The
transactions  under those combined orders are averaged as to price and allocated
in accordance with the purchase or sale orders actually placed for each account.

     Rule  12b-1  under  the  Investment  Company  Act  prohibits  any fund from
compensating  a broker or dealer for  promoting or selling the fund's  shares by
(1) directing to that broker or dealer any of the fund's portfolio transactions,
or (2)  directing  any other  remuneration  to that  broker or  dealer,  such as
commissions,  mark-ups,  mark  downs or other  fees  from the  fund's  portfolio
transactions,  that were  effected  by another  broker or dealer  (these  latter
arrangements  are considered to be a type of "step-out"  transaction).  In other
words, a fund and its investment adviser cannot use the fund's brokerage for the
purpose of rewarding broker-dealers for selling the fund's shares.

     However,  the Rule permits funds to effect brokerage  transactions  through
firms that also sell fund shares,  provided that certain  procedures are adopted
to prevent a quid pro quo with respect to portfolio  brokerage  allocations.  As
permitted by the Rule, the Manager has adopted  procedures (and the Fund's Board
of  Trustees  has  approved  those  procedures)  that  permit the Fund to direct
portfolio  securities  transactions  to brokers or dealers  that also promote or
sell  shares  of the  Fund,  subject  to  the  "best  execution"  considerations
discussed  above.  Those  procedures are designed to prevent:  (1) the Manager's
personnel who effect the Fund's portfolio  transactions from taking into account
a broker's or dealer's promotion or sales of the Fund shares when allocating the
Fund's portfolio transactions, and (2) the Fund, the Manager and the Distributor
from entering into agreements or understandings  under which the Manager directs
or is expected to direct the Fund's brokerage directly,  or through a "step-out"
arrangement,  to any  broker or  dealer in  consideration  of that  broker's  or
dealer's  promotion  or sale of the  Fund's  shares or the  shares of any of the
other Oppenheimer funds.

     The investment advisory agreement permits the Manager to allocate brokerage
for research services. The research services provided by a particular broker may
be useful both to the Fund and to one or more of the other  accounts  advised by
the  Manager or its  affiliates.  Investment  research  may be  supplied  to the
Manager by the broker or by a third party at the  instance  of a broker  through
which trades are placed.

     Investment research services include information and analysis on particular
companies  and  industries  as well as market or economic  trends and  portfolio
strategy,  market quotations for portfolio evaluations,  analytical software and
similar products and services. If a research service also assists the Manager in
a non-research capacity (such as bookkeeping or other administrative functions),
then only the percentage or component that provides assistance to the Manager in
the investment decision-making process may be paid in commission dollars.

     Although  the Manager  currently  does not do so, the Board of Trustees may
permit the Manager to use stated  commissions on secondary  fixed-income  agency
trades to obtain research if the broker  represents to the Manager that: (i) the
trade is not from or for the broker's own inventory, (ii) the trade was executed
by the broker on an agency basis at the stated  commission,  and (iii) the trade
is not a riskless principal  transaction.  The Board of Trustees may also permit
the Manager to use commissions on fixed-price  offerings to obtain research,  in
the same manner as is permitted for agency transactions.

     The research  services provided by brokers broaden the scope and supplement
the research activities of the Manager.  That research provides additional views
and  comparisons  for  consideration,  and helps the  Manager  to obtain  market
information  for the valuation of securities  that are either held in the Fund's
portfolio or are being considered for purchase. The Manager provides information
to the Board about the  commissions  paid to brokers  furnishing  such services,
together with the Manager's  representation  that the amount of such commissions
was reasonably related to the value or benefit of such services.

     During the fiscal years ended August 31, 2004, 2005 and 2006, the Fund paid
the total brokerage  commissions indicated in the chart below. During the fiscal
year ended August 31, 2006, the Fund paid  $2,122,207.00 in commissions to firms
that  provide  brokerage  and  research  services  to the Fund with  respect  to
$2,148,230,980.00  of aggregate  portfolio  transactions.  All such transactions
were on a "best execution"  basis, as described above. The provision of research
services was not necessarily a factor in the placement of all such transactions.



Fiscal Year Ended August 31    Total Brokerage Commissions Paid by the Fund*

      2004                                              $ 3,308,511

      2005                                              $ 3,407,539

      2006                                              $ 2,133,538

     * Amounts do not include  spreads or commissions on principal  transactions
on a net trade basis.

Distribution and Service Plans

     The Distributor.  Under its General Distributor's  Agreement with the Fund,
the  Distributor  acts as the Fund's  principal  underwriter  in the  continuous
public  offering  of the Fund's  classes of shares.  The  Distributor  bears the
expenses normally  attributable to sales,  including advertising and the cost of
printing  and  mailing  prospectuses,  other than those  furnished  to  existing
shareholders.  The  Distributor  is not  obligated to sell a specific  number of
shares.

     The sales charges and concessions  paid to, or retained by, the Distributor
from the sale of shares and the contingent  deferred  sales charges  retained by
the  Distributor on the redemption of shares during the Fund's three most recent
fiscal years are shown in the tables below.

- ------------------ ----------------------- -----------------------
Fiscal Year         Aggregate Front-End      Class A Front-End
                                               Sales Charges
Ended August 31       Sales Charges on          Retained by
                       Class A Shares          Distributor(1)
- ------------------ ----------------------- -----------------------
- ------------------ ----------------------- -----------------------
      2004               $3,390,971              $1,038,146
- ------------------ ----------------------- -----------------------
- ------------------ ----------------------- -----------------------
      2005               $3,232,920               $979,563
- ------------------ ----------------------- -----------------------
- ------------------ ----------------------- -----------------------
      2006               $2,764,870               $790,133
- ------------------ ----------------------- -----------------------
1. Includes amounts  retained by a broker-dealer  that is an affiliate or a
parent of the Distributor.

- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
Fiscal Year         Concessions on Class   Concessions on Class   Concessions on Class C   Concessions on Class N
Ended August 31     A Shares Advanced by   B Shares Advanced by     Shares Advanced by       Shares Advanced by
                       Distributor(1)         Distributor(1)          Distributor(1)           Distributor(1)
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
      2004                $254,037              $1,967,231               $330,437                  $68,040
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
      2005                $196,684              $1,308,849               $281,491                  $83,453
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
      2006                $140,832               $982,675                $206,626                  $38,323
- ------------------ ----------------------- ---------------------- ------------------------ ------------------------
1. The Distributor advances concession payments to financial intermediaries
for certain  sales of Class A shares and for sales of Class B, Class C and Class
N shares from its own resources at the time of sale.





- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
Fiscal       Year    Class A Contingent      Class B Contingent       Class C Contingent       Class N Contingent
                       Deferred Sales          Deferred Sales                                    Deferred Sales
Ended August 31     Charges Retained by     Charges Retained by     Deferred Sales Charges    Charges Retained by
                        Distributor             Distributor        Retained by Distributor        Distributor
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
      2004                $29,534                 $530,263                 $17,067                   $3,969
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
      2005                $33,107                 $496,570                 $17,566                  $13,003
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------
      2006                 $3,857                 $474,645                 $16,269                  $10,060
- ------------------ ----------------------- ----------------------- ------------------------- -----------------------

     Distribution  and Service  Plans.  The Fund has adopted a Service  Plan for
Class A shares and Distribution and Service Plans for Class B, Class C and Class
N shares under Rule 12b-1 of the  Investment  Company Act. Under those plans the
Fund  pays  the  Distributor  for all or a  portion  of its  costs  incurred  in
connection  with  the  distribution  and/or  servicing  of  the  shares  of  the
particular  class.  Each  plan  has  been  approved  by a vote of the  Board  of
Trustees, including a majority of the Independent Trustees(1), cast in person at
a meeting called for the purpose of voting on that plan.

     Under the Plans,  the  Manager  and the  Distributor  may make  payments to
affiliates.  In their  sole  discretion,  they may also  from  time to time make
substantial  payments  from their own  resources,  which include the profits the
Manager  derives from the advisory fees it receives from the Fund, to compensate
brokers, dealers,  financial institutions and other intermediaries for providing
distribution assistance and/or administrative services or that otherwise promote
sales of the Fund's shares. These payments,  some of which may be referred to as
"revenue   sharing,"  may  relate  to  the  Fund's   inclusion  on  a  financial
intermediary's preferred list of funds offered to its clients.

     Unless a plan is  terminated  as  described  below,  the plan  continues in
effect  from  year to year but only if the  Fund's  Board  of  Trustees  and its
Independent  Trustees  specifically  vote  annually to approve its  continuance.
Approval must be by a vote cast in person at a meeting called for the purpose of
voting on continuing  the plan. A plan may be terminated at any time by the vote
of a majority  of the  Independent  Trustees  or by the vote of the holders of a
"majority" (as defined in the Investment  Company Act) of the outstanding shares
of that class.

     The  Board of  Trustees  and the  Independent  Trustees  must  approve  all
material amendments to a plan. An amendment to increase materially the amount of
payments to be made under a plan must be approved by  shareholders  of the class
affected  by the  amendment.  Because  Class B shares of the Fund  automatically
convert into Class A shares 72 months after  purchase,  the Fund must obtain the
approval  of both  Class A and  Class B  shareholders  for a  proposed  material
amendment to the Class A plan that would materially  increase payments under the
plan.  That approval  must be by a majority of the shares of each class,  voting
separately by class.

     While the plans are in effect,  the  Treasurer  of the Fund  shall  provide
separate  written  reports  on the  plans  to the  Board  of  Trustees  at least
quarterly  for its review.  The reports  shall detail the amount of all payments
made  under a plan and the  purpose  for which the  payments  were  made.  Those
reports are subject to the review and approval of the Independent Trustees.

     Each plan states that while it is in effect,  the selection and  nomination
of those  Trustees of the Fund who are not  "interested  persons" of the Fund is
committed to the discretion of the Independent  Trustees.  This does not prevent
the involvement of others in the selection and nomination process as long as the
final  decision as to selection or  nomination  is approved by a majority of the
Independent Trustees.

     Under the plans for a class,  no payment  will be made to any  recipient in
any period in which the  aggregate  net asset  value of all Fund  shares of that
class  held by the  recipient  for itself  and its  customers  does not exceed a
minimum  amount,  if any, that may be set from time to time by a majority of the
Independent Trustees.

     |X| Class A  Service  Plan  Fees.  Under  the  Class A  service  plan,  the
Distributor  currently  uses the fees it receives  from the Fund to pay brokers,
dealers and other financial  institutions (they are referred to as "recipients")
for personal  services and account  maintenance  services they provide for their
customers who hold Class A shares. The services include, among others, answering
customer  inquiries about the Fund,  assisting in  establishing  and maintaining
accounts in the Fund, making the Fund's investment plans available and providing
other  services  at the  request  of the Fund or the  Distributor.  The  Class A
service plan permits  reimbursements to the Distributor at a rate of up to 0.25%
of average  annual  net assets of Class A shares.  The Board has set the rate at
that level.  The Distributor does not receive or retain the service fee on Class
A  shares  in  accounts  for  which  the  Distributor  has  been  listed  as the
broker-dealer of record.  While the plan permits the Board to authorize payments
to the  Distributor  to reimburse  itself for services under the plan, the Board
has not yet done so,  except in the case of the  special  arrangement  described
below,  regarding  grandfathered  retirement  accounts.  The  Distributor  makes
payments to recipients periodically at an annual rate not to exceed 0.25% of the
average  annual net assets  consisting of Class A shares held in the accounts of
the recipients or their customers.

     With  respect  to  purchases  of Class A  shares  subject  to a  contingent
deferred  sales charge by certain  retirement  plans that  purchased such shares
prior to March 1, 2001 ("grandfathered  retirement  accounts"),  the Distributor
currently  intends to pay the service fee to recipients in advance for the first
year after the shares are purchased.  During the first year the shares are sold,
the  Distributor  retains the service fee to  reimburse  itself for the costs of
distributing  the  shares.  After the first  year  shares are  outstanding,  the
Distributor  makes  service fee  payments to  recipients  periodically  on those
shares.  The  advance  payment is based on the net asset  value of shares  sold.
Shares purchased by exchange do not qualify for the advance service fee payment.
If Class A shares  purchased by grandfathered  retirement  accounts are redeemed
during the first year after their purchase, the recipient of the service fees on
those shares will be obligated  to repay the  Distributor  a pro rata portion of
the advance payment of the service fee made on those shares.

     For the fiscal year ended August 31, 2006  payments  under the Class A plan
totaled  $6,153,469,  of which $12,245 was retained by the Distributor under the
arrangement described above,  regarding  grandfathered  retirement accounts, and
included $375,476 paid to an affiliate of the Distributor's  parent company. Any
unreimbursed  expenses the Distributor  incurs with respect to Class A shares in
any fiscal year cannot be recovered in subsequent years. The Distributor may not
use  payments  received  under  the  Class  A plan  to pay  any of its  interest
expenses, carrying charges, or other financial costs, or allocation of overhead.

     |X| Class B, Class C and Class N Distribution  and Service Plan Fees. Under
each plan,  distribution and service fees are computed on the average of the net
asset value of shares in the  respective  class,  determined  as of the close of
each  regular  business  day  during  the  period.  Each plan  provides  for the
Distributor  to  be  compensated  at a  flat  rate,  whether  the  Distributor's
distribution  expenses  are more or less than the amounts paid by the Fund under
the plan during the period for which the fee is paid. The types of services that
recipients  provide  are  similar  to the  services  provided  under the Class A
service plan, described above.


     Each plan  permits the  Distributor  to retain both the  asset-based  sales
charges and the service fees or to pay  recipients the service fee on a periodic
basis, without payment in advance. However, the Distributor currently intends to
pay the service fee to  recipients  in advance for the first year after Class B,
Class C and Class N shares are purchased.  After the first year Class B, Class C
or Class N shares are outstanding,  after their purchase,  the Distributor makes
service fee payments  periodically on those shares. The advance payment is based
on the net asset  value of shares  sold.  Shares  purchased  by  exchange do not
qualify for the  advance  service  fee  payment.  If Class B, Class C or Class N
shares are redeemed during the first year after their purchase, the recipient of
the service fees on those shares will be  obligated to repay the  Distributor  a
pro rata portion of the advance payment of the service fee made on those shares.
Class B,  Class C or  Class N  shares  may not be  purchased  by a new  investor
directly  from  the  Distributor   without  the  investor   designating  another
registered  broker-dealer.  If  the  current  investor  no  longer  has  another
broker-dealer   of  record  for  an  existing   account,   the   Distributor  is
automatically  designated  as the  broker-dealer  of record,  but solely for the
purpose of acting as the  investor's  agent to  purchase  the  shares.  In those
cases,  the Distributor  retains the  asset-based  sales charge paid on Class B,
Class C and Class N  shares,  but does not  retain  any  service  fees as to the
assets represented by that account.

     The asset-based  sales charge and service fees increase Class B and Class C
expenses by 1.00% and the  asset-based  sales charge and service  fees  increase
Class N expenses by 0.50% of the net assets per year of the respective classes.

     The Distributor retains the asset-based sales charge on Class B and Class N
shares.  The Distributor  retains the asset-based sales charge on Class C shares
during the first year the shares are outstanding.  It pays the asset-based sales
charge as an ongoing  concession to the recipient on Class C shares  outstanding
for a year or more. If a dealer has a special  agreement  with the  Distributor,
the  Distributor  will pay the Class B,  Class C or Class N service  fee and the
asset-based sales charge to the dealer  periodically in lieu of paying the sales
concession and service fee in advance at the time of purchase.

     The  asset-based  sales charge on Class B, Class C and Class N shares allow
investors to buy shares  without a front-end  sales  charge  while  allowing the
Distributor  to  compensate  dealers that sell those  shares.  The Fund pays the
asset-based  sales  charge  to the  Distributor  for its  services  rendered  in
distributing  Class B, Class C and Class N shares.  The payments are made to the
Distributor in recognition that the Distributor:

     o pays sales  concessions to authorized  brokers and dealers at the time of
sale and pays service fees as described above,

     o may  finance  payment  of sales  concessions  and/or  the  advance of the
service fee payment to recipients under the plans, or may provide such financing
from its own resources or from the resources of an affiliate,

     o employs personnel to support distribution of Class B, Class C and Class N
shares,

     o bears the costs of sales literature,  advertising and prospectuses (other
than those furnished to current  shareholders) and state "blue sky" registration
fees and certain other distribution expenses,

     o may not be able to adequately compensate dealers that sell Class B, Class
C and Class N shares without receiving payment under the plans and therefore may
not be able to offer such Classes for sale absent the plans,

     o receives  payments under the plans  consistent  with the service fees and
asset-based sales charges paid by other  non-proprietary funds that charge 12b-1
fees,

     o may use the  payments  under  the plan to  include  the  Fund in  various
third-party distribution programs that may increase sales of Fund shares,

     o may experience increased difficulty selling the Fund's shares if payments
under the plan are  discontinued  because most competitor  funds have plans that
pay dealers for rendering distribution services as much or more than the amounts
currently being paid by the Fund, and

     o may not be able to continue  providing,  at the same or at a lesser cost,
the same quality  distribution  sales  efforts and  services,  or to obtain such
services from brokers and dealers, if the plan payments were to be discontinued.

     The  Distributor's  actual expenses in selling Class B, Class C and Class N
shares may be more than the payments it receives  from the  contingent  deferred
sales charges collected on redeemed shares and from the Fund under the plans. If
either the Class B, Class C or Class N plan is terminated by the Fund, the Board
of Trustees  may allow the Fund to continue  payments of the  asset-based  sales
charge  to  the  Distributor  for  distributing   shares  before  the  plan  was
terminated.

- ---------------------------------------------------------------------------------------------------------------------
          Distribution and Service Fees Paid to the Distributor for the Fiscal Year Ended August 31, 2006
- ---------------------------------------------------------------------------------------------------------------------
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
      Class:          Total Payments Under     Amount Retained by         Distributor's           Distributor's
                                                                            Aggregate         Unreimbursed Expenses
                                                                      Unreimbursed Expenses   as % of Net Assets of
                              Plan                 Distributor              Under Plan                Class
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
Class B Plan             $2,736,971(1)             $2,130,221               $8,531,867                3.30%
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
Class C Plan             $1,653,565(2)              $277,737                $3,783,065                2.31%
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
Class N Plan              $162,774(3)                $85,028                 $579,278                 1.62%
- -------------------- ----------------------- ------------------------ ----------------------- -----------------------
1.  Includes $44,982 paid to an affiliate of the Distributor's parent company.
2.  Includes $49,816 paid to an affiliate of the Distributor's parent company.
3.  Includes $6,728 paid to an affiliate of the Distributor's parent company.

     All payments under the plans are subject to the limitations  imposed by the
Conduct Rules of the NASD on payments of  asset-based  sales charges and service
fees. Payments to Fund Intermediaries

     Financial  intermediaries  may receive  various  forms of  compensation  or
reimbursement  from the Fund in the form of 12b-1 plan  payments as described in
the preceding section of this SAI. They may also receive payments or concessions
from the  Distributor,  derived  from sales  charges  paid by the clients of the
financial intermediary, also as described in this SAI. Additionally, the Manager
and/or  the  Distributor  (including  their  affiliates)  may make  payments  to
financial intermediaries in connection with their offering and selling shares of
the Fund  and  other  Oppenheimer  funds,  providing  marketing  or  promotional
support,  transaction  processing  and/or  administrative  services.  Among  the
financial intermediaries that may receive these payments are brokers and dealers
who  sell  and/or  hold  shares  of  the  Fund,   banks  (including  bank  trust
departments),  registered investment advisers,  insurance companies,  retirement
plan and qualified tuition program  administrators,  third party administrators,
and other institutions that have selling, servicing or similar arrangements with
the Manager or Distributor.  The payments to intermediaries vary by the types of
product  sold,  the  features of the Fund share class and the role played by the
intermediary.

     Possible  types of payments to financial  intermediaries  include,  without
limitation, those discussed below.

     o Payments made by the Fund, or by an investor  buying or selling shares of
the Fund may include:

     o  depending  on the share  class  that the  investor  selects,  contingent
deferred sales charges or initial  front-end sales charges,  all or a portion of
which  front-end  sales  charges are  payable by the  Distributor  to  financial
intermediaries (see "About Your Account" in the Prospectus);

     o ongoing  asset-based  payments  attributable to the share class selected,
including  fees  payable  under the Fund's  distribution  and/or  service  plans
adopted under Rule 12b-1 under the  Investment  Company Act, which are paid from
the Fund's assets and allocated to the class of shares to which the plan relates
(see "About the Fund -- Distribution and Service Plans" above);

     o  shareholder   servicing  payments  for  providing  omnibus   accounting,
recordkeeping,  networking,  sub-transfer  agency  or  other  administrative  or
shareholder  services,  including  retirement  plan and 529 plan  administrative
services fees,  which are paid from the assets of a Fund as reimbursement to the
Manager or Distributor for expenses they incur on behalf of the Fund.

     o Payments  made by the  Manager  or  Distributor  out of their  respective
resources  and assets,  which may  include  profits  the  Manager  derives  from
investment  advisory  fees  paid by the  Fund.  These  payments  are made at the
discretion of the Manager and/or the Distributor. These payments, often referred
to as "revenue sharing" payments, may be in addition to the payments by the Fund
listed above.

     o These types of payments may reflect  compensation for marketing  support,
support provided in offering the Fund or other Oppenheimer funds through certain
trading platforms and programs, transaction processing or other services;

     o The Manager and Distributor  each may also pay other  compensation to the
extent the payment is not  prohibited by law or by any  self-regulatory  agency,
such as the NASD.  Payments are made based on the guidelines  established by the
Manager and Distributor, subject to applicable law.

     These  payments may provide an incentive  to  financial  intermediaries  to
actively  market or promote the sale of shares of the Fund or other  Oppenheimer
funds, or to support the marketing or promotional  efforts of the Distributor in
offering shares of the Fund or other Oppenheimer funds. In addition,  some types
of payments may provide a financial  intermediary with an incentive to recommend
the Fund or a particular share class. Financial  intermediaries may earn profits
on these  payments,  since the  amount of the  payment  may  exceed  the cost of
providing  the service.  Certain of these  payments  are subject to  limitations
under applicable law. Financial intermediaries may categorize and disclose these
arrangements to their clients and to members of the public in a manner different
from the disclosures in the Fund's  Prospectus and this SAI. You should ask your
financial  intermediary for information  about any payments it receives from the
Fund, the Manager or the  Distributor  and any services it provides,  as well as
the fees and commissions it charges.

     Although  brokers or dealers that sell Fund shares may also act as a broker
or dealer in connection  with the execution of the purchase or sale of portfolio
securities by the Fund or other  Oppenheimer  funds, a financial  intermediary's
sales  of  shares  of  the  Fund  or  such  other  Oppenheimer  funds  is  not a
consideration  for the  Manager  when  choosing  brokers  or  dealers  to effect
portfolio transactions for the Fund or such other Oppenheimer funds.

     Revenue  sharing  payments  can  pay  for   distribution-related  or  asset
retention items including, without limitation,

     o  transactional  support,  one-time  charges for setting up access for the
Fund or other  Oppenheimer funds on particular  trading systems,  and paying the
intermediary's networking fees;

     o program  support,  such as expenses  related to including the Oppenheimer
funds in retirement plans, college savings plans, fee-based advisory or wrap fee
programs,  fund  "supermarkets",  bank or trust  company  products or  insurance
companies' variable annuity or variable life insurance products;

     o  placement  on  the  dealer's   list  of  offered   funds  and  providing
representatives  of the  Distributor  with access to a financial  intermediary's
sales meetings, sales representatives and management representatives.

     Additionally,  the  Manager  or  Distributor  may  make  payments  for firm
support,  such as business  planning  assistance,  advertising,  and educating a
financial  intermediary's  sales  personnel  about  the  Oppenheimer  funds  and
shareholder financial planning needs.

     For  the  year  ended   December  31,   2005,   the   following   financial
intermediaries that are broker-dealers offering shares of the Oppenheimer funds,
and/or  their  respective  affiliates,   received  revenue  sharing  or  similar
distribution-related  payments from the Manager or Distributor  for marketing or
program support:

Advantage Capital Corp./Financial Services Corp.           Advest, Inc.
Aegon USA                                                  Aetna Retirement Services, Inc.
A.G. Edwards & Sons, Inc.                                  AIG Life
Allianz Life Insurance Company                             Allmerica Financial Life Insurance and Annuity Co.
Allstate Financial Advisors                                American Enterprise Life Insurance
American General Securities, Inc.                          American General Annuity
Ameriprise Financial Services, Inc.                        American Portfolio Financial Services, Inc.
Ameritas Life Insurance Corporation                        Annuity Investors Life
Associated Securities                                      AXA Advisors
Banc One Securities Corp.                                  BNY Investment Center, Inc.
Cadaret Grant & Co. Inc.                                   Charles Schwab - Great West Life
Chase Investment Services Corp.                            CitiCorp Investment Services, Inc.
Citigroup Global Markets, Inc. (SSB)                       CitiStreet
Citizens Bank of Rhode Island                              CJM Planning Corp.
Columbus Life Insurance Company                            Commonwealth Financial Network
CUNA Brokerage Services, Inc.                              CUSO Financial Services, L.P.
Federal Kemper Life Assurance Company                      Financial Network (ING)
First Global Capital                                       GE Financial Assurance - GE Life & Annuity
Glenbrook Life and Annuity Co.                             Hartford
HD Vest                                                    HSBC Brokerage (USA) Inc.
ING Financial Advisers                                     ING Financial Partners
Jefferson Pilot Life Insurance Company                     Jefferson Pilot Securities Corp.
John Hancock Life Insurance Co.                            Kemper Investors Life Insurance Co.
Legend Equities Corp.                                      Legg Mason
Lincoln Benefit Life                                       Lincoln Financial
Lincoln Investment Planning, Inc.                          Lincoln National Life
Linsco Private Ledger                                      MassMutual Financial Group and affiliates
McDonald Investments, Inc.                                 Merrill Lynch & Co. and affiliates
MetLife and affiliates                                     Minnesota Life Insurance Company
Mony Life Insurance Co.                                    Morgan Stanley Dean Witter, Inc.
Multi-Financial (ING)                                      Mutual Service Corporation
National Planning Holdings, Inc.                           Nationwide and affiliates
NFP                                                        New York Life Securities, Inc.
Park Avenue Securities LLC                                 PFS Investments, Inc.
Prime Capital Services, Inc.                               Primevest Financial Services, Inc. (ING)
Protective Life Insurance Co.                              Prudential Investment Management Services LLC
Raymond James & Associates                                 Raymond James Financial Services
RBC Dain Rauscher Inc.                                     Royal Alliance
Securities America Inc.                                    Security Benefit Life Insurance Co.
Sentra Securities                                          Signator Investments
Sun Life Assurance Company of Canada                       SunAmerica Securities, Inc.
SunTrust Securities                                        Thrivent
Travelers Life & Annuity Co., Inc.                         UBS Financial Services Inc.
Union Central Life Insurance Company                       United Planners
Valic Financial Advisors, Inc.                             Wachovia Securities LLC
Walnut Street Securities (Met Life Network)                Waterstone Financial Group
Wells Fargo Investments, LLC

     For the year ended  December 31, 2005, the following  firms,  which in some
cases are broker-dealers,  received payments from the Manager or Distributor for
administrative   or  other  services   provided   (other  than  revenue  sharing
arrangements), as described above:

ABN AMRO Financial Services Inc.                           ACS HR Solutions LLC
Administrative Management Group                            ADP Broker/Dealer Inc.
Aetna Financial Services                                   Alliance Benefit Group
American Stock Transfer & Trust Co                         Ameriprise Financial Services, Inc.
Baden Retirement Plan Services LLC                         Banc One Securities Corp.
BCG Securities                                             Benefit Administration Company LLC
Benefit Administration Inc.                                Benefit Plans Administrative Services
Benetech Inc.                                              Bisys Retirement Services
Boston Financial Data Services Inc.                        Ceridian Retirement Plan Services
Charles Schwab & Co Inc.                                   Charles Schwab Trust Company
Circle Trust Company                                       Citigroup Global Markets Inc.
CitiStreet                                                 City National Bank
Columbia Funds Distributor Inc.                            CPI Qualified Plan Consultants Inc.
Daily Access.Com Inc.                                      Digital Retirement Solutions
DST Systems Inc.                                           Dyatech LLC
Edgewood/Federated Investments                             ERISA Administrative Services Inc.
Expert Plan Inc.                                           FASCorp
FBD Consulting Inc.                                        Fidelity Institutional Operations Co.
Fidelity Investments                                       First National Bank of Omaha
First Trust Corp.                                          First Trust-Datalynx
Franklin Templeton                                         Geller Group LTD
GoldK Inc.                                                 Great West Life & Annuity Ins Co.
Hartford Life Insurance Co                                 Hewitt Associates LLC
ICMA-RC Services LLC                                       Independent Plan Coordinators Inc.
ING                                                        Ingham Group
Interactive Retirement Systems                             Invesco Retirement Plans
Invesmart                                                  InWest Pension Management
John Hancock Life Insurance Co.                            JPMorgan Chase & Co
JPMorgan Chase Bank                                        July Business Services
Kaufman & Goble                                            Leggette & Company Inc.
Lincoln National Life                                      MassMutual Financial Group and affiliates
Matrix Settlement & Clearance Services                     Mellon HR Solutions
Mercer HR Services                                         Merrill Lynch & Co., Inc.
Metavante 401(k) Services                                  Metlife Securities Inc.
MFS Investment Management                                  Mid Atlantic Capital Corp.
Milliman Inc.                                              Morgan Stanley Dean Witter Inc.
National City Bank                                         National Financial Services Corp.
Nationwide Investment Service Corp.                        New York Life Investment Management
Northeast Retirement Services                              Northwest Plan Services Inc.
Pension Administration and Consulting                      PFPC Inc.
Plan Administrators Inc.                                   PlanMember Services Corporation
Princeton Retirement Group Inc.                            Principal Life Insurance Co
Programs for Benefit Plans Inc.                            Prudential Retirement Insurance & Annuity Co.
Prudential Retirement Services                             PSMI Group
Putnam Investments                                         Quads Trust Company
RSM McGladrey Retirement Resources                         SAFECO
Standard Insurance Co                                      Stanley Hunt DuPree Rhine
Stanton Group Inc.                                         State Street Bank & Trust
Strong Capital Management Inc.                             Symetra Investment Services Inc.
T Rowe Price Associates                                    Taylor Perky & Parker LLC
Texas Pension Consultants                                  The 401(K) Company
The Chicago Trust Company                                  The Retirement Plan Company LLC
The Vanguard Group                                         TruSource
Unified Fund Services Inc.                                 Union Bank & Trust Co. (Nebraska)
USI Consulting Group (CT)                                  Valic Retirement Services Co
Wachovia Bank NA                                           Web401k.com
Wells Fargo Bank NA                                        Wilmington Trust Company
WySTAR Global Retirement Solutions

Performance of the Fund

     Explanation of Performance Terminology. The Fund uses a variety of terms to
illustrate its investment  performance.  Those terms include  "cumulative  total
return,"  "average  annual total  return,"  "average  annual total return at net
asset value" and "total return at net asset value." An  explanation of how total
returns are  calculated  is set forth  below.  The charts  below show the Fund's
performance as of the Fund's most recent fiscal year end. You can obtain current
performance  information by calling the Fund's Transfer Agent at  1.800.225.5677
or    by    visiting     the     OppenheimerFunds     Internet     website    at
www.oppenheimerfunds.com.

     The Fund's  illustrations  of its performance data in  advertisements  must
comply with rules of the SEC. Those rules describe the types of performance data
that may be used and how it is to be calculated.  In general,  any advertisement
by the Fund of its  performance  data must  include  the  average  annual  total
returns for the advertised class of shares of the Fund.

     Use of standardized performance calculations enables an investor to compare
the Fund's  performance to the  performance of other funds for the same periods.
However,  a number of  factors  should be  considered  before  using the  Fund's
performance information as a basis for comparison with other investments:

     o Total returns  measure the  performance of a hypothetical  account in the
Fund over various periods and do not show the performance of each  shareholder's
account. Your account's performance will vary from the model performance data if
your  dividends  are  received  in cash,  or you buy or sell  shares  during the
period,  or you bought your shares at a different time and price than the shares
used in the model.

     o The Fund's  performance  returns  may not  reflect the effect of taxes on
dividends and capital gains distributions.

     o An  investment  in the  Fund is not  insured  by the  FDIC  or any  other
government agency.

     o The  principal  value of the Fund's  shares,  and total  returns  are not
guaranteed and normally will fluctuate on a daily basis.

     o When an investor's  shares are  redeemed,  they may be worth more or less
than their  original  cost.

     o Total returns for any given past period represent historical  performance
information  and are not, and should not be  considered,  a prediction of future
returns.

     The  performance of each class of shares is shown  separately,  because the
performance  of each class of shares will usually be different.  That is because
of the different  kinds of expenses each class bears.  The total returns of each
class of shares of the Fund are  affected by market  conditions,  the quality of
the  Fund's  investments,  the  maturity  of  those  investments,  the  types of
investments the Fund holds, and its operating expenses that are allocated to the
particular class.

     |X| Total Return Information.  There are different types of "total returns"
to measure  the  Fund's  performance.  Total  return is the change in value of a
hypothetical  investment  in the Fund  over a given  period,  assuming  that all
dividends and capital gains  distributions  are reinvested in additional  shares
and that  the  investment  is  redeemed  at the end of the  period.  Because  of
differences  in expenses  for each class of shares,  the total  returns for each
class are separately  measured.  The cumulative total return measures the change
in value over the entire  period (for  example,  ten years).  An average  annual
total  return  shows the  average  rate of return for each year in a period that
would  produce the  cumulative  total  return over the entire  period.  However,
average annual total returns do not show actual  year-by-year  performance.  The
Fund uses  standardized  calculations for its total returns as prescribed by the
SEC. The methodology is discussed below.

     In calculating total returns for Class A shares,  the current maximum sales
charge of 5.75% (as a  percentage  of the offering  price) is deducted  from the
initial  investment  ("P" in the  formula  below)  (unless  the  return is shown
without sales charge,  as described below).  For Class B shares,  payment of the
applicable contingent deferred sales charge is applied,  depending on the period
for which the return is shown:  5.0% in the first year, 4.0% in the second year,
3.0% in the third and fourth  years,  2.0% in the fifth year,  1.0% in the sixth
year and none thereafter. For Class C shares, the 1.0% contingent deferred sales
charge is deducted for returns for the one-year period.  For Class N shares, the
1.0%  contingent  deferred sales charge is deducted for returns for the one-year
period,  and total returns for the periods prior to 03/01/01 (the inception date
for Class N shares) are based on the Fund's Class A returns, adjusted to reflect
the higher Class N 12b-1 fees.

     o Average  Annual Total Return.  The "average  annual total return" of each
class  is an  average  annual  compounded  rate of  return  for  each  year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical  initial  investment of $1,000 ("P" in the formula below) held
for a number of years ("n" in the formula) to achieve an Ending Redeemable Value
("ERV" in the formula) of that investment, according to the following formula:

ERV   l/n      - 1     = Average Annual Total Return
  P

     o Average Annual Total Return (After Taxes on Distributions).  The "average
annual total  return  (after  taxes on  distributions)"  of Class A shares is an
average annual  compounded rate of return for each year in a specified number of
years,  adjusted  to show the  effect of  federal  taxes  (calculated  using the
highest  individual   marginal  federal  income  tax  rates  in  effect  on  any
reinvestment  date) on any  distributions  made by the Fund during the specified
period.  It is the rate of return based on the change in value of a hypothetical
initial  investment  of $1,000 ("P" in the  formula  below) held for a number of
years ("n" in the formula) to achieve an ending value ("ATVD" in the formula) of
that  investment,  after  taking  into  account  the  effect  of  taxes  on Fund
distributions,  but not on the  redemption  of  Fund  shares,  according  to the
following formula:

ATVD   l/n       - 1   = Average Annual Total Return (After Taxes on Distributions)
  P

     o  Average   Annual  Total  Return  (After  Taxes  on   Distributions   and
Redemptions). The "average annual total return (after taxes on distributions and
redemptions)"  of Class A shares is an average annual  compounded rate of return
for each year in a  specified  number of years,  adjusted  to show the effect of
federal taxes (calculated using the highest  individual  marginal federal income
tax rates in effect on any reinvestment  date) on any distributions  made by the
Fund  during the  specified  period and the  effect of  capital  gains  taxes or
capital loss tax benefits (each calculated using the highest federal  individual
capital  gains tax rate in effect on the  redemption  date)  resulting  from the
redemption  of the  shares  at the end of the  period.  It is the rate of return
based on the change in value of a hypothetical initial investment of $1,000 ("P"
in the formula below) held for a number of years ("n" in the formula) to achieve
an ending value ("ATVDR" in the formula) of that  investment,  after taking into
account the effect of taxes on Fund  distributions and on the redemption of Fund
shares, according to the following formula:

ATVDR    l/n      - 1    = Average Annual Total Return (After Taxes on Distributions and Redemptions)
  P

     o Cumulative  Total  Return.  The  "cumulative  total  return"  calculation
measures  the change in value of a  hypothetical  investment  of $1,000  over an
entire period of years. Its calculation uses some of the same factors as average
annual  total  return,  but it does not  average the rate of return on an annual
basis. Cumulative total return is determined as follows:

    ERV - P        = Total Return
- ----------------
       P

     o Total  Returns  at Net Asset  Value.  From time to time the Fund may also
quote a  cumulative  or an average  annual  total  return  "at net asset  value"
(without  deducting  sales  charges)  for Class A,  Class B,  Class C or Class N
shares.  Each is based on the  difference  in net  asset  value per share at the
beginning and the end of the period for a hypothetical  investment in that class
of shares (without  considering  front-end or contingent deferred sales charges)
and takes into  consideration  the  reinvestment  of dividends and capital gains
distributions.

- ----------------------------------------------------------------------------------------------------------------------
                               The Fund's Total Returns for the Periods Ended 8/31/06
- ----------------------------------------------------------------------------------------------------------------------
- -------------- ------------------------- -----------------------------------------------------------------------------
  Class of         Cumulative Total                              Average Annual Total Returns
                 Returns (10 years or
   Shares           life of class)
- -------------- ------------------------- -----------------------------------------------------------------------------
- -------------- ------------------------- ------------------------ ------------------------ ---------------------------
                                                 1-Year                   5-Years                   10-Years
                                                                   [(or life-of-class if     [(or life-of-class if
                                                                          less)]                     less)]
- -------------- ------------------------- ------------------------ ------------------------ ---------------------------
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
                  After       Without      After       Without      After       Without      After        Without
                  Sales        Sales       Sales        Sales       Sales        Sales       Sales         Sales
                 Charge       Charge       Charge      Charge       Charge      Charge      Charge        Charge
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
Class A(1)       121.56%      135.08%      -1.34%       4.68%       4.23%        5.47%       8.28%         8.92%
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
Class B(2)       124.36%      124.36%      -1.02%       3.84%       4.28%        4.60%       8.42%         8.42%
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
Class C(3)     117.06%(3)   117.06%(3)     2.85%        3.83%       4.63%        4.63%     8.06%(3)      8.06%(3)
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
Class N(4)      28.02%(4)    28.02%(4)    3.34%(4)      4.32%      5.10%(4)    5.10%(4)    4.59%(4)      4.59%(4)
- -------------- ------------ ------------ ----------- ------------ ----------- ------------ ---------- ----------------
1. Inception of Class A: 12/1/70

2. Inception of Class B: 8/17/93. Because Class B shares convert to Class A
shares 72 months after purchase,  the "Life-of-Class"  return for Class B shares
uses Class A performance for the period after conversion.

3. Inception of Class C: 11/1/95

4. Inception of Class N: 3/1/01.

  ---------------------------------------------------------------------------------------------------------------
                       Average Annual Total Returns for Class A Shares (After Sales Charge)
                                          For the Periods Ended 8/31/05
  ---------------------------------------------------------------------------------------------------------------
  ------------------------------------------ ------------------ ---------------------- --------------------------
                                                  1-Year               5-Years                 10-Years
                                                                 (or Life of Class)       (or Life of Class)
  ------------------------------------------ ------------------ ---------------------- --------------------------
  ------------------------------------------ ------------------ ---------------------- --------------------------
  After Taxes on Distributions                    -3.18%                2.52%                    5.96%
  ------------------------------------------ ------------------ ---------------------- --------------------------
  ------------------------------------------ ------------------ ---------------------- --------------------------
  After Taxes on Distributions and                -0.31%                2.73%                    5.94%
  Redemption of Fund Shares
  ------------------------------------------ ------------------ ---------------------- --------------------------

     Other Performance  Comparisons.  The Fund compares its performance annually
to that of an  appropriate  broadly-based  market index in its Annual  Report to
shareholders.  You can obtain that  information by contacting the Transfer Agent
at the  addresses or telephone  numbers shown on the cover of this SAI. The Fund
may also compare its performance to that of other  investments,  including other
mutual  funds,  or  use  rankings  of its  performance  by  independent  ranking
entities. Examples of these performance comparisons are set forth below.

     |X| Lipper Rankings.  From time to time the Fund may publish the ranking of
the performance of its classes of shares by Lipper, Inc. ("Lipper"). Lipper is a
widely-recognized  independent mutual fund monitoring  service.  Lipper monitors
the performance of regulated investment companies, including the Fund, and ranks
their performance for various periods in categories based on investment  styles.
The Lipper  performance  rankings  are based on total  returns  that include the
reinvestment of capital gain  distributions and income dividends but do not take
sales charges or taxes into  consideration.  Lipper also publishes  "peer-group"
indices of the  performance  of all mutual funds in a category  that it monitors
and averages of the performance of the funds in particular categories.

     |X|  Morningstar  Ratings.  From time to time the Fund may publish the star
rating  of the  performance  of its  classes  of  shares  by  Morningstar,  Inc.
("Morningstar"),  an independent  mutual fund  monitoring  service.  Morningstar
rates mutual funds in their specialized  market sector.  The Fund is rated among
the domestic hybrid category.

     Morningstar proprietary star ratings reflect historical risk-adjusted total
investment return. For each fund with at least a three-year history, Morningstar
calculates a Morningstar  Rating(TM)based on a Morningstar  Risk-Adjusted Return
measure that accounts for variation in a fund's monthly  performance  (including
the effects of sales charges, loads, and redemption fees), placing more emphasis
on downward  variations  and rewarding  consistent  performance.  The top 10% of
funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next
35% receive 3 stars,  the next 22.5% receive 2 stars, and the bottom 10% receive
1 star. (Each share class is counted as a fraction of one fund within this scale
and rated  separately,  which may cause slight  variations  in the  distribution
percentages.)  The  Overall  Morningstar  Rating  for a fund is  derived  from a
weighted average of the performance figures associated with its three-, five-and
ten-year (if applicable) Morningstar Rating metrics.

     |X|   Performance   Rankings  and   Comparisons   by  Other   Entities  and
Publications.  From time to time the Fund may include in its  advertisements and
sales literature performance  information about the Fund cited in newspapers and
other periodicals such as The New York Times, The Wall Street Journal, Barron's,
or similar  publications.  That information may include  performance  quotations
from other sources,  including  Lipper and  Morningstar.  The performance of the
Fund's classes of shares may be compared in  publications  to the performance of
various market indices or other investments, and averages,  performance rankings
or other benchmarks prepared by recognized mutual fund statistical services.

     Investors  may also wish to compare the returns on the Fund's share classes
to the  return on  fixed-income  investments  available  from  banks and  thrift
institutions.  Those include certificates of deposit,  ordinary  interest-paying
checking  and  savings  accounts,  and  other  forms of fixed or  variable  time
deposits,  and various other  instruments such as Treasury bills.  However,  the
Fund's  returns and share price are not guaranteed or insured by the FDIC or any
other agency and will fluctuate daily, while bank depository  obligations may be
insured  by the  FDIC  and may  provide  fixed  rates of  return.  Repayment  of
principal  and payment of interest on Treasury  securities is backed by the full
faith and credit of the U.S. government. From time to time, the Fund may publish
rankings  or  ratings of the  Manager or  Transfer  Agent,  and of the  investor
services provided by them to shareholders of the Oppenheimer  funds,  other than
performance  rankings of the  Oppenheimer  funds  themselves.  Those  ratings or
rankings of  shareholder  and  investor  services  by third  parties may include
comparisons  of their  services to those  provided by other mutual fund families
selected by the rating or ranking services.  They may be based upon the opinions
of the rating or ranking  service  itself,  using its research or  judgment,  or
based upon surveys of investors, brokers, shareholders or others.

     From  time to time the Fund may  include  in its  advertisements  and sales
literature the total return  performance of a  hypothetical  investment  account
that  includes  shares of the Fund and other  Oppenheimer  funds.  The  combined
account may be part of an illustration of an asset  allocation  model or similar
presentation.  The account  performance may combine total return  performance of
the Fund and the total return performance of other Oppenheimer funds included in
the account.  Additionally,  from time to time,  the Fund's  advertisements  and
sales  literature  may  include,  for  illustrative  or  comparative   purposes,
statistical  data or other  information  about  general or  specific  market and
economic conditions. That may include, for example,

     o information  about the  performance of certain  securities or commodities
markets or segments of those markets,

     o  information  about  the  performance  of  the  economies  of  particular
countries or regions,

     o the earnings of companies included in segments of particular  industries,
sectors, securities markets, countries or regions,

     o the  availability  of  different  types of  securities  or  offerings  of
securities,

     o information  relating to the gross national or gross domestic  product of
the United States or other countries or regions,

     o  comparisons   of  various  market  sectors  or  indices  to  demonstrate
performance, risk, or other characteristics of the Fund.




ABOUT YOUR ACCOUNT


                                               How to Buy Shares


     Additional  information  is  presented  below about the methods that can be
used to buy shares of the Fund.  Appendix C contains more information  about the
special sales charge arrangements  offered by the Fund, and the circumstances in
which sales charges may be reduced or waived for certain classes of investors.

     When you purchase shares of the Fund, your ownership interest in the shares
of the Fund will be  recorded  as a book entry on the  records of the Fund.  The
Fund will not issue or re-register physical share certificates.

     AccountLink.  When shares are purchased through AccountLink,  each purchase
must be at least $50 and shareholders  must invest at least $500 before an Asset
Builder Plan  (described  below) can be established  on a new account.  Accounts
established  prior  to  November  1,  2002  will  remain  at $25 for  additional
purchases.  Shares will be purchased on the regular business day the Distributor
is instructed to initiate the Automated  Clearing House ("ACH")  transfer to buy
the shares. Dividends will begin to accrue on shares purchased with the proceeds
of ACH  transfers on the business day the Fund  receives  Federal  Funds for the
purchase  through the ACH system before the close of the New York Stock Exchange
(the "NYSE").  The NYSE normally  closes at 4:00 p.m.,  but may close earlier on
certain days. If Federal Funds are received on a business day after the close of
the NYSE, the shares will be purchased and dividends will begin to accrue on the
next regular  business day. The proceeds of ACH transfers are normally  received
by the Fund three days after the transfers are initiated. If the proceeds of the
ACH transfer are not received on a timely basis,  the  Distributor  reserves the
right  to  cancel  the  purchase  order.  The  Distributor  and the Fund are not
responsible  for any delays in purchasing  shares  resulting  from delays in ACH
transmissions.

     Reduced  Sales  Charges.  As discussed in the  Prospectus,  a reduced sales
charge rate may be obtained for Class A shares under Right of  Accumulation  and
Letters of Intent  because of the  economies of sales  efforts and  reduction in
expenses realized by the Distributor,  dealers and brokers making such sales. No
sales charge is imposed in certain other  circumstances  described in Appendix C
to this SAI  because the  Distributor  or dealer or broker  incurs  little or no
selling expenses.

     The Oppenheimer  Funds.  The  Oppenheimer  funds are those mutual funds for
which  the  Distributor  acts  as the  distributor  and  currently  include  the
following:

Oppenheimer AMT-Free Municipals                               Oppenheimer Pennsylvania Municipal Fund
Oppenheimer AMT-Free New York Municipals                      Oppenheimer Portfolio Series:
Oppenheimer Balanced Fund                                         Active Allocation Fund
Oppenheimer Core Bond Fund                                        Aggressive Investor Fund
Oppenheimer California Municipal Fund                             Conservative Investor Fund
Oppenheimer Capital Appreciation Fund                             Moderate Investor Fund
Oppenheimer Capital Income Fund                               Oppenheimer Principal Protected Main Street Fund
Oppenheimer Champion Income Fund                              Oppenheimer Principal Protected Main Street Fund II
Oppenheimer Convertible Securities Fund                       Oppenheimer Principal Protected Main Street Fund III
Oppenheimer Developing Markets Fund                           Oppenheimer Quest Balanced Fund
Oppenheimer Discovery Fund                                    Oppenheimer Quest Capital Value Fund, Inc.
Oppenheimer Dividend Growth Fund                              Oppenheimer Quest International Value Fund, Inc.
Oppenheimer Emerging Growth Fund                              Oppenheimer Quest Opportunity Value Fund
Oppenheimer Emerging Technologies Fund                        Oppenheimer Quest Value Fund, Inc.
Oppenheimer Enterprise Fund                                   Oppenheimer Real Asset Fund
Oppenheimer Equity Fund, Inc.                                 Oppenheimer Real Estate Fund
Oppenheimer Global Fund                                       Oppenheimer Rochester Arizona Municipal Fund
Oppenheimer Global Opportunities Fund                         Oppenheimer Rochester Maryland Municipal Fund
Oppenheimer Gold & Special Minerals Fund                      Oppenheimer Rochester Massachusetts Municipal Fund
Oppenheimer Growth Fund                                       Oppenheimer Rochester Michigan Municipal Fund
Oppenheimer International Bond Fund                           Oppenheimer Rochester Minnesota Municipal Fund
Oppenheimer International Diversified Fund                    Oppenheimer Rochester North Carolina Municipal Fund
Oppenheimer International Growth Fund                         Oppenheimer Rochester Ohio Municipal Fund
Oppenheimer International Small Company Fund                  Oppenheimer Rochester Virginia Municipal Fund
Oppenheimer International Value Fund                          Oppenheimer Rochester National Municipals
Oppenheimer Limited Term California Municipal Fund            Oppenheimer Select Value Fund
Oppenheimer Limited-Term Government Fund                      Oppenheimer Senior Floating Rate Fund
Oppenheimer Limited Term Municipal Fund                       Oppenheimer Small- & Mid- Cap Value Fund
Oppenheimer Main Street Fund                                  Oppenheimer Strategic Income Fund
Oppenheimer Main Street Opportunity Fund                      Oppenheimer U.S. Government Trust
Oppenheimer Main Street Small Cap Fund                        Oppenheimer Value Fund
Oppenheimer MidCap Fund                                       Limited-Term New York Municipal Fund
Oppenheimer New Jersey Municipal Fund                         Rochester Fund Municipals

And the following money market funds:
Oppenheimer Cash Reserves                                     Centennial Money Market Trust
Oppenheimer Institutional Money Market Fund                   Centennial Government Trust
Oppenheimer Money Market Fund, Inc.                           Centennial New York Tax Exempt Trust
Centennial California Tax Exempt Trust                        Centennial Tax Exempt Trust

     There is an initial  sales charge on the purchase of Class A shares of each
of the Oppenheimer  funds  described above except the money market funds.  Under
certain  circumstances  described  in this SAI,  redemption  proceeds of certain
money market fund shares may be subject to a contingent deferred sales charge.

     Letters of Intent. Under a Letter of Intent ("Letter"),  you can reduce the
sales  charge  rate  that  applies  to your  purchases  of Class A shares if you
purchase  Class A,  Class B or Class C shares  of the Fund or other  Oppenheimer
funds during a 13-month  period.  The total amount of your purchases of Class A,
Class B and Class C shares will  determine the sales charge rate that applies to
your  Class A share  purchases  during  that  period.  You can choose to include
purchases  that you made up to 90 days  before the date of the  Letter.  Class A
shares of Oppenheimer  Money Market Fund, Inc. and Oppenheimer  Cash Reserves on
which you have not paid a sales charge and any Class N shares you  purchase,  or
may have  purchased,  will  not be  counted  towards  satisfying  the  purchases
specified in a Letter.

     A Letter is an investor's statement in writing to the Distributor of his or
her  intention  to  purchase a  specified  value of Class A, Class B and Class C
shares of the Fund and other  Oppenheimer  funds  during a 13-month  period (the
"Letter period").  At the investor's request, this may include purchases made up
to 90 days prior to the date of the  Letter.  The Letter  states the  investor's
intention to make the  aggregate  amount of purchases of shares which will equal
or exceed the amount specified in the Letter.  Purchases made by reinvestment of
dividends or capital gains  distributions  and purchases made at net asset value
(i.e.  without  paying a front-end or contingent  deferred  sales charge) do not
count toward satisfying the amount of the Letter.

     Each  purchase  of  Class A shares  under  the  Letter  will be made at the
offering  price  (including  the  sales  charge)  that  would  apply to a single
lump-sum  purchase of shares in the amount  intended to be  purchased  under the
Letter.

     In  submitting  a Letter,  the  investor  makes no  commitment  to purchase
shares. However, if the investor's purchases of shares within the Letter period,
when added to the value (at offering price) of the investor's holdings of shares
on the last day of that  period,  do not equal or exceed the  intended  purchase
amount,  the  investor  agrees  to pay the  additional  amount  of sales  charge
applicable  to such  purchases.  That amount is  described in "Terms of Escrow,"
below (those  terms may be amended by the  Distributor  from time to time).  The
investor agrees that shares equal in value to 5% of the intended purchase amount
will be held in escrow by the  Transfer  Agent  subject  to the Terms of Escrow.
Also, the investor agrees to be bound by the terms of the  Prospectus,  this SAI
and the application used for a Letter.  If those terms are amended,  as they may
be from time to time by the Fund, the investor agrees to be bound by the amended
terms and that those amendments will apply automatically to existing Letters.

     If the total eligible  purchases made during the Letter period do not equal
or exceed the intended purchase amount,  the concessions  previously paid to the
dealer of record for the account and the amount of sales charge  retained by the
Distributor  will be adjusted to the rates applicable to actual total purchases.
If total  eligible  purchases  during the  Letter  period  exceed  the  intended
purchase  amount  and exceed  the  amount  needed to qualify  for the next sales
charge rate reduction set forth in the  Prospectus,  the sales charges paid will
be adjusted to the lower rate. That adjustment will be made only if and when the
dealer  returns  to the  Distributor  the  excess of the  amount of  concessions
allowed or paid to the dealer over the amount of  concessions  that apply to the
actual amount of purchases.  The excess concessions  returned to the Distributor
will be used to purchase additional shares for the investor's account at the net
asset value per share in effect on the date of such purchase, promptly after the
Distributor's receipt thereof.

     The Transfer  Agent will not hold shares in escrow for  purchases of shares
of the Fund and other  Oppenheimer  funds by  OppenheimerFunds  prototype 401(k)
plans under a Letter.  If the intended  purchase  amount under a Letter  entered
into by an  OppenheimerFunds  prototype 401(k) plan is not purchased by the plan
by the end of the Letter period, there will be no adjustment of concessions paid
to the broker-dealer or financial institution of record for accounts held in the
name of that plan.

     In determining  the total amount of purchases  made under a Letter,  shares
redeemed by the investor  prior to the  termination of the Letter period will be
deducted.  It is the  responsibility of the dealer of record and/or the investor
to advise the Distributor  about the Letter when placing any purchase orders for
the  investor  during  the Letter  period.  All of such  purchases  must be made
through the Distributor.

         |X|  Terms of Escrow That Apply to Letters of Intent.

     1. Out of the initial purchase (or subsequent  purchases if necessary) made
pursuant to a Letter, shares of the Fund equal in value up to 5% of the intended
purchase amount  specified in the Letter shall be held in escrow by the Transfer
Agent. For example, if the intended purchase amount is $50,000, the escrow shall
be  shares  valued  in the  amount of $2,500  (computed  at the  offering  price
adjusted for a $50,000 purchase).  Any dividends and capital gains distributions
on the escrowed shares will be credited to the investor's account.

     2. If the total minimum investment  specified under the Letter is completed
within the 13-month Letter period, the escrowed shares will be promptly released
to the investor.

     3.  If,  at the end of the  13-month  Letter  period  the  total  purchases
pursuant to the Letter are less than the intended  purchase amount  specified in
the Letter,  the investor must remit to the  Distributor  an amount equal to the
difference  between the dollar  amount of sales  charges  actually  paid and the
amount of sales charges which would have been paid if the total amount purchased
had been made at a single time.  That sales charge  adjustment will apply to any
shares  redeemed  prior to the  completion of the Letter.  If the  difference in
sales  charges  is not  paid  within  twenty  days  after  a  request  from  the
Distributor  or the  dealer,  the  Distributor  will,  within  sixty days of the
expiration  of the Letter,  redeem the number of escrowed  shares  necessary  to
realize such difference in sales charges.  Full and fractional  shares remaining
after such redemption will be released from escrow.  If a request is received to
redeem escrowed shares prior to the payment of such additional sales charge, the
sales charge will be withheld from the redemption proceeds.

     4. By signing the Letter, the investor irrevocably constitutes and appoints
the Transfer  Agent as  attorney-in-fact  to surrender for redemption any or all
escrowed shares.

     5. The shares  eligible  for  purchase  under the Letter (or the holding of
which may be counted toward completion of a Letter) include:

     (a) Class A shares sold with a front-end sales charge or subject to a Class
A contingent deferred sales charge,

     (b) Class B and Class C shares of other  Oppenheimer funds acquired subject
to a contingent deferred sales charge, and

     (c) Class A, Class B or Class C shares  acquired  by exchange of either (1)
Class A shares of one of the other  Oppenheimer funds that were acquired subject
to a Class A initial or contingent deferred sales charge or (2) Class B or Class
C shares of one of the other  Oppenheimer  funds that were acquired subject to a
contingent deferred sales charge.

     6. Shares held in escrow  hereunder  will  automatically  be exchanged  for
shares of another  fund to which an exchange is  requested,  as described in the
section of the Prospectus  entitled "How to Exchange Shares" and the escrow will
be transferred to that other fund.

     Asset Builder  Plans.  As explained in the  Prospectus,  you must initially
establish  your  account  with $500.  Subsequently,  you can  establish an Asset
Builder Plan to automatically  purchase  additional  shares directly from a bank
account for as little as $50. For those accounts  established  prior to November
1, 2002 and which have previously  established  Asset Builder Plans,  additional
purchases  will remain at $25.  Shares  purchased by Asset Builder Plan payments
from bank  accounts  are  subject  to the  redemption  restrictions  for  recent
purchases described in the Prospectus. Asset Builder Plans are available only if
your bank is an ACH member.  Asset  Builder  Plans may not be used to buy shares
for OppenheimerFunds employer-sponsored qualified retirement accounts.

     If you make payments from your bank account to purchase shares of the Fund,
your bank account will be debited automatically. Normally the debit will be made
two  business  days  prior  to  the  investment   dates  you  selected  on  your
application.  Neither the Distributor,  the Transfer Agent nor the Fund shall be
responsible  for any delays in purchasing  shares that result from delays in ACH
transmissions.

     Before you establish Asset Builder payments, you should obtain a prospectus
of the selected  fund(s) from your financial  advisor (or the  Distributor)  and
request an application from the Distributor. Complete the application and return
it. You may change the amount of your Asset Builder payment or you can terminate
these automatic  investments at any time by writing to the Transfer  Agent.  The
Transfer  Agent  requires a  reasonable  period  (approximately  10 days)  after
receipt of your  instructions  to implement them. The Fund reserves the right to
amend,  suspend or discontinue  offering Asset Builder plans at any time without
prior notice.

     Retirement  Plans.  Certain  types of  retirement  plans  are  entitled  to
purchase  shares of the Fund without  sales  charges or at reduced  sales charge
rates,  as described  in Appendix C to this SAI.  Certain  special  sales charge
arrangements  described in that Appendix apply to retirement plans whose records
are maintained on a daily  valuation  basis by Merrill Lynch Pierce Fenner &
Smith,  Inc.  ("Merrill  Lynch")  or an  independent  record  keeper  that has a
contract or special  arrangement  with  Merrill  Lynch.  If on the date the plan
sponsor signed the Merrill Lynch record keeping  service  agreement the plan has
less than $1 million in assets  invested in applicable  investments  (other than
assets  invested in money market funds),  then the retirement  plan may purchase
only Class C shares of the  Oppenheimer  funds.  If on the date the plan sponsor
signed the  Merrill  Lynch  record  keeping  service  agreement  the plan has $1
million  or more in  assets  but less than $5  million  in  assets  invested  in
applicable  investments (other than assets invested in money market funds), then
the retirement plan may purchase only Class N shares of the  Oppenheimer  funds.
If on the date the plan sponsor signed the Merrill Lynch record keeping  service
agreement  the plan has $5  million  or more in assets  invested  in  applicable
investments  (other  than  assets  invested  in money  market  funds),  then the
retirement plan may purchase only Class A shares of the Oppenheimer funds.

     OppenheimerFunds  has entered into arrangements with certain record keepers
whereby the Transfer Agent or an affiliate compensates the record keeper for its
record keeping and account servicing functions that it performs on behalf of the
participant level accounts of a retirement plan. While such compensation may act
to reduce the  record  keeping  fees  charged by the  retirement  plan's  record
keeper, that compensation arrangement may be terminated at any time, potentially
affecting  the record  keeping  fees  charged by the  retirement  plan's  record
keeper.

     Cancellation  of Purchase  Orders.  Cancellation of purchase orders for the
Fund's  shares  (for  example,  when a purchase  check is  returned  to the Fund
unpaid)  causes a loss to be  incurred  when the net asset  values of the Fund's
shares on the cancellation  date is less than on the purchase date. That loss is
equal to the amount of the decline in the net asset  value per share  multiplied
by the number of shares in the purchase  order.  The investor is responsible for
that  loss.  If the  investor  fails to  compensate  the Fund for the loss,  the
Distributor  will do so. The Fund may reimburse the  Distributor for that amount
by redeeming shares from any account  registered in that investor's name, or the
Fund or the Distributor may seek other redress.

     Classes of Shares.  Each class of shares of the Fund represents an interest
in the same  portfolio  of  investments  of the Fund.  However,  each  class has
different  shareholder  privileges and features.  The net income attributable to
Class B, Class C or Class N shares and the dividends payable on Class B, Class C
or Class N shares will be reduced by  incremental  expenses borne solely by that
class.  Those expenses  include the asset-based  sales charges to which Class B,
Class C and Class N shares are subject.

     The  availability  of  different  classes of shares  permits an investor to
choose  the  method  of  purchasing  shares  that  is more  appropriate  for the
investor.  That may depend on the amount of the purchase, the length of time the
investor  expects to hold  shares,  and other  relevant  circumstances.  Class A
shares  normally are sold  subject to an initial  sales  charge.  While Class B,
Class C and Class N shares  have no initial  sales  charge,  the  purpose of the
deferred sales charge and asset-based sales charge on Class B, Class C and Class
N shares is the same as that of the initial  sales charge on Class A shares - to
compensate the Distributor and brokers,  dealers and financial institutions that
sell shares of the Fund. A salesperson  who is entitled to receive  compensation
from his or her firm for selling  Fund shares may  receive  different  levels of
compensation for selling one class of shares rather than another.

     The Distributor  will not accept a purchase order of more than $100,000 for
Class B shares or a purchase  order of $1 million  or more to  purchase  Class C
shares on behalf of a single  investor (not  including  dealer  "street name" or
omnibus accounts).

     Class B, Class C or Class N shares may not be  purchased  by a new investor
directly  from  the  Distributor   without  the  investor   designating  another
registered broker-dealer.

     Class A Shares Subject to a Contingent Deferred Sales Charge. For purchases
of Class A shares at net asset  value  whether or not  subject  to a  contingent
deferred sales charge as described in the Prospectus,  no sales concessions will
be paid to the broker-dealer of record, as described in the Prospectus, on sales
of Class A shares  purchased with the  redemption  proceeds of shares of another
mutual  fund  offered  as an  investment  option in a  retirement  plan in which
Oppenheimer  funds  are also  offered  as  investment  options  under a  special
arrangement with the Distributor, if the purchase occurs more than 30 days after
the  Oppenheimer  funds are  added as an  investment  option  under  that  plan.
Additionally, that concession will not be paid on purchases of Class A shares by
a retirement plan made with the redemption  proceeds of Class N shares of one or
more Oppenheimer funds held by the plan for more than 18 months.

     |X| Class B Conversion. Under current interpretations of applicable federal
income tax law by the Internal Revenue Service, the conversion of Class B shares
to Class A shares 72 months after purchase is not treated as a taxable event for
the shareholder.  If those laws or the IRS  interpretation  of those laws should
change,  the automatic  conversion  feature may be suspended.  In that event, no
further conversions of Class B shares would occur while that suspension remained
in effect. Although Class B shares could then be exchanged for Class A shares on
the basis of relative net asset value of the two classes, without the imposition
of a sales charge or fee, such exchange could constitute a taxable event for the
shareholder,  and absent  such  exchange,  Class B shares  might  continue to be
subject to the asset-based sales charge for longer than six years.

     |X|  Availability of Class N Shares.  In addition to the description of the
types of  retirement  plans which may purchase  Class N shares  contained in the
prospectus, Class N shares also are offered to the following:

     o to all rollover IRAs (including SEP IRAs and SIMPLE IRAs),

     o  to  all  rollover   contributions   made  to  Individual  401(k)  plans,
Profit-Sharing Plans and Money Purchase Pension Plans,

     o to all direct  rollovers  from  OppenheimerFunds-sponsored  Pinnacle  and
Ascender retirement plans,

     o to all trustee-to-trustee IRA transfers,

o        to all 90-24 type 403(b) transfers,

     o to Group  Retirement  Plans (as  defined in Appendix C to this SAI) which
have entered into a special agreement with the Distributor for that purpose,

     o to Retirement  Plans  qualified  under  Sections  401(a) or 401(k) of the
Internal  Revenue  Code,  the  recordkeeper  or the plan  sponsor  for which has
entered into a special agreement with the Distributor,

     o to Retirement  Plans of a plan sponsor where the aggregate  assets of all
such plans invested in the Oppenheimer funds is $500,000 or more,

     o to Retirement  Plans with at least 100 eligible  employees or $500,000 or
more in plan assets,

     o to  OppenheimerFunds-sponsored  Ascender  401(k)  plans  that pay for the
purchase  with  the  redemption  proceeds  of  Class  A  shares  of one or  more
Oppenheimer funds, and

     o to certain  customers of broker-dealers  and financial  advisors that are
identified in a special agreement between the broker-dealer or financial advisor
and the Distributor for that purpose.

     The sales  concession  and the advance of the service  fee, as described in
the Prospectus, will not be paid to dealers of record on sales of Class N shares
on:

     o  purchases  of  Class  N  shares  in  amounts  of  $500,000  or more by a
retirement plan that pays for the purchase with the redemption proceeds of Class
A  shares  of one or  more  Oppenheimer  funds  (other  than  rollovers  from an
OppenheimerFunds-sponsored  Pinnacle or Ascender 401(k) plan to any IRA invested
in the Oppenheimer funds),

     o  purchases  of  Class  N  shares  in  amounts  of  $500,000  or more by a
retirement plan that pays for the purchase with the redemption proceeds of Class
C shares  of one or more  Oppenheimer  funds  held by the plan for more than one
year  (other  than  rollovers  from an  OppenheimerFunds-sponsored  Pinnacle  or
Ascender 401(k) plan to any IRA invested in the Oppenheimer funds), and

     o on purchases of Class N shares by an OppenheimerFunds-sponsored  Pinnacle
or Ascender  401(k) plan made with the redemption  proceeds of Class A shares of
one or more Oppenheimer funds.

     No  sales  concessions  will be paid to the  broker-dealer  of  record,  as
described  in the  Prospectus,  on sales of  Class N shares  purchased  with the
redemption  proceeds of shares of another  mutual fund offered as an  investment
option in a  retirement  plan in which  Oppenheimer  funds are also  offered  as
investment  options under a special  arrangement  with the  Distributor,  if the
purchase  occurs more than 30 days after the  Oppenheimer  funds are added as an
investment option under that plan.

     |X|  Allocation of Expenses.  The Fund pays  expenses  related to its daily
operations,  such as custodian fees, Trustees' fees, transfer agency fees, legal
fees and auditing  costs.  Those  expenses are paid out of the Fund's assets and
are not paid directly by  shareholders.  However,  those expenses reduce the net
asset values of shares,  and  therefore  are  indirectly  borne by  shareholders
through their investment.

     The  methodology  for  calculating  the  net  asset  value,  dividends  and
distributions  of the Fund's  share  classes  recognizes  two types of expenses.
General expenses that do not pertain specifically to any one class are allocated
pro rata to the shares of all classes. The allocation is based on the percentage
of the Fund's total assets that is represented by the assets of each class,  and
then  equally to each  outstanding  share  within a given  class.  Such  general
expenses include  management fees, legal,  bookkeeping and audit fees,  printing
and mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current  shareholders,  fees to unaffiliated
Trustees,  custodian expenses,  share issuance costs,  organization and start-up
costs, interest,  taxes and brokerage commissions,  and non-recurring  expenses,
such as litigation costs.

     Other  expenses that are directly  attributable  to a particular  class are
allocated equally to each outstanding share within that class.  Examples of such
expenses  include  distribution  and service  plan  (12b-1)  fees,  transfer and
shareholder servicing agent fees and expenses,  and shareholder meeting expenses
(to the extent that such expenses pertain only to a specific class).

     Fund  Account  Fees.  As stated in the  Prospectus,  a $12 annual  "Minimum
Balance Fee" is assessed on each Fund account with a share balance  valued under
$500.  The Minimum  Balance Fee is  automatically  deducted  from each such Fund
account in September.

     Listed  below  are  certain  cases in which  the Fund has  elected,  in its
discretion, not to assess the Fund Account Fees. These exceptions are subject to
change:

     o A fund account whose shares were  acquired  after  September  30th of the
prior year;

     o A fund  account  that  has a  balance  below  $500  due to the  automatic
conversion of shares from Class B to Class A shares.  However,  once all Class B
shares held in the account have been converted to Class A shares the new account
balance may become subject to the Minimum Balance Fee;

     o Accounts of  shareholders  who elect to access  their  account  documents
electronically via eDoc Direct;

     o A fund account that has only certificated shares and, has a balance below
$500 and is being escheated;

     o Accounts of shareholders that are held by  broker-dealers  under the NSCC
Fund/SERV system;

     o Accounts held under the Oppenheimer Legacy Program and/or holding certain
Oppenheimer Variable Account Funds;

     o Omnibus  accounts  holding  shares  pursuant to the  Pinnacle,  Ascender,
Custom Plus, Recordkeeper Pro and Pension Alliance Retirement Plan programs; and

     o A fund  account  that falls below the $500  minimum  solely due to market
fluctuations within the 12-month period preceding the date the fee is deducted.

     To access account documents  electronically via eDocs Direct,  please visit
the  Service  Center  on  our  website  at   www.oppenheimerfunds.com   or  call
1.888.470.0862 for instructions.

     The  Fund  reserves  the  authority  to  modify  Fund  Account  Fees in its
discretion.

     Determination of Net Asset Values Per Share. The net asset values per share
of each class of shares of the Fund are  determined  as of the close of business
of the  NYSE on each day that  the  NYSE is  open.  The  calculation  is done by
dividing  the value of the  Fund's  net  assets  attributable  to a class by the
number of shares of that class that are outstanding. The NYSE normally closes at
4:00 p.m.,  Eastern time, but may close earlier on some other days (for example,
in case of weather  emergencies or on days falling before a U.S.  holiday).  All
references  to time in this SAI mean  "Eastern  time."  The NYSE's  most  recent
annual  announcement  (which is subject to change)  states that it will close on
New Year's Day,  Martin  Luther King,  Jr. Day,  Presidents'  Day,  Good Friday,
Memorial Day,  Independence Day, Labor Day,  Thanksgiving Day and Christmas Day.
It may also close on other  days.  Dealers  other than NYSE  members may conduct
trading in  certain  securities  on days on which the NYSE is closed  (including
weekends and holidays) or after 4:00 p.m. on a regular business day. Because the
Fund's net asset  values will not be  calculated  on those days,  the Fund's net
asset  values  per  share  may be  significantly  affected  on  such  days  when
shareholders  may not purchase or redeem shares.  Additionally,  trading on many
foreign  stock  exchanges  and  over-the-counter  markets  normally is completed
before the close of the NYSE.

     Changes in the values of securities  traded on foreign exchanges or markets
as a result of  events  that  occur  after the  prices of those  securities  are
determined,  but  before  the close of the NYSE,  will not be  reflected  in the
Fund's  calculation  of its  net  asset  values  that  day  unless  the  Manager
determines  that the event is likely to effect a material change in the value of
the security. The Manager, or an internal valuation committee established by the
Manager, as applicable,  may establish a valuation, under procedures established
by the Board and subject to the approval,  ratification  and confirmation by the
Board at its next ensuing meeting.

     |X|  Securities  Valuation.  The Fund's Board of Trustees  has  established
procedures  for  the  valuation  of the  Fund's  securities.  In  general  those
procedures are as follows:

     o Equity  securities  traded on a U.S.  securities  exchange  are valued as
follows:

     (1) if last sale information is regularly reported,  they are valued at the
last reported sale price on the principal  exchange on which they are traded, as
applicable, on that day, or

     (2) if last sale information is not available on a valuation date, they are
valued at the last  reported sale price  preceding  the valuation  date if it is
within the spread of the closing "bid" and "asked"  prices on the valuation date
or, if not, at the closing "bid" price on the valuation date.

     o Equity securities traded on a foreign  securities  exchange generally are
valued in one of the following ways:

     (1) at the last sale price available to the pricing service approved by the
Board of Trustees, or

     (2) at the last sale price  obtained by the Manager  from the report of the
principal  exchange on which the security is traded at its last trading  session
on or immediately before the valuation date, or

     (3) at the mean  between the "bid" and  "asked"  prices  obtained  from the
principal  exchange  on  which  the  security  is  traded  or,  on the  basis of
reasonable inquiry, from two market makers in the security.

     o Long-term  debt  securities  having a remaining  maturity in excess of 60
days  are  valued  based  on the mean  between  the  "bid"  and  "asked"  prices
determined  by a  portfolio  pricing  service  approved  by the Fund's  Board of
Trustees  or  obtained  by the  Manager  from two  active  market  makers in the
security on the basis of reasonable inquiry.

     o The  following  securities  are valued at the mean  between the "bid" and
"asked" prices  determined by a pricing service  approved by the Fund's Board of
Trustees  or  obtained  by the  Manager  from two  active  market  makers in the
security on the basis of reasonable inquiry:

     (1) debt  instruments  that  have a  maturity  of more  than 397 days  when
issued,

     (2) debt  instruments  that had a maturity  of 397 days or less when issued
and have a remaining maturity of more than 60 days, and

     (3) non-money  market debt  instruments  that had a maturity of 397 days or
less when issued and which have a remaining maturity of 60 days or less.

     o The following securities are valued at cost, adjusted for amortization of
premiums and accretion of discounts:

     (1) money market debt securities held by a non-money market fund that had a
maturity of less than 397 days when issued that have a remaining  maturity of 60
days or less, and

     (2) debt  instruments  held by a money  market  fund that have a  remaining
maturity of 397 days or less.

     o Securities (including restricted securities) not having readily-available
market  quotations  are  valued  at fair  value  determined  under  the  Board's
procedures. If the Manager is unable to locate two market makers willing to give
quotes,  a  security  may be priced at the mean  between  the "bid" and  "asked"
prices  provided by a single  active market maker (which in certain cases may be
the "bid" price if no "asked" price is available).

     In the  case of U.S.  government  securities,  mortgage-backed  securities,
corporate bonds and foreign government securities, when last sale information is
not generally  available,  the Manager may use pricing services  approved by the
Board of  Trustees.  The pricing  service may use  "matrix"  comparisons  to the
prices for comparable  instruments on the basis of quality,  yield and maturity.
Other  special  factors may be involved  (such as the  tax-exempt  status of the
interest paid by municipal securities). The Manager will monitor the accuracy of
the pricing  services.  That  monitoring may include  comparing  prices used for
portfolio valuation to actual sales prices of selected securities.

     The closing prices in the New York foreign  exchange market on a particular
business  day that are  provided  to the  Manager  by a bank,  dealer or pricing
service that the Manager has determined to be reliable are used to value foreign
currency, including forward contracts, and to convert to U.S. dollars securities
that are denominated in foreign currency.

     Puts, calls, and futures are valued at the last sale price on the principal
exchange on which they are traded,  as  applicable,  as  determined by a pricing
service  approved by the Board of Trustees or by the  Manager.  If there were no
sales that day,  they  shall be valued at the last sale  price on the  preceding
trading day if it is within the spread of the closing  "bid" and "asked"  prices
on the principal  exchange on the valuation date. If not, the value shall be the
closing bid price on the principal  exchange on the valuation  date. If the put,
call or future  is not  traded  on an  exchange,  it shall be valued by the mean
between "bid" and "asked" prices  obtained by the Manager from two active market
makers.  In certain  cases that may be at the "bid" price if no "asked" price is
available.

     When the Fund writes an option,  an amount equal to the premium received is
included  in the Fund's  Statement  of Assets and  Liabilities  as an asset.  An
equivalent credit is included in the liability  section.  The credit is adjusted
("marked-to-market")  to reflect the  current  market  value of the  option.  In
determining the Fund's gain on investments, if a call or put written by the Fund
is exercised,  the proceeds are increased by the premium received.  If a call or
put  written  by the Fund  expires,  the Fund  has a gain in the  amount  of the
premium. If the Fund enters into a closing purchase transaction,  it will have a
gain or loss,  depending  on whether the premium  received was more or less than
the cost of the closing  transaction.  If the Fund exercises a put it holds, the
amount the Fund receives on its sale of the underlying  investment is reduced by
the amount of premium paid by the Fund.

How to Sell Shares

     The  information  below  supplements the terms and conditions for redeeming
shares set forth in the Prospectus.

     Sending  Redemption  Proceeds by Federal Funds Wire. The Federal Funds wire
of redemption  proceeds may be delayed if the Fund's  custodian bank is not open
for  business  on a day when the Fund would  normally  authorize  the wire to be
made,  which is usually the Fund's  next  regular  business  day  following  the
redemption.  In those circumstances,  the wire will not be transmitted until the
next bank business day on which the Fund is open for business. No dividends will
be paid on the proceeds of redeemed  shares  awaiting  transfer by Federal Funds
wire.

     Reinvestment  Privilege.  Within six months of a redemption,  a shareholder
may reinvest all or part of the redemption proceeds of:

     o Class A shares  purchased  subject to an initial  sales charge or Class A
shares on which a contingent deferred sales charge was paid, or

     o Class B shares that were subject to the Class B contingent deferred sales
charge when redeemed.

     The reinvestment may be made without sales charge only in Class A shares of
the Fund or any of the other Oppenheimer funds into which shares of the Fund are
exchangeable as described in "How to Exchange Shares" below.  Reinvestment  will
be at the net asset value next computed  after the Transfer  Agent  receives the
reinvestment  order.  The  shareholder  must  ask the  Transfer  Agent  for that
privilege at the time of reinvestment. This privilege does not apply to Class C,
and  Class N  shares.  The Fund  may  amend,  suspend  or  cease  offering  this
reinvestment  privilege at any time as to shares redeemed after the date of such
amendment, suspension or cessation.

     Any  capital  gain that was  realized  when the  shares  were  redeemed  is
taxable,  and reinvestment  will not alter any capital gains tax payable on that
gain.  If there has been a capital  loss on the  redemption,  some or all of the
loss may not be tax  deductible,  depending  on the  timing  and  amount  of the
reinvestment.  Under the Internal  Revenue Code, if the  redemption  proceeds of
Fund  shares on which a sales  charge was paid are  reinvested  in shares of the
Fund or another of the Oppenheimer  funds within 90 days of payment of the sales
charge, the shareholder's basis in the shares of the Fund that were redeemed may
not include the amount of the sales charge  paid.  That would reduce the loss or
increase the gain  recognized  from the  redemption.  However,  in that case the
sales  charge  would  be  added  to the  basis  of the  shares  acquired  by the
reinvestment of the redemption proceeds.

     Payments "In Kind". The Prospectus  states that payment for shares tendered
for redemption is ordinarily made in cash. However, under certain circumstances,
the Board of Trustees of the Fund may determine  that it would be detrimental to
the best interests of the remaining  shareholders of the Fund to make payment of
a redemption  order wholly or partly in cash. In that case, the Fund may pay the
redemption  proceeds in whole or in part by a  distribution  "in kind" of liquid
securities from the portfolio of the Fund, in lieu of cash.

     The Fund has  elected to be  governed  by Rule 18f-1  under the  Investment
Company Act.  Under that rule,  the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net assets of the Fund during any
90-day  period for any one  shareholder.  If shares are  redeemed  in kind,  the
redeeming  shareholder  might  incur  brokerage  or other  costs in selling  the
securities for cash. The Fund will value  securities  used to pay redemptions in
kind  using the same  method  the Fund uses to value  its  portfolio  securities
described  above  under  "Determination  of Net Asset  Values Per  Share."  That
valuation will be made as of the time the redemption price is determined.

     Involuntary  Redemptions.  The Fund's  Board of  Trustees  has the right to
cause the  involuntary  redemption  of the  shares  held in any  account  if the
aggregate  net asset  value of those  shares  is less  than $200 or such  lesser
amount as the Board may fix. The Board will not cause the involuntary redemption
of shares in an  account if the  aggregate  net asset  value of such  shares has
fallen below the stated  minimum solely as a result of market  fluctuations.  If
the Board exercises this right, it may also fix the  requirements for any notice
to be given to the  shareholders in question (not less than 30 days).  The Board
may   alternatively  set  requirements  for  the  shareholder  to  increase  the
investment,  or set other terms and  conditions  so that the shares would not be
involuntarily redeemed.

     Transfers of Shares.  A transfer of shares to a different  registration  is
not an event that triggers the payment of sales charges.  Therefore,  shares are
not subject to the payment of a contingent deferred sales charge of any class at
the time of transfer to the name of another person or entity. It does not matter
whether the transfer occurs by absolute assignment,  gift or bequest, as long as
it does not involve,  directly or indirectly,  a public sale of the shares. When
shares  subject to a  contingent  deferred  sales  charge are  transferred,  the
transferred shares will remain subject to the contingent  deferred sales charge.
It  will  be  calculated  as if the  transferee  shareholder  had  acquired  the
transferred  shares in the same manner and at the same time as the  transferring
shareholder.

     If less than all shares  held in an account are  transferred,  and some but
not all shares in the account  would be subject to a contingent  deferred  sales
charge if redeemed at the time of  transfer,  the  priorities  described  in the
Prospectus  under "How to Buy Shares" for the imposition of the Class B, Class C
and Class N contingent deferred sales charge will be followed in determining the
order in which shares are transferred.

     Distributions  From  Retirement  Plans.  Requests  for  distributions  from
OppenheimerFunds-sponsored  IRAs,  SEP-IRAs,  SIMPLE IRAs,  403(b)(7)  custodial
plans,  401(k) plans or pension or  profit-sharing  plans should be addressed to
"Trustee,  OppenheimerFunds  Retirement  Plans," c/o the  Transfer  Agent at its
address listed in "How To Sell Shares" in the Prospectus or on the back cover of
this SAI. The request must: (1) state the reason for the distribution; (2) state
the owner's awareness of tax penalties if the distribution is premature; and (3)
conform  to the  requirements  of the  plan  and  the  Fund's  other  redemption
requirements.

     Participants     (other    than    self-employed    plan    sponsors)    in
OppenheimerFunds-sponsored  pension or  profit-sharing  plans with shares of the
Fund  held in the name of the plan or its  fiduciary  may not  directly  request
redemption of their accounts.  The plan administrator or fiduciary must sign the
request.

     Distributions  from pension and profit sharing plans are subject to special
requirements  under the Internal Revenue Code and certain  documents  (available
from the Transfer  Agent) must be completed and submitted to the Transfer  Agent
before the  distribution  may be made.  Distributions  from retirement plans are
subject to  withholding  requirements  under the Internal  Revenue Code, and IRS
Form W-4P  (available from the Transfer Agent) must be submitted to the Transfer
Agent with the distribution request, or the distribution may be delayed.  Unless
the   shareholder   has  provided  the  Transfer  Agent  with  a  certified  tax
identification  number,  the Internal Revenue Code requires that tax be withheld
from any distribution  even if the shareholder  elects not to have tax withheld.
The Fund,  the  Manager,  the  Distributor,  and the  Transfer  Agent  assume no
responsibility to determine  whether a distribution  satisfies the conditions of
applicable tax laws and will not be responsible  for any tax penalties  assessed
in connection with a distribution.

     Special Arrangements for Repurchase of Shares from Dealers and Brokers. The
Distributor is the Fund's agent to repurchase its shares from authorized dealers
or brokers  on behalf of their  customers.  Shareholders  should  contact  their
broker or dealer to arrange this type of redemption.  The  repurchase  price per
share will be the net asset value next computed after the  Distributor  receives
an order placed by the dealer or broker.  However, if the Distributor receives a
repurchase  order  from a dealer  or  broker  after  the  close of the NYSE on a
regular  business day, it will be processed at that day's net asset value if the
order was received by the dealer or broker from its customers  prior to the time
the NYSE closes.  Normally,  the NYSE closes at 4:00 p.m., but may do so earlier
on some days.

     Ordinarily,  for accounts redeemed by a broker-dealer under this procedure,
payment  will be made  within  three  business  days after the shares  have been
redeemed upon the Distributor's  receipt of the required redemption documents in
proper  form.  The  signature(s)  of the  registered  owners  on the  redemption
documents must be guaranteed as described in the Prospectus.

     Automatic  Withdrawal and Exchange  Plans.  Investors  owning shares of the
Fund valued at $5,000 or more can authorize the Transfer  Agent to redeem shares
(having  a  value  of at  least  $50)  automatically  on a  monthly,  quarterly,
semi-annual or annual basis under an Automatic  Withdrawal Plan.  Shares will be
redeemed three business days prior to the date requested by the  shareholder for
receipt of the payment.  Automatic  withdrawals of up to $1,500 per month may be
requested  by  telephone  if  payments  are to be made by check  payable  to all
shareholders of record.  Payments must also be sent to the address of record for
the account and the address must not have been changed within the prior 30 days.
Required minimum distributions from OppenheimerFunds-sponsored  retirement plans
may not be arranged on this basis.

     Payments are normally made by check,  but shareholders  having  AccountLink
privileges  (see "How To Buy Shares") may arrange to have  Automatic  Withdrawal
Plan  payments  transferred  to the  bank  account  designated  on  the  account
application or by signature-guaranteed  instructions sent to the Transfer Agent.
Shares are  normally  redeemed  pursuant to an Automatic  Withdrawal  Plan three
business  days  before the  payment  transmittal  date you select in the account
application.  If a contingent  deferred sales charge applies to the  redemption,
the amount of the check or payment will be reduced accordingly.

     The Fund cannot guarantee  receipt of a payment on the date requested.  The
Fund reserves the right to amend, suspend or discontinue offering these plans at
any time without prior notice.  Because of the sales charge  assessed on Class A
share purchases,  shareholders  should not make regular additional Class A share
purchases while participating in an Automatic  Withdrawal Plan. Class B, Class C
and Class N  shareholders  should  not  establish  automatic  withdrawal  plans,
because of the potential  imposition of the contingent  deferred sales charge on
such  withdrawals  (except  where  the  Class B,  Class C or Class N  contingent
deferred sales charge is waived as described in Appendix C to this SAI).

     By requesting an Automatic  Withdrawal or Exchange  Plan,  the  shareholder
agrees to the terms and  conditions  that apply to such plans,  as stated below.
These  provisions  may be  amended  from  time to time by the  Fund  and/or  the
Distributor.  When adopted,  any amendments will automatically apply to existing
Plans.

     |X| Automatic Exchange Plans. Shareholders can authorize the Transfer Agent
to  exchange  a  pre-determined  amount of shares of the Fund for shares (of the
same class) of other  Oppenheimer funds  automatically on a monthly,  quarterly,
semi-annual or annual basis under an Automatic Exchange Plan. The minimum amount
that may be exchanged to each other fund account is $50.  Instructions should be
provided   on   the   OppenheimerFunds   application   or   signature-guaranteed
instructions.  Exchanges made under these plans are subject to the  restrictions
that  apply  to  exchanges  as set  forth  in "How to  Exchange  Shares"  in the
Prospectus and below in this SAI.

     Automatic  Withdrawal  Plans.  Fund shares will be redeemed as necessary to
meet  withdrawal  payments.  Shares  acquired  without  a sales  charge  will be
redeemed  first.  Shares  acquired with  reinvested  dividends and capital gains
distributions  will be redeemed next,  followed by shares  acquired with a sales
charge, to the extent necessary to make withdrawal payments.  Depending upon the
amount withdrawn, the investor's principal may be depleted.  Payments made under
these plans should not be considered as a yield or income on your investment.

     The Transfer Agent will administer the investor's Automatic Withdrawal Plan
as  agent  for the  shareholder(s)  (the  "Planholder")  who  executed  the plan
authorization and application  submitted to the Transfer Agent. Neither the Fund
nor the  Transfer  Agent shall incur any  liability  to the  Planholder  for any
action taken or not taken by the Transfer  Agent in good faith to administer the
plan. Share certificates will not be issued for shares of the Fund purchased for
and held under the plan,  but the Transfer  Agent will credit all such shares to
the account of the Planholder on the records of the Fund. Any share certificates
held by a Planholder  may be  surrendered  unendorsed to the Transfer Agent with
the plan  application so that the shares  represented by the  certificate may be
held under the plan.

     For  accounts  subject to  Automatic  Withdrawal  Plans,  distributions  of
capital gains must be  reinvested  in shares of the Fund,  which will be done at
net asset value without a sales charge.  Dividends on shares held in the account
may be paid in cash or reinvested.

     Shares will be redeemed to make withdrawal  payments at the net asset value
per share  determined on the redemption  date.  Checks or  AccountLink  payments
representing the proceeds of Plan withdrawals will normally be transmitted three
business days prior to the date  selected for receipt of the payment,  according
to the choice specified in writing by the Planholder.  Receipt of payment on the
date selected cannot be guaranteed.

     The amount and the  interval of  disbursement  payments  and the address to
which  checks  are to be mailed or  AccountLink  payments  are to be sent may be
changed at any time by the  Planholder  by writing to the  Transfer  Agent.  The
Planholder should allow at least two weeks' time after mailing such notification
for the requested  change to be put in effect.  The Planholder may, at any time,
instruct the Transfer Agent by written notice to redeem all, or any part of, the
shares held under the plan.  That  notice  must be in proper form in  accordance
with the requirements of the then-current  Prospectus of the Fund. In that case,
the Transfer  Agent will redeem the number of shares  requested at the net asset
value  per  share  in  effect  and will  mail a check  for the  proceeds  to the
Planholder.

     The  Planholder may terminate a plan at any time by writing to the Transfer
Agent.  The Fund may also give  directions to the Transfer  Agent to terminate a
plan. The Transfer Agent will also terminate a plan upon its receipt of evidence
satisfactory  to it that the  Planholder  has died or is legally  incapacitated.
Upon  termination of a plan by the Transfer Agent or the Fund,  shares that have
not  been  redeemed  will  be  held in  uncertificated  form in the  name of the
Planholder. The account will continue as a dividend-reinvestment, uncertificated
account unless and until proper  instructions  are received from the Planholder,
his or her executor or guardian, or another authorized person.

     If the  Transfer  Agent ceases to act as transfer  agent for the Fund,  the
Planholder will be deemed to have appointed any successor  transfer agent to act
as agent in administering the plan.

How to Exchange Shares

     As stated in the  Prospectus,  shares of a particular  class of Oppenheimer
funds having more than one class of shares may be  exchanged  only for shares of
the same class of other Oppenheimer funds. Shares of Oppenheimer funds that have
a single class without a class  designation are deemed "Class A" shares for this
purpose.  You can obtain a current list showing  which funds offer which classes
of shares by calling the Distributor.

     o All of the  Oppenheimer  funds  currently  offer  Class  A, B, C, N and Y
shares with the following exceptions:

     The following funds only offer Class A shares:
     Centennial California Tax Exempt Trust                       Centennial New York Tax Exempt Trust
     Centennial Government Trust                                  Centennial Tax Exempt Trust
     Centennial Money Market Trust

     The following funds do not offer Class N shares:
     Limited Term New York Municipal Fund                         Oppenheimer Rochester National Municipals
     Oppenheimer AMT-Free Municipals                              Oppenheimer Senior Floating Rate Fund
     Oppenheimer AMT-Free New York Municipals                     Rochester Fund Municipals
     Oppenheimer California Municipal Fund                        Oppenheimer Rochester Arizona Municipal Fund
     Oppenheimer International Value Fund                         Oppenheimer Rochester Maryland Municipal Fund
     Oppenheimer Limited Term California Municipal Fund           Oppenheimer Rochester Massachusetts Municipal Fund
     Oppenheimer Limited Term Municipal Fund                      Oppenheimer Rochester Michigan Municipal Fund
     Oppenheimer Money Market Fund, Inc.                          Oppenheimer Rochester Minnesota Municipal Fund
     Oppenheimer New Jersey Municipal Fund                        Oppenheimer Rochester North Carolina Municipal Fund
     Oppenheimer Principal Protected Main Street Fund II          Oppenheimer Rochester Ohio Municipal Fund
     Oppenheimer Pennsylvania Municipal Fund                      Oppenheimer Rochester Virginia Municipal Fund

     The following funds do not offer Class Y shares:
     Limited Term New York Municipal Fund                        Oppenheimer Principal Protected Main Street Fund
     Oppenheimer AMT-Free Municipals                             Oppenheimer Principal Protected Main Street Fund II
     Oppenheimer AMT-Free New York Municipals                    Oppenheimer Principal Protected Main Street Fund III
     Oppenheimer Balanced Fund                                   Oppenheimer Quest Capital Value Fund, Inc.
     Oppenheimer California Municipal Fund                       Oppenheimer Quest International Value Fund, Inc.
     Oppenheimer Capital Income Fund                             Oppenheimer Rochester National Municipals
     Oppenheimer Cash Reserves                                    Oppenheimer Rochester Arizona Municipal Fund
     Oppenheimer Convertible Securities Fund                      Oppenheimer Rochester Maryland Municipal Fund
     Oppenheimer Dividend Growth Fund                             Oppenheimer Rochester Massachusetts Municipal Fund
     Oppenheimer Gold & Special Minerals Fund                     Oppenheimer Rochester Michigan Municipal Fund
     Oppenheimer Institutional Money Market Fund                  Oppenheimer Rochester Minnesota Municipal Fund
     Oppenheimer Limited Term California Municipal Fund           Oppenheimer Rochester North Carolina Municipal Fund
     Oppenheimer Limited Term Municipal Fund                      Oppenheimer Rochester Ohio Municipal Fund
     Oppenheimer New Jersey Municipal Fund                        Oppenheimer Rochester Virginia Municipal Fund
     Oppenheimer Pennsylvania Municipal Fund

     o  Oppenheimer  Money  Market  Fund,  Inc.  only offers Class A and Class Y
shares.

     o Class B and Class C shares of  Oppenheimer  Cash  Reserves are  generally
available  only by exchange  from the same class of shares of other  Oppenheimer
funds or through OppenheimerFunds-sponsored 401(k) plans.

     o  Class  M  shares  of  Oppenheimer  Convertible  Securities  Fund  may be
exchanged only for Class A shares of other  Oppenheimer  funds.  They may not be
acquired  by  exchange  of shares of any  class of any other  Oppenheimer  funds
except Class A shares of Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash
Reserves acquired by exchange of Class M shares.

     o Class A shares of  Oppenheimer  funds may be exchanged at net asset value
for shares of certain money market funds offered by the Distributor. Shares of a
money market fund  purchased  without a sales charge may be exchanged for shares
of  Oppenheimer  funds  offered  with a sales  charge upon  payment of the sales
charge.

     o Shares of the Fund acquired by reinvestment of dividends or distributions
from any of the other  Oppenheimer  funds or from any unit investment  trust for
which  reinvestment  arrangements  have been made  with the  Distributor  may be
exchanged  at net asset  value for  shares of the same class of any of the other
Oppenheimer funds into which you may exchange shares.

     o  Shares  of  Oppenheimer  Principal  Protected  Main  Street  Fund may be
exchanged  at net asset  value for  shares of the same class of any of the other
Oppenheimer funds into which you may exchange shares. However,  shareholders are
not  permitted  to  exchange  shares of other  Oppenheimer  funds for  shares of
Oppenheimer  Principal  Protected Main Street Fund until after the expiration of
the warranty period (8/5/2010).

     o Shares of  Oppenheimer  Principal  Protected  Main  Street Fund II may be
exchanged  at net asset  value for  shares of the same class of any of the other
Oppenheimer funds into which you may exchange shares. However,  shareholders are
not  permitted  to  exchange  shares of other  Oppenheimer  funds for  shares of
Oppenheimer  Principal  Protected Main Street Fund II until after the expiration
of the warranty period (3/3/2011).

     o Shares of  Oppenheimer  Principal  Protected  Main Street Fund III may be
exchanged  at net asset  value for  shares of the same class of any of the other
Oppenheimer funds into which you may exchange shares. However,  shareholders are
not  permitted  to  exchange  shares of other  Oppenheimer  funds for  shares of
Oppenheimer  Principal Protected Main Street Fund III until after the expiration
of the warranty period (12/16/2011).

     o Class A,  Class B,  Class C and  Class N  shares  of each of  Oppenheimer
Developing Markets Fund and Oppenheimer  International Small Company Fund may be
acquired by  exchange  only with a minimum  initial  investment  of $50,000.  An
existing  shareholder of each fund may make additional  exchanges into that fund
with as little as $50.

     The Fund may amend,  suspend or  terminate  the  exchange  privilege at any
time.  Although the Fund may impose these  changes at any time,  it will provide
you with notice of those changes  whenever it is required to do so by applicable
law. It may be required to provide 60 days' notice prior to materially  amending
or  terminating  the exchange  privilege.  That 60 day notice is not required in
extraordinary circumstances.

     |X| How Exchanges Affect Contingent  Deferred Sales Charges.  No contingent
deferred  sales charge is imposed on exchanges of shares of any class  purchased
subject to a contingent deferred sales charge, with the following exceptions:

     o When  Class A shares of any  Oppenheimer  fund  (other  than  Oppenheimer
Rochester  National  Municipals  and  Rochester  Fund  Municipals)  acquired  by
exchange of Class A shares of any Oppenheimer fund purchased  subject to a Class
A contingent  deferred sales charge are redeemed  within 18 months measured from
the  beginning of the calendar  month of the initial  purchase of the  exchanged
Class A shares,  the Class A contingent  deferred sales charge is imposed on the
redeemed shares.

     o When Class A shares of  Oppenheimer  Rochester  National  Municipals  and
Rochester  Fund  Municipals  acquired  by  exchange  of  Class A  shares  of any
Oppenheimer fund purchased subject to a Class A contingent deferred sales charge
are redeemed  within 24 months of the  beginning  of the  calendar  month of the
initial  purchase  of the  exchanged  Class A  shares,  the  Class A  contingent
deferred sales charge is imposed on the redeemed shares.

     o If any Class A shares of another  Oppenheimer fund that are exchanged for
Class A shares of Oppenheimer Senior Floating Rate Fund are subject to the Class
A contingent  deferred sales charge of the other Oppenheimer fund at the time of
exchange,  the holding period for that Class A contingent  deferred sales charge
will carry over to the Class A shares of Oppenheimer  Senior  Floating Rate Fund
acquired in the exchange. The Class A shares of Oppenheimer Senior Floating Rate
Fund acquired in that  exchange will be subject to the Class A Early  Withdrawal
Charge of Oppenheimer  Senior Floating Rate Fund if they are repurchased  before
the expiration of the holding period.

     o When Class A shares of Oppenheimer  Cash Reserves and  Oppenheimer  Money
Market Fund, Inc. acquired by exchange of Class A shares of any Oppenheimer fund
purchased  subject to a Class A  contingent  deferred  sales charge are redeemed
within  the Class A  holding  period of the fund  from  which  the  shares  were
exchanged,  the Class A contingent  deferred sales charge of the fund from which
the shares were exchanged is imposed on the redeemed shares.

     o Except  with  respect  to the  Class B shares  described  in the next two
paragraphs,  the  contingent  deferred sales charge is imposed on Class B shares
acquired  by  exchange  if they are  redeemed  within  six years of the  initial
purchase of the exchanged Class B shares.

     o With respect to Class B shares of  Oppenheimer  Limited  Term  California
Municipal Fund,  Oppenheimer  Limited-Term  Government Fund, Oppenheimer Limited
Term Municipal Fund, Limited Term New York Municipal Fund and Oppenheimer Senior
Floating Rate Fund,  the Class B contingent  deferred sales charge is imposed on
the  acquired  shares if they are  redeemed  within  five  years of the  initial
purchase of the exchanged Class B shares.

     o With respect to Class B shares of  Oppenheimer  Cash  Reserves  that were
acquired  through the  exchange  of Class B shares  initially  purchased  in the
Oppenheimer  Capital  Preservation  Fund, the Class B contingent  deferred sales
charge is imposed on the acquired  shares if they are redeemed within five years
of that initial purchase.

     o With  respect to Class C shares,  the Class C contingent  deferred  sales
charge is imposed on Class C shares  acquired by  exchange if they are  redeemed
within 12 months of the initial purchase of the exchanged Class C shares.

     o With respect to Class N shares,  a 1%  contingent  deferred  sales charge
will be imposed if the retirement  plan (not including IRAs and 403(b) plans) is
terminated  or Class N shares  of all  Oppenheimer  funds are  terminated  as an
investment  option of the plan and Class N shares are redeemed  within 18 months
after the plan's  first  purchase of Class N shares of any  Oppenheimer  fund or
with respect to an individual retirement plan or 403(b) plan, Class N shares are
redeemed  within 18 months of the plan's first purchase of Class N shares of any
Oppenheimer fund.

     o When  Class B,  Class C or Class N  shares  are  redeemed  to  effect  an
exchange,  the priorities described in "How To Buy Shares" in the Prospectus for
the  imposition  of the Class B, Class C or Class N  contingent  deferred  sales
charge  will be  followed  in  determining  the  order in which the  shares  are
exchanged.  Before exchanging shares,  shareholders should take into account how
the  exchange  may affect any  contingent  deferred  sales  charge that might be
imposed in the subsequent redemption of remaining shares.

     Shareholders  owning shares of more than one class must specify which class
of shares they wish to exchange.

     |X| Limits on Multiple  Exchange  Orders.  The Fund  reserves  the right to
reject  telephone or written  exchange  requests  submitted in bulk by anyone on
behalf of more than one account.

     |X| Telephone  Exchange  Requests.  When exchanging shares by telephone,  a
shareholder  must have an existing  account in the fund to which the exchange is
to be made.  Otherwise,  the  investors  must obtain a  prospectus  of that fund
before the exchange  request may be submitted.  If all telephone  lines are busy
(which  might  occur,  for  example,   during  periods  of  substantial   market
fluctuations),  shareholders might not be able to request exchanges by telephone
and would have to submit written exchange requests.

     Processing  Exchange  Requests.  Shares to be exchanged are redeemed on the
regular  business day the Transfer Agent receives an exchange  request in proper
form (the "Redemption  Date").  Normally,  shares of the fund to be acquired are
purchased on the  Redemption  Date,  but such purchases may be delayed by either
fund up to five business days if it determines that it would be disadvantaged by
an immediate transfer of the redemption  proceeds.  The Fund reserves the right,
in its discretion,  to refuse any exchange request that may disadvantage it. For
example,  if the  receipt of  multiple  exchange  requests  from a dealer  might
require the  disposition  of portfolio  securities  at a time or at a price that
might be disadvantageous to the Fund, the Fund may refuse the request.

     When you exchange some or all of your shares from one fund to another,  any
special  account  features  that are available in the new fund (such as an Asset
Builder  Plan or  Automatic  Withdrawal  Plan) will be  switched to the new fund
account unless you tell the Transfer Agent not to do so.

     In connection with any exchange request, the number of shares exchanged may
be less than the number  requested if the exchange or the number requested would
include shares subject to a restriction  cited in the Prospectus or this SAI, or
would include  shares covered by a share  certificate  that is not tendered with
the request.  In those cases,  only the shares  available  for exchange  without
restriction will be exchanged.

     The different  Oppenheimer  funds  available  for exchange  have  different
investment objectives,  policies and risks. A shareholder should assure that the
fund selected is  appropriate  for his or her  investment and should be aware of
the tax  consequences  of an  exchange.  For  federal  income tax  purposes,  an
exchange  transaction  is  treated as a  redemption  of shares of one fund and a
purchase of shares of another.  "Reinvestment  Privilege," above, discusses some
of the tax  consequences of  reinvestment of redemption  proceeds in such cases.
The  Fund,  the  Distributor,  and the  Transfer  Agent are  unable  to  provide
investment,  tax or legal advice to a shareholder in connection with an exchange
request or any other investment transaction.

Dividends, Capital Gains and Taxes

     Dividends and Distributions.  The Fund has no fixed dividend rate and there
can be no assurance as to the payment of any dividends or the realization of any
capital gains.  The dividends and  distributions  paid by a class of shares will
vary from time to time depending on market  conditions,  the  composition of the
Fund's portfolio, and expenses borne by the Fund or borne separately by a class.
Dividends are  calculated in the same manner,  at the same time, and on the same
day for each class of shares. However, dividends on Class B, Class C and Class N
shares  are  expected  to be lower  than  dividends  on Class A shares.  That is
because of the effect of the  asset-based  sales  charge on Class B, Class C and
Class N shares.  Those  dividends will also differ in amount as a consequence of
any difference in the net asset values of the different classes of shares.

     Dividends,  distributions  and  proceeds of the  redemption  of Fund shares
represented  by checks  returned to the Transfer  Agent by the Postal Service as
undeliverable  will be invested in shares of Oppenheimer Money Market Fund, Inc.
Reinvestment  will be made as  promptly  as  possible  after the  return of such
checks  to the  Transfer  Agent,  to  enable  the  investor  to earn a return on
otherwise  idle funds.  Unclaimed  accounts may be subject to state  escheatment
laws, and the Fund and the Transfer Agent will not be liable to  shareholders or
their representatives for compliance with those laws in good faith.

     Tax  Status of the  Fund's  Dividends,  Distributions  and  Redemptions  of
Shares.  The federal tax  treatment of the Fund's  dividends  and capital  gains
distributions is briefly highlighted in the Prospectus.  The following is only a
summary of certain  additional tax considerations  generally  affecting the Fund
and its shareholders.

     The tax  discussion in the  Prospectus  and this SAI is based on tax law in
effect on the date of the Prospectus  and this SAI.  Those laws and  regulations
may be changed by legislative,  judicial,  or administrative  action,  sometimes
with  retroactive  effect.  State and local tax  treatment  of  ordinary  income
dividends and capital gain  dividends from  regulated  investment  companies may
differ from the  treatment  under the  Internal  Revenue Code  described  below.
Potential  purchasers  of  shares  of the Fund are  urged to  consult  their tax
advisers with specific  reference to their own tax  circumstances as well as the
consequences  of federal,  state and local tax rules  affecting an investment in
the Fund.

     Qualification as a Regulated Investment Company. The Fund has elected to be
taxed as a regulated  investment  company  under  Subchapter  M of the  Internal
Revenue Code of 1986, as amended. As a regulated investment company, the Fund is
not subject to federal  income tax on the portion of its net  investment  income
(that is, taxable interest, dividends, and other taxable ordinary income, net of
expenses)  and  capital  gain net income  (that is, the excess of net  long-term
capital  gains  over net  short-term  capital  losses)  that it  distributes  to
shareholders.  That qualification  enables the Fund to "pass through" its income
and realized  capital gains to  shareholders  without having to pay tax on them.
This avoids a "double tax" on that income and capital gains,  since shareholders
normally  will be taxed on the dividends and capital gains they receive from the
Fund  (unless  their  Fund  shares  are  held  in a  retirement  account  or the
shareholder is otherwise exempt from tax).

     The Internal  Revenue Code contains a number of complex  tests  relating to
qualification  that the Fund might not meet in a particular  year. If it did not
qualify as a  regulated  investment  company,  the Fund would be treated for tax
purposes as an  ordinary  corporation  and would  receive no tax  deduction  for
payments made to shareholders.

     To qualify as a regulated  investment company,  the Fund must distribute at
least 90% of its investment  company  taxable  income (in brief,  net investment
income and the excess of net short-term  capital gain over net long-term capital
loss)  for  the  taxable  year.  The  Fund  must  also  satisfy   certain  other
requirements of the Internal  Revenue Code,  some of which are described  below.
Distributions  by the Fund made  during the  taxable  year or,  under  specified
circumstances,  within 12 months  after the close of the taxable  year,  will be
considered  distributions  of income  and gains  for the  taxable  year and will
therefore count toward satisfaction of the above-mentioned requirement.

     To qualify as a regulated investment company, the Fund must derive at least
90% of its gross income from dividends,  interest, certain payments with respect
to  securities  loans,  gains  from the sale or  other  disposition  of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the regulated investment company's principal business of investing in
stock or securities) and certain other income.

     In addition to satisfying the  requirements  described above, the Fund must
satisfy  an  asset  diversification  test in  order to  qualify  as a  regulated
investment company.  Under that test, at the close of each quarter of the Fund's
taxable  year,  at least 50% of the value of the Fund's  assets must  consist of
cash  and  cash  items  (including  receivables),  U.S.  government  securities,
securities of other  regulated  investment  companies,  and  securities of other
issuers. As to each of those issuers,  the Fund must not have invested more than
5% of the value of the Fund's total assets in securities of each such issuer and
the Fund must not hold more than 10% of the  outstanding  voting  securities  of
each such  issuer.  No more than 25% of the  value of its  total  assets  may be
invested  in the  securities  of any one  issuer  (other  than  U.S.  government
securities and securities of other regulated investment companies), or in two or
more  issuers  which the Fund  controls  and which  are  engaged  in the same or
similar trades or businesses.  For purposes of this test,  obligations issued or
guaranteed by certain agencies or  instrumentalities  of the U.S. government are
treated as U.S. government securities.

     Excise Tax on Regulated  Investment  Companies.  Under the Internal Revenue
Code,  by December  31 each year,  the Fund must  distribute  98% of its taxable
investment income earned from January 1 through December 31 of that year and 98%
of its capital  gains  realized in the period from  November 1 of the prior year
through  October 31 of the current  year.  If it does not,  the Fund must pay an
excise tax on the amounts not distributed.  It is presently anticipated that the
Fund  will  meet  those  requirements.  To meet  this  requirement,  in  certain
circumstances the Fund might be required to liquidate  portfolio  investments to
make sufficient distributions to avoid excise tax liability.  However, the Board
of Trustees and the Manager might  determine in a particular  year that it would
be in the  best  interests  of  shareholders  for  the  Fund  not to  make  such
distributions  at  the  required  levels  and  to  pay  the  excise  tax  on the
undistributed  amounts.  That would reduce the amount of income or capital gains
available for distribution to shareholders.

     Taxation  of  Fund   Distributions.   The  Fund  anticipates   distributing
substantially  all of its  investment  company  taxable  income for each taxable
year. Those distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes.

     Special  provisions of the Internal  Revenue Code govern the eligibility of
the  Fund's  dividends  for  the  dividends-received   deduction  for  corporate
shareholders.  Long-term  capital gains  distributions  are not eligible for the
deduction.  The amount of  dividends  paid by the Fund that may  qualify for the
deduction is limited to the aggregate  amount of qualifying  dividends  that the
Fund derives  from  portfolio  investments  that the Fund has held for a minimum
period,  usually 46 days. A corporate  shareholder  will not be eligible for the
deduction  on  dividends  paid on Fund shares  held for 45 days or less.  To the
extent the Fund's  dividends are derived from gross income from option premiums,
interest  income or  short-term  gains from the sale of  securities or dividends
from foreign corporations, those dividends will not qualify for the deduction.

     The Fund may either retain or distribute  to  shareholders  its net capital
gain for each taxable year.  The Fund  currently  intends to distribute any such
amounts.  If net long term capital  gains are  distributed  and  designated as a
capital gain  distribution,  it will be taxable to  shareholders  as a long-term
capital gain and will be properly  identified in reports sent to shareholders in
January  of each  year.  Such  treatment  will  apply  no  matter  how  long the
shareholder  has held his or her shares or whether that gain was  recognized  by
the Fund before the shareholder acquired his or her shares.

     If the Fund elects to retain its net capital gain, the Fund will be subject
to tax on it at the 35% corporate tax rate. If the Fund elects to retain its net
capital gain, the Fund will provide to shareholders of record on the last day of
its taxable year information  regarding their pro rata share of the gain and tax
paid. As a result,  each  shareholder  will be required to report his or her pro
rata  share of such gain on their tax return as  long-term  capital  gain,  will
receive a  refundable  tax credit for  his/her pro rata share of tax paid by the
Fund on the gain,  and will  increase  the tax basis  for  his/her  shares by an
amount equal to the deemed distribution less the tax credit.

     Investment  income  that may be received  by the Fund from  sources  within
foreign  countries may be subject to foreign taxes  withheld at the source.  The
United  States has entered into tax treaties with many foreign  countries  which
entitle the Fund to a reduced rate of, or exemption from,  taxes on such income.
The Fund may be subject to U.S. Federal income tax, and an interest  charge,  on
certain  distributions  or gains  from the sale of shares  of a foreign  company
considered  to be a PFIC,  even if those  amounts are paid out as  dividends  to
shareholders.  To avoid imposition of the interest charge, the Fund may elect to
"mark to market" all PFIC shares that it holds at the end of each taxable  year.
In that case,  any  increase or decrease in the value of those  shares  would be
recognized  as ordinary  income or as  ordinary  loss (but only to the extent of
previously recognized "mark-to-market" gains).

     Distributions by the Fund that do not constitute  ordinary income dividends
or  capital  gain  distributions  will be  treated as a return of capital to the
extent  of the  shareholder's  tax basis in their  shares.  Any  excess  will be
treated as gain from the sale of those shares, as discussed below.  Shareholders
will be advised  annually  as to the U.S.  federal  income tax  consequences  of
distributions made (or deemed made) during the year. If prior distributions made
by the Fund must be  re-characterized  as a non-taxable return of capital at the
end of the  fiscal  year as a result  of the  effect  of the  Fund's  investment
policies, they will be identified as such in notices sent to shareholders.

     Distributions  by the Fund will be treated in the  manner  described  above
regardless  of  whether  the  distributions  are paid in cash or  reinvested  in
additional  shares of the Fund (or of another  fund).  Shareholders  receiving a
distribution  in the form of  additional  shares will be treated as  receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date.

     The Fund will be  required  in certain  cases to  withhold  28% of ordinary
income dividends, capital gains distributions and the proceeds of the redemption
of  shares,  paid to any  shareholder  (1) who has  failed to  provide a correct
taxpayer identification number or to properly certify that number when required,
(2) who is subject to backup  withholding  for  failure to report the receipt of
interest or dividend  income  properly,  or (3) who has failed to certify to the
Fund that the shareholder is not subject to backup  withholding or is an "exempt
recipient" (such as a corporation).  Any tax withheld by the Fund is remitted by
the Fund to the U.S.  Treasury and all income and any tax withheld is identified
in reports  mailed to  shareholders  in January of each year with a copy sent to
the IRS.

     Tax Effects of  Redemptions  of Shares.  If a shareholder  redeems all or a
portion of his/her shares,  the shareholder will recognize a gain or loss on the
redeemed shares in an amount equal to the difference between the proceeds of the
redeemed shares and the shareholder's adjusted tax basis in the shares. All or a
portion  of  any  loss  recognized  in  that  manner  may be  disallowed  if the
shareholder  purchases  other  shares of the Fund within 30 days before or after
the redemption.

     In general,  any gain or loss arising from the  redemption of shares of the
Fund will be  considered  capital  gain or loss,  if the  shares  were held as a
capital asset. It will be long-term capital gain or loss if the shares were held
for more than one year. However, any capital loss arising from the redemption of
shares held for six months or less will be treated as a long-term  capital  loss
to the extent of the amount of capital gain dividends  received on those shares.
Special holding period rules under the Internal  Revenue Code apply in this case
to  determine  the  holding  period  of  shares  and  there  are  limits  on the
deductibility of capital losses in any year.

     Foreign Shareholders.  Under U.S. tax law, taxation of a shareholder who is
a  foreign  person  (to  include,  but  not  limited  to,  a  nonresident  alien
individual,  a foreign  trust, a foreign  estate,  a foreign  corporation,  or a
foreign  partnership)  primarily  depends on whether the foreign person's income
from the Fund is  effectively  connected  with the  conduct  of a U.S.  trade or
business.  Typically,  ordinary income dividends paid from a mutual fund are not
considered "effectively connected" income.

     Ordinary  income  dividends  that are paid by the Fund (and are  deemed not
"effectively connected income") to foreign persons will be subject to a U.S. tax
withheld  by the Fund at a rate of 30%,  provided  the Fund  obtains a  properly
completed and signed  Certificate of Foreign Status. The tax rate may be reduced
if the  foreign  person's  country of  residence  has a tax treaty with the U.S.
allowing for a reduced tax rate on ordinary  income  dividends paid by the Fund.
Any tax  withheld by the Fund is remitted by the Fund to the U.S.  Treasury  and
all income and any tax withheld is identified in reports mailed to  shareholders
in March of each year with a copy sent to the IRS.

     If the ordinary income  dividends from the Fund are  effectively  connected
with the conduct of a U.S. trade or business,  then the foreign person may claim
an  exemption  from the U.S.  tax  described  above  provided the Fund obtains a
properly  completed and signed  Certificate  of Foreign  Status.  If the foreign
person fails to provide a certification of his/her foreign status, the Fund will
be required to withhold U.S. tax at a rate of 28% on ordinary income  dividends,
capital gains  distributions and the proceeds of the redemption of shares,  paid
to any foreign  person.  Any tax withheld by the Fund is remitted by the Fund to
the U.S.  Treasury and all income and any tax withheld is  identified in reports
mailed to shareholders in January of each year with a copy sent to the IRS.

     The tax  consequences to foreign persons  entitled to claim the benefits of
an applicable tax treaty may be different from those described  herein.  Foreign
shareholders  are urged to consult  their own tax advisors or the U.S.  Internal
Revenue  Service with respect to the particular tax  consequences  to them of an
investment in the Fund,  including  the  applicability  of the U.S.  withholding
taxes described above.

     Dividend  Reinvestment in Another Fund.  Shareholders of the Fund may elect
to reinvest all dividends  and/or capital gains  distributions  in shares of the
same class of any of the other  Oppenheimer  funds  into which you may  exchange
shares.  Reinvestment  will be made without  sales charge at the net asset value
per share in effect at the close of business on the payable date of the dividend
or distribution.  To elect this option, the shareholder must notify the Transfer
Agent in writing  and must have an  existing  account in the fund  selected  for
reinvestment.  Otherwise the shareholder first must obtain a prospectus for that
fund and an application from the Distributor to establish an account.  Dividends
and/or  distributions  from  shares of certain  other  Oppenheimer  funds may be
invested in shares of this Fund on the same basis.

Additional Information About the Fund

     The Distributor.  The Fund's shares are sold through  dealers,  brokers and
other financial  institutions that have a sales agreement with  OppenheimerFunds
Distributor,  Inc.,  a  subsidiary  of the  Manager  that  acts  as  the  Fund's
Distributor.  The Distributor also distributes  shares of the other  Oppenheimer
funds and is sub-distributor for funds managed by a subsidiary of the Manager.

     The Transfer Agent.  OppenheimerFunds  Services, the Fund's Transfer Agent,
is a division of the  Manager.  It is  responsible  for  maintaining  the Fund's
shareholder  registry  and  shareholder   accounting  records,  and  for  paying
dividends  and  distributions  to  shareholders.  It  also  handles  shareholder
servicing and administrative  functions.  It serves as the Transfer Agent for an
annual per account  fee.  It also acts as  shareholder  servicing  agent for the
other  Oppenheimer  funds.  Shareholders  should  direct  inquiries  about their
accounts to the Transfer Agent at the address and toll-free numbers shown on the
back cover.

     The Custodian.  Citibank,  N.A. is the custodian of the Fund's assets.  The
custodian's  responsibilities  include  safeguarding  and controlling the Fund's
portfolio  securities  and handling the delivery of such  securities to and from
the Fund.  It is the practice of the Fund to deal with the custodian in a manner
uninfluenced by any banking relationship the custodian may have with the Manager
and its  affiliates.  The Fund's cash  balances  with the custodian in excess of
$100,000  are not  protected  by  federal  deposit  insurance.  Those  uninsured
balances at times may be substantial.

     Independent  Registered Public  Accounting Firm.  Deloitte & Touche LLP
serves  as the  independent  registered  public  accounting  firm for the  Fund.
Deloitte &  Touche LLP audits the Fund's  financial  statements and performs
other  related  audit  services.  Deloitte  &  Touche  LLP also  acts as the
independent registered public accounting firm for certain other funds advised by
the  Manager  and its  affiliates.  Audit and  non-audit  services  provided  by
Deloitte  &  Touche  LLP to the  Fund  must  be  pre-approved  by the  Audit
Committee.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF OPPENHEIMER CAPITAL INCOME FUND:

We have audited the accompanying statement of assets and liabilities of
Oppenheimer Capital Income Fund, including the statement of investments, as of
August 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit includes consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of August 31, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.

      In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Oppenheimer Capital Income Fund as of August 31, 2006, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP

Denver, Colorado
October 16, 2006



STATEMENT OF INVESTMENTS  August 31, 2006
- --------------------------------------------------------------------------------

                                                                          VALUE
                                                      SHARES         SEE NOTE 1
- --------------------------------------------------------------------------------
COMMON STOCKS--52.1%
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--4.0%
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE--0.9%
Wyndham Worldwide Corp. 1                            909,040       $ 26,598,510
- --------------------------------------------------------------------------------
MEDIA--1.0%
CBS Corp., Cl. B                                     110,000          3,140,500
- --------------------------------------------------------------------------------
Clear Channel Communications, Inc.                   782,500         22,723,800
- --------------------------------------------------------------------------------
Viacom, Inc., Cl. B 1                                112,450          4,081,935
                                                                   -------------
                                                                     29,946,235

- --------------------------------------------------------------------------------
MULTILINE RETAIL--0.1%
Target Corp.                                          56,000          2,709,840
- --------------------------------------------------------------------------------
SPECIALTY RETAIL--2.0%
CSK Auto Corp. 1,2                                 5,502,500         63,113,675
- --------------------------------------------------------------------------------
CONSUMER STAPLES--9.2%
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING--0.8%
Wal-Mart Stores, Inc.                                550,000         24,596,000
- --------------------------------------------------------------------------------
FOOD PRODUCTS--0.5%
B&G Foods, Inc.                                      875,000         14,988,750
- --------------------------------------------------------------------------------
TOBACCO--7.9%
Altria Group, Inc. 3                               2,175,000        181,677,750
- --------------------------------------------------------------------------------
Loews Corp./Carolina Group 3                       1,069,900         61,262,474
                                                                   -------------
                                                                    242,940,224

- --------------------------------------------------------------------------------
ENERGY--14.7%
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES--0.2%
ENSCO International, Inc.                             23,000          1,027,870
- --------------------------------------------------------------------------------
GlobalSantaFe Corp.                                   95,200          4,685,744
                                                                   -------------
                                                                      5,713,614

- --------------------------------------------------------------------------------
OIL & GAS--14.5%
BP plc, ADR                                          500,000         34,025,000
- --------------------------------------------------------------------------------
Chevron Corp.                                         84,000          5,409,600
- --------------------------------------------------------------------------------
Enbridge Energy Management LLC 2                     747,702         35,104,599
- --------------------------------------------------------------------------------
Kinder Morgan Management LLC                       3,650,001        154,066,522
- --------------------------------------------------------------------------------
Kinder Morgan, Inc. 3                              1,550,750        161,836,270
- --------------------------------------------------------------------------------
Occidental Petroleum Corp.                           215,000         10,962,850
- --------------------------------------------------------------------------------
Tortoise Energy Capital Corp.                        598,733         14,130,099
- --------------------------------------------------------------------------------
Valero GP Holdings LLC 1                           1,000,000         20,470,000
- --------------------------------------------------------------------------------
Williams Cos., Inc. (The)                            304,700          7,504,761
                                                                   -------------
                                                                    443,509,701





                                                                          VALUE
                                                      SHARES         SEE NOTE 1
- --------------------------------------------------------------------------------
FINANCIALS--15.9%
- --------------------------------------------------------------------------------
COMMERCIAL BANKS--1.3%
U.S. Bancorp 3                                     1,000,000       $ 32,070,000
- --------------------------------------------------------------------------------
Wachovia Corp.                                       166,500          9,095,895
                                                                   -------------
                                                                     41,165,895

- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES--6.7%
Bank of America Corp.                              1,650,000         84,925,500
- --------------------------------------------------------------------------------
Citigroup, Inc.                                    2,400,000        118,440,000
                                                                   -------------
                                                                    203,365,500

- --------------------------------------------------------------------------------
INSURANCE--5.1%
ACE Ltd.                                             825,000         44,434,500
- --------------------------------------------------------------------------------
Everest Re Group Ltd. 3                            1,175,000        110,426,500
                                                                   -------------
                                                                    154,861,000

- --------------------------------------------------------------------------------
REAL ESTATE--0.4%
Anthracite Capital, Inc.                             931,250         11,966,563
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS--0.2%
Crystal River Capital, Inc. 1                        305,000          6,685,600
- --------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT & DEVELOPMENT--0.8%
Realogy Corp. 1                                    1,136,300         24,316,820
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE--1.4%
Washington Mutual, Inc. 3                          1,000,000         41,890,000
- --------------------------------------------------------------------------------
HEALTH CARE--1.3%
- --------------------------------------------------------------------------------
PHARMACEUTICALS--1.3%
Pfizer, Inc. 3                                     1,400,000         38,584,000
- --------------------------------------------------------------------------------
INDUSTRIALS--3.4%
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE--1.6%
Raytheon Co. 3                                     1,000,000         47,210,000
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES--0.3%
Cendant Corp.                                      4,545,200          8,772,236
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES--1.5%
General Electric Co.                               1,175,000         40,020,500
- --------------------------------------------------------------------------------
Siemens AG, Sponsored ADR                             76,500          6,506,325
                                                                   -------------
                                                                     46,526,825

- --------------------------------------------------------------------------------
MATERIALS--0.3%
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING--0.3%
Packaging Corp. of America                           415,000          9,603,100






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                                               VALUE
                                                                             SHARES       SEE NOTE 1
- -----------------------------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES--2.5%
- -----------------------------------------------------------------------------------------------------

DIVERSIFIED TELECOMMUNICATION SERVICES--2.2%
Citizens Communications Co.                                               1,250,000   $   17,237,500
- -----------------------------------------------------------------------------------------------------
Consolidated Communications Holdings, Inc.                                1,110,000       19,036,500
- -----------------------------------------------------------------------------------------------------
FairPoint Communications, Inc.                                            1,000,000       16,350,000
- -----------------------------------------------------------------------------------------------------
Windstream Corp.                                                          1,075,000       14,190,000
                                                                                      --------------
                                                                                          66,814,000

- -----------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES--0.3%
Sprint Nextel Corp.                                                         500,000        8,460,000
- -----------------------------------------------------------------------------------------------------
UTILITIES--0.8%
- -----------------------------------------------------------------------------------------------------
MULTI-UTILITIES & UNREGULATED POWER--0.8%
Sempra Energy                                                               500,000       24,860,000
                                                                                      --------------
Total Common Stocks (Cost $1,071,638,101)                                              1,589,198,088

- -----------------------------------------------------------------------------------------------------
PREFERRED STOCKS--7.6%
- -----------------------------------------------------------------------------------------------------
AES Trust III, 6.75% Cv.                                                    187,500        9,140,625
- -----------------------------------------------------------------------------------------------------
Citigroup Funding, Inc., 5.02% Cv., Series GNW                              400,000       13,148,000
- -----------------------------------------------------------------------------------------------------
Emmis Communications Corp., 6.25% Cum. Cv., Series A, Non-Vtg.              475,000       19,475,000
- -----------------------------------------------------------------------------------------------------
General Motors Corp., 4.50% Cv. Sr. Debs., Series A                       1,050,000       25,725,000
- -----------------------------------------------------------------------------------------------------
Hess Corp., 7% Cv., Non-Vtg.                                                 47,500        5,481,975
- -----------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc., 3.60% Cv. Yield Enhanced Equity
Linked Debt Securities, Series TYC (linked to Tyco International
Ltd. common stock)                                                        1,968,811       51,090,645
- -----------------------------------------------------------------------------------------------------
Lucent Technologies Capital Trust I, 7.75% Cum. Cv., Non-Vtg.                12,250       12,372,500
- -----------------------------------------------------------------------------------------------------
NRG Energy, Inc., 5.75% Cv.                                                  10,000        2,534,600
- -----------------------------------------------------------------------------------------------------
Platinum Underwriters Holdings Ltd., 6% Cv., Series A, Non-Vtg.             175,000        5,202,750
- -----------------------------------------------------------------------------------------------------
Travelers Property Casualty Corp., 4.50% Cv. Jr. Unsec. Sub. Nts.         1,875,000       45,037,500
- -----------------------------------------------------------------------------------------------------
United Rentals Trust I, 6.50% Cv. Quarterly Income Preferred Securities     575,000       25,300,000
- -----------------------------------------------------------------------------------------------------
XL Capital Ltd., 7% Cv.                                                     675,000       16,726,500
                                                                                      ---------------
Total Preferred Stocks (Cost $221,975,067)                                               231,235,095


                                                                          PRINCIPAL
                                                                             AMOUNT
- -----------------------------------------------------------------------------------------------------
MORTGAGE-BACKED OBLIGATIONS--12.7%
- -----------------------------------------------------------------------------------------------------
Banc of America Commercial Mortgage, Inc., Commercial Mtg.
Pass-Through Certificates, Series 2005-3, Cl. A2, 4.501%, 7/10/43        $2,670,000        2,604,381
- -----------------------------------------------------------------------------------------------------
Banc of America Funding Corp., CMO Pass-Through Certificates,
Series 2004-2, Cl. 2A1, 6.50%, 7/20/32                                    2,193,364        2,218,231
- -----------------------------------------------------------------------------------------------------
Banc of America Mortgage Securities, Inc., CMO Pass-Through
Certificates, Series 2004-8, Cl. 5A1, 6.50%, 5/25/32                      1,702,886        1,712,465







                                                                               PRINCIPAL         VALUE
                                                                                  AMOUNT    SEE NOTE 1
- -------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED OBLIGATIONS Continued
- -------------------------------------------------------------------------------------------------------

Citigroup Mortgage Loan Trust, Inc., CMO, Series 2006-WF1,
Cl. A2B, 5.536%, 3/1/36                                                      $   660,000   $   658,606
- -------------------------------------------------------------------------------------------------------
Countrywide Alternative Loan Trust, CMO:
Series 2005-J1, Cl. 3A1, 6.50%, 8/25/32                                        4,260,682     4,293,970
Series 2005-J3, Cl. 3A1, 6.50%, 9/25/34                                        3,443,729     3,482,092
- -------------------------------------------------------------------------------------------------------
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust, CMO,
Series 2006-AB2, Cl. A7, 5.961%, 6/25/36                                       3,835,972     3,829,441
- -------------------------------------------------------------------------------------------------------
Deutsche Alt-B Securities, Inc. Mortgage Loan Trust, CMO,
Series 2006-AB3, Cl. A7, 6.36%, 4/25/08                                        1,241,856     1,243,669
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.:
4.50%, 5/1/19                                                                 12,266,826    11,799,190
5%, 8/1/33                                                                     6,553,362     6,310,347
5%, 9/1/36 4                                                                   1,612,000     1,545,505
6%, 5/1/18                                                                     4,196,620     4,244,371
6.50%, 4/1/18-4/1/34                                                           2,189,716     2,233,181
7%, 9/1/23-3/1/35                                                             10,511,058    10,823,227
8%, 4/1/16                                                                       562,192       595,385
9%, 8/1/22-5/1/25                                                                170,574       183,014
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., CMO Gtd. Real Estate
Mtg. Investment Conduit Multiclass Pass-Through Certificates:
Series 2034, Cl. Z, 6.50%, 2/15/28                                               711,710       730,776
Series 2053, Cl. Z, 6.50%, 4/15/28                                               772,862       793,307
Series 2055, Cl. ZM, 6.50%, 5/15/28                                              942,045       962,179
Series 2075, Cl. D, 6.50%, 8/15/28                                             2,489,826     2,555,580
Series 2080, Cl. Z, 6.50%, 8/15/28                                               612,703       625,393
Series 2326, Cl. ZP, 6.50%, 6/15/31                                              767,083       787,892
Series 2387, Cl. PD, 6%, 4/15/30                                                 482,469       483,263
Series 2500, Cl. FD, 5.83%, 3/15/32 5                                            342,419       345,887
Series 2526, Cl. FE, 5.73%, 6/15/29 5                                            460,966       461,191
Series 2551, Cl. FD, 5.73%, 1/15/33 5                                            361,563       365,650
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., CMO Interest-Only
Stripped Mtg.-Backed Security, Series 2005-87, Cl. SG, 12.157%, 10/25/35 6     9,014,995       484,963
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., Interest-Only Stripped
Mtg.-Backed Security:
Series 176, Cl. IO, 13.529%, 6/1/26 6                                            633,116       143,383
Series 183, Cl. IO, 10.491%, 4/1/27 6                                            986,108       223,672
Series 184, Cl. IO, 15.986%, 12/1/26 6                                         1,048,649       237,784
Series 192, Cl. IO, 15.182%, 2/1/28 6                                            318,638        69,427
Series 200, Cl. IO, 14.013%, 1/1/29 6                                            380,905        86,238
Series 2003-118, Cl. S, 10.072%, 12/25/33 6                                    5,279,311       598,050
Series 2130, Cl. SC, (1.575)%, 3/15/29 6                                         749,620        43,694
Series 2796, Cl. SD, 1.061%, 7/15/26 6                                         1,112,551        70,981
Series 2920, Cl. S, (2.806)%, 1/15/35 6                                        6,441,260       293,439
Series 3000, Cl. SE, (3.951)%, 7/15/25 6                                       6,721,550       222,213
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., Principal-Only Stripped
Mtg.-Backed Security, Series 176, Cl. PO, 4.448%, 6/1/26 7                       301,350       244,614






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                      PRINCIPAL         VALUE
                                                                         AMOUNT    SEE NOTE 1
- ----------------------------------------------------------------------------------------------
MORTGAGE-BACKED OBLIGATIONS Continued
- ----------------------------------------------------------------------------------------------

Federal National Mortgage Assn.:
5%, 6/1/18-11/1/33                                                  $28,649,718   $27,700,002
5%, 3/1/18-9/1/36 4                                                  35,844,541    34,756,783
5.50%, 1/1/33-4/1/34                                                 36,454,752    35,910,668
5.50%, 9/1/21-9/1/36 4                                               38,229,000    37,700,024
6%, 8/1/32-1/1/33                                                     7,383,661     7,419,365
6%, 9/1/21-9/1/36 4                                                  27,244,000    27,504,436
6.50%, 12/1/29-11/1/31                                               12,923,016    13,193,684
6.50%, 4/1/16-9/1/36 4                                               16,550,483    16,831,042
7%, 11/1/17-7/1/35                                                   10,001,122    10,306,572
7.50%, 1/1/33-3/1/33                                                 14,184,741    14,730,192
8.50%, 7/1/32                                                            59,628        64,262
- ----------------------------------------------------------------------------------------------
Federal National Mortgage Assn. Grantor Trust, CMO,
Trust 2002-T1, Cl. A2, 7%, 11/25/31                                   2,179,545     2,236,469
- ----------------------------------------------------------------------------------------------
Federal National Mortgage Assn., CMO Gtd. Real Estate
Mtg. Investment Conduit Pass-Through Certificates:
Trust 1993-87, Cl. Z, 6.50%, 6/25/23                                  1,950,842     2,005,179
Trust 2001-50, Cl. NE, 6%, 8/25/30                                      284,224       284,758
Trust 2001-51, Cl. OD, 6.50%, 10/25/31                                2,645,563     2,700,025
Trust 2001-70, Cl. LR, 6%, 9/25/30                                      374,576       375,555
Trust 2001-72, Cl. NH, 6%, 4/25/30                                      165,250       165,102
Trust 2001-74, Cl. PD, 6%, 5/25/30                                       68,593        68,443
Trust 2002-9, Cl. PC, 6%, 3/25/17                                     8,010,280     8,115,386
Trust 2002-77, Cl. WF, 5.73%, 12/18/32 5                                542,702       547,491
Trust 2003-17, Cl. EQ, 5.50%, 3/25/23                                 1,903,000     1,860,236
Trust 2003-28, Cl. KG, 5.50%, 4/25/23                                 1,921,000     1,891,763
Trust 2004-101, Cl. BG, 5%, 1/25/20                                   2,550,000     2,481,334
Trust 2005-31, Cl. PB, 5.50%, 4/25/35                                 1,430,000     1,390,645
Trust 2005-100, Cl. BQ, 5.50%, 11/25/25                               1,560,000     1,498,184
Trust 2005-104, Cl. MC, 5.50%, 12/25/25                               7,321,312     7,121,559
Trust 2006-50, Cl. KS, 4.677%, 6/25/36 5                              3,202,317     2,951,356
Trust 2006-50, Cl. SK, 4.677%, 6/25/36 5                                259,542       251,449
Trust 2006-57, Cl. PA, 5.50%, 8/25/27                                 6,415,418     6,423,060
- ----------------------------------------------------------------------------------------------
Federal National Mortgage Assn., CMO Gtd. Real Estate
Mtg. Investment Conduit Pass-Through Certificates,
Interest-Only Stripped Mtg.-Backed Security:
Trust 2001-15, Cl. SA, 6.429%, 3/17/31 6                                928,149       114,069
Trust 2002-47, Cl. NS, (0.223)%, 4/25/32 6                            1,348,732       106,661
Trust 2002-51, Cl. S, (0.104)%, 8/25/32 6                             1,238,321        99,543
- ----------------------------------------------------------------------------------------------
Federal National Mortgage Assn., CMO Interest-Only
Stripped Mtg.-Backed Security, Trust 340, Cl. 2, 8.345%, 9/1/33 6     2,047,200       507,095
- ----------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Interest-Only
Stripped Mtg.-Backed Security:
Trust 222, Cl. 2, 14.988%, 6/1/23 6                                   2,248,960       497,849
Trust 240, Cl. 2, 18.732%, 9/1/23 6                                   3,399,467       773,632
Trust 252, Cl. 2, 10.142%, 11/1/23 6                                  1,667,901       417,650
Trust 273, Cl. 2, 15.989%, 8/1/26 6                                     473,005       106,396






                                                                            PRINCIPAL        VALUE
                                                                               AMOUNT   SEE NOTE 1
- ---------------------------------------------------------------------------------------------------
MORTGAGE-BACKED OBLIGATIONS Continued
- ---------------------------------------------------------------------------------------------------

Federal National Mortgage Assn., Interest-Only
Stripped Mtg.-Backed Security: Continued
Trust  303, Cl. IO, 12.054%, 11/1/29 6                                    $   605,841   $  148,053
Trust  308, Cl. 2, 13.611%, 9/1/30 6                                        1,757,403      444,856
Trust  321, Cl. 2, 6.489%, 4/1/32 6                                         6,816,678    1,610,546
Trust  322, Cl. 2, 16.576%, 4/1/32 6                                        2,590,246      605,676
Trust  329, Cl. 2, 10.462%, 1/1/33 6                                        3,401,218      833,340
Trust  331, Cl. 9, 8.748%, 2/1/33 6                                         1,906,886      435,127
Trust  334, Cl. 17, 17.39%, 2/1/33 6                                        1,108,812      262,892
Trust  344, Cl. 2, 8.907%, 12/1/33 6                                        1,985,657      473,119
Trust  362, Cl. 12, 4.55%, 8/1/35 6                                         5,767,331    1,273,024
Trust  362, Cl. 13, 4.571%, 8/1/35 6                                        3,202,283      725,745
Trust  2001-65, Cl. S, 10.366%, 11/25/31 6                                  3,073,863      288,341
Trust  2001-81, Cl. S, 3.442%, 1/25/32 6                                      700,884       51,465
Trust  2002-9, Cl. MS, 0.572%, 3/25/32 6                                      844,819       67,764
Trust  2002-52, Cl. SD, (2.472)%, 9/25/32 6                                 1,469,802      113,739
Trust  2002-75, Cl. SA, 11.301%, 11/25/32 6                                 3,581,199      343,770
Trust  2002-77, Cl. SH, 3.651%, 12/18/32 6                                    868,335       85,415
Trust  2003-33, Cl. SP, 13.214%, 5/25/33 6                                  3,015,547      345,667
Trust  2003-46, Cl. IH, 8.403%, 6/25/33 6                                   6,325,955    1,372,172
Trust  2004-54, Cl. DS, (3.732)%, 11/25/30 6                                1,393,018       71,696
Trust  2005-6, Cl. SE, (2.59)%, 2/25/35 6                                   4,413,273      206,466
Trust  2005-19, Cl. SA, (3.328)%, 3/25/35 6                                16,432,857      770,507
Trust  2005-40, Cl. SA, (3.374)%, 5/25/35 6                                 3,817,675      179,946
Trust  2005-71, Cl. SA, 3.446%, 8/25/25 6                                   4,275,700      224,174
Trust  2006-33, Cl. SP, 13.778%, 5/25/36 6                                  8,556,070      648,357
- ---------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., Principal-Only
Stripped Mtg.-Backed Security:
Trust  340, Cl. 1, 5.056%, 9/1/33 7                                         2,047,200    1,469,277
Trust  1993-184, Cl. M, 5.413%, 9/25/23 7                                     770,119      618,342
- ---------------------------------------------------------------------------------------------------
GE Capital Commercial Mortgage Corp., Commercial Mtg. Obligations:
Series 2004-C3, Cl. A2, 4.433%, 7/10/39                                     1,720,000    1,687,944
Series 2005-C3, Cl. A2, 4.853%, 7/10/45                                     1,590,000    1,569,463
- ---------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc., Commercial Mtg.
Pass-Through Certificates, Series 1997-C1, Cl. A3, 6.869%, 7/15/29            656,535      661,958
- ---------------------------------------------------------------------------------------------------
Government National Mortgage Assn., 8.50%, 8/15/17-12/15/17                   221,801      236,788
- ---------------------------------------------------------------------------------------------------
Government National Mortgage Assn., CMO Interest-Only
Stripped Mtg.-Backed Security, Series 2002-41, Cl. GS, 4.706%, 6/16/32 6      789,520      119,686
- ---------------------------------------------------------------------------------------------------
Government National Mortgage Assn., Interest-Only Stripped
Mtg.-Backed Security:
Series 2001-21, Cl. SB, (5.729)%, 1/16/27 6                                 1,511,219       92,305
Series 2002-15, Cl. SM, (8.599)%, 2/16/32 6                                 1,382,654       80,362
Series 2002-76, Cl. SY, (5.202)%, 12/16/26 6                                3,361,624      228,284
Series 2004-11, Cl. SM, (8.329)%, 1/17/30 6                                 1,176,503       68,799
Series 2006-47, Cl. SA, 17.104%, 8/16/36 6                                 11,355,000      629,027






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                              PRINCIPAL          VALUE
                                                                                 AMOUNT     SEE NOTE 1
- -------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED OBLIGATIONS Continued
- -------------------------------------------------------------------------------------------------------

Greenwich Capital Commercial Funding Corp., Commercial
Mtg. Pass-Through Certificates:
Series 2005-GG3, Cl. A2, 4.305%, 8/10/42                                   $  1,990,000   $  1,938,503
Series 2005-GG5, Cl. A2, 5.117%, 4/10/37                                      1,750,000      1,741,295
- -------------------------------------------------------------------------------------------------------
JPMorgan Chase Commercial Mortgage Securities Corp.,
Commercial Mtg. Pass-Through Certificates:
Series 2005-LDP2, Cl. A2, 4.575%, 7/15/42                                       640,000        625,328
Series 2005-LDP4, Cl. A2, 4.79%, 10/15/42                                     2,280,000      2,240,014
- -------------------------------------------------------------------------------------------------------
LB-UBS Commercial Mortgage Trust, Commercial Mtg.
Pass-Through Certificates, Series 2005-C5, Cl. A2, 4.885%, 9/15/30            1,900,000      1,879,959
- -------------------------------------------------------------------------------------------------------
Lehman XS Trust, Mtg. Pass-Through Certificates, Series 2005-10,
Cl. 2A3B, 5.55%, 1/25/36                                                      1,489,863      1,477,611
- -------------------------------------------------------------------------------------------------------
Mastr Alternative Loan Trust, CMO Pass-Through Certificates:
Series 2004-6, Cl. 10A1, 6%, 7/25/34                                          2,763,677      2,743,334
Series 2004-9, Cl. A3, 4.70%, 8/25/34 5                                       1,598,205      1,586,146
- -------------------------------------------------------------------------------------------------------
Prudential Mortgage Capital Co. II LLC, Commercial Mtg.
Pass-Through Certificates, Series PRU-HTG 2000-C1, Cl. A2,
7.306%, 10/6/15                                                               2,380,000      2,551,081
- -------------------------------------------------------------------------------------------------------
Residential Accredit Loans, Inc., CMO Asset-Backed
Pass-Through Certificates:
Series 2003-QS1, Cl. A2, 5.75%, 1/25/33                                       1,366,504      1,357,939
Series 2006-QS5, Cl. 2 A2, 6%, 4/25/08                                        4,473,432      4,466,190
- -------------------------------------------------------------------------------------------------------
Wachovia Bank Commercial Mortgage Trust, Commercial Mtg.
Obligations, Series 2005-C17, Cl. A2, 4.782%, 3/15/42                         3,590,000      3,538,217
- -------------------------------------------------------------------------------------------------------
WAMU Mortgage Pass-Through Certificates, Series 2005-AR5 Trust,
CMO Mtg. Pass-Through Certificates, Series 2005-AR5,
Cl. A1, 4.673%, 5/25/35 5                                                     1,441,143      1,436,867
- -------------------------------------------------------------------------------------------------------
Wells Fargo Mortgage-Backed Securities 2004-DD Trust,
CMO Mtg. Pass-Through Certificates, Series 2004-DD,
Cl. 2A1, 4.511%, 1/25/35 5                                                      341,327        340,014
                                                                                          ------------
Total Mortgage-Backed Obligations (Cost $388,925,731)                                      386,681,160

- -------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--1.9%
- -------------------------------------------------------------------------------------------------------
Ace Securities Corp., Home Equity Loan Pass-Through Certificates,
Series 2002-HE7, Cl. A2B, 5.504%, 11/25/35 5                                  1,310,000      1,311,429
- -------------------------------------------------------------------------------------------------------
Aesop Funding II LLC, Automobile Asset-Backed Certificates,
Series 2005-1A, Cl. A2, 5.385%, 4/20/08 5                                       900,000        900,683
- -------------------------------------------------------------------------------------------------------
Argent Securities Trust 2004-W8, Asset-Backed Pass-Through Certificates,
Series 2004-W8, Cl. A2, 5.804%, 5/25/34 5                                     4,500,000      4,522,361
- -------------------------------------------------------------------------------------------------------
Argent Securities Trust 2006-W5, Asset-Backed Pass-Through Certificates,
Series 2006-W5, Cl. A2B, 5.424%, 5/26/36 5                                    1,810,000      1,811,115
- -------------------------------------------------------------------------------------------------------
Capital Auto Receivables Asset Trust, Automobile Asset-Backed Securities,
Series 2004-2, Cl. A3, 3.58%, 1/15/09                                         2,990,000      2,942,908







                                                                            PRINCIPAL        VALUE
                                                                               AMOUNT   SEE NOTE 1
- ---------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Continued
- ---------------------------------------------------------------------------------------------------

Centex Home Equity Co. LLC, Home Equity Loan Asset-Backed Certificates:
Series 2005-C, Cl. AF1, 4.196%, 6/25/35                                    $  334,323   $  333,014
Series 2005-D, Cl. AF1, 5.04%, 10/25/35                                     1,218,938    1,213,325
Series 2005-D, Cl. AV2, 5.594%, 10/25/35 5                                  2,550,000    2,552,940
Series 2006-A, Cl. AV2, 5.424%, 5/16/36 5                                   2,270,000    2,271,398
- ---------------------------------------------------------------------------------------------------
Citibank Credit Card Issuance Trust, Credit Card Receivable Nts.,
Series 2003-C4, Cl. C4, 5%, 6/10/15                                           430,000      415,457
- ---------------------------------------------------------------------------------------------------
Consumer Credit Reference Index Securities Program, Credit Card
Asset-Backed Certificates, Series 2002-B, Cl. FX, 10.421%, 3/22/07 8        2,890,000    2,940,735
- ---------------------------------------------------------------------------------------------------
CWABS Asset-Backed Certificates Trust 2002-4, Asset-Backed
Certificates, Series 2002-4, Cl. A1, 5.694%, 2/25/33 5                         44,821       44,868
- ---------------------------------------------------------------------------------------------------
CWABS Asset-Backed Certificates Trust 2005-16, Asset-Backed
Certificates, Series 2005-16, Cl. 2AF2, 5.382%, 5/25/36 5                     920,000      917,902
- ---------------------------------------------------------------------------------------------------
CWABS Asset-Backed Certificates Trust 2005-17, Asset-Backed Certificates:
Series 2005-17, Cl. 1AF1, 5.524%, 5/25/36 5                                 1,468,245    1,470,046
Series 2005-17, Cl. 1AF2, 5.363%, 5/25/36 5                                   620,000      618,349
- ---------------------------------------------------------------------------------------------------
CWABS Asset-Backed Certificates Trust 2005-7, Asset-Backed Certificates,
Series 2005-7, Cl. AF1B, 4.317%, 11/25/35 5                                   350,276      348,965
- ---------------------------------------------------------------------------------------------------
First Franklin Mortgage Loan Trust 2005-FF10, Mtg.
Pass-Through Certificates,
Series 2005-FF10, Cl. A3, 5.534%, 11/25/35 5                                3,800,000    3,804,119
- ---------------------------------------------------------------------------------------------------
First Franklin Mortgage Loan Trust 2006-FF10, Mtg.
Pass-Through Certificates,
Series 2006-FF10, Cl. A3, 5.414%, 7/25/36 5                                 1,790,000    1,791,102
- ---------------------------------------------------------------------------------------------------
First Franklin Mortgage Loan Trust 2006-FF5, Mtg.
Pass-Through Certificates,
Series 2006-FF5, Cl.2A1, 5.374%, 5/15/36 5                                  1,236,307    1,237,160
- ---------------------------------------------------------------------------------------------------
First Franklin Mortgage Loan Trust 2006-FF9, Mtg.
Pass-Through Certificates,
Series 2006-FF9, Cl. 2A2, 5.495%, 7/7/36 5                                    920,000      920,566
- ---------------------------------------------------------------------------------------------------
Ford Credit Auto Owner Trust, Automobile Loan
Pass-Through Certificates:
Series 2005-A, Cl. A3, 3.48%, 11/17/08                                      1,799,955    1,785,417
Series 2005-B, Cl. A2, 3.78%, 9/15/07                                          25,968       25,964
- ---------------------------------------------------------------------------------------------------
Household Home Equity Loan Trust, Home Equity Loan
Pass-Through Certificates, Series 2005-3, Cl. A1, 5.585%, 1/20/35 5         1,415,345    1,417,533
- ---------------------------------------------------------------------------------------------------
Lehman XS Trust, Mtg. Pass-Through Certificates:
Series 2005-2, Cl. 2A1B, 5.18%, 8/25/35 5                                   1,938,626    1,931,861
Series 2005-4, Cl. 2A1B, 5.17%, 10/25/35                                    1,438,151    1,431,092
- ---------------------------------------------------------------------------------------------------
MBNA Credit Card Master Note Trust, Credit Card Receivables,
Series 2003-C7, Cl. C7, 6.68%, 3/15/16 5                                    4,080,000    4,338,874
- ---------------------------------------------------------------------------------------------------
Morgan Stanley ABS Capital I, Mtg. Pass-Through Certificates,
Series 2005-WMC6, Cl. A2B, 5.584%, 7/25/35 5                                1,100,000    1,102,646






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                           PRINCIPAL         VALUE
                                                                              AMOUNT    SEE NOTE 1
- ---------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Continued
- ---------------------------------------------------------------------------------------------------

Onyx Acceptance Owner Trust, Automobile Receivable Obligations,
Series 2005-B, Cl. A2, 4.03%, 4/15/08                                    $   392,250   $   391,953
- ---------------------------------------------------------------------------------------------------
Option One Mortgage Loan Trust, Asset-Backed Certificates,
Series 2006-2, Cl. 2A2, 5.424%, 7/1/36 5                                   3,010,000     3,011,853
- ---------------------------------------------------------------------------------------------------
Popular ABS Mortgage Pass-Through Trust, Home Equity
Pass-Through Certificates:
Series 2004-5, Cl. A F2, 3.735%, 11/10/34 5                                  561,648       558,330
Series 2005-2, Cl. A F2, 4.415%, 4/25/35 5                                 1,040,000     1,029,372
- ---------------------------------------------------------------------------------------------------
Popular ABS Mortgage Pass-Through Trust, Mtg. Pass-Through
Certificates, Series 2005-1, Cl. AF2, 3.914%, 5/25/35 5                      600,000       594,933
- ---------------------------------------------------------------------------------------------------
RAMP Series 2004-RS7 Trust, Mtg. Asset-Backed Pass-Through
Certificates, Series 2004-RS7, Cl. AI3, 4.45%, 7/25/28                     1,910,000     1,892,051
- ---------------------------------------------------------------------------------------------------
RAMP Series 2006-RS4 Trust, Mtg. Asset-Backed Pass-Through
Certificates, Series 2006-RS4, Cl. A1, 5.404%, 7/25/36 5                   1,173,508     1,174,233
- ---------------------------------------------------------------------------------------------------
Structured Asset Investment Loan Trust, Mtg. Pass-Through
Certificates, Series 2006-2, Cl. A1, 5.384%, 4/25/36 5                     1,356,042     1,356,967
- ---------------------------------------------------------------------------------------------------
Structured Asset Securities Corp., Home Equity Asset-Backed Securities,
Series 2005-4XS, Cl. 3A1, 5.18%, 3/26/35                                   2,442,289     2,433,190
- ---------------------------------------------------------------------------------------------------
Wells Fargo Home Equity Asset-Backed Securities 2006-2 Trust,
Home Equity Asset-Backed Certificates,
Series 2006-2, Cl. A2, 5.485%, 7/25/36 5                                   1,790,000     1,791,102
                                                                                       ------------
Total Asset-Backed Securities (Cost $58,739,253)                                        58,635,813

- ---------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--0.8%
- ---------------------------------------------------------------------------------------------------
Fannie Mae Unsec. Nts., 3.69%, 10/5/07 9                                   2,255,000     2,131,419
- ---------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. Unsec. Nts.:
4.125%, 7/12/10                                                            1,210,000     1,172,835
5.125%, 4/18/11                                                            1,310,000     1,316,008
6.625%, 9/15/09 3                                                          2,340,000     2,444,907
- ---------------------------------------------------------------------------------------------------
Federal National Mortgage Assn. Unsec. Nts.:
4.75%, 12/15/10                                                            3,405,000     3,371,239
6%, 5/15/11                                                                2,855,000     2,971,687
6.625%, 9/15/09                                                            3,555,000     3,717,350
- ---------------------------------------------------------------------------------------------------
Tennessee Valley Authority Bonds, Series A, 6.79%, 5/23/12                 4,898,000     5,321,525
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bonds:
4.50%, 2/15/36                                                             1,269,000     1,194,744
8.875%, 8/15/17                                                              285,000       382,524
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Nts.:
4.875%, 8/15/16                                                              301,000       304,504
5.125%, 5/15/16                                                              958,000       985,505
                                                                                       ------------
Total U.S. Government Obligations (Cost $25,744,220)                                    25,314,247





                                                                     PRINCIPAL         VALUE
                                                                        AMOUNT    SEE NOTE 1
- ---------------------------------------------------------------------------------------------
NON-CONVERTIBLE CORPORATE BONDS AND NOTES--11.0%
- ---------------------------------------------------------------------------------------------

Ahold Finance USA, Inc., 6.25% Sr. Unsec. Unsub. Nts., 5/1/09      $ 2,775,000   $ 2,788,875
- ---------------------------------------------------------------------------------------------
Albertson's, Inc., 8% Sr. Unsec. Debs., 5/1/31                       2,425,000     2,252,165
- ---------------------------------------------------------------------------------------------
Allied Waste North America, Inc.:
5.75% Sr. Sec. Nts., Series B, 2/15/11                               5,000,000     4,775,000
8.50% Sr. Sub. Nts., 12/1/08                                         2,500,000     2,612,500
- ---------------------------------------------------------------------------------------------
AT&T Wireless Services, Inc.:
7.50% Sr. Unsec. Nts., 5/1/07 10                                       770,000       779,838
8.125% Sr. Unsec. Nts., 5/1/12 10                                    2,115,000     2,370,701
- ---------------------------------------------------------------------------------------------
BAE Systems Holdings, Inc., 4.75% Nts., 8/15/10 8                    2,995,000     2,908,445
- ---------------------------------------------------------------------------------------------
Bank Plus Corp., 12% Sr. Nts., 7/18/07 11                            2,500,000     2,675,000
- ---------------------------------------------------------------------------------------------
Barclays Bank plc, 6.278% Perpetual Bonds 12                         4,410,000     4,125,643
- ---------------------------------------------------------------------------------------------
Beazer Homes USA, Inc.:
6.875% Sr. Unsec. Nts., 7/15/15                                      1,515,000     1,355,925
8.375% Sr. Nts., 4/15/12                                               800,000       796,000
- ---------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 7.50% Sr. Unsec. Nts., 9/1/09           3,310,000     3,464,494
- ---------------------------------------------------------------------------------------------
CenterPoint Energy, Inc., 7.25% Sr. Nts., Series B, 9/1/10           2,770,000     2,923,364
- ---------------------------------------------------------------------------------------------
Centex Corp., 4.875% Sr. Unsec. Nts., 8/15/08                        1,800,000     1,774,535
- ---------------------------------------------------------------------------------------------
Chancellor Media CCU, 8% Sr. Unsec. Nts., 11/1/08                    1,440,000     1,506,845
- ---------------------------------------------------------------------------------------------
Charter Communications Holdings I LLC, 11% Sr. Sec. Nts., 10/1/15   57,500,000    51,318,750
- ---------------------------------------------------------------------------------------------
Charter Communications Holdings LLC/Charter
Communications Holdings Capital Corp.:
9.92% Sr. Unsec. Disc. Nts., 4/1/11                                 27,500,000    20,487,500
10% Sr. Unsec. Sub. Nts., 5/15/11                                    2,000,000     1,430,000
13.50% Sr. Unsec. Disc. Nts., 1/15/11                                4,250,000     3,378,750
- ---------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875% Sr. Unsec. Nts., 1/15/16             5,601,000     5,460,975
- ---------------------------------------------------------------------------------------------
CIT Group, Inc., 5.40% Sr. Nts., 3/7/13                              2,960,000     2,929,349
- ---------------------------------------------------------------------------------------------
Citigroup, Inc., 6.125% Sub. Nts., 8/25/36                           1,220,000     1,236,797
- ---------------------------------------------------------------------------------------------
Clear Channel Communications, Inc., 6.25% Nts., 3/15/11              1,965,000     1,963,579
- ---------------------------------------------------------------------------------------------
Comcast Corp., 6.45% Unsec. Nts., 3/15/37                            3,540,000     3,482,868
- ---------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.568% Pass-Through Certificates,
Series D, 12/1/06                                                   10,250,000    10,240,199
- ---------------------------------------------------------------------------------------------
Cox Communications, Inc., 4.625% Unsec. Nts., 1/15/10                4,530,000     4,391,803
- ---------------------------------------------------------------------------------------------
CSC Holdings, Inc., 7.625% Sr. Unsec. Debs., 7/15/18                 3,000,000     3,041,250
- ---------------------------------------------------------------------------------------------
D.R. Horton, Inc.:
5.375% Sr. Unsec. Nts., 6/15/12                                      1,790,000     1,702,797
6.125% Nts., 1/15/14                                                 1,315,000     1,277,523
- ---------------------------------------------------------------------------------------------
DaimlerChrysler North America Holding Corp., 7.30% Nts., 1/15/12     2,760,000     2,939,579
- ---------------------------------------------------------------------------------------------
Delhaize America, Inc., 9% Unsub. Debs., 4/15/31                     1,820,000     2,138,444
- ---------------------------------------------------------------------------------------------
Dominion Resources, Inc., 8.125% Sr. Unsub. Nts., 6/15/10            2,570,000     2,793,361
- ---------------------------------------------------------------------------------------------
Eastman Kodak Co., 3.625% Nts., Series A, 5/15/08                      360,000       343,911
- ---------------------------------------------------------------------------------------------
EchoStar DBS Corp., 5.75% Sr. Unsec. Nts., 10/1/08                   1,810,000     1,796,425







STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                    PRINCIPAL        VALUE
                                                                       AMOUNT   SEE NOTE 1
- -------------------------------------------------------------------------------------------
NON-CONVERTIBLE CORPORATE BONDS AND NOTES Continued
- -------------------------------------------------------------------------------------------
El Paso Corp.:
6.50% Sr. Unsec. Nts., 6/1/08 8                                    $  578,000   $  580,168
7.625% Sr. Unsec. Nts., 9/1/08 11                                   2,170,000    2,224,250
- -------------------------------------------------------------------------------------------
Enterprise Products Operating LP, 4.625% Sr. Unsec. Nts.,
Series B, 10/15/09                                                  1,520,000    1,479,545
- -------------------------------------------------------------------------------------------
EOP Operating LP, 8.10% Unsec. Nts., 8/1/10                         2,720,000    2,952,103
- -------------------------------------------------------------------------------------------
Federated Department Stores, Inc., 6.625% Sr. Unsec. Nts., 9/1/08   1,945,000    1,988,385
- -------------------------------------------------------------------------------------------
FirstEnergy Corp., 7.375% Sr. Unsub. Nts., Series C, 11/15/31       2,660,000    3,017,294
- -------------------------------------------------------------------------------------------
Ford Motor Credit Co., 9.75% Sr. Unsec. Nts., 9/15/10 8             5,600,000    5,801,359
- -------------------------------------------------------------------------------------------
Gap, Inc. (The):
6.90% Nts., 9/15/07                                                 2,130,000    2,152,037
9.393% Unsub. Nts., 12/15/08 5                                        359,000      387,880
- -------------------------------------------------------------------------------------------
General Motors Acceptance Corp., 8% Bonds, 11/1/31                  2,355,000    2,386,637
- -------------------------------------------------------------------------------------------
Goldman Sachs Capital, Inc. (The), 6.345% Sub. Bonds, 2/15/34       4,505,000    4,461,657
- -------------------------------------------------------------------------------------------
HBOS plc, 6.413% Sub. Perpetual Bonds, Series A 8,12                4,300,000    4,104,079
- -------------------------------------------------------------------------------------------
HCA, Inc., 8.75% Sr. Nts., 9/1/10                                   2,985,000    3,014,850
- -------------------------------------------------------------------------------------------
Hilton Hotels Corp., 8.25% Sr. Unsec. Nts., 2/15/11                 2,135,000    2,305,100
- -------------------------------------------------------------------------------------------
HSBC Finance Capital Trust IX, 5.911% Nts., 11/30/35 5              2,900,000    2,880,376
- -------------------------------------------------------------------------------------------
Hyatt Equities LLC, 6.875% Nts., 6/15/07 8                          2,855,000    2,874,899
- -------------------------------------------------------------------------------------------
Hyundai Motor Manufacturing Alabama LLC, 5.30% Sr. Unsec.
Nts., 12/19/08 8                                                    1,645,000    1,628,543
- -------------------------------------------------------------------------------------------
IPALCO Enterprises, Inc., 8.375% Sr. Sec. Nts., 11/14/08 5          1,410,000    1,462,875
- -------------------------------------------------------------------------------------------
Isle of Capri Casinos, Inc., 9% Sr. Sub. Nts., 3/15/12              1,000,000    1,051,250
- -------------------------------------------------------------------------------------------
iStar Financial, Inc., 5.15% Sr. Unsec. Nts., 3/1/12                3,125,000    3,036,384
- -------------------------------------------------------------------------------------------
JPMorgan Chase & Co., 5.15% Sub. Nts., 10/1/15                      2,960,000    2,867,003
- -------------------------------------------------------------------------------------------
K. Hovnanian Enterprises, Inc.:
6.50% Sr. Nts., 1/15/14                                             2,525,000    2,291,438
8.875% Sr. Sub. Nts., 4/1/12                                        1,600,000    1,552,000
- -------------------------------------------------------------------------------------------
KB Home, 5.75% Sr. Unsec. Unsub. Nts., 2/1/14                       1,915,000    1,707,642
- -------------------------------------------------------------------------------------------
Kinder Morgan Energy Partners LP, 7.30% Sr. Unsec. Nts., 8/15/33    2,705,000    2,911,362
- -------------------------------------------------------------------------------------------
Kinder Morgan, Inc., 6.50% Sr. Unsec. Nts., 9/1/12                  2,435,000    2,390,756
- -------------------------------------------------------------------------------------------
Kroger  Co. (The), 5.50% Unsec. Unsub. Nts., 2/1/13                 2,970,000    2,909,780
- -------------------------------------------------------------------------------------------
Lennar  Corp., 7.625% Sr. Unsec. Nts., 3/1/09                       2,760,000    2,880,667
- -------------------------------------------------------------------------------------------
Liberty Media Corp.:
5.70% Sr. Unsec. Nts., 5/15/13                                      1,580,000    1,492,206
7.875% Sr. Nts., 7/15/09                                              845,000      887,477
- -------------------------------------------------------------------------------------------
Limited Brands, Inc., 6.125% Sr. Unsec. Nts., 12/1/12               2,965,000    2,980,643
- -------------------------------------------------------------------------------------------
Marsh & McLennan Cos., Inc.:
5.875% Sr. Unsec. Bonds, 8/1/33                                     1,930,000    1,746,970
7.125% Sr. Unsec. Nts., 6/15/09                                     1,660,000    1,723,274






                                                                                   PRINCIPAL              VALUE
                                                                                      AMOUNT         SEE NOTE 1
- -----------------------------------------------------------------------------------------------------------------
NON-CONVERTIBLE CORPORATE BONDS AND NOTES Continued
- -----------------------------------------------------------------------------------------------------------------

May Department Stores Co., 7.90% Unsec. Debs., 10/15/07                           $1,050,000         $1,070,672
- ----------------------------------------------------------------------------------------------------------------
MBIA, Inc., 5.70% Sr. Unsec. Unsub. Nts., 12/1/34                                  2,320,000          2,181,417
- ----------------------------------------------------------------------------------------------------------------
MeadWestvaco Corp., 6.85% Unsec. Unsub. Nts., 4/1/12                               2,815,000          2,923,338
- ----------------------------------------------------------------------------------------------------------------
MetLife, Inc., 5.70% Sr. Unsec. Nts., 6/15/35                                      2,545,000          2,427,449
- ----------------------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 6% Sr. Sec. Nts., 10/1/09                                        2,960,000          2,908,200
- ----------------------------------------------------------------------------------------------------------------
Mission Energy Holding Co., 13.50% Sr. Sec. Nts., 7/15/08                          2,630,000          2,955,463
- ----------------------------------------------------------------------------------------------------------------
Morgan Stanley, 4.75% Sub. Nts., 4/1/14                                            3,080,000          2,915,168
- ----------------------------------------------------------------------------------------------------------------
National City Bank, 6.20% Sub. Nts., 12/15/11                                        213,000            221,591
- ----------------------------------------------------------------------------------------------------------------
Nationwide Financial Services, Inc.:
5.90% Nts., 7/1/12                                                                 1,600,000          1,627,498
6.25% Sr. Unsec. Nts., 11/15/11                                                       40,000             41,393
- ----------------------------------------------------------------------------------------------------------------
NiSource Finance Corp., 7.875% Sr. Unsec. Nts., 11/15/10                           3,680,000          3,958,245
- ----------------------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 7.875% Unsec. Unsub. Nts., 2/1/09              4,125,000          4,320,938
- ----------------------------------------------------------------------------------------------------------------
Petroleum Export Ltd. Cayman SPV, 4.623% Sr. Nts., Cl. A1, 6/15/10 8               4,082,667          4,027,359
- ----------------------------------------------------------------------------------------------------------------
PF Export Receivables Master Trust, 3.748% Sr. Nts., Series B, 6/1/13 8              916,261            859,998
- ----------------------------------------------------------------------------------------------------------------
Popular North America, Inc., 4.70% Nts., 6/30/09                                   3,665,000          3,587,438
- ----------------------------------------------------------------------------------------------------------------
Prudential Holdings LLC, 8.695% Bonds, Series C, 12/18/23 8                        2,910,000          3,572,918
- ----------------------------------------------------------------------------------------------------------------
Prudential Insurance Co. of America, 8.30% Nts., 7/1/25                            2,970,000          3,693,834
- ----------------------------------------------------------------------------------------------------------------
PSEG Funding Trust I, 5.381% Nts., 11/16/07                                        1,735,000          1,731,029
- ----------------------------------------------------------------------------------------------------------------
Pulte Homes, Inc., 4.875% Nts., 7/15/09                                            2,975,000          2,912,888
- ----------------------------------------------------------------------------------------------------------------
Qwest Corp., 5.625% Unsec. Nts., 11/15/08 10                                         363,000            360,278
- ----------------------------------------------------------------------------------------------------------------
Reed Elsevier Capital, Inc., 4.625% Nts., 6/15/12                                  1,235,000          1,172,983
- ----------------------------------------------------------------------------------------------------------------
Reynolds American, Inc., 6.50% Sr. Sec. Nts., 6/1/07 8                             1,848,000          1,861,612
- ----------------------------------------------------------------------------------------------------------------
Rite Aid Corp., 6.875% Sr. Unsec. Debs., 8/15/13                                  13,500,000         11,407,500
- ----------------------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 7% Sr. Unsec. Unsub. Nts., 10/15/07                    800,000            811,457
- ----------------------------------------------------------------------------------------------------------------
Safeway, Inc., 6.50% Sr. Unsec. Nts., 3/1/11                                       2,850,000          2,932,314
- ----------------------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., 8% Sr. Unsec. Sub. Nts., 3/15/12                   1,000,000          1,017,500
- ----------------------------------------------------------------------------------------------------------------
Telefonos de Mexico SA de CV, 4.50% Nts., 11/19/08                                 1,575,000          1,546,396
- ----------------------------------------------------------------------------------------------------------------
Telus Corp., 8% Nts., 6/1/11                                                         350,000            385,270
- ----------------------------------------------------------------------------------------------------------------
Time Warner Entertainment Co. LP, 8.375% Sr. Nts., 7/15/33                         2,400,000          2,760,302
- ----------------------------------------------------------------------------------------------------------------
Tribune Co., 5.50% Nts., Series E, 10/6/08                                         1,615,000          1,601,738
- ----------------------------------------------------------------------------------------------------------------
TXU Energy Co., 6.125% Nts., 3/15/08                                               1,955,000          1,970,503
- ----------------------------------------------------------------------------------------------------------------
Tyson Foods, Inc., 7.25% Sr. Unsec. Nts., 10/1/06                                  3,405,000          3,406,941
- ----------------------------------------------------------------------------------------------------------------
United States Steel Corp., 10.75% Sr. Nts., 8/1/08                                   545,000            589,963
- ----------------------------------------------------------------------------------------------------------------
Univision Communications, Inc., 3.50% Sr. Unsec. Nts., 10/15/07                    2,795,000          2,712,986
- ----------------------------------------------------------------------------------------------------------------
Verizon Global Funding Corp., 7.25% Sr. Unsec. Unsub. Nts., 12/1/10                1,400,000          1,495,217
- ----------------------------------------------------------------------------------------------------------------
Vornado Realty LP, 5.625% Sr. Unsec. Unsub. Nts., 6/15/07                          2,990,000          2,985,679
- ----------------------------------------------------------------------------------------------------------------
Westar Energy, Inc., 7.125% Sr. Unsec. Nts., 8/1/09                                2,190,000          2,285,683






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

                                                                                        PRINCIPAL          VALUE
                                                                                           AMOUNT     SEE NOTE 1
- -----------------------------------------------------------------------------------------------------------------
NON-CONVERTIBLE CORPORATE BONDS AND NOTES Continued
- -----------------------------------------------------------------------------------------------------------------

Williams Cos., Inc., Credit Linked Certificate Trust (The), 6.75%  Nts., 4/15/09 8   $  2,885,000   $  2,899,425
- -----------------------------------------------------------------------------------------------------------------
Xerox Corp., 9.75% Sr. Unsec. Nts., 1/15/09                                             2,750,000      2,983,750
- -----------------------------------------------------------------------------------------------------------------
Yum! Brands, Inc., 7.70% Sr. Nts., 7/1/12                                               1,890,000      2,071,338
                                                                                                    -------------
Total Non-Convertible Corporate Bonds and Notes (Cost $344,988,751)                                  334,789,750

- -----------------------------------------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS AND NOTES-10.5%
- -----------------------------------------------------------------------------------------------------------------
Charter Communications, Inc.:
5.875% Cv. Sr. Nts., 11/16/09 8                                                         5,000,000      4,406,250
5.875% Cv. Sr. Nts., 11/16/09                                                          16,000,000     14,100,000
- -----------------------------------------------------------------------------------------------------------------
CSK Auto, Inc., 4.625% Cv. Sr. Unsec. Nts., 12/15/25 5,8                               11,000,000     11,893,750
- -----------------------------------------------------------------------------------------------------------------
Level 3 Communications, Inc., 6% Cv. Unsec. Sub. Nts., 3/15/10                          2,500,000      2,146,875
- -----------------------------------------------------------------------------------------------------------------
Liberty Media Corp.:
0.75% Cv. Sr. Unsec. Unsub. Debs., 3/30/23 13                                          56,000,000     59,010,000
3.25% Exchangeable Sr. Unsec. Debs., 3/15/31 (exchangeable for Viacom,
Inc. Cl. B common stock or cash based on the value thereof)                           122,500,000     95,396,875
4% Exchangeable Sr. Unsec. Debs., 11/15/29 (exchangeable for Sprint
Corp. PCS, Series 1 common stock or cash based on the value of that stock)              5,000,000      3,318,750
- -----------------------------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 2.75% Cv. Sr. Unsec. Debs., Series A, 6/15/23               33,750,000     33,159,375
- -----------------------------------------------------------------------------------------------------------------
Nortel Networks Corp., 4.25% Cv. Sr. Unsec. Nts., 9/1/08                               22,500,000     21,403,121
- -----------------------------------------------------------------------------------------------------------------
Pride International, Inc., 3.25% Cv. Sr. Nts., 5/1/33                                  20,500,000     23,908,125
- -----------------------------------------------------------------------------------------------------------------
Sirius Satellite Radio, Inc., 2.50% Cv. Sr. Nts., 2/15/09                              17,500,000     19,950,000
- -----------------------------------------------------------------------------------------------------------------
XM Satellite Radio Holdings, Inc.:
1.75% Cv. Sr. Nts., 12/1/09 8                                                          14,250,000     11,346,563
1.75% Cv. Sr. Nts., 12/1/09                                                            26,750,000     21,299,688
                                                                                                    -------------
Total Convertible Corporate Bonds and Notes (Cost $340,108,387)                                      321,339,372

- -----------------------------------------------------------------------------------------------------------------
STRUCTURED NOTES-7.6%
- -----------------------------------------------------------------------------------------------------------------
Bank of America NA, Boston Scientific Corp. Cv. Linked Nts.,
2.25%, 11/6/06                                                                         15,000,000     10,827,000
- -----------------------------------------------------------------------------------------------------------------
Citigroup Global Markets Holdings, Inc.:
Pulte Homes, Inc. Cv. Equity Linked Nts., 7.55%, 3/14/07                                  259,673      8,187,074
Tyco International Ltd. Cv. Equity Linked Nts., 2.87%, 12/15/06                         1,170,961     30,907,867
- -----------------------------------------------------------------------------------------------------------------
Credit Suisse First Boston, Inc. (New York), Cv. Equity Linked Nts.,
1.60%, 12/29/06 (redemption linked to Comcast Corp., Cl. A common stock)                1,724,340     56,101,402
- -----------------------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. (The):
Boston Scientific Corp. Cv. Equity Linked Nts., 4.70%, 5/3/07 1,11                        566,560      9,907,435
EchoStar Communications Corp. Cv. Linked Nts., 3.40%, 1/2/07                              595,400     17,965,600
GlobalSantaFe Corp. Cv. Linked Nts., 7%, 6/30/08                                          431,460     21,350,367
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc., Cv. Yield Enhanced Equity Linked Debt
Securities, Series H, 7%, 12/20/06 (linked to CarMax, Inc.)                               764,498     23,615,343







                                                                                      PRINCIPAL               VALUE
                                                                                         AMOUNT          SEE NOTE 1
- --------------------------------------------------------------------------------------------------------------------
STRUCTURED NOTES Continued
- --------------------------------------------------------------------------------------------------------------------

Morgan Stanley:
Cv. Nts., 3.42%, 3/16/07 (linked to Tyco International Ltd.) 11                   $   1,171,000     $    30,346,465
Cv. Performance Equity Linked Redemption Quarterly-pay Nts.,
2.50% (linked to Microsoft Corp.)                                                     1,000,000          23,975,000
                                                                                                    ----------------
Total Structured Notes (Cost $218,542,461)                                                              233,183,553

- --------------------------------------------------------------------------------------------------------------------
JOINT REPURCHASE AGREEMENTS--0.1%
- --------------------------------------------------------------------------------------------------------------------
Undivided interest of 0.30% in joint repurchase agreement (Principal Amount/
Value $1,235,729,000, with a maturity value of $1,235,908,181) with UBS Warburg
LLC, 5.22%, dated 8/31/06, to be repurchased at $3,670,532 on 9/1/06,
collateralized by Federal National Mortgage Assn., 6%-7%,
3/1/36-8/1/36, with a value of $1,262,388,232 (Cost $3,670,000)                       3,670,000           3,670,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AT VALUE (COST $2,674,331,971)                                         104.3%      3,184,047,078
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES IN EXCESS OF OTHER ASSETS                                                      (4.3)       (131,118,258)
                                                                                  ----------------------------------
NET ASSETS                                                                                100.0%    $ 3,052,928,820
                                                                                  ==================================


FOOTNOTES TO STATEMENT OF INVESTMENTS

1. Non-income producing security.

2. Represents ownership of at least 5% of the voting securities of the issuer,
and is or was an affiliate, as defined in the Investment Company Act of 1940, at
or during the period ended August 31, 2006. Transactions during the period in
which the issuer was an affiliate are as follows:


                                                        SHARES              GROSS             GROSS               SHARES
                                               AUGUST 31, 2005          ADDITIONS        REDUCTIONS       AUGUST 31,2006
- -------------------------------------------------------------------------------------------------------------------------
CSK Auto Corp.                                       6,488,750             94,627         1,080,877            5,502,500
Enbridge Energy Management LLC                         700,000            787,096*          739,394              747,702



                                                                            VALUE          DIVIDEND             REALIZED
                                                                       SEE NOTE 1            INCOME          GAIN (LOSS)
- -------------------------------------------------------------------------------------------------------------------------

CSK Auto Corp.                                                        $63,113,675               $--          $(7,956,683)
Enbridge Energy Management LLC                                         35,104,599                --              102,570
                                                                      ---------------------------------------------------
                                                                      $98,218,274               $--          $(7,854,113)
                                                                      ===================================================
* All or a portion of the transactions were a result of a stock dividend.






STATEMENT OF INVESTMENTS  Continued
- --------------------------------------------------------------------------------

3. A sufficient amount of liquid assets has been designated to cover outstanding
written call options, as follows:

                                      CONTRACTS      EXPIRATION        EXERCISE             PREMIUM            VALUE
                                SUBJECT TO CALL           DATES           PRICE            RECEIVED       SEE NOTE 6
- ---------------------------------------------------------------------------------------------------------------------

Altria Group, Inc.                        6,750        12/18/06         $ 90.00          $  415,112       $  540,000
Everest Re Group Ltd.                     3,500         9/18/06          100.00             162,745               --
Kinder Morgan, Inc.                       9,500        11/20/06          105.00             829,491          712,500
Kraft Foods, Inc., Cl. A                 15,000         10/6/06           30.25           1,602,338        5,541,450
Loews Corp./Carolina Group                2,000         9/18/06           65.00              63,246               --
Pfizer, Inc.                              1,000         9/18/06           27.50              24,999           48,000
Raytheon Co.                              7,000        11/20/06           50.00             625,314          420,000
Raytheon Co.                              2,500         9/18/06           47.50             251,217          125,000
U.S. Bancorp                             10,000         9/18/06           32.50             326,240          150,000
Washington Mutual, Inc.                  10,000        10/23/06           45.00           2,043,471          350,000
                                                                                         ----------------------------
                                                                                         $6,344,173       $7,886,950
                                                                                         ============================

4. When-issued security or forward commitment to be delivered and settled after
August 31, 2006. See Note 1 of accompanying Notes.

5. Represents the current interest rate for a variable or increasing rate
security.

6. Interest-Only Strips represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. These securities typically
decline in price as interest rates decline. Most other fixed income securities
increase in price when interest rates decline. The principal amount of the
underlying pool represents the notional amount on which current interest is
calculated. The price of these securities is typically more sensitive to changes
in prepayment rates than traditional mortgage-backed securities (for example,
GNMA pass-throughs). Interest rates disclosed represent current yields based
upon the current cost basis and estimated timing and amount of future cash
flows. These securities amount to $17,897,059 or 0.59% of the Fund's net assets
as of August 31, 2006.

7. Principal-Only Strips represent the right to receive the monthly principal
payments on an underlying pool of mortgage loans. The value of these securities
generally increases as interest rates decline and prepayment rates rise. The
price of these securities is typically more volatile than that of coupon-bearing
bonds of the same maturity. Interest rates disclosed represent current yields
based upon the current cost basis and estimated timing of future cash flows.
These securities amount to $2,332,233 or 0.08% of the Fund's net assets as of
August 31, 2006.

8. Represents securities sold under Rule 144A, which are exempt from
registration under the Securities Act of 1933, as amended. These securities have
been determined to be liquid under guidelines established by the Board of
Trustees. These securities amount to $61,706,103 or 2.02% of the Fund's net
assets as of August 31, 2006.

9. Zero coupon bond reflects effective yield on the date of purchase.

10. All or a portion of the security is held in collateralized accounts to cover
initial margin requirements on open futures sales contracts. The aggregate
market value of such securities is $961,871. See Note 5 of accompanying Notes.

11. Illiquid security. The aggregate value of illiquid securities as of August
31, 2006 was $45,153,150, which represents 1.48% of the Fund's net assets. See
Note 9 of accompanying Notes.

12. This bond has no contractual maturity date, is not redeemable and
contractually pays an indefinite stream of interest. Rate reported represents
the current interest rate for this variable rate security.






13. A sufficient amount of securities has been designated to cover outstanding
written put options, as follows:

                                                   CONTRACTS      EXPIRATION        EXERCISE       PREMIUM         VALUE
                                              SUBJECT TO PUT           DATES           PRICE      RECEIVED    SEE NOTE 6
- --------------------------------------------------------------------------------------------------------------------------

BellSouth Corp.                                        2,712        10/23/06          $35.00   $   541,762   $    13,560
Boston Scientific Corp.                                  480        11/20/06           20.00       142,556       127,200
Boston Scientific Corp.                                   11         1/22/07           30.00         6,127        13,640
Capital One Financial Corp.                            1,000        10/23/06           70.00       261,992       135,000
Capital One Financial Corp.                            3,500        10/23/06           75.00     1,648,204     1,260,000
ENSCO International, Inc.                                271         9/18/06           50.00       180,552       143,630
ENSCO International, Inc.                                481        12/18/06           50.00       384,975       312,650
GlobalSantaFe Corp.                                       48         9/18/06           57.50        29,615        38,880
GlobalSantaFe Corp.                                    1,000        10/23/06           57.50       726,978       850,000
GlobalSantaFe Corp.                                    4,350         1/22/07           57.50     4,228,802     4,002,000
Phelps Dodge Corp.                                     3,000        10/23/06           75.00     1,886,492       270,000
Phelps Dodge Corp.                                     2,000        10/23/06           90.00     2,913,910     1,040,000
PMI Group, Inc. (The)                                  1,282        12/18/06           45.00       405,522       339,730
Take-Two Interactive Software, Inc.                    3,000         9/18/06           15.00       410,987       900,000
Take-Two Interactive Software, Inc.                    5,500        12/18/06           15.00     1,726,571     1,815,000
Transocean, Inc.                                       3,000        11/20/06           80.00     4,200,251     4,080,000
Tyco International Ltd.                                7,033        10/23/06           27.50     1,491,875     1,090,115
                                                                                               --------------------------
                                                                                               $21,187,171   $16,431,405
                                                                                               ==========================

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.






STATEMENT OF ASSETS AND LIABILITIES  August 31, 2006
- --------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------

Investments, at value--see accompanying statement of investments:
Unaffiliated companies (cost $2,613,078,717)                                     $ 3,085,828,804
Affiliated companies (cost $61,253,254)                                               98,218,274
                                                                                 ----------------
                                                                                   3,184,047,078
- -------------------------------------------------------------------------------------------------
Cash                                                                                     480,838
- -------------------------------------------------------------------------------------------------
Unrealized appreciation on swap contracts                                                112,535
- -------------------------------------------------------------------------------------------------
Receivables and other assets:
Investments sold (including $18,326,400 sold on a when-issued basis
or forward commitment)                                                                21,592,539
Interest, dividends and principal paydowns                                            20,435,079
Shares of beneficial interest sold                                                     1,283,013
Other                                                                                     86,576
                                                                                 ----------------
Total assets                                                                       3,228,037,658

- -------------------------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------------------------
Options written, at value (premiums received $27,531,344)
- --see accompanying statement of investments                                           24,318,355
- -------------------------------------------------------------------------------------------------
Unrealized depreciation on swap contracts                                                 74,262
- -------------------------------------------------------------------------------------------------
Payables and other liabilities:
Investments purchased (including $135,924,653 purchased on
a when-issued basis or forward commitment)                                           146,041,730
Shares of beneficial interest redeemed                                                 2,620,526
Distribution and service plan fees                                                     1,222,149
Transfer and shareholder servicing agent fees                                            331,473
Shareholder communications                                                               222,222
Trustees' compensation                                                                    43,019
Futures margins                                                                           38,790
Other                                                                                    196,312
                                                                                 ----------------
Total liabilities                                                                    175,108,838

- -------------------------------------------------------------------------------------------------
NET ASSETS                                                                       $ 3,052,928,820
                                                                                 ================

- -------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS
- -------------------------------------------------------------------------------------------------
Par value of shares of beneficial interest                                       $       249,001
- -------------------------------------------------------------------------------------------------
Additional paid-in capital                                                         2,548,267,834
- -------------------------------------------------------------------------------------------------
Accumulated net investment income                                                      5,059,260
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign currency transactions       (13,212,123)
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments and translation of assets
and liabilities denominated in foreign currencies                                    512,564,848
                                                                                 ----------------
NET ASSETS                                                                       $ 3,052,928,820
                                                                                 ================





- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
- -------------------------------------------------------------------------------------------------------------
Class A Shares:
Net asset value and redemption price per share (based on net assets of $2,594,507,457 and
211,207,431 shares of beneficial interest outstanding)                                                $12.28
Maximum offering price per share (net asset value plus sales charge of 5.75% of offering price)       $13.03
- -------------------------------------------------------------------------------------------------------------
Class B Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales charge)
and offering price per share (based on net assets of $258,811,805 and 21,319,655 shares
of beneficial interest outstanding)                                                                   $12.14
- -------------------------------------------------------------------------------------------------------------
Class C Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales charge)
and offering price per share (based on net assets of $163,958,585 and 13,550,923 shares
of beneficial interest outstanding)                                                                   $12.10
- -------------------------------------------------------------------------------------------------------------
Class N Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales charge)
and offering price per share (based on net assets of $35,650,973 and 2,923,104 shares of
beneficial interest outstanding)                                                                      $12.20

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.







STATEMENT OF OPERATIONS  For the Year Ended August 31, 2006
- --------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------------
Interest                                                         $  68,620,165
- -------------------------------------------------------------------------------
Dividends (net of foreign withholding taxes of $10,263)             57,984,350
- -------------------------------------------------------------------------------
Fee income                                                              91,851
- -------------------------------------------------------------------------------
Other income                                                            61,987
                                                                 --------------
Total investment income                                            126,758,353

- -------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------
Management fees                                                     16,153,003
- -------------------------------------------------------------------------------
Distribution and service plan fees:
Class A                                                              6,153,469
Class B                                                              2,736,971
Class C                                                              1,653,565
Class N                                                                162,774
- -------------------------------------------------------------------------------
Transfer and shareholder servicing agent fees:
Class A                                                              3,015,591
Class B                                                                466,302
Class C                                                                255,257
Class N                                                                 76,380
- -------------------------------------------------------------------------------
Shareholder communications:
Class A                                                                416,131
Class B                                                                 96,579
Class C                                                                 33,643
Class N                                                                  9,910
- -------------------------------------------------------------------------------
Custodian fees and expenses                                            178,388
- -------------------------------------------------------------------------------
Trustees' compensation                                                  45,585
- -------------------------------------------------------------------------------
Administration service fees                                              1,500
- -------------------------------------------------------------------------------
Other                                                                  223,011
                                                                 --------------
Total expenses                                                      31,678,059
Less reduction to custodian expenses                                    (1,156)
                                                                 --------------
Net expenses                                                        31,676,903

- -------------------------------------------------------------------------------
NET INVESTMENT INCOME                                               95,081,450








- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- -----------------------------------------------------------------------------------

Net realized gain (loss) on:
Investments:
  Unaffiliated companies (including premiums on options exercised)   $  13,837,709
  Affiliated companies                                                  (7,854,113)
Closing and expiration of option contracts written                      19,692,603
Closing and expiration of futures contracts                              1,759,143
Foreign currency transactions                                               19,608
Swap contracts                                                              57,121
                                                                     --------------
Net realized gain                                                       27,512,071
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments                                                              7,981,990
Futures contracts                                                          251,097
Option contracts                                                         4,574,751
Swap contracts                                                            (143,164)
                                                                     --------------
Net change in unrealized appreciation                                   12,664,674

- -----------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS                 $ 135,258,195
                                                                     ==============


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.






STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------


YEAR ENDED AUGUST 31,                                                            2006               2005
- ----------------------------------------------------------------------------------------------------------
OPERATIONS
- ----------------------------------------------------------------------------------------------------------
Net investment income                                                  $    95,081,450    $    90,086,029
- ----------------------------------------------------------------------------------------------------------
Net realized gain                                                           27,512,071        151,145,430
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation                                       12,664,674        159,251,121
                                                                       -----------------------------------
Net increase in net assets resulting from operations                       135,258,195        400,482,580

- ----------------------------------------------------------------------------------------------------------
DIVIDENDS AND/OR DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------
Dividends from net investment income:
Class A                                                                    (77,812,436)       (98,334,605)
Class B                                                                     (6,031,033)        (9,374,778)
Class C                                                                     (3,701,400)        (4,622,703)
Class N                                                                       (836,479)          (783,486)
- ----------------------------------------------------------------------------------------------------------
Distributions from net realized gain:
Class A                                                                   (112,727,835)       (79,229,551)
Class B                                                                    (12,275,789)        (9,824,424)
Class C                                                                     (7,342,478)        (4,580,356)
Class N                                                                     (1,340,023)          (642,942)

- ----------------------------------------------------------------------------------------------------------
BENEFICIAL INTEREST TRANSACTIONS
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
beneficial interest transactions:
Class A                                                                     (3,331,341)       127,979,966
Class B                                                                    (31,772,777)       (37,260,401)
Class C                                                                      1,811,081         24,380,138
Class N                                                                      6,928,899         11,328,890

- ----------------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Total increase (decrease)                                                 (113,173,416)       319,518,328
- ----------------------------------------------------------------------------------------------------------
Beginning of period                                                      3,166,102,236      2,846,583,908
                                                                       -----------------------------------
End of period (including accumulated net investment income (loss) of
$5,059,260 and $(5,155,034), respectively)
                                                                       $ 3,052,928,820    $ 3,166,102,236
                                                                       ===================================


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.






FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

CLASS A       YEAR ENDED AUGUST 31,                     2006           2005           2004             2003           2002
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING DATA
- ----------------------------------------------------------------------------------------------------------------------------

Net asset value, beginning of period              $    12.63     $    11.84     $    11.22       $     9.76     $    12.72
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income                                    .39 1          .38 1          .46              .54            .51
Net realized and unrealized gain (loss)                  .16           1.28            .69             1.35          (2.66)
                                                  --------------------------------------------------------------------------
Total from investment operations                         .55           1.66           1.15             1.89          (2.15)
- ----------------------------------------------------------------------------------------------------------------------------
Dividends and/or distributions to shareholders:
Dividends from net investment income                    (.37)          (.48)          (.53)            (.43)          (.48)
Distributions from net realized gain                    (.53)          (.39)            --               --           (.33)
                                                  --------------------------------------------------------------------------
Total dividends and/or distributions
to shareholders                                         (.90)          (.87)          (.53)            (.43)          (.81)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period                    $    12.28     $    12.63     $    11.84       $    11.22     $     9.76
                                                  ===========================================================================

- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN, AT NET ASSET VALUE 2                      4.68%         14.40%         10.32%           20.10%        (17.75)%
- -----------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------

Net assets, end of period (in thousands)          $2,594,507     $2,670,552     $2,379,956       $2,130,486     $1,873,458
- -----------------------------------------------------------------------------------------------------------------------------
Average net assets (in thousands)                 $2,608,268     $2,565,609     $2,356,948       $1,900,896     $2,224,911
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets: 3
Net investment income                                   3.21%          3.09%          3.85%            5.41%          4.48%
Total expenses                                          0.91%          0.89% 4        0.89% 4,5        0.93% 4        0.98% 4
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate                                   66% 6          55% 6          52%             141%           148%



1. Per share amounts calculated based on the average shares outstanding during
the period.

2. Assumes an investment on the business day before the first day of the fiscal
period, with all dividends and distributions reinvested in additional shares on
the reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in the
total returns. Total returns are not annualized for periods of less than one
full year. Returns do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.

3. Annualized for periods of less than one full year.

4. Reduction to custodian expenses less than 0.01%.

5. Voluntary waiver of transfer agent fees less than 0.01%.

6. The portfolio turnover rate excludes purchase and sales of To Be Announced
(TBA) mortgage-related securities as follows:

                                     PURCHASE TRANSACTIONS     SALE TRANSACTIONS
- --------------------------------------------------------------------------------
Year Ended August 31, 2006                  $2,212,763,141        $2,305,352,091
Year Ended August 31, 2005                  $3,541,353,653        $3,677,756,448

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.








FINANCIAL HIGHLIGHTS  Continued
- --------------------------------------------------------------------------------

CLASS B      YEAR ENDED AUGUST 31,                      2006           2005           2004              2003           2002
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------

Net asset value, beginning of period              $    12.49     $    11.72     $    11.10        $     9.67     $    12.60
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income                                    .28 1          .28 1          .36               .45            .41
Net realized and unrealized gain (loss)                  .16           1.26            .68              1.33          (2.62)
                                                  ----------------------------------------------------------------------------
Total from investment operations                         .44           1.54           1.04              1.78          (2.21)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends and/or distributions to shareholders:
Dividends from net investment income                    (.26)          (.38)          (.42)             (.35)          (.39)
Distributions from net realized gain                    (.53)          (.39)            --                --           (.33)
                                                  ----------------------------------------------------------------------------
Total dividends and/or distributions
to shareholders                                         (.79)          (.77)          (.42)             (.35)          (.72)
- ------------------------------------------------------------------------------------------------------------------------------

Net asset value, end of period                    $    12.14     $    12.49     $    11.72        $    11.10     $     9.67
                                                  ============================================================================

- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN, AT NET ASSET VALUE 2                      3.84%         13.40%          9.46%            18.94%        (18.31)%
- ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands)          $  258,812     $  299,093     $  316,568        $  343,074     $  327,368
- ------------------------------------------------------------------------------------------------------------------------------
Average net assets (in thousands)                 $  273,916     $  304,769     $  349,853        $  312,457     $  410,652
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets: 3
Net investment income                                   2.37%          2.25%          3.00%             4.55%          3.67%
Total expenses                                          1.74%          1.73% 4        1.76% 4,5         1.81% 4        1.76% 4
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate                                   66% 6          55% 6          52%              141%           148%


1. Per share amounts calculated based on the average shares outstanding during
the period.

2. Assumes an investment on the business day before the first day of the fiscal
period, with all dividends and distributions reinvested in additional shares on
the reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in the
total returns. Total returns are not annualized for periods of less than one
full year. Returns do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.

3. Annualized for periods of less than one full year.

4. Reduction to custodian expenses less than 0.01%.

5. Voluntary waiver of transfer agent fees less than 0.01%.

6. The portfolio turnover rate excludes purchase and sales of To Be Announced
(TBA) mortgage-related securities as follows:

                                PURCHASE TRANSACTIONS     SALE TRANSACTIONS
- ---------------------------------------------------------------------------
Year Ended August 31, 2006             $2,212,763,141        $2,305,352,091
Year Ended August 31, 2005             $3,541,353,653        $3,677,756,448

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.






CLASS C      YEAR ENDED AUGUST 31,                      2006           2005           2004              2003           2002
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------

Net asset value, beginning of period              $    12.46     $    11.69     $    11.09        $     9.66     $    12.59
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income                                    .29 1          .28 1          .35               .45            .42
Net realized and unrealized gain (loss)                  .15           1.26            .69              1.34          (2.62)
                                                  ----------------------------------------------------------------------------
Total from investment operations                         .44           1.54           1.04              1.79          (2.20)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends and/or distributions to shareholders:
Dividends from net investment income                    (.27)          (.38)          (.44)             (.36)          (.40)
Distributions from net realized gain                    (.53)          (.39)            --                --           (.33)
                                                  ----------------------------------------------------------------------------
Total dividends and/or distributions
to shareholders                                         (.80)          (.77)          (.44)             (.36)          (.73)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period                    $    12.10     $    12.46     $    11.69        $    11.09     $     9.66
                                                  ============================================================================

- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN, AT NET ASSET VALUE 2                      3.83%         13.52%          9.40%            19.05%        (18.30)%
- ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands)          $  163,959     $  167,013     $  133,368        $   93,797     $   72,792
- ------------------------------------------------------------------------------------------------------------------------------
Average net assets (in thousands)                 $  165,514     $  150,410     $  122,458        $   75,459     $   84,049
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets: 3
Net investment income                                   2.40%          2.27%          3.01%             4.55%          3.74%
Total expenses                                          1.71%          1.71% 4        1.72% 4,5         1.78% 4        1.76% 4
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate                                   66% 6          55% 6          52%              141%           148%


1. Per share amounts calculated based on the average shares outstanding during
the period.

2. Assumes an investment on the business day before the first day of the fiscal
period, with all dividends and distributions reinvested in additional shares on
the reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in the
total returns. Total returns are not annualized for periods of less than one
full year. Returns do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.

3. Annualized for periods of less than one full year.

4. Reduction to custodian expenses less than 0.01%.

5. Voluntary waiver of transfer agent fees less than 0.01%.

6. The portfolio turnover rate excludes purchase and sales of To Be Announced
(TBA) mortgage-related securities as follows:

                                   PURCHASE TRANSACTIONS    SALE TRANSACTIONS
- -----------------------------------------------------------------------------
Year Ended August 31, 2006                $2,212,763,141       $2,305,352,091
Year Ended August 31, 2005                $3,541,353,653       $3,677,756,448

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.






FINANCIAL HIGHLIGHTS  Continued
- --------------------------------------------------------------------------------

CLASS N          YEAR ENDED AUGUST 31,                  2006           2005           2004              2003           2002
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING DATA
- ------------------------------------------------------------------------------------------------------------------------------

Net asset value, beginning of period              $    12.55     $    11.78     $    11.16        $     9.73     $    12.69
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income                                    .34 1          .34 1          .39               .46            .50
Net realized and unrealized gain (loss)                  .16           1.26            .72              1.37          (2.66)
                                                  ----------------------------------------------------------------------------
Total from investment operations                         .50           1.60           1.11              1.83          (2.16)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends and/or distributions to shareholders:
Dividends from net investment income                    (.32)          (.44)          (.49)             (.40)          (.47)
Distributions from net realized gain                    (.53)          (.39)            --                --           (.33)
                                                  ----------------------------------------------------------------------------
Total dividends and/or distributions
to shareholders                                         (.85)          (.83)          (.49)             (.40)          (.80)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period                    $    12.20     $    12.55     $    11.78        $    11.16     $     9.73
                                                  ============================================================================

- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN, AT NET ASSET VALUE 2                      4.32%         13.95%         10.01%            19.45%        (17.89)%
- ------------------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands)          $   35,651     $   29,444     $   16,692        $    9,023     $    4,071
- ------------------------------------------------------------------------------------------------------------------------------
Average net assets (in thousands)                 $   32,598     $   22,974     $   13,301        $    5,968     $    2,839
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets: 3
Net investment income                                   2.82%          2.73%          3.42%             4.92%          4.74%
Total expenses                                          1.30%          1.24% 4        1.28% 4,5         1.35% 4        1.25% 4
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate                                   66% 6          55% 6          52%              141%           148%


1. Per share amounts calculated based on the average shares outstanding during
the period.

2. Assumes an investment on the business day before the first day of the fiscal
period, with all dividends and distributions reinvested in additional shares on
the reinvestment date, and redemption at the net asset value calculated on the
last business day of the fiscal period. Sales charges are not reflected in the
total returns. Total returns are not annualized for periods of less than one
full year. Returns do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.

3. Annualized for periods of less than one full year.

4. Reduction to custodian expenses less than 0.01%.

5. Voluntary waiver of transfer agent fees less than 0.01%.

6. The portfolio turnover rate excludes purchase and sales of To Be Announced
(TBA) mortgage-related securities as follows:

                                PURCHASE TRANSACTIONS   SALE TRANSACTIONS
- -------------------------------------------------------------------------
Year Ended August 31, 2006             $2,212,763,141      $2,305,352,091
Year Ended August 31, 2005             $3,541,353,653      $3,677,756,448

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.





NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

Oppenheimer Capital Income Fund (the Fund) is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The Fund's investment objective is to seek as much current income as is
compatible with prudent investment. The Fund has a secondary objective to
conserve principal while providing an opportunity for capital appreciation. The
Fund's investment advisor is OppenheimerFunds, Inc. (the Manager).

      The Fund offers Class A, Class B, Class C and Class N shares. Class A
shares are sold at their offering price, which is normally net asset value plus
a front-end sales charge. Class B, Class C and Class N shares are sold without a
front-end sales charge but may be subject to a contingent deferred sales charge
(CDSC). Class N shares are sold only through retirement plans. Retirement plans
that offer Class N shares may impose charges on those accounts. All classes of
shares have identical rights and voting privileges with respect to the Fund in
general and exclusive voting rights on matters that affect that class alone.
Earnings, net assets and net asset value per share may differ due to each class
having its own expenses, such as transfer and shareholder servicing agent fees
and shareholder communications, directly attributable to that class. Class A, B,
C and N have separate distribution and/or service plans. Class B shares will
automatically convert to Class A shares six years after the date of purchase.

      The following is a summary of significant accounting policies consistently
followed by the Fund.

- --------------------------------------------------------------------------------
SECURITIES VALUATION. The Fund calculates the net asset value of its shares as
of the close of the New York Stock Exchange (the "Exchange"), normally 4:00 P.M.
Eastern time, on each day the Exchange is open for business. Securities may be
valued primarily using dealer-supplied valuations or a portfolio pricing service
authorized by the Board of Trustees. Securities listed or traded on National
Stock Exchanges or other domestic exchanges are valued based on the last sale
price of the security traded on that exchange prior to the time when the Fund's
assets are valued. Securities traded on NASDAQ(R) are valued based on the
closing price provided by NASDAQ prior to the time when the Fund's assets are
valued. In the absence of a sale, the security is valued at the last sale price
on the prior trading day, if it is within the spread of the closing "bid" and
"asked" prices, and if not, at the closing bid price. Securities traded on
foreign exchanges are valued based on the last sale price on the principal
exchange on which the security is traded, as identified by the portfolio pricing
service, prior to the time when the Fund's assets are valued. In the absence of
a sale, the security is valued at the official closing price on the principal
exchange. Corporate, government and municipal debt instruments having a
remaining maturity in excess of sixty days and all mortgage-backed securities
will be valued at the mean between the "bid" and "asked" prices. Futures
contracts traded on a commodities or futures exchange will be valued at the
final settlement price or official closing price on the principal exchange as
reported by such principal exchange at its trading session ending at, or most
recently prior to, the time when the Fund's assets are valued. Securities
(including restricted securities) for which market quotations are not readily
available






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES Continued

are valued at their fair value. Foreign and domestic securities whose values
have been materially affected by what the Manager identifies as a significant
event occurring before the Fund's assets are valued but after the close of their
respective exchanges will be fair valued. Fair value is determined in good faith
using consistently applied procedures under the supervision of the Board of
Trustees. Short-term "money market type" debt securities with remaining
maturities of sixty days or less are valued at amortized cost (which
approximates market value).

- --------------------------------------------------------------------------------
STRUCTURED NOTES. The Fund invests in structured notes whose market values,
interest rates and/or redemption prices are linked to the performance of
underlying foreign currencies, interest rate spreads, stock market indices,
prices of individual securities, commodities or other financial instruments or
the occurrence of other specific events. The structured notes are often
leveraged, increasing the volatility of each note's market value relative to the
change in the underlying linked financial element or event. Fluctuations in
value of these securities are recorded as unrealized gains and losses in the
accompanying Statement of Operations. The Fund records a realized gain or loss
when a structured note is sold or matures. As of August 31, 2006, the market
value of these securities comprised 7.6% of the Fund's net assets and resulted
in unrealized cumulative gains of $14,641,092.

- --------------------------------------------------------------------------------
SECURITIES ON A WHEN-ISSUED BASIS OR FORWARD COMMITMENT. Delivery and payment
for securities that have been purchased by the Fund on a when-issued basis or
forward commitment can take place up to ten days or more after the trade date.
Normally the settlement date occurs within six months after the trade date;
however, the Fund may, from time to time, purchase securities whose settlement
date extends six months or more beyond trade date. During this period, such
securities do not earn interest, are subject to market fluctuation and may
increase or decrease in value prior to their delivery. The Fund maintains
internally designated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a when-issued
basis or forward commitment may increase the volatility of the Fund's net asset
value to the extent the Fund executes such transactions while remaining
substantially fully invested. The Fund may also sell securities that it
purchased on a when-issued basis or forward commitment prior to settlement of
the original purchase. As of August 31, 2006, the Fund had purchased
$135,924,653 of securities issued on a when-issued basis or forward commitment
and sold $18,326,400 of securities issued on a when-issued basis or forward
commitment.

     In  connection  with  its  ability  to  purchase  or sell  securities  on a
when-issued  basis,  the Fund may enter  into  forward  roll  transactions  with
respect to mortgage-related  securities.  Forward roll transactions  require the
sale of  securities  for  delivery  in the  current  month,  and a  simultaneous
agreement with the same  counterparty to repurchase  similar (same type,  coupon
and maturity) but not identical  securities on a specified future date. The Fund
records the incremental difference between the forward purchase and sale of each
forward roll as realized gain (loss) on investments or as fee income in the case
of such  transactions that have an associated fee in lieu of a difference in the
forward purchase and sale price.

      Risks of entering into forward roll transactions include the potential
inability of the counterparty to meet the terms of the agreement; the potential
of the Fund to receive inferior securities at redelivery as compared to the
securities sold to the counterparty; counterparty credit risk; and the potential
pay down speed variance between the mortgage-related pools.

- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION. The Fund's accounting records are maintained in
U.S. dollars. The values of securities denominated in foreign currencies and
amounts related to the purchase and sale of foreign securities and foreign
investment income are translated into U.S. dollars as of the close of the New
York Stock Exchange (the "Exchange"), normally 4:00 P.M. Eastern time, on each
day the Exchange is open for business. Foreign exchange rates may be valued
primarily using dealer supplied valuations or a portfolio pricing service
authorized by the Board of Trustees.

      Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in the
values of assets and liabilities, including investments in securities at fiscal
period end, resulting from changes in exchange rates.

      The effect of changes in foreign currency exchange rates on investments is
separately identified from the fluctuations arising from changes in market
values of securities held and reported with all other foreign currency gains and
losses in the Fund's Statement of Operations.

- --------------------------------------------------------------------------------
JOINT REPURCHASE AGREEMENTS. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated funds
advised by the Manager, may transfer uninvested cash balances into joint trading
accounts on a daily basis. These balances are invested in one or more repurchase
agreements. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal. In the event of default by the other party to the agreement,
retention of the collateral may be subject to legal proceedings.

- --------------------------------------------------------------------------------
ALLOCATION OF INCOME, EXPENSES, GAINS AND LOSSES. Income, expenses (other than
those attributable to a specific class), gains and losses are allocated on a
daily basis to each class of shares based upon the relative proportion of net
assets represented by such class. Operating expenses directly attributable to a
specific class are charged against the operations of that class.






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES Continued

FEDERAL TAXES. The Fund intends to comply with provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its investment company taxable income, including any net
realized gain on investments not offset by capital loss carryforwards, if any,
to shareholders, therefore, no federal income or excise tax provision is
required.

The tax components of capital shown in the table below represent distribution
requirements the Fund must satisfy under the income tax regulations, losses the
Fund may be able to offset against income and gains realized in future years and
unrealized appreciation or depreciation of securities and other investments for
federal income tax purposes.

                                                                  NET UNREALIZED
                                                                    APPRECIATION
                                                                BASED ON COST OF
                                                                  SECURITIES AND
UNDISTRIBUTED     UNDISTRIBUTED               ACCUMULATED      OTHER INVESTMENTS
NET INVESTMENT        LONG-TERM                      LOSS     FOR FEDERAL INCOME
INCOME                     GAIN      CARRYFORWARD 1,2,3,4           TAX PURPOSES
- --------------------------------------------------------------------------------
$22,026,713                 $--                $6,086,311           $488,518,969

1. As of August 31, 2006, the Fund had $37,847 of post-October losses available
to offset future realized capital gains, if any. Such losses, if unutilized,
will expire in 2015.

2. The Fund had $6,048,464 of straddle losses which were deferred.

3. During the fiscal year ended August 31, 2006, the Fund did not utilize any
capital loss carryforward.

4. During the fiscal year ended August 31, 2005, the Fund did not utilize any
capital loss carryforward.

Net investment income (loss) and net realized gain (loss) may differ for
financial statement and tax purposes. The character of dividends and
distributions made during the fiscal year from net investment income or net
realized gains may differ from their ultimate characterization for federal
income tax purposes. Also, due to timing of dividends and distributions, the
fiscal year in which amounts are distributed may differ from the fiscal year in
which the income or net realized gain was recorded by the Fund. Accordingly, the
following amounts have been reclassified for August 31, 2006. Net assets of the
Fund were unaffected by the reclassifications.

                                  INCREASE TO                 INCREASE TO
                                  ACCUMULATED             ACCUMULATED NET
       INCREASE TO             NET INVESTMENT               REALIZED LOSS
       PAID-IN CAPITAL                 INCOME            ON INVESTMENTS 5
       ------------------------------------------------------------------
       $648,789                    $3,514,192                  $4,162,981

5. $1,119,832 was distributed in connection with Fund share redemptions.






The tax character of distributions paid during the years ended August 31, 2006
and August 31, 2005 was as follows:

                                        YEAR ENDED                  YEAR ENDED
                                   AUGUST 31, 2006             AUGUST 31, 2005
- -------------------------------------------------------------------------------
Distributions paid from:
Ordinary income                       $162,410,486                $113,115,572
Long-term capital gain                  59,656,987                  94,277,273
                                      -----------------------------------------
Total                                 $222,067,473                $207,392,845
                                      =========================================

The aggregate cost of securities and other investments and the composition of
unrealized appreciation and depreciation of securities and other investments for
federal income tax purposes as of August 31, 2006 are noted below. The primary
difference between book and tax appreciation or depreciation of securities and
other investments, if applicable, is attributable to the tax deferral of losses
or tax realization of financial statement unrealized gain or loss.

            Federal tax cost of securities          $ 2,698,274,740
            Federal tax cost of other investments      (141,337,674)
                                                    ----------------
            Total federal tax cost                  $ 2,556,937,066
                                                    ================

            Gross unrealized appreciation           $   591,708,830
            Gross unrealized depreciation              (103,189,861)
                                                    ----------------
            Net unrealized appreciation             $   488,518,969
                                                    ================

- --------------------------------------------------------------------------------
TRUSTEES' COMPENSATION. The Board of Trustees has adopted a deferred
compensation plan for independent trustees that enables trustees to elect to
defer receipt of all or a portion of the annual compensation they are entitled
to receive from the Fund. For purposes of determining the amount owed to the
Trustee under the plan, deferred amounts are treated as though equal dollar
amounts had been invested in shares of the Fund or in other Oppenheimer funds
selected by the Trustee. The Fund purchases shares of the funds selected for
deferral by the Trustee in amounts equal to his or her deemed investment,
resulting in a Fund asset equal to the deferred compensation liability. Such
assets are included as a component of "Other" within the asset section of the
Statement of Assets and Liabilities. Deferral of trustees' fees under the plan
will not affect the net assets of the Fund, and will not materially affect the
Fund's assets, liabilities or net investment income per share. Amounts will be
deferred until distributed in accordance to the Plan.

- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions to
shareholders, which are determined in accordance with income tax regulations,
are recorded on the ex-dividend date. Income distributions, if any, are declared
and paid quarterly. Capital gain distributions, if any, are declared and paid
annually.






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES Continued

INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date or upon
ex-dividend notification in the case of certain foreign dividends where the
ex-dividend date may have passed. Non-cash dividends included in dividend
income, if any, are recorded at the fair market value of the securities
received. Interest income, which includes accretion of discount and amortization
of premium, is accrued as earned.

- --------------------------------------------------------------------------------
CUSTODIAN FEES. "Custodian fees and expenses" in the Statement of Operations may
include interest expense incurred by the Fund on any cash overdrafts of its
custodian account during the period. Such cash overdrafts may result from the
effects of failed trades in portfolio securities and from cash outflows
resulting from unanticipated shareholder redemption activity. The Fund pays
interest to its custodian on such cash overdrafts, to the extent they are not
offset by positive cash balances maintained by the Fund, at a rate equal to the
Federal Funds Rate plus 0.50%. The "Reduction to custodian expenses" line item,
if applicable, represents earnings on cash balances maintained by the Fund
during the period. Such interest expense and other custodian fees may be paid
with these earnings.

- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS. Security transactions are recorded on the trade date.
Realized gains and losses on securities sold are determined on the basis of
identified cost.

- --------------------------------------------------------------------------------
INDEMNIFICATIONS. The Fund's organizational documents provide current and former
trustees and officers with a limited indemnification against liabilities arising
in connection with the performance of their duties to the Fund. In the normal
course of business, the Fund may also enter into contracts that provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would be dependent on future claims that may be made against the
Fund. The risk of material loss from such claims is considered remote.

- --------------------------------------------------------------------------------
OTHER. The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.






- --------------------------------------------------------------------------------
2. SHARES OF BENEFICIAL INTEREST

The Fund has authorized an unlimited number of $0.001 par value shares of
beneficial interest of each class. Transactions in shares of beneficial interest
were as follows:

                                   YEAR ENDED AUGUST 31, 2006            YEAR ENDED AUGUST 31, 2005
                                   SHARES              AMOUNT            SHARES              AMOUNT
- ----------------------------------------------------------------------------------------------------
CLASS A

Sold                           18,616,904       $ 226,300,881        22,558,905       $ 277,939,203
Dividends and/or
distributions reinvested       14,837,822         176,523,004        13,463,832         165,521,957
Redeemed                      (33,641,665)       (406,155,226)      (25,590,738)       (315,481,194)
                               ---------------------------------------------------------------------
Net increase (decrease)          (186,939)      $  (3,331,341)       10,431,999       $ 127,979,966
                               =====================================================================

- ----------------------------------------------------------------------------------------------------
CLASS B

Sold                            3,241,843       $  38,903,049         4,597,999       $  56,062,655
Dividends and/or
distributions reinvested        1,451,650          17,079,474         1,486,058          18,104,691
Redeemed                       (7,316,039)        (87,755,300)       (9,161,381)       (111,427,747)
                               ---------------------------------------------------------------------
Net decrease                   (2,622,546)      $ (31,772,777)       (3,077,324)      $ (37,260,401)
                               =====================================================================

- ----------------------------------------------------------------------------------------------------
CLASS C

Sold                            2,830,185       $  33,853,111         3,382,894       $  41,213,863
Dividends and/or
distributions reinvested          845,746           9,915,326           693,034           8,423,553
Redeemed                       (3,532,313)        (41,957,356)       (2,075,964)        (25,257,278)
                               ---------------------------------------------------------------------
Net increase                      143,618       $   1,811,081         1,999,964       $  24,380,138
                               =====================================================================

- ----------------------------------------------------------------------------------------------------
CLASS N

Sold                            1,158,822       $  13,939,161         1,172,709       $  14,333,266
Dividends and/or
distributions reinvested          178,715           2,111,820           114,121           1,396,302
Redeemed                         (760,312)         (9,122,082)         (358,515)         (4,400,678)
                               ---------------------------------------------------------------------
Net increase                      577,225       $   6,928,899           928,315       $  11,328,890
                               =====================================================================


- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES

The aggregate cost of purchases and proceeds from sales of securities, other
than short-term obligations, for the year ended August 31, 2006, were as
follows:

                                             PURCHASES               SALES
     ----------------------------------------------------------------------
     Investment securities              $1,877,908,686      $1,894,044,219
     U.S. government and
     government agency obligations          88,930,024         121,538,583
     To Be Announced (TBA)
     mortgage-related securities         2,212,763,141       2,305,352,091






NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------

4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES

MANAGEMENT FEES. Management fees paid to the Manager were in accordance with the
investment advisory agreement with the Fund which provides for a fee at an
average annual rate as shown in the following table:

FEE SCHEDULE AUG. 1, 2005 TO DECEMBER 31, 2005      FEE SCHEDULE EFFECTIVE JAN. 1, 2006
- ----------------------------------------------------------------------------------------------------

Up to $100 million of net assets        0.75%       Up to $100 million of net assets          0.75%
Next $100 million of net assets         0.70        Next $100 million of net assets           0.70
Next $100 million of net assets         0.65        Next $100 million of net assets           0.65
Next $100 million of net assets         0.60        Next $100 million of net assets           0.60
Next $100 million of net assets         0.55        Next $100 million of net assets           0.55
Over $500 million of net assets         0.50        From $500 million to $5 billion
                                                    of net assets                             0.50
                                                    Over $5 billion of net assets             0.48

- --------------------------------------------------------------------------------
ADMINISTRATION SERVICES. The Fund pays the Manager a fee of $1,500 per year for
preparing and filing the Fund's tax returns.

- --------------------------------------------------------------------------------
TRANSFER AGENT FEES. OppenheimerFunds Services (OFS), a division of the Manager,
acts as the transfer and shareholder servicing agent for the Fund. The Fund pays
OFS a per account fee. For the year ended August 31, 2006, the Fund paid
$3,794,415 to OFS for services to the Fund.

- --------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE PLAN (12b-1) FEES. Under its General Distributor's
Agreement with the Fund, OppenheimerFunds Distributor, Inc. (the Distributor)
acts as the Fund's principal underwriter in the continuous public offering of
the Fund's classes of shares.

- --------------------------------------------------------------------------------
SERVICE PLAN FOR CLASS A SHARES. The Fund has adopted a Service Plan for Class A
shares. It reimburses the Distributor for a portion of its costs incurred for
services provided to accounts that hold Class A shares. Reimbursement is made
periodically at an annual rate of up to 0.25% of the average annual net assets
of Class A shares of the Fund. The Distributor currently uses all of those fees
to pay dealers, brokers, banks and other financial institutions periodically for
providing personal services and maintenance of accounts of their customers that
hold Class A shares. Any unreimbursed expenses the Distributor incurs with
respect to Class A shares in any fiscal year cannot be recovered in subsequent
periods. Fees incurred by the Fund under the plan are detailed in the Statement
of Operations.

- --------------------------------------------------------------------------------
     DISTRIBUTION AND SERVICE PLANS FOR CLASS B, CLASS C AND CLASS N SHARES. The
Fund has adopted Distribution and Service Plans for Class B, Class C and Class N
shares to compensate  the  Distributor  for its services in connection  with the
distribution of those shares and servicing  accounts.  Under the plans, the Fund
pays the Distributor an annual  asset-based sales charge of 0.75% on Class B and
Class C shares  and 0.25% on Class N shares.  The  Distributor  also  receives a
service fee of 0.25% per year under each plan. If either the Class B, Class C or
Class N plan is terminated by the Fund or by the  shareholders  of a class,  the
Board of  Trustees  and its  independent  trustees  must  determine  whether the
Distributor  shall be entitled  to payment  from the Fund of all or a portion of
the service fee and/or  asset-based sales charge in respect to shares sold prior
to  the  effective  date  of  such  termination.   The  Distributor's  aggregate
uncompensated  expenses  under the plan at August 31,  2006 for Class B, Class C
and Class N shares were $8,531,867,  $3,783,065 and $579,278, respectively. Fees
incurred  by  the  Fund  under  the  plans  are  detailed  in the  Statement  of
Operations.

- --------------------------------------------------------------------------------
SALES CHARGES. Front-end sales charges and contingent deferred sales charges
(CDSC) do not represent expenses of the Fund. They are deducted from the
proceeds of sales of Fund shares prior to investment or from redemption proceeds
prior to remittance, as applicable. The sales charges retained by the
Distributor from the sale of shares and the CDSC retained by the Distributor on
the redemption of shares is shown in the following table for the period
indicated.

                                                              CLASS A            CLASS B            CLASS C          CLASS N
                                          CLASS A          CONTINGENT         CONTINGENT         CONTINGENT       CONTINGENT
                                        FRONT-END            DEFERRED           DEFERRED           DEFERRED         DEFERRED
                                    SALES CHARGES       SALES CHARGES      SALES CHARGES      SALES CHARGES    SALES CHARGES
                                      RETAINED BY         RETAINED BY        RETAINED BY        RETAINED BY      RETAINED BY
YEAR ENDED                            DISTRIBUTOR         DISTRIBUTOR        DISTRIBUTOR        DISTRIBUTOR      DISTRIBUTOR
- -----------------------------------------------------------------------------------------------------------------------------

August 31, 2006                          $790,133              $3,857           $502,444            $30,357          $11,456

- --------------------------------------------------------------------------------
WAIVERS AND REIMBURSEMENTS OF EXPENSES. OFS has voluntarily agreed to limit
transfer and shareholder servicing agent fees for all classes to 0.35% of
average annual net assets per class. This undertaking may be amended or
withdrawn at any time.

- --------------------------------------------------------------------------------
5. FUTURES CONTRACTS

A futures contract is a commitment to buy or sell a specific amount of a
commodity or financial instrument at a negotiated price on a stipulated future
date. Futures contracts are traded on a commodity exchange. The Fund may buy and
sell futures contracts that relate to broadly based securities indices
(financial futures) or debt securities (interest rate futures) in order to gain
exposure to or protection from changes in market value of stocks and bonds or
interest rates. The Fund may also buy or write put or call options on these
futures contracts.

      The Fund generally sells futures contracts as a hedge against increases in
interest rates and decreases in market value of portfolio securities. The Fund
may also purchase futures contracts to gain exposure to market changes as it may
be more efficient or cost effective than actually buying securities.

      Upon entering into a futures contract, the Fund is required to deposit
either cash or securities (initial margin) in an amount equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Fund each day. The variation margin payments are equal
to the daily changes in the contract value and are recorded as unrealized gains
and losses. The Fund recognizes a realized gain or loss when the contract is
closed or has expired.

      Cash held by the broker to cover initial margin requirements on open
futures contracts is noted in the Statement of Assets and Liabilities.
Securities held in collateralized accounts to cover initial margin requirements
on open futures contracts are noted in the Statement of Investments. The
Statement of Assets and Liabilities reflects a receivable and/or payable for






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
5. FUTURES CONTRACTS Continued

the daily mark to market for variation margin. Realized gains and losses are
reported in the Statement of Operations at the closing and expiration of futures
contracts. The net change in unrealized appreciation and depreciation is
reported in the Statement of Operations.

      Risks of entering into futures contracts (and related options) include the
possibility that there may be an illiquid market and that a change in the value
of the contract or option may not correlate with changes in the value of the
underlying securities.

As of August 31, 2006, the Fund had outstanding futures contracts as follows:

UNREALIZED
                                 EXPIRATION        NUMBER OF      VALUATION AS OF      APPRECIATION
CONTRACT DESCRIPTION                  DATES        CONTRACTS      AUGUST 31, 2006    (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------
CONTRACTS TO PURCHASE
U.S. Long Bonds                    12/19/06              451          $50,089,188         $ 325,521
U.S. Treasury Nts., 10 yr.         12/19/06              117           12,562,875             6,641
                                                                                          ----------
                                                                                            332,162
                                                                                          ----------
CONTRACTS TO SELL
Euro-Bundesobligation, 10 yr.        9/7/06              157           23,788,854          (463,813)
U.S. Treasury Nts., 2 yr.          12/29/06              639          130,575,656          (199,441)
U.S. Treasury Nts., 5 yr.          12/29/06              215           22,598,516           (70,429)
                                                                                          ----------
                                                                                           (733,683)
                                                                                          ----------
                                                                                          $(401,521)
                                                                                          ==========


- --------------------------------------------------------------------------------
6. OPTION ACTIVITY

The Fund may buy and sell put and call options, or write put and covered call
options on portfolio securities in order to produce incremental earnings or
protect against changes in the value of portfolio securities.

      The Fund generally purchases put options or writes covered call options to
hedge against adverse movements in the value of portfolio holdings. When an
option is written, the Fund receives a premium and becomes obligated to sell or
purchase the underlying security at a fixed price, upon exercise of the option.

      Options are valued daily based upon the last sale price on the principal
exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Fund will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid.

      Securities designated to cover outstanding call or put options are noted
in the Statement of Investments where applicable. Contracts subject to call,
expiration date, exercise price, premium received and market value are detailed
in a note to the Statement of Investments. Options written are reported as a
liability in the Statement of Assets and Liabilities. Realized gains and losses
are reported in the Statement of Operations.






      The risk in writing a call option is that the Fund gives up the
opportunity for profit if the market price of the security [or commodity]
increases and the option is exercised. The risk in writing a put option is that
the Fund may incur a loss if the market price of the security [or commodity]
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of not being able to enter into a closing transaction if a
liquid secondary market does not exist.

Written option activity for the year ended August 31, 2006 was as follows:

                                                         CALL OPTIONS                       PUT OPTIONS
                                         ----------------------------      ----------------------------
                                         NUMBER OF          AMOUNT OF      NUMBER OF          AMOUNT OF
                                         CONTRACTS           PREMIUMS      CONTRACTS           PREMIUMS
- -------------------------------------------------------------------------------------------------------
Options outstanding as of
August 31, 2005                             30,563       $  4,354,050         65,934       $ 15,086,303
Options written                            265,819         20,248,754        372,878         82,034,765
Options closed or expired                 (216,045)       (16,272,363)      (336,797)       (59,440,300)
Options exercised                          (13,087)        (1,986,268)       (63,347)       (16,493,597)
                                          --------------------------------------------------------------
Options outstanding as of
August 31, 2006                             67,250       $  6,344,173         38,668       $ 21,187,171
                                          ==============================================================


- --------------------------------------------------------------------------------
7. TOTAL RETURN SWAP CONTRACTS

The Fund may enter into a total return swap transaction to maintain a total
return on a particular investment, or portion of its portfolio, or for other
non-speculative purposes. Because the principal amount is not exchanged, it
represents neither an asset nor a liability to either counterparty, and is
referred to as notional. The unrealized gain (loss) related to the daily change
in the valuation of the notional amount of the swap, as well as the amount due
to (owed by) the Fund at termination or settlement, is combined and separately
disclosed as an asset (liability). The Fund also records any periodic payments
received from (paid to) the counterparty, including at termination, under such
contracts as realized gain (loss). Total return swaps are subject to risks (if
the counterparty fails to meet its obligations).






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
7. TOTAL RETURN SWAP CONTRACTS Continued

As of August 31, 2006, the Fund had entered into the following total return swap
agreements:

SWAP                                                                            NOTIONAL     TERMINATION          UNREALIZED
COUNTERPARTY             SWAP DESCRIPTION                                         AMOUNT           DATES        DEPRECIATION
- -----------------------------------------------------------------------------------------------------------------------------

                         Received or paid monthly. The Counterparty
                         pays the Fund a Floating Payment which is
                         the sum of the Notional Amount, the Lehman
                         Brothers CMBS Index Spread and the Financial
                         Spread on the initial Notional Amount for the
                         Swap Interest Accrual Period. In addition, the
                         Counterparty, pays the Fund the Total Return
                         Amount if it is a positive value for a given
                         Index Period. If it is a negative, the Fund pays
                         the Counterparty the absolute value of the
Deutsche Bank            Total Return Amount for a given Index Period,
AG                       on each Payment Date.                                $5,560,000         12/1/06              $5,644
- -----------------------------------------------------------------------------------------------------------------------------
                         Received or paid monthly. If the Carry
                         Amount, plus the Spread Return Amount
                         (Spread Change times Duration times
                         Notional Amount), is positive, the
                         Counterparty pays the Fund. The payment
                         is based on the Carry Amount which is the
                         Spread on the Lehman Brothers CMBS AAA
                         8.5+ Index as of the close of one Business Day
                         prior to the Period End Day plus 15 basis
                         points times the Notional Amount times the
Lehman Brothers          Day Count Basis. If it is negative, the Fund
Special Financing,       pays the Counterparty the absolute value of
Inc.                     the Spread Return Amount.                             6,170,000         12/1/06               6,263
                                                                                                                     --------
                                                                                                                     $11,907
                                                                                                                     ========
Abbreviation is as follows:
CMBS                     Commercial Mortgage Backed Securities

- --------------------------------------------------------------------------------
 8. CREDIT DEFAULT SWAP CONTRACTS

The Fund may enter into a credit default swap contract to seek to maintain a
total return on a particular investment or portion of its portfolio, or for
other non-speculative purposes. Credit default swap contracts are subject to
credit risks (for example if the counterparty fails to meet its obligations).

     As a purchaser of a credit default swap contract,  the Fund pays a periodic
interest fee on the notional  amount to the  counterparty.  This interest fee is
accrued daily as a component of unrealized  appreciation  (depreciation)  and is
recorded as realized  loss upon  payment.  The Fund also  records an increase or
decrease to  unrealized  gain (loss) in an amount equal to the daily  valuation.
Upon  occurrence  of a  specific  credit  event with  respect to the  underlying
referenced  debt  obligation,  the Fund is obligated to deliver that security to
the  counterparty  in  exchange  for  receipt of the  notional  amount  from the
counterparty. The difference between the value of the security delivered and the
notional amount received is recorded as realized gain.

Information regarding such credit default swaps as of August 31, 2006 is as
follows:

                                                                 NOTIONAL        ANNUAL
                                                                   AMOUNT      INTEREST
                         REFERENCED                           RECEIVED BY     RATE PAID            UNREALIZED
                         DEBT                               THE FUND UPON        BY THE          APPRECIATION
COUNTERPARTY             OBLIGATION                          CREDIT EVENT          FUND        (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------

Deutsche Bank            Weyerhaeuser Co.                      $2,910,000         0.580%             $(13,637)
- --------------------------------------------------------------------------------------------------------------
Morgan Stanley
Capital Services, Inc.:
                         Arrow Electronics, Inc.                2,910,000         0.790               (33,301)
                         Arrow Electronics, Inc.                1,470,000         0.770               (14,971)
                         Belo Corp.                             1,675,000         0.650                 5,260
                         Belo Corp.                               925,000         0.670                 2,054
                         Belo Corp.                             1,870,000         0.675                 3,721
                         Federated Department Stores, Inc.      2,910,000         0.445                  (417)
                                                                                                     ---------
                                                                                                     $(51,291)
                                                                                                     =========

As a seller of a credit default swap contract, the Fund receives a periodic
interest fee on the notional amount from the counterparty. This interest fee is
accrued daily as a component of unrealized appreciation (depreciation) and is
recorded as realized gain upon receipt. The Fund also records an increase or
decrease to unrealized gain (loss) in an amount equal to the daily valuation.
Upon occurrence of a specific credit event with respect to the underlying
referenced debt obligation, the Fund receives that security from the
counterparty in exchange for payment of the notional amount to the counterparty.
The difference between the value of the security received and the notional
amount paid is recorded as realized loss.

Information regarding such credit default swaps as of August 31, 2006 is as
follows:

                                                                              ANNUAL
                                                                NOTIONAL    INTEREST
                                                                  AMOUNT        RATE
                  REFERENCED                                     PAID BY    RECEIVED             UNREALIZED
                  DEBT                                     THE FUND UPON      BY THE           APPRECIATION
COUNTERPARTY      OBLIGATION                                CREDIT EVENT        FUND         (DEPRECIATION)

Deutsche Bank:
                  Abitibi-Consolidated Co. of Canada          $2,385,000        1.52%               $ 6,772
                  Allied Waste North America, Inc.               920,000        2.00                 11,247
                  Allied Waste North America, Inc.             1,440,000        2.00                 17,524
                  General Motors Acceptance Corp.                825,000        2.30                 10,647
                  General Motors Corp.                           920,000        6.40                    (18)
                  General Motors Corp.                           560,000        6.40                    (11)






NOTES TO FINANCIAL STATEMENTS  Continued
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
8. CREDIT DEFAULT SWAP CONTRACTS Continued

                                                                                 ANNUAL
                                                                   NOTIONAL    INTEREST
                                                                     AMOUNT        RATE
                          REFERENCED                                PAID BY    RECEIVED              UNREALIZED
                          DEBT                                THE FUND UPON      BY THE            APPRECIATION
COUNTERPARTY              OBLIGATION                           CREDIT EVENT        FUND          (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------------

Morgan Stanley
Capital Services, Inc.:
                          General Motors Acceptance Corp.        $1,875,000        3.15%               $ 50,424
                          Hyundai Motor Manufacturing
                          Alabama LLC                             1,280,000        0.40                   2,293
                          J.C. Penney Corp., Inc.                 2,910,000        0.61                   2,593
                                                                                                       --------
                                                                                                       $101,471
                                                                                                       ========

- --------------------------------------------------------------------------------
9. ILLIQUID SECURITIES

As of August 31, 2006, investments in securities included issues that are
illiquid. A security may be considered illiquid if it lacks a readily available
market or if its valuation has not changed for a certain period of time. The
Fund will not invest more than 10% of its net assets (determined at the time of
purchase and reviewed periodically) in illiquid securities. Securities that are
illiquid are marked with the applicable footnote on the Statement of
Investments.

- --------------------------------------------------------------------------------
10. RECENT ACCOUNTING PRONOUNCEMENT

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. FIN 48 requires the evaluation of tax positions
taken in the course of preparing the Fund's tax returns to determine whether it
is "more-likely-than-not" that tax positions taken in the Fund's tax return will
be ultimately sustained. A tax liability and expense must be recorded in respect
of any tax position that, in Management's judgment, will not be fully realized.
FIN 48 is effective for fiscal years beginning after December 15, 2006. As of
August 31, 2006, the Manager is evaluating the implications of FIN 48. Its
impact in the Fund's financial statements has not yet been determined.

- --------------------------------------------------------------------------------
11. LITIGATION

     A  consolidated  amended  complaint  was filed as a putative  class  action
against the Manager and the Transfer Agent and other defendants (including 51 of
the  Oppenheimer  funds  including the Fund) in the U.S.  District Court for the
Southern  District  of New York on January  10, 2005 and was amended on March 4,
2005.  The  complaint  alleged,  among other  things,  that the Manager  charged
excessive fees for distribution  and other costs, and that by permitting  and/or
participating in those actions, the  Directors/Trustees  and the Officers of the
funds breached their fiduciary duties to fund shareholders  under the Investment
Company  Act of 1940  and at  common  law.  The  plaintiffs  sought  unspecified
damages,  an  accounting of all fees paid,  and an award of attorneys'  fees and
litigation expenses.

      In response to the defendants' motions to dismiss the suit, seven of the
eight counts in the complaint, including the claims against certain of the
Oppenheimer funds, as nominal defendants, and against certain present and former
Directors, Trustees and Officers of the funds, and the Distributor, as
defendants, were dismissed with prejudice, by court order dated March 10, 2006,
and the remaining count against the Manager and the Transfer Agent was dismissed
with prejudice by court order dated April 5, 2006. The plaintiffs filed an
appeal of those dismissals on May 11, 2006.

      The Manager believes that the allegations contained in the complaint are
without merit and that there are substantial grounds to sustain the district
court's rulings. The Manager also believes that it is premature to render any
opinion as to the likelihood of an outcome unfavorable to it, the funds, the
Directors/Trustees or the Officers on the appeal of the decisions of the
district court, and that no estimate can yet be made with any degree of
certainty as to the amount or range of any potential loss.


                                                  Appendix A

                                              RATINGS DEFINITIONS

     Below   are   summaries   of   the   rating   definitions   used   by   the
nationally-recognized  rating agencies listed below. Those ratings represent the
opinion  of the agency as to the credit  quality of issues  that they rate.  The
summaries below are based upon publicly  available  information  provided by the
rating organizations.

Moody's Investors Service, Inc. ("Moody's")

LONG-TERM RATINGS: BONDS AND PREFERRED STOCK ISSUER RATINGS

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

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

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

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

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

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

     Caa:  Bonds and  preferred  stock  rated "Caa" are of poor  standing.  Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.  Ca: Bonds and  preferred  stock rated "Ca"  represent
obligations  which are  speculative  in a high degree.  Such issues are often in
default or have other marked shortcomings.

     C: Bonds and preferred  stock rated "C" are the lowest class of rated bonds
and can be regarded as having  extremely  poor  prospects of ever  attaining any
real investment standing.

     Moody's  applies  numerical  modifiers 1, 2, and 3 in each  generic  rating
classification  from "Aa" through  "Caa." The modifier  "1"  indicates  that the
obligation ranks in the higher end of its generic rating category;  the modifier
"2" indicates a mid-range  ranking;  and the modifier "3" indicates a ranking in
the lower end of that generic rating category. Advanced refunded issues that are
secured by certain assets are identified with a # symbol.

     PRIME RATING SYSTEM  (SHORT-TERM  RATINGS - TAXABLE DEBT) These ratings are
opinions of the ability of issuers to honor  senior  financial  obligations  and
contracts.  Such obligations  generally have an original  maturity not exceeding
one year, unless explicitly noted.

     Prime-1:  Issuer has a superior ability for repayment of senior  short-term
debt obligations.

     Prime-2:  Issuer has a strong  ability for  repayment of senior  short-term
debt obligations.  Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics,  while appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

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

     Not Prime: Issuer does not fall within any Prime rating category.

     Standard  &  Poor's  Ratings  Services  ("Standard  &  Poor's"),  a
division of The McGraw-Hill Companies, Inc.

LONG-TERM ISSUE CREDIT RATINGS

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

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

     o Nature of and provisions of the obligation; and

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

     The issue  ratings  definitions  are expressed in terms of default risk. As
such, they pertain to senior  obligations of an entity.  Junior  obligations are
typically rated lower than senior obligations,  to reflect the lower priority in
bankruptcy, as noted above.

     AAA: An obligation rated "AAA" have the highest rating assigned by Standard
&  Poor's.  The obligor's  capacity to meet its financial  commitment on the
obligation is extremely strong.

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

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

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

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

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

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

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

     CC: An obligation rated "CC" are currently highly vulnerable to nonpayment.

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

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

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

     c: The `c' subscript is used to provide additional information to investors
that the bank may terminate its  obligation  to purchase  tendered  bonds if the
long-term credit rating of the issuer is below an investment-grade  level and/or
the issuer's bonds are deemed taxable.

     p: The letter `p' indicates that the rating is  provisional.  A provisional
rating  assumes the  successful  completion of the project  financed by the debt
being rated and indicates that payment of debt service  requirements  is largely
or entirely  dependent upon the  successful,  timely  completion of the project.
This rating,  however,  while addressing credit quality subsequent to completion
of the  project,  makes no comment on the  likelihood  of or the risk of default
upon failure of such  completion.  The investor should exercise his own judgment
with respect to such likelihood and risk.

     Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation  confirming
investments and cash flows.

     r: The `r' highlights  derivative,  hybrid,  and certain other  obligations
that Standard  &  Poor's  believes may  experience  high  volatility or high
variability in expected returns as a result of noncredit risks. Examples of such
obligations  are  securities  with  principal  or  interest  return  indexed  to
equities,   commodities,   or  currencies;   certain  swaps  and  options;   and
interest-only  and  principal-only  mortgage  securities.  The absence of an `r'
symbol should not be taken as an indication  that an obligation  will exhibit no
volatility or variability in total return.

N.R. Not rated.

     Debt  obligations of issuers  outside the United States and its territories
are rated on the same basis as domestic  corporate  and  municipal  issues.  The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

Bond Investment Quality Standards

     Under present  commercial bank regulations issued by the Comptroller of the
Currency,  bonds rated in the top four  categories  (`AAA',  `AA',  `A',  `BBB',
commonly known as  investment-grade  ratings) generally are regarded as eligible
for  bank  investment.   Also,  the  laws  of  various  states  governing  legal
investments  impose certain rating or other standards for  obligations  eligible
for investment by savings  banks,  trust  companies,  insurance  companies,  and
fiduciaries in general

     SHORT-TERM ISSUE CREDIT RATINGS  Short-term  ratings are generally assigned
to those obligations  considered short-term in the relevant market. In the U.S.,
for example,  that means  obligations with an original  maturity of no more than
365 days-including commercial paper.

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

     A-2: A short-term  obligation  rated "A-2" is somewhat more  susceptible to
the adverse  effects of changes in  circumstances  and economic  conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial  commitment on the obligation is  satisfactory.  A-3: A short-term
obligation rated "A-3" exhibits adequate protection parameters. However, adverse
economic  conditions  or  changing  circumstances  are more  likely to lead to a
weakened  capacity  of the  obligor  to meet  its  financial  commitment  on the
obligation.

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

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

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

NOTES:

     A Standard  &  Poor's note rating  reflects the  liquidity  factors and
market  access  risks  unique  to notes.  Notes due in three  years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.  The following  criteria will be used in making
that assessment: o Amortization  schedule-the larger the final maturity relative
to other maturities,  the more likely it will be treated as a note; and o Source
of payment-the  more  dependent the issue is on the market for its  refinancing,
the more likely it will be treated as a note.

     SP-1:  Strong capacity to pay principal and interest.  An issue with a very
strong capacity to pay debt service is given a (+) designation.

     SP-2:  Satisfactory  capacity  to pay  principal  and  interest,  with some
vulnerability  to adverse  financial  and economic  changes over the term of the
notes.

     SP-3: Speculative capacity to pay principal and interest.

Fitch, Inc.

     International  credit ratings assess the capacity to meet foreign  currency
or local  currency  commitments.  Both "foreign  currency" and "local  currency"
ratings are internationally  comparable  assessments.  The local currency rating
measures  the  probability  of payment  within the  relevant  sovereign  state's
currency and  jurisdiction  and therefore,  unlike the foreign  currency rating,
does not take account of the possibility of foreign exchange  controls  limiting
transfer into foreign currency.

INTERNATIONAL LONG-TERM CREDIT RATINGS
     The following  ratings scale applies to foreign currency and local currency
ratings.

Investment Grade:

     AAA: Highest Credit Quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events. AA: Very High Credit Quality.  "AA"
ratings  denote a very low  expectation  of credit  risk.  They  indicate a very
strong  capacity for timely payment of financial  commitments.  This capacity is
not significantly vulnerable to foreseeable events.

     A: High Credit  Quality.  "A" ratings  denote a low  expectation  of credit
risk.  The capacity for timely  payment of financial  commitments  is considered
strong.  This  capacity  may,  nevertheless,  be more  vulnerable  to changes in
circumstances or in economic conditions than is the case for higher ratings.

     BBB: Good Credit Quality.  "BBB" ratings indicate that there is currently a
low  expectation  of credit risk.  The capacity for timely  payment of financial
commitments is considered adequate,  but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity.  This is the lowest
investment-grade category.

Speculative Grade:

     BB:  Speculative.  "BB" ratings  indicate  that there is a  possibility  of
credit risk  developing,  particularly as the result of adverse  economic change
over time. However, business or financial alternatives may be available to allow
financial  commitments  to be met.  Securities  rated in this  category  are not
investment grade.


     B: Highly Speculative. "B" ratings indicate that significant credit risk is
present,  but a limited  margin of safety  remains.  Financial  commitments  are
currently being met. However,  capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

     CCC, CC C: High Default Risk.  Default is a real possibility.  Capacity for
meeting  financial  commitments  is solely  reliant  upon  sustained,  favorable
business or economic developments.  A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.

     DDD, DD, and D: Default.  The ratings of  obligations  in this category are
based  on  their  prospects  for  achieving   partial  or  full  recovery  in  a
reorganization or liquidation of the obligor. While expected recovery values are
highly  speculative  and cannot be estimated with any  precision,  the following
serve as general  guidelines.  "DDD"  obligations have the highest potential for
recovery,  around  90%-100% of outstanding  amounts and accrued  interest.  "DD"
indicates  potential  recoveries  in the range of  50%-90%,  and "D" the  lowest
recovery potential, i.e., below 50%.

     Entities  rated in this  category  have  defaulted  on some or all of their
obligations.  Entities  rated "DDD" have the highest  prospect for resumption of
performance  or  continued  operation  with or  without a formal  reorganization
process.  Entities  rated  "DD"  and  "D"  are  generally  undergoing  a  formal
reorganization or liquidation process;  those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

     Plus (+) and minus (-) signs may be appended  to a rating  symbol to denote
relative status within the major rating categories. Plus and minus signs are not
added to the "AAA"  category or to  categories  below  "CCC," nor to  short-term
ratings other than "F1" (see below).

INTERNATIONAL SHORT-TERM CREDIT RATINGS

     The following  ratings scale applies to foreign currency and local currency
ratings.  A short-term rating has a time horizon of less than 12 months for most
obligations,  or up to three years for U.S. public finance securities,  and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.

     F1:  Highest  credit  quality.  Strongest  capacity  for timely  payment of
financial commitments.  May have an added "+" to denote any exceptionally strong
credit feature.

     F2: Good credit  quality.  A  satisfactory  capacity for timely  payment of
financial  commitments,  but the margin of safety is not as great as in the case
of higher ratings.

     F3:  Fair  credit  quality.   Capacity  for  timely  payment  of  financial
commitments is adequate.  However,  near-term  adverse changes could result in a
reduction to non-investment grade.

     B:   Speculative.   Minimal   capacity  for  timely  payment  of  financial
commitments,  plus  vulnerability to near-term  adverse changes in financial and
economic conditions.

     C: High default risk.  Default is a real possibility.  Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.

     D: Default. Denotes actual or imminent payment default.



                                                  Appendix B

                                           Industry Classifications

Aerospace & Defense                                   Household Products
Air Freight & Couriers                                Industrial Conglomerates
Airlines                                              Insurance
Auto Components                                       Internet & Catalog Retail
Automobiles                                           Internet Software & Services
Beverages                                             IT Services
Biotechnology                                         Leisure Equipment & Products
Building Products                                     Machinery
Chemicals                                             Marine
Consumer Finance                                      Media
Commercial Banks                                      Metals & Mining
Commercial Services & Supplies                        Multiline Retail
Communications Equipment                              Multi-Utilities
Computers & Peripherals                               Office Electronics
Construction & Engineering                            Oil & Gas
Construction Materials                                Paper & Forest Products
Containers & Packaging                                Personal Products
Distributors                                          Pharmaceuticals
Diversified Financial Services                        Real Estate
Diversified Telecommunication Services                Road & Rail
Electric Utilities                                    Semiconductors and Semiconductor Equipment
Electrical Equipment                                  Software
Electronic Equipment & Instruments                    Specialty Retail
Energy Equipment & Services                           Textiles, Apparel & Luxury Goods
Food & Staples Retailing                              Thrifts & Mortgage Finance
Food Products                                         Tobacco
Gas Utilities                                         Trading Companies & Distributors
Health Care Equipment & Supplies                      Transportation Infrastructure
Health Care Providers & Services                      Water Utilities
Hotels Restaurants & Leisure                          Wireless Telecommunication Services
Household Durables



                                                  Appendix C

            OppenheimerFunds Special Sales Charge Arrangements and Waivers

     In certain  cases,  the initial  sales  charge that applies to purchases of
Class A shares(1) of the  Oppenheimer  funds or the  contingent  deferred  sales
charge  that may apply to Class A, Class B or Class C shares  may be  waived.(2)
That is because of the economies of sales efforts  realized by  OppenheimerFunds
Distributor,  Inc.,  (referred to in this document as the "Distributor"),  or by
dealers  or other  financial  institutions  that offer  those  shares to certain
classes of investors. Not all waivers apply to all funds.

     For  the  purposes  of  some  of the  waivers  described  below  and in the
Prospectus and Statement of Additional Information of the applicable Oppenheimer
funds, the term "Retirement Plan" refers to the following types of plans:

     1) plans  created  or  qualified  under  Sections  401(a)  or 401(k) of the
Internal Revenue Code,

     2) non-qualified deferred compensation plans,

     3) employee benefit plans(3)

     4) Group Retirement Plans(4)

     5) 403(b)(7) custodial plan accounts

     6) Individual  Retirement  Accounts ("IRAs"),  including  traditional IRAs,
Roth IRAs, SEP-IRAs, SARSEPs or SIMPLE plans

     The interpretation of these provisions as to the applicability of a special
arrangement  or waiver in a  particular  case is in the sole  discretion  of the
Distributor or the transfer agent (referred to in this document as the "Transfer
Agent")  of  the  particular   Oppenheimer   fund.  These  waivers  and  special
arrangements  may be amended or terminated at any time by a particular fund, the
Distributor, and/or OppenheimerFunds,  Inc. (referred to in this document as the
"Manager").

     Waivers that apply at the time shares are redeemed must be requested by the
shareholder and/or dealer in the redemption request.

     I.  Applicability  of Class A Contingent  Deferred Sales Charges in Certain
Cases


     Purchases  of Class A Shares of  Oppenheimer  Funds That Are Not Subject to
Initial Sales Charge but May Be Subject to the Class A Contingent Deferred Sales
Charge (unless a waiver applies).

     There is no initial  sales  charge on purchases of Class A shares of any of
the Oppenheimer funds in the cases listed below. However, these purchases may be
subject to the Class A contingent  deferred  sales charge if redeemed  within 18
months (24 months in the case of Oppenheimer  Rochester National  Municipals and
Rochester  Fund  Municipals)  of the  beginning of the  calendar  month of their
purchase, as described in the Prospectus (unless a waiver described elsewhere in
this Appendix  applies to the  redemption).  Additionally,  on shares  purchased
under these  waivers that are subject to the Class A contingent  deferred  sales
charge,  the  Distributor  will pay the applicable  concession  described in the
Prospectus  under "Class A Contingent  Deferred  Sales  Charge."(5)  This waiver
provision applies to:

     |_| Purchases of Class A shares aggregating $1 million or more.

     |_| Purchases of Class A shares by a Retirement  Plan that was permitted to
purchase  such shares at net asset value but  subject to a  contingent  deferred
sales  charge  prior to March 1, 2001.  That  included  plans (other than IRA or
403(b)(7)  Custodial  Plans) that: 1) bought shares costing $500,000 or more, 2)
had at the time of purchase 100 or more eligible  employees or total plan assets
of $500,000 or more, or 3) certified to the Distributor that it projects to have
annual plan purchases of $200,000 or more.

     |_|  Purchases  by  an  OppenheimerFunds-sponsored  Rollover  IRA,  if  the
purchases are made:

     1) through a broker, dealer, bank or registered investment adviser that has
made special arrangements with the Distributor for those purchases, or

     2) by a direct rollover of a distribution from a qualified  Retirement Plan
if the  administrator  of that  Plan  has  made  special  arrangements  with the
Distributor for those purchases.

     |_|  Purchases of Class A shares by  Retirement  Plans that have any of the
following record-keeping arrangements:

     1) The record  keeping is  performed by Merrill  Lynch Pierce  Fenner &
Smith,  Inc.  ("Merrill  Lynch") on a daily  valuation  basis for the Retirement
Plan. On the date the plan sponsor signs the  record-keeping  service  agreement
with Merrill Lynch, the Plan must have $3 million or more of its assets invested
in (a)  mutual  funds,  other than  those  advised  or managed by Merrill  Lynch
Investment  Management,  L.P. ("MLIM"),  that are made available under a Service
Agreement  between Merrill Lynch and the mutual fund's principal  underwriter or
distributor,  and (b) funds  advised or managed by MLIM (the funds  described in
(a) and (b) are referred to as "Applicable Investments").

     2) The record  keeping  for the  Retirement  Plan is  performed  on a daily
valuation  basis by a record keeper whose services are provided under a contract
or arrangement  between the Retirement  Plan and Merrill Lynch.  On the date the
plan sponsor signs the record keeping service  agreement with Merrill Lynch, the
Plan must have $5 million or more of its assets  (excluding  assets  invested in
money market funds) invested in Applicable Investments.

     3) The record  keeping  for a  Retirement  Plan is handled  under a service
agreement  with  Merrill  Lynch  and on the  date the plan  sponsor  signs  that
agreement,  the Plan has 500 or more eligible  employees  (as  determined by the
Merrill Lynch plan conversion manager).

II. Waivers of Class A Sales Charges of Oppenheimer Funds


     A. Waivers of Initial and  Contingent  Deferred  Sales  Charges for Certain
Purchasers.

     Class A shares purchased by the following  investors are not subject to any
Class A sales charges (and no  concessions  are paid by the  Distributor on such
purchases):

     |_| The Manager or its affiliates.

     |_| Present or former  officers,  directors,  trustees and  employees  (and
their  "immediate  families") of the Fund, the Manager and its  affiliates,  and
retirement plans  established by them for their  employees.  The term "immediate
family" refers to one's spouse, children, grandchildren,  grandparents, parents,
parents-in-law,  brothers and sisters,  sons- and daughters-in-law,  a sibling's
spouse, a spouse's siblings,  aunts,  uncles,  nieces and nephews;  relatives by
virtue of a remarriage (step-children, step-parents, etc.) are included.

     |_| Registered  management  investment  companies,  or separate accounts of
insurance  companies having an agreement with the Manager or the Distributor for
that purpose.

     |_| Dealers or brokers that have a sales agreement with the Distributor, if
they purchase  shares for their own accounts or for  retirement  plans for their
employees.

     |_| Employees and registered representatives (and their spouses) of dealers
or brokers  described  above or  financial  institutions  that have entered into
sales  arrangements  with such dealers or brokers (and which are  identified  as
such to the Distributor) or with the Distributor.  The purchaser must certify to
the Distributor at the time of purchase that the purchase is for the purchaser's
own account (or for the benefit of such employee's spouse or minor children).

     |_| Dealers,  brokers,  banks or registered  investment  advisors that have
entered into an agreement with the Distributor  providing  specifically  for the
use of shares of the Fund in particular  investment  products made  available to
their clients.  Those clients may be charged a transaction  fee by their dealer,
broker, bank or advisor for the purchase or sale of Fund shares.

     |_|  Investment  advisors and  financial  planners who have entered into an
agreement  for this  purpose  with the  Distributor  and who charge an advisory,
consulting or other fee for their services and buy shares for their own accounts
or the accounts of their clients.

     |_| "Rabbi trusts" that buy shares for their own accounts, if the purchases
are made through a broker or agent or other financial intermediary that has made
special arrangements with the Distributor for those purchases.

     |_| Clients of investment advisors or financial planners (that have entered
into an  agreement  for this purpose  with the  Distributor)  who buy shares for
their own accounts may also  purchase  shares  without  sales charge but only if
their  accounts are linked to a master  account of their  investment  advisor or
financial  planner on the books and  records of the broker,  agent or  financial
intermediary  with which the  Distributor  has made such special  arrangements .
Each of these  investors may be charged a fee by the broker,  agent or financial
intermediary for purchasing shares.

     |_| Directors,  trustees, officers or full-time employees of OpCap Advisors
or its  affiliates,  their  relatives or any trust,  pension,  profit sharing or
other benefit plan which beneficially owns shares for those persons.

     |_|  Accounts  for which  Oppenheimer  Capital  (or its  successor)  is the
investment  advisor (the  Distributor  must be advised of this  arrangement) and
persons  who are  directors  or  trustees  of the  company or trust which is the
beneficial owner of such accounts.

     |_| A unit investment trust that has entered into an appropriate  agreement
with the Distributor.

     |_| Dealers,  brokers,  banks, or registered  investment advisers that have
entered  into an  agreement  with the  Distributor  to sell  shares  to  defined
contribution   employee  retirement  plans  for  which  the  dealer,  broker  or
investment adviser provides administration services.

     |_|  Retirement  Plans and deferred  compensation  plans and trusts used to
fund those plans  (including,  for example,  plans  qualified  or created  under
sections  401(a),  401(k),  403(b) or 457 of the Internal Revenue Code), in each
case if those  purchases  are made  through a broker,  agent or other  financial
intermediary  that has made special  arrangements with the Distributor for those
purchases.

     |_| A  TRAC-2000  401(k)  plan  (sponsored  by the  former  Quest for Value
Advisors)  whose Class B or Class C shares of a Former Quest for Value Fund were
exchanged for Class A shares of that Fund due to the  termination of the Class B
and Class C TRAC-2000 program on November 24, 1995.

     |_| A qualified  Retirement  Plan that had agreed with the former Quest for
Value Advisors to purchase  shares of any of the Former Quest for Value Funds at
net asset value, with such shares to be held through  DCXchange,  a sub-transfer
agency mutual fund clearinghouse,  if that arrangement was consummated and share
purchases commenced by December 31, 1996.

     |_|  Effective  October  1, 2005,  taxable  accounts  established  with the
proceeds of Required  Minimum  Distributions  from Retirement  Plans.  |_| B. B.
Waivers of the Class A Initial and Contingent  Deferred Sales Charges in Certain
Transactions.

     1. Class A shares issued or purchased in the following transactions are not
subject to sales charges (and no concessions are paid by the Distributor on such
purchases):

     |_|  Shares  issued  in plans of  reorganization,  such as  mergers,  asset
acquisitions and exchange offers, to which the Fund is a party.

     |_|  Shares   purchased   by  the   reinvestment   of  dividends  or  other
distributions  reinvested  from  the  Fund or  other  Oppenheimer  funds or unit
investment  trusts for which  reinvestment  arrangements have been made with the
Distributor.

     |_|  Shares  purchased  by  certain  Retirement  Plans  that  are part of a
retirement plan or platform offered by banks, broker-dealers, financial advisors
or insurance companies, or serviced by recordkeepers.

     |_|  Shares   purchased  by  the  reinvestment  of  loan  repayments  by  a
participant  in a Retirement  Plan for which the Manager or an affiliate acts as
sponsor.

     |_| Shares purchased in amounts of less than $5.

     2. Class A shares issued and purchased in the  following  transactions  are
not subject to sales charges (a dealer concession at the annual rate of 0.25% is
paid by the  Distributor  on  purchases  made  within the first 6 months of plan
establishment):

     |_| Retirement Plans that have $5 million or more in plan assets.

     |_|  Retirement  Plans with a single plan  sponsor  that have $5 million or
more in aggregate assets invested in Oppenheimer funds.

     C. C. Waivers of the Class A Contingent  Deferred  Sales Charge for Certain
Redemptions.

     The Class A contingent  deferred sales charge is also waived if shares that
would otherwise be subject to the contingent  deferred sales charge are redeemed
in the following cases:

     |_| To make Automatic Withdrawal Plan payments that are limited annually to
no more than 12% of the account value adjusted annually.

     |_|  Involuntary  redemptions  of shares by operation of law or involuntary
redemptions of small accounts  (please refer to  "Shareholder  Account Rules and
Policies," in the applicable fund Prospectus).

     |_| For distributions from Retirement Plans, deferred compensation plans or
other employee benefit plans for any of the following purposes:

     1) Following  the death or disability  (as defined in the Internal  Revenue
Code) of the  participant  or  beneficiary.  The death or disability  must occur
after the participant's account was established.

     2) To return excess contributions.

     3) To return contributions made due to a mistake of fact.

     4) Hardship withdrawals, as defined in the plan.(6)

     5) Under a Qualified  Domestic  Relations Order, as defined in the Internal
Revenue  Code,  or, in the case of an IRA,  a divorce  or  separation  agreement
described in Section 71(b) of the Internal Revenue Code.

     6) To meet the minimum  distribution  requirements of the Internal  Revenue
Code.

     7) To make "substantially  equal periodic payments" as described in Section
72(t) of the Internal Revenue Code.

     8) For loans to participants or beneficiaries.

     9) Separation from service.(7)

     10)  Participant-directed  redemptions to purchase  shares of a mutual fund
(other than a fund managed by the Manager or a subsidiary of the Manager) if the
plan has made special arrangements with the Distributor.

     11) Plan  termination  or  "in-service  distributions,"  if the  redemption
proceeds are rolled over directly to an OppenheimerFunds-sponsored IRA.

     |_| For distributions  from 401(k) plans sponsored by  broker-dealers  that
have entered into a special agreement with the Distributor allowing this waiver.

     |_| For  distributions  from retirement plans that have $10 million or more
in plan  assets  and  that  have  entered  into a  special  agreement  with  the
Distributor.

     |_| For distributions  from retirement plans which are part of a retirement
plan product or platform  offered by certain  banks,  broker-dealers,  financial
advisors,  insurance  companies  or record  keepers  which have  entered  into a
special agreement with the Distributor.

III. Waivers of Class B, Class C and Class N Sales Charges of Oppenheimer Funds


     The Class B, Class C and Class N contingent deferred sales charges will not
be applied to shares  purchased in certain types of  transactions or redeemed in
certain circumstances described below.

     D. Waivers for Redemptions in Certain Cases.

     The Class B, Class C and Class N contingent  deferred sales charges will be
waived for redemptions of shares in the following cases:

     |_| Shares redeemed  involuntarily,  as described in  "Shareholder  Account
Rules and Policies," in the applicable Prospectus.

     |_|  Redemptions  from accounts other than  Retirement  Plans following the
death or disability of the last surviving  shareholder.  The death or disability
must have occurred  after the account was  established,  and for  disability you
must provide  evidence of a  determination  of disability by the Social Security
Administration.

     |_|  The  contingent  deferred  sales  charges  are  generally  not  waived
following the death or  disability of a grantor or trustee for a trust  account.
The contingent deferred sales charges will only be waived in the limited case of
the death of the trustee of a grantor trust or revocable  living trust for which
the  trustee is also the sole  beneficiary.  The death or  disability  must have
occurred after the account was established,  and for disability you must provide
evidence of a  determination  of disability (as defined in the Internal  Revenue
Code).

     |_|  Distributions  from accounts for which the broker-dealer of record has
entered into a special agreement with the Distributor allowing this waiver.

     |_|  Redemptions  of Class B shares held by Retirement  Plans whose records
are  maintained on a daily  valuation  basis by Merrill Lynch or an  independent
record keeper under a contract with Merrill Lynch.

     |_| Redemptions of Class C shares of Oppenheimer U.S. Government Trust from
accounts of clients of financial  institutions  that have entered into a special
arrangement with the Distributor for this purpose.

     |_|  Redemptions of Class C shares of an Oppenheimer  fund in amounts of $1
million or more requested in writing by a Retirement  Plan sponsor and submitted
more than 12 months  after  the  Retirement  Plan's  first  purchase  of Class C
shares,  if the  redemption  proceeds are invested to purchase Class N shares of
one or more Oppenheimer funds.

     |_| Distributions(8)  from Retirement Plans or other employee benefit plans
for any of the following purposes:

     1) Following  the death or disability  (as defined in the Internal  Revenue
Code) of the  participant  or  beneficiary.  The death or disability  must occur
after the participant's account was established in an Oppenheimer fund.

     2) To return excess contributions made to a participant's account.

     3) To return contributions made due to a mistake of fact.

     4) To make hardship withdrawals, as defined in the plan.(9)

     5) To make  distributions  required  under a Qualified  Domestic  Relations
Order or, in the case of an IRA, a divorce or separation  agreement described in
Section 71(b) of the Internal Revenue Code.

     6) To meet the minimum  distribution  requirements of the Internal  Revenue
Code.

     7) To make "substantially  equal periodic payments" as described in Section
72(t) of the Internal Revenue Code.

     8) For loans to participants or beneficiaries.(10)

     9) On account of the participant's separation from service.(11)

     10)  Participant-directed  redemptions to purchase  shares of a mutual fund
(other  than a fund  managed by the  Manager  or a  subsidiary  of the  Manager)
offered  as an  investment  option  in a  Retirement  Plan if the  plan has made
special arrangements with the Distributor.

     11)  Distributions  made on account of a plan  termination or  "in-service"
distributions,  if the  redemption  proceeds  are  rolled  over  directly  to an
OppenheimerFunds-sponsored IRA.

     12) For  distributions  from a  participant's  account  under an  Automatic
Withdrawal  Plan  after  the  participant  reaches  age 59  1/2,  as long as the
aggregate value of the distributions does not exceed 10% of the account's value,
adjusted annually.

     13) Redemptions of Class B shares under an Automatic Withdrawal Plan for an
account other than a Retirement  Plan,  if the  aggregate  value of the redeemed
shares does not exceed 10% of the account's value, adjusted annually.

     14) For distributions  from 401(k) plans sponsored by  broker-dealers  that
have entered  into a special  arrangement  with the  Distributor  allowing  this
waiver.

     |_|  Redemptions  of Class B shares  or Class C shares  under an  Automatic
Withdrawal  Plan from an account  other than a Retirement  Plan if the aggregate
value  of the  redeemed  shares  does  not  exceed  10% of the  account's  value
annually.

     E. Waivers for Shares Sold or Issued in Certain Transactions.

     The contingent  deferred sales charge is also waived on Class B and Class C
shares sold or issued in the following cases:

     |_| Shares sold to the Manager or its affiliates.

     |_| Shares sold to registered  management  investment companies or separate
accounts of  insurance  companies  having an  agreement  with the Manager or the
Distributor for that purpose.

     |_| Shares issued in plans of reorganization to which the Fund is a party.

     |_| Shares  sold to  present or former  officers,  directors,  trustees  or
employees (and their  "immediate  families" as defined above in Section I.A.) of
the Fund, the Manager and its affiliates  and  retirement  plans  established by
them for their employees.

     IV.  Special  Sales  Charge   Arrangements   for  Shareholders  of  Certain
Oppenheimer Funds Who Were Shareholders of Former Quest for Value Funds


     The initial and  contingent  deferred  sales  charge  rates and waivers for
Class A, Class B and Class C shares  described in the Prospectus or Statement of
Additional  Information of the Oppenheimer funds are modified as described below
for certain  persons who were  shareholders of the former Quest for Value Funds.
To be eligible,  those persons must have been shareholders on November 24, 1995,
when OppenheimerFunds,  Inc. became the investment advisor to those former Quest
for Value  Funds.  Those funds  include:  Oppenheimer  Quest  Value  Fund,  Inc.
Oppenheimer  Small- &  Mid- Cap Value Fund  Oppenheimer  Quest Balanced Fund
Oppenheimer Quest International  Value Fund, Inc.  Oppenheimer Quest Opportunity
Value Fund

     These  arrangements  also apply to shareholders of the following funds when
they merged (were  reorganized)  into various  Oppenheimer funds on November 24,
1995:

     Quest for Value U.S. Government Income Fund              Quest for Value New York Tax-Exempt Fund
     Quest for Value Investment Quality Income Fund           Quest for Value National Tax-Exempt Fund
     Quest for Value Global Income Fund                       Quest for Value California Tax-Exempt Fund

     All of the funds  listed  above are  referred  to in this  Appendix  as the
"Former Quest for Value Funds." The waivers of initial and  contingent  deferred
sales charges  described in this Appendix apply to shares of an Oppenheimer fund
that are either:

     |_|  acquired by such  shareholder  pursuant to an exchange of shares of an
Oppenheimer fund that was one of the Former Quest for Value Funds, or

     |_|  purchased  by such  shareholder  by  exchange  of  shares  of  another
Oppenheimer fund that were acquired  pursuant to the merger of any of the Former
Quest for Value Funds into that other Oppenheimer fund on November 24, 1995. |_|
F. A. Reductions or Waivers of Class A Sales Charges.

     |X| Reduced Class A Initial Sales Charge Rates for Certain Former Quest for
Value Funds Shareholders.

     Purchases by Groups and  Associations.  The following  table sets forth the
initial  sales  charge  rates  for  Class  A  shares  purchased  by  members  of
"Associations" formed for any purpose other than the purchase of securities. The
rates in the  table  apply if that  Association  purchased  shares of any of the
Former Quest for Value Funds or received a proposal to purchase such shares from
OCC Distributors prior to November 24, 1995.

- -------------------------------- ---------------------------- --------------------------------- ---------------------
Number of Eligible Employees     Initial Sales Charge as a    Initial Sales Charge as a % of    Concession as % of
or Members                       % of Offering Price          Net Amount Invested               Offering Price
- -------------------------------- ---------------------------- --------------------------------- ---------------------
- -------------------------------- ---------------------------- --------------------------------- ---------------------
9 or Fewer                       2.50%                        2.56%                             2.00%
- -------------------------------- ---------------------------- --------------------------------- ---------------------
- -------------------------------- ---------------------------- --------------------------------- ---------------------
At least 10 but not more than    2.00%                        2.04%                             1.60%
49
- -------------------------------- ---------------------------- --------------------------------- ---------------------

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

     For  purchases  by  Associations  having 50 or more  eligible  employees or
members,  there is no initial  sales charge on purchases of Class A shares,  but
those  shares  are  subject  to the Class A  contingent  deferred  sales  charge
described in the applicable fund's Prospectus.

     Purchases made under this  arrangement  qualify for the lower of either the
sales charge rate in the table based on the number of members of an Association,
or the sales charge rate that applies under the Right of Accumulation  described
in the applicable  fund's  Prospectus  and Statement of Additional  Information.
Individuals who qualify under this arrangement for reduced sales charge rates as
members  of  Associations  also may  purchase  shares  for their  individual  or
custodial  accounts at these  reduced  sales charge  rates,  upon request to the
Distributor.

     |X|  Waiver of Class A Sales  Charges  for  Certain  Shareholders.  Class A
shares  purchased  by the  following  investors  are not  subject to any Class A
initial or contingent deferred sales charges:

     o Shareholders who were shareholders of the AMA Family of Funds on February
28, 1991 and who  acquired  shares of any of the Former Quest for Value Funds by
merger of a portfolio of the AMA Family of Funds.

     o  Shareholders  who acquired  shares of any Former Quest for Value Fund by
merger of any of the  portfolios of the Unified  Funds.

     |X|  Waiver  of  Class  A  Contingent  Deferred  Sales  Charge  in  Certain
Transactions.  The Class A  contingent  deferred  sales charge will not apply to
redemptions  of Class A shares  purchased by the  following  investors  who were
shareholders of any Former Quest for Value Fund:

     Investors  who  purchased  Class A shares  from a dealer that is or was not
permitted  to receive a sales load or  redemption  fee imposed on a  shareholder
with  whom  that  dealer  has  a  fiduciary  relationship,  under  the  Employee
Retirement Income Security Act of 1974 and regulations adopted under that law.

     B. Class A, Class B and Class C Contingent  Deferred Sales Charge  Waivers.
H. |X| Waivers for  Redemptions of Shares  Purchased  Prior to March 6, 1995. In
the following  cases,  the  contingent  deferred sales charge will be waived for
redemptions  of Class A, Class B or Class C shares of an  Oppenheimer  fund. The
shares must have been  acquired  by the merger of a Former  Quest for Value Fund
into the fund or by exchange  from an  Oppenheimer  fund that was a Former Quest
for Value Fund or into  which  such fund  merged.  Those  shares  must have been
purchased prior to March 6, 1995 in connection with:

     o withdrawals under an automatic  withdrawal plan holding only either Class
B or Class C shares if the annual  withdrawal does not exceed 10% of the initial
value of the account value, adjusted annually, and

     o liquidation of a  shareholder's  account if the aggregate net asset value
of shares held in the account is less than the  required  minimum  value of such
accounts.

     |X| Waivers for  Redemptions of Shares  Purchased on or After March 6, 1995
but Prior to November 24, 1995. In the following cases, the contingent  deferred
sales  charge  will be waived  for  redemptions  of Class A,  Class B or Class C
shares of an Oppenheimer  fund. The shares must have been acquired by the merger
of a  Former  Quest  for  Value  Fund  into  the  fund  or by  exchange  from an
Oppenheimer  fund  that was a Former  Quest For Value  Fund or into  which  such
Former Quest for Value Fund merged.  Those shares must have been purchased on or
after March 6, 1995, but prior to November 24, 1995: o redemptions following the
death or disability of the  shareholder(s)  (as evidenced by a determination  of
total  disability by the U.S.  Social  Security  Administration);  o withdrawals
under an  automatic  withdrawal  plan  (but  only for Class B or Class C shares)
where the  annual  withdrawals  do not exceed  10% of the  initial  value of the
account value;  adjusted annually,  and o liquidation of a shareholder's account
if the  aggregate net asset value of shares held in the account is less than the
required  minimum account value. A  shareholder's  account will be credited with
the amount of any contingent deferred sales charge paid on the redemption of any
Class A, Class B or Class C shares of the  Oppenheimer  fund  described  in this
section if the proceeds are invested in the same Class of shares in that fund or
another  Oppenheimer  fund within 90 days after  redemption.  V.  Special  Sales
Charge  Arrangements  for  Shareholders  of Certain  Oppenheimer  Funds Who Were
Shareholders of Connecticut Mutual Investment Accounts, Inc.


     The initial and contingent deferred sale charge rates and waivers for Class
A and Class B shares  described in the respective  Prospectus (or this Appendix)
of the  following  Oppenheimer  funds  (each is  referred to as a "Fund" in this
section):

     Oppenheimer U. S. Government Trust,
     Oppenheimer Core Bond Fund,
     Oppenheimer Value Fund and

     are  modified  as  described  below for those  Fund  shareholders  who were
shareholders  of the  following  funds  (referred to as the "Former  Connecticut
Mutual  Funds")  on  March 1,  1996,  when  OppenheimerFunds,  Inc.  became  the
investment adviser to the Former  Connecticut  Mutual Funds:  Connecticut Mutual
Liquid  Account  Connecticut  Mutual Total  Return  Account  Connecticut  Mutual
Government   Securities  Account  CMIA  LifeSpan  Capital  Appreciation  Account
Connecticut  Mutual Income Account CMIA LifeSpan  Balanced  Account  Connecticut
Mutual Growth  Account CMIA  Diversified  Income  Account I. J. A. Prior Class A
CDSC and Class A Sales Charge Waivers.

     |X| Class A Contingent  Deferred Sales Charge.  Certain  shareholders  of a
Fund and the other Former  Connecticut  Mutual Funds are entitled to continue to
make additional purchases of Class A shares at net asset value without a Class A
initial  sales  charge,  but subject to the Class A  contingent  deferred  sales
charge that was in effect  prior to March 18,  1996 (the "prior  Class A CDSC").
Under the prior Class A CDSC,  if any of those  shares are  redeemed  within one
year of purchase, they will be assessed a 1% contingent deferred sales charge on
an amount equal to the current  market value or the original  purchase  price of
the shares  sold,  whichever  is smaller  (in such  redemptions,  any shares not
subject to the prior Class A CDSC will be redeemed first).

     Those shareholders who are eligible for the prior Class A CDSC are:

     1) persons  whose  purchases  of Class A shares of a Fund and other  Former
Connecticut  Mutual Funds were $500,000  prior to March 18, 1996, as a result of
direct  purchases  or  purchases  pursuant  to the Fund's  policies  on Combined
Purchases or Rights of Accumulation, who still hold those shares in that Fund or
other Former  Connecticut  Mutual Funds, and 2) persons whose intended purchases
under a Statement of Intention entered into prior to March

     18, 1996,  with the former general  distributor  of the Former  Connecticut
Mutual  Funds to  purchase  shares  valued at  $500,000  or more over a 13-month
period  entitled  those  persons to purchase  shares at net asset value  without
being subject to the Class A initial sales charge

     Any of the Class A shares of a Fund and the other Former Connecticut Mutual
Funds that were  purchased  at net asset value prior to March 18,  1996,  remain
subject to the prior Class A CDSC, or if any additional  shares are purchased by
those  shareholders at net asset value pursuant to this arrangement they will be
subject to the prior Class A CDSC.

     |X| Class A Sales Charge Waivers.  Additional  Class A shares of a Fund may
be purchased without a sales charge, by a person who was in one (or more) of the
categories  below and acquired Class A shares prior to March 18, 1996, and still
holds Class A shares:

     1) any purchaser, provided the total initial amount invested in the Fund or
any one or more of the Former Connecticut Mutual Funds totaled $500,000 or more,
including  investments  made  pursuant to the Combined  Purchases,  Statement of
Intention  and  Rights of  Accumulation  features  available  at the time of the
initial  purchase and such investment is still held in one or more of the Former
Connecticut Mutual Funds or a Fund into which such Fund merged;

     2) any  participant  in a qualified  plan,  provided that the total initial
amount  invested  by the  plan in the  Fund  or any  one or  more of the  Former
Connecticut Mutual Funds totaled $500,000 or more;

     3)  Directors  of the  Fund or any one or  more of the  Former  Connecticut
Mutual Funds and members of their immediate families;

     4)  employee  benefit  plans  sponsored  by  Connecticut  Mutual  Financial
Services,  L.L.C.  ("CMFS"),  the prior  distributor  of the Former  Connecticut
Mutual Funds, and its affiliated companies;

     5) one or more  members of a group of at least 1,000  persons  (and persons
who are  retirees  from such group)  engaged in a common  business,  profession,
civic or  charitable  endeavor  or other  activity,  and the  spouses  and minor
dependent children of such persons, pursuant to a marketing program between CMFS
and such group; and

     6) an  institution  acting as a  fiduciary  on behalf of an  individual  or
individuals,  if such institution was directly  compensated by the individual(s)
for  recommending  the  purchase of the shares of the Fund or any one or more of
the Former Connecticut  Mutual Funds,  provided the institution had an agreement
with CMFS.

     Purchases  of Class A shares  made  pursuant  to (1) and (2)  above  may be
subject to the Class A CDSC of the Former  Connecticut  Mutual  Funds  described
above.

     Additionally,  Class A shares  of a Fund may be  purchased  without a sales
charge by any holder of a variable  annuity contract issued in New York State by
Connecticut  Mutual Life Insurance Company through the Panorama Separate Account
which is beyond the  applicable  surrender  charge  period and which was used to
fund a qualified plan, if that holder  exchanges the variable  annuity  contract
proceeds to buy Class A shares of the Fund.

      B. Class A and Class B Contingent Deferred Sales Charge Waivers.

In addition to the waivers set forth in the Prospectus and in this Appendix, above, the contingent deferred
     sales charge will be waived for  redemptions  of Class A and Class B shares
of a Fund and  exchanges  of Class A or Class B shares of a Fund into Class A or
Class B shares of a Former Connecticut Mutual Fund provided that
the Class A or Class B shares of the Fund to be redeemed or exchanged were (i) acquired prior to March 18,
1996 or (ii) were acquired by exchange from an Oppenheimer fund that was a Former Connecticut Mutual Fund.
Additionally, the shares of such Former Connecticut Mutual Fund must have been purchased prior to March 18,
1996:

     1) by the estate of a deceased shareholder;

     2) upon the disability of a shareholder,  as defined in Section 72(m)(7) of
the Internal Revenue Code;

     3) for retirement distributions (or loans) to participants or beneficiaries
from  retirement  plans qualified under Sections 401(a) or 403(b)(7)of the Code,
or from IRAs, deferred compensation plans created under Section 457 of the Code,
or other employee benefit plans;

     4) as  tax-free  returns  of excess  contributions  to such  retirement  or
employee benefit plans;

     5) in  whole or in part,  in  connection  with  shares  sold to any  state,
county,  or city,  or any  instrumentality,  department,  authority,  or  agency
thereof,  that is prohibited by applicable  investment  laws from paying a sales
charge or concession in connection with the purchase of shares of any registered
investment management company;

     6) in  connection  with  the  redemption  of  shares  of the  Fund due to a
combination with another investment  company by virtue of a merger,  acquisition
or similar reorganization transaction;

     7) in connection with the Fund's right to involuntarily redeem or liquidate
the Fund;

     8) in connection  with automatic  redemptions of Class A shares and Class B
shares in certain  retirement plan accounts pursuant to an Automatic  Withdrawal
Plan but limited to no more than 12% of the original value annually; or

     9) as  involuntary  redemptions  of shares by  operation  of law,  or under
procedures set forth in the Fund's Articles of  Incorporation,  or as adopted by
the Board of Directors of the Fund.

     VI. Special Reduced Sales Charge for Former Shareholders of Advance America
         Funds, Inc.


     Shareholders  of  Oppenheimer   AMT-Free   Municipals,   Oppenheimer   U.S.
Government  Trust,  Oppenheimer  Strategic  Income Fund and Oppenheimer  Capital
Income Fund who  acquired  (and still hold) shares of those funds as a result of
the  reorganization  of  series  of  Advance  America  Funds,  Inc.  into  those
Oppenheimer  funds on October 18, 1991,  and who held shares of Advance  America
Funds,  Inc.  on March 30,  1990,  may  purchase  Class A shares  of those  four
Oppenheimer funds at a maximum sales charge rate of 4.50%.

     VII.  Sales Charge  Waivers on  Purchases of Class M Shares of  Oppenheimer
Convertible Securities Fund


     Oppenheimer  Convertible Securities Fund (referred to as the "Fund" in this
section)  may sell Class M shares at net asset value  without any initial  sales
charge to the classes of investors  listed  below who,  prior to March 11, 1996,
owned shares of the Fund's  then-existing Class A and were permitted to purchase
those shares at net asset value without sales charge:

     |_| the Manager and its affiliates,

     |_| present or former  officers,  directors,  trustees and  employees  (and
their  "immediate  families" as defined in the Fund's  Statement  of  Additional
Information) of the Fund, the Manager and its affiliates,  and retirement  plans
established  by them or the  prior  investment  advisor  of the Fund  for  their
employees,

     |_|  registered  management  investment  companies or separate  accounts of
insurance  companies  that had an  agreement  with the Fund's  prior  investment
advisor or distributor for that purpose,

     |_| dealers or brokers that have a sales agreement with the Distributor, if
they purchase  shares for their own accounts or for  retirement  plans for their
employees,

     |_| employees and registered representatives (and their spouses) of dealers
or brokers  described in the preceding  section or financial  institutions  that
have entered into sales  arrangements  with those  dealers or brokers (and whose
identity is made known to the Distributor) or with the Distributor,  but only if
the  purchaser  certifies to the  Distributor  at the time of purchase  that the
purchaser meets these qualifications,

     |_| dealers,  brokers,  or registered  investment advisors that had entered
into an agreement  with the  Distributor  or the prior  distributor  of the Fund
specifically  providing  for the use of Class M shares  of the Fund in  specific
investment products made available to their clients, and

     |_| dealers,  brokers or  registered  investment  advisors that had entered
into an agreement with the Distributor or prior distributor of the Fund's shares
to sell shares to defined  contribution  employee retirement plans for which the
dealer, broker, or investment advisor provides administrative services.


     (1) Certain waivers also apply to Class M shares of Oppenheimer Convertible
Securities Fund.

     (2)  In  the  case  of   Oppenheimer   Senior   Floating   Rate   Fund,   a
continuously-offered  closed-end fund,  references to contingent  deferred sales
charges mean the Fund's Early Withdrawal Charges and references to "redemptions"
mean "repurchases" of shares.

     (3) An "employee  benefit plan" means any plan or  arrangement,  whether or
not it is  "qualified"  under the  Internal  Revenue  Code,  under which Class N
shares of an  Oppenheimer  fund or funds are  purchased  by a fiduciary or other
administrator  for the account of  participants  who are  employees  of a single
employer or of affiliated  employers.  These may include,  for example,  medical
savings  accounts,  payroll  deduction plans or similar plans. The fund accounts
must be registered in the name of the fiduciary or administrator  purchasing the
shares for the benefit of participants in the plan.

     (4) The term "Group  Retirement  Plan" means any qualified or non-qualified
retirement plan for employees of a corporation or sole  proprietorship,  members
and  employees of a  partnership  or  association  or other  organized  group of
persons (the members of which may include other  groups),  if the group has made
special  arrangements  with  the  Distributor  and  all  members  of  the  group
participating  in (or who are  eligible  to  participate  in) the plan  purchase
shares  of an  Oppenheimer  fund or funds  through a single  investment  dealer,
broker or other  financial  institution  designated  by the  group.  Such  plans
include 457 plans, SEP-IRAs,  SARSEPs,  SIMPLE plans and 403(b) plans other than
plans for  public  school  employees.  The term  "Group  Retirement  Plan"  also
includes  qualified  retirement plans and  non-qualified  deferred  compensation
plans and IRAs that purchase  shares of an  Oppenheimer  fund or funds through a
single investment  dealer,  broker or other financial  institution that has made
special arrangements with the Distributor.

     (5)  However,  that  concession  will not be paid on purchases of shares in
amounts  of $1  million  or more  (including  any  right of  accumulation)  by a
Retirement Plan that pays for the purchase with the redemption proceeds of Class
C shares  of one or more  Oppenheimer  funds  held by the Plan for more than one
year.

     (6) This provision does not apply to IRAs.

     (7) This provision only applies to qualified retirement plans and 403(b)(7)
custodial  plans  after your  separation  from  service in or after the year you
reached age 55.

     (8) The  distribution  must be requested  prior to Plan  termination or the
elimination of the Oppenheimer funds as an investment option under the Plan.

     (9) This provision does not apply to IRAs.

     (10) This provision does not apply to loans from 403(b)(7)  custodial plans
and loans from the OppenheimerFunds-sponsored Single K retirement plan.

     (11) This  provision  does not apply to  403(b)(7)  custodial  plans if the
participant is less than age 55, nor to IRAs.

Oppenheimer Capital Income Fund
Internet Website:
         www.oppenheimerfunds.com

Investment Advisor
         OppenheimerFunds, Inc.
         Two World Financial Center
         225 Liberty Street, 11th Floor
         New York, New York 10281-1008

Distributor
         OppenheimerFunds Distributor, Inc.
         Two World Financial Center
         225 Liberty Street, 11th Floor
         New York, New York 10281-1008

Transfer Agent
         OppenheimerFunds Services
         P.O. Box 5270
         Denver, Colorado 80217
         1.800.CALL OPP (225.5677)

Custodian Bank
         Citibank, N.A.
         111 Wall Street
         New York, New York 10005

Independent Registered Public Accounting Firm
         Deloitte & Touche LLP
         555 Seventeenth Street
         Denver, Colorado 80202

Counsel to the Funds
         Myer, Swanson, Adams & Wolf, P.C.
         1600 Broadway
         Denver, Colorado 80202

Counsel to the Independent Trustees
         Bell, Boyd & Lloyd LLC
         70 West Madison Street, Suite 3100
         Chicago, Illinois 60602

(OppenheimerFunds logo)

PX0300.11.06