VAN KAMPEN AMERICAN CAPITAL HARBOR FUND, N-30D, 1998-02-25

VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
N-30D, 1998-02-25

Previous: GREEN MOUNTAIN POWER CORP, U-3A-2, 1998-02-25

Next: HARTFORD STOCK FUND INC /CT/, NSAR-B, 1998-02-25

<PAGE>

Van Kampen American Capital

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

HARBOR FUND

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

Annual Report
December 31, 1997

[PHOTO APPEARS HERE]

-- A Wealth of Knowledge . A Knowledge of Wealth" --
VAN KAMPEN AMERICAN CAPITAL
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................................ 1

Performance Results........................................... 3

Performance in Perspective.................................... 4

Glossary of Terms............................................. 5

Portfolio Management Review................................... 6

Portfolio Highlights.......................................... 9

Portfolio of Investments......................................10

Statement of Assets and Liabilities...........................17

Statement of Operations.......................................18

Statement of Changes in Net Assets............................19

Financial Highlights..........................................20

Notes to Financial Statements.................................23

Report of Independent Accountants.............................29
</TABLE>
<PAGE>

LETTER TO SHAREHOLDERS

February 1, 1998

Dear Shareholder,

The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.

Most Americans will benefit from the bill's $95 billion in tax cuts over
five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.

This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.

ECONOMIC OVERVIEW

These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is headed for
surplus, and our nation's currency is rising around the world.

Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar and significant
productivity gains helped offset inflationary pressures caused by rising wages.

After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.

DENNIS J. MCDONNELL AND DON G. POWELL

1 Continued on page two
<PAGE>

MARKET OVERVIEW

Bolstered by solid economic growth and low inflation, stock prices
continued their advance during the reporting period. Over the 12 months through
December, the Wilshire 5000 Index, which measures the performance of all
publicly traded U.S. companies, gained 29.17 percent. And with its 22.64 percent
advance in 1997, the Dow Jones Industrial Average completed its third
consecutive year of 20 percent-plus gains for the first time in the history of
the index.

But while U.S. stocks kept rising, volatility also picked up. During the
spring, stronger-than-expected economic growth and a subsequent hike in short-
term interest rates caused stock prices to fall by 10 percent. Later in the
year, investors were unnerved by the spreading economic crisis in Asia. Between
early August and late October, the DJIA fell by 16 percent before rebounding
sharply to close the reporting period near record-high territory.

Within the equity market, large stocks continued to outperform their small-
cap cousins. For the year, the Russell 1000 Index of large-cap companies
returned 30.49 percent, compared to 20.52 percent for the Russell 2000 Index of
small stocks. A wave of consolidations helped make Financial Services the top-
performing industry group. The Dow Jones Financial Index soared 48.44 percent
during 1997.

OUTLOOK

We expect that the recent upheavals in Southeast Asia will have a mixed
impact on the U.S. economy and financial markets. Sales of American goods
overseas are likely to decline in coming months, and competition from relatively
inexpensive imports could pinch profit margins. However, lower currency values
in Asia will likely result in less inflation in the U.S. and a greater
likelihood of stable or falling interest rates. Such a scenario usually benefits
stock prices, and we believe that a portfolio of high-quality domestic stocks
should continue to perform well. We also anticipate that stock selection will
play a larger role in generating investment performance due to the uneven impact
of the Asian crisis on individual companies.

As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.

Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you and your family through our
diverse menu of quality investments.

Sincerely,

/s/ Don G. Powell /s/ Dennis J. McDonnell

Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.

2
<PAGE>

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV/1/............ 16.91% 15.98% 15.96%
One-year total return/2/......................... 10.17% 10.99% 14.96%
Five-year average annual total return/2/......... 9.96% 10.19% N/A
Ten-year average annual total return/2/.......... 11.67% N/A N/A
Life-of-Fund average annual total return/2/...... 9.83% 10.77% 9.63%
Commencement Date................................ 11/15/56 12/20/91 10/26/93
</TABLE>

N/A = Not Applicable

/1/ Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (5.75% for A shares) or
contingent deferred sales charge for early withdrawal (5% for B shares and
1% for C shares).

/2/ Standardized total return. Assumes reinvestment of all distributions for
the period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).

See the Prior Performance section of the current prospectus. Past
performance does not guarantee future results. Investment return and net
asset value will fluctuate with market conditions. This performance was
achieved during generally rising stock prices. Fund shares, when redeemed,
may be worth more or less than their original cost.

Debt securities acquired by the Fund are not subject to any ratings
limitations and may include high-, medium-, lower- and non-rated debt
securities. Lower- and non-rated securities are regarded as speculative
with respect to capacity to pay interest and repay principal.

Market forecasts provided in this report may not necessarily come to pass.

3
<PAGE>

PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE

As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:

. Reflect the impact of favorable market trends or difficult market
conditions
. Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured

For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard & Poor's 500-Stock
Index*, the Russell 2000 Stock Index, and the Lipper Convertible Securities Fund
Index** over time. These indices are unmanaged statistical composites and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities they represent. Similarly, their performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

Van Kampen American Capital Harbor Fund vs. Standard & Poor's 500-Stock
Index*, Russell 2000 Stock Index, and the Lipper Convertible Securities
Fund Index** (December 31, 1987 through December 31, 1997)

<TABLE>
<CAPTION>
VKAC Harbour Lipper Convertible Standard and Poor's Russell 2000 Stock Index
Fund
<S> <C> <C> <C> <C>
12/31/87 9,425 10,000 10,000 10,000
1/31/88 9,828 10,231 10,404 10,436
2/29/88 10,181 10,646 10,839 11,377
3/31/88 10,113 10,651 10,569 11,909
4/30/88 l0,230 10,763 10,669 12,180
5/31/88 10,230 10,685 10,703 11,852
6/30/88 10,615 11,130 11,269 12,697
7/31/88 10,555 11,006 11,208 12,577
8/31/88 10,309 10,836 10,776 12,256
9/30/88 10,600 11,050 11,305 12,581
10/31/88 10,888 11,200 11,599 12,442
11/30/88 10,801 11,062 11,379 12,029
12/31/88 11,005 11,234 11,650 12,502
1/31/89 11,547 11,664 12,478 13,060
2/28/89 11,485 11,638 12,117 13,155
3/31/89 11,698 11,729 12,474 13,466
4/30/89 12,131 12,088 13,099 14,053
5/31/89 12,474 12,322 13,559 14,659
6/30/89 12,609 12,309 13,573 14,323
7/31/89 13,122 12,773 14,772 14,877
8/31/89 13,232 13,023 15,001 15,240
9/30/89 13,215 12,998 15,024 15,288
10/31/89 13,047 12,649 14,646 14,383
11/30/89 13,168 12,775 14,888 14,480
12/31/89 13,271 12,847 15,330 14,535
1/31/90 12,781 12,378 14,275 13,265
2/28/90 12,837 12,516 14,397 13,677
3/31/90 13,075 12,689 14,866 14,209
4/30/90 12,759 12,455 14,466 13,745
5/31/90 13,478 13,066 15,797 14,718
6/30/90 13,643 13,092 15,797 14,748
7/31/90 13,652 13,008 15,715 14,099
8/31/90 12,967 12,329 14,232 12,221
9/30/90 12,489 11,806 13,636 11,140
10/31/90 12,350 11,469 13,545 10,460
11/30/90 12,867 11,990 14,357 11,257
12/31/90 13,108 12,287 14,852 11,704
1/31/91 13,463 12,769 15,469 12,762
2/28/91 14,000 13,412 16,510 14,186
3/31/91 14,236 13,607 17,002 15,184
4/30/91 14,246 13,766 17,008 15,146
5/31/91 14,483 14,086 17,664 15,868
6/30/91 14,182 13,741 16,965 14,943
7/31/91 14,673 14,069 17,726 15,467
8/31/91 15,112 14,460 18,074 16,040
9/30/91 15,134 14,531 17,871 16,166
10/31/91 15,431 14,814 18,083 16,593
11/30/91 15,209 14,439 17,289 15,826
12/31/91 16,134 15,245 19,358 17,093
1/31/92 16,177 15,636 18,973 18,478
2/29/92 16,350 15,918 19,154 19,017
3/31/92 16,112 15,724 18,871 18,373
4/30/92 16,134 15,774 19,397 17,730
5/31/92 16,431 16,042 19,416 17,965
6/30/92 16,177 15,876 19,230 17,166
7/31/92 16,623 16,295 19,988 17,711
8/31/92 16,545 16,207 19,508 17,211
9/30/92 16,798 16,520 19,836 17,608
10/31/92 16,922 16,677 19,878 18,168
11/30/92 17,294 17,091 20,480 19,558
12/31/92 17,688 17,442 20,831 20,240
1/31/93 18,102 17,834 20,977 20,925
2/28/93 18,102 17,836 21,197 20,441
3/31/93 18,638 18,419 21,738 21,105
4/30/93 18,409 18,302 21,185 20,525
5/31/93 18,844 18,712 21,666 21,434
6/30/93 19,100 18,865 21,841 21,587
7/31/93 19,027 18,979 21,724 21,865
8/31/93 19,686 19,498 22,472 22,810
9/30/93 19,870 19,642 22,403 23,453
10/31/93 19,969 19,938 22,837 24,057
11/30/93 19,599 19,760 22,542 23,265
12/31/93 20,087 20,030 22,921 24,061
1/31/94 20,658 20,539 23,666 24,815
2/28/94 20,339 20,363 22,955 24,725
3/31/94 19,320 19,646 22,059 23,420
4/30/94 19,103 19,396 22,313 23,559
5/31/94 19,144 19,370 22,590 23,295
6/30/94 18,759 19,208 22,153 22,504
7/31/94 19,143 19,521 22,851 22,873
8/31/94 19,541 20,074 23,710 24,148
9/30/94 19,236 19,914 23,236 24,067
10/31/94 19,278 19,877 23,721 23,972
11/30/94 18,793 19,322 22,784 23,004
12/31/94 18,796 19,299 23,232 23,622
1/31/95 19,122 19,477 23,796 23,324
2/28/95 19,491 19,940 24,654 24,294
3/31/95 19,770 20,401 25,487 24,713
4/30/95 20,187 20,752 26,200 25,262
5/31/95 20,661 21,201 27,151 25,696
6/30/95 21,050 21,649 27,912 27,029
7/31/95 21,776 22,298 28,799 25,586
8/31/95 21,849 22,464 28,790 29,178
9/30/95 22,284 22,805 30,123 29,699
10/31/95 22,020 22,433 29,973 28,371
11/30/95 22,694 23,106 31,204 29,563
12/31/95 23,018 23,365 31,931 30,343
1/31/96 23,431 23,782 32,973 30,310
2/29/96 23,660 24,151 33,201 31,255
3/31/96 23,827 24,385 33,643 31,891
4/30/96 24,203 24,949 34,095 33,596
5/31/96 24,658 25,354 34,874 34,920
6/30/96 24,422 25,022 35,149 33,486
7/31/96 23,457 24,139 33,541 30,561
8/31/96 24,185 24,994 34,172 32,336
9/30/96 25,088 25,789 36,228 33,599
10/31/96 25,199 25,913 37,174 33,082
11/30/96 25,837 26,802 39,902 34,445
12/31/96 25,798 26,786 39,243 35,347
1/31/97 26,689 27,586 41,650 36,054
2/28/97 26,517 27,464 41,896 35,180
3/31/97 25,621 26,922 40,302 33,520
4/30/97 25,864 27,124 42,656 33,613
5/31/97 27,167 28,412 45,155 37,352
6/30/97 28,019 29,315 48,323 38,953
7/31/97 29,420 30,669 51,020 40,766
8/31/97 29,210 30,664 48,089 41,699
9/30/97 30,700 32,030 50,862 44,751
10/31/97 29,659 31,228 49,109 42,785
11/30/97 29,818 31,118 51,298 42,508
12/31/97 30,160 31,315 52,317 43,252
</TABLE>

The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (5.75% for A shares).

While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.

* The Standard & Poor's 500-Stock Index represents general stock market
performance and was initially selected as a benchmark for the Fund's
performance; however, based upon the Fund's asset composition, we believe the
Russell 2000 Stock Index provides a more accurate benchmark for the Fund.
Therefore, the Standard & Poor's 500-Stock Index will not be shown in future
reports.

** The Lipper Convertible Securities Fund Index was not in existence until
January 1, 1988.

4
<PAGE>

GLOSSARY OF TERMS

BOND:
A debt security issued by a government or corporation that generally pays a
bondholder a stated rate of interest and repays the principal at maturity
date.

CAPITALIZATION:
The size of a company, as measured by the value of its stock. Morningstar,
Inc., an independent mutual fund rating service, defines "small-cap" as
less than $1 billion, "mid-cap" as between $1 billion and $5 billion, and
"large-cap" as more than $5 billion.

COMMON STOCK:
Shares of securities that represent ownership in a corporation. Its
dividend rights are subordinate to preferred stock, and its dividend is not
fixed.

CONVERTIBLE SECURITY:
A security that can be exchanged for common stock at the option of the
security holder for a specified price or rate. Examples include convertible
bonds and convertible preferred stock.

DOW JONES INDUSTRIAL AVERAGE:
The oldest and most widely recognized stock market average, which reflects
the performance of 30 actively traded stocks of well-established companies.

NET ASSET VALUE (NAV):
The value of a mutual fund share, computed by deducting a fund's
liabilities from its total assets and dividing this amount by the number of
shares outstanding. It does not include any initial or contingent deferred
sales charge.

STANDARD AND POOR'S 500-STOCK INDEX:
An index of the 500 largest, most actively traded stocks on the New York
Stock Exchange. It provides a guide to the overall health of the U.S. stock
market. The S&P 500 is a much broader index than the Dow Jones Industrial
Average and reflects the stock market more accurately.

YIELD:
The rate of return on an investment, usually expressed as an annual
percentage rate.

5
<PAGE>

PORTFOLIO MANAGEMENT REVIEW

VAN KAMPEN AMERICAN CAPITAL HARBOR FUND

We recently spoke to the management team of the Van Kampen American Capital
Harbor Fund about the key events and economic forces that shaped the markets
during the past year. The team included James Behrmann and Christine Drusch,
portfolio managers, and Alan T. Sachtleben, chief investment officer for equity
investments. Effective January 12, 1998, Christine Drusch will be the portfolio
manager and Matthew Hart will be the associate portfolio manager for the Harbor
Fund. The following excerpts reflect their views on the Fund's performance
during the year ended December 31, 1997.

Q WHAT WAS THE STOCK MARKET ENVIRONMENT FOR THE FUND DURING THE PAST 12
MONTHS?

A 1997 was another positive year for the stock market. Moderate economic
growth and low inflation provided a very favorable environment for equity
investments and drove the market to record levels. However, the year was marked
by several periods of notable volatility. In March, the economy was growing so
rapidly that investors feared inflation might start to rise--a concern that
sparked a month-long drop in the stock market and erased its year-to-date gains.
This setback was brief, and the market had recouped its losses by early May. In
October, the stock market became very sensitive to economic turmoil in Southeast
Asia, causing the Dow Jones Industrial Average (DJIA) to drop a record number of
points in a single day. The DJIA rose back up to hover slightly below its all-
time high by the end of the reporting period.

Market leadership took several twists and turns as well. Investors favored
blue-chip stocks early in the year, but by mid-year momentum had switched to
small-capitalization stocks, which outperformed large caps in almost every major
economic sector in the third quarter. In October, uncertainty surrounding the
situation in Asia prompted investors to seek out large, well-established
companies--as a result, small stocks began to struggle again and large stocks
regained their dominant position.

Q HOW DID THE BOND AND CONVERTIBLE SECURITIES MARKETS RESPOND?

A The bond market improved steadily throughout 1997, thanks to the
continuation of controlled economic growth and negligible inflation. After a
slight raise in March, the Federal Reserve Board did not adjust interest rates
for the remainder of the year, which also contributed to the bond market rally.
Yields on the 30-year Treasury bond fell steadily, while bond prices, which move
in the opposite direction of yields, rose accordingly. In December, the yield on
the 30-year Treasury bond had dipped below six percent, reaching a four-year
low.

Declining interest rates and the strong equity market propelled convertible
securities throughout the year. Convertibles rose 18.98 percent during the
reporting period, while their underlying common stock appreciated 22.10 percent,
according to the Merrill Lynch Convertible Index. In other words, convertible
securities returned 86 percent of their underlying common stock, or 3.12
percentage points less than their underlying common stock, while enjoying the
lower levels of risk inherent in convertible securities. Most of the companies
that issue convertible securities are small caps, so many convertibles got a
boost in the third quarter when small caps outperformed the market.

6
<PAGE>

Q GIVEN THIS ENVIRONMENT, WHAT WAS YOUR STRATEGY FOR MANAGING THE FUND?

A We consistently manage the Fund for capital appreciation, current income,
and preservation of capital by investing primarily in convertible securities. In
seeking to meet this objective, we focus on growth companies and diversify
across many market sectors. At the end of the reporting period, the portfolio
consisted of 81 percent convertible securities, 8 percent common stock, and 11
percent U.S. government obligations and short-term investments. We maintained a
modest weighting in the common stock portion of the portfolio, given concerns
about the impact of the economic turmoil in Asia. As often happens in times of
economic uncertainty, many equity investors have shifted their assets to large,
high-quality stocks with proven track records. Historically, the Fund's common
stock allocation has been comprised of large, established growth companies, so
this strategy has been compatible with the recent trend in the market.

Q WHICH SECTORS AND HOLDINGS HAD THE GREATEST IMPACT ON THE
PORTFOLIO?

A Like the stock market, the Fund saw leadership rotate among the sectors
during the reporting periodNas the markets reacted to economic and global
events, investor sentiment for various industries rose and fell throughout the
year. The best-performing sector overall was finance, which we attributed to
favorable interest rates, low inflation, and moderate economic growth. We had a
significant weighting in finance and enjoyed solid performance from Sovereign
Bancorp, Conseco, Travelers Group, and U.S. Bancorp. While finance was the most
consistently strong area, we found a number of attractive opportunities in
consumer distribution or retail, including Pier 1 Imports, Home Depot, and Rite
Aid. Also, we uncovered several promising names in health care, namely Sunrise
Assisted Living, a provider of home-like retirement communities.

Other noteworthy holdings came from the energy sector, as oil services
companies performed well for most of the year. Demand for offshore drilling has
been increasing, and many major drillers have increased their budgets for
exploration and production. As a result, most exploration companies are in a
growth cycle. Drillers and manufacturers of land rig equipment seem to be
especially well positioned to take advantage of this environment, and the Fund's
holdings in this area include Nabors Industries and Halter Marine. A bout of
profit-taking at year-end caused a dip in oil stock prices, but we remain
bullish on this sector in the long term.

Finally, the Fund has a substantial weighting in consumer services. Within
this category, temporary staffing has been particularly attractive. Firms that
specialize in information technology are thriving, as companies hire temporary
help to address short-term projects. Corestaff and Personnel Group of America
are among our prominent holdings here. Another favorable segment of consumer
services is broadcast media. Deregulation of this industry has allowed companies
to own more radio or television stations within a given market and therefore
control more advertising dollars. Sinclair Broadcasting (television) has been a
leader for the Fund in this area. For additional Fund portfolio highlights,
please refer to page 9.

Q WHAT FACTORS WORKED AGAINST THE FUND?

A The situation in Asia took a toll on the technology sector. Many technology
companies either sell their products overseas, manufacture products for
companies that do business overseas, or compete directly with Asian
companies-any of which would have hindered performance in the past six months.
Semiconductor stocks were hit especially hard, because much of

7
<PAGE>

their revenue is dependent upon Asia. The Fund had a moderate weighting in
technology when the Asian crisis began to unfold, which minimized its effects on
the Fund. The situation is expected to impact future growth rates in the
technology sector, so we will make selections very carefully.

Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?

A The Fund achieved a 12-month total return of 16.91 percent1 (Class A shares
at net asset value) as of December 31, 1997. By comparison, the Standard &
Poor's 500-Stock Index returned 33.31 percent, and the Russell 2000 Index
returned 22.36 percent. Finally, the Lipper Convertible Securities Fund Index,
which most closely resembles the Fund, returned 16.91 percent. The S&P 500-Stock
Index is a broad-based, unmanaged index that reflects the general performance of
the stock market, while the Russell 2000 Index reflects the general performance
of smaller-cap stocks. We have included the Russell 2000 Index because most
convertible securities are issued by small cap companies. (The S&P 500-Stock
Index will not be shown in future reports.) The Lipper Convertible Securities
Fund Index represents the average performance of convertible securities funds.

Keep in mind that these indices are unmanaged statistical composites that
do not include any commissions, fees or sales charges that would be paid by an
investor purchasing the securities or investments they represent. Please refer
to the chart on page three for additional Fund performance results.

Q WHAT IS YOUR OUTLOOK FOR THE FUND FOR THE NEXT SIX MONTHS?

A We believe the economic uncertainty in Southeast Asia will be a double-
edged sword for the domestic economy. On the downside, we anticipate that U.S.
corporate profits could be negatively impacted by lower foreign sales and
increased competition from lower-priced imports. On the upside, a slowdown in
corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia will result in low
price inflation in the U.S. and stable or declining interest rates. Convertible
securities typically perform well when interest rates are declining and the
stock market is moderately strong, so we see this environment as favorable for
the Harbor Fund.

As investor sentiment shifts back to high-quality stocks, we expect larger,
well-established companies to perform well. At the same time, we've begun to see
more convertibles issued from these types of companies, which may provide some
attractive choices for the Fund. Convertibles are considered defensive
investments, having performed competitively in up markets while reducing the
negative effects of down markets. Given the uncertain outlook for the economy,
we believe the Harbor Fund may be a prudent choice for certain investors.

/s/ Alan T. Sachtleben /s/ Christine Drusch

Alan T. Sachtleben Christine Drusch
Chief Investment Officer Portfolio Manager
Equity Investments

8 Please see footnotes on page three
<PAGE>

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL HARBOR FUND

<TABLE>
<CAPTION>
TOP TEN HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS

As of As of
December 31, 1997 June 30, 1997
<S> <C> <C>
United States Treasury Bond 4.8%.......... N/A
Merrill Lynch 2.6%.......... 2.7%
Sovereign Bancorp, Inc. 1.9%.......... 1.9%
Corestaff, Inc. 1.8%.......... N/A
Pennzoil Co. 1.7%.......... 1.4%
Alza Corp., LYON 1.7%.......... 1.5%
Houston Industries, Inc. 1.7%.......... N/A
Roche Holdings, Inc. 1.6%.......... 1.0%
Omnicom Group, Inc. 1.6%.......... 1.8%
Ahmanson H.F. Co. 1.6%.......... N/A
N/A = Not Applicable
</TABLE>

<TABLE>
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS

AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997
<S> <C> <S> <C>
Consumer Services........... 17% Consumer Services............ 17%
Finance..................... 15% Finance...................... 17%
Health Care................. 13% Energy....................... 12%
Energy...................... 12% Consumer Distribution........ 11%
Consumer Distribution....... 11% Technology................... 10%
</TABLE>

<TABLE>
ASSET ALLOCATION AS A PERCENTAGE OF TOTAL ASSETS

AS OF DECEMBER 31, 1997
<S> <C>
[_] Common Stock................. 8%
[_] U.S. Government.............. 11%
[_] Convertibles................. 81%

AS OF JUNE 30, 1997
<S> <C>
[_] Common Stock................. 11%
[_] U.S. Government.............. 5%
[_] Convertibles................. 80%
[_] Other........................ 4%
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
- ------------------------------------------------------------------------------------------------------
December 31, 1997
- ------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS 50.0%
CONSUMER DISTRIBUTION 10.2%
$ 8,500 Costco Cos, Inc., 144A-Private Placement (a).. * 08/19/17 $ 5,057,500
4,300 CUC International, Inc........................ 3.000% 02/15/02 5,364,250
4,700 Home Depot, Inc............................... 3.250 10/01/01 6,274,500
2,925 InaCom Corp................................... 6.000 06/15/06 3,948,750
4,700 Men's Warehouse, Inc.......................... 5.250 03/01/03 5,546,000
3,000 Pier 1 Imports, Inc........................... 5.750 10/01/03 5,760,000
4,700 Rite Aid Corp., 144A-Private Placement (a).... 5.250 09/15/02 5,064,250
4,500 Staples, Inc., 144A-Private Placement (a)..... 4.500 10/01/00 5,962,500
4,500 U.S. Office Products Co....................... 5.500 05/15/03 4,185,000
----------
47,162,750
----------

CONSUMER NON-DURABLES 0.7%
3,100 Loews Corp.................................... 3.125 09/15/07 3,100,000
----------
CONSUMER SERVICES 8.3%
9,240 Corestaff, Inc................................ 2.940 08/15/04 7,692,300
2,125 Hilton Hotels Corp............................ 5.000 05/15/06 2,332,187
5,900 Interpublic Group Cos Inc., 144A-Private
Placement (a)................................. 1.800 09/16/04 4,852,750
3,700 Marriott International, Inc., LYON............ * 03/25/11 2,405,000
5,885 National Data Corp............................ 5.000 11/01/03 5,723,163
10,250 News America Holdings, Inc., LYON............. * 03/11/13 4,817,500
5,000 Omnicom Group, Inc., 144A-Private
Placement (a)................................. 4.250 01/03/07 6,925,000
2,000 Personnel Group of America, Inc., 144A-Private
Placement (a)................................. 5.750 07/01/04 2,240,000
3,000 Times Mirror Co., LYON,
144A-Private Placement (a).................... * 04/15/17 1,260,000
----------
38,247,900
----------
ENERGY 5.0%
4,050 Consolidated Natural Gas Co................... 7.250 12/15/15 4,647,375
1,500 Nabors Industries, Inc........................ 5.000 05/15/06 2,692,500
2,100 Offshore Logistics, Inc., 144A-Private
Placement (a)................................. 6.000 12/15/03 2,415,000
</TABLE>

See Notes to Financial Statements

10
<PAGE>

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ENERGY (CONTINUED)
$ 1,700 Parker Drilling Co........................ 5.500% 08/01/04 $ 1,806,250
5,500 Pennzoil Co. (Convertible into 76,518 Chevron
Oil Co. common shares).................... 4.750 10/01/03 7,370,000
2,500 SFP Pipeline Holdings, Inc................ 11.163 08/15/10 4,045,608
-----------
22,976,733
-----------

FINANCE 3.5%
3,240 Berkshire Hathaway, Inc................... * 12/02/01 5,236,650
STRYPES Merrill Lynch, 125,500 shares (Convertible into
102,860 Cox Communication common shares).. 6.000 06/01/99 4,236,481
STRYPES Merrill Lynch, 60,000 shares (Convertible into
49,998 MGIC Investment Corp. common shares) 6.500 08/15/98 6,636,091
-----------
16,109,222
-----------

HEALTHCARE 11.4%
4,300 Alternative Living Services, Inc.......... 5.250 12/15/02 4,966,500
16,000 Alza Corp., LYON.......................... * 07/14/14 7,360,000
5,000 Athena Neurosciences, Inc., 144A-Private
Placement (a)............................. 4.750 11/15/04 5,100,000
4,000 Dura Pharmaceuticals, Inc................. 3.500 07/15/02 4,460,000
4,000 FPA Medical Management, Inc............... 6.500 12/15/01 4,090,000
4,800 Omnicare, Inc., 144A-Private Placement (a) 5.000 12/01/07 4,896,000
4,800 Phycor, Inc............................... 4.500 02/15/03 4,680,000
2,400 Renal Treatment Centers, Inc.............. 5.625 07/15/06 2,895,000
1,425 Renal Treatment Centers, Inc., 144A-Private
Placement (a)............................. 5.625 07/15/06 1,718,906
15,000 Roche Holdings, Inc., 144A-Private
Placement (a)............................. * 05/06/12 6,937,500
4,500 Sunrise Assisted Living, Inc., 144A-Private
Placement (a)............................. 5.500 06/15/02 5,827,500
-----------
52,931,406
-----------

PRODUCER MANUFACTURING 4.0%
2,700 Robbins and Myers, Inc.................... 6.500 09/01/03 4,158,000
5,000 Thermo Electron Corp., 144A-Private
Placement (a)............................. 4.250 01/01/03 6,225,000
1,945 U.S. Filter Corp.......................... 4.500 12/15/01 2,013,075
5,540 USA Waste Services, Inc................... 4.000 02/01/02 6,121,700
-----------
18,517,775
-----------
</TABLE>

See Notes to Financial Statements

11
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
<S> <C> <C> <C>
TECHNOLOGY 5.7%
$ 2,475 American Residential Services, Inc.......................... 7.250% 04/15/04 $ 2,196,563
1,000 Comverse Technology, Inc.................................... 5.750 10/01/06 1,073,750
3,650 Comverse Technology, Inc., 144A-Private
Placement (a)............................................... 5.750 10/01/06 3,919,188
3,500 Dovatron International, Inc., 144A-Private
Placement (a)............................................... 6.000 10/15/02 5,385,625
1,750 EMC Corp.................................................... 3.250 03/15/02 2,371,250
7,750 Hewlett Packard Co., LYON, 144A-Private
Placement (a)............................................... * 10/14/17 4,049,375
3,700 Solectron Corp., 144A-Private Placement (a)................. 6.000 03/01/06 5,078,250
1,200 Titan Corp.................................................. 8.250 11/01/03 2,148,000
-----------
26,222,001
-----------
TRANSPORTATION 1.2%
1,800 Halter Marine Group, Inc., 144A-Private
Placement (a)............................................... 4.500 09/15/04 2,016,000
3,365 Seacor Holdings, Inc........................................ 5.375 11/15/06 3,836,100
----------
5,852,100
----------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS 50.0%.............................. 231,119,887
-----------
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS 1.6%
3,400 Deutsche Bank Finance (Netherlands),
144A-Private Placement (Convertible into
51,511 Daimler-Benz common shares)(a)....................... * 02/12/17 1,513,000
2,100 IMAX Corp. (Canada), 144A-Private
Placement (a)............................................... 5.750 04/01/03 2,535,750
1,700 Swiss Re Finance Bermuda Ltd. (Switzerland),
144A-Private Placement (a).................................. 2.000 07/06/00 3,115,250
----------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS................................. 7,164,000
----------
UNITED STATES GOVERNMENT OBLIGATIONS 4.4%
20,000 United States Treasury Bond................................ 6.125 11/15/27 20,559,400
-----------
</TABLE>

12 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

<TABLE>
<CAPTION>
Description Shares Market Value
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK 28.2%
CONSUMER DURABLES 0.6%
Newell Financial Trust, 5.25%, 144A-Private Placement (a)................... 55,000 $2,860,000
---------
CONSUMER NON-DURABLES 0.8%
Ralston Purina Co., 7.00% (Convertible into 83,609
Interstate Bakeries Corp. common shares).................................... 51,000 3,514,222
---------
CONSUMER SERVICES 6.4%
Apple South Financing, Inc., TECONS, $3.500 dividend per share.............. 25,000 1,290,625
Evergreen Media Corp., $3.000 dividend per share, 144A-Private
Placement (a)............................................................... 75,000 5,943,750
Golden Books Financing Trust, TOPRS, 8.75%, 144A-Private
Placement (a)............................................................... 65,700 3,465,675
Host Marriott Financial Trust, QUIPS, 6.75%, 144A-Private
Placement (a)............................................................... 85,000 5,142,500
News Corp., 5.00% (Convertible into 69,498 British Sky Broadcasting Group
common shares), 144A-Private Placement (a).................................. 45,000 4,005,000
Sinclair Broadcast Group Inc., 6.00%........................................ 48,900 2,799,525
Snyder Communications, Inc., STRYPES, 6.50%................................. 165,000 5,610,000
TCI Communications, $2.125 dividend per share............................... 25,000 1,603,125
----------
29,860,200
----------
ENERGY 3.8%
EVI, Inc., 5.00%, 144A - Private Placement (a).............................. 85,000 3,878,125
Sun Co., Ser A, $1.800 dividend per share................................... 80,000 2,870,000
Tosco Financing Trust, 5.75%................................................ 78,500 5,033,813
Unocal Capital Trust, 6.25%................................................. 100,000 5,625,000
----------
17,406,938
----------
FINANCE 8.3%
Ahmanson H.F. Co., $3.000 dividend per share Ser D, 6.00%................... 50,000 6,875,000
American Heritage Life Investment Corp., PRIDES, 8.50%...................... 25,000 1,425,000
Conseco, Inc., PRIDES, 7.00%................................................ 100,000 5,125,000
Finova Finance Trust, TOPRS, 5.50%.......................................... 40,000 2,800,000
Jefferson Pilot Corp., ACES, 7.25%.......................................... 38,000 4,066,000
PLC Capital Trust II, 6.50%................................................. 48,000 2,640,000
Sovereign Bancorp, Inc., $3.125 dividend per share.......................... 65,000 8,092,500
</TABLE>

13 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997

<TABLE>
<CAPTION>
Description Shares Market Value
<S> <C> <C>
FINANCE (CONTINUED)
Sunamerica, Inc., PERCS, $3.188 dividend per share............... 110,200 $ 5,131,188
WBK Trust, STRYPES, 10.00%....................................... 63,000 2,110,500
-----------
38,265,188
-----------
HEALTHCARE 1.0%
MedPartners, Inc., 6.50%......................................... 206,000 4,532,000
-----------
RAW MATERIALS/PROCESSING INDUSTRIES 0.4%
Timet Capital Trust, Inc., 6.625%, 144A-Private Placement (a).... 34,000 1,700,000
-----------
TECHNOLOGY 0.4%
Qualcomm Financial Trust, 5.75%, 144A-Private Placement (a)...... 45,000 2,126,250
-----------
TRANSPORTATION 1.4%
CNF Trust I, Ser A, TECONS, 5.00%................................ 25,000 1,425,000
Royal Caribbean Cruises Limited, Ser A, 7.25%.................... 60,000 5,103,750
-----------
6,528,750
-----------
UTILITIES 5.1%
Aes Trust II, TECONS, 5.50%, 144A - Private Placement (a)........ 50,000 2,600,000
Houston Industries, Inc., ACES, 7.00% (Convertible into 106,399
Time Warner, Inc. common shares)................................. 128,750 7,346,796
Nextel Trust, STRYPES, 7.25%..................................... 255,000 6,056,250
Nortel Inversora SA, MEDS (Argentina), 10.00% (Convertible into
93,047 Telecom Argentina SA common shares)....................... 53,500 3,393,906
Worldcom, Inc., DECS, 8.00%...................................... 41,600 4,368,000
-----------
23,764,952
-----------
TOTAL CONVERTIBLE PREFERRED STOCK 28.2%.......................... 130,558,500
-----------
</TABLE>

14 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997

<TABLE>
<CAPTION>
Description Shares Market Value
<S> <C> <C>
COMMON STOCKS 8.0%
CONSUMER NON-DURABLES 0.9%
RJR Nabisco Holdings Corp.......................... 109,200 $ 4,095,000
------------
CONSUMER SERVICES 0.6%
CBS Corp........................................... 100,000 2,943,750
------------
ENERGY 2.5%
Amoco Corp......................................... 34,000 2,894,250
British Petroleum Co. PLC-ADR (United Kingdom)..... 20,000 1,593,750
Texaco, Inc........................................ 70,000 3,806,250
USX-Marathon Group................................. 90,000 3,037,500
------------
11,331,750
------------
FINANCE 2.0%
Citicorp........................................... 20,000 2,528,750
Travelers Group, Inc............................... 51,000 2,747,625
U.S. Bancorp....................................... 37,000 4,141,687
------------
9,418,062
------------
PRODUCER MANUFACTURING 0.7%
General Electric Co................................ 42,600 3,125,775
------------
TECHNOLOGY 0.6%
International Business Machines Corp............... 25,000 2,614,062
------------
UTILITIES 0.7%
SBC Communications, Inc............................ 45,000 3,296,250
------------
TOTAL COMMON STOCKS................................ 36,824,649
------------
TOTAL LONG-TERM INVESTMENTS 92.2% (COST $378,642,297) 426,226,436
------------
</TABLE>

15 See Notes to Financial Statements

<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997

<TABLE>
<CAPTION>
Description Market Value
<S> <C>
SHORT-TERM INVESTMENTS 6.9%
REPURCHASE AGREEMENT 0.3%
BA Securities ($1,335,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 12/31/97, to be sold on
01/02/98 at $1,335,482)........................................... $ 1,335,000
------------

U.S. GOVERNMENT AGENCY OBLIGATIONS 6.6%
Federal Home Loan Mortgage
($5,907,000 par, yielding 5.553%, 02/06/98 maturity).............. 5,873,730
Federal National Mortgage Association
($5,000,000 par, yielding 5.553%, 01/05/98 maturity).............. 4,996,181
Federal National Mortgage Association
($20,000,000 par, yielding 5.553%, 02/06/98 maturity)............. 19,887,458
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS.......................... 30,757,369
------------
TOTAL SHORT-TERM INVESTMENTS (COST $32,092,369)................... 32,092,369
------------
TOTAL INVESTMENTS 99.1% (COST $410,734,666)....................... 458,318,805
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%........................ 4,015,890
------------
NET ASSETS 100.0%................................................. $462,334,695
------------
</TABLE>

*Zero coupon bond
(a) 144A securities are those which are exempt from registration.under Rule
144A of the Securities Act of 1933.
These securities may be resold only in transactions exempt from
registration which are normally transactions with qualified institutional
buyers.
ACES-Automatically convertible equity securities
ADR -American Depository Receipt
DECS-Debt exchangeable for common stock
LYON-Liquid yield option note
MEDS-Mandatorily exchangeable debt security
PERCS-Preferred equity redemption cumulative stock
PRIDES-Preferred redeemable increased dividend equity security
QUIPS-Quality income preferred securities
STRYPES-Structured yield product exchangeable for stock
TECONS-Trust convertible securities
TOPRS-Trust originated preferred securities

16 See Notes to Financial Statements

<PAGE>

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $410,734,666)........................................ $458,318,805
Cash......................................................................... 5,272
Receivables:
Investments Sold........................................................ 9,805,468
Interest................................................................ 2,113,924
Dividends............................................................... 320,143
Fund Shares Sold........................................................ 85,406
Other........................................................................ 41,819
------------
Total Assets............................................................ 470,690,837
------------
LIABILITIES:
Payables:
Income Distributions.................................................... 3,942,274
Investments Purchased................................................... 2,235,030
Fund Shares Repurchased................................................. 1,338,404
Distributor and Affiliates.............................................. 305,840
Investment Advisory Fee................................................. 213,154
Accrued Expenses............................................................. 180,139
Trustees' Deferred Compensation and Retirement Plans......................... 141,301
------------
Total Liabilities....................................................... 8,356,142
------------
NET ASSETS................................................................... $462,334,695
============
NET ASSETS CONSIST OF:
Capital...................................................................... $408,435,858
Net Unrealized Appreciation.................................................. 47,584,139
Accumulated Net Realized Gain................................................ 4,507,515
Accumulated Undistributed Net Investment Income.............................. 1,807,183
------------
NET ASSETS................................................................... $462,334,695
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$376,442,973 and 24,997,425 shares of beneficial interest issued and
outstanding)............................................................ $ 15.06
Maximum sales charge (5.75%* of offering price)......................... .92
------------
Maximum offering price to public........................................ $ 15.98
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$81,289,568 and 5,426,072 shares of beneficial interest issued and
outstanding)............................................................ $ 14.98
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$4,602,154 and 305,181 shares of beneficial interest issued and
outstanding)............................................................ $ 15.08
============
*On sales of $50,000 or more, the sales charge will be reduced.
</TABLE>

17 See Notes to Financial Statements
<PAGE>

STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest................................................................... $13,976,440
Dividends.................................................................. 7,614,260
-----------
Total Income.......................................................... 21,590,700
-----------
EXPENSES:
Investment Advisory Fee.................................................... 2,510,215
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of
$860,887, $817,776 and $40,397, respectively)............................ 1,719,060
Shareholder Services....................................................... 852,052
Legal...................................................................... 43,836
Trustees' Fees and Expenses................................................ 18,228
Custody.................................................................... 16,471
Other...................................................................... 367,628
-----------
Total Expenses........................................................ 5,527,490
-----------
NET INVESTMENT INCOME...................................................... $16,063,210
===========
REALIZED AND UNREALIZED GAIN:
Net Realized Gain.......................................................... $54,691,941
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period............................................... 46,088,714
End of the Period..................................................... 47,584,139
-----------
Net Unrealized Appreciation During the Period......................... 1,495,425
-----------
NET REALIZED AND UNREALIZED GAIN........................................... $56,187,366
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS................................. $72,250,576
===========
</TABLE>

18 See Notes to Financial Statements
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended
December 31, 1997 and 1996

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................................. $ 16,063,210 $ 15,957,003
Net Realized Gain.................................................. 54,691,941 30,086,825
Net Unrealized Appreciation During the Period...................... 1,495,425 5,783,287
------------- -------------
Change in Net Assets from Operations.......................... 72,250,576 51,827,115
------------- -------------
Distributions from Net Investment Income*.......................... (17,653,801) (15,719,315)
Distributions in Excess of Net Investment Income*.................. (2,441,344) --
------------- -------------
Distributions from and in Excess of Net Investment Income*......... (20,095,145) (15,719,315)
Distributions from Net Realized Gains*............................. (48,007,153) (34,144,422)
------------- -------------
Total Distributions.......................................... (68,102,298) (49,863,737)

NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES................ 4,148,278 1,963,378
------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................................... 84,935,691 87,167,694
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................................... 56,172,535 40,889,008
Cost of Shares Repurchased......................................... (138,510,168) (150,653,873)
------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................. 2,598,058 (22,597,171)
------------- -------------
TOTAL INCREASE/DECREASE IN NET ASSETS.............................. 6,746,336 (20,633,793)
NET ASSETS:
Beginning of the Period............................................ 455,588,359 476,222,152
------------- -------------
End of the Period (Including accumulated undistributed
net investment income of ($1,807,183) and
$1,590,591, respectively)........................................ $ 462,334,695 $ 455,588,359
============= =============

Year Ended Year Ended
*Distributions by Class December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------
Distributions from and in Excess of Net Investment Income:
Class A Shares................................................ $ (16,890,943) $ (13,429,245)
Class B Shares................................................ (3,045,626) (2,188,814)
Class C Shares................................................ (158,576) (101,256)
------------- -------------
$ (20,095,145) $ (15,719,315)
============= =============
Distributions from Net Realized Gain:
Class A Shares................................................ $ (39,111,920) $ (28,014,766)
Class B Shares................................................ (8,428,584) (5,855,197)
Class C Shares................................................ (466,649) (274,459)
------------- -------------
$ (48,007,153) $ (34,144,422)
============= =============
</TABLE>

19 See Notes to Financial Statements
<PAGE>

FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
Class A Shares 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....... $15.054 $ 15.05 $13.24 $ 15.12 $14.95
------- ------- ------ -------- ------
Net Investment Income.......................... .600 .566 .68 .63 .69
Net Realized and Unrealized Gain/Loss.......... 1.854 1.173 2.25 (1.5625) 1.365
------- ------- ------ -------- ------
Total from Investment Operations............... 2.454 1.739 2.93 (.9325) 2.055
------- ------- ------ -------- ------
Less:
Distributions from and in Excess of
Net Investment Income..................... .730 .555 .7025 .62 .66
Distributions from and in Excess of
Net Realized Gain......................... 1.719 1.180 .4175 .3275 1.225
------- ------- ------ -------- ------
Total Distributions............................ 2.449 1.735 1.12 .9475 1.885
------- ------- ------ -------- ------
Net Asset Value, End of the Period............. $15.059 $15.054 $15.05 $ 13.24 $15.12
======= ======= ====== ======== ======
Total Return (a)............................... 16.91% 12.08% 22.46% (6.43%) 13.56%
Net Assets at End of the Period (In millions).. $ 376.4 $ 373.1 $394.5 $ 369.7 $432.3
Ratio of Expenses to Average Net Assets........ 1.04% 1.09% 1.00% 1.04% 1.02%
Ratio of Net Investment Income to
Average Net Assets............................. 3.58% 3.60% 4.62% 4.39% 4.37%
Portfolio Turnover............................. 170% 129% 130% 105% 134%
Average Commission Paid Per
Equity Share Traded (b)........................ $ .0599 $ .0605 -- -- --
</TABLE>

(a) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.

(b) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

See Notes to Financial Statements

20
<PAGE>

FINANCIAL HIGHLIGHTS (CONTINUED

The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.

- ------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
Class B Shares 1997 1996 1995 1994 1993(a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....... $14.992 $ 14.99 $13.20 $ 15.07 $14.90
------- ------- ------ -------- ------
Net Investment Income..................... .470 .437 .56 .51 .56
Net Realized and Unrealized Gain/Loss..... 1.848 1.180 2.23 (1.5505) 1.375
------- ------- ------ -------- ------
Total from Investment Operations............... 2.318 1.617 2.79 (1.0405) 1.935
------- ------- ------ -------- ------
Less:
Distributions from and in Excess of
Net Investment Income..................... .610 .435 .5825 .502 .54
Distributions from and in Excess of
Net Realized Gain......................... 1.719 1.180 .4175 .3275 1.225
------- ------- ------ -------- ------
Total Distributions............................ 2.329 1.615 1.00 .8295 1.765
------- ------- ------ -------- ------
Net Asset Value, End of the Period............. $14.981 $14.992 $14.99 $ 13.20 $15.07
======= ======= ====== ======== ======
Total Return (b)............................... 15.98% 11.19% 21.46% (7.11%) 12.68%
Net Assets at End of the Period (In millions).. $ 81.3 $ 78.9 $ 78.1 $ 71.1 $ 60.1
Ratio of Expenses to Average Net Assets........ 1.82% 1.88% 1.81% 1.84% 1.73%
Ratio of Net Investment Income to
Average Net Assets............................. 2.80% 2.81% 3.81% 3.63% 3.62%
Portfolio Turnover............................. 170% 129% 130% 105% 134%
Average Commission Paid Per
Equity Share Traded (c)........................ $ .0599 $ .0605 -- -- --
</TABLE>

(a) Based on average month-end shares outstanding.

(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.

(c) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

See Notes to Financial Statements

21
<PAGE>

FINANCIAL HIGHLIGHTS (CONTINUED)

The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
October 26, 1993
(Commencement
Year Ended December 31, of Distribution) to
--------------------------------------
Class C Shares 1997 1996 1995 1994 December 31, 1993(a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period........................................ $15.079 $ 15.07 $13.25 $ 15.13 $ 16.14
------- ------- ------ -------- -------
Net Investment Income........................ .448 .439 .56 .52 .15
Net Realized and Unrealized
Gain/Loss.................................... 1.882 1.185 2.26 (1.5705) (.0325)
------- ------- ------ -------- -------
Total from Investment Operations.................. 2.330 1.624 2.82 (1.0505) .1175
------- ------- ------ -------- -------
Less:
Distributions from and in Excess
of Net Investment Income..................... .610 .435 .5825 .502 .125
Distributions from and in Excess
of Net Realized Gain......................... 1.719 1.180 .4175 .3275 1.0025
------- ------- ------ -------- -------
Total Distributions............................... 2.329 1.615 1.00 .8295 1.1275
------- ------- ------ -------- -------
Net Asset Value, End of the Period................ $15.080 $15.079 $15.07 $ 13.25 $ 15.13
======= ======= ====== ======== =======
Total Return (b).................................. 15.96% 11.20% 21.52% (7.14%) .93%*
Net Assets at End of the Period
(In millions)..................................... $ 4.6 $ 3.6 $ 3.6 $ 3.3 $ 1.1
Ratio of Expenses to
Average Net Assets................................ 1.82% 1.88% 1.80% 1.84% 1.90%
Ratio of Net Investment Income to
Average Net Assets................................ 2.79% 2.81% 3.80% 3.72% 3.88%
Portfolio Turnover................................ 170% 129% 130% 105% 134%
Average Commission Paid Per
Equity Share Traded (c)........................... $ .0599 $ .0605 -- -- --
</TABLE>

(a) Based on average month-end shares outstanding.

(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.

* Non-Annualized

See Notes to Financial Statements

22
<PAGE>

NOTES TO FINANCIAL STATEMENTS
December 31, 1997

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Harbor Fund (the "Fund") is organized as a Delaware
business trust, and is registered as a diversified open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to seek income, capital appreciation, and
conservation of capital by investing primarily in convertible bonds and
preferred stocks. The Fund commenced investment operations on November 15, 1956.
The distribution of the Fund's Class B and Class C shares commenced on December
20, 1991 and October 26, 1993, respectively.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.

A. SECURITY VALUATION-Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Unlisted securities and listed securities for which the last sales price is not
available are valued at the last bid price. Unlisted convertible securities are
valued at the higher of their last bid price or the value of the securities
issuable on conversion. Fixed income investments are stated at values using
market quotations. For those securities where quotations or prices are not
available, valuations are determined in accordance with procedures established
in good faith by the Board of Trustees. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost.

Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. Debt securities rated below investment grade and comparable
unrated securities represented approximately 26% of the investment portfolio at
the end of the period.

B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1997, there were no
when issued or delayed delivery purchase commitments.

23
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997

The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Fund will make payment for such security only upon
physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.

C. INCOME AND EXPENSES-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discounts are
amortized over the expected life of each applicable security. Premiums on debt
securities are not amortized. Expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.

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

For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $23,597,262 as a 28% rate capital gain
distribution and $10,286,383 as a 20% rate capital gain distribution.
Shareholders were sent a 1997 Form 1099-DIV in January 1998 representing their
proportionate share of the capital gain distribution to be reported on their
income tax returns. For corporate shareholders 20.36% of the distributions
qualify for the dividend received deductions.

Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales.

At December 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $411,097,980; the aggregate gross unrealized
appreciation is $54,513,093 and the aggregate gross unrealized depreciation is
$7,292,268, resulting in net unrealized appreciation of $47,220,825.

E. DISTRIBUTION OF INCOME AND GAINS-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net

24
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997

realized gains for book purposes may include short-term capital gains which are
included in ordinary income for tax purposes.

Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1997 fiscal year have been identified and appropriately reclassified.
Permanent difference related to the recognition of market discount on bonds
totaling $4,253,633 have been reclassified from accumulated net realized
gain/loss to accumulated undistributed net investment income. Additionally,
miscellaneous permanent difference of ($5,106) was reclassified from accumulated
net investment income to accumulated net realized gain.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

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

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- --------------------------------------------------------------------------------
<S> <C>
First $350 million.................................................... .55 of 1%
Next $350 million..................................................... .50 of 1%
Next $350 million..................................................... .45 of 1%
Over $1.05 billion.................................................... .40 of 1%
</TABLE>

For the year ended December 31, 1997, the Fund recognized expenses of
approximately $43,800 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.

For the year ended December 31, 1997, the Fund recognized expenses of
approximately $90,000 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting
services to the Fund. These services are provided by VKAC at cost.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $543,800,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.

The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year

25
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997

period and are based upon each trustee's years of service to the Fund. The
maximum annual benefit per trustee under the plan is equal to $2,500.
At December 31, 1997, VKAC owned 10,929 Class A shares of the Fund.

3. CAPITAL TRANSACTIONS

The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.

At December 31, 1997, capital aggregated $322,661,130, $81,120,868 and
$4,653,860 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------
Sales:
<S> <C> <C>
Class A............................... 4,596,353 $ 72,255,103
Class B............................... 702,695 11,137,353
Class C............................... 95,609 1,543,235
--------- -------------
Total Sales................................ 5,394,657 $ 84,935,691
========= =============
Dividend Reinvestment:
Class A............................... 3,078,670 $ 45,914,946
Class B............................... 660,267 9,780,959
Class C............................... 32,032 476,630
--------- -------------
Total Dividend Reinvestment................ 3,770,969 $ 56,172,535
========= =============
Repurchases:
Class A............................... (7,461,163) $(118,439,608)
Class B............................... (1,201,555) (19,139,823)
Class C............................... (58,685) (930,737)
--------- -------------
Total Repurchases (8,721,403) $(138,510,168)
========= =============
</TABLE>

26
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997

At December 31, 1996, capital aggregated $322,930,689, $79,342,379 and
$3,564,732 for Classes A, B, and C, respectively. For the year ended December
31, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------
Sales:
<S> <C> <C>
Class A 4,875,165 $ 75,494,408
Class B 703,001 10,764,426
Class C 58,788 908,860
--------- -------------
Total Sales 5,636,954 $ 87,167,694
========= =============
Dividend Reinvestment:
Class A 2,263,498 $ 33,723,663
Class B 463,576 6,871,379
Class C 19,718 293,966
--------- -------------
Total Dividend Reinvestment 2,746,792 $ 40,889,008
========= =============
Repurchases:
Class A (8,572,686) $(132,355,144)
Class B (1,109,391) (16,975,680)
Class C (85,772) (1,323,049)
--------- -------------
Total Repurchases (9,767,849) $(150,653,873)
========= =============
</TABLE>

27
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within five years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule.

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- --------------------------------------------------------------
<S> <C> <C>
First.................................... 5.00% 1.00%
Second................................... 4.00% None
Third.................................... 3.00% None
Fourth................................... 2.50% None
Fifth.................................... 1.50% None
Sixth and Thereafter..................... None None

</TABLE>

For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$48,500 and CDSC on the redeemed shares of Classes B and C of approximately
$125,400. Sales charges do not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $730,572,633 and $799,658,611,
respectively.

5. DISTRIBUTION AND SERVICE PLANS

The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $678,000.

28
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen American Capital Harbor
Fund (the "Fund") at December 31, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Chicago, Illinois
January 29, 1997

29
<PAGE>

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International /Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term
Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money

To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.

To view a current Van Kampen American Capital or Morgan Stanley fund prospectus
or to receive additional fund information, choose from one of the following:

. visit our web site at www.vkac.com N to view prospectuses, select
Investors' Place, then Download a Prospectus
. call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
. e-mail us by visiting www.vkac.com and selecting Investors' Place

30
<PAGE>

VAN KAMPEN AMERICAN CAPITAL HARBOR FUND

Board of Trustees

J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman

Officers

DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, Texas 77056

Distributor

VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

Shareholder Servicing Agent

ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256

Custodian

STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105

Legal Counsel

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

Independent Accountants

PRICE WATERHOUSE LLP
200 E. Randolph Drive
Chicago, IL 60601

TAX NOTICE TO CORPORATE
SHAREHOLDERS

For 1997, 20.36% of the dividends paid by the fund and taxed as ordinary income
qualified for the 70% dividends received deduction for corporations.

* "Interested" persons of the Fund, as defined in the Investment Company Act
of 1940.
(c) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.

This report is submitted for the general information of the shareholders of the
fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.

31
<PAGE>

VAN KAMPEN AMERICAN CAPITAL HARBOR FUND

THIS PAGE INTENTIONALLY LEFT BLANK

32
<PAGE>

Van Kampen American Capital Distributors, Inc. Bulk Rate
One Parkview Plaza U.S. Postage
Oakbrook Terrace, Illinois 60181 PAID
VAN KAMPEN
AMERICAN CAPITAL

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> Harbor Class A
<MULTIPLIER> 1

<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> HARBOR CLASS B
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 410,734,666<F1>
<INVESTMENTS-AT-VALUE> 458,318,805<F1>
<RECEIVABLES> 12,324,941<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 47,091<F1>
<TOTAL-ASSETS> 470,690,837<F1>
<PAYABLE-FOR-SECURITIES> 2,235,030<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,121,112<F1>
<TOTAL-LIABILITIES> 8,356,142<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 81,120,868
<SHARES-COMMON-STOCK> 5,426,072
<SHARES-COMMON-PRIOR> 5,264,665
<ACCUMULATED-NII-CURRENT> 1,807,183<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 4,507,515<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 47,584,139<F1>
<NET-ASSETS> 81,289,568
<DIVIDEND-INCOME> 7,614,260<F1>
<INTEREST-INCOME> 13,976,440<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (5,527,490)<F1>
<NET-INVESTMENT-INCOME> 16,063,210<F1>
<REALIZED-GAINS-CURRENT> 54,691,941<F1>
<APPREC-INCREASE-CURRENT> 1,495,425<F1>
<NET-CHANGE-FROM-OPS> 72,250,576<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (3,045,626)
<DISTRIBUTIONS-OF-GAINS> (8,428,584)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 702,695
<NUMBER-OF-SHARES-REDEEMED> (1,201,555)
<SHARES-REINVESTED> 660,267
<NET-CHANGE-IN-ASSETS> 2,362,351
<ACCUMULATED-NII-PRIOR> 1,590,591<F1>
<ACCUMULATED-GAINS-PRIOR> 2,071,254<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 2,510,215<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 5,527,490<F1>
<AVERAGE-NET-ASSETS> 81,827,243
<PER-SHARE-NAV-BEGIN> 14.992
<PER-SHARE-NII> 0.470
<PER-SHARE-GAIN-APPREC> 1.848
<PER-SHARE-DIVIDEND> (0.610)
<PER-SHARE-DISTRIBUTIONS> (1.719)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.981
<EXPENSE-RATIO> 1.82
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> HARBOR CLASS C
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 410,734,666<F1>
<INVESTMENTS-AT-VALUE> 458,318,805<F1>
<RECEIVABLES> 12,324,941<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 47,091<F1>
<TOTAL-ASSETS> 470,690,837<F1>
<PAYABLE-FOR-SECURITIES> 2,235,030<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,121,112<F1>
<TOTAL-LIABILITIES> 8,356,142<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,653,860
<SHARES-COMMON-STOCK> 305,181
<SHARES-COMMON-PRIOR> 236,225
<ACCUMULATED-NII-CURRENT> 1,807,183<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 4,507,515<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 47,584,139<F1>
<NET-ASSETS> 4,602,154
<DIVIDEND-INCOME> 7,614,260<F1>
<INTEREST-INCOME> 13,976,440<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (5,527,490)<F1>
<NET-INVESTMENT-INCOME> 16,063,210<F1>
<REALIZED-GAINS-CURRENT> 54,691,941<F1>
<APPREC-INCREASE-CURRENT> 1,495,425<F1>
<NET-CHANGE-FROM-OPS> 72,250,576<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (158,576)
<DISTRIBUTIONS-OF-GAINS> (466,649)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 95,609
<NUMBER-OF-SHARES-REDEEMED> (58,685)
<SHARES-REINVESTED> 32,032
<NET-CHANGE-IN-ASSETS> 1,040,091
<ACCUMULATED-NII-PRIOR> 1,590,591<F1>
<ACCUMULATED-GAINS-PRIOR> 2,071,254<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 2,510,215<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 5,527,490<F1>
<AVERAGE-NET-ASSETS> 4,037,851
<PER-SHARE-NAV-BEGIN> 15.079
<PER-SHARE-NII> 0.448
<PER-SHARE-GAIN-APPREC> 1.882
<PER-SHARE-DIVIDEND> (0.610)
<PER-SHARE-DISTRIBUTIONS> (1.719)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.080
<EXPENSE-RATIO> 1.82
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>