VAN KAMPEN MERRITT TAX FREE FUND /IL/, 497, 1995-08-04

VAN KAMPEN MERRITT TAX FREE FUND /IL/
497, 1995-08-04

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<PAGE> 1

DEAR VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND SHAREHOLDER:

Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Municipal Bond Fund (the "AC
Fund"). The Reorganization calls for the AC Fund shareholders to become
shareholders of the Van Kampen American Capital Municipal Income Fund (the "VK
Fund"), a mutual fund which pursues a substantially similar investment
objective.

The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed Reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the Reorganization, please refer to
the combined Proxy Statement/Prospectus.

HOW WILL THE REORGANIZATION AFFECT ME?

Assuming shareholders of the AC Fund approve the Reorganization, the assets
and liabilities of the AC Fund will be combined with those of the VK Fund and
you will become a shareholder of the VK Fund. You will receive shares of the VK
Fund approximately equal in value at the time of issuance to the shares of the
AC Fund that you hold immediately prior to the Reorganization. See the section
of the combined Proxy Statement/Prospectus entitled "Distributor, Purchase,
Valuation, Redemption and Exchange of Shares." Class A shareholders of the AC
Fund will receive Class A shares of the VK Fund; Class B shareholders of the AC
Fund will receive Class B shares of the VK Fund; and Class C shareholders of the
AC Fund will receive Class C shares of the VK Fund.

WHY IS THE REORGANIZATION BEING RECOMMENDED?

As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp.
("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the AC Fund and the VK Fund
separately. The Reorganization will result in combining the assets and
liabilities of the AC Fund with the assets and liabilities of the VK Fund and
consolidating their operations.
<PAGE> 2

The Reorganization is intended to provide various benefits to shareholders of
the AC Fund who become shareholders of the VK Fund (as well as to existing and
future investors in the VK Fund). For example, higher net asset levels would
enable the VK Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
potentially reducing per share expense levels. Higher net asset levels also may
benefit portfolio management by permitting larger individual portfolio
investments that may result in reduced transaction costs or more favorable
pricing and by providing the opportunity for greater portfolio diversity. These
benefits, in turn, should have a favorable effect on the relative performance of
the VK Fund.

The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including approval by the AC Fund's shareholders), which
are summarized below in "The Proposed Reorganization -- Terms of the Agreement"
section of the accompanying combined Proxy Statement/Prospectus. These
conditions are stated in the Agreement which is attached as Exhibit A to the
combined Proxy Statement/Prospectus.

WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?

No. The full value of your shares of the AC Fund will be exchanged for shares
of the corresponding class of the VK Fund without any sales load, commission or
other transactional fee being imposed. As more fully discussed in the combined
Proxy Statement/Prospectus, the holding period for shareholders acquiring Class
B or Class C shares of the VK Fund in the Reorganization subject to a contingent
deferred sales charge will be measured from the time (i) the holder purchased
Class B or C shares from the AC Fund or (ii) purchased Class B or C shares of
any other Van Kampen American Capital open-end fund and subsequently exchanged
into Class B or C shares of the AC Fund. If the Reorganization is completed, the
VK Fund will bear the costs associated with the Reorganization, such as printing
and mailing costs and other expenses associated with the Special Meeting. If the
Reorganization is not completed VKAC will bear the costs associated with the
Reorganization.

HOW WILL THE FEES PAID BY THE VK FUND COMPARE TO THOSE PAYABLE BY THE AC FUND?

It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the VK Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses applicable to the AC
Fund.
<PAGE> 3

WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VK FUND? WHAT HAPPENS TO MY
ACCOUNT IF THE REORGANIZATION IS APPROVED?

If the Reorganization is approved, your interest in Class A, B or C shares of
the AC Fund will automatically be converted into the same class of shares of the
VK Fund and we will send you written confirmation that this change has taken
place. You will receive the same class of shares of the VK Fund approximately
equal in value to your Class A, B or C shares of the AC Fund. No certificates
for VK Fund shares will be issued in connection with the Reorganization,
although such certificates will be available upon request. If you currently hold
certificates representing your shares of the AC Fund, it is not necessary to
surrender such certificates.

WHO WILL ADVISE THE VK FUND AND PROVIDE OTHER SERVICES?

The VK Adviser provides advisory services to the VK Fund under an arrangement
that is substantially similar to that currently in effect between the AC Fund
and AC Adviser. The contractual advisory fees payable by the VK Fund are no
higher than the contractual advisory fees applicable to the AC Fund. Van Kampen
American Capital Distributors, Inc. serves as distributor of shares of both the
VK Fund and the AC Fund. In addition, State Street Bank & Trust Company, 225
Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713, is the
custodian of both the VK Fund and the AC Fund. ACCESS Investor Services, Inc.
("ACCESS"), P.O. Box 418256, Kansas City, Missouri 64141-9256, serves as the
transfer agent for both the VK Fund and the AC Fund.

WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the shares
of the VK Fund in connection with the Reorganization. Additionally, the AC Fund
would not recognize any gain or loss as a result of the transfer of all of its
assets and liabilities solely in exchange for the shares of the VK Fund or as a
result of its liquidation. The VK Fund expects that it will not recognize any
gain or loss as a result of the Reorganization, that it will take a carryover
basis in the assets acquired from the AC Fund and that its holding period of
such assets will include the period during which assets were held by the AC
Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences" in
the combined Proxy Statement/ Prospectus.

WHAT IF I REDEEM MY AC FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?

If you choose to redeem your shares of AC Fund before the Reorganization takes
place, the redemption will be treated as a normal redemption of shares and will
be a
<PAGE> 4

taxable transaction, unless your account is not subject to taxation, such as an
individual retirement account or other tax-qualified retirement plan.

We hope these answers help to clarify the Reorganization proposal for you. If
you still have questions, do not hesitate to call us at 1-800-341-2911. Please
give this matter your prompt attention. We need to receive your proxy before the
shareholder meeting scheduled for September 15, 1995. If shareholders approve
the Reorganization, it is expected to take effect on September 22, 1995.

Thank you for your investment in Van Kampen American Capital Municipal Bond
Fund.

Very truly yours,

Van Kampen American Capital
Municipal Bond Fund

Don G. Powell
President and Trustee
<PAGE> 5

VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL BOND FUND
2800 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(800) 421-5666

NOTICE OF SPECIAL MEETING
SEPTEMBER 15, 1995

A Special Meeting of Shareholders of Van Kampen American Capital Municipal
Bond Fund (the "AC Fund") will be held at the Hyatt Regency Oak Brook, 1909
Spring Road, Oak Brook, Illinois 60521, on September 15, 1995 at 2:00 p.m. (the
"Special Meeting"), for the following purposes:

(1) To approve a plan of reorganization pursuant to which the AC Fund would
transfer all of its assets and liabilities to the Van Kampen American Capital
Municipal Income Fund (the "VK Fund") in exchange for corresponding Class A, B
and C shares of beneficial interest of the VK Fund, the AC Fund would
distribute such Class A, B and C shares of the VK Fund to the holders of Class
A, B and C shares of the AC Fund, respectively, and the AC Fund would be
dissolved.

(2) To transact such other business as may properly come before the Special
Meeting.

The Special Meeting is scheduled to be held jointly with the special meetings
of the respective shareholders of five other Van Kampen American Capital Funds
because the shareholders of each of such funds are expected to consider and vote
on similar matters. In the event that any shareholder of any Van Kampen American
Capital Fund present at the special meetings objects to the holding of a joint
meeting and moves for an adjournment of the meeting of such fund to a time
immediately after the other special meetings so that such fund's special meeting
may be held separately, the persons named as proxies will vote in favor of such
adjournment. Shareholders of each Van Kampen American Capital Fund will vote
separately on each of the proposals relating to their fund, and an unfavorable
vote on a proposal by the shareholders of one fund will not affect the
implementation of such a proposal by another fund if the proposal is approved by
the shareholders of that fund.

Shareholders of record as of the close of business on August 1, 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.

For the Board of Trustees,

Nori L. Gabert
Secretary

August 2, 1995
---------------------

PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 6

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND

PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

This Proxy Statement/Prospectus is being furnished to shareholders of the Van
Kampen American Capital Municipal Bond Fund (the "AC Fund"), and relates to the
Special Meeting of Shareholders of the AC Fund (the "Special Meeting") called
for the purpose of approving the proposed reorganization of the AC Fund (the
"Reorganization") which would result in shareholders of the AC Fund in effect
exchanging their Class A, B and C shares of the AC Fund for Class A, B and C
shares, respectively, of the Van Kampen American Capital Municipal Income Fund
(the "VK Fund"), a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "VKAC Tax Free Trust"). The Reorganization would be
accomplished as follows: (1) the VK Fund would acquire all the then existing
assets and liabilities of the AC Fund in exchange for Class A, B and C shares of
beneficial interest of the VK Fund (the "Shares"); (2) the AC Fund would
distribute the Shares to the AC Fund shareholders holding the same respective
class of shares; and (3) the AC Fund would dissolve and all shares of the AC
Fund would be cancelled.

The VK Fund, an open-end, diversified management investment company, is one of
twelve series of the VKAC Tax Free Trust, which is authorized to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, for
each series authorized by its Board of Trustees. Each series represents
interests in a separate portfolio of securities and other assets, with its own
investment objectives and policies. The investment objective of the VK Fund is
to provide investors with a high level of current income exempt from federal
income tax consistent with preservation of capital, which is substantially
similar to that of the AC Fund. (See "Comparisons of the VK Fund and AC
Fund -- Investment Objectives and Policies" below.) There can be no assurance
that the VK Fund will achieve its investment objective. The address, principal
executive office and telephone number of the VKAC Tax Free Trust is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800) 225-2222. The
address, principal executive office and telephone number of the AC Fund is 2800
Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666. The enclosed proxy and
this Proxy Statement/Prospectus are first being sent to AC Fund shareholders on
or about August 2, 1995.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
<PAGE> 7

This Proxy Statement/Prospectus contains information shareholders of the AC
Fund should know before voting on the Reorganization (in effect, investing in
Class A, B or C Shares, as the case may be, of the VK Fund) and constitutes an
offering of Class A, B and C Shares of the VK Fund only. Please read it
carefully and retain it for future reference. A Statement of Additional
Information dated July 31, 1995, relating to this Proxy Statement/Prospectus
(the "Reorganization SAI") has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated herein by reference. A Prospectus
(the "VK Fund Prospectus") and Statement of Additional Information containing
additional information about the VK Fund, each dated July 31, 1995, have been
filed with the SEC and are incorporated herein by reference. A copy of the VK
Fund Prospectus accompanies this Proxy Statement/Prospectus. A Prospectus and
Statement of Additional Information containing additional information about the
AC Fund, each dated August 1, 1995, have been filed with the SEC and are
incorporated herein by reference. Copies of any of the foregoing may be obtained
without charge by calling or writing to the AC Fund at the telephone number or
address shown above. If you wish to request the Reorganization SAI, please ask
for the "Reorganization SAI."
---------------------

No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------

The VK Fund and the VKAC Tax Free Trust are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act of 1940, as amended (the "Act"), and in accordance
therewith file reports and other information with the SEC. Such reports, other
information and proxy statements filed by the VK Fund and the VKAC Tax Free Fund
can be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Office
at 500 West Madison Street, Chicago, Illinois. Copies of such material can also
be obtained from the SEC's Public Reference Branch, Office of Consumer Affairs
and Information Services, Washington, D.C. 20549, at prescribed rates.

The date of this Proxy Statement/Prospectus is July 31, 1995.

2
<PAGE> 8

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION............ 4
A. SUMMARY.................................................... 4
The Reorganization......................................... 4
Comparisons of the VK Fund and the AC Fund................. 5
Investment Objectives and Policies....................... 6
Advisory and Other Fees.................................. 8
Distribution, Purchase, Valuation, Redemption and
Exchange of Shares..................................... 9
Federal Income Tax Consequences............................ 14
Reasons for the Proposed Reorganization.................... 15
B. RISK FACTORS............................................... 17
Nature of Investment....................................... 17
Changes in Certain Investment Practices.................... 18
C. INFORMATION ABOUT THE FUNDS................................ 18
D. THE PROPOSED REORGANIZATION................................ 19
Terms of the Agreement..................................... 19
Description of Securities to be Issued..................... 21
Shares of Beneficial Interest............................ 21
Voting Rights of Shareholders............................ 21
Continuation of Shareholder Accounts and Plans; Share
Certificates............................................... 22
Federal Income Tax Consequences............................ 22
Capitalization............................................. 24
Comparative Performance Information........................ 24
Ratification of Investment Objective, Policies and
Restrictions of the VK Fund.............................. 25
Legal Matters.............................................. 25
Expenses................................................... 26
E. RECOMMENDATION OF AC BOARD................................. 26
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING............
26
OTHER INFORMATION................................................. 26
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND............... 26
B. SHAREHOLDER PROPOSALS...................................... 27
VOTING INFORMATION AND REQUIREMENTS............................... 27
EXHIBIT A.........................................................
EXHIBIT B.........................................................
</TABLE>

3
<PAGE> 9

APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION

A. SUMMARY

The following is a summary of, and is qualified by references to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VKAC Tax
Free Fund attached hereto as Exhibit A (the "Agreement"), the prospectus of the
AC Fund dated August 1, 1995 (the "AC Fund Prospectus") incorporated herein by
reference and the prospectus of the VK Fund dated July 31, 1995 (the "VK Fund
Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of
Class A, B and C Shares of the VK Fund only.

THE REORGANIZATION

On May 11, 1995, the Board of Trustees of the AC Fund (the "AC Board")approved
the Agreement. The Agreement provides that the AC Fund will transfer all of its
assets and liabilities to the VK Fund in exchange for Class A, B and C shares of
the VK Fund. At the Closing (as defined herein), the VK Fund will issue Shares
of the VK Fund to the AC Fund which VK Fund Shares will have an aggregate net
asset value approximately equal in amount to the net asset value of the AC Fund
net assets as of the Closing. See "Distribution, Purchase, Valuation and
Redemption of Shares" below. The Agreement provides that the AC Fund will
dissolve pursuant to a plan of liquidation and dissolution to be adopted by the
AC Board following the Closing, and as part of such dissolution, will distribute
to each shareholder of the AC Fund Shares of the respective class of the VK Fund
approximately equal in value to their existing shares in the AC Fund. All
members of the AC Board were elected as trustees of the VK Fund on July 21,
1995.

The AC Board has unanimously determined that the Reorganization is in the best
interests of shareholders of each class of shares of the AC Fund and that the
interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the VKAC Tax Free Fund (the
"VK Board") has unanimously determined that the Reorganization is in the best
interests of the VK Fund and that the interests of each class of shares of
existing shareholders of the VK Fund will not be diluted as a result of the
Reorganization. Management of the respective funds believes that the proposed
Reorganization of the AC Fund into the VK Fund should allow the VK Fund to
achieve future economies of scale and eliminate certain costs of operating the
AC Fund and the VK Fund separately.

The VK Fund has agreed to pay all of the costs of soliciting approval of the
Reorganization by the AC Fund's shareholders and related costs of the
Reorganization in the event the Reorganization is completed, including expenses
incurred by the AC

4
<PAGE> 10

Fund. Accordingly, if the Reorganization is completed, shareholders of the VK
Fund after the Reorganization will bear a pro rata portion of such expenses. If
the Reorganization is not completed VKAC will bear the costs associated with the
Reorganization.

The AC Board is asking shareholders of the AC Fund to approve the
Reorganization at a Special Meeting to be held on September 15, 1995. If
shareholders of the AC Fund approve the Reorganization, it is expected that the
Closing will be on September 22, 1995, but it may be at a different time as
described herein.

THE AC BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF THE
REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS."

COMPARISONS OF THE VK FUND AND THE AC FUND

The principal changes which would result from the Reorganization are listed
below:

(1) The holders of Class A, B and C shares of the AC Fund would become holders
of the same class of Shares, respectively, of the VK Fund. The AC Fund and
the VK Fund have substantially similar investment objectives and follow
similar investment strategies. Like the AC Fund, the VK Fund also has the
ability to utilize options and futures, but it may also engage in interest
rate transactions such as swaps, caps, floors or collars. In addition, the
VK Fund may invest a substantial portion of its assets in municipal
securities that pay interest that is subject to the federal alternative
minimum tax, while the AC Fund may only invest up to 20% of its assets in
such securities.

(2) The VK Fund is managed by Van Kampen American Capital Investment Advisory
Corp. ("VK Adviser"), an affiliate of the AC Fund's investment adviser,
Van Kampen American Capital Asset Management, Inc. ("AC Adviser"). The
annual advisory fee for the VK Fund is 0.50% of its average net assets up
to $500 million and 0.45% on net assets over $500 million. As of March 31,
1995, the VK Fund's net assets were approximately $691.9 million. The
annual advisory fee for the AC Fund is 0.50% of its daily net assets. As
of March 31, 1995, the AC Fund's net assets were approximately $352.2
million.

(3) Both the AC Fund and the VK Fund offer three classes of shares. The Class
A shares of both the VK Fund and the AC Fund are subject to an initial
sales charge of up to 4.75%. However, the initial sales charge applicable
to Class A shares of the VK Fund will be waived for Class A Shares
acquired in the Reorganization. Any subsequent purchases of Class A shares
of the VK Fund after the Reorganization will be subject to an initial
sales charge of up to 4.75%, excluding Class A Shares purchased

5
<PAGE> 11

through the dividend reinvestment plan. Purchases of Class A shares of the
VK Fund or the AC Fund in amounts of $1,000,000 or more are not subject to
an initial sales charge but a contingent deferred sales charge of 1.00%
may be imposed on certain redemptions made within the first year after
purchase. Class B Shares of the VK Fund and Class B shares of the AC Fund
do not incur a sales charge when they are purchased, but generally are
subject to a contingent deferred sales charge of 4.00% if redeemed within
the first year after purchase, which charge is reduced to zero over a six
year period in the case of the VK Fund and over a five year period in the
case of the AC Fund. However, Class B Shares of the VK Fund acquired in
the Reorganization will remain subject to the contingent deferred sales
charge applicable to Class B shares of the AC Fund. Class C shares of the
VK Fund and the AC Fund do not incur a sales charge when purchased, but
are subject to a contingent deferred sales charge of 1.00% if redeemed
within the first year after purchase.

(4) Both the AC Fund and the VK Fund have adopted distribution plans (the
"Distribution Plans") pursuant to Rule 12b-1 under the Act and have
adopted service agreements or plans (the "Service Plans"). Both the VK
Fund and the AC Fund can pay up to 0.75% of their respective average daily
net assets attributable to Class B and C shares for reimbursement of
certain distribution-related expenses. In addition, both the VK Fund and
the AC Fund can pay up to 0.25% of the respective average daily net assets
attributable to Class A, B and C shares for the provision of ongoing
services to shareholders. Class B shares of the VK Fund and the AC Fund
automatically convert to Class A shares after six years. Unlike Class C
shares of the VK Fund, Class C shares of the AC Fund automatically convert
to Class A shares after ten years. However, Class B and C Shares of the VK
Fund acquired in the Reorganization will automatically convert to Class A
shares of the VK Fund in accordance with the same conversion schedule
applicable to Class B and C shares of the AC Fund, respectively.

Certain other comparisons between the AC Fund and the VK Fund are discussed
below.

INVESTMENT OBJECTIVES AND POLICIES

The VK Fund and the AC Fund have substantially similar investment objectives
and also share similar investment practices, but there are also certain
differences in their investment policies, practices and restrictions. The
investment objective of the VK Fund is to provide a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
investment objective of the AC Fund is to provide as high a level of current
interest income exempt from federal income tax as is consistent with the
preservation of capital.

The VK Fund and the AC Fund attempt to achieve their investment objectives by
generally investing at least 80% of their assets in diversified portfolios of
tax exempt municipal securities rated investment grade at the time of
investment. Additionally, the AC Fund may not invest more than 50% of its assets
in securities

6
<PAGE> 12

rated in a category below the top three ratings categories of Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The VK Fund
has no such restriction. The VK Fund has the flexibility to invest in municipal
bonds rated, at the time of investment, between BB and B- (inclusive) by S&P or
between Ba and B3 (inclusive) by Moody's, while the AC Fund may not invest in
municipal bonds rated, at the time of investment, below B by S&P and Moody's.

As the table below indicates, the holdings of the VK Fund and the AC Fund have
similar credit quality, although a larger percentage of the VK Fund's holdings
have the highest credit rating of Moody's and Standard & Poor's. Unlike the AC
Fund, the VK Fund's policy as to ratings is not fundamental and may be changed
without shareholder approval.

In addition, the VK Fund may invest a substantial portion of its assets in
securities which are subject to the alternative minimum tax, while the AC Fund
may only invest up to 20% of its assets in such securities. Like the AC Fund,
the VK Fund has the ability to utilize options and futures, but it may also
engage in interest rate transactions such as swaps, caps, floors or collars.

A comparison of the credit quality of the respective portfolios of the VK Fund
and the AC Fund, as of March 31, 1995, is set forth in the table below.

CREDIT QUALITY
(AS OF MARCH 31, 1995)

<TABLE>
<CAPTION>
VK FUND AC FUND
----------------------------- ---------------------------
CREDIT RATING MOODY'S STANDARD & POOR'S MOODY'S STANDARD & POOR'S
- ---------------------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Aaa/AAA..................... 48.4% 49.8% 19.4% 15.9%
Aa/AA....................... 4.2 4.1 14.4 16.7
A/A......................... 7.3 10.7 24.3 31.3
Baa/BBB..................... 14.5 5.3 11.6 9.1
Ba/BB....................... 2.4 6.3 0.5 2.0
B/B......................... 0.7 0.6 0.0 0.0
Caa/CCC..................... 0.0 0.0 0.0 0.9
Ca/CC....................... 0.0 0.0 0.0 0.0
C/C......................... 0.0 0.0 0.0 0.0
Unrated..................... 22.5 23.2 29.8 24.1
----- ----- ----- -----
TOTAL............... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

7
<PAGE> 13

for managing institutional portfolios, and over $50 billion under management or
supervision. VKAC's more than 40 open-end and 38 closed-end funds and more than
2,700 unit investment trusts are professionally distributed by leading financial
advisers nationwide. The business address of VK Adviser is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. VK Adviser and the Advisory Agreement are more
fully described in the VK Fund Prospectus and Statement of Additional
Information.

ADVISORY AND OTHER FEES

The AC Fund pays AC Adviser a monthly fee based on its average daily net asset
value at the annual rate of 0.50% of the AC Fund's average net assets. In
addition, the AC Fund bears most expenses associated with its operation and the
issuance and repurchase or redemption of its securities, except for the
compensation of trustees affiliated with VKAC, and officers of the AC Fund who
are interested persons of VKAC or its subsidiaries. Total operating expenses for
the period ended September 30, 1994, for the AC Fund were 0.93%, 1.72% and 1.72%
with respect to Class A, B and C shares, respectively.

The VK Fund pays VK Adviser a monthly fee based on its average daily net asset
value at the annual rates of 0.50% of the first $500 million and 0.45%
thereafter. The effective advisory fee for the fiscal year ended December 31,
1994 was .48% of the VK Fund's average daily net asset value. The VK Fund bears
most expenses associated with its operations and the issuance and repurchase or
redemption of its securities, except for the compensation of trustees affiliated
with VKAC and officers of the VK Fund who are interested persons of VKAC or its
subsidiaries. The total operating expenses of the VK Fund for the period ended
December 31, 1994 were 0.99%, 1.70% and 1.74% of the average daily net assets
attributable to Class A, B and C Shares, respectively. For a complete
description of the VK Fund's advisory services, see the respective sections in
the VK Fund's Prospectus and Statement of Additional Information entitled
"Investment Advisory Services" and "Investment Advisory and Other Services --
Investment Advisory Agreement." For a complete description of the AC Fund's
advisory services, see the respective sections in the AC Fund's Prospectus and
Statement of Additional Information entitled "Investment Advisory Services" and
"Investment Advisory Agreement."

In addition, the VK Fund has adopted the Distribution Plan with respect to
each class of shares pursuant to Rule 12b-1 under the Act and has adopted the
Service Plan with respect to each class of its shares. The Distribution Plan and
the Service Plan provide that the VK Fund can pay up to 0.25%, 1.00% and 1.00%
of the VK Fund's average daily net assets attributable to the Class A, B and C
shares, respectively, for reimbursement of certain distribution-related expenses
and for the provision of ongoing services to shareholders. The Distribution Plan
and the Service Plan are being implemented through an agreement with Van Kampen
American

8
<PAGE> 14

Capital Distributors, Inc. ("VKAC Distributors"), the distributor of each class
of the VK Fund's shares, sub-agreements between VKAC Distributors and members of
the National Association of Securities Dealers, Inc. (the "NASD") who are acting
as securities dealers and NASD members or eligible non-members who are acting as
brokers or agents and similar agreements between the VK Fund and banks who are
acting as brokers for their customers that may provide their customers or
clients certain services or assistance. The AC Fund has similar Distribution and
Service Plans. The Distribution and Service Plans provide that the AC Fund can
pay up to 0.25%, 1.00% and 1.00% of the AC Fund's average daily net assets
attributable to the Class A, B and C shares, respectively, for reimbursement of
certain distribution-related expenses and for the provision of ongoing services
to shareholders and provides for payment to members of the NASD referred to
above that provide their customers or clients certain services or assistance.
For a complete description of these arrangements with respect to the VK Fund,
see the section in the VK Fund's Prospectus entitled "The Distribution and
Service Plans." For a complete description of these arrangements with respect to
the AC Fund, see the respective sections in the AC Fund's Prospectus and
Statement of Additional Information entitled "Distribution Plans."

DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES

Generally, Class B shares of the VK Fund and the AC Fund do not incur a sales
charge when they are purchased, but generally are subject to a contingent
deferred sales charge if redeemed within a specified period of time from the
date of purchase. Class B Shares of the VK Fund are subject to a contingent
deferred sales charge equal to 4.00% of the lesser of the then current net asset
value or the original purchase price on Class B Shares redeemed during the first
year after purchase, which charge is reduced to zero over a six year period.
Class B shares of the AC Fund are subject to a contingent deferred sales charge
equal to 4.00% of the lesser of the then current net asset value or the original
purchase price on Class B shares redeemed during the first year after purchase,
which charge is reduced to zero over a five year period. However, Class B Shares
of the VK Fund acquired in the Reorganization will remain subject to the
contingent deferred sales charge applica-

9
<PAGE> 15

ble to Class B shares of the AC Fund. Class B shares of the AC Fund and the VK
Fund automatically convert to Class A shares six years after purchase.

Generally, Class C shares of the VK Fund and the AC Fund do not incur a sales
charge if redeemed after the first year after purchase. Both Class C shares of
the VK Fund and the AC Fund are subject to a contingent deferred sales charge
equal to 1.00% of the lesser of the then current net asset value or the original
purchase price on such shares redeemed during the first year after purchase and
do not incur a sales charge if redeemed after the first year from the date of
purchase. See "Fee Comparisons" below. Class C shares of the AC Fund
automatically convert to Class A shares after ten years. Class C shares of the
VK Fund have no such automatic conversion feature. However, Class C Shares of
the VK Fund acquired in the Reorganization will remain subject to the conversion
schedule applicable to Class B shares of the AC Fund.

With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. eastern time. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share would have been $10.12, $10.12 and
$10.13 on July 21, 1995 for Classes A, B and C, respectively. The AC Fund,
however, generally computes net asset value per share by valuing fixed income
securities using the last reported bid price. When calculating the net assets of
the AC Fund in accordance with this pricing methodology, the net asset value per
share was $10.08, $10.08 and $10.09 on July 21, 1995 for Classes A, B and C,
respectively. In connection with the Reorganization, the net assets of the AC
Fund will be calculated using the current pricing methodology of the VK Fund.
For this reason the value of the VK Fund Shares received in connection with the
Reorganization may be approximately equal in value to the shares of the AC Fund
held immediately prior to the Reorganization rather than identical in value.

The minimum initial investment with respect to each class of shares in the VK
Fund and the AC Fund is $500, although Shares of the VK Fund acquired in
connection with the Reorganization will not be subject to the minimum investment
limitation. The minimum subsequent investment in the VK Fund and the AC Fund is
$25. For a complete description of these arrangements with respect to the VK
Fund, see the section in the VK Fund Prospectus entitled "Purchase of Shares."
For a complete description of these arrangements with respect to the AC Fund,
see the respective sections in the AC Fund's Prospectus and Statement of
Additional Information entitled "Purchase of Shares" and "Purchase and
Redemption of Shares."

Shares of either the AC Fund or the VK Fund may be purchased by check, by
electronic transfer or by bank wire and also offer exchange privileges among all

10
<PAGE> 16

other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors (except Van Kampen American Capital Government Target Fund).

Shares of the VK Fund and the AC Fund properly presented for redemption may be
redeemed or exchanged at the next determined net asset value per share (subject
to any applicable deferred sales charge). Shares of either the AC Fund or the VK
Fund may be redeemed or exchanged by mail or by special redemption privileges
(telephone exchange, telephone redemption, by check or electronic transfer). If
a shareholder of either fund attempts to redeem shares within a short time after
they have been purchased by check, the respective fund may delay payment of the
redemption proceeds until such fund can verify that payment for the purchase of
the shares has been (or will be) received. No further purchases of the shares of
the AC Fund may be made after the date on which the shareholders of the AC Fund
approve the Reorganization, and the stock transfer books of the AC Fund will be
permanently closed as of the date of Closing. Only redemption requests and
transfer instructions received in proper form by the close of business on the
day prior to the date of Closing will be fulfilled by the AC Fund. Redemption
requests or transfer instructions received by the AC Fund after that date will
be treated by the AC Fund as requests for the redemption or instructions for
transfer of the shares of the VK Fund credited to the accounts of the
shareholders of the AC Fund. Redemption requests or transfer instructions
received by the AC Fund after the close of business on the day prior to the date
of Closing will be forwarded to the VK Fund. For a complete description of the
redemption arrangements for the VK Fund, see the section in the VK Fund's
Prospectus entitled "Redemption of Shares," and the sections in the AC Fund's
Prospectus and Statement of Additional Information entitled "Redemption of
Shares" and "Purchase and Redemption of Shares."

The differences in the distribution, purchase and redemption procedures and
fee structure of the shares of the VK Fund and the shares of the AC Fund are
highlighted in the table below.

FEE COMPARISONS

11
<PAGE> 17

<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.48% 0.50% 0.47%
Rule 12b-1 Fees.................................... 0.30%(4) 0.20% 0.25%
Other Expenses..................................... 0.21% 0.23% 0.19%
Total Fund Operating Expenses...................... 0.99% 0.93% 0.91%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 57 $ 57 $ 56
Three Years...................................... $ 78 $ 76 $ 75
Five Years....................................... $ 100 $ 97 $ 96
Ten Years........................................ $ 163 $ 156 $ 154
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 57 $ 57 $ 56
Three Years...................................... $ 78 $ 76 $ 75
Five Years....................................... $ 100 $ 97 $ 96
Ten Years........................................ $ 163 $ 156 $ 154

CLASS B SHARES
- ---------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge (as a percentage of
the lower of the original purchase price or
redemption proceeds)............................. 4.00%(2) 4.00% (3) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.48% 0.50% 0.47%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.22% 0.24% 0.20%
Total Fund Operating Expenses...................... 1.70% 1.74% 1.67%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 57 $ 58 $ 57
Three Years...................................... $ 89 $ 85 $ 88
Five Years....................................... $ 107 $ 109 $ 106
Ten Years........................................ $ 165 $ 164 $ 159
</TABLE>

12
<PAGE> 18

<TABLE>
<CAPTION>
VK AC
CLASS B SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 17 $ 18 $ 17
Three Years...................................... $ 54 $ 55 $ 53
Five Years....................................... $ 92 $ 94 $ 91
Ten Years........................................ $ 165 $ 164 $ 159

CLASS C SHARES(5)
- ---------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.48% 0.50% 0.47%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.26% 0.24% 0.24%
Total Fund Operating Expenses...................... 1.74% 1.74% 1.71%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 28 $ 28 $ 27
Three Years...................................... $ 55 $ 55 $ 54
Five Years....................................... $ 94 $ 94 $ 93
Ten Years........................................ $ 205 $ 205 $ 202
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 18 $ 18 $ 17
Three Years...................................... $ 55 $ 55 $ 54
Five Years....................................... $ 94 $ 94 $ 93
Ten Years........................................ $ 205 $ 205 $ 202
</TABLE>

- ---------------
(1) Class A shares of the VK Fund received pursuant to the Reorganization will
not be subject to a sales charge upon purchase.

(2) Class B Shares of the VK Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first year
after

13
<PAGE> 19

purchase, which charge is reduced to zero over a six year period as follows:
Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year 4 -- 2.50%; Year
5 -- 1.50%; Year 6 -- 1.00%; and Year 7 -- 0.00%. However, Class B Shares of
the VK Fund acquired in the Reorganization will be subject to the contingent
deferred sales charge schedule applicable to Class B shares of the AC Fund.
(3) Class B shares of the AC Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B shares redeemed during the first year
after purchase, which charge is reduced to zero over a five year period as
follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year 4 -- 2.50%;
Year 5 -- 1.50%; and Year 6 -- 0.00%.
(4) As of June 30, 1995, the Rule 12b-1 fees for the VK Fund's Class A shares
was reduced from 0.30% to 0.25%
(5) Class C shares are subject to a contingent deferred sales charge equal to
1.00% of the lesser of the then current net asset value or the original
purchase price on Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
(6) Expenses examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted in the above table. The Pro Forma column
reflects expenses estimated to be paid on new shares purchased from the
combined fund subsequent to the Reorganization. For those shares issued in
connection with the Reorganization, the following expenses would be incurred
based upon the purchase of the AC Fund immediately prior to the
Reorganization and the Pro Forma expense ratio:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
With Redemption at End of Period
Class A............................... $ 56 $75 $ 96 $ 154
Class B............................... $ 57 $83 $106 $ 159
Class C............................... $ 27 $54 $ 93 $ 202
Without Redemption at End of Period
Class A............................... $ 56 $75 $ 96 $ 154
Class B............................... $ 17 $53 $ 91 $ 159
Class C............................... $ 17 $54 $ 93 $ 202
</TABLE>

* For the fiscal year ended December 31, 1994.
** For the six months ended March 31, 1995, on an annualized basis.

FEDERAL INCOME TAX CONSEQUENCES

14
<PAGE> 20

Fund pursuant to the Reorganization. Additionally, the AC Fund would not
recognize any gain or loss as a result of the exchange of all of its assets for
the shares of the VK Fund or as a result of its liquidation. The VK Fund expects
that it will not recognize any gain or loss as a result of the Reorganization,
that it will take a carryover basis in the assets acquired from the AC Fund and
that its holding period of such assets will include the period during which the
assets were held by the AC Fund. See "The Proposed Reorganization -- Federal
Income Tax Consequences."

The above information is only a summary of more complete information contained
in this Proxy Statement/Prospectus and the related Statement of Additional
Information.

REASONS FOR THE PROPOSED REORGANIZATION

On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from The
Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immediately
after the acquisition, American Capital Management & Research, Inc. was merged
into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed
Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser
currently are each wholly-owned subsidiaries of VKAC.

On February 10, 1995, the VK Board and AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund, in order to seek to achieve certain economies of
scale and efficiencies, (ii) permitting exchangeability of shares between funds
advised by the VK Adviser and the AC Adviser, (iii) selecting a common transfer
agent to facilitate exchangeability and enhance shareholder services, and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").

The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.

The VK Board and the AC Board held joint meetings on March 14, 1995 and April
6-7, 1995 to review the findings and recommendations of the Joint Committee. The
VK Board unanimously approved each element of the Consolidation,

15
<PAGE> 21

including the combination of the VK Fund and AC Fund, on April 7, 1995 subject
to approval of the Consolidation by the AC Board. The AC Board met May 11, 1995,
and unanimously approved each element of the Consolidation, including the
combination of the VK Fund and the AC Fund. Each of the VK Board and the AC
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.

At separate shareholder meetings held on July 21, 1995, the shareholders of
the VK Fund and the AC Fund approved the reorganization of the VK Fund and the
AC Fund into Delaware business trusts (or series thereof) and the combination of
the VK Board and the AC Board. Shareholders of the AC Fund are now being asked
to approve its combination with the VK Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) seek to achieve economies of scale by combining
the assets of the funds and (iii) potentially reduce transaction costs and
obtain greater portfolio diversity.

In connection with approving the combination of the AC Fund with the VK Fund,
the AC Board considered the costs resulting from the separate operations of the
AC Fund and the VK Fund in light of their substantially similar investment
objectives, policies and restrictions. The AC Board also considered the
potential expense savings, economies of scale, reduced per-share expenses and
benefits to the portfolio management process that could result from combining
the assets and operations of the AC Fund and the VK Fund. In this regard, the AC
Board reviewed information provided by the AC Adviser, VK Adviser and VKAC
Distributors, relating to the anticipated cost savings to the shareholders of
the AC Fund and the VK Fund as a result of the Reorganization.

In particular, the AC Board considered the probability that the elimination of
duplicative operations and the increase in asset levels of the VK Fund after the
Reorganization would result in the following potential benefits for investors,
although there can, of course, be no assurances in this regard:

(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the AC Fund and the VK
Fund should eliminate the duplication of services that currently exists as
a result of their separate operations. For example, currently the AC Fund
and the VK Fund are managed separately by different affiliated investment
entities. Consolidating the separate operations of the AC Fund with those
of the VK Fund should promote more efficient operations on a more cost-
effective basis.

(2) ACHIEVEMENT OF REDUCED PER-SHARE EXPENSES AND ECONOMIES OF SCALE.
Combining the net assets of the AC Fund with the assets of the VK Fund
also should lead to reduced expenses, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to

16
<PAGE> 22

be spread over a larger asset base. An increase in the asset levels of the
VK Fund also could result in achieving future economies of scale, which
should also reduce per share expenses. Any significant reductions in
expenses on a per share basis should, in turn, have a favorable effect on
the relative total return of the VK Fund.

(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset levels
also should enable the VK Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.

In determining whether to recommend approval of the Reorganization to
shareholders of the AC Fund, the AC Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of VK Adviser and
other service providers to the VK Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the AC Fund
and the VK Fund before the Reorganization and the estimated expense ratios of
the VK Fund after the Reorganization; (3) the comparative investment performance
of the AC Fund and the VK Fund, as well as the performance of the VK Fund
compared to its peers; (4) the terms and conditions of the Agreement and whether
the Reorganization would result in dilution of AC Fund shareholder interests;
(5) the advantages of eliminating the competition and duplication of effort
inherent in marketing two funds having similar investment objectives, in
addition to the economies of scale realized through the combination of the two
funds; (6) the compatibility of the funds' service features available to
shareholders, including the retention of applicable holding periods and exchange
privileges; (7) the costs estimated to be incurred by the respective funds as a
result of the Reorganization; and (8) the anticipated tax consequences of the
Reorganization. Based upon these and other factors, the AC Board unanimously
determined that the Reorganization is in the best interests of the shareholders
of the AC Fund.

B. RISK FACTORS

NATURE OF INVESTMENT

Each of the VK Fund and the AC Fund invest primarily in a portfolio of tax
exempt municipal securities. Investment in either of the VK Fund or the AC Fund
may not be appropriate for all investors.

Certain investment policies and practices of the VK Fund involve special
risks. Investment in municipal securities involves risks of fluctuation in value
as a result of changes in market rates of interest and actual or perceived
changes in the credit quality of the issuer. To the extent such securities are
"revenue" securities and not "general obligation" securities and therefore not
backed by the full faith and credit of the issuer, changes in the ability of the
specific revenue source to satisfy the

17
<PAGE> 23

obligations of the securities may also affect market value. Investment in lower
grade municipal securities involves greater credit risk and market risk. Such
securities may be less liquid, more volatile and have less publicly available
information as compared to higher grade income securities. Other investment
policies and practices also involve special risks, including investment in
municipal securities whose rates of interest vary inversely with market rates of
interest, investment in municipal lease obligations that have
"non-appropriation" clauses, the use of options, futures and interest rate
transactions, the use of when issued and delayed delivery transactions and
investment in municipal securities that pay interest that is subject to the
federal alternative minimum tax. For a more complete discussion of the risks of
an investment in the VK Fund, see the sections of the VK Fund Prospectus
entitled "Investment Objective and Policies," "Municipal Securities,"
"Investment Practices" and "Special Considerations Regarding the Fund."

CHANGES IN CERTAIN INVESTMENT PRACTICES

Both the VK Fund and the AC Fund may engage in certain options and financial
futures transactions, although the VK Fund may also engage in interest rate
transactions such as swaps, caps, floors or collars. The VK Fund also has
greater levels of flexibility in pursuing its investment objectives through the
ability to invest up to 80% of its total assets in tax-exempt municipal
securities rated BBB or better by S&P or Baa or better by Moody's, while the AC
Fund must have at least 50% of its assets invested in tax-exempt municipal
securities rated A or better by S&P and by Moody's. Further, the VK Fund may
also invest up to 20% of its assets in tax-exempt municipal securities rated
between BB and B- (inclusive) by S&P and between Ba and B3 (inclusive) by
Moody's, while the AC Fund may not invest in any securities rated below B by S&P
and Moody's. Such lower rated or unrated securities are commonly referred to as
"junk bonds" and are regarded by Moody's and S&P as predominantly speculative
with respect to the capacity to pay interest or repay principal in accordance
with their terms. Accordingly, although the VK Fund has greater flexibility to
achieve its investment objective, it also may incur additional risks. For a
complete description of the AC Fund's investment practices, see the section in
the AC Fund's Prospectus entitled "Investment Practices" and "Investment
Objective and Policies" and the section of the VK Fund's Statement of Additional
Information entitled "Additional Investment Considerations."

C. INFORMATION ABOUT THE FUNDS

18
<PAGE> 24

information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.

AC Fund. Information about the AC Fund is included in its current Prospectus
dated August 1, 1995. Additional information about the AC Fund is included in
its current Statement of Additional Information dated the same date as the AC
Fund Prospectus. Copies of the AC Fund's Statement of Additional Information may
be obtained without charge by calling (800) 421-5666. The AC Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.

Management's Discussion of VK Fund Performance as of the Annual Report dated
December 31, 1995 and Management's Discussion of AC Fund Performance as of the
Annual Report dated September 30, 1994 are attached hereto as Exhibit B.

As series of the VKAC Tax Free Trust, a Delaware business trust, and as a
Delaware business trust, the operations of the VK Fund and the AC Fund are
governed by their respective Agreements and Declarations of Trust (each, a
"Declaration"), their respective Bylaws and applicable Delaware law.

D. THE PROPOSED REORGANIZATION

The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement, a copy of which
is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote is required to approve the Agreement at a
meeting of shareholders at which a quorum is present.

TERMS OF THE AGREEMENT

Pursuant to the Agreement, the VK Fund series of the VKAC Tax Free Trust would
acquire all of the assets and the liabilities of the AC Fund on the date of the
Closing in exchange for Class A, B and C Shares of the VK Fund.

Subject to AC Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or

19
<PAGE> 25

such later date as soon as practicable thereafter as the VK Fund and the AC Fund
may mutually agree.

On the date of Closing, the AC Fund will transfer to the VK Fund all of the
assets and liabilities of the AC Fund. The VKAC Tax Free Trust will in turn
transfer to the AC Fund a number of Class A, B and C Shares of the VK Fund
approximately equal in value to the value of the net assets of the AC Fund
transferred to the VK Fund as of the date of Closing, as determined in
accordance with the valuation method described in the VK Fund's then current
prospectus. In order to minimize any potential for undesirable federal income
and excise tax consequences in connection with the Reorganization, the VK Fund
and the AC Fund may distribute on or before the Closing all or substantially all
of their respective undistributed net investment income (including net capital
gains) as of such date.

The AC Fund expects to distribute the Class A, B and C Shares of the VK Fund
to the shareholders of the AC Fund promptly after the Closing and then dissolve
pursuant to a plan of dissolution adopted by the AC Board.

The AC Fund and the VKAC Tax Free Trust have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.

Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:

1. the approval of the Reorganization by the AC Fund's shareholders;

2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;

3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;

4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;

5. the effectiveness under applicable law of the registration statement of
the VK Fund of which this Proxy Statement/Prospectus forms a part and
the absence of any stop orders under the Securities Act pertaining
thereto; and

6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.

20
<PAGE> 26

The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the AC
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of AC Fund shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.

The AC Board recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the AC Fund's
shareholders and that the interests of the AC Fund's existing shareholders will
not be diluted as a result of consummation of the proposed Reorganization.

DESCRIPTION OF SECURITIES TO BE ISSUED

SHARES OF BENEFICIAL INTEREST

Beneficial interests in the VK Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The VKAC Tax
Free Trust's Declaration permits the trustees, as they deem necessary or
desirable, to create one or more separate investment portfolios and to issue a
separate series of shares for each portfolio and, subject to compliance with the
Act, to further sub-divide the shares of a series into one or more classes of
shares for such portfolio.

VOTING RIGHTS OF SHAREHOLDERS

Holders of shares of the VK Fund are entitled to one vote per share on matters
as to which they are entitled to vote; however, separate votes generally are
taken by each series on matters affecting an individual series. The Declaration
of VKAC Tax Free Trust and the Declaration of AC Fund are substantially
identical, except that the Declaration of the VKAC Tax Free Trust permits the VK
Board or shareholders to remove a trustee with or without cause by the act of
two-thirds of such trustees or shareholders, respectively. The Declaration of
the AC Fund permits (i) the AC Board to remove a trustee with cause by the act
of two-thirds of the trustees and (ii) shareholders holding a majority of the
shares of each series outstanding to remove a trustee with or without cause. The
Declaration of the AC Fund also requires the approval of 80% of the trustees in
office or majority vote of the shares of each series then outstanding to amend
these provisions.

21
<PAGE> 27

investment policies and restrictions and the ratification of the selection of
independent auditors. Moreover, under the Act, shareholders owning not less than
10% of the outstanding shares of the AC Fund or VK Fund may request that the
respective board of trustees call a shareholders' meeting for the purpose of
voting upon the removal of trustee(s).

CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES

If the Reorganization is approved, the VK Fund will establish an account for
each AC Fund shareholder containing the appropriate number of Shares of the VK
Fund. The shareholder services and shareholder programs of the VK Fund and the
AC Fund have already been conformed as part of the Consolidation. Shareholders
of the AC Fund who are accumulating AC Fund shares under the dividend
reinvestment plan, or who are receiving payment under the systematic withdrawal
plan with respect to AC Fund shares, will retain the same rights and privileges
after the Reorganization in connection with the VK Fund Class A, B or C Shares
received in the Reorganization through substantially similar plans maintained by
the VK Fund. Van Kampen American Capital Trust Company will continue to serve as
custodian for the assets of AC Fund shareholders held in IRA accounts after the
Reorganization. Such IRA investors will be sent appropriate documentation to
confirm Van Kampen American Capital Trust Company's custodianship.

It will not be necessary for shareholders of the AC Fund to whom certificates
have been issued to surrender their certificates. Upon dissolution of the AC
Fund, such certificates will become null and void.

FEDERAL INCOME TAX CONSEQUENCES

The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the AC Fund and
shareholders of the VK Fund. It is based upon the Code, legislative history,
Treasury regulations, judicial authorities, published positions of the Internal
Revenue Service (the "Service") and other relevant authorities, all as in effect
on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their AC Fund shares as capital assets. No advance rulings
have been or will be sought from the Service regarding any matter discussed in
this Proxy Statement/Prospectus. Accordingly, no assurances can be given that
the Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisors to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws.

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the

22
<PAGE> 28

VKAC Tax Free Trust and the AC Fund receive an opinion from O'Melveny & Myers
substantially to the effect that for federal income tax purposes:

1. The acquisition by the VK Fund of the assets of the AC Fund in exchange
solely for Class A, B and C Shares of the VK Fund and the assumption by the VK
Fund of the liabilities of the AC Fund will qualify as a tax-free reorganization
within the meaning of Section 368(a)(1) of the Code.

2. No gain or loss will be recognized by the AC Fund or the VK Fund upon the
transfer to the VK Fund of the assets of the AC Fund in exchange solely for the
Class A, B and C Shares of the VK Fund and the assumption by the VK Fund of the
liabilities of the AC Fund.

3. The VK Fund's basis in the AC Fund assets received in the Reorganization
will, in each instance, equal the basis in such assets in the hands of the AC
Fund immediately prior to the transfer, and the VK Fund's holding period of such
assets will, in each instance, include the period during which the assets were
held by the AC Fund.

4. No gain or loss will be recognized by the shareholders of the AC Fund upon
the exchange of their shares of the AC Fund for the Class A, B or C Shares,
respectively, of the VK Fund.

5. The aggregate tax basis in the Class A, B and C Shares of the VK Fund
received by the shareholders of the AC Fund will be the same as the aggregate
tax basis of the shares of the AC Fund surrendered in exchange therefor.

6. The holding period of the Class A, B and C Shares of the VK Fund received
by the shareholders of the AC Fund will include the holding period of the shares
of the AC Fund surrendered in exchange therefor if such surrendered shares of
the AC Fund are held as capital assets by such shareholder.

In rendering its opinion, O'Melveny & Myers may rely upon certain
representations of the management of the AC Fund and the VKAC Tax Free Trust and
assume that the Reorganization will be consummated as described in the Agreement
and that redemptions of shares of the AC Fund occurring prior to the Closing
will consist solely of redemptions in the ordinary course of business.

The VK Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the AC Fund and its shareholders.

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<PAGE> 29

CAPITALIZATION

The following table sets forth the capitalization of the AC Fund and the VK
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.

CAPITALIZATION TABLE AS OF MARCH 31, 1995

<TABLE>
<CAPTION>
VK FUND AC FUND PRO FORMA
------------ ------------ --------------
<S> <C> <C> <C>
NET ASSETS
Class A shares......... $518,812,475(1) $305,953,845 $ 824,766,320(1)
Class B shares......... 168,825,651 39,139,420 207,965,071
Class C shares......... 4,271,805 7,936,521 12,208,326
------------ ------------ --------------
Total........... $691,909,931 $353,029,786 $1,044,939,717
============ ============ ==============

NET ASSET VALUE PER SHARE
Class A shares......... $15.04 $9.98 $15.04
Class B shares......... 15.05 9.98 15.05
Class C shares......... 15.05 9.99 15.05

SHARES OUTSTANDING
Class A shares......... 34,490,551(1) 30,671,176 54,833,227(1)
Class B shares......... 11,221,067 3,922,453 13,821,693
Class C shares......... 283,931 794,623 811,275
------------ ------------ --------------
Total........... 45,995,549 35,388,252 69,466,195
============ ============ ==============

SHARES AUTHORIZED
Class A shares......... Unlimited Unlimited Unlimited
Class B shares......... Unlimited Unlimited Unlimited
Class C shares......... Unlimited Unlimited Unlimited
</TABLE>

- ---------------
(1) Includes $1,051,642 and 69,916 shares representing Class D Shares
outstanding as of March 31, 1995.

COMPARATIVE PERFORMANCE INFORMATION

The average annual total return for the AC Fund for the one-year, three-year,
five-year and ten-year periods ended March 31, 1995 were 1.03%, 5.49%, 6.88% and
8.62% in respect of its Class A shares; for the one-year period ended March 31,
1995 and for the period beginning September 29, 1992 (the date Class B Shares of
the AC Fund were first offered for sale to the public) were 1.14% and 4.18% in
respect of its Class B shares; and for the one-year period ended March 31, 1995
and for the period beginning August 30, 1993 (the date Class C Shares of the AC
Fund were first offered for sale to the public) were 4.14% and 1.92% in respect
of its Class C shares. The average annual total return for VK Fund for the
one-year and three-year periods ended March 31, 1995 and for the period
beginning August 1,

24
<PAGE> 30

1990 (the date Class A Shares of the VK Fund were first offered for sale to the
public) through March 31, 1995 were 2.49%, 4.64% and 7.04% in respect of its
Class A Shares; for the one-year period ended March 31, 1995 and for the period
since inception, the average annual total return for Class B Shares (inception
August 24, 1992) was 3.00% and 3.41% and for Class C Shares (inception August
13, 1993) was 5.78% and 1.39%. The foregoing returns include the effect of the
maximum sales charge applicable to sales of Shares of both the VK Fund and the
AC Fund.

The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.

RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE VK FUND

Approval of the Reorganization will constitute the ratification by AC Fund
shareholders of the investment objective, policies and restrictions,
Distribution Plan and Advisory Agreement of the VK Fund. For a discussion of the
investment objective, policies and restrictions of the VK Fund, see "Summary --
Comparisons of the VK Fund and AC Fund" and the VK Fund Prospectus accompanying
this Proxy Statement/Prospectus. Approval of the Reorganization will constitute
approval of amendments to any of the fundamental investment restrictions of the
AC Fund that might otherwise be interpreted as impeding the Reorganization, but
solely for the purpose of and to the extent necessary for, consummation of the
Reorganization.

LEGAL MATTERS

Certain legal matters concerning the issuance of Class A, B and C Shares of
the VK Fund will be passed on by Skadden, Arps, Slate, Meagher & Flom, 333 West
Wacker Drive, Chicago, Illinois 60606, which serves as counsel to the VK Fund.
Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a Trustee
of the VKAC Tax Free Fund. On July 21, 1995, Mr. Whalen was elected as a Trustee
of the AC Fund.

Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by O'Melveny & Myers, 400 South Hope Street,
Los Angeles, California 90071, which serves as counsel to AC Fund. Lawrence J.
Sheehan, a former partner of O'Melveny & Myers and currently of counsel with
said firm, is a Trustee of the AC Fund. On July 21, 1995, Mr. Sheehan was
elected as a Trustee of the VKAC Tax Free Fund.

25
<PAGE> 31

EXPENSES

The expenses of the Reorganization, including expenses incurred by the AC Fund
will be borne by the VK Fund after the Reorganization. Accordingly, if the
Reorganization is completed, the VK Fund and its shareholders after the
Reorganization will bear such expenses of the Reorganization. If the
Reorganization is not completed VKAC will bear costs associated with the
Reorganization. The AC Board has determined that the arrangements regarding the
payment of expenses and other charges relating to the Reorganization are fair
and equitable.

E. RECOMMENDATION OF THE AC BOARD

The AC Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of shareholders of
each class of shares of the AC Fund. THE AC BOARD RECOMMENDS VOTING FOR THE
PROPOSED REORGANIZATION.

OTHER MATTERS THAT MAY COME
BEFORE THE SPECIAL MEETING

It is not anticipated that any action will be asked of the shareholders of the
AC Fund other than as indicated above, but if other matters are properly brought
before the Special Meeting, it is intended that the persons named in the proxy
will vote in accordance with their judgment.

OTHER INFORMATION

A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND

At the close of business on July 21, 1995, there were 301,655,984 Class A
shares, 4,047,608 Class B shares and 709,587 Class C shares, respectively, of
the AC Fund.

Certain officers, directors and employees of VKAC own, in the aggregate, not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail
broker-dealer affiliate of the VKAC Distributors, is a wholly owned subsidiary
of VK/AC Holding, Inc. No officer or trustee of the VK Fund or the AC Fund owns
or would be able to acquire 5% or more of the common stock of VK/AC Holding,
Inc.

The trustees and officers of the AC Fund as a group own less than one percent
of the outstanding shares of the AC Fund.

26
<PAGE> 32

As of July 6, 1995, no person was known by the AC Fund to own beneficially or
of record as much as 5% of the Class A shares of the AC Fund.

As of July 6, 1995, no person was known by the AC Fund to own beneficially or
of record as much as 5% of the Class B shares of the AC Fund except as follows:
6.99% was owned of record by National Financial Services Corp., Church Street
Station, P.O. Box 3730, New York, New York 10008-3730.

As of July 6, 1995, no person was known by the AC Fund to own beneficially or
of record as much as 5% of the Class C shares of the AC Fund except as follows:
37.37% was owned of record by Smith Barney Inc., 388 Greenwich Street, 11th
Floor, New York, New York 10013-2375.

At the close of business on July 21, 1995, there were 33,987,806 Class A
shares, 11,262,366 Class B shares and 297,862 Class C shares, respectively, of
the VK Fund.

As of July 17, 1995, the trustees and officers as a group own less than 1% of
the shares of the VK Fund.

To the knowledge of the VK Fund, as of July 17, 1995, no person owned of
record or beneficially 5% or more of the VK Fund's Class A Shares or Class B
Shares.

As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the VK Fund's Class C Shares: Dain Bosworth Inc. FBO, Richard I.
Nannini and Eleanor L. Nannini, 2925 Juliann Way, Reno, NV 89509-5198, 6%; and
Edward D. Jones and Co. F/A/O, Frieda K. Bowker, TTEE, U/A DTD 1/16/81 for EDJ
#149-03045-1-4, P.O. Box 2500, Maryland Heights, MO 63043-8500, 5%.

B. SHAREHOLDER PROPOSALS

As a general matter, the AC Fund does not intend to hold future regular annual
or special meetings of shareholders unless required by the Act. Any shareholder
who wishes to submit proposals for consideration at a meeting of shareholders of
the VK Fund should send such proposal to the VK Fund at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the VK Fund
a reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.

VOTING INFORMATION AND REQUIREMENTS

Each valid proxy given by a shareholder of the AC Fund will be voted by the
persons named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on

27
<PAGE> 33

such other business as may come before the Special Meeting on which shareholders
are entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the AC Board "FOR" approval of the
Reorganization.

Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Fund a written notice of revocation, by delivering a
duly executed proxy bearing a later date, or by attending the Special Meeting
and voting in person.

The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.

The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE
OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF THE AC FUND ENTITLED
TO VOTE AT THE SPECIAL MEETING AT WHICH A QUORUM IS CONSTITUTED. Shares not
voted with respect to a proposal due to an abstention or broker non-vote will be
deemed votes not cast with respect to such proposal, but such shares will be
deemed present for quorum purposes.

In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Special Meeting, the persons named in the
proxy may propose and vote in favor of one or more adjournments of the Special
Meeting to permit further solicitation of proxies. If sufficient shares were
present to constitute a quorum, but insufficient votes had been cast in favor of
the Reorganization to approve it, proxies would be voted in favor of adjournment
only if the AC Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the AC Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.

28
<PAGE> 34

VK Adviser or VKAC, or by dealers or their representatives. In addition, such
solicitation servicing may also be provided by Applied Mailing Systems, a
solicitation firm located in Boston, Massachusetts, at a cost estimated to be
approximately $4,604, plus reasonable expenses.

July 31, 1995

PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.

YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.

29
<PAGE> 35
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement") is made as of
July 31, 1995, by and between the Van Kampen American Capital Tax Free Trust, a
Delaware business trust formed under the laws of the State of Delaware
(the "VKM Trust") on behalf of its series, the Van Kampen American Capital
Municipal Income Fund (the "VKM Fund") and the Van Kampen American Capital
Municipal Bond Fund a business trust formed under the laws of the State of
Delaware (the "AC Fund")

W I T N E S S E T H :

WHEREAS, on December 20, 1994, (the "Acquisition Date") The Van Kampen
Merritt Companies, Inc. ("TVKMC") acquired all of the issued and outstanding
shares of American Capital Management & Research, Inc. ("American Capital") and
subsequently changed the combined entity's name to Van Kampen American Capital,
Inc.;

WHEREAS, American Capital and TVKMC, through their affiliated companies,
sponsor and manage a number of registered investment companies; and

WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;

WHEREAS, the AC Fund was organized as a corporation under the laws of Texas
on September 7, 1976, and subsequently reincorporated under the laws of the
State of Maryland on July 2, 1992 and further, reorganized as a Delaware
business trust, pursuant to an Agreement and Declaration of Trust subsequently
amended and restated as of June 20, 1995, pursuant to which it is authorized
to issue an unlimited number of shares of beneficial interest which have a
par value equal to $0.01 per share;

WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management")
provides investment advisory and administrative services to the AC Fund;

WHEREAS, the VKM Trust was organized as a Massachusetts business trust, and
subsequently reorganized as a Delaware business trust pursuant to an Agreement
and Declaration of Trust (the "Declaration of Trust") dated May 10, 1995,
pursuant to which it is authorized to issue an unlimited number of shares of
beneficial interest for each series authorized by the trustees, one of which
series is the VKM Fund, the shares of which have a par value of $0.01 per
share;

WHEREAS, Van Kampen American Capital Investment Advisory Corp. (formerly,
Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.") provides
investment advisory and administrative services to the VKM Fund;

WHEREAS, the Board of Trustees of each of the VKM Trust and the AC Fund
have determined that entering into this Agreement for the VKM Fund to acquire
the assets and liabilities of the AC Fund is in the best interests of the
shareholders of each respective fund; and

WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");

NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:

1. PLAN OF TRANSACTION.

A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the AC Fund will convey, transfer and deliver
to the VKM Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the AC Fund (including accrued interest to the Closing Date)
consisting of nondefaulted, liquid, tax-exempt municipal securities at least 80%
of which shall be rated investment grade by Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service ("Moody's"), due bills, cash and other
marketable securities acceptable to the VKM Fund as more fully set forth on
Schedule 1 hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets").

B. CONSIDERATION. In consideration thereof, the VKM Trust agrees that on
the Closing Date the VKM Trust will (i) deliver to the AC Fund, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the

1
<PAGE> 36

VKM Fund having net asset values per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets net of
any liabilities of the AC Fund described in Section 3E hereof (the
"Liabilities") determined pursuant to Section 3A of this Agreement
(collectively, the "VKM Fund Shares") and (ii) assume all of the AC Fund's
Liabilities. All VKM Fund Shares delivered to the AC Fund in exchange for such
Assets shall be delivered at net asset value without sales load, commission or
other transactional fee being imposed.

2. CLOSING OF THE TRANSACTION.

CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the AC Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VKM Trust shall deliver to the AC Fund the VKM Fund
Shares in the amount determined pursuant to Section 1B hereof and the AC
Fund thereafter shall, in order to effect the distribution of such shares
to the AC Fund stockholders, instruct the VKM Trust to register the pro rata
interest in the VKM Fund Shares (in full and fractional shares) of each of the
holders of record of shares of the AC Fund in accordance with their holdings of
either Class A, Class B or Class C Shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses and
taxpayer identification numbers), and the VKM Trust agrees promptly to comply
with said instruction. The VKM Trust shall have no obligation to inquire as to
the validity, propriety or correctness of such instruction, but shall assume
that such instruction is valid, proper and correct.

3. PROCEDURE FOR REORGANIZATION.

A. VALUATION. The value of the Assets and Liabilities of the AC Fund to be
transferred and assumed, respectively, by the VKM Fund shall be computed as of
the Closing Date, in the manner set forth in the most recent Prospectus and
Statement of Additional Information of the VKM Fund (collectively, the "VKM
Trust Prospectus"), copies of which have been delivered to the AC Trust.

B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the VKM Fund (the "Custodian") for
the benefit of the VKM Fund, duly endorsed in proper form for transfer in such
condition as to constitute a good delivery thereof, free and clear of all liens,
encumbrances and claims whatsoever, in accordance with the custom of brokers,
and shall be accompanied by all necessary state stock transfer stamps, the cost
of which shall be borne by the AC Fund.

C. FAILURE TO DELIVER SECURITIES. If the AC Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the AC Fund's
securities for the reason that any of such securities purchased by the VKM Trust
have not yet been delivered to it by the AC Fund's broker or brokers, then, in
lieu of such delivery, the AC Trust shall deliver to the Custodian, with respect
to said securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other documents
as may be required by the VKM Trust or Custodian, including brokers'
confirmation slips.

D. SHAREHOLDER ACCOUNTS. The VKM Trust, in order to assist the AC Fund
in the distribution of the VKM Fund Shares to the AC Fund shareholders after
delivery of the VKM Fund Shares to the AC Fund, will establish pursuant to the
request of the AC Fund an open account with the VKM Fund for each shareholder
of the AC Fund and, upon request by the AC Fund, shall transfer to such account
the exact number of full and fractional Class A, Class B and Class C shares of
the VKM Fund then held by the AC Fund specified in the instruction provided
pursuant to Section 2 hereof. The VKM Fund is not required to issue
certificates representing VKM Fund Shares unless requested to do so by a
shareholder. Upon liquidation or dissolution of the AC Fund, certificates
representing shares of beneficial interest stock of the AC Fund shall become
null and void.

E. LIABILITIES. The Liabilities shall include all of AC Fund's liabilities,
debts, obligations, and duties of whatever kind or nature, whether absolute,
accrued, contingent, or otherwise, whether or not arising in the ordinary course
of business, whether or not determinable at the Closing Date, and whether or not
specifically referred to in this Agreement.

2
<PAGE> 37
limitation, the preparation of the VKM Trust's Registration Statement on Form
N-14 (the "Registration Statement") and the solicitation of the AC Fund
shareholder proxies; (ii) the AC Trust's and AC Fund's counsel's
reasonable attorney's fees, which fees shall be payable pursuant to receipt of
an itemized statement; and (iii) the cost of rendering the tax opinion, more
fully referenced in Section 7F below. In the event that the transactions
contemplated herein are not consummated for any reason, then all reasonable
outside expenses incurred to the date of termination of this Agreement shall be
borne by Advisory Corp.

G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the AC Fund shall voluntarily
dissolve and completely liquidate by taking, in accordance with the Delaware
Business Trust Law and Federal securities laws, all steps as shall be necessary
and proper to effect a complete liquidation and dissolution of the AC Fund.
Immediately after the Closing Date, the stock transfer books relating to the AC
Fund shall be closed and no transfer of shares shall thereafter be made on such
books.

4. AC FUND'S REPRESENTATIONS AND WARRANTIES.

The AC Fund, hereby represents and warrants to the VKM Trust which
representations and warranties are true and correct on the date hereof, and
agrees with the VKM Trust that:

A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly formed
and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The AC Fund is
qualified to do business in all jurisdictions in which it is required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on either the AC Fund. The AC Fund has all
material federal, state and local authorizations necessary to own all of the
properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the AC Fund.

B. REGISTRATION. The AC Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end, diversified
management company and such registration has not been revoked or rescinded.
The AC Fund is in compliance in all material respects with the 1940 Act and
the rules and regulations thereunder with respect to its activities.
All of the outstanding shares of beneficial interest of the AC Fund have been
duly authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive or dissenters' rights.

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the AC Fund audited as of and for the year ended
September 30, 1994, true and complete copies of which have been heretofore
furnished to the VKM Trust, fairly represent the financial condition and the
results of operations of the AC Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust (i) an
unaudited statement of assets and liabilities and the portfolio of investments
and the related statements of operations and changes in net assets of the AC
Fund for the period ended June 30 , 1995; and (ii) within five (5) business days
after the Closing Date, an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and changes in
net assets as of and for the interim period ending on the Closing Date; such
financial statements will represent fairly the financial position and portfolio
of investments and the results of the AC Fund's operations as of, and for the
period ending on, the dates of such statements in conformity with generally
accepted accounting principles applied on a consistent basis during the periods
involved and the results of its operations and changes in financial position for
the periods then ended; and such financial statements shall be certified by the
Treasurer of the AC Fund as complying with the requirements hereof.

E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the AC Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the AC Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the AC Fund which would, if adversely determined, materially affect
the AC Fund's financial condition. All Liabilities were incurred by the AC
Fund in the ordinary course of its business.

F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the AC
Fund's

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<PAGE> 38

Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the AC Fund to which the AC Fund is a party.

G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, Price Waterhouse, auditors
for the AC Fund, shall furnish the VKM Fund with a statement of the earnings
and profits of the AC Fund within the meaning of the Code as of the Closing
Date.

H. RESTRICTED SECURITIES. None of the securities comprising the assets of
the AC Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of 1933,
(the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.

I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the AC Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shown thereon shall have been paid so far as due, or provision shall
have been made for the payment thereof, and to the best of the AC Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.

J. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter into
this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the AC Trust's
Board of Trustees, and except for obtaining approval of the holders of the
shares of the AC Fund, no other corporate acts or proceedings by the AC Fund
are necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by the AC Fund and
constitutes a legal, valid and binding obligation of AC Fund enforceable in
accordance with its terms subject to bankruptcy laws and other equitable
remedies.

K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Fund does not and will not (i) violate
any provision of the Declaration of Trust or amendment thereof of the AC Fund,
(ii) violate any statute, law, judgment, writ, decree, order, regulation or
rule of any court or governmental authority applicable to the AC Fund, (iii)
result in a violation or breach of, or constitute a default under any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the AC Fund is subject, or (iv) result in the creation
or imposition or any lien, charge or encumbrance upon any property or assets of
the AC Fund. Except as set forth in Schedule 2 to this Agreement, (i) no
consent, approval, authorization, order or filing with or notice to any court
or governmental authority or agency is required for the consummation by the AC
Fund of the transactions contemplated by this Agreement and (ii) no consent of
or notice to any third party or entity is required for the consummation by the
AC Fund of the transactions contemplated by this Agreement.

L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:

(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the AC
Fund, other than changes in the ordinary course of its business, or any
pending or threatened litigation, which has had or may have a material
adverse effect on such business, results of operations, assets or
financial condition;

(2) issued any option to purchase or other right to acquire shares of
the AC Fund granted by the AC Fund to any person other than subscriptions
to purchase shares at net asset value in accordance with terms in the
Prospectus for the AC Fund;

(3) any entering into, amendment or termination of any contract or
agreement by AC Fund, except as otherwise contemplated by this Agreement;

(4) any indebtedness incurred, other than in the ordinary course of
business, by the AC Fund for borrowed money or any commitment to borrow
money entered into by the AC Fund;

(5) any amendment of the Declaration of Trust of the AC Fund; or

4
<PAGE> 39
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the AC Fund other than a lien
for taxes not yet due and payable.

M. TITLE. On the Closing Date, the AC Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the VKM
Fund will receive good and marketable title to such Assets, free and clear of
all liens, mortgages, pledges, encumbrances, charges, claims and equities other
than a lien for taxes not yet due and payable.

N. PROXY STATEMENT. The AC Fund's Proxy Statement, at the time of
delivery by the AC Fund to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the AC Fund's
Prospectus and Statement of Additional Information with respect to the AC Fund
on the forms incorporated by reference into such Proxy Statement and as of
their respective dates (collectively, the "AC Fund's Proxy
Statement/Prospectus"), and at the time the Registration Statement becomes
effective, the Registration Statement insofar as it relates to the AC Fund and
at all times subsequent thereto and including the Closing Date, as amended or
as supplemented if it shall have been amended or supplemented, conform and will
conform, in all material respects, to the applicable requirements of the
applicable Federal and state securities laws and the rules and regulations of
the SEC thereunder, and do not and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representations or
warranties in this Section 4N apply to statements or omissions made in reliance
upon and in conformity with written information concerning the VKM Trust, VKM
Fund or their affiliates furnished to the AC Fund by the VKM Trust.

O. BROKERS. There are no brokers or finders fees payable by the AC Fund
Trust in connection with the transactions provided for herein.

P. TAX QUALIFICATION. The AC Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years.

Q. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the VKM Fund
and those to which the Assets are subject.

R. AC FUND LIABILITIES. Except as otherwise provided for herein, the AC
Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the AC Fund's known debts, liabilities and
obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.

5. THE VKM TRUST'S REPRESENTATIONS AND WARRANTIES.

The VKM Trust, on behalf of the VKM Fund, hereby represents and warrants to
the AC Trust, which representations and warranties are true and correct on the
date hereof, and agrees with the AC Fund that:

A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly formed
and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and VKM Fund
are qualified to do business in all jurisdictions in which they are required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on either the VKM Trust or VKM Fund. The VKM
Trust has all material federal, state and local authorization necessary to own
on behalf of the VKM Trust all of the properties and assets allocated to the VKM
Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have a
material adverse effect on the VKM Trust or VKM Fund.

B. REGISTRATION. The VKM Fund is registered under the 1940 Act as an
open-end, diversified management company and such registration has not been
revoked or rescinded. The VKM Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest of the VKM Fund have been duly
authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive dissenters rights.

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<PAGE> 40

December 31, 1994, true and complete copies of which have been heretofore
furnished to the AC Trust fairly represent the financial condition and the
results of operations of the VKM Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended June 30, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the VKM Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the period involved and fairly present the financial
position of the VKM Fund as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the VKM Trust
as complying with the requirements hereof.

E. CONTINGENT LIABILITIES. There are no contingent liabilities of the VKM
Fund not disclosed in the financial statements delivered pursuant to Sections 5C
and 5D which would materially affect the VKM Fund's financial condition, and
there are no legal, administrative, or other proceedings pending or, to its
knowledge, threatened against the VKM Fund which would, if adversely
determined, materially affect the VKM Fund's financial condition.

F. MATERIAL AGREEMENTS. The VKM Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the VKM
Trust Prospectus, there are no material agreements outstanding to which the VKM
Fund is a party.

G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the VKM Fund required by laws to
have been filed by such dates shall have been filed, and all Federal and other
taxes shall have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the VKM Fund's knowledge no such return
is currently under audit and no assessment has been asserted with respect to
any such return.

H. CORPORATE AUTHORITY. The VKM Trust has the necessary power under its
Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by the VKM Trust's Board of Trustees, no other corporate
acts or proceedings by the VKM Trust or VKM Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the VKM Trust and constitutes a valid and binding
obligation of the VKM Trust enforceable in accordance with its terms subject to
bankruptcy laws and other equitable remedies.

I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i) result
in a material violation of any provision of the Declaration of Trust of the VKM
Trust or the Designation of Series of the VKM Fund, (ii) result in a material
violation of any statute, law, judgment, writ, decree, order, regulation or rule
of any court or governmental authority applicable to the VKM Trust or (iii)
result in a material violation or breach of, or constitute a default under, or
result in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the VKM Trust pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the VKM Trust is subject. Except as set forth in Schedule 3
to this Agreement, (i) no consent, approval, authorization, order or filing with
notice to any court or governmental authority or agency is required for the
consummation by the VKM Trust of the transactions contemplated by this Agreement
and (ii) no consent of or notice to any third party or entity is required for
the consummation by the VKM Trust of the transactions contemplated by this
Agreement.

J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the VKM Fund which
would materially affect its financial condition.

K. SHARES OF THE VKM FUND: REGISTRATION. The VKM Fund Shares to be issued
pursuant to Section 1 hereof will be duly registered under the Securities Act
and all applicable state securities laws.

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<PAGE> 41
L. SHARES OF THE VKM FUND: AUTHORIZATION. Subject to the matters set forth
in the Statement of Additional Information of the VKM Fund, under the heading
"The Fund and the Trust", a copy of which has been furnished to the AC Trust,
the shares of beneficial interest of the VKM Fund to be issued pursuant to
Section 1 hereof have been duly authorized and, when issued in accordance with
this Agreement, will be validly issued and fully paid and non-assessable by
the VKM Trust and conform in all material respects to the description thereof
contained in the VKM Trust's Prospectus furnished to the AC Trust.

M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
VKM Fund, other than changes in the ordinary course of its business, which has
had a material adverse effect on such business, results of operations, assets
or financial condition.

N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein filed on Form N-14, (the "Registration Statement"), as of the
effective date of the Registration Statement, and at all times subsequent
thereto up to and including the Closing Date, as amended or as supplemented if
they shall have been amended or supplemented, will conform, in all material
respects, to the applicable requirements of the applicable Federal securities
laws and the rules and regulations of the SEC thereunder, and will not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representations or warranties in this Section 5N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the AC Fund furnished to the VKM Trust by the AC Fund.

O. TAX QUALIFICATION. The VKM Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years. For purposes of this Section, any
reference to the VKM Fund shall include its predecessors, a sub-trust of a
Massachusetts business trust organized and designated on August 13, 1985 and
subsequently reorganized by merger with and into the VKM Fund.

6. COVENANTS.

During the period from the date of this Agreement and continuing until the
Closing Date the AC Fund and VKM Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):

A. OTHER ACTIONS. The AC Fund shall operate only in the ordinary course of
business consistent with prior practice. No party shall take any action that
would, or reasonably would be expected to, result in any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect.

B. GOVERNMENT FILINGS; CONSENTS. The AC Fund and VKM Trust shall file all
reports required to be filed by the AC Fund and VKM Trust with the SEC between
the date of this Agreement and the Closing Date and shall deliver to the other
party copies of all such reports promptly after the same are filed. Except where
prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the AC
Fund and the VKM Trust shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.

C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the AC
Fund's Proxy Statement/Prospectus, each party hereto will cooperate with the
other and furnish to the other the information relating to the AC Fund, VKM
Trust or VKM Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to
be set forth in the Registration Statement or the Proxy Statement/Prospectus,
as the case may be. The AC Fund shall promptly prepare and file with the SEC
the Proxy Statement/Prospectus and the VKM Trust shall promptly prepare and
file with the SEC the Registration Statement, in which the Proxy
Statement/Prospectus will be included as a prospectus. In connection with the
Registration Statement, insofar as it relates to the AC Fund and its affiliated
persons, VKM Trust shall only include such information as is approved by the AC
Fund for use in the Registration Statement. The VKM Trust shall not amend or
supplement any such information regarding the VKM Trust and such affiliates
without the prior written consent of the AC Fund which consent shall not be
unreasonably withheld. The VKM Trust shall promptly notify and provide the AC
Fund with copies of all amendments or

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<PAGE> 42

supplements filed with respect to the Registration Statement. The VKM Trust
shall use all reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filing.
The VKM Trust shall also take any action (other than qualifying to do business
in any jurisdiction in which it is now not so qualified) required to be taken
under any applicable state securities laws in connection with the issuance of
the VKM Trust's shares of beneficial interest in the transactions contemplated
by this Agreement, and the AC Fund shall furnish all information concerning the
AC Fund and the holders of the AC Fund's shares of beneficial interest as may
be reasonably requested in connection with any such action.

D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
AC Trust shall make available to the VKM Trust a copy of each report, schedule,
registration statement and other document (the "Documents") filed or received by
it during such period pursuant to the requirements of Federal or state
securities laws or Federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law or which are not
relevant to the AC Fund). During the period prior to the Closing Date, the VKM
Trust shall make available to the AC Fund each Document pertaining to the
transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).

E. SHAREHOLDERS MEETING. The AC Fund shall call a meeting of the AC Fund
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to
each shareholder of the AC Fund as of the record date for such meeting of
shareholders. The AC Fund's Board of Trustees shall recommend to the AC Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.

F. COORDINATION OF PORTFOLIOS. The AC Fund and VKM Trust covenant and
agree to coordinate the respective portfolios of the AC Fund and VKM Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VKM Fund's portfolio, the resulting
portfolio will meet the VKM Fund's investment objective, policies and
restrictions, as set forth in the VKM Trust Prospectus, a copy of which has
been delivered to the AC Fund.

G. DISTRIBUTION OF THE SHARES. At Closing the AC Fund covenants that it
shall cause to be distributed the VKM Fund Shares in the proper pro rata amount
for the benefit of AC Fund's shareholders and such that the AC Fund shall not
continue to hold amounts of said shares so as to cause a violation of Section
12(d)(1) of the 1940 Act. The AC Fund covenants further that, pursuant to
Section 3G, it shall liquidate and dissolve as promptly as practicable after
the Closing Date. The AC Fund covenants to use all reasonable efforts to
cooperate with the VKM Trust and the VKM Trust's transfer agent in the
distribution of said shares.

H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the AC Fund and the VKM Trust represents that
no agent, broker, investment banker, financial advisor or other firm or person
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement, and each party shall hold the other harmless from and against any all
claims, liabilities or obligations with respect to any such fees, commissions or
expenses asserted by any person to be due or payable in connection with any of
the transactions contemplated by this Agreement on the basis of any act or
statement alleged to have been made by such first party or its affiliate.

I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.

J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the AC Fund and the VKM Trust will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any press release or make any public statement prior
to such consultation, except as may be required by law or the rules of any
national securities exchange on which such party's securities are traded.

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<PAGE> 43

the AC Fund shall take any action, or cause any action to be taken (including,
without limitation, the filing of any tax return) that is inconsistent with
such treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to the
Closing Date, the VKM Trust, the VKM Fund, the AC Trust and the AC Fund will
take such action, or cause such action to be taken, as is reasonably necessary
to enable O'Melveny & Myers, counsel to the AC Fund, to render the tax opinion
required herein.

L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the AC Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.

7. CONDITIONS TO OBLIGATIONS OF THE AC FUND.

The obligations of the AC Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
AC Fund, of the following conditions:

A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest the AC Fund present in person or
by proxy at a meeting of said shareholders in which a quorum is constituted.

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VKM Trust contained herein shall be true
in all material respects as of the Closing Date, and as of the Closing Date
there shall have been no material adverse change in the financial condition,
results of operations, business properties or assets of the VKM Fund, and the
AC Trust shall have received a certificate of the President or Vice President
of the VKM Trust satisfactory in form and substance to the AC Fund so stating.
The VKM Trust shall have performed and complied in all material respects with
all agreements, obligations and covenants required by this Agreement to be so
performed or complied with by it on or prior to the Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not have been any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement, which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse affect on business
operations of the VKM Fund.

F. TAX OPINION. The AC Trust and the AC Fund shall have obtained an
opinion from O'Melveny & Myers, counsel for the AC Fund, dated as of the
Closing Date, addressed to the AC Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code, substantially in
the form attached as Annex A.

G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of
the Closing Date, addressed to the AC Fund substantially in the form and to the
effect that: (i) the VKM Trust is duly formed and in good standing as a
business trust under the laws of the State of Delaware; (ii) the Board of
Trustees of the VKM Trust has duly designated the VKM Fund as a series of the
VKM Trust pursuant to the terms of the Declaration of Trust of the VKM Trust;
(iii) the VKM Fund is registered as an open-end, diversified management company
under the 1940 Act; (iv) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of VKM Trust and this Agreement has been duly
executed and delivered by the VKM Trust and (assuming the Agreement is a valid
and binding obligation of the other parties thereto) is a valid and binding
obligation of the VKM Trust; (v) neither the execution or delivery by the VKM
Trust of this Agreement nor the consummation by the VKM Trust or VKM Fund of
the

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<PAGE> 44

transactions contemplated thereby contravene the VKM Trust's Declaration of
Trust, or, to the best of their knowledge, violate any provision of any
statute or any published regulation or any judgment or order disclosed to us
by the VKM Trust as being applicable to the VKM Trust or the VKM Fund;
(vi) to the best of their knowledge based solely on the certificate of an
appropriate officer of the VKM Trust attached hereto, there is no pending or
threatened litigation which would have the effect of prohibiting any material
business practice or the acquisition of any material property or the conduct of
any material business of the VKM Fund or might have a material adverse effect
on the value of any assets of the VKM Fund; (vii) the VKM Fund's Shares have
been duly authorized and upon issuance thereof in accordance with this
Agreement will, subject to certain matters regarding the liability of a
shareholder of a Delaware trust, be validly issued, fully paid and
non-assessable; (viii) except as to financial statements and schedules and
other financial and statistical data included or incorporated by reference
therein and subject to usual and customary qualifications with respect to Rule
10b-5 type opinions, as of the effective date of the Registration Statement
filed pursuant to the Agreement, the portions thereof pertaining to VKM Trust
and the VKM Fund comply as to form in all material respects with the
requirements of the Securities Act, the Securities Exchange Act and the 1940
Act and the rules and regulations of the Commission thereunder and no facts
have come to counsel's attention which would cause them to believe that as of
the effectiveness of the portions of the Registration Statement applicable to
VKM Trust and VKM Fund, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading;
and (ix) to the best of their knowledge and information and subject to the
qualifications set forth below, the execution and delivery by the VKM Trust of
the Agreement and the consummation of the transactions therein contemplated do
not require, under the laws of the States of Delaware or Illinois or the
federal laws of the United States, the consent, approval, authorization,
registration, qualification or order of, or filing with, any court or
governmental agency or body (except such as have been obtained). Counsel need
express no opinion, however, as to any such consent, approval, authorization,
registration, qualification, order or filing (a) which may be required as a
result of the involvement of other parties to the Agreement in the transactions
contemplated by the Agreement because of their legal or regulatory status or
because of any other facts specifically pertaining to them; (b) the absence of
which does not deprive the AC Trust or the AC Fund of any material
benefit under the Agreement; or (c) which can be readily obtained without
significant delay or expense to the AC Trust or the AC Fund, without loss to
the AC Trust or the AC Fund of any material benefit under the Agreement and
without any material adverse effect on the AC Trust or the AC Fund during the
period such consent, approval, authorization, registration, qualification or
order was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the United States of America which, in counsel's
experience, are normally applicable to transactions of the type provided for in
the Agreement and (c) court orders and judgments disclosed to us by the VKM
Trust in connection with this opinion. In addition, although counsel need not
specifically considered the possible applicability to the VKM Trust of any
other laws, orders or judgments, nothing has come to their attention in
connection with their representation of the VKM Trust and the VKM Fund in this
transaction that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.

H. OFFICER CERTIFICATES. The AC Fund shall have received a certificate of
an authorized officer of the VKM Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the AC Trust.

8. CONDITIONS TO OBLIGATIONS OF VKM TRUST

The obligations of the VKM Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
VKM Trust of the following conditions:

A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the AC Fund contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business, properties or assets of the AC Fund since March 31, 1995
and the VKM Trust shall have received a certificate of the Chairman or

10
<PAGE> 45

President of the AC Fund satisfactory in form and substance to the VKM Trust
so stating. The AC Fund shall have performed and complied in all material
respects with all agreements, obligations and covenants required by this
Agreement to be so performed or complied with by them on or prior to the
Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.

F. TAX OPINION. The VKM Trust and the VKM Fund shall have obtained an
opinion from O'Melveny & Myers, counsel for the AC Fund, dated as of the
Closing Date, addressed to the VKM Trust and VKM Fund, that the consummation
of the transactions set forth in this Agreement comply with the requirements
of a reorganization as described in Section 368(a) of the Code substantially
in the form attached as Annex A.

G. OPINION OF COUNSEL. The VKM Trust and VKM Fund shall have received
the opinion of O'Melveny & Myers, counsel for the AC Fund, dated as of the
Closing Date, addressed to the VKM Trust and VKM Fund, substantially in the
form and to the effect that: (i) the AC Fund is duly formed and existing as a
trust under the laws of the State of Delaware; (ii) the AC Fund is registered
as an open-end, diversified management company under the 1940 Act; (iii) this
Agreement and the reorganization provided for herein and the execution of this
Agreement have been duly authorized by all necessary trust action of the AC
Fund and this Agreement has been duly executed and delivered by the AC Fund and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the AC Fund (iv) neither the
execution or delivery by the AC Fund of this Agreement nor the consummation by
the AC Fund of the transactions contemplated thereby contravene the AC Fund's
Declaration of Trust or, to their knowledge, violate any provision of any
statute, or any published regulation or any judgment or order disclosed to them
by the AC Fund as being applicable to the AC Fund; (v) to their knowledge based
solely on the certificate of an appropriate officer of the AC Fund attached
thereto, there is no pending, or threatened litigation involving the AC Fund
except as disclosed therein (vi) except as to financial statements and
schedules and other financial and statistical data included or incorporated by
reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the AC Fund and the AC Fund comply as to form in all material
respects with their requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the Commission thereunder
and no facts have come to counsel's attention which cause them to believe that
as of the effectiveness of the portions of the Registration Statement
applicable to the AC Fund, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading;
and (vii) to their knowledge and subject to the qualifications set forth below,
the execution and delivery by the AC Fund of the Agreement and the consummation
of the transactions therein contemplated do not require, under the laws of the
State of Delaware, or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or filing (a) which
may be required as a result of the involvement of other parties to the
Agreement in the transactions contemplated by the Agreement because of their
legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the VKM Trust or
VKM Fund of any material benefit under such agreements; or (c) which can be
readily obtained without significant delay or expense to the VKM Trust or VKM
Fund, without loss to the VKM Trust or VKM Fund of any material benefit under
the Agreement and without any material adverse effect on them during the period
such consent, approval authorization, registration, qualification or order

11
<PAGE> 46

was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or fillings under (a)
laws which are specifically referred to in the opinion, (b) laws of the
State of Delaware and the United States of America which, in our experience,
are normally applicable to transactions of the type provided for in the
Agreement and (c) court orders and judgments disclosed to them by the AC
Fund in connection with the opinion. Counsel's opinion as to the validity and
binding nature of this Agreement may be limited to the present law of the State
of Delaware. Counsel's other opinions may be limited to the present Federal law
of the United States and the present general corporation and trust laws of the
State of Delaware.

H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall
consist solely of nondefaulted, liquid tax-exempt municipal securities, at
least 80% of which shall be rated investment grade by S&P or Moody's cash and
other marketable securities which are in conformity with the VKM Fund's
investment objective, policy and restrictions as set forth in the VKM Trust
Prospectus, a copy of which has been delivered to the AC Fund.

I. SHAREHOLDER LIST. The AC Fund shall have delivered to the VKM Trust an
updated list of all shareholders of the AC Fund, as reported by the AC Fund's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the AC Fund, taxpayer identification
numbers, Form W-9 and last known address.

J. OFFICER CERTIFICATES. The VKM Trust shall have received a certificate
of an authorized officer of the AC Fund, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 4 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be
furnished to the VKM Trust.

9. AMENDMENT, WAIVER AND TERMINATION

(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of or Trustees amend this Agreement at any time before or
after approval thereof by the shareholders of the AC Fund; provided, however,
that after receipt of AC Fund shareholder approval, no amendment shall be made
by the parties hereto which substantially changes the terms of Sections 1, 2
and 3 hereof without obtaining AC Fund's shareholder approval thereof or that
affect any applications for exemptive relief from the SEC or any orders with
respect thereto without obtaining the approval of the staff of the SEC.

(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.

(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:

(i) by the mutual consents of the Board of Trustees of the AC Fund
and the VKM Trust;

(ii) by the AC Trust, if the VKM Trust breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;

(iii) by the VKM Trust, if the AC Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;

(iv) by either the AC Fund or VKM Trust, if the Closing has not
occurred on or prior to September 30, 1995 (provided that the rights to
terminate this Agreement pursuant to this subsection (C) (iv) shall not be
available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of
the Closing to occur on or before such date);

12
<PAGE> 47

(v) by the VKM Trust in the event that: (a) all the conditions
precedent to the AC Fund's obligation to close, as set forth in Section 7
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the VKM Trust gives the AC Fund written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 8 of this Agreement; and (c) the AC Fund then fails or refuses
to close within the earlier of five (5) business days or September 30,
1995; or

(vi) by the AC Fund in the event that: (a) all the conditions
precedent to the VKM Trust's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the AC Fund gives the VKM Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
the conditions precedent to the AC Fund's obligation to close, as set
forth in Section 7 of this Agreement; and (c) the VKM Trust then fails or
refuses to close within the earlier of five (5) business days or
September 30, 1995.

10. REMEDIES

In the event of termination of this Agreement by either or both of the AC Fund
and VKM Trust pursuant to Section 9(C), written notice thereof shall forthwith
be given by the terminating party to the other party hereto, and this Agreement
shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without further
action by the parties hereto.

11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.

(A) SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the VKM Trust's and the AC Fund's right to seek
indemnity pursuant to this Agreement shall survive for a period of ninety (90)
days beyond the expiration of the Survival Period of the representation,
warranty, covenant or agreement upon which indemnity is sought. In no event
shall the VKM Trust or the AC Fund be obligated to indemnify the other if
indemnity is not sought within ninety (90) days of the expiration of the
applicable Survival Period.

(B) INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold
the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a
party or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "Losses"): arising out of or related to any
claim of a breach of any representation, warranty or covenant made herein by
the Indemnitor; provided, however, that no Indemnified Party shall be
indemnified hereunder against any Losses arising directly

13
<PAGE> 48

from such Indemnified Party's (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of such Indemnified Party's position.

(C) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall given written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnitor or
thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the defense of such
matter, and in any event until Indemnitor states in writing that it will assume
the defense, Indemnitor shall pay all costs of Indemnified Party arising out of
the defense until the defense is assumed; provided, however, that Indemnified
Party shall consult with Indemnitor and obtain Indemnitor's consent to any
payment or settlement of any such claim. Indemnitor shall keep Indemnified Party
fully apprised at all times as to the status of the defense. If Indemnitor does
not assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided for
hereunder, Indemnitor shall be subrogated to all rights of Indemnified Party
with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made.

12. SURVIVAL

The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.

13. NOTICES.

All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the AC Fund shall be addressed to
the AC Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post
Oak Boulevard, Houston, TX 77056; Attention: General Counsel, with a copy to
George M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, or at such other address as the AC Fund may designate by
written notice to the VKM Trust. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel
or at such other address and to the attention of such other person as the VKM
Trust may designate by written notice to the AC Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.

14. SUCCESSORS AND ASSIGNS.

This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.

15. BOOKS AND RECORDS.

The AC Fund and the VKM Trust agree that copies of the books and records
of the AC Fund relating to the Assets including, but not limited to all files,
records, written materials; e.g., closing transcripts, surveillance files and
credit reports shall be delivered by the AC Fund to the VKM Trust at the Closing
Date. In addition to, and without limiting the foregoing, the AC Fund and the
VKM Trust agree to take such action as my be necessary in order that the VKM
Trust shall have reasonable access to such other books and records as may be
reasonably requested, all for three years after the Closing Date for the three
tax years ending December 31, 1992, December 31, 1993 and December 31, 1994
namely, general ledger, journal entries, voucher registers; distribution
journal; payroll register; monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.

14
<PAGE> 49

16. GENERAL.

This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the AC Trust and
VKM Trust and delivered to each of the parties hereto. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. This Agreement is for the sole
benefit of the parties thereto, and nothing in this Agreement, expressed or
implied, is intended to confer upon any other person any rights or remedies
under or by reason of this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts or choice of law.

17. LIMITATION OF LIABILITY.

Copies of the Declarations of Trust of the VKM Trust and AC Fund are on
file with the Secretary of the State of the State of Delaware and notice is
hereby given and the parties hereto acknowledge and agree that this instrument
is executed on behalf of the Trustees of the VKM Trust and the AC Fund,
respectively, as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders of the VKM
Trust or AC Fund individually but binding only upon the assets and property of
the VKM Trust or the AC Fund the case may be.

IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND,
a Delaware business trust
By:
Title:
Attest:
Title:

VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST,
a Delaware business trust
By:
Title:
Attest:
Title:

15
<PAGE> 50

EXHIBIT B

MANAGEMENT'S DISCUSSION OF VK FUND AND
AC FUND PERFORMANCE

Management's Discussion of VK Fund Performance as of the Annual Report dated
December 31, 1995.

The VK Fund's performance during its fiscal year ended December 31, 1994, was
impacted by rising rates and inflation concerns. The Federal Reserve Board (the
"Fed") raised the Fed Funds rate--the rate banks charge each other for overnight
loans--from 3 percent to 5.5 percent during 1994, pushing interest rates to
their highest level in three years. As rates rose, so did yields on fixed-income
securities. The yield on 30-year Treasury bonds, for example, began the year at
6.35 percent and increased to a high of 8.16 percent, before ending the year at
7.89 percent. However, since yields and prices move in opposite directions, this
had a negative impact on prices of fixed-income securities. Additionally, low
interest rates during the early part of the year prompted many issuers to refund
their debt, and the income from the higher-yielding issues that were refunded
could not be replaced in the current environment.

Equity investors, meanwhile, worried that higher interest rates would increase
corporate borrowing costs and depress earnings. These factors combined to push
the stock market down during much of the year, and resulted in the Standard &
Poor's 500-Stock Index achieving a total return for the year of just 1.36
percent. This index is a broad-based, unmanaged indicator of general stock
market performance.

The Fed remains concerned about inflation, and probably will raise interest
rates again this year. Many economists expect inflation to increase in 1995 at
an annual rate of about 3.5 percent, although consumer prices, which are a key
inflation measure, rose only 2.7 percent last year. Analysts point to a steady
increase in consumer spending, especially for durable goods like automobiles and
major appliances, as an indication that the inflation rate will rise.
Additionally, the national unemployment rate is below 6%, which could force
employers to pay more for employees. Labor costs account for about two-thirds of
what consumers pay for goods and services.

Clearly, consumers are feeling better about the economy. The consumer
confidence index reached a four-and-a-half year high in December, rising to
102.2 from 100.4 in November. Consumer confidence was boosted by the increase in
jobs and personal income.
<PAGE> 51

PERFORMANCE RESULTS FOR THE PERIOD

WALL STREET JOURNAL ABBREVIATIONS

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
VAN KAMPEN MER
FUND GROUP --------------------------------
FUND NAME MUNINA MUINCB N/A
QUOTRON SYMBOL VKMMX VMIBX VMICX
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
One-year total return based on
NAV(1).............................. (6.37)% (6.96)% (6.97)%
One-year total return(2).............. (10.73)% (10.50)% (7.86)%
Life of Fund average annual total
return(2)........................... 5.83 % .96 % (2.99)%
Life of Fund cumulative total return
based on NAV(1)..................... 34.71 % 5.55 % (4.22)%
Distribution Rate(3).................. 5.90 % 5.39 % 5.39 %
Taxable-equivalent distribution
rate(4)............................. 9.22 % 8.42 % 8.42 %
SEC yield(5).......................... 5.95 % 5.52 % 5.47 %
Commencement date..................... 08/01/90 08/24/92 08/13/93
</TABLE>

- -------------------------
N/A = Not Applicable.

(1) Assumes reinvestment of all distributions for the period ended December 31,
1994, and does not include payment of the maximum sales charge (4.65% for A
shares) or continent deferred sales charge (4% for B shares; 1% for C
shares). Effective January 16, 1995, the maximum sales charge for Class A
shares was changed to 4.75%. Had certain expenses of the VK Fund not been
assumed by the Adviser, total returns would have been lower.

(2) Standardized total return for the period ended December 31, 1994.

(3) Distribution rate represents the monthly annualized distributions of the
Fund at end of December 1994, and not the earnings of the Fund.

(4) Taxable-equivalent calculations reflect a federal income tax rate of 36%.

(5) SEC yield is a standardized calculation prescribed by the Commission for
determining the amount of net income a portfolio should theoretically
generate for the 30-day period ending December 30, 1994.

A portion of the interest income may be subject to the alternative minimum tax
(AMT).

Past performance does not guarantee future results. Investment return and net
asset value will fluctuate with market conditions. An investor's shares, when
redeemed, may be worth more or less than their original cost.
<PAGE> 52
STANDARDIZED TOTAL RETURN COMPARISON

VK FUND VS. LEHMAN BROTHERS
MUNICIPAL BOND INDEX
(August 1990 through December 1994)

The following graph compares the value of an investment in the VK Fund's
Class A shares with the value of an investment in the Lehman Brothers Municipal
Bond Index from August 1990 through December 1994, the last trading day of
fiscal year 1994, based upon a $10,000 investment in Class A shares of the VK
Fund and in the securities comprising such index as of August 1990. The
approximate values of such an investment in each fiscal year were: 1990: Class
A shares of VK Fund -- $11,150, Lehman Index -- $11,550; 1991: Class A shares
of VK Fund -- $11,150, Lehman Index -- $11,550; 1992: Class A shares of VK Fund
- -- $12,200, Lehman Index -- $12,550; 1993: Class A shares of VK Fund --
$13,700, Lehman Index -- $14,100; 1994: Class A shares of VK Fund -- $12,850,
Lehman Index -- $13,375.

Performance of Class B and C Shares may vary from the Class A Shares
illustrated above due to the distribution and administrative expense
differentials applicable to these classes.

The Index is unmanaged and expense free. Its performance does not reflect
transaction and other costs applicable to the Fund's actively managed portfolio.

Past performance is not predictive of future performance.

Management's Discussion of AC Fund Performance as of the Annual Report dated
September 30, 1994.

The AC Fund invests in intermediate and long-term municipal bonds with the
objective of providing current interest income exempt from federal income taxes
as is consistent with the preservation of capital. During the reporting period
that ended September 30, 1994, the AC Fund's performance was negatively affected
by repeated increases in interest rates.

Accelerating economic activity and the resulting fears of inflation created a
challenging environment for municipal bonds. Although the Federal Reserve Board
(the "Fed") raised short-term interest rates five times during the reporting
period, for a total increase of 1.75 percentage points, the economy continued to
grow. In August (the latest month for which figures were available) new factory
orders increased 4.4%, the largest gain in nearly two years and the 11th
increase in the previous 13 months. This report and others of a variety of
economic indicators generated renewed fears of both inflation and additional
interest-rate increases.
<PAGE> 53

As these fears grew, municipal bond yields rose steadily. After hitting a
12-month low of 5.41% on October 14, 1993, the yield on the Bond Buyer Index of
25 Revenue Bonds, an unmanaged municipal bond index, rose to a 12-month high of
6.70% on September 29, 1994. The yield on 10-year Treasury notes followed a
similar pattern, rising from a 12-month low of 5.79% on October 15, 1993, to a
12-month high of 7.82% on September 29, 1994. Bond yields and prices move
inversely, so the steady rise in yields pushed down municipal bond prices. The
bond market has built a very high inflation premium into rates on long-term
bonds. Since Treasuries historically have offered a "real" return -- the return
after inflation -- of around 2.5%, the yield at the end of September meant
investors were anticipating inflation to hit an annualized rate of about 5% even
though many forecasters have predicted the inflation rate in 1995 will be
between 3% and 3.5%.

As a result of rising interest rates, there was a significant decline in
refundings. Refundings occur when municipalities issue new lower-yielding bonds
to replace existing higher-yielding bonds. As interest rates rose, this reduced
the incentive to refund existing debt. As a result, the dollar value of
refundings during the first nine months of 1994 declined 43.5%, including a 68%
decline in September compared with September 1993. Normally, if the supply
decreases while demand remains steady, prices will rise. However, demand for
municipal bonds declined during the reporting period along with the supply, so
prices fell.

As the interested rate environment changed, the AC Fund placed primary
emphasis on its federally tax-exempt dividend, since that is the component of
total return that usually is of greatest importance to shareholders. (A portion
of the income may be subject to state and local taxes and, if applicable, may be
subject to the federal alternative minimum tax.) To provide dividend income, the
AC Fund focused on longer-term bonds, which offer a higher coupon rate. The
coupon rate is the percentage of a bond's face value that is paid to the AC Fund
annually as interest. So, the AC Fund continued to selectively purchase
longer-term revenue bonds, since revenue bonds generally offer a higher interest
rate than general obligation bonds. The average maturity of the portfolio at the
end of the reporting period was a little more than 20 years.

Within this investment strategy, the AC Fund has maintained a high quality
rating in its portfolio holdings.

All classes of shares of the AC Fund at net asset value (without a sales
charge) outperformed the Lehman Brothers Municipal Bond Index during the
reporting period. Class A shares of the AC Fund achieved a total return at net
asset value of -1.33%, including reinvestment of dividends totalling $.5745 per
share. Class B shares achieved a total return at net asset value of -2.13%,
including reinvestment of dividends totalling $.4905 per share. Class C shares
achieved a total return at net asset value of -2.03%, including reinvestment of
dividends totalling $.4905 per share.
<PAGE> 54

The Lehman Brothers Municipal Bond Index, a broad-based, unmanaged index of
municipal bonds, achieved a total return of -2.44% for the 12 months ended
September 30, 1994. The index does not reflect any commissions or fees that
would be paid by an investor purchasing the securities it represents.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN --
CLASS A (AS OF 9/30/94) 1 YEAR 5 YEARS 10 YEARS
- -------------------------------------- ------ ------- --------
<S> <C> <C> <C>
At Net Asset Value.................... -1.33% 7.62% 9.58%
With Maximum 4.75% Sales Charge....... -6.06% 6.58% 9.05%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- SINCE INCEPTION
CLASS B (AS OF 9/30/94) 1 YEAR (9/29/92)
- ----------------------------------------- ------ ---------------
<S> <C> <C>
At Net Asset Value....................... -2.13% 4.46%
With Applicable Contingent Deferred Sales
Charge Upon Redemption (Maximum 4%).... -5.86% 3.04%
</TABLE>

<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN -- SINCE INCEPTION
CLASS C (AS OF 9/30/94) 1 YEAR (8/30/93)
- ----------------------------------------- ------ ---------------
<S> <C> <C>
At Net Asset Value....................... -2.03% -1.05%
With Applicable Contingent Deferred Sales
Charge Upon Redemption (Maximum 1%).... -2.97% -1.05%
</TABLE>

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE AC FUND (CLASS A) VS.
LEHMAN BROTHERS MUNICIPAL BOND INDEX
9/30/84-9/30/94

The following graph compares the value of an investment in the AC Fund's
Class A shares with the value of an investment in the Lehman Brothers Municipal
Bond Index from September 1984 through September 1994, the last trading day of
fiscal year 1994, based upon a $10,000 investment in Class A shares of the AC
Fund and in the securities comprising such index as of September 1984. The
approximate values of such an investment in each fiscal year were: 1985: Class A
shares of AC Fund -- $10,900, Lehman Index -- $11,000; 1986: Class A shares of
AC Fund -- $13,500, Lehman Index -- $13,500; 1987: Class A shares of AC Fund --
$12,500, Lehman Index -- $13,500; 1988: Class A shares of AC Fund -- $12,500,
Lehman Index -- $13,750; 1989: Class A shares of AC Fund -- $12,500, Lehman
Index -- $14,000; 1990: Class A shares of AC Fund -- $16,000, Lehman Index --
$17,500; 1991: Class A shares of AC Fund -- $17,000, Lehman Index -- $19,000;
1992: Class A shares of AC Fund -- $22,000, Lehman Index -- $24,000; 1993:
Class A shares of AC Fund -- $25,000, Lehman Index -- $27,500; 1994: Class A
shares of AC Fund -- $25,000, Lehman Index -- $26,500.

Past performance is not indicative of future performance. Performance of other
classes of shares of the AC Fund will be greater or less than the lines shown
based
<PAGE> 55

on the differences in loads or fees paid by shareholders investing in the
different classes.

* The Lehman Brothers Municipal Bond Index is a broad-based unmanaged index of
municipal bonds. While the SEC required that we provide a broad-based securities
market index comparison, it may not assist you in evaluating the performance of
your Fund against its objectives. The Lehman Brothers index does not reflect any
commissions or fees that would be paid by an investor purchasing the securities
it represents. All front-end sales charges and all other fees and expenses are
included in the performance shown for the AC Fund Class A with an ending value
of $23,780. In addition, since investors purchase shares of the AC Fund with
varying sales charges depending primarily on volume purchased, the AC Fund's
Class A performance at net asset value also is shown.
<PAGE> 56

- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------

Van Kampen American Capital Municipal Income Fund, formerly known as Van
Kampen Merritt Municipal Income Fund (the "Fund"), is a separate diversified
mutual fund, organized as a series of Van Kampen American Capital Tax Free
Trust. The Fund's investment objective is to provide a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Fund seeks to achieve its investment objective by investing at least 80% of
its assets in a diversified portfolio of tax-exempt municipal securities rated
investment grade at the time of investment. Investment grade securities are
securities rated BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa
or higher by Moody's Investors Service, Inc. ("Moody's"). Up to 20% of the
Fund's total assets may consist of tax-exempt municipal securities rated below
investment grade (but not rated lower than B- by S&P or B3 by Moody's) and
unrated tax-exempt municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
Municipal securities in which the Fund may invest include conventional
fixed-rate municipal securities, variable rate municipal securities and other
types of municipal securities described herein. See "Municipal Securities." The
Fund may invest a substantial portion of its assets in municipal securities that
pay interest that is subject to the alternative minimum tax. There is no
assurance that the Fund will achieve its investment objective.

The investment adviser for the Fund is Van Kampen American Capital
Investment Advisory Corp. This Prospectus sets forth the information about the
Fund that a prospective investor should know before investing in the Fund.
Please read it carefully and retain it for future reference. The address of the
Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone
number is (800) 421-5666.
(Continued on next page)
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

A Statement of Additional Information, dated July 31, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.

------------------
VAN KAMPEN AMERICAN CAPITALSM

------------------
THIS PROSPECTUS IS DATED JULY 31, 1995.
<PAGE> 57

(Continued from previous page.)

The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") which may be purchased at a price equal to their net asset
value per share, plus sales charges which, at the election of the investor, may
be imposed (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares six years after the end of the calendar month in which
the investor's order to purchase was accepted, in the circumstances and subject
to the qualifications described in this Prospectus. See "Alternative Sales
Arrangements" and "Purchase of Shares."

2
<PAGE> 58

- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 7
Annual Fund Operating Expenses and Example..................... 8
Financial Highlights........................................... 10
The Fund....................................................... 12
Investment Objective and Policies.............................. 12
Municipal Securities........................................... 13
Investment Practices........................................... 16
Special Considerations Regarding the Fund...................... 20
Investment Advisory Services................................... 21
Alternative Sales Arrangements................................. 23
Purchase of Shares............................................. 25
Shareholder Services........................................... 34
Redemption of Shares........................................... 39
The Distribution and Service Plans............................. 42
Distributions from the Fund.................................... 44
Tax Status..................................................... 45
Fund Performance............................................... 48
Description of Shares of the Fund.............................. 49
Additional Information......................................... 49
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS OR BY THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.

3
<PAGE> 59

- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------

THE FUND. Van Kampen American Capital Municipal Income Fund (the "Fund") is a
separate diversified series of Van Kampen American Capital Tax Free Trust (the
"Trust"), an open-end management investment company organized as a Delaware
business trust. See "The Fund."

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

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income tax, consistent
with preservation of capital.

INVESTMENT POLICY. The Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a diversified portfolio of tax-exempt
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") in the case of long-term obligations, and have equivalent ratings in
the case of short-term obligations. Up to 20% of the Fund's total assets may be
invested in tax-exempt municipal securities rated, at the time of investment,
between BB and B-(inclusive) by S&P or between Ba and B3 (inclusive) by Moody's
(or equivalently rated short-term obligations) and unrated tax-exempt municipal
securities that the Fund's investment adviser believes are of comparable
quality. See "Special Considerations Regarding the Fund."

Municipal securities in which the Fund may invest include fixed and variable
rate securities, municipal notes, municipal leases, tax exempt commercial paper,
custodial receipts, participation certificates and derivative municipal
securities the terms of which include elements of, or are similar in effect to,
certain Strategic Transactions (as defined herein) in which the Fund may engage.
The Fund may invest up to 15% of its total assets in derivative variable rate
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range or capped floaters, whose rates are subject to
periodic of lifetime caps. There is no assurance that the Fund will achieve its
investment objective. Debt securities rated below investment grade are commonly
referred to as "junk bonds." The net asset value per share of the Fund may
increase or decrease depending on changes in interest rates and other factors
affecting the municipal credit markets. See "Investment Objective and Policies."

INVESTMENT PRACTICES. The Fund also may use various investment techniques
including engaging in risk management transactions and entering into when-issued
or delayed delivery transactions and various strategic transactions. Such
transactions entail certain risks. See "Municipal Securities" and "Investment
Practices." The Fund may invest a substantial portion of its assets in municipal
securities that

4
<PAGE> 60

pay interest that is subject to the federal alternative minimum tax. The Fund
may not be a suitable investment for investors who are already subject to the
federal alternative minimum tax or who would become subject to the federal
alternative minimum tax as a result of an investment in the Fund. See "Tax
Status."

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

ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.

The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares," and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares, and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."

Class A Shares. Class A Shares are subject to an initial sales charge equal to
4.75% of the public offering price (4.99% of the net amount invested), reduced
on investments of $100,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares
automatically will convert to Class A Shares six years after the end of the
calendar month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.

5
<PAGE> 61

Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares.

REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for the Fund. See "Investment Advisory Services."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."

The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.

6
<PAGE> 62

- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as a
percentage of the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>

- ----------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."

(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.

(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."

7
<PAGE> 63

- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of
average daily net assets)............. .48% .48% .48%
12b-1 Fees (as a percentage of average
daily net assets)(1).................. .25% 1.00% 1.00%
Other expenses (as a percentage of
average daily net assets)............. .21% .22% .26%
Total (as a percentage of average daily
net
assets)............................... .94% 1.70% 1.74%
</TABLE>

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

(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."

8
<PAGE> 64

EXAMPLE:

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ---- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of .94% for Class
A Shares, 1.70% for Class B Shares and
1.74% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $57 $89 $107 $162*
Class C Shares............................ $28 $55 $ 94 $205
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $17 $54 $ 92 $162*
Class C Shares............................ $18 $55 $ 94 $205
</TABLE>

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

* Based on conversion to Class A shares after six years.

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion of
Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Investment Advisory Services" and "The Distribution and
Service Plans."

9
<PAGE> 65

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)
- --------------------------------------------------------------------------------

The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------- CLASS B
AUGUST 1,
1990 SHARES
(COMMENCEMENT ------------
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1994
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 16.164 $ 15.310 $ 15.071 $ 14.250 $14.263 $ 16.139
Net Investment Income.................... .886 .964 1.041 1.066 .406 .780
Net Realized and Unrealized Gain/Loss on
Investments............................ (1.907) .862 .374 .853 (.049) (1.890)
------ ------ ------ ------ ------ ------
Total from Investment Operations.......... (1.021) 1.826 1.415 1.919 .357 (1.110)
------ ------ ------ ------ ------ ------
Less:
Distributions from and in Excess of Net
Investment Income(2)................... .882 .972 1.044 1.098 .370 .768
Distributions from and in Excess of Net
Realized Gains(2)...................... .000 .000 .132 .000 .000 .000
------ ------ ------ ------ ------ ------
Total Distributions....................... .882 .972 1.176 1.098 .370 .768
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period............ $ 14.261 $ 16.164 $ 15.310 $ 15.071 $14.250 $ 14.261
============ ============ ============ ============ =============== ============
Total Return (Non-annualized)(1).......... (6.37%) 12.20% 9.69% 13.98% 2.57% (6.96%)
Net Assets at End of Period (in
millions)................................ $ 495.8 $ 597.6 $ 463.6 $ 293.7 $ 146.6 $ 158.7

CLASS C SHARES
------------------------------
AUGUST 24, 1992 AUGUST 13, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1994 1993
------------ ---------------- ------------ ----------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 15.308 $ 15.481 $ 16.141 $ 15.990
Net Investment Income.................... .852 .320 .783 .300
Net Realized and Unrealized Gain/Loss on
Investments............................ .845 (.033) (1.894) .171
------ ------ ------ ------
Total from Investment Operations.......... 1.697 .287 (1.111) .471
------ ------ ------ ------
Less:
Distributions from and in Excess of Net
Investment Income(2)................... .866 .328 .768 .320
Distributions from and in Excess of Net
Realized Gains(2)...................... .000 .132 .000 .000
------ ------ ------ ------
Total Distributions....................... .866 .460 .768 .320
------ ------ ------ ------
Net Asset Value, End of Period............ $ 16.139 $ 15.308 $ 14.262 $ 16.141
============ ================= ============ =================
Total Return (Non-annualized)(1).......... 11.33% 1.90% (6.97%) 2.96%
Net Assets at End of Period (in
millions)................................ $ 168.2 $ 48.4 $ 3.9 $ 4.1
</TABLE>

(Continued on following page)

See Financial Statements and Notes Thereto

10
<PAGE> 66

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for a share outstanding throughout the
period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------------------------------------------ CLASS B
AUGUST 1,
1990 SHARES
(COMMENCEMENT ------------
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1994
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)(1)............ .99% .87% .86% .59% .89% 1.70%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)...................... 5.93% 6.08% 6.76% 7.29% 7.11% 5.22%
Portfolio Turnover................. 74.96% 81.78% 91.57% 105.99% 108.79% 74.96%

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

(1) During the time period noted for Class C Shares, no expenses were assumed by
the investment adviser. If certain expenses had not been waived or assumed
by the investment adviser for Class A Shares and Class B Shares, total
return would have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to
Average Net Assets
(annualized)................. -- .98% 1.00% 1.07% 1.19% --
Ratio of Net Investment Income
to Average Net Assets
(annualized)................. -- 5.97% 6.62% 6.81% 6.81% --

<CAPTION>
Ratio of Expenses to
(annualized)................. 1.73% 2.42% -- --
Ratio of Net Investment Income
to Average Net Assets
(annualized)................. 5.11% 4.48% -- --

<CAPTION>
Average Net Assets
</TABLE>

(2) Distributions in excess result from temporary differences inherent in the
recognition of interest income and capital gains under generally accepted
accounting principles and for federal income tax purposes.

See Financial Statements and Notes Thereto

11
<PAGE> 67

- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------

Van Kampen American Capital Municipal Income Fund (the "Fund") is a separate
diversified series of Van Kampen American Capital Tax Free Trust (the "Trust"),
which is an open-end management investment company, commonly known as a "mutual
fund," organized as a Delaware business trust. Mutual funds sell their shares to
investors and invest the proceeds in a portfolio of securities. A mutual fund
allows investors to pool their money with that of other investors in order to
obtain professional investment management. Mutual funds generally make it
possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.

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

The investment objective of the Fund is to provide investors with a high level
of current income exempt from federal income tax, consistent with preservation
of capital. The Fund's investment objective is a fundamental policy and may not
be changed without shareholder approval. Under normal market conditions, the
Fund invests at least 80% of its total assets in tax-exempt municipal securities
rated investment grade. The Fund's policy with respect to ratings is not a
fundamental policy, and thus may be changed by the Trustees without shareholder
approval. See "Municipal Securities." The Fund intends, however, to maintain at
all times at least 80% of its total assets in tax-exempt municipal securities
rated investment grade or deemed by the investment adviser to be of comparable
quality at the time of investment. Investment grade securities are securities
rated BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's") in the case of long-term
obligations, and have equivalent ratings in the case of short-term obligations.
According to published guidelines, securities rated BBB by S&P are regarded by
S&P as having an adequate capacity to pay interest and repay principal. Whereas
such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories. According to published
guidelines, securities rated Baa by Moody's are considered by Moody's as medium
grade obligations. Such securities are, in the opinion of Moody's, neither
highly protected nor poorly secured. Interest payments and principal security
appear to Moody's to be adequate for the present but certain

12
<PAGE> 68

protective elements may be lacking or may be characteristically unreliable over
any great length of time. In the opinion of Moody's they lack outstanding
investment characteristics and in fact have speculative characteristics as well.

Up to 20% of the Fund's total assets may be invested in tax-exempt municipal
securities rated, at the time of investment, between BB and B- (inclusive) by
S&P or between Ba and B3 (inclusive) by Moody's (or equivalently rated
short-term obligations) and unrated tax-exempt securities that the Adviser
considers to be comparable quality. These securities are below investment grade
and are regarded by S&P, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. While in the opinion of S&P such securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. These securities
are regarded by Moody's as generally lacking characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the securities' contract over any long period of time may, in the
opinion of Moody's, be small. Debt securities rated below investment grade are
commonly referred to as "junk bonds." For a description of S&P's and Moody's
ratings see the Statement of Additional Information. From time to time the Fund
temporarily may also invest up to 10% of its assets in tax exempt money market
funds. Such instruments will be treated as investments in municipal securities.

An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.

- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------

GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of the Fund's
assets will be invested in municipal securities. The foregoing is a fundamental
policy of the Fund and cannot be changed without approval of the shareholders of
the Fund.

13
<PAGE> 69

special excise tax or other specific revenue source. Industrial development
bonds are usually revenue securities, the credit quality of which is normally
directly related to the credit standing of the industrial user involved.

Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Fund may engage. Variable
rate securities bear rates of interest that are adjusted periodically according
to formulae intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. The Fund
will not invest more than 15% of its total assets in derivative municipal
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Such securities may also pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of securities whose rates vary inversely
with market rates of interest generally will be larger than comparable changes
in the value of such municipal securities generally will fluctuate in response
to changes in market rates of interest to a greater extent than the value of an
equal principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets.
While markets for such recent innovations progress through stages of
development, such markets may be less developed than more fully developed
markets for municipal securities. A more detailed description of the types of
municipal securities in which the Fund may invest is included in the Statement
of Additional Information.

The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general

14
<PAGE> 70

levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Volatility may be
greater during periods of general economic uncertainty.

From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.

LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in lower grade tax-exempt municipal securities or in unrated municipal
securities considered by the Adviser to be of comparable quality. Lower grade
municipal securities are rated between BB and B- by S&P or between Ba and B3 by
Moody's, in each case inclusive of such rating categories. Higher yields are
generally available from municipal securities of such grade. With respect to
such 20% of the Fund's total assets, the Fund has not established any limit on
the percentage of its portfolio which may be invested in securities in any one
rating category.

Investors should carefully consider the risks of owning shares of an
investment company which invests in lower grade municipal securities before
making an investment in the Fund. The higher yield on certain securities held by
the Fund reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. See "Special
Considerations Regarding the Fund."

The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
See "Special Considerations Regarding the Fund."

15
<PAGE> 71

SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for the
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. As a result, the Fund will not necessarily invest in the highest
yielding tax-exempt municipal securities permitted by the investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. There is no limitation as to the
maturity of municipal securities in which the Fund may invest. The Adviser may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Other than
for tax purposes, frequency of portfolio turnover will generally not be a
limiting factor if the Fund considers it advantageous to purchase or sell
securities. The Fund may have annual portfolio turnover rates in excess of 100%.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses or dealer costs than a lower rate, which expenses and costs
must be borne by the Fund and its shareholders. High portfolio turnover may also
result in the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status" in
this Prospectus and "Investment Policies and Restrictions" in the Statement of
Additional Information.

DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing the Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.

- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------

In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions

16
<PAGE> 72

generally will not be treated as investments in tax-exempt municipal securities
for purposes of the Fund's 80% investment policy with respect thereto.

STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing

17
<PAGE> 73

potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. The Strategic Transactions that the Fund may use and some of their
risks are described more fully in the Fund's Statement of Additional
Information.

Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."

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

OTHER PRACTICES. The Fund has no restrictions on the maturity of municipal
bonds in which it may invest. The Fund will seek to invest in municipal bonds of
such maturities that, in the judgment of the Fund and the Adviser, will provide
a high level of current income consistent with liquidity requirements and market
conditions.

The Fund may borrow amounts up to 5% of its net assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its net assets to
secure such borrowings.

18
<PAGE> 74

The Fund generally will not invest more than 25% of its total assets in any
industry, nor will the Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Adviser determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds or in issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The securities in which the Fund invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities are generally traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.

The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances

19
<PAGE> 75

when, in the judgment of the Adviser, more than one firm can offer comparable
execution services. In selecting among such firms, consideration is given to
those firms which supply research and other services in addition to execution
services. However, it is not the policy of the Adviser, absent special
circumstances, to pay higher commissions to a firm because it has supplied such
services.

In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.

- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
- ------------------------------------------------------------------------------

In normal circumstances, the Fund may invest up to 20% of its total assets in
lower grade tax-exempt municipal securities or in unrated municipal securities
considered by the Adviser to be of comparable quality. Lower grade municipal
securities are rated between BB and B- by S&P or between Ba and B3 by Moody's,
in each case inclusive of such rating categories. Investment in lower grade
municipal securities involves special risks as compared with investment in
higher grade municipal securities. The market for lower grade municipal
securities is considered to be less liquid than the market for investment grade
municipal securities which may adversely affect the ability of the Fund to
dispose of such securities in a timely manner at a price which reflects the
value of such security in the Adviser's judgement. The market price for less
liquid securities tends to be more volatile than the market price for more
liquid securities. Illiquid securities and the absence of readily available
market quotations with respect thereto may make the Adviser's valuation of such
securities more difficult, and the Adviser's judgment may play a greater role in
the valuation of the Fund's securities. Lower grade municipal securities
generally involve greater credit risk than higher grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates and individual issuer developments. Because issuers of lower
grade municipal securities frequently choose not to seek a rating of their
municipal securities, the Fund will rely more heavily on the Adviser's ability
to determine the relative investment quality of such securities than if the Fund
invested exclusively in higher grade municipal securities. The Fund may, if
deemed appropriate by the Adviser, retain a security whose rating has been
downgraded below B- by S&P or below B3 by Moody's, or whose rating has been
withdrawn. More detailed information concerning the risks associated with
instruments in lower grade municipal securities is included in the Fund's
Statement of Additional Information.

20
<PAGE> 76

The Fund may invest a substantial portion of its assets in municipal
securities that pay interest that is subject to the federal alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in the Fund.

The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1994 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all municipal securities held by the Fund during the 1994
fiscal year, computed on a monthly basis.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
---------------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
- ---------------------------------- ---------------------- -------------------------
<S> <C> <C>
AAA/Aaa........................... 39.02% 0.00%
AA/Aa............................. 8.05 0.00
A/A............................... 14.77 0.00
BBB/Baa........................... 18.18 12.02
BB/Ba............................. 3.13 2.41
B/B............................... 0.32 1.48
CCC/Caa........................... 0.00 0.00
CC/Ca............................. 0.00 0.00
C/C............................... 0.00 0.00
D................................. 0.00 0.62
------ ------
Percentage of Rated and Unrated
Securities...................... 83.47% 16.53%
================= ===================
</TABLE>

The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during periods of relative instability in the market for
lower grade securities. The percentage of the Fund's assets invested in
securities of various grades may from time to time vary substantially from those
set forth above.

- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38

21
<PAGE> 77

closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- --------------------------------------------------------- -----------
<S> <C>
First $500 million....................................... 0.500 of 1%
Over $500 million........................................ 0.450 of 1%
</TABLE>

Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.

22
<PAGE> 78

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

PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Johnson has been employed by the Adviser for the last five years.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------

The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution fees with respect to each class of shares that may be incurred over
the anticipated duration of their investment in the Fund.

The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of

23
<PAGE> 79

such Class A Shares would not have all of his or her funds invested initially
and, therefore, would initially own fewer shares than if Class B Shares or Class
C Shares had been purchased. On the other hand, an investor whose purchase would
not qualify for price discounts applicable to Class A Shares and intends to
remain invested until after the expiration of the applicable CDSC may wish to
defer the sales charge and have all his or her funds initially invested in Class
B Shares or Class C Shares. If such an investor anticipates that he or she will
redeem such shares prior to the expiration of the CDSC period applicable to
Class B Shares, the investor may wish to acquire Class C Shares. Investors must
weigh the benefits of deferring the sales charge and having all of their funds
invested against the higher aggregate distribution and service fee applicable to
Class B Shares and Class C Shares (discussed below). Investors who intend to
hold their shares for a significantly long time may not wish to continue to bear
the ongoing distribution and service expenses of Class C Shares which in the
aggregate, eventually would exceed the aggregate amount of initial sales charge
and distribution and service expenses applicable to Class A Shares, irrespective
of the fact that a CDSC would eventually not apply to a redemption of such Class
C Shares.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, service fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee, service fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Purchase of Shares -- Net Asset Value."

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be

24
<PAGE> 80

approved by the SEC pursuant to an amended exemptive order. All such expenses
incurred by a class will be borne on a pro rata basis by the outstanding shares
of such class. All allocations of administrative expenses to a particular class
of shares will be limited to the extent necessary to preserve the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").

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

The Fund offers shares for sale to the public on a continuous basis through
Van Kampen American Capital Distributors, Inc. (the "Distributor"), as principal
underwriter, which is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Shares are also offered through members of the National Association of
Securities Dealers, Inc. ("NASD") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
non-NASD members acting as agents for investors ("financial intermediaries").
The Fund reserves the right to suspend or terminate the continuous public
offering of its shares at any time and without prior notice.

The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or directly with the Distributor plus
any applicable sales charge. Sales personnel or brokers, dealers and financial
intermediaries distributing the Fund's shares may receive different compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it,

25
<PAGE> 81

pay fees to, and sponsor business seminars for, qualifying brokers, dealers or
financial intermediaries for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. In addition, the Distributor may provide additional
compensation to Edward D. Jones & Co. ("Edward D. Jones") or an affiliate
thereof based on a combination of its sales of shares and increases in assets
under management. Such payments to brokers, dealers and financial intermediaries
for sales contests, other sales programs and seminars are made by the
Distributor out of its own assets and not out of the assets of the Fund. These
programs will not change the price an investor pays for shares or the amount
that the Fund will receive from such sale.

CLASS A SHARES

The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between an investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive 90% or more of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933.

SALES CHARGE TABLE

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Less than $100,000................ 4.75% 4.99% 4.25%
$100,000 but less than $250,000... 3.75 3.90 3.25
$250,000 but less than $500,000... 2.75 2.83 2.25
$500,000 but less than
$1,000,000...................... 2.00 2.04 1.75
$1,000,000 or more*............... * * *
</TABLE>

- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales to
$2 million, plus 0.80% on the next million, plus 0.20% on the next $2 million
and 0.08% on the excess over $5 million. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

26
<PAGE> 82

QUANTITY DISCOUNTS

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

Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.

As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.

As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("Money Market Fund"), Van Kampen American Capital Tax Free
Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve Fund
("Reserve Fund") and The Govett Funds, Inc.

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund alone, or in combination with other shares of the Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.

27
<PAGE> 83

the investment goal. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provision, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. If the goal is not achieved within the
13-month period, the investor must pay the difference between the charges
applicable to the purchases made and the charges previously paid. When an
investor signs a Letter of Intent, shares equal to at least 5% of the total
purchase amount of the level selected will be restricted from sale or redemption
by the investor until the Letter of Intent is satisfied or any additional sales
charges have been paid; if the Letter of Intent is not satisfied by the investor
and any additional sales charges are not paid, sufficient restricted shares will
be redeemed by the Fund to pay such charges. Additional information is contained
in the application accompanying this Prospectus.

OTHER PURCHASE PROGRAMS

Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.

UNIT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund with no minimum initial or subsequent investment requirement, and
with a lower sales charge if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all investments made from
unit trust distributions will be 1.00% of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer or financial intermediary or the Distributor.

The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.

As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send

28
<PAGE> 84

account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.

NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:

(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.

(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.

(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.

(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.

(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.

(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.

(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs

29
<PAGE> 85

made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.

The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.

Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.

CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The

30
<PAGE> 86

amount of the contingent deferred sales charge will vary depending on (i) the
class of CDSC Shares to which such shares belong and (ii) the number of years
from the time of payment for the purchase of the CDSC Shares until the time of
their redemption. The charge will be assessed on an amount equal to the lesser
of the then current market value or the original purchase price of the CDSC
Shares being redeemed. Accordingly, no sales charge will be imposed on increases
in net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchases of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of shares of such class of CDSC Shares, such as
the payment of compensation to selected dealers and agents and for selling such
shares. The combination of the contingent deferred sales charge and the
distribution and service fees facilitates the ability of the Fund to sell such
CDSC Shares without a sales charge being deducted at the time of purchase.

In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares, if any, and fourth of CDSC Shares held
longest during the period of time that a contingent deferred sales charge is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase.

To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).

31
<PAGE> 87

on redemptions made within one year of the purchase. A commission will be paid
to dealers who initiate and are responsible for purchases of $1 million or more
as follows: 1% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million.

CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <C> <C>
First................................................ 4.00%
Second............................................... 3.75%
Third................................................ 3.50%
Fourth............................................... 2.50%
Fifth................................................ 1.50%
Sixth................................................ 1.00%
Seventh and after.................................... 0.00%
</TABLE>

The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."

Conversion Feature. Six years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher aggregate distribution and service fees. The purpose of
the conversion feature is to relieve the holders of Class B Shares that have
been outstanding for a period of time sufficient for the Distributor to have
been compensated for distribution expenses related to the Class B Shares from
most of the burden of such distribution-related expenses. The Fund does not
expect to issue any stock certificates upon conversion.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to a Class B Share of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of the Fund prior to conversion, a Class B Share
of the Fund issued in connection with an exercise of the exchange privilege, or
a series of exchanges, shall be deemed to have been issued on

32
<PAGE> 88

the date on which the investor's order to purchase the exchanged Class B Share
was accepted or, in the case of a series of exchanges, when the investor's order
to purchase the original Class B Share was accepted.

The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Code and (ii) that
the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.

CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a contingent deferred sales charge of
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge. Class C Shares of the
Fund do not convert to Class A Shares.

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

NET ASSET VALUE

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon

33
<PAGE> 89

more frequently than once a day if deemed desirable. The net asset value per
share of the different classes of shares are expected to be substantially the
same; from time to time, however, the per share net asset value of the different
classes of shares may differ.

Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.

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

The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.

SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof.

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<PAGE> 90

In addition, if such certificates are lost the shareholder must write to Van
Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."

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

DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund so
long as a pre-existing account for such class of shares exists for such
shareholder.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.

EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or the
Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. Before effecting an exchange, shareholders in the Fund should obtain
and read a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.

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<PAGE> 91

In general, shares of the Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of the Fund registered in
a shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, the Fund will increase the number of days shares must be
registered in a shareholder's name prior to an exchange to 30 days.

Exchanges of Class A Shares of the Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to the Fund will have the sales
charge differential imposed upon exchange into the Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of the Fund upon exchange into the
Fund.

No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of the Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.

Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.

36
<PAGE> 92

reasonable procedures are employed, a shareholder agrees that neither VKAC nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification options) and broker, dealer or financial intermediary of record
as the account from which shares are exchanged, unless otherwise specified by
the shareholder. In order to establish a systematic withdrawal plan for the new
account or dividend diversification options for the new account, an exchanging
shareholder must file a specific written request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
may restrict or terminate the exchange privilege at any time on 60 days' notice
to its shareholders of any termination or material amendment.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.

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

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.

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<PAGE> 93

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

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

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

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

AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.

38
<PAGE> 94

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

Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.

WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any gain or loss realized on the redemption of shares
is a taxable event.

39
<PAGE> 95

shareholder and dealer. Shareholders must submit a written redemption request in
proper form (as described above under "Written Redemption Requests") to the
dealer within three business days after calling the dealer with the sell order.
Payment for shares redeemed (less any sales charge, if applicable) will
ordinarily be made by check mailed within three business days to the dealer.

TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request.

40
<PAGE> 96

The Fund reserves the right at any time to terminate, limit or otherwise modify
this telephone redemption privilege.

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

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

GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.

REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.

41
<PAGE> 97

- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------

CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.

CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.

CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to

42
<PAGE> 98

holders of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.

OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.

The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. The Fund will disclose in its prospectus from
time to time the then current amount of any such unreimbursed expenses with
respect to each class of CDSC Shares expressed as a dollar amount and as a
percent of the Fund's total net assets. As of December 31, 1994, there were
$418,563 and $5,871 of unreimbursed distribution expenses with respect to Class
B Shares and Class C Shares, respectively, representing 0.06% and less than
0.01% of the Fund's total net assets. If the Distribution Plan was terminated or
not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.

Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of CDSC Shares to defray distribution related expenses
attributable to any other class of CDSC Shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required

43
<PAGE> 99

to register as dealers pursuant to state law. In the unlikely event that a court
were to find that these laws prevent such banks from providing such services
described above, the Fund would seek alternate providers and expects that
shareholders would not experience any disadvantage.

- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------

The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income and dividends, less all expenses of the Fund
attributable to the class of shares in question. Net short-term capital gains,
if any, may be distributed throughout the year. Expenses of the Fund are accrued
each day. Net realized long-term capital gains, if any, are expected to be
distributed, to the extent permitted by applicable law, to shareholders at least
annually. Distributions cannot be assured, and the amount of each monthly
distribution may vary.

Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.

Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.

Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment

44
<PAGE> 100

plan is automatic. This instruction may be made by telephone by calling
(800) 421-5666 ((800) 772-8889 for the hearing impaired) or in writing to
ACCESS.

- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------

The following discussion reflects applicable federal income tax law, as of the
date of this Prospectus:

FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If the Fund so qualifies and if it
distributes each year to its shareholders at least 90% of its net investment
income (including tax-exempt interest and other taxable income including net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses), it will not be
required to pay federal income taxes on any income distributed to shareholders.
The Fund intends to distribute at least the minimum amount of net investment
income to satisfy the 90% distribution requirement. The Fund will not be subject
to federal income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, the Fund will be treated
as having been distributed.

If the Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of the Fund's
taxable year, at least 50% of the total of the Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), the Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from the
Fund.

45
<PAGE> 101

Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. Distributions in excess of the Fund's earnings
and profits, such as distributions of principal, will first reduce the adjusted
tax basis of the shares held by the shareholders and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such shareholders
(assuming such shares are held as a capital asset). The Fund will inform
shareholders of the source and tax status of such distributions promptly after
the close of each calendar year. Distributions from the Fund will not be
eligible for the dividends received deduction for corporations.

Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in the Fund may cause such shareholders to be subject to (or result
in an increased liability under) the alternative minimum tax.

Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.

Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held shares for more than one year. Any loss realized
on shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss to the
extent of any capital gains dividends received with respect to such shares.

46
<PAGE> 102

Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.

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

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.

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

The Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.

47
<PAGE> 103

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

- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.

From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.

From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, the Fund may utilize sales literature that
includes hypotheticals.

Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).

48
<PAGE> 104

- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------

The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized as a sub-trust of a Massachusetts business trust by a
Declaration of Trust dated August 15, 1985, under the name Van Kampen Merritt
Municipal Income Fund and was reorganized as a series of the Trust on July 31,
1995. Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of shares is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights, except with respect to the conversion
of Class B Shares into Class A Shares as described above. In the event of
liquidation, each of the shares of the Fund is entitled to its portion of all of
the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B Shares and Class C Shares pay higher distribution expenses, the
liquidation proceeds to holders of Class B Shares and Class C Shares are likely
to be lower than to other shareholders.

The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information.

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

This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.

The fiscal year of the Fund ends December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An

49
<PAGE> 105

annual report, containing financial statements audited by the Fund's independent
auditors, is sent to shareholders each year. After the end of each year,
shareholders will receive federal income tax information regarding dividends and
capital gains distributions.

Shareholder inquiries should be directed to Van Kampen American Capital
Municipal Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.

50
<PAGE> 106

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5666.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital Funds

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds

Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 107

MUNICIPAL INCOME
FUND

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

P R O S P E C T U S
JULY 31, 1995

- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 108

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000

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

STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

DATED JULY 31, 1995

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

This Statement of Additional Information provides information about the Van
Kampen American Capital Municipal Income Fund (the "VK Fund"), an open-end
diversified management investment company, a series of the Van Kampen American
Capital Tax Free Trust ("VKAC Tax Free Trust"), in addition to information
contained in the Proxy Statement/Prospectus of the VK Fund, dated July 31, 1995,
which also serves as the proxy statement of the Van Kampen American Capital
Municipal Bond Fund (the "AC Fund"), in connection with the issuance of Class A,
B and C shares of the VK Fund to shareholders of the AC Fund. This Statement of
Additional Information is not a prospectus. It should be read in conjunction
with the Proxy Statement/Prospectus, into which it has been incorporated by
reference and which may be obtained by contacting the VKAC Tax Free Fund located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181 (telephone No. (708)
684-6000 or (800) 225-2222) or the AC Fund located at 2800 Post Oak Boulevard,
Houston, Texas 77056 (telephone no. (800) 421-5666).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the AC Fund................................................ 2
Additional Information About the VK Fund and the VKAC Tax Free Trust.................. 2
Additional Information About the AC Fund.............................................. 2
Financial Statements.................................................................. 2
Pro Forma Financial Statements........................................................ 2
</TABLE>

The VKAC Tax Free Trust will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.

1
<PAGE> 109

PROPOSED REORGANIZATION OF THE AC FUND

The shareholders of the AC Fund are being asked to approve an acquisition
of all the assets and liabilities of the AC Fund in exchange for Class A, B and
C Shares of the VK Fund series of the VKAC Tax Free Trust (the
"Reorganization").

For detailed information about the Reorganization, AC Fund shareholders
should refer to the Proxy Statement/Prospectus.

ADDITIONAL INFORMATION ABOUT THE VK FUND AND THE VKAC TAX FREE TRUST

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Fund, dated July 31, 1995, attached as Appendix
A to this Statement of Additional Information.

ADDITIONAL INFORMATION ABOUT THE AC FUND

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the AC Fund, dated August 1, 1995, attached as
Appendix B to this Statement of Additional Information.

FINANCIAL STATEMENTS

Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the AC Fund for fiscal year ended September 30,
1994, attached as Appendix C to this Statement of Additional Information, (ii)
the unaudited financial statements of the AC Fund for the six months ended March
31, 1995, attached as Appendix D to this Statement of Additional Information,
and (iii) the audited financial statements of the VK Fund for the fiscal year
ended December 31, 1994, attached as Appendix E to this Statement of Additional
Information.

PRO FORMA FINANCIAL STATEMENTS

Set forth below are unaudited pro forma financial statements of the VK Fund
giving effect to the Reorganization, which include (i) Pro Forma Condensed
Statement of Assets and Liabilities at December 31, 1994; (ii) Pro Forma
Condensed Statement of Operations for the twelve months ended December 31, 1994;
and (iii) Pro Forma Portfolio of Investments at December 31, 1994.

2
<PAGE> 110

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
VK FUND AC FUND PRO FORMA
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments, at Market Value (cost of $667,323,342,
$317,276,106 and $984,599,448, respectively)(3).... $652,138,108 $323,637,945 $ 975,776,053
Short Term Investments............................. 0 9,440,000 9,440,000
Other Assets less Liabilities...................... 7,216,006 6,788,358 14,004,364
------------ ------------ --------------
Net Assets......................................... $659,354,114 $339,866,303 $ 999,220,417
============ ============ ==============
Net Assets Consist of:
Capital.......................................... $698,739,659 $344,023,529 $1,042,763,188
Accumulated Distributions in Excess of Net
Investment Income................................ (228,298) (857,562) (1,085,860)
Net Unrealized Appreciation/Depreciation on
Investments...................................... (13,135,218) 6,361,839 (6,773,379)
Accumulated Net Realized Loss on Investments..... (26,022,029) (9,661,503) (35,683,532)
------------ ------------ --------------
Net Assets......................................... $659,354,114 $339,866,303 $ 999,220,417
============ ============ ==============
Class A Shares:
Net Assets including the conversion of
Class D shares (VK Fund) to Class A shares.... $496,797,310 $295,786,556 $ 792,583,866
Shares Outstanding(2)............................ 34,836,991 30,891,664 55,579,386
------------ ------------ --------------
NAV.............................................. $14.26 $9.57 $14.26
============ ============ ==============
Class B Shares:
Net Assets....................................... $158,705,886 $ 36,619,883 $ 195,325,769
Shares Outstanding(2)............................ 11,128,652 3,822,901 13,696,666
------------ ------------ --------------
NAV.............................................. $14.26 $9.58 $14.26
============ ============ ==============
Class C Shares:
Net Assets....................................... $ 3,850,918 $ 7,459,864 $ 11,310,782
Shares Outstanding(2)............................ 270,017 778,038 793,149
------------ ------------ --------------
NAV.............................................. $14.26 $9.59 $14.26
============ ============ ==============
</TABLE>

- ---------------
(1) The pro forma statements are presented as if the Reorganization was
effective December 31, 1994. The pro forma statements give effect to the
proposed exchange of stock for assets and liabilities with the VK Fund
being the surviving entity. The proposed transaction will be accounted for
in accordance with generally accepted accounting principles as a tax-free
reorganization. The historical cost basis of the investments is carried
over to the surviving entity.
(2) The pro forma statement presumes the issuance by the VK Fund of 20,742,395
Class A shares, 2,568,014 Class B shares, and 523,132 Class C shares in
exchange for the assets and liabilities of the AC Fund.
(3) Due to the differences in the pricing methodologies of the two funds,
immediately prior to the Reorganization the investments of the AC Fund will
be valued on the same basis as the investments of the VK Fund and, as a
result, the market value of the AC Fund will be increased by approximately
$1,400,000, or $0.04 per share.
(4) In connection with this transaction, the combined Fund immediately after the
Reorganization will incur a non-recurring cost associated with the
combination of approximately $300,500, or $.004 per share.

3
<PAGE> 111

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
VK FUND AC FUND ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest Income........................ $ 49,581,836 $ 24,487,547 $ 0 $ 74,069,383
------------ ------------ --------- -------------
Expenses:
Investment Advisory Fee(1)............. 3,475,616 1,781,081 (178,000) 5,078,697
Distribution (12b-1) and Service
Fees(2)................................ 3,333,395 1,056,555 (271,000) 4,118,950
All Other Expenses(3).................. 1,484,254 801,200 (130,400) 2,155,054
------------ ------------ --------- -------------
Total Expenses 8,293,265 3,638,836 (579,400) 11,352,701
------------ ------------ --------- -------------
Net Investment Income.................... $ 41,288,571 $ 20,848,711 $ 579,400 $ 62,716,682
============ ============ ========= =============
Realized and Unrealized Loss on
Investments:
Net Realized Loss on Investments....... $(15,519,375) $ (70,117) $ 0 $ (15,589,492)
Net Change in Unrealized Depreciation
on Investments During the Period....... (76,400,277) (34,062,389) 0 (110,462,666)
------------ ------------ --------- -------------
Net Realized and Unrealized Loss on
Investments.............................. $(91,919,652) $(34,132,506) $ 0 $(126,052,158)
=========== =========== ========= =============
Net Increase (Decrease) in Net Assets
from Operations........................ $(50,631,081) $(13,283,795) $ 579,400 $ (63,335,476)
=========== =========== ========= =============
</TABLE>

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

(1) Reflects the results of a breakpoint differential in the advisory fee
schedule in effect for the VK Fund.
(2) In connection with this transaction, the Class A Share Distribution and
Service Plan for the VK Fund will be reduced from a maximum of .30% of
average net assets to a maximum of .25% of average net assets.
(3) Reflects the reduction of other operating expenses as a result of the
elimination of certain duplicative expenses and the results of operating a
larger, more efficient Fund rather than two smaller Funds.

4
<PAGE> 112

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 1.9%
2,805 Alabama Higher Edl Ln Corp...................... 6.000 09/01/07 2,722,477
2,100 Alabama St Indl Dev Auth Rev.................... 7.500 09/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A.............. 6.750 08/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec
Inds Inc Rfdg................................... 6.500 02/15/09 4,489,851
700 Citronelle, AL Util Brd Rev..................... 9.000 05/01/13 747,600
1,225 IDB of the City of Bessemer, AL Rohn Inc Ser
91A............................................. 9.000 09/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser
91A............................................. 9.500 09/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev.............. 5.000 08/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev.............. 5.125 08/01/18 880,738
------------
18,654,601
------------
ALASKA 1.4%
2,500 Alaska Energy Auth Pwr Rev...................... 6.250 07/01/21 2,335,050
5,690 Kasaan, AK Lease Rev............................ 8.000 08/15/16 5,979,507
8,000 North Slope Borough, AK Cap Apprec Ser B........ * 06/30/04 4,389,840
1,000 Valdez, AK Marine Term Rev...................... 7.125 12/01/25 1,004,140
------------
13,708,537
------------
ARIZONA 2.4%
1,000 Maricopa Cnty AZ Indl Dev....................... 6.500 07/01/09 969,030
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev
Borden Inc Proj................................. * 10/01/12 964,750
1,000 Pima Cnty AZ Indl Dev Auth...................... 6.625 11/01/14 958,420
230 Pinal Cnty, AZ Indl Dev Auth Rev................ 9.000 12/01/13 235,957
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A...... 9.500 07/01/10 6,119,458
5,290 Salt River Proj AZ Agric........................ 7.875 01/01/28 5,719,548
500 Scottsdale, AZ Indl Dev Ser..................... 8.250 06/01/15 503,415
500 Tempe, AZ Indl Dev Auth Ser A................... 6.750 12/01/13 456,275
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed
Aermod Cent Inc................................. 8.700 09/01/19 7,697,480
------------
23,624,333
------------
ARKANSAS 0.8%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp
Impt Dist No 8 AR Impt Ser A.................... 9.750 07/01/12 3,440,630
</TABLE>

5
<PAGE> 113

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp
Impt Dist No 8 AR Impt Ser B.................... 9.750 07/01/12 3,440,630
750 Pope Cnty, AR Pollutn Ctl Rev................... 11.000 12/01/15 799,845
------------
7,681,105
------------
CALIFORNIA 7.1%
6,880 California Edl Fac Auth Rev College Of
Osteopathic Med Pacific......................... 7.500 06/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev Kaiser
Permanente Med.................................. 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev Dept of
Corrections CA St Prison Susanville Ser D....... 5.250 06/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Sisters Charity........................... 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Sisters Charity........................... 5.000 12/01/23 1,704,461
2,000 Compton, CA Ctfs Partn Ser B.................... 7.500 08/01/15 2,049,640
4,325 Delano, CA Ctfs Partn Ser A..................... 9.250 01/01/22 4,649,375
1,000 El Centro, CA Ctfs Partn........................ 7.000 06/01/19 921,310
1,000 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates
Proj Rfdg....................................... 7.875 02/01/15 1,000,000
10,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev
Multi Cap Fac Proj IV........................... 5.000 12/01/08 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin
Auth Rev Grand Cent Sq Ser A.................... 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin
Auth Rev Grand Cent Sq Ser A.................... 5.900 12/01/26 836,100
2,000 Los Angeles, CA Regl Arpts Rev.................. 11.250 11/01/25 2,170,260
2,000 Los Angeles, CA Wtr & Pwr Rev................... 5.375 09/01/23 1,594,740
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/05 570,680
900 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/10 323,415
800 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/11 268,584
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/12 219,156
</TABLE>

6
<PAGE> 114

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/13 204,295
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/14 190,358
500 Norco, CA Swr Issue Rfdg........................ 6.700 10/01/13 468,090
500 Norco, CA Swr Issue Rfdg........................ 7.200 10/01/19 468,275
300 Northern CA Pwr Rev............................. 5.000 07/01/09 243,057
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1
Aliso Viejo Ser A............................... 7.350 08/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease Rev Ser A
Rfdg............................................ 5.400 11/01/20 5,799,500
1,750 San Joaquin Hills, CA Tran...................... 6.750 01/01/32 1,438,850
1,000 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg.... 7.000 09/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice
Cent Proj Ser A Rfdg............................ 5.900 09/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj Ser C
Rfdg............................................ 5.250 09/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc Rev Yorba
Linda Redev Proj Ser A.......................... * 09/01/19 951,650
------------
70,961,959
------------
COLORADO 5.6%
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A...... 8.875 08/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A...... 8.875 08/01/11 3,434,668
1,560 Arapahoe Cnty, CO Single Family Mtg Rev......... 8.375 08/01/19 1,606,566
500 Berry Creek Metro Dist Eagle 6.................. 8.250 12/01/11 518,810
500 Boulder Cnty, CO Indl Dev Rev................... 8.875 01/01/17 515,610
800 Colorado Hlth Fac Auth Rev...................... 6.625 02/01/13 721,368
500 Colorado Hlth Fac Auth Rev...................... 7.000 08/01/15 468,490
1,500 Colorado Hlth Fac Auth Rev...................... 6.250 02/15/21 1,392,795
3,900 Colorado Hlth Fac Auth Rev Hosp North CO
Med Cent........................................ 6.000 05/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser A........... 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser A........... 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1 Ser A
Rfdg............................................ * 12/01/06 4,565,145
1,000 Dove Valley Metro Dist CO....................... 9.500 12/01/08 1,044,190
1,000 Edgewater, CO Redev Rev Tax..................... 6.750 12/01/08 951,510
3,690 Jefferson Cnty, CO Residential Mtg Rev.......... 11.500 09/01/12 5,553,856
</TABLE>

7
<PAGE> 115

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,000 Meridian Metro Dist CO Peninsular & Oriental
Steam Navig Co Rfdg............................. 7.500 12/01/11 5,121,750
630 Mountain Vlg Metro Dist CO...................... 7.950 12/01/03 631,921
500 Mountain Vlg Metro Dist CO...................... 8.100 12/01/11 515,930
5,000 University of CO Hosp Auth Hosp Rev Ser A....... 6.400 11/15/22 4,891,450
------------
55,950,622
------------
CONNECTICUT 0.7%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing
Home Pgm AHF/Hartford........................... 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A............................ 5.500 03/15/10 1,839,160
------------
6,885,251
------------
DISTRICT OF COLUMBIA 0.6%
4,000 District of Columbia Ctfs Partn................. 7.300 01/01/13 3,808,240
2,500 District of Columbia Rev Ser A.................. 7.700 01/01/23 2,497,125
------------
6,305,365
------------
FLORIDA 3.9%
500 Atlantic Beach, FL Rev Ser A.................... 7.500 10/01/02 490,455
500 Atlantic Beach, FL Rev Ser A.................... 7.875 10/01/08 487,245
1,000 Broward Cnty, FL Edl Auth Rev................... 8.500 04/01/10 1,123,260
1,760 Broward Cnty, FL Res Rec Rev.................... 7.950 12/01/08 1,885,100
2,295 Broward Cnty, FL Res Rec Rev.................... 7.950 12/01/08 2,458,128
1,000 Charlotte Cnty, FL Hosp Rev..................... 8.250 08/15/18 1,104,900
3,000 Emerald Coast, FL Hsg Corp Hsg Rev Ser A 1991... 9.500 01/01/22 3,000,000
560 Florida St Brd Edl Cap Ser A.................... 7.250 06/01/23 585,709
590 Florida St Brd Edl Cap Ser A.................... 7.250 06/01/23 640,214
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev
Environmental Preservation 2000 Ser A........... 4.750 07/01/10 4,114,850
245 Gtr Orlando Aviation Rev........................ 8.375 10/01/16 272,337
2,255 Gtr Orlando Aviation Rev........................ 8.375 10/01/16 2,445,028
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg...... 5.750 03/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg...... 5.750 03/01/05 796,527
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg............. 7.875 12/15/25 2,920,425
1,000 Orange Cnty, FL Dev Tax Rev..................... 6.000 10/01/16 922,460
2,000 Orlando, FL Util Commn Rev...................... 8.625 10/01/05 2,096,920
</TABLE>

8
<PAGE> 116

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
855 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth
Sys Rev Sun Coast Hosp Ser A.................... 8.500 03/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth
Sys Rev Sun Coast Hosp Ser A.................... 8.500 03/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park........................... 10.000 07/01/22 4,420,486
1,000 St. Petersburg, FL Hlth Fac Rev................. 7.750 12/01/15 1,105,600
670 Tampa, FL Cap Impt Prog Rev..................... 8.250 10/01/18 693,101
------------
38,486,243
------------
GEORGIA 1.3%
3,000 Atlanta, GA Arpt Fac Rev........................ 6.250 01/01/21 2,692,860
1,000 Burke Cnty, GA Dev Auth Pollutn Ctl Rev......... 9.375 12/01/17 1,106,340
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs
Franklin Forest Ser A........................... 8.000 06/01/22 2,925,000
1,750 Georgia Muni Elec Auth Pwr Rev.................. 8.375 01/01/16 1,899,362
850 Georgia Muni Elec Auth Pwr Rev.................. 6.000 01/01/20 748,493
2,000 Georgia Muni Elec Pwr Rev Ser................... 7.875 01/01/18 2,089,120
1,250 Municipal Elec Auth GA Spl Oblig................ 8.125 01/01/17 1,348,187
500 Rockdale Cnty, GA Dev Auth...................... 7.500 01/01/26 478,640
------------
13,288,002
------------
HAWAII 2.4%
4,055 Hawaii St Arpts Sys Rev Ser 1993................ 6.350 07/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev
Hawaiian Elec Co................................ 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev Continental
Airls Inc....................................... 9.600 06/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev Continental
Airls Inc....................................... 9.700 06/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev................... 6.350 07/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev................... 6.400 07/01/08 1,568,268
500 Hawaii St Harbor Cap Impt Rev................... 7.000 07/01/17 503,760
------------
23,920,514
------------
ILLINOIS 10.9%
4,500 Bedford Park, IL Tax Increment Rev Sr Lien
Bedford City Sq Proj............................ 9.250 02/01/12 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr Lien......... 8.250 07/01/13 6,895,000
</TABLE>

9
<PAGE> 117

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Chicago IL Gas Supply Rev....................... 8.100 05/01/20 1,090,930
1,000 Chicago IL Metro Wtr Dist....................... 7.000 01/01/11 1,050,300
1,000 Chicago IL O'Hare Arpt Rev Ser A................ 6.000 01/01/18 880,290
1,000 Chicago IL O'Hare Arpt Rev Ser B................ 6.000 01/01/18 883,380
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser C1......... 5.750 01/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
Intl Terminal................................... 6.750 01/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc................................ 8.500 05/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc Ser A.......................... 8.400 05/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc Ser B.......................... 8.950 05/01/18 5,436,274
1,000 Cook Cnty Cmnty College #508.................... 8.750 01/01/07 1,196,670
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/12 514,794
1,000 Crestwood, IL Tax Increment..................... 7.250 12/01/08 941,600
1,000 Du Page Cnty, IL Alt Rev........................ 6.550 01/01/21 1,048,980
950 Hanover Park, IL Rev 1st Mtg.................... 9.250 12/01/07 1,008,444
4,800 Hodgkins, IL Tax Increment...................... 9.500 12/01/09 5,184,000
1,000 Illinois Edl Fac Auth Rev....................... 6.750 10/01/21 988,880
1,000 Illinois Edl Fac Auth Rev....................... 6.900 12/01/21 1,074,180
1,000 Illinois Hlth Fac Auth Rev...................... 6.750 08/15/11 982,290
500 Illinois Hlth Fac Auth Rev...................... 6.625 10/01/12 475,920
1,000 Illinois Hlth Fac Auth Rev-8.................... 8.125 01/01/13 1,068,560
1,000 Illinois Hlth Fac Auth Rev...................... 6.300 08/01/13 895,340
2,000 Illinois Hlth Fac Auth Rev...................... 6.000 04/01/18 1,775,900
1,000 Illinois Hlth Fac Auth Rev...................... 7.700 10/01/19 1,100,940
1,000 Illinois Hlth Fac Auth Rev...................... 7.250 05/01/22 954,280
</TABLE>

10
<PAGE> 118

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj A.......................................... 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj B.......................................... 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser
D............................................... 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser
D............................................... 9.500 11/15/15 512,512
1,150 Illinois Hlth Fac Auth Rev Holy Cross Hosp
Proj............................................ 6.700 03/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med
Cent Chicago Ser A.............................. 10.250 02/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser
A............................................... 6.250 08/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser
A............................................... 6.375 08/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United Med Cent...... 8.375 07/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential Mtg Rev....... 9.086 02/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic Cent Ser
B............................................... * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A..................... 8.000 06/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins Res
Recovery Partners Ser A......................... 9.250 10/15/14 7,216,230
865 Round Lake, IL Beach Ser 199.................... 7.200 12/01/04 832,406
500 Round Lake, IL Beach Ser 199.................... 7.500 12/01/13 429,555
1,705 St Charles, IL Indl Dev Rev..................... 7.500 11/01/13 1,592,742
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A.... 5.800 04/01/10 1,381,692
------------
108,751,549
------------
INDIANA 1.8%
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp
Inc............................................. 7.000 07/01/12 2,770,818
2,000 Indiana Fin Auth Arpt Rev....................... 6.250 11/01/16 1,808,420
1,000 Indiana Hlth Fac Fing Auth...................... 6.850 07/01/22 991,440
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal
Express Corp Proj............................... 7.100 01/15/17 2,874,510
550 Indianapolis, IN Loc Pub Impt................... 6.750 02/01/14 540,133
2,000 Indianapolis, IN Loc Pub Impt................... 6.700 01/01/17 1,896,720
1,000 Indianapolis, IN Loc Pub Impt................... 6.000 02/01/20 891,110
1,000 Indianapolis, IN Loc Pub Impt................... 6.750 02/01/20 951,340
450 Indianapolis, IN Loc Pub Impt................... 6.500 02/01/22 411,660
1,000 Marion Cnty, IN Hosp Fac Rev.................... 6.500 09/01/13 948,100
1,000 Petersburg, IN Pollutn Ctl Rev.................. 6.100 01/01/16 884,750
</TABLE>

11
<PAGE> 119

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 St Joseph Cnty, IN Hosp Rev..................... 6.250 08/15/22 1,368,240
1,500 Wells Cnty, IN Hosp Auth Rev.................... 8.500 04/15/03 1,484,805
------------
17,822,046
------------
IOWA 0.5%
25,000 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser
A............................................... * 09/01/16 2,214,250
3,000 Muscatine, IA Elec Rev.......................... 5.000 01/01/08 2,536,440
145 Pocahontas, IA Indl Dev Rev..................... 10.250 10/01/00 150,472
------------
4,901,162
------------
KANSAS 0.2%
1,000 Burlington KS Pollutn Ctl Rev Rfdg.............. 7.000 06/01/31 1,005,790
1,000 Newton, KS Hosp Rev Ser......................... 7.750 11/15/24 947,830
------------
1,953,620
------------
KENTUCKY 2.1%
1,000 Bowling Green, KY Indl Dev Rev Coltec
Inds Inc Rfdg................................... 6.550 03/01/09 938,510
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds
Inc............................................. 9.875 10/01/10 2,842,532
10,950 Jefferson Cnty, KY Cap Corp..................... * 08/15/14 2,611,027
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys
Proj............................................ 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland
Hosp Corp Ser A Rfdg & Impt..................... 6.125 02/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D................. 7.450 01/01/23 2,190,924
8,000 Kentucky St Tpk Res Rec Rd...................... 5.000 07/01/08 6,816,480
1,000 Kentucky St Tpk Toll Rd Rev..................... 5.500 07/01/07 914,500
------------
21,438,436
------------
LOUISIANA 1.1%
1,000 Hodge, LA Util Rev Comb......................... 9.000 03/01/10 1,028,380
2,600 Lafayette, LA Econ Dev Auth Indl Dev Rev
Advanced Polymer Proj Ser 1985.................. 10.000 12/31/00 2,672,644
1,000 Lake Charles, LA Harbor & Term.................. 7.750 08/15/22 1,026,050
475 Louisiana Pub Fac Auth Rev...................... 8.250 09/01/08 478,591
10,000 Orleans Parish, LA Sch Brd Rfdg................. * 02/01/15 2,407,600
1,000 Port New Orleans, LA Indl Dev................... 8.250 06/01/04 1,017,540
1,000 St Charles Parish, LA Pollutn Ctl Rev........... 8.250 06/01/14 1,042,450
1,400 West Feliciana Parish, LA Pollutn Ctl Rev....... 7.500 05/01/15 1,383,984
------------
11,057,239
------------
</TABLE>

12
<PAGE> 120

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MAINE 0.3%
1,500 Maine Edl Ln Marketing Corp Student Ln
Rev Ser A4...................................... 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student
Ln Rev Ser A4................................... 5.600 11/01/00 1,955,140
------------
3,420,190
------------
MARYLAND 0.8%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem
Steel Corp Proj Ser A Rfdg...................... 7.550 06/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac Auth Rev
Kernan Hosp Issue............................... 6.100 07/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid Waste Rev
Montgomery Cnty Res Recovery Proj Ser A......... 6.200 07/01/10 2,706,960
1,165 Rockville, MD Mtg Rev Summit Apts Proj Ser A
Rfdg............................................ 5.625 07/01/19 989,353
------------
8,328,038
------------
MASSACHUSETTS 1.9%
1,000 Boston, MA Rev Boston City...................... 7.625 02/15/21 1,104,760
1,665 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser
A............................................... 7.000 01/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New
England Med Cent Hosp Ser G..................... 5.000 07/01/13 3,398,262
6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 5.750 10/01/06 4,272,000
1,000 Massachusetts St Hsg Multi Family............... 8.750 08/01/08 1,020,000
550 Massachusetts St Hsg Res Hsg.................... 8.400 08/01/21 562,375
1,000 Massachusetts St Indl 1st Mtg................... 8.625 10/01/23 968,870
1,000 Massachusetts St Indl Fin Agy................... 8.800 06/01/14 1,087,350
750 Massachusetts St Indl Fin Rev................... 7.100 11/15/18 673,387
2,000 Massachusetts St Wtr Res Ser.................... 7.500 04/01/16 2,189,060
2,000 Plymouth Cnty, MA Ctfs Partn Ser A.............. 7.000 04/01/22 2,005,280
------------
18,968,472
------------
MICHIGAN 1.5%
1,000 Detroit, MI Tax Incremnt 13..................... 7.600 07/01/10 1,014,280
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev
Munson Hlthcare Ser A Rfdg...................... 6.250 07/01/12 1,925,960
750 Michigan Pub Pwr Agy Rev........................ 7.000 01/01/18 770,002
1,000 Michigan St Hosp Fin Auth Rev................... 8.125 07/01/05 1,042,670
</TABLE>

13
<PAGE> 121

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,470 Michigan St Hosp Fin Auth Rev Garden City
Hosp............................................ 8.300 09/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B... 2.870 04/01/04 4,532,416
500 Monroe Cnty, MI Pollutn Ctl Rev................. 10.500 12/01/16 534,600
1,000 Mount Clemens, MI Corp Hsg...................... 6.600 06/01/13 971,950
2,390 Romulus, MI Cmnty Sch Rfdg...................... * 05/01/19 465,190
1,000 Royal Oak, MI Hosp Fin Auth..................... 6.750 01/01/20 970,680
------------
14,705,158
------------
MINNESOTA 0.8%
965 Minnesota St Hsg Fin Agy Single Family Mtg...... 6.750 01/01/26 912,648
1,000 North St Paul, MN Multi Family.................. 9.250 02/01/22 1,056,250
2,000 Southern MN Muni Pwr Agy Rev.................... 5.000 01/01/16 1,578,040
1,250 Southern MN Muni Pwr Agy Rev.................... 5.000 01/01/17 969,125
8,160 Southern MN Muni Pwr Agy Pwr Supply Sys
Rev Ser A....................................... * 01/01/22 1,351,949
2,500 St Paul, MN Port Auth Hsg Rev................... 9.500 12/01/11 2,393,750
------------
8,261,762
------------
MISSISSIPPI 0.6%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl
Rev Var Weyerhaeuser Co Rfdg.................... 6.560 04/01/22 4,706,600
1,155 Ridgeland, MS Urban Renewal..................... 7.750 12/01/15 1,073,999
------------
5,780,599
------------
MISSOURI 2.0%
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John
Knox Vlg Proj Rfdg & Impt....................... 7.125 08/15/12 2,001,660
1,890 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev.............................. 7.250 06/01/04 2,014,570
3,920 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev.............................. 7.250 06/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev
Hlth Midwest Ser B.............................. 6.250 02/15/22 3,790,200
1,000 Missouri St Hlth & Edl Fac Rev.................. 8.125 10/01/10 1,096,550
3,000 Missouri St Hlth & Edl Fac Rev Freeman Hosp Proj
Ser A........................................... 5.375 02/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home
Rev Mary Queen & Mother Proj Rfdg............... 7.125 03/20/23 2,213,258
1,000 St Louis, MO Pkg Fac Rev........................ 6.625 12/15/21 929,130
</TABLE>

14
<PAGE> 122

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
975 St Louis, MO Tax Increment Rev.................. 10.000 08/01/10 1,098,084
------------
19,954,119
------------
MONTANA 0.5%
6,000 Montana St Brd Invt Res Recovery Rev Yellowstone
Energy L P Proj................................. 7.000 12/31/19 5,373,240
------------
NEBRASKA 0.8%
5,200 Nebraska Invt Fin Auth Single Family Mtg Rev.... 9.963 09/19/23 4,998,500
850 Nebraska Invt Fin Auth Single Family Mtg Rev.... 9.293 09/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family Mtg Rev.... 10.542 09/10/30 1,892,250
------------
7,639,812
------------
NEVADA 1.8%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser
A............................................... 6.700 06/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp
Ser A........................................... 6.500 12/01/33 5,403,970
2,500 Henderson, NV Loc Impt Dist No T-4 Ser A........ 8.500 11/01/12 2,531,100
2,575 Humboldt Genl Hosp Dist NV...................... 6.125 06/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj
Ser E Rfdg...................................... 5.750 09/01/17 3,448,517
------------
17,637,235
------------
NEW HAMPSHIRE 0.9%
1,000 New Hampshire St Indl Dev Auth Rev.............. 10.750 10/01/12 1,142,260
1,000 New Hampshire St Indl Dev Auth Rev.............. 7.800 04/01/16 1,024,360
1,000 New Hampshire St Tpk Sys Rev Ser................ 6.750 11/01/11 1,016,990
2,500 New Hampshire Higher Edl & Hlth................. 8.500 01/01/15 2,689,200
2,000 New Hampshire Higher Edl & Hlth................. 7.625 07/01/16 1,860,880
1,000 New Hampshire St Bus Auth Pollutn Ctl........... 7.750 06/01/14 964,040
------------
8,697,730
------------
NEW JERSEY 2.3%
1,000 Camden Cnty, NJ Pollutn Ctl Ser................. 7.500 12/01/09 963,520
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A
Rfdg............................................ 8.448 08/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev
Ser A........................................... 5.800 07/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev
Ser A........................................... 5.800 07/01/08 1,918,720
3,200 New Jersey St Tpk Auth Rev Ser C................ 6.500 01/01/16 3,178,272
</TABLE>

15
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj B Rfdg................... 6.250 06/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj C Rfdg................... 6.200 08/01/30 1,165,562
------------
23,504,883
------------
NEW MEXICO 0.4%
1,275 Albuquerque, NM Home Mtg Rev.................... 12.000 09/01/98 1,287,635
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San
Juan Regl Med Cent Inc Proj..................... 7.900 06/01/11 2,654,150
------------
3,941,785
------------
NEW YORK 13.0%
4,945 Battery Park City Auth NY Rev Sr Ser A Rfdg..... 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic Hosp Rev...... 8.000 01/01/20 3,583,155
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev
Burrows Paper Corp Recycling.................... 8.000 01/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter Fac Rev
Ser A........................................... 6.100 07/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac
Ser 5 Rfdg...................................... 7.000 07/01/12 5,025,350
1,500 Metropolitan Tran Auth NY Rev................... 5.500 07/01/15 1,286,700
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj............................. 6.000 01/01/19 4,355,000
1,000 New York City Muni Wtr Auth Rev................. 7.625 06/15/16 1,066,690
4,100 New York City Muni Wtr Auth Rev................. 5.000 06/15/17 3,155,401
3,000 New York City Muni Wtr Fin Auth................. 7.250 06/15/15 3,267,660
20,000 New York City Muni Wtr Fin Auth Wtr &
Swr Sys Rev..................................... 5.350 06/15/12 17,209,000
4,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser B....................................... 5.625 06/15/11 3,520,600
2,500 New York City Ser B............................. 7.500 02/01/07 2,606,625
5,000 New York City Ser C Rfdg........................ 6.500 08/01/04 4,938,050
7,500 New York City Ser C Subser C-1.................. 7.500 08/01/20 7,692,225
5,000 New York City Ser H............................. 7.000 02/01/16 4,931,850
2,580 New York City Ser H Subser H-1.................. 4.900 08/01/97 2,505,232
1,000 New York, NY City Indl Dev A.................... 7.000 07/01/23 932,660
3,250 New York St Dorm Auth Rev....................... 7.700 05/15/12 3,615,820
1,000 New York St Dorm Auth Rev....................... 8.125 07/01/17 1,083,570
</TABLE>

16
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14,600 New York St Dorm Auth Rev City Univ 3rd Genl
Resources Ser E................................. 6.750 07/01/24 14,634,635
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev.. 8.041 04/01/20 1,990,625
2,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev Niagara Mohawk Pwr Corp Ser A Rfdg.......... 7.200 07/01/29 2,072,800
7,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev NY St Elec & Gas Corp Ser A Rfdg............ 6.050 04/01/34 6,371,120
1,000 New York St Environmental Fac Rev............... 10.000 10/01/17 1,097,130
490 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser A............................. 7.750 08/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser A............................. 7.750 08/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Ser C.................................. 7.300 02/15/21 499,658
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Ser C.................................. 7.300 02/15/21 1,663,085
1,965 New York St Med Care Fac........................ 7.250 02/15/09 2,067,966
1,000 New York St Med Care Fac........................ 8.000 02/15/25 1,083,470
1,000 New York St Med Care Fac Rev.................... 7.400 02/15/19 1,008,700
2,500 New York St Pwr Auth Rev........................ 7.375 01/01/18 2,603,075
5,000 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser A Rfdg.................................. 6.500 01/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St Fac........... 7.500 04/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy Rev Proj Res
Recovery Fac.................................... 6.875 05/01/06 2,920,380
1,000 Port Auth NY & NJ Cons.......................... 6.125 07/15/22 918,130
1,000 Triborough Brog & Tunl Auth..................... 7.875 01/01/18 1,081,280
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy
Proj............................................ 8.000 03/15/22 1,021,980
------------
130,027,643
------------
NORTH CAROLINA 1.3%
335 North Carolina Eastern Muni Pwr................. 8.000 01/01/21 363,391
2,665 North Carolina Eastern Muni Pwr................. 8.000 01/01/21 2,890,858
7,695 North Carolina Eastern Muni Pwr................. 4.500 01/01/24 5,724,772
2,850 North Carolina Muni Pwr Rev..................... 7.875 01/01/19 3,081,420
1,000 North Carolina Muni Pwr Rev..................... 6.000 01/01/20 864,850
------------
12,925,291
------------
</TABLE>

17
<PAGE> 125

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH DAKOTA 0.3%
1,240 Mercer Cnty, ND Pollutn Ctl Rev Ser............. 7.000 01/01/19 1,195,434
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's
Hosp Corp Proj.................................. 8.875 11/15/24 2,022,540
------------
3,217,974
------------
OHIO 1.8%
500 Cleveland, OH Pkg Fac Rev....................... 8.000 09/15/12 505,950
750 Coshocton Cnty, OH Solid Waste Disp............. 7.875 08/01/13 721,680
1,000 Cuyahoga Cnty, OH Hlthcare...................... 7.300 11/15/23 893,870
500 Fairfield, OH Econ Dev Rev...................... 8.500 01/01/03 512,495
4,660 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys
Ser B Rfdg...................................... 5.250 06/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B.... 9.213 03/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG Fdg Ltd
Partnership Proj Rfdg........................... 6.375 04/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College
Cleveland Elec Ser A Rfdg....................... 8.000 10/01/23 1,962,140
------------
17,829,135
------------
OKLAHOMA 1.4%
9,685 Grand River Dam Auth Okla Rev................... 5.000 06/01/12 7,861,023
2,810 Oklahoma Hsg Fin Agy Single Family Rev Mtg
Class B......................................... 7.997 08/01/18 3,034,800
800 Tulsa, OK Muni Arpt Tr Rev...................... 9.500 06/01/20 836,680
1,000 Tulsa, OK Muni Arpt Tr Rev...................... 7.600 12/01/30 928,650
1,500 Woodward, OK Muni Auth Rev...................... 8.000 11/01/12 1,613,190
------------
14,274,343
------------
OREGON 0.0%
500 Salem, OR Hosp Fac Auth......................... 7.500 12/01/24 476,030
------------
PENNSYLVANIA 3.8%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart
Hosp Ser A Rfdg................................. 6.750 11/15/14 2,613,420
2,000 Butler Cnty Indl Dev Auth 1st Mtg Rev........... 8.750 06/01/16 2,098,380
500 Chartiers Valley, PA Indl....................... 7.250 12/01/11 488,085
500 Chartiers Valley, PA Indl....................... 7.400 12/01/15 488,030
995 Clearfield Hosp Auth Ser 94..................... 6.875 06/01/16 916,713
</TABLE>

18
<PAGE> 126

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp
Crozer-Chester Mem Cent......................... 6.000 12/15/20 1,587,840
1,500 Delaware Cnty, PA Indl Dev Auth Rev............. 8.100 12/01/13 1,590,495
2,000 Delaware St Econ Dev Auth Ser A................. 6.900 01/01/18 1,740,220
1,750 Emmaus, PA Gen Auth Rev......................... 8.150 05/15/18 1,864,327
2,500 Emmaus, PA Gen Auth Rev Ser C................... 7.900 05/15/18 2,644,475
500 Erie Cnty, PA Hosp Auth Rev..................... 7.250 07/01/12 491,745
845 Lebanon Cnty, PA Good Samaritan................. 5.850 11/15/07 739,915
1,000 Lebanon Cnty, PA Hlth Fac....................... 6.750 10/01/10 946,180
1,000 Lehigh Cnty, PA Indl Dev Auth................... 8.000 08/01/12 974,190
1,315 Luzerne Cnty, PA Indl Dev Ser................... 7.875 12/01/13 1,285,833
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford
Hosp Proj....................................... 8.875 10/01/20 1,734,660
1,000 Mckeesport, PA Hosp Auth Rev.................... 6.500 07/01/08 932,030
1,000 Montgomery Cnty, PA Indl Dev Rev................ 7.500 01/01/12 1,030,240
1,000 Montgomery Cnty, PA Indl Dev Auth............... 6.300 01/01/13 863,960
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth
Hosp Rev........................................ 5.660 06/01/12 2,588,940
500 Pennsylvania St Higher Edl Fac Rev.............. 7.200 07/01/19 514,060
250 Pennsylvania St Higher Edl Rev.................. 7.500 03/01/14 253,250
1,000 Philadelphia, PA Auth Indl Rev.................. 6.125 02/15/03 961,600
725 Philadelphia, PA Hosp & Higher.................. 7.250 03/01/24 637,449
2,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.500 11/15/08 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease Ser B
Rfdg............................................ 6.400 11/15/16 870,416
500 Scranton-Lackawanna, PA Rev..................... 8.250 07/01/09 522,305
1,000 Scranton-Lackawanna, PA Ser A................... 7.375 07/15/08 961,960
2,330 Somerset Cnty, PA Gen Auth...................... 6.250 10/15/11 2,385,290
1,000 Washington Cnty, PA Hosp Auth................... 7.350 06/01/13 909,290
------------
37,508,518
------------
RHODE ISLAND 0.9%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A....... 8.000 09/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn Corp Spl
Oblig Ser A..................................... 6.950 08/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm
Ser B........................................... 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A.......................... 6.800 07/15/98 2,507,501
</TABLE>

19
<PAGE> 127

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
600 West Warwick, RI Ser A.......................... 7.300 07/15/08 604,374
------------
9,127,037
------------
SOUTH CAROLINA 0.2%
1,070 Piedmont Muni Pwr Agy Rev....................... 5.000 01/01/25 790,451
140 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 146,238
210 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 219,357
650 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 669,617
------------
1,825,663
------------
SOUTH DAKOTA 0.4%
150 South Dakota St Hlth Auth Rev................... 7.625 11/01/13 157,111
1,850 South Dakota St Hlth Auth Rev................... 7.625 11/01/13 2,012,485
1,000 South Dakota St Hlth Auth Rev................... 7.250 04/01/20 933,720
1,000 South Dakota St Hsg Dev Auth.................... 6.850 05/01/26 981,250
------------
4,084,566
------------
TENNESSEE 0.3%
500 Clarksville, TN Hosp Rev........................ 6.250 07/01/13 440,725
1,500 Maury Cnty, TN Indl Dev Brd Pollutn Ctl Rev
Multi Modal Saturn Corp Proj Rfdg............... 6.500 09/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth Spl Fac & Proj
Rev Federal Express Corp Rfdg................... 7.875 09/01/09 1,592,235
------------
3,417,670
------------
TEXAS 7.6%
1,000 Austin, TX Hsg Fin Corp......................... 6.750 04/01/19 928,140
1,250 Austin, TX Util Sys Rev......................... 7.750 11/15/06 1,314,612
1,000 Austin, TX Util Sys Rev Ser..................... 7.800 11/15/12 1,094,670
2,380 Austin, TX Util Sys Rev Ser..................... 7.800 11/15/12 2,584,442
2,280 Austin, TX Util Sys Rev......................... 6.000 05/15/15 2,089,597
1,500 Bexar Cnty, TX Hlth Fac Dev..................... 7.900 05/01/18 1,538,325
500 Bexar Cnty, TX Hlth Fac Dev..................... 7.000 05/01/21 480,800
435 Bexar Cnty, TX Hsg Corp Rev..................... 9.250 04/01/16 448,110
410 Bexar Cnty, TX Hsg Corp Rev..................... 8.200 04/01/22 422,295
3,675 Brazos River Auth TX Pollutn Ctl Rev............ 9.875 10/01/17 4,012,401
1,595 Capital Indl Dev Corp TX PC..................... 7.400 05/01/12 1,702,917
625 Clear Creek, TX Indpt Sch Dist.................. 6.250 02/01/11 638,568
940 Dallas-Ft Worth Intl Arpt....................... 7.500 11/01/25 873,241
135 El Paso, TX Ppty Fin Auth Inc................... 8.700 12/01/18 140,805
</TABLE>

20
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500 Eldridge Rd Util Dist TX Rfdg................... 6.125 03/01/11 446,210
500 Fort Bend Cnty, TX Levee #11.................... 8.700 03/01/09 536,905
440 Fort Bend Cnty, TX Levee #11.................... 8.700 03/01/10 472,639
680 Fort Worth, TX Hsg Fin Rfdg..................... 8.500 10/01/11 725,349
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow
Freight Sys Inc Proj............................ 8.000 12/01/16 2,605,475
785 Harris Cnty, TX Hsg Fin Single Family Mtg....... 10.125 07/15/03 779,646
1,000 Harris Cnty, TX Hth Fac Dev..................... 7.125 06/01/15 1,020,520
500 Harris Cnty, TX Muni Util G O................... 7.300 03/01/14 478,125
1,000 Harris Cnty, TX Util Dist #1.................... 9.750 03/01/00 1,008,370
855 Houston, TX Hsg Fin Corp Rev.................... 5.950 12/01/10 791,969
675 Houston, TX Hsg Fin Single Family Mtg Rev....... 10.000 09/15/14 686,805
1,160 Jefferson Cnty, TX Hlth Fac..................... 8.300 10/01/14 1,233,706
3,995 Leander, TX Indpt Sch Dist Cap Apprec Rfdg...... * 08/15/16 853,652
1,000 Mills Rd Muni Util Dist TX...................... 6.500 09/01/14 902,600
500 Mission Bend Muni Util Dist 2................... 10.000 09/01/98 560,210
375 Mission Bend Muni Util Dist 2................... 10.000 09/01/00 426,907
655 Montgomery Cnty, TX Muni Util Dist.............. 8.900 09/01/02 727,547
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C
Presbyterian Hlthcare Sys....................... 10.655 06/22/21 3,364,375
500 North Mission Glen Muni Util.................... 6.500 09/01/14 448,460
750 Northwest Harris Cnty Util...................... 8.100 10/01/15 784,522
1,500 Richardson, TX Hosp Auth Rev.................... 6.750 12/01/23 1,390,935
1,750 Rusk Cnty, TX Hlth Fac Cor...................... 7.750 04/01/13 1,708,035
440 Sabine River Auth, TX Pollutn Ctl Rev........... 9.000 09/01/07 475,824
1,350 Sabine River Auth, TX Pollutn Ctl Rev........... 7.750 04/01/16 1,400,490
1,000 Sam Rayburn, TX Muni Pwr Agy.................... 6.750 10/01/14 915,530
1,000 Sam Rayburn, TX Muni Pwr Agy.................... 6.250 10/01/17 837,830
500 Texas Gen Svcs Commn Partn I.................... 7.000 08/01/19 479,635
500 Texas Gen Svcs Commn Partn I.................... 7.000 08/01/24 478,380
8,565 Texas Muni Pwr Agy Rev.......................... 5.500 09/01/13 7,412,750
13,000 Texas Muni Pwr Agy Rev.......................... * 09/01/13 3,785,340
3,954 Texas St........................................ 6.350 12/01/13 3,888,447
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev
Coll Ser C Rfdg................................. 9.207 07/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd
College Student Ln.............................. 0/7.850 10/01/25 2,391,494
1,000 Texas St Superconducting Ser.................... 5.500 04/01/20 831,500
</TABLE>

21
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,450 Texas St Veterans Hsg........................... 6.800 12/01/23 1,437,211
245 Travis Cnty, TX Hsg Fin Single Family Mtg....... 8.200 04/01/22 247,207
1,000 Tyler, TX Hlth Fac Dev Ser B.................... 6.750 11/01/25 888,890
1,000 Weslaco, TX Hlth Fac Dev Ser.................... 5.250 06/01/16 818,660
2,250 West Side Calhoun Cnty, TX Navig Dist Solid
Waste Disp Union Carbide Chem & Plastics........ 8.200 03/15/21 2,365,897
500 Willow Fork Drain Dist TX....................... 7.000 03/01/12 496,975
500 Willow Fork Drain Dist TX....................... 7.000 03/01/13 491,370
1,000 Winters, TX Wtrwks & Swr Rev.................... 8.500 08/01/17 1,164,310
------------
75,820,250
------------
UTAH 2.9%
3,215 Bountiful, UT Hosp Rev South Davis Cmnty
Hosp Proj....................................... 9.500 12/15/18 3,271,070
2,400 Intermountain Pwr Agy UT Rev.................... 7.750 07/01/17 2,531,088
3,650 Intermountain Pwr Agy UT Rev.................... 7.750 07/01/20 3,876,336
2,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/21 1,766,940
2,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/21 1,766,940
1,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/23 880,570
1,850 Intermountain Pwr Agy UT Spl Oblig.............. 5.000 07/01/16 1,455,561
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg... 6.150 02/15/12 9,668,560
1,000 Utah St Bldg Ownership Auth..................... 7.800 08/15/10 1,073,890
1,300 Utah St Bldg Ownership Auth..................... 7.800 08/15/11 1,396,057
1,000 Utah St Hsg Fin Agy Single Family Mtg Ser F2.... 7.000 07/01/27 1,001,560
------------
28,688,572
------------
VIRGIN ISLANDS 0.2%
500 University Virgin Islands....................... 7.500 10/01/09 494,215
500 University Virgin Islands....................... 7.650 10/01/14 489,950
785 Virgin Islands Port Auth Rev.................... 10.125 11/01/05 811,901
------------
1,796,066
------------
VIRGINIA 1.3%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp Rev......... 5.500 09/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev... 6.600 08/15/23 3,403,330
2,080 Loudoun Cnty, VA Ctfs Partn..................... 6.800 03/01/14 2,102,423
1,000 Loudoun Cnty, VA Ctfs Partn..................... 6.900 03/01/19 1,011,500
</TABLE>

22
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

23
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VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)

*Zero coupon bond

24
<PAGE> 132

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

Van Kampen American Capital Municipal Income Fund, formerly known as Van
Kampen Merritt Municipal Income Fund (the "Fund"), seeks to provide high current
income exempt from federal income taxes consistent with preservation of capital.
The Fund attempts to achieve its investment objective by investing at least 80%
of its assets in a diversified portfolio of tax-exempt municipal securities
rated investment grade at the time of investment. There is no assurance that the
Fund will achieve its investment objective. The Fund is a separate series of Van
Kampen American Capital Tax Free Trust, a Delaware business trust (the
"Trust").

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Description of Municipal Securities Ratings........................................... B-13
Officers and Trustees................................................................. B-18
Investment Advisory and Other Services................................................ B-23
Portfolio Transactions and Brokerage Allocation....................................... B-25
Tax Status of the Fund................................................................ B-26
The Distributor....................................................................... B-26
Legal Counsel......................................................................... B-27
Performance Information............................................................... B-27
Independent Auditors' Report.......................................................... B-30
Financial Statements.................................................................. B-31
Notes to Financial Statements......................................................... B-44
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.

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THE FUND AND THE TRUST

The Fund is a separate series of the Trust, an open-end diversified management
investment company. At present, the Fund, Van Kampen American Capital Insured
Tax Free Income Fund, Van Kampen American Capital Tax Free High Income Fund, Van
Kampen American Capital California Insured Tax Free Fund, Van Kampen American
Capital Limited Term Municipal Income Fund, Van Kampen American Capital Florida
Insured Tax Free Income Fund, Van Kampen American Capital New Jersey Tax Free
Income Fund, and Van Kampen American Capital New York Tax Free Income Fund have
been organized as series of the Trust and have commenced investment operations.
Van Kampen American Capital California Tax Free Income Fund, Van Kampen American
Capital Michigan Tax Free Income Fund, Van Kampen American Capital Missouri Tax
Free Income Fund and Van Kampen American Capital Ohio Tax Free Income Fund have
been organized as series of the Trust but have not yet commenced investment
operations. Other series may be organized and offered in the future.

The Trust is an unincorporated business trust established under the laws of
the state of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995, (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. Each share
represents an equal proportionate interest in the assets of the series with each
other share in such series and no interest in any other series. No series is
subject to the liabilities of any other series. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability. The Fund was originally organized as a
sub-trust of a Massachusetts business trust by a Declaration of Trust dated
August 15, 1985, under the name of Van Kampen Merritt Municipal Income Fund and
was reorganized as a series of the Trust on July 31, 1995.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of a majority of the shares present and voting at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.

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

INVESTMENT POLICIES AND RESTRICTIONS

The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (taken at current market value) would then be invested
in securities of a single

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issuer or, if, as a result, the Fund would hold more than 10% of the
outstanding voting securities of an issuer.

2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)

3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions as described in the
Prospectus.

4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.

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

6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging or risk
management transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.

7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

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

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax-exempt investment companies that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax-exempt investment company or securities of any tax-exempt
investment company aggregating in value more than 5% of the total assets
of the Fund.

10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs.

11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.

The Fund may not change any of these investment restrictions as they apply to
the Fund without the approval of the lesser of (i) more than 50% of the Fund's
outstanding shares or (ii) 67% of the Fund's outstanding Shares present at a
meeting at which the holders of more than 50% of the outstanding shares are

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present in person or by proxy. As long as the percentage restrictions described
above are satisfied at the time of the investment or borrowing, the Fund will be
considered to have abided by those restrictions even if, at a later time, a
change in values or net assets causes an increase or decrease in percentage
beyond that allowed.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were one year or less are excluded from such calculation. The Fund anticipates
that its annual portfolio turnover rate will normally be less than 100%.

ADDITIONAL INVESTMENT CONSIDERATIONS

MUNICIPAL SECURITIES

Municipal securities include long-term obligations, which are often called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax-exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
bonds are "general obligation" and "revenue" or "special obligation" bonds,
which include "industrial revenue bonds." General obligation bonds are secured
by the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special tax or other specific revenue
source such as from the user of the facility being financed.

Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
of entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.

Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent

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participations in a lease, an installment purchase contract, or a conditional
sales contract. Some municipal leases and participation certificates may not be
readily marketable.

The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.

The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals. There generally is no secondary market for
these notes, although they are redeemable at face value. Each note purchase by
the Fund will meet the criteria established for the purchase of municipal
securities.

The Fund also may invest up to 15% of its total assets in variable rate
derivative municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest. Such variable rate
derivative municipal securities may pay a rate of interest determined by
applying a multiple to the variable rate. The extent of increases and decreases
in the value of derivative municipal securities whose rates vary inversely with
changes in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.

Although the Fund will invest at least 80% of its assets in municipal
securities rated investment grade at the time of investment, municipal
securities, like other debt obligations, are subject to the risk of non-payment.
The ability of issuers of municipal securities to make timely payments of
interest and principal may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value of
the municipal security experiencing non-payment and a potential decrease in the
net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal securities and the Fund
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in the
payment of interest or repayment of principal, or both, the Fund may take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), may limit the extent to
which the Fund may exercise its rights by taking possession of such assets,
because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income.

The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified

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institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. The Fund may, from time to time,
adopt a more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.

HIGH YIELD MUNICIPAL SECURITIES

In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade tax-exempt municipal securities and up to 20% of
the Fund's total assets may be invested in lower grade tax-exempt municipal
securities. The amount of available information about the financial condition of
municipal securities issuers is generally less extensive than that for corporate
issuers with publicly traded securities and the market for tax-exempt municipal
securities is considered to be generally less liquid than the market for
corporate debt obligations. Liquidity relates to the ability of a Fund to sell a
security in a timely manner at a price which reflects the value of that
security. As discussed below, the market for lower grade tax-exempt municipal
securities is considered generally to be less liquid than the market for
investment grade tax-exempt municipal securities. Further, municipal securities
in which the Fund may invest include special obligation bonds, lease
obligations, participation certificates and variable rate instruments. The
market for such securities may be particularly less liquid. The relative
illiquidity of some of the Fund's portfolio securities may adversely affect the
ability of the Fund to dispose of such securities in a timely manner and at a
price which reflects the value of such security in the Adviser's judgment.
Although the issuer of some such municipal securities may be obligated to redeem
such securities at face value, such redemption could result in capital losses to
the Fund to the extent that such municipal securities were purchased by the Fund
at a premium to face value. The market for less liquid securities tends to be
more volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.

The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the Fund's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
fixed income securities can be expected to decline. Net asset value and market
value may be volatile due to the Fund's investment in lower grade and less
liquid municipal securities. Volatility may be greater during periods of general
economic uncertainty.

The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.

Lower grade tax-exempt municipal securities generally involve greater credit
risk than higher grade municipal securities. A general economic downturn or a
significant increase in interest rates could severely disrupt the market for
lower grade tax-exempt municipal securities and adversely affect the market
value of such securities. In addition, in such circumstances, the ability of
issuers of lower grade tax-exempt municipal securities to repay principal and to
pay interest, to meet projected financial goals and to obtain additional
financing may be adversely affected. Such consequences could lead to an
increased incidence of default for

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such securities and adversely affect the value of the lower grade tax-exempt
municipal securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade tax-exempt municipal
securities are less sensitive to changes in interest rates than are those for
higher rated tax-exempt municipal securities, but are more sensitive to adverse
economic changes or individual issuer developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of lower grade tax-exempt municipal securities.

Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade tax-exempt municipal securities in the Fund's portfolio and thus in
the net asset value of the Fund. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid municipal
securities. Volatility may be greater during periods of general economic
uncertainty. The Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of interest or a repayment of
principal on its portfolio holdings, and the Fund may be unable to obtain full
recovery thereof. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional capital with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Recent and proposed legislation may have an adverse impact on
the market for lower grade tax-exempt municipal securities. Recent legislation
requires federally-insured savings and loan associations to divest their
investments in lower grade bonds. Other legislation has been proposed which, if
enacted, could have an adverse impact on the market for lower grade tax-exempt
municipal securities.

The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating tax-exempt municipal securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
the Adviser continuously monitors the issuers of tax-exempt municipal securities
held in the Fund's portfolio. The Fund may, if deemed appropriate by the
Adviser, retain a security whose rating has been downgraded below B- by S&P or
below B3 by Moody's, or whose rating has been withdrawn.

Because issuers of lower grade tax-exempt municipal securities frequently
choose not to seek a rating of their municipal securities, the Adviser will be
required to determine the relative investment quality of many of the municipal
securities in the Fund's portfolio. Further, because the Fund may invest up to
20% of its total assets in these lower grade municipal securities, achievement
by the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in higher grade municipal securities. The relative lack of financial
information available with respect to issuers of municipal securities may
adversely affect the Adviser's ability to successfully conduct the required
investment analysis.

STRATEGIC TRANSACTIONS

The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.

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"Strategic Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.

Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.

GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options

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("OTC options"). Exchange listed options are issued by a regulated intermediary
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options. The discussion
below uses the OCC as a paradigm, but is also applicable to other financial
intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.

B-9
<PAGE> 141

If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.

The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.

GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.

The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.

The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.

B-10
<PAGE> 142

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap

B-11
<PAGE> 143

market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.

OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OCC issued and
exchange listed options sold by the Fund other than those above generally settle
with physical delivery, and the Fund will segregate an amount of assets equal to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.

With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.

The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.

B-12
<PAGE> 144

DESCRIPTION OF MUNICIPAL SECURITIES RATINGS

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:

1. DEBT

A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.

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

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

1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

2. Nature of and provisions of the obligation;

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

<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.

BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.

BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
</TABLE>

B-13
<PAGE> 145

<TABLE>
<S> <C>
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.

CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.

CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.

C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.

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

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

C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.

I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.

L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.

P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and 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
judgement with respect to such likelihood and risk.

*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flows.
</TABLE>

B-14
<PAGE> 146

<TABLE>
<S> <C>
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

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.
</TABLE>

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) are generally regarded as eligible for bank investment. In addition,
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 generally.

2. MUNICIPAL NOTES

A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment:

-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

The note rating symbols and definitions are as follows:

<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) 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.
</TABLE>

3. COMMERCIAL PAPER

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

<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.

A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.

C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.

D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>

B-15
<PAGE> 147

A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.

4. TAX-EXEMPT DUAL RATINGS

S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').

MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:

1. LONG-TERM MUNICIPAL BONDS

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

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

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

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

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

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

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

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

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

B-16
<PAGE> 148

<TABLE>
<S> <C>
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes the probable credit stature upon completion of
construction or elimination of the basis of the condition.

NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>

2. SHORT-TERM EXEMPT NOTES

Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.

Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.

MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.

MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.

MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.

SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.

3. TAX-EXEMPT COMMERCIAL PAPER

Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.

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

Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.

Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.

B-17
<PAGE> 149

Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.

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

OFFICERS AND TRUSTEES

The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.

TRUSTEES

<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>

B-18
<PAGE> 150

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
</TABLE>

B-19
<PAGE> 151

<TABLE>
<S> <C>
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

<TABLE>
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
</TABLE>

B-20
<PAGE> 152

Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.

Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.

Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>

- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.

B-21
<PAGE> 153

Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.

The Fund will pay trustees who are not affiliated persons of the VK Adviser,
the Distributor or Van Kampen American Capital an annual retainer of $2,500 per
year and $125 per regular quarterly meeting of the Fund, plus expenses. No
additional fees are proposed at the present time to be paid for special
meetings, committee meetings or to the chairman of the board. The trustees have
approved an aggregate annual compensation cap from the combined fund complex of
$84,000 per trustee (excluding any retirement benefits) until December 31, 1996,
based upon the current net assets and the current number of Van Kampen American
Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end
funds advised by the VK Adviser would receive additional compensation for
serving as a trustee of such funds). In addition, the VK Adviser has agreed to
reimburse the Fund through December 31, 1996, for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- ------------------------------- -------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 21,968 $ 45 $2,500 $62,362
Philip G. Gaughan.............. 21,928 824 2,500 63,250
Donald C. Miller............... 23,768 1,131 2,500 62,178
Jack A. Nelson................. 23,858 428 2,500 62,362
Jerome L. Robinson............. 23,801 827 2,500 58,475
Wayne W. Whalen................ 17,553 278 2,500 49,875
</TABLE>

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

(1) Messrs. McDonnell and Powell, trustees of the Trust, are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its 1994 fiscal year.

(2) The Registrant is Van Kampen American Capital Tax Free Trust (the "Trust")
which currently is comprised of 8 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 8 series during such series' fiscal year ended December 31,
1994. Beginning in October 1994 each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation. The total
combined amount of deferred compensation (including interest) accrued with
respect to each trustee from the Fund Complex (as defined herein) as of
December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr. Miller $14,553;
Mr. Nelson $14,737 and Mr. Robinson $13,725.

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended December 31, 1994.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.

(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual funds
in the Fund Complex during the calendar year ended December 31, 1994. The VK
Adviser also serves as investment adviser for other investment companies;
however, with the exception of Messrs. Powell, McDonnell and Whalen, such
investment companies do not have the same trustees as the Fund Complex.

B-22
<PAGE> 154

Combining the Fund Complex with other investment companies advised by the VK
Adviser, Mr. Whalen received Total Compensation of $161,850.

As of July 17, 1995, the trustees and officers as a group own less than 1% of
the shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

To the knowledge of the Fund, as of July 17, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Dain Bosworth Inc. FBO, Richard I. Nannini
and Eleanor L. Nannini, 2925 Juliann Way, Reno, NV 89509-5198, 6%; and Edward D.
Jones and Co. F/A/O, Frieda K. Bowker, TTEE, U/A DTD 1/16/81 for EDJ
#149-03045-1-4, P.O. Box 2500, Maryland Heights, MO 63043-8500, 5%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.). The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership, C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson
each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition,
certain officers, directors and employees of Van Kampen American Capital, Inc.
own, in the aggregate, not more than 7% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 11% of the common stock of VK/AC Holding, Inc. Presently, and
after giving effect to the exercise of such options, no officer or trustee of
the Fund owns or would own 5% or more of the common stock of VK/AC Holding, Inc.

The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative services, and permits its officers and employees to
serve without compensation as officers of the Fund and trustees of the Trust if
duly elected to such positions.

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

The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.

The investment advisory agreement for the Fund will continue in effect from
year to year if specifically approved by the Trustees of the Trust, of which the
Fund is a separate series (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.

B-23
<PAGE> 155

The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $3,475,616, $2,578,871 and $1,315,431, respectively.

OTHER AGREEMENTS

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, shared such costs proportionately among
themselves based upon their respective net asset values.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $334,800, $275,030 and $158,860, respectively,
representing the Distributor's cost of providing certain support services.

ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
advised by the VK Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared proportionately based on
the number of outstanding classes of securities per fund and with the remaining
75 percent of such cost being paid by the Fund and such other Van Kampen
American Capital funds based proportionally on their respective net assets.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $18,250, $16,306 and $7,960, respectively,
representing the VK Adviser's cost of providing accounting services.

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

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $21,950, $21,500 and $7,200, respectively,
representing Van Kampen American Capital's cost of providing legal services.

B-24
<PAGE> 156

CUSTODIAN AND INDEPENDENT AUDITORS

State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.

The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund or the Adviser, (ii) have sold or are selling shares
of the Fund and (iii) may select firms that are affiliated with the Fund, the
Adviser, or its distributor and other principal underwriters.

If purchases or sales of securities of the Fund and of one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.

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

B-25
<PAGE> 157

State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.

TAX STATUS OF THE FUND

The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
11% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of shares. The Distribution Plan and Service Plan sometimes are
referred to herein collectively as the "Plans". The Plans provide that the Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."

B-26
<PAGE> 158

that were purchased prior to all Implementation Dates, the percentage of the
total average daily net asset value of a class of shares that may be utilized
pursuant to the Distribution and Service Agreement will be less than the maximum
percentage amount permissible with respect to such class of shares under the
Distribution and Service Agreement.

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.

For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $1,626,311, $1,662,702 and $41,554 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $1,357,846 and $408,661
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares and Class B Shares, respectively. For the year ended December 31,
1994, the Fund has reimbursed the Distributor $212,577 and $55,751 for
advertising expenses, and $40,262 and $26,873 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 4% and 1%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.

The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends

B-27
<PAGE> 159

and other distributions made during the period) of a $1,000 investment in a
given class of shares of the Fund (less the maximum sales charge, if any) at the
beginning of the period, annualizing the increase or decrease over the specified
period with respect to such initial investment and expressing the result as a
percentage. Average compounded total return will be computed separately for each
class of shares.

Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, including or
excluding any applicable sales charge as indicated, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.

CLASS A SHARES

The average total return, including payment of maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1994 was (10.73%); (ii) the approximately four year, five month period from
August 1, 1990 (the commencement of investment operations of the Fund) through
December 31, 1994 was 5.83%.

The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.95%. The tax-equivalent yield with
respect to Class A Shares for the 30 day period ending December 30, 1994
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 9.30%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.90%.

The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 28.41%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 34.71%.

CLASS B SHARES

The average total return, including payment of the CDSC, with respect to the
Class B Shares for (i) the one year period ended December 31, 1994 was (10.50%)
and (ii) the approximately two year, five month period of August 24, 1992
(commencement of distribution) through December 31, 1994 was 0.96%.

The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.52%. The tax-equivalent yield with
respect to Class B Shares for the 30 day period ending December 30, 1994
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 8.63%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.39%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 2.32%.

B-28
<PAGE> 160

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 5.55%.

CLASS C SHARES

The average total return, including payment of the CDSC, with respect to the
Class C Shares for (i) the one year period ended December 31, 1994 was (7.86%)
and (ii) the approximately one year, five month period of August 13, 1994
(commencement of distribution) through December 31, 1994 was (2.99%).

The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.47%. The tax-equivalent yield with
respect to Class C Shares for the 30 day period ending December 30, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 8.55%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.39%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.22%).

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.22%).

B-29
<PAGE> 161

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt Municipal Income Fund:

We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement
of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented. 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 generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial state-
ments and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Van
Kampen Merritt Municipal Income Fund as of December 31, 1994, 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 periods presented, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 14, 1995

B-30
<PAGE> 162

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds
Alabama 2.7%
$ 2,805 Alabama Higher Edl Ln Corp ..................................... AAA Aaa 6.000% 9/01/07 $ 2,722,477
2,100 Alabama St Indl Dev Auth Rev Var Rate Cpn ..................... NR NR 7.500 9/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A (AMBAC Insd) ............... AAA Aaa 6.750 8/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec Inds Inc Rfdg . NR NR 6.500 2/15/09 4,489,851
1,225 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.000 9/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.500 9/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.000 8/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.250 8/01/18 880,738
------------
17,907,001
------------
Alaska 1.6%
5,690 Kasaan, AK Lease Rev ........................................... A- Baa1 8.000 8/15/16 5,979,507
8,000 North Slope Borough, AK Cap Appreciation Ser B
(Cap Gar Insd) ................................................. AAA Aa * 6/30/04 4,389,840
------------
10,369,347
------------
Arizona 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj ... NR Ba1 * 10/01/12 964,750
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A
(Prerefunded @ 07/01/00) ...................................... BB NR 9.500 7/01/10 6,119,458
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent Inc . A- Baa1 8.700 9/01/19 7,697,480
------------
14,781,688
------------
Arkansas 1.0%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser A <F3> ................................... NR NR 9.750 7/01/12 3,440,630
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser B <F3> ................................... NR NR 9.750 7/01/12 3,440,630
------------
6,881,260
------------
California 9.3%
6,880 California Edl Fac Auth Rev College Of Osteopathic Med Pacific NR NR 7.500 6/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev Kaiser Permanente Med ........ AA Aa2 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison Susanville Ser D (Cap Guar Insd) .................... AAA Aaa 5.250 6/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 5.000 12/01/23 1,704,461
4,325 Delano, CA Ctfs Partn Ser A ................................... NR NR 9.250 1/01/22 4,649,375
1,000 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj Rfdg ..... NR NR 7.875 2/01/15 1,000,000
</TABLE>

See Notes to Financial Statements

B-31

<PAGE> 163

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$10,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi
Cap Fac Proj IV (MBIA Insd) ..................................... AAA Aaa 5.000% 12/01/08 $ 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.900 12/01/26 836,100
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/05 570,680
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/10 323,415
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/11 268,584
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/12 219,156
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/13 204,295
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/14 190,358
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1 Aliso Viejo
Ser A (Prerefunded @ 08/15/02) .................................. AAA NR 7.350 8/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease Rev Ser A Rfdg (AMBAC Insd) .. AAA Aaa 5.400 11/01/20 5,799,500
1,000 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg .................... NR NR 7.000 9/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice Cent Proj Ser A Rfdg NR Baa1 5.900 9/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj Ser C Rfdg (AMBAC Insd) .... AAA Aaa 5.250 9/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc Rev Yorba Linda Redev Proj
Ser A (MBIA Insd) ............................................... AAA Aaa * 9/01/19 951,650
------------
61,607,737
------------
Colorado 7.2%
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A ........................ AAA Aaa 8.875 8/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A
(Prerefunded @ 08/01/10) ......................................... AAA Aaa 8.875 8/01/11 3,434,668
3,900 Colorado Hlth Fac Auth Rev Hosp North CO Med Cent (MBIA Insd) ..... AAA Aaa 6.000 5/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1 Ser A Rfdg ................... A+ A * 12/01/06 4,565,145
3,690 Jefferson Cnty, CO Residential Mtg Rev ............................ AAA Aaa 11.500 9/01/12 5,553,856
</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 164

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Colorado (Continued)
$ 5,000 Meridian Metro Dist CO Peninsular & Oriental Steam
Navig Co Rfdg .................................................. NR A3 7.500% 12/01/11 $ 5,121,750
5,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ......... AAA Aaa 6.400 11/15/22 4,891,450
------------
47,583,432
------------
Connecticut 1.0%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home
Pgm AHF/Hartford ................................................ AA- A1 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A ............................................. AA- Aa 5.500 3/15/10 1,839,160
------------
6,885,251
------------
District of Columbia 0.6%
4,000 District of Columbia Ctfs Partn .................................. BBB NR 7.300 1/01/13 3,808,240
------------
Florida 3.4%
3,000 Emerald Coast, FL Hsg Corp Hsg Rev Ser A 1991 .................... NR NR 9.500 1/01/22 3,000,000
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev Environmental
Preservation 2000 Ser A .......................................... AAA Aaa 4.750 7/01/10 4,114,850
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/05 796,527
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown Cogeneration
Proj A Rfdg (AMBAC Insd) ......................................... BBB- Baa3 7.875 12/15/25 2,920,425
855 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A ............................................ BBB- NR 8.500 3/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A (Prerefunded @ 03/01/00) .................... AAA NR 8.500 3/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park ............................................ NR NR 10.000 7/01/22 4,420,486
------------
22,175,786
------------
Georgia 0.4%
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs Franklin Forest Ser A . NR NR 8.000 6/01/22 2,925,000
------------
Hawaii 3.6%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd) ................... AAA Aaa 6.350 7/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd) ..................................................... AAA Aaa 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.600 6/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.700 6/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.350 7/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.400 7/01/08 1,568,268
------------
23,416,754
------------

</TABLE>

See Notes to Financial Statements

B-33
<PAGE> 165

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Illinois 13.4%
$ 4,500 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq Proj.. NR NR 9.250% 2/01/12 $ 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr Lien ........................ NR NR 8.250 7/01/13 6,895,000
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser C1 (MBIA Insd) ............ AAA Aaa 5.750 1/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev Intl Terminal ......... AAA Aaa 6.750 1/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc ..... BB Baa3 8.500 5/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser A.. BB Baa2 8.400 5/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B.. BB Baa2 8.950 5/01/18 5,436,274
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/12 514,794
4,800 Hodgkins, IL Tax Increment ..................................... NR NR 9.500 12/01/09 5,184,000
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A ........ NR NR 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B ........ NR NR 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ............ BBB Baa1 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00) ...................................... AAA NR 9.500 11/15/15 512,512
1,150 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj ................ NR Baa1 6.700 3/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A.. BB- Ba 10.250 2/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.250 8/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.375 8/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United Med Cent
(Prerefunded @ 07/01/01) ....................................... NR NR 8.375 7/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg) ...... A+ Aa 9.086 2/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic Cent Ser B (AMBAC Insd) .... AAA Aaa * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A (AMBAC Insd) ....................... AAA Aaa 8.000 6/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins Res Recovery
Partners Ser A ................................................. NR NR 9.250 10/15/14 7,216,230
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd) ....... AAA Aaa 5.800 4/01/10 1,381,692
------------
88,479,962
------------
</TABLE>

See Notes to Financial Statements

B-34
<PAGE> 166

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Indiana 0.9%
$ 2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc ........... NR A1 7.000% 7/01/12 $ 2,770,818
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal Express
Corp Proj ...................................................... BBB Baa2 7.100 1/15/17 2,874,510
------------
5,645,328
------------
Iowa 0.3%
25,000 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser A .............. AA Aaa * 9/01/16 2,214,250
------------
Kentucky 1.7%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg ............. NR NR 6.550 3/01/09 938,510
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds Inc ................... B+ Ba2 9.875 10/01/10 2,842,532
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj
(Inverse Fltg) (MBIA Insd) ....................................... AAA Aaa 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (Cap Guar Insd) ................................ AAA Aaa 6.125 2/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Collateralized) .......... AAA Aaa 7.450 1/01/23 2,190,924
------------
11,096,429
------------
Louisiana 0.8%
2,600 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985 .................................................... NR NR 10.000 12/31/00 2,672,644
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ..................... AAA Aaa * 2/01/15 2,407,600
------------
5,080,244
------------
Maine 0.5%
1,500 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.600 11/01/00 1,955,140
------------
3,420,190
------------
Maryland 1.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg ....................................................... NR NR 7.550 6/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac Auth Rev Kernan Hosp Issue
(Connie Lee Insd) ................................................ AAA NR 6.100 7/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid Waste Rev Montgomery Cnty
Res Recovery Proj Ser A .......................................... NR A 6.200 7/01/10 2,706,960
1,165 Rockville, MD Mtg Rev Summit Apts Proj Ser A Rfdg (MBIA Insd) .... AAA Aaa 5.625 7/01/19 989,353
------------
8,328,038
------------
Massachusetts 1.7%
1,665 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser A
(AMBAC Insd) ..................................................... AAA Aaa 7.000 1/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med Cent
Hosp Ser G (Embedded Swap) (MBIA Insd) ........................... AAA Aaa 5.000 7/01/13 3,398,262
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 167

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts (Continued)
$ 6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A .......................................................... NR B 5.750% 10/01/06 $ 4,272,000
2,000 Plymouth Cnty, MA Ctfs Partn Ser A ............................. A- NR 7.000 4/01/22 2,005,280
------------
11,362,670
------------
Michigan 1.4%
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson Hlthcare
Ser A Rfdg (AMBAC Insd) .......................................... AAA Aaa 6.250 7/01/12 1,925,960
2,470 Michigan St Hosp Fin Auth Rev Garden City Hosp ................... BBB- Ba 8.300 9/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B
(Embedded Swap) (AMBAC Insd) ..................................... AAA Aaa 2.870 4/01/04 4,532,416
2,390 Romulus, MI Cmnty Sch Rfdg (FGIC Insd) ........................... AAA Aaa * 5/01/19 465,190
------------
9,400,976
------------
Minnesota 0.2%
8,160 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A
(MBIA Insd) ...................................................... AAA Aaa * 1/01/22 1,351,949
------------
Mississippi 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev Var
Weyerhaeuser Co Rfdg (Inverse Fltg) .............................. A A2 6.560 4/01/22 4,706,600
------------
Missouri 2.6%
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt ................................................. NR NR 7.125 8/15/12 2,001,660
1,890 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/04 2,014,570
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Hlth Midwest Ser B
(MBIA Insd) ...................................................... AAA Aaa 6.250 2/15/22 3,790,200
3,000 Missouri St Hlth & Edl Fac Rev Freeman Hosp Proj Ser A ........... AAA Aaa 5.375 2/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev
Mary Queen & Mother Proj Rfdg .................................... NR Aaa 7.125 3/20/23 2,213,258
------------
16,830,355
------------
Montana 0.8%
6,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj . NR NR 7.000 12/31/19 5,373,240
------------
Nebraska 1.2%
5,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.963 9/15/23 4,998,500
850 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.293 9/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 10.542 9/10/30 1,892,250
------------
7,639,812
------------
Nevada 2.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC Insd) ..... AAA Aaa 6.700 6/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp Ser A ............. BBB- Baa3 6.500 12/01/33 5,403,970
</TABLE>

See Notes to Financial Statements

B-36

<PAGE> 168

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nevada (Continued)
$ 2,500 Henderson, NV Loc Impt Dist No T-4 Ser A ..................... NR NR 8.500% 11/01/12 $ 2,531,100
2,575 Humboldt Genl Hosp Dist NV ................................... NR Baa 6.125 6/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .. NR Baa 5.750 9/01/17 3,448,517
------------
17,637,235
------------
New Jersey 2.9%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (Inverse Fltg)
(MBIA Insd) .................................................... AAA Aaa 8.448 8/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) <F2> ............................................... AAA Aaa 5.800 7/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) .................................................... AAA Aaa 5.800 7/01/08 1,918,720
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj B Rfdg (MBIA Insd) .......................... AAA Aaa 6.250 6/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj C Rfdg (MBIA Insd) ......................... AAA Aaa 6.200 8/01/30 1,165,562
------------
19,363,091
------------
New Mexico 0.4%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan Regl
Med Cent Inc Proj .............................................. NR A 7.900 6/01/11 2,654,150
------------
New York 16.0%
4,945 Battery Park City Auth NY Rev Sr Ser A Rfdg ................... AA A1 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic Hosp Rev .................... NR NR 8.000 1/01/20 3,583,155
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper
Corp Recycling ................................................ NR NR 8.000 1/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter Fac Rev Ser A (MBIA Insd) . AAA Aaa 6.100 7/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5 Rfdg ... BBB Baa1 7.000 7/01/12 5,025,350
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal One
Group Assn Proj ............................................... A A 6.000 1/01/19 4,355,000
4,000 New York City Muni Wtr Fin Auth ............................... A- A 5.625 6/15/11 3,520,600
20,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev (MBIA Insd) . AAA Aaa 5.350 6/15/12 17,209,000
2,500 New York City Ser B ........................................... A- Baa1 7.500 2/01/07 2,606,625
5,000 New York City Ser C Rfdg ...................................... A- Baa1 6.500 8/01/04 4,938,050
7,500 New York City Ser C Subser C-1 ................................ A- Baa1 7.500 8/01/20 7,692,225
5,000 New York City Ser H ........................................... A- Baa1 7.000 2/01/16 4,931,850
2,580 New York City Ser H Subser H-1 ................................ A- Baa1 4.900 8/01/97 2,505,232
14,600 New York St Dorm Auth Rev City Univ 3rd Genl Resources
Ser E (MBIA Insd) ............................................. AAA Aaa 6.750 7/01/24 14,634,602
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) . A A1 8.041 4/01/20 1,990,625
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 169

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York (Continued)
$ 2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara
Mohawk Pwr Corp Ser A Rfdg (FGIC Insd) ........................ AAA Aaa 7.200% 7/01/29 $ 2,072,800
7,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev NY St
Elec & Gas Corp Ser A Rfdg (MBIA Insd) ........................ AAA Aaa 6.050 4/01/34 6,371,120
490 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A ................................................... BBB+ Baa1 7.750 8/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A (Prerefunded @ 02/15/01) ........................... AAA Aaa 7.750 8/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs
Fac Ser C ..................................................... BBB+ Baa1 7.300 2/15/21 499,658
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C (Prerefunded @ 08/15/01) ................................ AAA Aaa 7.300 2/15/21 1,663,085
5,000 New York St Urban Dev Corp Rev Correctional Cap Fac
Ser A Rfdg (FSA Insd) ......................................... AAA Aaa 6.500 1/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St Fac ......................... BBB Baa1 7.500 4/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy Rev Proj Res Recovery Fac .. NR Baa 6.875 5/01/06 2,920,380
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy Proj ............ NR NR 8.000 3/15/22 1,021,980
-------------
105,759,358
-------------
North Dakota 0.3%
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp Proj ... BBB- NR 8.875 11/15/24 2,022,540
-------------
Ohio 2.3%
4,660 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys Ser B Rfdg ....... AA- A1 5.250 6/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) .... AAA Aaa 9.213 3/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG Fdg Ltd Partnership Proj Rfdg
(AMBAC Insd) .................................................... AAA Aaa 6.375 4/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College Cleveland Elec
Ser A Rfdg ...................................................... BB Ba2 8.000 10/01/23 1,962,140
-------------
15,195,140
-------------
Oklahoma 0.5%
2,810 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B
(Inverse Fltg) .................................................. AAA NR 7.997 8/01/18 3,034,800
-------------
Pennsylvania 1.7%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser A Rfdg ... BBB NR 6.750 11/15/14 2,613,420
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp Crozer-Chester
Mem Cent ........................................................ BBB+ A 6.000 12/15/20 1,587,840
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00) ..................................... BBB- NR 8.875 10/01/20 1,734,660
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd) .................................... AAA Aaa 5.660 6/01/12 2,588,940
</TABLE>

See Notes to Financial Statements

B-38

<PAGE> 170

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania (Continued)
$2,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Temple Univ Hosp Ser A ......................................... BBB+ Baa1 6.500% 11/15/08 $ 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease Ser B Rfdg ................ BB Ba 6.400 11/15/16 870,416
------------
11,268,496
------------
Rhode Island 1.4%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ..................... NR NR 8.000 9/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn Corp Spl Oblig Ser A
(Prerefunded @ 08/01/02) ...................................... AAA Aaa 6.950 8/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B .......... A NR 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A ......................................... NR Ba 6.800 7/15/98 2,507,501
600 West Warwick, RI Ser A ......................................... NR Ba 7.300 7/15/08 604,374
------------
9,127,037
------------
Tennessee 0.5%
1,500 Maury Cnty, TN Indl Dev Brd Pollutn Ctl Rev Multi Modal
Saturn Corp Proj Rfdg .......................................... BBB+ Baa1 6.500 9/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth Spl Fac & Proj Rev
Federal Express Corp Rfdg ...................................... BBB Baa2 7.875 9/01/09 1,592,235
------------
2,976,945
------------
Texas 3.6%
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow Freight
Sys Inc Proj .................................................. A- NR 8.000 12/01/16 2,605,475
3,995 Leander, TX Indpt Sch Dist Cap Apprec Rfdg .................... NR Aaa * 8/15/16 853,652
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C Presbyterian
Hlthcare Sys (Inverse Fltg) (MBIA Insd) ....................... AAA Aaa 10.655 6/22/21 3,364,375
13,000 Texas Muni Pwr Agy Rev (MBIA Insd) ............................ AAA Aaa * 9/01/13 3,785,340
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll
Ser C Rfdg (Inverse Fltg) ..................................... AAA NR 9.207 7/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd College Student Ln <F4> .. NR A 0/7.850 10/01/25 2,391,494
3,954 Texas St ..................................................... NR NR 6.350 12/01/13 3,888,447
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp
Union Carbide Chem & Plastics ................................ BBB Baa2 8.200 3/15/21 2,365,897
------------
24,045,305
------------
Utah 2.1%
3,215 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj ............ NR NR 9.500 12/15/18 3,271,070
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg) ... AA Aa 6.150 2/15/12 9,668,560
1,000 Utah St Hsg Fin Agy Single Family Mtg Ser F2 ................. AAA Aaa 7.000 7/01/27 1,001,560
------------
13,941,190
------------
Virginia 1.8%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp Rev (AMBAC Insd) ......... AAA Aaa 5.500 9/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Inverse Fltg)
(FGIC Insd) ................................................... AAA Aaa 6.600 8/15/23 3,403,330
</TABLE>

See Notes to Financial Statements

B-39
<PAGE> 171

Van Kampen Merritt Municipal Income Fund

Total Long-Term Investments 98.9%
(Cost $667,323,342) ............................................................................. 652,138,108
Other Assets in Excess of Liabilities 1.1% ..................................................... 7,216,006
--------------
Net Assets 100% ................................................................................ $ 659,354,114
--------------
*Zero coupon bond

<FN>
<F1>At December 31, 1994, for federal income tax purposes cost is
$667,518,084; the aggregate gross unrealized appreciation is $30,921,003 and
the aggregate gross unrealized depreciation is $44,250,963, resulting in net
unrealized depreciation including futures transactions of $13,329,960.
<F2>Assets segregated as collateral for open futures transactions.
<F3>Non-income producing security.
<F4>Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
</FN>
</TABLE>

See Notes to Financial Statements

B-40

<PAGE> 172

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $667,323,342) <F1>....................................... $ 652,138,108
Receivables:
Interest.................................................................................... 12,305,247
Fund Shares Sold............................................................................ 799,516
Investments Sold............................................................................ 535,000
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 17,688
Other....................................................................................... 2,841
--------------
Total Assets................................................................................ 665,798,400
--------------
Liabilities:
Payables:
Fund Shares Repurchased..................................................................... 2,429,138
Income Distributions ....................................................................... 1,627,340
Custodian Bank.............................................................................. 879,971
Margin on Futures <F5>...................................................................... 352,445
Investment Advisory Fee <F2>................................................................ 273,528
Accrued Expenses............................................................................ 881,864
--------------
Total Liabilities........................................................................... 6,444,286
--------------
Net Assets.................................................................................. $ 659,354,114
--------------
Net Assets Consist of:
Paid in Surplus <F3> ....................................................................... $ 698,739,659
Accumulated Distributions in Excess of Net Investment Income <F1>........................... (228,298)
Net Unrealized Depreciation on Investments.................................................. (13,135,218)
Accumulated Net Realized Loss on Investments ............................................... (26,022,029)
--------------
Net Assets.................................................................................. $ 659,354,114
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $495,814,695 and
34,768,092 shares of beneficial interest issued and outstanding) <F3>....................... $ 14.26
Maximum sales charge (4.65%* of offering price)............................................. .70
--------------
Maximum offering price to public ........................................................... $ 14.96
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $158,705,886 and
11,128,652 shares of beneficial interest issued and outstanding) <F3>....................... $ 14.26
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,850,918 and
270,017 shares of beneficial interest issued and outstanding) <F3>.......................... $ 14.26
--------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $982,615 and
68,899 shares of beneficial interest issued and outstanding) <F3>........................... $ 14.26
--------------
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.

See Notes to Financial Statements

B-41

<PAGE> 173

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest............................................................................................. $ 49,936,822
Amortization of Discount (Premium) - Net............................................................. (354,986)
---------------
Total Income......................................................................................... 49,581,836
---------------
Expenses:
Investment Advisory Fee <F2> ........................................................................ 3,475,616
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $1,626,311, $1,662,702,
$41,554 and $2,828, respectively) <F6> .............................................................. 3,333,395
Shareholder Services ................................................................................ 829,610
Legal <F2>........................................................................................... 186,400
Amortization of Organizational Expenses and Initial Registration Costs <F1> ......................... 30,470
Trustees Fees and Expenses <F2>...................................................................... 26,240
Other................................................................................................ 411,534
---------------
Total Expenses....................................................................................... 8,293,265
---------------
Net Investment Income................................................................................ $ 41,288,571
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.................................................................................. $ 692,840,108
Cost of Securities Sold (Including reorganization and restructuring costs of $144,803)............... (708,359,483)
---------------
Net Realized Loss on Investments (Including realized loss on closed and
expired option transactions and futures transactions of $1,411,955 and $788,622, respectively)....... (15,519,375)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.............................................................................. 63,265,059
End of the Period (Including unrealized appreciation on open futures transactions of $2,050,016)..... (13,135,218)
---------------
Net Unrealized Depreciation on Investments During the Period......................................... (76,400,277)
---------------
Net Realized and Unrealized Loss on Investments...................................................... $ (91,919,652)
---------------
Net Decrease in Net Assets from Operations........................................................... $ (50,631,081)
---------------
</TABLE>

See Notes to Financial Statements

B-42

<PAGE> 174

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 41,288,571 $ 39,506,461
Net Realized Loss on Investments............................................ (15,519,375) (10,384,633)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (76,400,277) 45,121,848
---------------- ----------------
Change in Net Assets from Operations ....................................... (50,631,081) 74,243,676
---------------- ----------------
Distributions from Net Investment Income*................................... (41,020,921) (39,506,461)
Distributions in Excess of Net Investment Income* <F1>...................... -0- (495,948)
---------------- ----------------
Distributions from and in Excess of Net Investment Income*.................. (41,020,921) (40,002,409)
Distributions in Excess of Net Realized Gain on Investments* <F1>........... -0- (38,069)
---------------- ----------------
Total Distributions......................................................... (41,020,921) (40,040,478)
---------------- ----------------
Net Change in Net Assets from Investment Activities......................... (91,652,002) 34,203,198
---------------- ----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 76,732,460 265,150,384
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 21,110,678 19,988,555
Cost of Shares Repurchased.................................................. (116,770,207) (61,493,977)
---------------- ----------------
Net Change in Net Assets from Capital Transactions ......................... (18,927,069) 223,644,962
---------------- ----------------
Total Increase/Decrease in Net Assets....................................... (110,579,071) 257,848,160
Net Assets:
Beginning of the Period..................................................... 769,933,185 512,085,025
---------------- ----------------
End of the Period (Including undistributed net investment income
of $(228,298) and $(495,948), respectively) ................................ $ 659,354,114 $ 769,933,185
- ---------------------------------------------------------------------------- ---------------- ----------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares.............................................. $ (32,205,506) $ (33,630,614)
Class B Shares.............................................. (8,547,628) (6,329,274)
Class C Shares.............................................. (212,571) (42,521)
Class D Shares.............................................. (55,216) -0-
--------------- ---------------
$ (41,020,921) $ (40,002,409)
--------------- ---------------
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares.............................................. $ -0- $ (13,619)
Class B Shares.............................................. -0- (24,450)
Class C Shares.............................................. -0- -0-
Class D Shares.............................................. -0- -0-
--------------- ---------------
$ -0- $ (38,069)
--------------- ---------------
</TABLE>

See Notes to Financial Statements

B-43
<PAGE> 175

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Municipal Income Fund (the "Fund") was organized as a
sub-trust of the Van Kampen Merritt Tax Free Fund, a Massachusetts business
trust, and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund commenced
investment operations on August 1, 1990. On August 24, 1992, the Fund commenced
the distribution of its Class B shares. The distribution of the Fund's Class C
shares, which were initially introduced as Class D shares and subsequently
renamed Class C shares on March 7, 1994, commenced on August 13, 1993. The
distribution of the Fund's fourth class of shares, Class D shares, commenced on
March 14, 1994.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.

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" and "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, 1994, there were no
when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.

D. Organizational Expenses and Initial Registration Costs-The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $152,425. These costs are being amortized
on a straight line basis over the 60 month period ending July 31, 1995. Van
Kampen American Capital Investment Advisory Corp. (the "Adviser") has agreed
that in the event any of the initial shares of the Fund originally purchased
by VKAC are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. 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.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $18,151,198. Of this amount, $10,452,715 and
$7,698,483 will expire on December 31, 2001 and 2002, respectively. Net realized
gains or losses may differ for financial and tax reporting purposes primarily as
a result of the deferral of post October 31 losses and the capitalization of
reorganization and restructuring costs for tax purposes.

F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes. Due to inherent differences in the recognition of interest income
under generally accepted accounting principles and federal income tax purposes,
for those securities which the Fund has placed on non-accrual status, the amount
of distributable net investment income may differ between book and federal
income tax purposes for a particular period. These differences are temporary in

B-44
<PAGE> 176

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

nature, but may result in book basis distribution in excess of net investment
income for certain periods.

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 $500 million... .50 of 1%
Over $500 million.... .45 of 1%

</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended December 31, 1994, the Fund recognized expenses of
approximately $375,000 representing VKAC's cost of providing accounting, legal
and certain shareholder services to the Fund.

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 has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.

At December 31, 1994, VKAC owned 387, 105, 100 and 100 shares of Classes A, B,
C and D, respectively.

3. Capital Transactions

The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $518,901,563, $174,384,111,
$4,365,588 and $1,088,397 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 2,891,335 $ 43,601,705
Class B........................ 1,909,204 28,989,319
Class C........................ 141,638 2,139,693
Class D........................ 133,104 2,001,743
----------- ----------------
Total Sales.................... 5,075,281 $ 76,732,460
----------- ----------------
Dividend Reinvestment:
Class A........................ 1,085,808 $ 16,133,995
Class B........................ 325,032 4,818,852
Class C........................ 9,020 133,759
Class D........................ 1,671 24,072
----------- ----------------
Total Dividend Reinvestment ... 1,421,531 $ 21,110,678
----------- ----------------
Repurchases:
Class A........................ (6,182,355) $ (91,457,676)
Class B........................ (1,527,736) (22,372,124)
Class C........................ (134,564) (2,002,989)
Class D........................ (65,876) (937,418)
----------- ----------------
Total Repurchases.............. (7,910,531) $ (116,770,207)
</TABLE>

B-45
<PAGE> 177

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

At December 31, 1993, paid in surplus aggregated $550,623,539, $162,948,064 and
$4,095,125 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 8,915,080 $ 140,550,519
Class B ...................... 7,505,483 118,273,049
Class C....................... 394,838 6,326,816
----------- ---------------
Total Sales................... 16,815,401 $ 265,150,384
----------- ---------------
Dividend Reinvestment:
Class A ...................... 1,031,763 $ 16,387,904
Class B ...................... 224,461 3,569,933
Class C....................... 1,914 30,718
----------- ---------------
Total Dividend Reinvestment... 1,258,138 $ 19,988,555
----------- ---------------
Repurchases:
Class A ...................... (3,256,771) $ (51,726,961)
Class B ...................... (471,941) (7,504,607)
Class C....................... (142,829) (2,262,409)
----------- ---------------
Total Repurchases............. (3,871,541) $ (61,493,977)
----------- ---------------
</TABLE>

Class B, C and D 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 six years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.

Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>

For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$209,000 and CDSC on the redeemed shares of Classes B, C and D of approximately
$516,000. Sales charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and sales of investment securities, excluding short-term
notes and reorganization and restructuring costs, for the year ended December
31, 1994, were $541,728,813 and $708,214,680, respectively.

5. Derivative Financial Instruments

A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where
the recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.

B-46
<PAGE> 178

Van Kampen Merritt Municipal Income Fund

Transactions in options for the year ended December 31, 1994, were
as follows:

<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993... 850 $ 429,134
Options Written and
Purchased (Net).................... 13,078 (2,715,877)
Options Terminated in Closing
Transactions (Net)................. (6,870) (166,364)
Options Expired ................... (6,458) 2,554,550
Options Exercised.................. (600) (101,443)
------ ----------
Outstanding at December 31, 1994... -0- $ -0-
------ ----------
</TABLE>

B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.

The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.

Transactions in futures contracts for the year ended December 31, 1994, were as
follows:

<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------
<S> <C>
Outstanding at December 31, 1993... 2,551
Futures Opened..................... 86,779
Futures Closed .................... (70,246)
--------
Outstanding at December 31, 1994... 19,084
--------
</TABLE>

The futures contracts outstanding at December 31, 1994, and the descriptions and
unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
- ----------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
Mar 1995 - Sells to Open 2,483 $ 903,312
Mar 1995 - Buys to Open ........... 4,216 4,185,872
June 1995 - Sells to Open .......... 1,061 (837,479)
Two-year U.S. Treasury Note Futures
Mar 1995 - Buys to Open ........... 750 (72,470)
Five-year U.S. Treasury Note Futures
Mar 1995 - Sells to Open ........... 1,000 1,443,831
Municipal Bond Futures
Mar 1995 - Buys to Open ............ 726 (22)
Eurodollar Note Futures
Mar 1995 - Sells to Open ........... 4,424 8,328,486
June 1995 - Buys to Open............ 4,424 (11,901,514)
--------- --------------
19,084 $ 2,050,016
--------- --------------
</TABLE>

C. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.

An Embedded Swap security includes a swap component such that the fixed coupon
component of the underlying bond is adjusted by the difference between the
securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.

B-47
<PAGE> 179

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
December 31, 1994

6. Distribution and Service Plans

The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "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 .30% each for Class A and Class D shares
and 1.00% each for Class B and Class C shares are accrued daily. Included in
these fees for the year ended December 31, 1994, are payments to VKAC of
approximately $1,540,000.

B-48

<PAGE> 180

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
AUGUST 1, 1995

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 1,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
MUNICIPAL BONDS............................................................... 2
RISK FACTORS RELATING TO HIGH YIELD BONDS..................................... 3
TEMPORARY INVESTMENTS......................................................... 4
REPURCHASE AGREEMENTS......................................................... 4
FUTURES CONTRACTS AND RELATED OPTIONS......................................... 5
INVESTMENT RESTRICTIONS....................................................... 8
TRUSTEES AND EXECUTIVE OFFICERS............................................... 9
INVESTMENT ADVISORY AGREEMENT................................................. 13
DISTRIBUTOR................................................................... 14
DISTRIBUTION PLANS............................................................ 15
TRANSFER AGENT................................................................ 16
PORTFOLIO TURNOVER............................................................ 16
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 17
DETERMINATION OF NET ASSET VALUE.............................................. 18
PURCHASE AND REDEMPTION OF SHARES............................................. 18
EXCHANGE PRIVILEGE............................................................ 22
CHECK WRITING PRIVILEGE....................................................... 22
FEDERAL TAX INFORMATION....................................................... 22
FUND PERFORMANCE.............................................................. 26
OTHER INFORMATION............................................................. 27
FINANCIAL STATEMENTS.......................................................... 27
APPENDIX...................................................................... 28
</TABLE>
<PAGE> 181

GENERAL INFORMATION

Van Kampen American Capital Municipal Bond Fund (the "Fund") was originally
incorporated in Texas on September 8, 1976. The Fund was reincorporated in
Maryland on July 2, 1992, and reorganized under the laws of Delaware on July 31,
1995.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.

As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class A shares of the Fund.

As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class B shares of the Fund except as
follows: 6.99% was owned of record by National Financial Services Corp., Church
Street Station, P.O. Box 3730, New York, New York 10008-3730.

As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class C shares of the Fund except as
follows: 37.37% was owned of record by Smith Barney Inc., 388 Greenwich Street,
11th Floor, New York, New York 10013-2375.

MUNICIPAL BONDS

"Municipal Bonds" include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development obligations are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Bonds if the
interest paid thereon is exempt from Federal income tax. Municipal Bonds also
include short-term tax-exempt municipal obligations such as tax anticipation
notes, bond anticipation notes, revenue anticipation notes, and variable rate
demand notes.

The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or from other
specific revenue sources such as the user of the facility being financed.
Industrial

2
<PAGE> 182

development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund's portfolio
may also include "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality which is the issuer of the
bonds.

When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.

The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper, provided that such obligations have the ratings
described in the Prospectus. Demand notes are obligations which normally have a
stated maturity in excess of one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified number
of days' notice to the noteholders. The interest rate on a demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. Participation interests in
variable rate demand notes will be purchased only if, in the opinion of counsel,
interest income on such interest will be tax-exempt when distributed as
dividends to shareholders.

Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Bonds in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and among
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally, and such laws, if
any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on Municipal
Bonds.

RISK FACTORS RELATING TO HIGH YIELD BONDS

As described in the Prospectus, the Fund may purchase Municipal Bonds rated
BB or B by Standard & Poor's Corporation ("S&P") and Ba or B by Moody's
Investors Services, Inc. ("Moody's") and non-rated securities considered by the
Adviser to be of comparable quality if the purchase would not cause more than
20% of the Fund's total assets to be invested in such lower rated securities.
See the Appendix for a description of Municipal Bond ratings. The Prospectus
discussion of the risks of investing in such lower rated high yield bonds is
supplemented as follows:

1. Youth and Growth of the High Yield Bond Market. Since the high yield
bond market is relatively new, its growth has paralleled a long economic
expansion, and it has not weathered a recession in its present size and
form. An economic downturn or increase in interest rates is likely to
have a negative effect on the high yield bond market and on the value of
the high yield bonds in the Fund's portfolio, as well as on the ability
of the bonds' issuers to repay principal and interest.

2. Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less

3
<PAGE> 183

sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic changes or individual issuer
developments. During an economic downturn or substantial period of
rising interest rates, the issuers may experience financial stress which
would adversely affect their ability to service their principal and
interest obligations, to meet projected revenue goals, and to obtain
additional financing. If the issuer of a bond owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to
result in increased volatility of market prices of high yield bonds and
the Fund's asset value. Furthermore, in the case of high yield bonds
structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby
tend to be more volatile than securities which pay interest periodically
and in cash.

3. Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds,
and there may be a negative impact on the Fund's board of directors'
ability to accurately value high yield bonds and the Fund's assets and
on the Fund's ability to dispose of the bonds. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a
thinly traded market. To the extent the Fund owns or may acquire
illiquid high yield bonds, these securities may involve special
liquidity and valuation difficulties.

4. Credit Ratings. Certain risks are associated with applying credit
ratings as a method of evaluating high yield bonds. Credit ratings
evaluate the safety of principal and interest payments, not market value
risk of high yield bonds. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the
Adviser monitors the issuers of high yield bonds in the Fund's portfolio
to determine if the issuers appear to have sufficient cash flow to meet
required principal and interest payments, and to attempt to assure the
bonds' liquidity so the Fund can meet redemption requests. The Fund may
retain a portfolio security whose rating has been changed.

TEMPORARY INVESTMENTS

The taxable securities in which the Fund may invest as temporary
investments include U.S. Government securities, domestic bank certificates of
deposit and repurchase agreements.

U.S. Government securities include obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of deposit issued
by a commercial bank unless the bank is organized and operating in the United
States and has total assets of at least $500 million and is a member of the
Federal Deposit Insurance Corporation.

REPURCHASE AGREEMENTS

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

4
<PAGE> 184

seller defaults under its repurchase obligation. See "Investment
Practices -- Repurchase Agreements" in Prospectus for further information.

FUTURES CONTRACTS AND RELATED OPTIONS

FUTURES CONTRACTS

A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a price weighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.

An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.

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

For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.

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

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

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

5
<PAGE> 185

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

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

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

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

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

The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool". CFTC regulations require, among
other things, (i) that futures and related options be used solely for bona fide
hedging purposes (or meet certain conditions as specified in CFTC regulations)
and (ii) that the Fund not enter into futures and related options

6
<PAGE> 186

for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to minimize leverage in
connection with the purchase of futures contracts by the Fund, an amount of
cash, cash equivalents or liquid high grade debt securities equal to the market
value of the obligation under the futures contracts (less any related margin
deposits) will be maintained in a segregated account with the Custodian.

OPTIONS ON FUTURES CONTRACTS

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

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

ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS

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

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

7
<PAGE> 187

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the 1940 Act as
the lesser of (i) 67% or more of the voting securities present in person or by
proxy at the meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. These restrictions provide that the Fund shall not:

1. Purchase or hold securities of any issuer if any of the Fund's officers
or directors, or officers or directors of its investment adviser, who
beneficially own more than 1/2% of the securities of that issuer,
together own beneficially more than five percent of the securities of
such issuer.

2. Purchase securities on margin or make short sales, but it may engage in
transactions in options, futures contracts and related options and make
margin deposits and payments in connection therewith.

3. Make loans of money or securities to other persons except through the
purchase of securities in accordance with its investment objective and
policies.

4. Invest in real estate; commodities or commodities contracts; interests
in oil, gas, or other mineral exploration or development programs; or
any security not payable in United States currency (but this shall not
prevent the Fund from investing in Municipal Bonds or Temporary
Investments secured by real estate or interests therein or from
entering into transactions in futures contracts and related options).

5. Engage in the underwriting of securities or invest more than 15% of its
net assets in securities subject to restrictions on resale or for which
there is no readily available market. Such securities include
securities issued in limited placements under which the Fund represents
that it is purchasing without a view to a public distribution,
repurchase agreements maturing in more than seven days and securities
subject to legal or contractual restrictions on resale.

6. Invest in securities other than Municipal Bonds and Temporary
Investments (as defined in the Prospectus), listed futures contacts
related to U.S. Government securities, Municipal Bonds or to an index
of Municipal Bonds, and options on such contracts.

7. Invest more than five percent of its total assets at market value at
time of purchase in the securities of any one issuer (other than
obligations of the United States Government or of any instrumentalities
thereof).

8. Borrow money, except from banks for temporary or emergency purposes,
such borrowing not to exceed five percent of its total assets at market
value at the time of borrowing. Any such borrowing may be secured
provided that not more than ten percent of the total assets at market
value at the time of pledging may be used as security for such
borrowings. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options,
segregate or deposit assets to cover or secure options written, and
make margin deposits and payments in connection with futures contracts
and related options.

9. Purchase any Municipal Bond rated below Baa by Moody's and below BBB by
S&P, or which, if non-rated, is in the opinion of the Adviser of
comparable quality, if immediately after and as a result of such
purchase such Bonds would constitute more than 20% of the Fund's total
assets.

10. Purchase any Municipal Bond rated below A by Moody's and S&P, or which
is non-rated, if immediately after and as a result of such purchase
such Bonds would constitute more than 50% of the Fund's total assets.

11. Purchase any Municipal Bond rated below B by Moody's and S&P or any
non-rated Municipal bonds considered by the Adviser to be of comparable
quality.

8
<PAGE> 188

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

Each state and each political subdivision, agency or instrumentality of
such state, and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in the Prospectus. The non-government
user of facilities financed by industrial development bonds is also considered
as a separate issuer. If, however, a security is guaranteed by another entity,
securities issued or guaranteed by such guaranteeing entity shall be limited to
ten percent of the value of the Fund's total assets.

Because of the nature of the securities in which the Fund may invest, the
Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies.

TRUSTEES AND EXECUTIVE OFFICERS

The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63

Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Arts; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.

Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66

Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
</TABLE>

9
<PAGE> 189
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
---------------------- ---------------------------
<S> <C>
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.

Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by Van Kampen American Capital
Investment Advisory Corp.

Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.

Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.

David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.

Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.

Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
</TABLE>

10
<PAGE> 190
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
---------------------- -----------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.

Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.

William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.

The Fund's officers other than Messrs. Johnson, McDonnell and Nyberg are
located 2800 Post Oak Blvd., Houston, TX 77056. Messrs. Johnson, McDonnell and
Nyberg are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------- ----------------- ----------------------
<S> <C> <C>

Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.

David C. Johnson......... Vice President Vice President -- Portfolio Manager of the
Age: 42 Adviser.

Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
</TABLE>

11
<PAGE> 191

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.

Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 48 Treasurer investment companies advised by the
Adviser.

Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital; Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.

Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.

J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.

Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>

The Trustees and Officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the fiscal year ended September 30, 1994, the
Trustees who were not affiliated with the Adviser or its parent received as a
group $13,494 in Trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such Trustees also received compensation for serving as
trustees or directors of other investment companies advised by the Adviser. For
legal services rendered during the fiscal year, the Fund paid legal fees of
$11,680 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of
Counsel. The firm also serves as legal counsel to other Van Kampen American
Capital Funds.

12
<PAGE> 192

Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Fund is for the most recent
fiscal year and the total compensation shown for the Fund and other related
mutual Funds is for the calendar year ended December 31, 1994. Mr. Powell is not
compensated for his service as Trustee, because of his affiliation with the
Adviser.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM
ACCRUED REGISTRANT
AS AND
AGGREGATE PART FUND
COMPENSATION OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
----------------------------------------- ------ ----- -------
<S> <C> <C> <C>
J. Miles Branagan........................ $2,050 -0- $64,000
Dr. Richard E. Caruso(3)................. $2,080(2) -0- $64,000
Dr. Roger Hilsman........................ $2,125 -0- $66,000
David Rees(3)............................ $2,050 -0- $64,000
Lawrence J. Sheehan...................... $2,155 -0- $67,000
Dr. Fernando Sisto(3).................... $2,660 -0- $82,000
William S. Woodside(4)................... $ -0- -0- $18,000
</TABLE>

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

(1) Represents 29 investment company portfolios in the fund complex.

(2) Amount reflects deferred compensation of $2,020 for Dr. Caruso.

(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: Dr. Caruso,
$4,786; Mr. Rees, $7,466; and Dr. Sisto, $3,037.

(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second and fourth columns, $1,650
and $36,000, respectively, was paid by the Adviser directly.

(5) Includes the following amounts for which the various Funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in Footnote 4 above).

Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,056 and a
meeting fee of $30 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports and notices, and proxy

13
<PAGE> 193

solicitation materials. In addition, the Adviser furnishes at no cost to the
Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.

Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. During the
fiscal years ended September 30, 1992, 1993 and 1994, the Adviser received
$1,393,099, $1,615,258 and $1,804,381, respectively, in advisory fees from the
Fund. For such periods the Fund paid $91,361, $120,055 and $115,272,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser or its parent in reimbursement of personnel, office
space, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services are provided at cost which is
allocated among the investment companies advised by the Adviser. The Fund also
pays shareholder service agency fees, distribution fees, custodian fees, legal
and auditing fees, the costs of reports to shareholders and all other ordinary
expenses not specifically assumed by the Adviser.

Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at an annual
rate of 0.50% of the Funds average net assets.

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

The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in the states where the Fund's shares are qualified for sale, the
compensation due the Adviser for such fiscal year shall be reduced by the amount
of such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the year. The Advisory
Agreement also provides that the Adviser shall not be liable to the Fund for any
actions or omissions if it acted in good faith without negligence or misconduct.

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

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

DISTRIBUTOR

The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's

14
<PAGE> 194

outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.

During the fiscal years ended September 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,079,211,
$1,055,715 and $793,290, respectively. Of such totals, the amount retained by
the Distributor was $32,794, $97,650 and $118,647, respectively. The remainder
was reallowed to dealers. Of such dealer reallowances, $314,982, $197,590 and
$105,378, respectively, was received by Advantage Capital Corporation, an
affiliated dealer of the Distributor.

DISTRIBUTION PLANS

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

The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of the Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professions, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus 1 1/2% compounded
quarterly on the unreimbursed distribution expenses. With respect to the Class C
Plan, authorized payments under the Class C Plan also include payments at an
annual rate of up to 0.75% of the net assets of the Class C shares to reimburse
the Distributor for (1) upfront commissions and transaction fees of up to 0.75%
of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees paid to broker-dealers and other Service Organizations in an
amount up to 0.75% of the average daily net assets of the Fund's Class C shares,
(2) out-of-pocket expenses of printing and distributing prospectuses and annual
and semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus 1 1/2% compounded
quarterly on the unreimbursed distribution expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the NASD for asset-based
charges.

15
<PAGE> 195

does not believe that termination of a relationship with a bank would result in
any material adverse consequences to the Fund. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.

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

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

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

For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $686,403 or .21%, of the Fund's average net assets.
Such expenses were paid to reimburse the Distributor for payments made to
Service Organizations for servicing Fund shareholders and administering the
Class A Plan. The offering of Class B shares commenced on September 29, 1992.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class B Plan were $311,708 or 1.00% of the Class B shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $233,781 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class B
shares of the Fund and $77,927 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended September 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B Plan and carried forward were approximately $1.6
million. The offering of Class C shares commenced August 30, 1993. For the
fiscal year ended September 30, 1994, the Fund's aggregate expenses under the
Class C Plan were $54,489 or 1.00% of the Class C shares' average daily net
assets. Such expenses were paid to the Distributor for the following payments:
$40,867 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of Class C shares of the Fund and $13,622 for
fees paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan. For the fiscal year ended September 30, 1994,
the unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $130,000.

TRANSFER AGENT

For the fiscal years ended September 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$334,826 for these services. These services are provided at cost plus a profit.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The

16
<PAGE> 196

turnover rate may vary greatly from year to year as well as within a year. The
Fund's portfolio turnover rate for prior years is shown under "Financial
Highlights" in the Prospectus. The annual turnover rate is expected to exceed
100%, which is higher than that of many other investment companies. A 100%
turnover rate would occur if all the Fund's portfolio securities were replaced
during one year. The lower turnover rate during the last fiscal year reflects
the Adviser's investment strategy and the lower volatility of the market for
municipal securities during the period.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs. Portfolio securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include the spread between the bid and asked price. Sales to dealers are
effected at bid prices.

The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of the accounts and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund.

Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Fund as a factor in the
selection of firms to execute portfolio transactions for the Fund.

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

The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser. During the fiscal years
ended September 30, 1992, 1993 and 1994, the Fund paid $-0-, $-0- and $4,589,
respectively, in brokerage commissions. The negotiated commission paid to an
affiliated broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction.

17
<PAGE> 197

DETERMINATION OF NET ASSET VALUE

The net asset value of Fund shares is computed by dividing the value of all
securities plus other assets, less liabilities, by the number of shares
outstanding. The net asset value of the shares of the Fund is determined once
daily as of the close of trading (currently 4:00 p.m., New York time) each day
the New York Stock Exchange (the "Exchange") is open. The Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Directors. Expenses and fees, including the management fee are
accrued daily and taken into account for the purpose of determining the net
asset value of Fund shares. Short-term instruments having remaining maturities
of 60 days or less are valued at amortized cost.

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

PURCHASE AND REDEMPTION OF SHARES

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

PURCHASE OF SHARES

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

ALTERNATIVE SALES ARRANGEMENTS

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

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

INVESTMENTS BY MAIL

A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such

18
<PAGE> 198

investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.

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

CUMULATIVE PURCHASE DISCOUNT

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

LETTER OF INTENT

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

REDEMPTION OF SHARES

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

19
<PAGE> 199

not reasonably practicable for the Fund to fairly determine the value of its net
assets; or (d) the SEC, by order, so permits.

CONTINGENT DEFERRED SALES CHARGE-CLASS A

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

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

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

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

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

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

(a) Redemption Upon Disability or Death

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

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

20
<PAGE> 200

partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.

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

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

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

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

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

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

The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC upon such
involuntary redemption.

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

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

(f) Redemption by Adviser

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

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<PAGE> 201

EXCHANGE PRIVILEGE

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

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

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

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

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

CHECK WRITING PRIVILEGE

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

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

FEDERAL TAX INFORMATION

The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.

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<PAGE> 202

The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares and meet certain
diversification and other requirements. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares as a
result of the higher distribution services and incremental transfer agency fees
applicable to the Class B and Class C shares. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its taxable net investment income and taxable net realized
capital gains. If for any taxable year the Fund does not qualify for the special
tax treatment afforded regulated investment companies, all of its taxable
income, including any net realized capital gains, would be subject to tax at
regular corporate rates (without any deduction for distributions to
shareholders).

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

The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors,
tax-exempt, net Municipal Bond interest income. In order for the Fund to be
eligible to pay exempt-interest dividends during any taxable year, at the close
of each fiscal quarter, at least 50% of the aggregate value of the Fund's assets
must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
net income" (i.e., its ordinary taxable income and the excess, if any, of its
net short-term capital gains over any net long-term capital losses) recognized
by the Fund during the taxable year (the "Distribution Requirements").

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

Not later than 60 days after the close of its taxable year, the Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
"exempt-interest" dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the dividend.

Although exempt-interest dividends generally may be treated by the Fund's
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Fund. "Substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses in
his trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than five percent of the usable area of the facilities or for whom
the facilities or a part thereof were specifically constructed, reconstructed or
acquired. Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the

23
<PAGE> 203

shareholder's taxable year. If a shareholder receives an exempt-interest
dividend with respect to any shares and such shares are held for six months or
less, any short-term capital loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.

If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Bonds or other assets, the Fund will
have no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held his shares. Not later than 60 days after the close of the Fund's
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.

A capital gain dividend received after the purchase of the Fund's shares
reduces the net asset value of the shares by the amount of the distribution and
will be subject to income taxes. A loss on the sale of shares held for less than
six months (to the extent not disallowed on account of the receipt of
exempt-interest dividends) attributable to a capital gain dividend is treated as
a long-term capital loss for Federal income tax purposes.

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

BACK-UP WITHHOLDING

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

TREATMENT OF DIVIDENDS

While the Fund expects that a major portion of its investment income will
constitute tax-exempt interest, a portion may consist of "investment company
taxable income" and "net capital gains". As pointed out above, the Fund will be
subject to tax for any year on its undistributed investment company taxable
income and net capital gains.

It is anticipated that substantially all of the Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level. Dividends
from net investment income and distributions from any short-term capital gains
are taxable to shareholders as ordinary income.

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

Since none of the Fund's net investment income will arise from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations. To qualify for the dividends
received deduction, a corporate shareholder must hold the shares on which the
dividend is paid for more than 45 days.

The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision that,
for taxable years beginning after December 31, 1989, 75% of the excess of a
corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of tax

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<PAGE> 204

preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.

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

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

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

TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS

In connection with its operations, the Fund may effect transactions in U.S.
Government securities and municipal bond futures contracts ("Futures Contracts")
and in options thereon ("Futures Options"). Gains or losses recognized by the
Fund from transactions in such Futures Contracts and Futures Options constitute
capital gains and losses for federal income tax purposes and do not therefore
qualify as exempt-interest income.

With respect to a Futures Contract closed out by the Fund, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60 percent thereof and short-term capital gain or loss to the extent of 40
percent thereof (hereinafter "60/40 gain or loss"). Open Futures Contracts held
by the Fund at the end of any fiscal year will be required to be treated as sold
at market value on the last day of such fiscal year for federal income tax
purposes (i.e. "marked-to-market"). Gain or loss recognized under this mark-to-
market rule is 60/40 gain or loss. The federal income tax treatment accorded to
Futures Options will be the same as that accorded to Futures Contracts. The
Distribution Requirements may limit the Fund's ability to hold Futures Contracts
and Futures Options at the end of a year.

A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined in
Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.

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

The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. The Fund has not determined whether it will make
any of these elections.

The Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has pointed
out that although the Internal Revenue Service has issued a favorable published
ruling on a similar but not identical situation, it could reach a different
conclusion from

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<PAGE> 205

that of counsel. Counsel has also advised the Fund that the Internal Revenue
Service presently will not ordinarily issue private letter rulings regarding the
ownership of securities subject to stand-by commitments.

RESTRICTIONS ON FUTURES CONTRACTS AND RELATED OPTIONS

Among the requirements for qualification as a regulated investment company
under the Code, the Fund must derive less than 30% of its gross income each year
from sales of securities held for less than three months. This requirement and
the mark-to-market rule may restrict the Fund's ability to: (i) effect closing
purchase transactions in Futures Contracts and Futures Options which have been
held for less than three months, and (ii) enter into various other short-term
transactions.

In addition, the Code requires that a Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of a Fund's assets may be invested in
the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, a Fund's ability to invest in Futures Contracts and Futures
Options may be limited.

FUND PERFORMANCE

The Fund's average annual total return for Class A shares for the one-year,
five-year and ten-year periods ended March 31 1995, was 1.03%, 6.88% and 8.59%,
respectively. The average annual total return for Class B shares of the Fund for
the one-year period ended March 31, 1995 was 1.14%, and for the period from
September 29, 1992 (the initial offering of Class B shares) to March 31, 1995
was 4.18%. The average annual total return for Class C shares for the one-year
period ended March 31, 1995 was 4.14%, and for the period from August 30, 1993
(the initial offering of Class C shares) to March 31, 1995 was 1.92%. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.

The annualized current yield for Class A shares, Class B shares and Class C
shares of the Fund for the 30-day period ending March 31, 1995 was 4.98%, 4.39%
and 4.38%, respectively. The tax equivalent yield (based on an assumption of a
tax rate of 36%) for the same period for Class A, Class B and Class C shares of
the Fund was 7.77%, 6.85%, and 6.84%, respectively. The yield for Class A, Class
B and Class C shares is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.

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

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

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

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

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<PAGE> 206

OTHER INFORMATION

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

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

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

FINANCIAL STATEMENTS

The attached financial statements in the form in which they appear in the
Annual and Semi-annual Reports to Shareholders, including the related Report of
Independent Accountants on the September 30, 1994 financial statements, are
included in the Statement of Additional Information.

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

<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 MARCH 31, 1995
------------------ --------------
<S> <C> <C>
Net Asset Value per Class A Share $ 9.82 $ 9.98
Class A Per Share Sales Charge -- 4.75% of
offering price (4.99% of net asset value per
share) $ .49 $ .50
------- -------
Class A Per Share Offering Price to the Public $10.31 $10.48
</TABLE>

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APPENDIX

RATINGS OF INVESTMENTS

Ratings of Municipal Bonds
Descriptions of Moody's Investors Service, Inc. ("Moody's") Municipal Bond
Ratings:

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

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

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.

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

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

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

Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange ranking;
and a modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."

Beginning on February 5, 1985, Moody's started new rating categories for
variable rate demand obligations ("VRDO's"). VRDO's receive two ratings. The
first rating, depending on the maturity of the VRDO, is assigned either a bond
or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an

28
<PAGE> 208

evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:

VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.

VMIG 2: ample margins of protection, high quality.

VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well established.

VMIG 4: adequate quality, not predominantly speculative but there is risk.

DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The first two are described below:

Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P") MUNICIPAL DEBT RATINGS

A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

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

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

I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. 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 creditor's rights.

AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.

AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.

29
<PAGE> 209

BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.

BB,B Debt rated "BB" and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.

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

Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and 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.

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

A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest category is "A" which is further defined with the designation of 1, 2
and 3 to indicate the relative degree of safety. The first two categories are
described below:

A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment.

A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.

A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated "A-1".

The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.

Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:

SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.

SP-2 A satisfactory capacity to pay principal and interest.

SP-3 A speculative capacity to pay principal and interest.

S&P may continue to rate note issues with a maturity greater than three
years in accordance with the same rating scale currently employed for municipal
bond ratings.

S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).

30
<PAGE> 210

Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e., different ratings by Moody's and S&P) and dual rated
securities as described above.

Subsequent to its purchase by the Fund, an issue of Municipal Bonds or a
Temporary Investment may cease to be rated or its rating may be reduced, causing
more than 20% of the Fund's assets invested in Municipal Bonds to be invested in
low or non-rated bonds. This would not require the elimination of such
obligation from the Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in Municipal
Bonds or Temporary Investments in accordance with the investment policies
contained herein.

31
<PAGE> 211
Investment Portfolio
September 30, 1994

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 94.9%
EDUCATION 4.5%
$ 1,000,000 Broward County, Florida, Educational Facilities Authority Rev.
(Nova University Project), G.O., 8.50%, 4/1/10 . . . . . . . . . $ 1,148,150
625,000 Clear Creek, Texas, Independent School District, G.O.,
6.25%, 2/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . 654,156
1,000,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07 . . . . . . . 1,229,150
1,150,000 Florida State Board of Education, Capital Outlay, Series A,
7.25%, 6/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,564
Illinois Educational Facilities Authority Rev., G.O.
1,000,000 Lake First College, FSA, 6.75%, 10/1/21 . . . . . . . . . . . . 1,020,930
1,000,000 Northwestern University, Series 1985, 6.90%, 12/1/21 . . . . . . 1,103,630
2,000,000 New Hampshire Higher Education & Daniel Webster College
Issue, G.O., 7.625%, 7/1/16 . . . . . . . . . . . . . . . . . . 1,900,260
1,000,000 New York City, New York, Industrial Development Agency, Civil
Facility Rev. (Marymount Manhattan College Project), G.O.,
7.00%, 7/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 953,620
New York State Dormitory Authority Rev.
1,000,000 City University, 8.125%, 7/1/17; Pre-refunded 7/1/97 . . . . . . 1,104,280
3,250,000 State University Educational Facility, Series 1990-A,
7.70%, 5/15/12 . . . . . . . . . . . . . . . . . . . . . . . . 3,703,960
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, MBIA, G.O., 7.20%, 7/1/19 . . . . . 538,005
250,000 Pennsylvania Medical College, Series A, G.O., 7.50%,
3/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,850
University of the Virgin Islands, Series A
500,000 7.50%, 10/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . 497,335
500,000 7.65%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . 496,965
--------------
TOTAL EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . 15,866,855
--------------

HEALTH CARE 1.7%
500,000 Colorado Health Facilities Authority Rev. (Cleo Wallace Center
Project), 7.00%, 8/1/15 . . . . . . . . . . . . . . . . . . . . 481,925
1,500,000 Colorado Health Facilities Authority Rev. (PSL Healthcare System
Project), Series 1991-A, FSA, 6.25%, 2/15/21 . . . . . . . . . . 1,460,220
1,000,000 Cuyahoga County, Ohio, Health Care Facilities Rev.
(Jennings Hall), 7.30%, 11/15/23 . . . . . . . . . . . . . . . . 941,580
1,000,000 Lebanon County, Pennsylvania, Health Facilities Authority Health
Center Rev. (UTD Church of Christ Homes Project),
6.75%, 10/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 969,620
750,000 Massachusetts State, Industrial Finance Rev., 7.10%, 11/15/18 . . . 688,673
235,000 Pinal County, Arizona, Industrial Development Authority (Casa
Grande Regional Medical Center Project), 9.00%, 12/1/13 . . . . . 239,991
1,000,000 St. Petersburg, Florida, Health Facilities Authority Rev. (Allegany
Health Systems), 7.75%, 12/1/15 . . . . . . . . . . . . . . . . 1,130,990
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 5,912,999
--------------

HOSPITALS 14.6%
Bexar County, Texas, Health Facilities Development Rev. (St. Lukes
Lutheran Hospital Project)
500,000 7.00%, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 495,785
1,500,000 7.90%, 5/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 1,564,290
1,000,000 Boston, Massachusetts, Rev. (Boston City Hospital), FHA,
7.625%, 2/15/21 . . . . . . . . . . . . . . . . . . . . . . . . 1,132,060
500,000 Boulder County, Colorado, Industrial Development Rev. (Boulder
Medical Center Project), 8.875%, 1/1/17 . . . . . . . . . . . . 519,905
</TABLE>

F-1
<PAGE> 212
Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS--CONTINUED
$ 1,000,000 Charlotte County, Florida, Hospital Authority Rev. (Bon Secours
Health System), 8.25%, 8/15/18 . . . . . . . . . . . . . . . . . $ 1,128,880
500,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement
(Clarksville Memorial Project), 6.25%, 7/1/13 . . . . . . . . . . 458,670
995,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project), Series-94, 6.875%, 6/1/16 . . . . . . . . . . 903,619
800,000 Colorado Health Facilities Authority Rev. (Rocky Mountain
Adventist), 6.625%, 2/1/13 . . . . . . . . . . . . . . . . . . . 747,680
2,000,000 Delaware State Economic Development Authority Rev. (Osteopathic
Hospital Association of Delaware), Series A, 6.90%, 1/1/18 . . . 1,823,740
1,000,000 Ector County, Texas, Hospital District (Medical Center Hospital),
7.125%, 4/15/02 . . . . . . . . . . . . . . . . . . . . . . . . 1,012,720
500,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health
Center), Series 1992, 7.25%, 7/1/12 . . . . . . . . . . . . . . 506,535
1,000,000 Harris County, Texas, Health Facilities Development Corp.
(Memorial Hospital System Project), 7.125%, 6/1/15 . . . . . . . 1,039,500
Illinois Health Facilities Authority Rev.
1,000,000 Elmhurst Memorial Hospital, Series 87-A, 8.125%, 1/1/13 . . . . . 1,086,380
1,000,000 Improvement Swedish Covenant, Series A, 6.30%, 8/1/13 . . . . . . 915,540
2,000,000 Lutheran Health System, Series B, MBIA, 6.00%, 4/1/18 . . . . . . 1,868,980
1,000,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19 . . . . . . 1,125,770
1,000,000 Memorial Hospital, 7.25%, 5/1/22 . . . . . . . . . . . . . . . . 977,770
500,000 Mercy Center For Health Care Services, 6.625%, 10/1/12 . . . . . 492,770
1,000,000 Northwestern Memorial Hospital, 6.75%, 8/15/11 . . . . . . . . . 1,028,770
1,000,000 Indiana Health Facilities, Financing Hospital Authority Rev.
(Community Hospital of Indiana), Series-H, MBIA,
6.85%, 7/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,510
1,160,000 Jefferson County, Texas, Health Facility Authority Rev. (Baptist
Health Care Project), 8.30%, 10/1/14 . . . . . . . . . . . . . . 1,249,355
845,000 Lebanon County, Pennsylvania, Good Samaritan Hospital Authority
Rev. (Good Samaritan Hospital Project), 5.85%, 11/15/07 . . . . . 762,367
1,000,000 Marion County, Indiana, Hospital Authority, Facility Rev.
(Methodist Hospital of Indiana), 6.50%, 9/1/13 . . . . . . . . . 973,060
1,000,000 McKeesport, Pennsylvania, Hospital Authority Rev. (McKeesport
Hospital Project), 6.50%, 7/1/08 . . . . . . . . . . . . . . . . 924,620
1,000,000 Michigan State Hospital Finance Authority Rev. (St. Joseph
Hospital Corp.), Series A, 8.125%, 7/1/05 . . . . . . . . . . . 1,053,220
1,000,000 Missouri State Health & Educational Facilities Authority
(Heartland Health Systems Project), 8.125%, 10/1/10 . . . . . . . 1,122,930
2,500,000 New Hampshire Health & Higher Educational Facility Authority Rev.
(Wentworth Douglass Hospital), 8.50%, 1/1/15 . . . . . . . . . . 2,735,975
New York State Medical Care Facilities Finance Agency Rev.
1,000,000 Columbia Presbyterian Hospital, Series A, FHA, 8.00%, 2/15/25 . . 1,104,630
1,965,000 Montefiore Medical Center, 7.25%, 2/15/09 . . . . . . . . . . . 2,096,262
1,000,000 North General Hospital, Series 89-A, 7.40%, 2/15/19 . . . . . . . 1,040,740
725,000 Philadelphia, Pennsylvania, Hospital & Higher Education Facilities
Authority Rev. (Roxborough Memorial Hospital),
Series 2, 7.25%, 3/1/24 . . . . . . . . . . . . . . . . . . . . 658,445
1,500,000 Richardson, Texas, Hospital Authority, Refunding & Improvement
Rev. (Richardson Medical Center), 6.75%, 12/1/23 . . . . . . . . 1,416,225
1,000,000 Royal Oak, Michigan, Hospital Finance Authority, Rev. (William
Beaumont Hospital), Series D, 6.75%, 1/1/20 . . . . . . . . . . . 1,006,770
1,750,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project), 7.75%, 4/1/13 . . . . . . 1,693,405

</TABLE>

F-2
<PAGE> 213
Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS--CONTINUED

$ 500,000 Salem, Oregon, Hospitals Facilities Authority Rev.,
7.50%, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . . $ 493,455
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority
Rev. (Moses Taylor Hospital Project)
1,000,000 Series A, 7.375%, 7/15/08 . . . . . . . . . . . . . . . . . . . 983,730
500,000 Series B, 8.25%, 7/1/09 . . . . . . . . . . . . . . . . . . . . 534,570
South Dakota State Health & Educational Facilities Authority Rev.
(Sioux Valley Hospital)
1,000,000 7.25%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 958,700
2,000,000 7.625%, 11/1/13 . . . . . . . . . . . . . . . . . . . . . . . . 2,216,063
1,500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA, 6.25%, 8/15/22 . . . . . . . 1,449,990
1,000,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health), Series B, 6.75%, 11/1/25 . . . . 914,870
1,000,000 Washington County, Pennsylvania, Hospital Authority,
7.35%, 6/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . 941,050
1,500,000 Wells County, Indiana, Hospital Authority Rev., Refunding
(Caylor-Nickel Medical Center, Inc.), 8.50%, 4/15/03 . . . . . . 1,517,085
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical
Center Project), Series-A, 5.25%, 6/1/16 . . . . . . . . . . . . 848,500
1,000,000 West Virginia State, Hospital Finance Authority, Refunding &
Improvement (Fairmont General Hospital), Series A,
6.75%, 3/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . 946,270
2,000,000 Wisconsin State Health & Educational Facilities Rev. (Wheaton
Franciscan Services Inc.), 8.20%, 8/15/18 . . . . . . . . . . . 2,254,280
--------------
TOTAL HOSPITALS . . . . . . . . . . . . . . . . . . . . . . . . 51,746,441
--------------

HOUSING 6.2%
1,275,000 Albuquerque, New Mexico, Home Mtg. Rev., 12.00%, 9/1/98 . . . . . . 1,261,536
1,645,000 Arapahoe County, Colorado, Single Family Mtg. Rev.,
8.375%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,697,311
1,000,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project), 6.75%, 4/1/19 . . . . . . . . 965,230
Bexar County, Texas, Housing Finance Corp., Rev.
410,000 8.20%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . 430,791
435,000 Series B, 9.25%, 4/1/16 . . . . . . . . . . . . . . . . . . . . 455,692
145,000 El Paso, Texas, Property Finance Authority Inc., Single Family
Mtg. Rev., Series A, 8.70%, 12/1/18 . . . . . . . . . . . . . . 154,960
680,000 Fort Worth, Texas, Housing Finance Corp., Home Mtg. Rev.,
Refunding, 8.50%, 10/1/11 . . . . . . . . . . . . . . . . . . . 724,315
800,000 Harris County, Texas, Housing Financing Corp., Single Family Mtg.
Rev., Series 1983-A, 10.125%, 7/15/03 . . . . . . . . . . . . . 802,592
Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.
705,000 10.00%, 9/15/14 . . . . . . . . . . . . . . . . . . . . . . . . 725,057
885,000 Series A, FSA, 5.95%, 12/1/10 . . . . . . . . . . . . . . . . . 866,937
1,000,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding
(Laguna Point Apartments Project), 6.50%, 7/1/09 . . . . . . . . 994,250
Massachusetts State Housing Finance Agency
1,000,000 Multi-family Housing Authority, Series A, 8.75%, 8/1/08 . . . . . 1,041,250
550,000 Residential Housing Authority, Series A, 8.40%, 8/1/21 . . . . . 573,375
965,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26 . . . . . . . . . . . . . . . . . . . . . . . . . 956,556
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Retirement Community Rev. (GDL Farms Corp.
Project), 6.30%, 1/1/13 . . . . . . . . . . . . . . . . . . . . 895,260

</TABLE>

F-3
<PAGE> 214
Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING--CONTINUED
$ 1,000,000 Mount Clemens, Michigan, Housing Corp., Multi-family Rev.,
Refunding, Series A, 6.60%, 6/1/13 . . . . . . . . . . . . . . . $ 1,000,640
1,000,000 North St. Paul, Minnesota, Multi-family Refunding Housing Rev.
(Cottages North St. Paul), 9.25%, 2/1/22 . . . . . . . . . . . . 1,078,020
1,000,000 Pima County, Arizona, IDR, Single Family Mtg. Rev.,
6.625%, 11/1/14 . . . . . . . . . . . . . . . . . . . . . . . . 1,000,720
1,155,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project),
Series A, 7.75%, 12/1/15 . . . . . . . . . . . . . . . . . . . . 1,120,997
2,500,000 St. Paul, Minnesota Port Authority, Housing & Redevelopment
Authority, Multi-family Housing Rev., Series J, 9.50%, 12/1/11 . 2,375,525
1,000,000 South Dakota State Housing Development Authority, Homeowner
Mtg., Series D-1, 6.85%, 5/1/26 . . . . . . . . . . . . . . . . 1,013,750
1,450,000 Texas State Veterans Housing Assistance, MBIA, G.O.,
6.80%, 12/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 1,471,344
245,000 Travis County, Texas, Housing Finance Corp., Single Family Mtg.
Rev., 8.20%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . 252,073
--------------
TOTAL HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . 21,858,181
--------------

LIFE CARE 1.6%
2,000,000 Butler County, Pennsylvania, Industrial Development Authority Rev.,
1st Mtg. Rev. (Sherwood Oaks Project), Series A, 8.75%, 6/1/16 . 2,119,800
975,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project), 9.25%, 12/1/07 . . . . . . . . . . . . . . . . . . . . 1,013,454
1,000,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
(Reeds Landing Project), 8.625%, 10/1/23 . . . . . . . . . . . . 1,001,470
500,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple), Series-A, 6.75%, 12/1/13 . . . . . . 445,875
1,000,000 Wisconsin State Health & Educational Facilities Authority Rev.
(United Lutheran Program for the Aging Inc. Project),
8.50%, 3/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,056,780
--------------
TOTAL LIFE CARE . . . . . . . . . . . . . . . . . . . . . . . . 5,637,379
--------------

MISCELLANEOUS 7.4%
500,000 Berry Creek Metropolitan District, Colorado, G.O.,
Refunding and Improvement, 8.25%, 12/1/11 . . . . . . . . . . . 529,345
2,000,000 Compton, California, Certificates of Participation, Refunding,
Series B, 7.50%, 8/1/15 . . . . . . . . . . . . . . . . . . . . 2,100,760
1,000,000 Detroit, Michigan, Tax Increment Bonds (Development Area No. 1
Project), Series 89-A, 7.60%, 7/1/10 . . . . . . . . . . . . . . 1,047,540
2,500,000 District of Columbia Rev. (National Public Radio), Series A,
7.70%, 1/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,300
1,000,000 Dove Valley Metropolitan District, Arapahoe County, Colorado,
G.O., 9.50%, 12/1/08 . . . . . . . . . . . . . . . . . . . . . . 1,026,910
1,000,000 Du Page County, Illinois (Stormwater Project), 6.55%, 1/1/21 . . . 1,077,360
Fort Bend County, Texas, Levee Improvement District No. 11, G.O.
500,000 8.70%, 3/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . 544,620
440,000 8.70%, 3/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 479,441
1,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project), 7.75%, 8/15/22 . . 1,043,160
1,000,000 Lehigh County, Pennsylvania, IDR (Allentown Interstate Motel),
8.00%, 8/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 995,130
Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series 1992, G.O.
630,000 7.95%, 12/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 643,432
500,000 8.10%, 12/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . 525,640

</TABLE>

F-4
<PAGE> 215

Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS--CONTINUED
$ 145,000 Pocahontas, Iowa, Industrial Development Rev. (Navistar
International Harvester Co.), 10.25%, 10/1/00 . . . . . . . . . . $ 150,690
1,000,000 Port of New Orleans, Louisiana, IDR, Refunding (Avondale
Industries, Inc.), 8.25%, 6/1/04 . . . . . . . . . . . . . . . . 1,038,230
2,330,000 Somerset County, Pennsylvania, General Authority, Commonwealth
Lease Rev., FGIC, 6.25%, 10/15/11 . . . . . . . . . . . . . . . 2,448,830
1,750,000 St. Charles, Illinois, Industrial Development Rev. (Tri-City Center
Project), 7.50%, 11/1/13 . . . . . . . . . . . . . . . . . . . . 1,693,090
Texas General Services, Community Partner Interests, (Office
Building and Land Acquisition Project)
500,000 7.00%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . 487,875
500,000 7.00%, 8/1/24 . . . . . . . . . . . . . . . . . . . . . . . . 487,130
1,000,000 Texas State, Refunding (Superconducting Project), Series C, G.O.,
5.50%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 864,050
Utah State Building Ownership Authority Lease Rev. (Dept. of
Employment Security)
1,000,000 7.80%, 8/15/10 . . . . . . . . . . . . . . . . . . . . . . . . . 1,096,710
1,300,000 7.80%, 8/15/11 . . . . . . . . . . . . . . . . . . . . . . . . . 1,425,723
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline),
7.125%, 12/1/25 . . . . . . . . . . . . . . . . . . . . . . . . 1,056,150
1,250,000 Virginia, Port of Authority, Commonwealth, 8.20%, 7/1/08 . . . . . 1,372,988
1,500,000 Woodward, Oklahoma, Municipal Auto Sales, Refunding,
8.00%, 11/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 1,645,860
--------------
TOTAL MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 26,265,964
--------------

MUNICIPAL UTILITY DISTRICT (MUD) 1.4%
500,000 Eldridge Road, Texas, MUD, Refunding, 6.125%, 3/1/11 . . . . . . . 452,450
1,000,000 Harris County, Texas, MUD No. 1, 9.75%, 3/1/00; Pre-refunded 3/1/95 1,022,650
500,000 Harris County, Texas, MUD, Refunding, G.O., 7.30%, 3/1/14 . . . . . 490,815
1,000,000 Mills Road, Texas, MUD, 6.50%, 9/1/14 . . . . . . . . . . . . . . . 927,450
Mission Bend MUDNo. 2, Texas
500,000 10.00%, 9/1/98 . . . . . . . . . . . . . . . . . . . . . . . . . 567,770
375,000 10.00%, 9/1/00 . . . . . . . . . . . . . . . . . . . . . . . . . 432,881
655,000 Montgomery County, Texas, MUD No. 4 (Water Works System),
8.90%, 9/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . 744,362
500,000 North Mission Glen, Texas, MUD, Refunding, 6.50%, 9/1/14 . . . . . 460,755
--------------
TOTAL MUD . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,099,133
--------------

NURSING HOMES 0.6%
500,000 Fairfield, Ohio, Economic Development Rev., Refunding
(Beverly Enterprises), 8.50%, 1/1/03 . . . . . . . . . . . . . . 523,690
475,000 Louisiana Public Facilities Authority, Industrial Development Rev.,
Refunding (Beverly Enterprises), 8.25%, 9/1/08 . . . . . . . . . 490,822
1,315,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project),
Series-A, 7.875%, 12/1/13 . . . . . . . . . . . . . . . . . . . 1,270,724
--------------
TOTAL NURSING HOMES . . . . . . . . . . . . . . . . . . . . . . 2,285,236
--------------

POLLUTION CONTROL REVENUE (PCR) 6.1%
3,675,000 Brazos River Authority, Texas, PCR (Texas Utilities Electric Co.
Project A), 9.875%, 10/1/17 . . . . . . . . . . . . . . . . . . 4,151,316
1,000,000 Burke County, Georgia, Development Authority, PCR
(Georgia Power Co.), 9.375%, 12/1/17 . . . . . . . . . . . . . . 1,133,810
1,000,000 Burlington, Kansas, PCR, MBIA (Kansas Gas & Electric Co. Project),
7.00%, 6/1/31 . . . . . . . . . . . . . . . . . . . . . . . . . 1,054,670
1,595,000 Capital Industrial Development Corp., Texas, PCR (International
Business Machines Corp.), 7.40%, 5/1/12 . . . . . . . . . . . . 1,722,472

</TABLE>

F-5
<PAGE> 216

Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR)--CONTINUED
$ 750,000 County of Coshocton, Ohio, Solid Waste Disposal Rev. (Stone
Container Corp. Project), Series 1992, 7.875%, 8/1/13 . . . . . . $ 736,185
1,000,000 Hodge, Louisiana, Utility Rev. (Stone Container Corp. Project),
Series 1990, 9.00%, 3/1/10 . . . . . . . . . . . . . . . . . . . 1,020,930
1,280,000 Illinois Development Finance Authority, PCR (Commonwealth
Edison Co.), 11.375%, 10/15/14 . . . . . . . . . . . . . . . . . 1,349,747
1,250,000 Mercer County, North Dakota, PCR, Basin Electric Power, Series E,
7.00%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,285,713
500,000 Monroe County, Michigan, PCR (Detroit Edison Co.), Series A,
10.50%, 12/1/16 . . . . . . . . . . . . . . . . . . . . . . . . 542,065
New Hampshire State Industrial Development Authority, PCR
1,000,000 New England Power Co., 7.80%, 4/1/16 . . . . . . . . . . . . . . 1,047,310
1,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12 . . . . . . . 1,161,110
1,000,000 Parish of St. Charles, Louisiana, PCR (Louisiana Power &
Light Co.), 8.25%, 6/1/14 . . . . . . . . . . . . . . . . . . . 1,104,010
1,400,000 Parish of West Feliciana, Louisiana, PCR (Gulf States Utilities),
Series A, 7.50%, 5/1/15 . . . . . . . . . . . . . . . . . . . . 1,471,904
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power &
Lighting), Series 1993-A, 6.10%, 1/1/16 . . . . . . . . . . . . 936,680
750,000 Pope County, Arkansas, PCR (Arkansas Power & Light Project),
11.00%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . 814,463
Sabine River Authority, Texas, Refunding, PCR (Texas Utilities
Co. Project)
1,350,000 7.75%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,411,938
440,000 Series 1986, 9.00%, 9/1/07 . . . . . . . . . . . . . . . . . . . 481,743
--------------
TOTAL PCR . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,426,066
--------------

POOL FINANCING PROGRAMS 2.8%
Emmaus, Pennsylvania, General Authority, Local Government Bond
Pool Program, Rev.
1,750,000 Series A, BIG, 8.15%, 5/15/18 . . . . . . . . . . . . . . . . . 1,889,650
2,500,000 Series C, BIG, 7.90%, 5/15/18 . . . . . . . . . . . . . . . . . 2,679,275
Indianapolis, Indiana, Local Public Improvement
1,000,000 Series A, 6.00%, 2/1/20 . . . . . . . . . . . . . . . . . . . . 945,280
2,000,000 Series C, 6.70%, 1/1/17 . . . . . . . . . . . . . . . . . . . . 1,986,020
450,000 Series D, 6.50%, 2/1/22 . . . . . . . . . . . . . . . . . . . . 432,747
550,000 Series D, 6.75%, 2/1/14 . . . . . . . . . . . . . . . . . . . . 558,272
1,000,000 Series D, 6.75%, 2/1/20 . . . . . . . . . . . . . . . . . . . . 992,680
670,000 Tampa, Florida, Capital Improvement Program Rev., Series A,
8.25%, 10/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 701,410
--------------
TOTAL POOL FINANCING PROGRAMS . . . . . . . . . . . . . . . . . 10,185,334
--------------

RESOURCE RECOVERY 3.2%
Broward County, Florida, Resource Recovery Rev.
1,810,000 North Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . 1,971,633
2,365,000 South Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . 2,576,195
1,000,000 Camden County, New Jersey, PCR, Solid Waste Resource Recovery
Rev., Series B, 7.50%, 12/1/09 . . . . . . . . . . . . . . . . . 992,700
1,500,000 Delaware County, Pennsylvania, Industrial Development Authority
Rev. (Resource Recovery Project), 8.10%, 12/1/13 . . . . . . . . 1,602,030
1,000,000 El Centro, California, Certificates of Participation, 7.00%, 6/1/19 959,170
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Resource Recovery, 7.50%, 1/1/12 . . . . . . . . 1,037,120
2,000,000 Northeast, Maryland, Solid Waste Disposal Authority Rev.
(Montgomery County Resource Recovery Project), Series A,
6.30%, 7/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,876,260

</TABLE>

F-6
<PAGE> 217
Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
RESOURCE RECOVERY--CONTINUED
$ 500,000 Rockdale County, Georgia, Development Authority Rev., Solid Waste
Disposal (Visy Paper, Inc. Project), 7.50%, 1/1/26 . . . . . . . $ 484,710
--------------
TOTAL RESOURCE RECOVERY . . . . . . . . . . . . . . . . . . . . 11,499,818
--------------

SALES TAX REVENUE 1.5%
1,000,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08 961,440
1,000,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08 . . . . . . 931,800
1,000,000 Orange County, Florida, Tourist Development Tax Rev., AMBAC,
6.00%, 10/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 950,860
Round Lake Beach, Illinois, Tax Increment Rev.
900,000 Series 1993, 7.20%, 12/1/04 . . . . . . . . . . . . . . . . . . 855,774
500,000 Series 1993, 7.50%, 12/1/13 . . . . . . . . . . . . . . . . . . 444,000
975,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area), Series A, 10.00%, 8/1/10 . . . . . . . . . . . . . . . . 1,109,102
--------------
TOTAL SALES TAX REVENUE . . . . . . . . . . . . . . . . . . . . 5,252,976
--------------

TRANSPORTATION 10.0%
3,000,000 Atlanta, Georgia, Airport Facilities Rev. (Atlanta International
Airport), Series 1990, 6.25%, 1/1/21 . . . . . . . . . . . . . . 2,826,810
Chicago, Illinois, O'Hare International Airport Rev.
1,000,000 Series A, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 913,590
1,000,000 Series B, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 913,590
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev.,
8.00%, 9/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . 522,285
940,000 Dallas-Fort Worth, Texas, International Airport Facility Rev,
(American Airlines, Inc.), 7.50%, 11/1/25 . . . . . . . . . . . 925,448
2,500,000 Greater Orlando Aviation Authority, Florida, Airport Facilities
Rev., 8.375%, 10/1/16 . . . . . . . . . . . . . . . . . . . . . 2,762,645
500,000 Hawaii State Harbor Capital Improvement Rev., MBIA,
7.00%, 7/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 525,205
2,000,000 Indiana Transportation Finance Authority, Airport Facilities Lease
Rev., Series A, 6.25%, 11/1/16 . . . . . . . . . . . . . . . . . 1,894,660
Kentucky State Turnpike Authority, Toll Road Rev., Refunding
1,000,000 Series A, 5.50%, 7/1/07 . . . . . . . . . . . . . . . . . . . . 948,940
8,000,000 Series 1987-A, 5.00%, 7/1/08 . . . . . . . . . . . . . . . . . . 7,078,800
2,000,000 Los Angeles, California, Regional Airport Facility Improvement
Corp., Lease Rev., 11.25%, 11/1/25 . . . . . . . . . . . . . . . 2,203,760
1,500,000 Metropolitan Transportation Authority, New York Transportation
Facilities, Rev., Series G, MBIA, 5.50%, 7/1/15 . . . . . . . . . 1,343,295
1,000,000 New Hampshire State Turnpike System, Rev., Refunding, Series A,
FGIC, 6.75%, 11/1/11 . . . . . . . . . . . . . . . . . . . . . . 1,045,350
3,200,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16 . . . 3,281,568
1,000,000 Port Authority of New York and New Jersey, Consolidated Board,
95th Series, 6.125%, 7/15/22 . . . . . . . . . . . . . . . . . . 937,910
1,000,000 Philadelphia, Pennsylvania, Industrial Development Authority Rev.
(Parking Garage II Project), 6.125%, 2/15/03 . . . . . . . . . . 973,780
1,750,000 San Joaquin Hills, California, Transcorridor Agency, Toll Road
Rev., 6.75%, 1/1/32 . . . . . . . . . . . . . . . . . . . . . . 1,637,108
1,000,000 St. Louis, Missouri, Parking Facilities Rev., 6.625%, 12/15/21 . . 988,680
1,000,000 Triborough Bridge & Tunnel Authority, New York, Rev.,
7.875%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 1,101,960
Tulsa, Oklahoma, Municipal Airport Trust, Rev.
1,000,000 7.60%, 12/1/30 . . . . . . . . . . . . . . . . . . . . . . . . . 982,910
800,000 American Airlines, 9.50%, 6/1/20 . . . . . . . . . . . . . . . . 841,696

</TABLE>

F-7
<PAGE> 218

Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION--CONTINUED

$ 825,000 Virgin Islands Port Authority, Marine Division Rev.
(Marine Terminal), Series A, 10.13%, 11/1/05 . . . . . . . . . . $ 859,196
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . 35,509,186
--------------

UTILITIES--COMBINATION ELECTRIC, GAS AND/OR WATER 9.5%
Austin, Texas, Utility System Rev.
1,250,000 FGIC, 7.75%, 11/15/06 . . . . . . . . . . . . . . . . . . . . . 1,334,700
2,280,000 Refunding, 6.00%, 5/15/15 . . . . . . . . . . . . . . . . . . . 2,131,686
1,000,000 Series A, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . 1,118,640
2,380,000 Series B, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . 2,608,147
1,000,000 Chicago, Illinois, Gas Supply Rev. (People's Gas Lighting and Coke
Co.), Series A, 8.10%, 5/1/20 . . . . . . . . . . . . . . . . . 1,111,720
1,000,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11 1,071,490
700,000 Citronelle, Alabama, Utilities Board, Water, Sewer & Gas Rev.,
9.00%, 5/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 757,526
10,950,000 Jefferson County, Kentucky, Capital Project Lease Rev., Waste
Water Treatment Plant, Zero Coupon, 8/15/14 . . . . . . . . . . . 2,710,344
750,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16 . . . 835,193
2,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plant
Rev., 5.375%, 9/1/23 . . . . . . . . . . . . . . . . . . . . . . 1,668,520
2,000,000 Massachusetts State Water Resource Authority, Series A,
7.50%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 2,240,700
1,000,000 New Hampshire State Business Finance Authority, Electric Facilities
Rev. (Plymouth Cogeneration Light Power), 7.75%, 6/1/14 . . . . . 975,260
New York City Municipal Water Finance Authority, New York,
Water & Sewer Rev.
1,000,000 Series A, 7.625%, 6/15/16 . . . . . . . . . . . . . . . . . . . 1,086,040
3,000,000 Series A, MBIA, 7.25%, 6/15/15 . . . . . . . . . . . . . . . . . 3,346,230
4,100,000 Series B, 5.00%, 6/15/17 . . . . . . . . . . . . . . . . . . . . 3,288,159
1,000,000 New York State Environment Facilities Corp., Water Facilities Rev.
(Long Island Water Corp.), 10.00%, 10/1/17 . . . . . . . . . . . 1,109,150
Norco, California, Sewer and Water Rev., Refunding,
500,000 6.70%, 10/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 488,465
500,000 7.20%, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 487,570
750,000 Northwest Harris County, Texas, Municipal Utility, Waterworks and
Sewer System Combination Tax, 8.10%, 10/1/15 . . . . . . . . . . 796,117
2,000,000 Orlando, Florida, Utilities Commission, Water & Electric Rev.,
Refunding, 8.625%, 10/1/05; Pre-refunded 10/1/95 . . . . . . . . 2,123,880
Willow Fork, Texas, Drainage District, G.O.
500,000 7.00%, 3/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 502,825
500,000 7.00%, 3/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 502,540
1,000,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17 . . . . . . 1,202,170
--------------
TOTAL UTILITIES--COMBINATION ELECTRIC, GAS AND/OR WATER . . . . . . 33,497,072
--------------

UTILITIES--ELECTRIC 23.8%
2,500,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake
Hydroelectric Project), BIG, 6.25%, 7/1/21 . . . . . . . . . . . . 2,430,150
1,500,000 Florida State Municipal Power Agency, Refunding (St. Lucie
Project), FGIC, 5.00%, 10/1/01 . . . . . . . . . . . . . . . . . 1,444,245
Georgia State Municipal Electric Authority, Power Rev.
850,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 789,582
2,000,000 Series A, 7.875%, 1/1/18; Pre-refunded 1/1/96 . . . . . . . . . . 2,117,060
1,750,000 Series Q, 8.375%, 1/1/16; Pre-refunded 1/1/98 . . . . . . . . . . 1,937,880

</TABLE>

F-8
<PAGE> 219

Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--ELECTRIC--CONTINUED
$ 9,685,000 Grand River Dam Authority, Oklahoma, Rev., Series 1987,
5.00%, 6/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,252,395
Intermountain Power Agency, Utah, Power Supply Authority Rev.
1,850,000 1st Crossover Series, 5.00%, 7/1/16 . . . . . . . . . . . . . . 1,527,212
1,000,000 Series A, 6.00%, 7/1/23 . . . . . . . . . . . . . . . . . . . . 921,820
2,400,000 Series A, 7.75%, 7/1/17 . . . . . . . . . . . . . . . . . . . . 2,571,240
3,650,000 Series B, 7.75%, 7/1/20 . . . . . . . . . . . . . . . . . . . . 3,963,426
2,000,000 Series H, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 1,847,580
2,000,000 Series I, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 1,847,580
1,000,000 Lewis County, Washington, Public Utility District No. 1, Rev.
(Cowlitz Falls Hydroelectric Project), 6.00%, 10/1/24 . . . . . . 913,580
Massachusetts Municipal Wholesale Electric Co., Rev.
2,060,000 Series B, 13.00%, 7/1/18 . . . . . . . . . . . . . . . . . . . . 2,145,305
310,000 Series B, 13.625%, 7/1/17; Pre-refunded 1/1/93 . . . . . . . . . 326,380
750,000 Michigan Public Power Agency, Rev., Refunding (Belle River
Project), 7.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 778,958
1,250,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd
Crossover Series Rev., 8.125%, 1/1/17 . . . . . . . . . . . . . 1,374,988
3,000,000 Muscatine, Iowa, Electric Authority Rev., 5.00%, 1/1/08 . . . . . . 2,628,210
2,500,000 New York State Power Authority, Rev., Series T, 7.375%, 1/1/18 . . 2,636,000
300,000 Northern California, Public Power Agency, Rev., 5.00%, 7/1/09 . . . 254,643
North Carolina Eastern Municipal Power Agency, Power System Rev.
335,000 8.00%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 370,279
2,665,000 8.00%, 1/1/21; Pre-refunded 1/1/98 . . . . . . . . . . . . . . . 2,945,651
7,695,000 Series A, 4.50%, 1/1/24 . . . . . . . . . . . . . . . . . . . . 6,076,972
North Carolina Municipal Power Agency No. 1, Catawba Electric Rev.
1,000,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 909,550
2,850,000 7.875%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 3,139,161
1,070,000 Piedmont Municipal Power Agency, South Carolina, Rev.,
5.00%, 1/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . 828,587
5,290,000 Salt River Project, Arizona Agricultural Improvement & Power
District Electric System Rev., 7.875%, 1/1/28 . . . . . . . . . . 5,826,723
Sam Rayburn, Texas, Municipal Power Agency, Refunding
1,000,000 Series A, 6.25%, 10/1/17 . . . . . . . . . . . . . . . . . . . . 870,840
1,000,000 Series A, 6.75%, 10/1/14 . . . . . . . . . . . . . . . . . . . . 949,640
1,000,000 South Carolina, Public Service Authority, 7.875%, 7/1/21;
Pre-refunded 1/1/96 . . . . . . . . . . . . . . . . . . . . . . 1,053,297
Southern Minnesota Municipal Power Agency, Power Supply
System Rev.
2,000,000 Series A, 5.00%, 1/1/16 . . . . . . . . . . . . . . . . . . . . 1,654,780
1,250,000 Series C, 5.00%, 1/1/17 . . . . . . . . . . . . . . . . . . . . 1,029,625
8,565,000 Texas Municipal Power Agency Rev., 5.50%, 9/1/13 . . . . . . . . . 7,621,908
Washington State Public Power Supply System Rev.
1,250,000 Nuclear Project No. 1, Series B, 7.125%, 7/1/16 . . . . . . . . . 1,312,438
445,000 Nuclear Project No. 1, Series D, 15.00%, 7/1/17 . . . . . . . . . 534,574
2,500,000 Nuclear Project No. 2, Series B, 7.00%, 7/1/12 . . . . . . . . . 2,596,400
1,000,000 Nuclear Project No. 2, Series B, 7.375%, 7/1/12 . . . . . . . . . 1,117,760
2,000,000 Nuclear Project No. 2, Series 1990-C, 7.625%, 7/1/10 . . . . . . 2,264,820
3,000,000 Nuclear Project No. 3, MBIA 5.60%, 7/1/17 . . . . . . . . . . . 2,626,560
--------------
TOTAL UTILITIES--ELECTRIC . . . . . . . . . . . . . . . . . . 84,437,799
--------------
TOTAL MUNICIPAL BONDS (COST $321,111,687) . . . . . . . . . . . 336,480,439
--------------

</TABLE>

F-9
<PAGE> 220

Investment Portfolio--continued

<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 3.7%
$ 100,000 Arkansas State Development Finance Authority, 3.65%, 12/1/15 . . . $ 100,000
California Statewide Communities Development Corp. Rev., Series A
600,000 3.50%, 6/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
1,000,000 3.50%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
400,000 Cuyahoga County, Ohio, IDR (Allen Group, Inc. Project),
3.50%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
500,000 Dade County, Florida, Industrial Development Authority Rev.,
(Dynacolor Graphic Project), 4.00%, 6/1/99 . . . . . . . . . . . 500,000
500,000 Delaware County, Pennsylvania, Industrial Development
Authority Rev. (Ram Motors, Inc.), 4.20%, 9/1/10 . . . . . . . . 500,000
300,000 Fort Wayne, Indiana, Hospital Authority, Series C, 3.90%, 1/1/16 . 300,000
900,000 Illinois Development Finance Authority Rev., 3.70%, 4/1/07 . . . . 900,000
100,000 Illinois Health Facilities Authority Rev., 3.70%, 1/1/18 . . . . . 100,000
800,000 Indiana Health Facilities Financing Authority Rev., Capital Access
Designated Pool Program, 3.70%, 12/1/02 . . . . . . . . . . . . 800,000
100,000 Maricopa County, Arizona, Industrial Development Authority,
Hospital Facility Rev. (Samaritan Health Services Hospital),
Series B-2, 3.60%, 12/1/08 . . . . . . . . . . . . . . . . . . . 100,000
New York City, New York, G.O.
500,000 3.70%, 8/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
700,000 3.70%, 8/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
400,000 3.70%, 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
1,550,000 New York, New York, Subseries A-7, G.O., 3.95%, 8/1/20 . . . . . . 1,550,000
100,000 New York State Job Development Authority, 3.60%, 3/1/07 . . . . . . 100,000
500,000 Ossian, Indiana, Economic Development Rev. (Walbro Auto
Corporation Project), 3.80%, 12/1/23 . . . . . . . . . . . . . . 500,000
3,100,000 Panola County, Mississippi (Moog Automotive, Inc. Project),
3.85%, 9/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 3,100,000
400,000 Pennsylvania State Higher Educational Facility Authority Rev.,
Series B, 3.75%, 7/1/18 . . . . . . . . . . . . . . . . . . . . 400,000
300,000 Sacramento County, California, Multi-family Housing Rev., Series E,
3.75%, 9/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
100,000 Uinta County, Wyoming, PCR, Refunding (Chevron U.S.A., Inc.
Project), 3.50%, 12/1/22 . . . . . . . . . . . . . . . . . . . . 100,000
--------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $12,950,000) . . . . . . . . . . . . . . . . . . . . . . 12,950,000
--------------
TOTAL INVESTMENTS (Cost $334,061,687) 98.6% . . . . . . . . . . . . 349,430,439
Other assets and liabilities, net 1.4% . . . . . . . . . . . . . . 4,826,629
--------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,257,068
==============
</TABLE>

<TABLE>
<S> <C>
Insurers:
+Interest rates are as of September 30, 1994. AMBAC -- AMBAC Indemnity Corp.
FHA -- Federal Housing Administration BIG -- Bond Investors Guaranty Insurance Co.
G.O. -- General obligation bond FGIC -- Financial Guaranty Insurance Corp.
Rev. -- Revenue bond FSA -- Financial Security Assurance Inc.
IDR -- Industrial Revenue Bond MBIA -- Municipal Bond Investor's Assurance Corp.
</TABLE>

See Notes to Financial Statements.

F-10
<PAGE> 221
Statement of Assets and Liabilities
September 30, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $334,061,687) . . . . . . . . . . . $ 349,430,439
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,191
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 6,945,043
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . 677,921
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . 255,397
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,370
---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,316,361
---------------

LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . 1,836,732
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,716
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 220,415
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,623
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,807
---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,059,293
---------------

NET ASSETS, equivalent to $9.82 per share for Class A shares and
$9.83 per share for Class B and Class C shares . . . . . . . . . . $ 354,257,068
===============

NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 31,463,264 Class A, 3,791,614 Class B and
814,200 Class C shares outstanding . . . . . . . . . . . . . . . . . $ 360,691
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,124,331
Accumulated net realized loss on securities . . . . . . . . . . . . . . (9,469,519)
Net unrealized appreciation of investments . . . . . . . . . . . . . . 15,368,752
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (1,127,187)
---------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . $ 354,257,068
===============
</TABLE>

See Notes to Financial Statements.

F-11
<PAGE> 222
Statement of Operations
Year Ended September 30, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,134,366
---------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,804,381
Service fees--Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 686,403
Distribution and service fees--Class B . . . . . . . . . . . . . . . . . 311,708
Distribution and service fees--Class C . . . . . . . . . . . . . . . . . 54,489
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . 407,704
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,272
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . 109,827
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 64,148
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,177
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,983
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . 15,386
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,381
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,628,859
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 20,505,507
---------------

REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . (2,005,680)
Net unrealized depreciation of securities during the year . . . . . . . . (23,803,245)
---------------
Net realized and unrealized loss on securities . . . . . . . . . . . . (25,808,925)
---------------

Decrease in net assets resulting from operations . . . . . . . . . . . $ (5,303,418)
===============
</TABLE>

See Notes to Financial Statements.

F-12
<PAGE> 223

Statement of Changes in Net Assets

<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------------------
1994 1993
---------------------- -----------------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . $ 355,682,180 $ 292,305,914
--------------------- -----------------------
Operations
Net investment income . . . . . . . . . . . . . . . . 20,505,507 18,722,991
Net realized loss on securities . . . . . . . . . . . (2,005,680) (61,760)
Net unrealized appreciation (depreciation) of
securities during the year . . . . . . . . . . . . . (23,803,245) 18,032,935
--------------------- -----------------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . (5,303,418) 36,694,166
--------------------- -----------------------
Dividends and distributions to shareholders
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . (18,227,557) (18,216,098)
Class B . . . . . . . . . . . . . . . . . . . . . . . (1,534,981) (490,357)
Class C . . . . . . . . . . . . . . . . . . . . . . . (276,302) (275)
--------------------- -----------------------
(20,038,840) (18,706,730)
--------------------- -----------------------
In excess of book-basis net investment
income (Note 1D)
Class A . . . . . . . . . . . . . . . . . . . . . . . -- (252,018)
Class B . . . . . . . . . . . . . . . . . . . . . . . -- (55,026)
Class C . . . . . . . . . . . . . . . . . . . . . . . -- (4,939)
--------------------- -----------------------
-- (311,983)
--------------------- -----------------------
Total dividends and distributions to shareholders . . (20,038,840) (19,018,713)
--------------------- -----------------------
Net equalization credits (debits) (Note 1F) . . . . . . (20,289) 81,721
--------------------- -----------------------
Capital transactions
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . 49,766,921 54,755,685
Class B . . . . . . . . . . . . . . . . . . . . . . . 25,694,674 22,802,935
Class C . . . . . . . . . . . . . . . . . . . . . . . 9,071,276 1,280,053
--------------------- -----------------------
84,532,871 78,838,673
--------------------- -----------------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . 10,485,166 10,718,588
Class B . . . . . . . . . . . . . . . . . . . . . . . 958,506 333,342
Class C . . . . . . . . . . . . . . . . . . . . . . . 183,364 3,626
--------------------- -----------------------
11,627,036 11,055,556
--------------------- -----------------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . (60,814,520) (42,583,199)
Class B . . . . . . . . . . . . . . . . . . . . . . . (9,282,719) (1,691,938)
Class C . . . . . . . . . . . . . . . . . . . . . . . (2,125,233) --
--------------------- -----------------------
(72,222,472) (44,275,137)
--------------------- -----------------------
Increase in net assets resulting from capital
transactions . . . . . . . . . . . . . . . . . . . . 23,937,435 45,619,092
--------------------- -----------------------
Increase (decrease) in Net Assets . . . . . . . . . . . (1,425,112) 63,376,266
--------------------- -----------------------
NET ASSETS, end of year . . . . . . . . . . . . . . . $ 354,257,068 $ 355,682,180
===================== =======================
</TABLE>

See Notes to Financial Statements.

F-13
<PAGE> 224
Notes to Financial Statements

Note 1-Significant Accounting Policies
American Capital Municipal Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.

A. Investment Valuations
Investments in municipal bonds are valued at the most recently quoted bid
prices or at bid prices based on a matrix system (which considers such
factors as security prices, yields, maturities and ratings) furnished by
dealers and an independent pricing service. Municipal variable rate
demand notes are valued at par; periodic rate changes reflect current
market conditions.

Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are
valued based on market quotations until the remaining days to maturity
becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost.

Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity.
The insurance reduces financial risk but not market risk of the security.

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. At September 30, 1994, debt
securities rated below investment grade and comparable unrated securities
represented approximately 19% of the investment portfolio.

B. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of net realized capital gains will be
made until tax basis capital loss carryforwards expire or are offset by
net realized capital gains.

C. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Interest income is accrued daily.

D. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.

E. Debt Discount and Premium
The Fund accounts for debt discounts and premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.

F. Equalization
At September 30, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is a
practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the

F-14
<PAGE> 225

amount of the undistributed net investment income, is charged or credited
to undistributed net investment income.

The balance of equalization included in undistributed net investment
income at the date of change, which was approximately $2.8 million, was
reclassified to capital surplus. Such reclassification had no effect on
net assets, results of operations, or net asset value per share of the
Fund.

G. When-Issued Securities
Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the date of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.

Note 2-Management Fees and Other Transactions with Affiliates
American Capital Asset Management, Inc. (the "Adviser") serves as investment
manager of the Fund. Management fees are paid monthly, based on the rate of
.50% per annum of the average daily net assets of the Fund.

Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended September 30, 1994, these charges included $10,303 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.

American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent. These services are provided at
cost plus a profit. For the year ended September 30, 1994, the fees for such
services were $334,826.

The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retailer Dealer"), both
affiliates of the Adviser, received $118,647 and $105,378, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.

Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to reimburse the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional fee of up to .75% per annum
of their average daily net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $1.6 million and $130,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.

Legal fees of $11,680 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.

Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.

Note 3-Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $45,734,980 and $21,355,006,
respectively.

For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was

F-15
<PAGE> 226
$334,094,902. Net unrealized appreciation of investments aggregated
$15,335,537, gross unrealized appreciation of investments aggregated
$19,847,942, and gross unrealized depreciation of investments aggregated
$4,512,405.

The net realized capital loss carryforward for federal income tax purposes of
approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.

Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,320 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $490. During the year, such fees aggregated $13,494.

The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$25,830. The deferred fees have been credited with interest at a rate equal to
that earned by the Fund on its short-term investments.

Note 5-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.

The Fund has 200 million of each class of shares of $.01 par value of capital
stock authorized. Transactions in shares of capital stock were as follows:

<TABLE>
<CAPTION>
Year Ended September 30
---------------------------
1994 1993
------------ -----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . 4,883,618 5,402,298
Class B . . . . . . . . . . . . . . . . . . . 2,518,998 2,225,454
Class C . . . . . . . . . . . . . . . . . . . 884,668 121,207
----------- -----------
8,287,284 7,748,959
----------- -----------
Shares issued for dividends and distributions
reinvested
Class A . . . . . . . . . . . . . . . . . . . 1,032,887 1,047,735
Class B . . . . . . . . . . . . . . . . . . . 94,773 32,208
Class C . . . . . . . . . . . . . . . . . . . 18,175 344
----------- -----------
1,145,835 1,080,287
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . (6,004,203) (4,190,132)
Class B . . . . . . . . . . . . . . . . . . . (915,403) (164,467)
Class C . . . . . . . . . . . . . . . . . . . (210,194) -
----------- -----------
(7,129,800) (4,354,599)
----------- -----------
Increase in shares outstanding . . . . . . 2,303,319 4,474,647
=========== ===========
</TABLE>

Note 6-Subsequent Dividends
The Board of Directors of the Fund declared a dividend of $.0485 per share for
Class A shares, $.0415 per share for Class B shares and $.0415 for Class C
shares from net investment income, payable November 15, 1994 to shareholders of
record on October 31, 1994.

F-16

<PAGE> 227
Financial Highlights

Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

<TABLE>
<CAPTION>
Class A(1)
---------------------------------------------
Year Ended September 30
---------------------------------------------
1994 1993(2) 1992 1991 1990
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period . . $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . .68 .69 .705 .71 .72
Expenses . . . . . . . . . . . . . . . . (.09) (.094) (.09) (.08) (.08)
------- ------- ------ ------ ------
Net investment income . . . . . . . . . . .59 .596 .615 .63 .64
Net realized and unrealized gains or
losses on securities . . . . . . . . . . (.7255) .558 .349 .5198 (.195)
------- ------- ------ ------ ------
Total from investment operations . . . . (.1355) 1.154 .964 1.1498 .445
------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . . (.5745) (.596) (.624) (.6398) (.645)
Distributions in excess of book-basis
net investment income(3) . . . . . . . . -- (.008) -- -- --
------- ------- ------ ------ ------
Total distributions . . . . . . . . . . . (.5745) (.604) (.624) (.6398) (.645)
------- ------- ------ ------ ------
Net asset value, end of period . . . . . $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13
======= ======= ====== ====== ======
TOTAL RETURN(4) . . . . . . . . . . . . (1.33%) 11.91% 10.31% 12.98% 4.90%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . $ 309.0 $ 332.3 $292.3 $266.9 $237.4
Average net assets (millions) . . . . . . $ 324.2 $ 313.0 $278.6 $253.2 $241.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . .93% .91% 90% .89% .86%
Net investment income . . . . . . . . . 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate . . . . . . . . . 6% 3% 6% 10% 17%
</TABLE>

(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1
stock split effected July 26, 1991. Additionally, in 1991, the Fund
adopted for financial reporting purposes a method of accounting for
debt discounts and premiums which is the same as is used for federal
income tax reporting. The effect of the change, on a pro forma basis,
would have been to increase net investment income with a corresponding
decrease in net realized and unrealized gains or losses in the amount
of $.01 for 1990. Similarly, the ratio of net investment income to
average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. Prior year financial information was not restated.
(4) Total return does not consider the effect of sales charges.

See Notes to Financial Statements.

F-17
<PAGE> 228
Financial Highlights, continued

Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

<TABLE>
<CAPTION>
Class B(1) Class C(2)
------------------------ ----------------------------

Year August 30,
Year Ended September 30, Ended 1993(5) through
------------------------ September 30, September 30,
1994 1993(2) 1994 1993
------ -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . $ 10.53 $ 9.98 $10.54 $10.53
------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . .68 .685 .69 .05
Expenses . . . . . . . . . . . . . . . (.17) (.175) (.18) (.015)
------- ------ ------ ------
Net investment income . . . . . . . . . .51 .51 .51 .035
Net realized and unrealized gains or
losses on securities . . . . . . . . . (.7195) .564 (.7295) .061
------- ------ ------ ------
Total from investment operations . . . (.2095) 1.074 (.2195) .096
------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . (.4905) (.501) (.4905) (.007)
------- ------ ------ ------
Distributions in excess of book-basis net
investment income(3) . . . . . . . . -- (.023) -- (.079)
Total distributions . . . . . . . . . . (.4905) (.524) (.4905) (.086)
------- ------ ------ ------
Net asset value, end of period . . . . $ 9.83 $10.53 $ 9.83 $10.54
======= ====== ====== ======
TOTAL RETURN(4) . . . . . . . . . . . (2.13%) 11.15% (2.03%) .91%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . $ 37.2 $ 22.1 $ 8.0 $ 1.3
Average net assets (millions) . . . . . $ 31.2 $ 10.0 $ 5.4 $ 0.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . 1.72% 1.71% 1.72% 1.69%(6)
Net investment income . . . . . . . . . 5.00% 4.96% 5.03% 4.25%(6)
Portfolio turnover rate . . . . . . . . 6% 3% 6% 3%

</TABLE>

(1) Sales of Class B commenced September 29, 1992 at a net asset value of
$10.00 per share. At September 30, 1992, there were 50 Class B shares
outstanding with a per share net asset value of $9.98. The decrease in
net asset value was due principally to a dividend of $.052 per share.
Other financial highlights for Class B shares for this short period
(September 29, 1992 to September 30, 1992) are not presented as they
are not meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales charges.
(5) Commencement of offering of sales.
(6) Annualized

See Notes to Financial Statements.

F-18
<PAGE> 229

Report of Independent Accountants

To the Shareholders and Board of Directors of
American Capital Municipal Bond Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 American Capital Municipal Bond
Fund, Inc. at September 30, 1994, and the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (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 September 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

/s/ PRICE WATERHOUSE LLP

Houston, Texas
November 11, 1994

F-19
<PAGE> 230

PORTFOLIO OF INVESTMENTS

March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 95.6%
EDUCATION 4.6%
$1,000 Broward County, Florida,
Educational Facilities Authority
Rev. (Nova University Project),
G.O............................... 8.500% 04/01/10 $ 1,143,070
625 Clear Creek, Texas, Independent
School District, G.O.............. 6.250 02/01/11 660,175
1,000 Cook County, Illinois, Community
College, District #508,
Certificates of Participation,
FGIC.............................. 8.750 01/01/07 1,252,580
1,150 Florida State Board of Education,
Capital Outlay, Series A.......... 7.250 06/01/23 1,266,722
1,000 Illinois Educational Facilities
Authority Rev., G.O.
Lake First College, FSA........... 6.750 10/01/21 1,041,270
1,000 Illinois Educational Facilities
Authority Rev., G.O., Northwestern
University, Series 1985........... 6.900 12/01/21 1,113,650
2,000 New Hampshire Higher Education &
Daniel Webster College Issue,
G.O............................... 7.625 07/01/16 1,960,540
1,000 New York City, New York,
Industrial Development Agency,
Civil Facility Rev. (Marymount
Manhattan College Project), G.O... 7.000 07/01/23 1,009,310
1,000 New York State Dormitory Authority
Rev. City University (Prerefunded
@ 7/1/97)......................... 8.125 07/01/17 1,091,920
3,250 New York State Dormitory Authority
Rev., State University Education
Facility, Series 1990-A........... 7.700 05/15/12 3,705,130
500 Pennsylvania State Higher
Educational Facilities Authority
Rev. Hahnemann University Project,
MBIA, G.O......................... 7.200 07/01/19 533,815
250 Pennsylvania State Higher
Educational Facilities Authority
Rev., Pennsylvania Medical
College, Series A, G.O............ 7.500 03/01/14 257,635
500 University of the Virgin Islands,
Series A.......................... 7.500 10/01/09 521,130
500 University of the Virgin Islands,
Series A.......................... 7.650 10/01/14 518,185
-----------
TOTAL EDUCATION............... 16,075,132
-----------
HEALTH CARE 1.7%
500 Colorado Health Facilities
Authority Rev. (Cleo Wallace
Center Project)................... 7.000 08/01/15 502,435
1,500 Colorado Health Facilities
Authority Rev. (PSL Healthcare
System Project), Series 1991-A,
FSA............................... 6.250 02/15/21 1,518,435
1,000 Cuyahoga County, Ohio, Health Care
Facilities Rev. (Jenning Hall).... 7.300 11/15/23 947,300
1,000 Lebanon County, Pennsylvania,
Health Facilities Authority Health
Center Rev. (UTD Church of Christ
Homes Project).................... 6.750 10/01/10 1,004,600
700 Massachusetts State, Industrial
Finance Rev....................... 7.100 11/15/18 672,875
230 Pina County, Arizona, Industrial
Development Authority (Casa Grande
Regional Medical Center Project).. 9.000 12/01/13 238,425
1,000 St. Petersburg, Florida, Health
Facilities Authority Rev.
(Allegany Health Systems)......... 7.750 12/01/15 1,130,330
-----------
TOTAL HEALTH CARE............. 6,014,400
-----------
</TABLE>

See Notes to Financial Statements.

F-20

<PAGE> 231

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOSPITAL 15.5%
$ 500 Bexar County, Texas, Health
Facilities Development Rev.
(St. Lukes Lutheran Hospital
Project).......................... 7.000% 05/01/21 $ 509,830
1,500 Bexar County, Texas, Health
Facilities Development Rev.
(St. Lukes Lutheran Hospital
Project).......................... 7.900 05/01/18 1,762,245
1,000 Boston Massachusetts, Rev. (Boston
City Hospital), FHA............... 7.625 02/15/21 1,133,810
500 Boulder County, Colorado,
Industrial Development Rev.
(Boulder Medical Center Project).. 8.875 01/01/17 518,565
1,000 Charlotte County, Florida,
Hospital Authority Rev. (Bon
Secours Health System)............ 8.250 08/15/18 1,120,860
500 Clarksville, Tennessee, Hospital
Rev., Refunding & Improvement
(Clarskville Memorial Project).... 6.250 07/01/13 477,960
995 Clearfield, Pennsylvania, Hospital
Authority Rev. (Clearfield
Hospital Project), Series-94...... 6.875 06/01/16 995,587
800 Colorado Health Facilities
Authority Rev. (Rocky Mountain
Adventist)........................ 6.625 02/01/13 779,520
2,000 Delaware State Economic
Development Authority Rev.
(Osteopathic Hospital Association
of Delaware), Series A............ 6.900 01/01/18 1,835,120
500 Erie County, Pennsylvania,
Hospital Authority Rev. (Metro
Health Center), Series 1992....... 7.250 07/01/12 514,150
1,000 Harris County, Texas, Health
Facilities Development Corp.
(Memorial Hospital System
Project).......................... 7.125 06/01/15 1,057,750
1,000 Illinois Health Facilities
Authority Rev. Elmhurst Memorial
Hospital, Series 87-A............. 8.125 01/01/13 1,073,910
1,000 Illinois Health Facilities
Authority Rev. Improvement Swedish
Covenant, Series A................ 6.300 08/01/13 933,080
2,000 Illinois Health Facilities
Authority Rev. Lutheran Health
System, Series B, MBIA............ 6.000 04/01/18 1,922,940
1,000 Illinois Health Facilities
Authority Rev. Masonic Medical
Center, Series 1989-B............. 7.700 10/01/19 1,124,910
1,000 Illinois Health Facilities
Authority Rev., Memorial Hospital. 7.250 05/01/22 1,005,850
500 Illinois Health Facilities
Authority Rev. Mercy Center For
Health Care Services.............. 6.625 10/01/12 500,350
1,000 Illinois Health Facilities
Authority Rev., Northwestern
Memorial Hospital................. 6.750 08/15/11 1,031,460
1,000 Indiana Health Facilities,
Financing Hospital Authority Rev.
(Community Hospital of Indiana),
Series-H, MBIA.................... 6.850 07/01/22 1,044,390
1,160 Jefferson County, Texas, Health
Facility Authority Rev. (Baptist
Health Care Project).............. 8.300 10/01/14 1,263,426
845 Lebanon County, Pennsylvania, Good
Samaritan Hospital Authority Rev.
(Good Samaritan Hospital Project). 5.850 11/15/07 772,279
1,000 Marion County, Indiana, Hospital
Authority, Facility Rev.,
(Methodist Hospital of Indiana)... 6.500 09/01/13 1,006,840
1,000 McKeesport, Pennsylvania, Hospital
Authority Rev. (McKeesport
Hospital Project)................. 6.500 07/01/08 979,910
</TABLE>

See Notes to Financial Statements.

F-21

<PAGE> 232

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,000 Michigan State Hospital Finance
Authority Rev. St. Joseph Hospital
Corp., Series A.................... 8.125% 07/01/05 $1,045,100
1,000 Michigan State Hospital Finance
Authority Rev., Refunding, Genesys
Health System, Series A............ 7.500 10/01/07 1,010,500
1,000 Missouri State Health & Educational
Facilities Authority (Heartland
Health Systems Project)............ 8.125 10/01/10 1,112,180
1,000 New Hampshire Health & Higher
Educational Facility Authority
Rev................................ 7.500 06/01/05 1,042,440
2,500 New Hampshire Health & Higher
Educational Facility Authority Rev.
(Wentworth Douglass Hospital)...... 8.500 01/01/15 2,700,525
1,000 New York State Medical Care
Facilities Finance Agency Rev.
Columbia Presbyterian Hospital,
Series A, FHA...................... 8.000 02/15/25 1,092,980
1,960 New York State Medical Care
Facilities Finance Agency Rev.,
Montefiore Medical Center.......... 7.250 02/15/09 2,104,080
1,000 New York State Medical Care
Facilities Finance Agency Rev.,
North General Hospital, Series 89-
A.................................. 7.400 02/15/19 1,034,670
1,000 Newton, Kansas, Hospital Rev.,
Newton Health Care Corp., Series-A. 7.750 11/15/24 1,018,260
695 Philadelphia, Pennsylvania,
Hospital & Higher Education
Facilities Authority Rev.
(Roxborough Memorial Hospital),
Series 2........................... 7.250 03/01/24 649,040
1,500 Richardson, Texas, Hospital
Authority, Refunding & Improvement
Rev. (Richardson Medical Center)... 6.750 12/01/23 1,507,740
1,000 Royal Oak, Michigan, Hospital
Finance Authority, Rev. (William
Beaumont Hospital), Series D....... 6.750 01/01/20 1,027,130
1,750 Rusk County, Texas, Health
Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital
Project)........................... 7.750 04/01/13 1,801,450
500 Salem, Oregon, Hospitals Facilities
Authority Rev...................... 7.500 12/01/24 507,295
1,000 Scranton-Lackawanna, Pennsylvania,
Health & Welfare Authority Rev.
(Moses Taylor Hospital Project),
Series A........................... 7.375 07/15/08 1,012,830
500 Scranton-Lackawanna, Pennsylvania,
Health & Welfare Authority Rev.
(Moses Taylor Hospital Project),
Series B........................... 8.250 07/01/09 536,310
1,000 South Dakota State Health &
Educational Facilities Authority
Rev. (Sioux Valley Hospital)....... 7.250 04/01/20 1,003,450
2,000 South Dakota State Health &
Educational Facilities Authority
Rev. (Sioux Valley Hospital)....... 7.625 11/01/13 2,221,598
1,500 St. Joseph County, Indiana,
Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA. 6.250 08/15/22 1,504,245
1,000 Tyler, Texas, Health Facilities
Development Corp. (East Texas
Medical Center Regional Health),
Series B........................... 6.750 11/01/25 964,310
1,000 Washington County, Pennsylvania,
Hospital Authority................. 7.350 06/01/13 952,800
1,500 Wells County, Indiana, Hospital
Authority Rev., Refunding (Caylor-
Nickel Medical Center, Inc.)....... 8.500 04/15/03 1,529,550
1,000 Weslaco, Texas, Health Facilities
Development (Knapp Medical Center
Project), Series-A, CONN........... 5.250 06/01/16 885,540
</TABLE>

See Notes to Financial Statements.

F-22

<PAGE> 233

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,000 West Virginia State, Hospital
Finance Authority, Refunding &
Improvement (Fairmont General
Hospital), Series A................. 6.750% 03/01/14 $ 969,850
2,000 Wisconsin State Health & Educational
Facilities Rev. (Wheaton Franciscan
Services Inc.)...................... 8.200 08/15/18 2,238,660
-----------
TOTAL HOSPITAL.................. 54,837,275
-----------
HOUSING 5.8%
1,545 Arapahoe County, Colorado, Single
Family Mtg. Rev..................... 8.375 08/01/19 1,618,094
1,000 Austin, Texas, Housing Finance
Corp., Multi-family Rev. (Stassey
Woods Apartment Project)............ 6.750 04/01/19 979,090
410 Bexar County, Texas, Housing Finance
Corp., Rev.......................... 8.200 04/01/22 431,550
420 Bexar County, Texas, Housing Finance
Corp., Rev., Series B............... 9.250 04/01/16 440,534
135 El Paso, Texas, Property Finance
Authority Inc., Single Family Mtg.
Rev., Series A...................... 8.700 12/01/18 145,064
645 Fort Worth, Texas, Housing Finance
Corp., Home Mtg. Rev. Refunding..... 8.500 10/01/11 702,605
735 Harris County, Texas, Housing
Financing Corp., Single Family Mtg.
Rev., Series 1983-A................. 10.125 07/15/03 737,742
670 Houston, Texas, Housing Finance
Corp., Single Family Mgt. Rev....... 10.000 09/15/14 689,309
855 Houston, Texas, Housing Finance
Corp., Single Family Mgt. Rev.,
Series A, FSA....................... 5.950 12/01/10 842,089
1,000 Maricopa County, Arizona, IDR,
Multi-Family Rev., Refunding (Laguna
Point Apartments Project)........... 6.500 07/01/09 1,016,630
1,000 Massachusetts State Housing Finance
Agency, Multi-family Housing
Authority, Series A................. 8.750 08/01/08 1,051,250
550 Massachusetts State Housing Finance
Agency, Residential Housing
Authority, Series A................. 8.400 08/01/21 578,875
910 Minnesota State Housing Finance
Agency, Single Family Mtg. Rev...... 6.750 01/01/26 907,725
1,000 Montgomery County, Pennsylvania,
Industrial Development Authority,
Retirement Community Rev. (GDL Farms
Corp. Project)...................... 6.300 01/01/13 907,690
1,000 Mount Clemens, Michigan, Housing
Corp., Multi-family Rev., Refunding,
Series A............................ 6.600 06/01/13 1,030,480
1,000 North St. Paul, Minnesota, Multi-
family Refunding Housing Rev.
(Cottages North St. Paul)........... 9.250 02/01/22 1,086,250
1,000 Pima County, Arizona, IDR, Single
Family Mtg. Rev..................... 6.625 11/01/14 1,018,000
1,155 Ridgeland, Mississippi, Urban
Renewal (The Orchard, Ltd. Project),
Series A............................ 7.750 12/01/15 1,130,410
2,500 St. Paul, Minnesota Port Authority,
Housing & Redevelopment Authority,
Multi-family Housing Rev., Series J. 9.500 12/01/11 2,396,875
1,000 South Dakota State Housing
Development Authority, Homeowner
Mtg., Series D-1.................... 6.850 05/01/26 1,017,500
1,450 Texas State Veterans Housing
Assistance, MBIA, G.O.,............. 6.800 12/01/23 1,521,616
</TABLE>

See Notes to Financial Statements.

F-23

<PAGE> 234

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 245 Travis County, Texas, Housing Finance
Corp., Single Family Mtg. Rev........ 8.200% 04/01/22 $ 253,134
-----------
TOTAL HOUSING.................... 20,502,512
-----------
LIFE CARE 2.7%
500 Atlantic Beach, Florida, Rev.,
Refunding & Improvement Fleet Landing
Project, Series A.................... 7.500 10/01/02 506,270
500 Atlantic Beach, Florida, Rev.,
Refunding & Improvement Fleet Landing
Project, Series A.................... 7.875 10/01/08 514,430
2,000 Butler County, Pennsylvania,
Industrial Development Authority
Rev., 1st Mgt. Rev. (Sherwood Oaks
Project), Series A................... 8.750 06/01/16 2,099,300
500 Chartiers Valley, Pennsylvania,
Industrial & Commercial Development
Authority (Asbury Health Center
Project)............................. 7.250 12/01/11 503,840
500 Chartiers Valley, Pennsylvania,
Industrial & Commercial Development
Authority (Asbury Health Center
Project)............................. 7.400 12/01/15 494,195
950 Hanover Park, Illinois, 1st Mgt. Rev.
Windsor Park Manor Project........... 9.250 12/01/07 1,029,733
1,000 Massachusetts State Industrial
Finance Agency Rev. 1st Mtg. Reeds
Landing Project...................... 8.625 10/01/23 1,012,350
1,000 Massachusetts State Industrial
Finance Agency, Greater Lynn Mental
Health Association Project........... 8.800 06/01/14 1,105,680
500 Scottsdale, Arizona, Industrial
Development Authority, Refunding, 1st
Mtg. Westminter Village, Series A.... 8.250 06/01/15 528,275
500 Tempe, Arizona, Industrial
Development Authority Rev. Friendship
Village Temple, Series-A............. 6.750 12/01/13 487,020
1,000 Wisconsin State Health & Educational
Facilities Authority Rev., (United
Lutheran Program for the Aging Inc.
Project)............................. 8.500 03/01/19 1,058,750
-----------
TOTAL LIFE CARE.................. 9,339,843
-----------
MISCELLANEOUS 7.6%
500 Berry Creek Metropolitan District,
Colorado, G.O., Refunding and
Improvement.......................... 8.250 12/01/11 534,280
2,000 Compton, California, Certificates of
Participation, Refunding, Series B... 7.500 08/01/15 2,119,320
1,000 Detroit, Michigan, Tax Increment
Bonds (Development Area No. 1
Project) Series 89-A................. 7.600 07/01/10 1,047,270
2,500 District of Columbia Rev. (National
Public Radio), Series A.............. 7.700 01/01/23 2,621,775
1,000 Dove Valley Metropolitan District,
Arapahoe County, Colorado, G.O....... 9.500 12/01/08 1,048,290
1,000 Du Page County, Illinois (Stormwater
Project)............................. 6.550 01/01/21 1,091,860
500 Fort Bend County, Texas, Levee
Improvement District No. 11, G.O..... 8.700 03/01/09 547,735
440 Fort Bend County, Texas, Levee
Improvement District No. 11, G.O..... 8.700 03/01/10 482,007
1,000 Lake Charles, Louisiana, Harbor &
Terminal Facilities Rev. (Trunkline
Liquified Natural Gas Co. Project)... 7.750 08/15/22 1,074,380
1,000 Lehigh County, Pennsylvania, IDR
(Allentown Interstate Motel.......... 8.000 08/01/12 1,022,720
</TABLE>

See Notes to Financial Statements.

F-24

<PAGE> 235

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 630 Mountain Village Metropolitan
District, San Miguel County,
Colorado, Refunding, Series 1992,
G.O................................. 7.950% 12/01/03 $ 652,182
500 Mountain Village Metropolitan
District, San Miguel County,
Colorado, Refunding, Series 1992,
G.O................................. 8.100 12/01/11 525,605
145 Pocahontas, Iowa, Industrial
Development Rev. (Navistar
International Harvester Co.)........ 10.250 10/01/00 150,986
1,000 Port of New Orleans, Louisiana, IDR,
Refunding (Avondale Industries,
Inc.)............................... 8.250 06/01/04 1,063,900
2,330 Somerset County, Pennsylvania,
General Authority, Commonwealth
Lease Rev., FGIC.................... 6.250 10/15/11 2,474,693
1,705 St. Charles, Illinois, Industrial
Development Rev. (Tri-City Center
Project)............................ 7.500 11/01/13 1,707,302
500 Texas General Services, Community
Partner Interests, (Office Building
and Land Acquisition Project)....... 7.000 08/01/19 513,320
500 Texas General Services, Community
Partner Interests, (Office Building
and Land Acquisition Project)....... 7.000 08/01/24 513,320
1,000 Texas State, Refunding
(Superconducting Project), Series C,
G.O. ............................... 5.500 04/01/20 922,340
1,000 Utah State Building Ownership
Authority Lease Rev. (Dept. of
Employment Security)................ 7.800 08/15/10 1,090,020
1,300 Utah State Building Ownership
Authority Lease Rev. (Dept. of
Employment Security)................ 7.800 08/15/11 1,417,026
1,000 Valdez, Alaska, Marine Term Rev.,
Refunding (Sohio Pipeline).......... 7.125 12/01/25 1,073,550
1,250 Virginia, Port of Authority,
Commonwealth........................ 8.200 07/01/08 1,369,200
1,500 Woodward, Oklahoma, Municipal Auto
Sales, Refunding.................... 8.000 11/01/12 1,629,645
-----------
TOTAL MISCELLANEOUS............ 26,692,726
-----------
MUNICIPAL UTILITY DISTRICT
(MUD) 1.2%
500 Eldridge Road, Texas, MUD,
Refunding........................... 6.125 03/01/11 479,860
500 Harris County, Texas, MUD,
Refunding, G.O. .................... 7.300 03/01/14 508,790
1,000 Mills Road, Texas, MUD.............. 6.500 09/01/14 973,090
500 Mission Bend MUD No. 2, Texas....... 10.000 09/01/98 567,845
375 Mission Bend MUD No. 2, Texas....... 10.000 09/01/00 435,878
655 Montgomery County, Texas, MUD No. 4
(Water Works System)................ 8.900 09/01/02 737,117
500 North Mission Glen, Texas, MUD,
Refunding........................... 6.500 09/01/14 482,360
-----------
TOTAL MUD...................... 4,184,940
-----------
NURSING HOMES 1.2%
500 Fairfield, Ohio, Economic
Development Rev., Refunding (Beverly
Enterprises)........................ 8.500 01/01/03 525,595
475 Louisiana Public Facilities
Authority, Industrial Development
Rev., Refunding (Beverly
Enterprises)........................ 8.250 09/01/08 500,740
1,315 Luzerne County, Pennsylvania,
Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood
Nursing Center Project), Series-A... 7.875 12/01/13 1,377,620
</TABLE>

See Notes to Financial Statements.

F-25

<PAGE> 236

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,555 New Hampshire Health & Higher
Educational Facility Authority Rev.,
Refunding 1st Mtg. Odd Fellows Home. 8.800% 06/01/09 $ 1,698,635
-----------
TOTAL NURSING HOMES............. 4,102,590
-----------
POLLUTION CONTROL REVENUE (PCR) 5.6%
3,675 Brazos River Authority, Texas, PCR
(Texas Utilities Electric Co.
Project A).......................... 9.875 10/01/17 4,074,031
1,000 Burke County, Georgia, Development
Authority, PCR (Georgia Power Co.).. 9.375 12/01/17 1,115,390
1,000 Burlington, Kansas, PCR, MBIA
(Kansas Gas & Electric Co. Project). 7.000 06/01/31 1,050,940
1,595 Capital Industrial Development
Corp., Texas, PCR (International
Business Machines Corp.)............ 7.400 05/01/12 1,749,683
750 County of Coshocton, Ohio, Solid
Waste Disposal Rev. (Stone Container
Corp. Project), Series 1992......... 7.875 08/01/13 753,022
1,000 Hodge, Louisiana, Utility Rev.
(Stone Container Corp. Project),
Series 1990......................... 9.000 03/01/10 1,063,530
1,240 Mercer County, North Dakota, PCR,
Basin Electric Power, Series E...... 7.000 01/01/19 1,274,174
500 Monroe County, Michigan, PCR
(Detroit Edison Co.), Series A...... 10.500 12/01/16 531,290
1,000 New Hampshire State Industrial
Development Authority, PCR, New
England Power Co. .................. 7.800 04/01/16 1,042,090
1,000 New Hampshire State Industrial
Development Authority, PCR, United
Illuminating Co., Series B.......... 10.750 10/01/12 1,140,690
1,000 Parish of St. Charles, Louisiana,
PCR (Louisiana Power & Light Co.)... 8.250 06/01/14 1,068,750
1,400 Parish of West Feliciana, Louisiana,
PCR (Gulf States Utilities), Series
A................................... 7.500 05/01/15 1,432,634
1,000 Petersburg, Indiana, PCR, Refunding
(Indianapolis Power & Lighting),
Series 1993-A....................... 6.100 01/01/16 981,440
750 Pope County, Arkansas, PCR (Arkansas
Power & Light Project).............. 11.000 12/01/15 792,983
1,350 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities Co.
Project)............................ 7.750 04/01/16 1,404,338
440 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities Co.
Project), Series 1986............... 9.000 09/01/07 482,090
-----------
TOTAL PCR....................... 19,957,075
-----------
POOL FINANCING PROGRAMS 2.9%
1,750 Emmaus, Pennsylvania, General
Authority, Local Government Bond
Pool Program, Rev., Series A, BIG... 8.150 05/15/18 1,881,215
2,500 Emmaus, Pennsylvania, General
Authority, Local Government Bond
Pool Program, Rev., Series C, BIG... 7.900 05/15/18 2,669,750
1,000 Indianapolis, Indiana, Local Public
Improvement, Series A............... 6.000 02/01/20 967,350
2,000 Indianapolis, Indiana, Local Public
Improvement, Series C............... 6.700 01/01/17 2,010,220
450 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.500 02/01/22 450,410
550 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.750 02/01/14 579,502
1,000 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.750 02/01/20 1,024,400
</TABLE>

See Notes to Financial Statements.

F-26

<PAGE> 237

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 670 Tampa, Florida, Capital Improvement
Program Rev., Series A.............. 8.250% 10/01/18 $ 700,237
-----------
TOTAL POOL FINANCING PROGRAMS... 10,283,084
-----------
RESOURCE RECOVERY 2.7%
1,760 Broward County, Florida, Resource
Recovery Rev., North Project........ 7.950 12/01/08 1,920,389
2,295 Broward County, Florida, Resource
Recovery Rev., South Project........ 7.950 12/01/08 2,501,206
1,000 Camden County, New Jersey, PCR,
Solid Waste Resource Recovery Rev.,
Series B............................ 7.500 12/01/09 960,440
1,500 Delaware County, Pennsylvania,
Industrial Development Authority
Rev. (Resource Recovery Project).... 8.100 12/01/13 1,588,005
1,000 El Centro, California, Certificates
of Participation.................... 7.000 06/01/19 975,990
1,000 Montgomery County, Pennsylvania,
Industrial Development Authority
Rev., Resource Recovery............. 7.500 01/01/12 1,054,390
500 Rockdale County, Georgia,
Development Authority Rev. Solid
Waste Disposal (Visy Paper, Inc.
Project)............................ 7.500 01/01/26 504,685
-----------
TOTAL RESOURCE RECOVERY......... 9,505,105
-----------
SALES TAX REVENUE 1.5%
1,000 Crestwood, Illinois, Tax Increment
Rev., Refunding..................... 7.250 12/01/08 986,250
1,000 Edgewater, Colorado, Redevelopment
Rev................................. 6.750 12/01/08 1,009,710
1,000 Orange County, Florida, Tourist
Development Tax Rev., AMBAC......... 6.000 10/01/16 1,000,930
865 Round Lake Beach, Illinois, Tax
Increment Rev., Series 1993......... 7.200 12/01/04 858,954
500 Round Lake Beach, Illinois, Tax
Increment Rev., Series 1993......... 7.500 12/01/13 448,390
975 St. Louis, Missouri, Tax Increment
Rev. (Scullin Redevelopment Area),
Series A............................ 10.000 08/01/10 1,144,367
-----------
TOTAL SALES TAX REVENUE......... 5,448,601
-----------
TRANSPORTATION 9.7%
3,000 Atlanta, Georgia, Airport Facilities
Rev. (Atlanta International
Airport), Series 1990............... 6.250 01/01/21 2,946,900
1,000 Chicago, Illinois, O'Hare
International Airport Rev.,
Series A............................ 6.000 01/01/18 940,910
1,000 Chicago, Illinois, O'Hare
International Airport Rev.,
Series B............................ 6.000 01/01/18 940,910
500 Cleveland, Ohio, Parking Facilities
Improvement Rev..................... 8.000 09/15/12 523,230
940 Dallas-Fort Worth, Texas,
International Airport Facility Rev.,
(American Airlines, Inc.)........... 7.500 11/01/25 955,623
2,500 Greater Orlando Aviation Authority,
Florida, Airport Facilities Rev..... 8.375 10/01/16 2,746,558
500 Hawaii State Harbor Capital
Improvement Rev., MBIA.............. 7.000 07/01/17 525,685
2,000 Indiana Transportation Finance
Authority, Airport Facilities Lease
Rev., Series A...................... 6.250 11/01/16 1,962,720
1,000 Kentucky State Turnpike Authority,
Toll Road Rev., Refunding Series A.. 5.500 07/01/07 967,900
</TABLE>

See Notes to Financial Statements.

F-27

<PAGE> 238

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8,000 Kentucky State Turnpike Authority,
Toll Road Rev., Refunding Series
1987-A.............................. 5.000% 07/01/08 $ 7,261,520
2,000 Los Angeles, California, Regional
Airport Facility Improvement Corp.,
Lease Rev........................... 11.250 11/01/25 2,138,200
1,500 Metropolitan Transportation
Authority, New York Transportation
Facilities, Rev., Series G, MBIA.... 5.500 07/01/15 1,419,315
1,000 New Hampshire State Turnpike System,
Rev., Refunding Series A, FGIC...... 6.750 11/01/11 1,087,400
3,200 New Jersey State Turnpike Authority,
Series C............................ 6.500 01/01/16 3,372,416
1,000 Port Authority of New York and New
Jersey, Consolidated Board, 95th
Series.............................. 6.125 07/15/22 997,250
915 Philadelphia, Pennsylvania,
Industrial Development Authority
Rev. (Parking Garage II Project).... 6.125 02/15/03 907,049
1,000 St. Louis, Missouri, Parking
Facilities Rev...................... 6.625 12/15/21 1,007,690
1,000 Triborough Bridge & Tunnel
Authority, New York, Rev............ 7.875 01/01/18 1,093,430
1,000 Tulsa, Oklahoma, Municipal Airport
Trust, Rev.......................... 7.600 12/01/30 986,530
800 Tulsa, Oklahoma, Municipal Airport
Trust, Rev. (American Airlines)..... 9.500 06/01/20 832,968
785 Virgin Islands Port Authority,
Marine Division Rev. (Marine
Terminal), Series A................. 10.125 11/01/05 811,737
-----------
TOTAL TRANSPORTATION............ 34,425,941
-----------
UTILITIES--COMBINATION ELECTRIC, GAS
AND/OR WATER 9.7%
1,250 Austin, Texas, Utility System Rev.,
FGIC................................ 7.750 11/15/06 1,316,662
2,280 Austin, Texas, Utility System Rev.,
Refunding........................... 6.000 05/15/15 2,258,796
1,000 Austin, Texas, Utility System Rev.,
Series A............................ 7.800 11/15/12 1,112,940
2,380 Austin, Texas, Utility System Rev.,
Series B............................ 7.800 11/15/12 2,631,209
1,000 Chicago, Illinois, Gas Supply Rev.
(People's Gas Lighting and
Coke Co.), Series A................. 8.100 05/01/20 1,103,260
1,000 Chicago, Illinois, Metropolitan
Water District, G.O................. 7.000 01/01/11 1,122,700
700 Citronelle, Alabama, Utilities
Board, Water, Sewer & Gas Rev....... 9.000 05/01/13 752,171
10,950 Jefferson County, Kentucky, Capital
Project Lease Rev. Waste Water
Treatment Plant..................... * 08/15/14 2,931,315
750 Jefferson, Wisconsin, Sewer System,
Waterworks.......................... 7.400 07/01/16 840,397
2,000 Los Angeles, California, Dept. of
Water & Power, Electric Plant Rev... 5.375 09/01/23 1,776,940
2,000 Massachusetts State Water Resource
Authority, Series A................. 7.500 04/01/16 2,243,440
1,000 New Hampshire State Business Finance
Authority, Electric Facilities Rev.
(Plymouth Cogeneration Light Power). 7.750 06/01/14 1,006,120
1,000 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series A................ 7.625 06/15/16 1,075,680
3,000 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series A, MBIA.......... 7.250 06/15/15 3,352,200
</TABLE>

See Notes to Financial Statements.

F-28

<PAGE> 239

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$4,100 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series B................ 5.000% 06/15/17 $ 3,510,584
1,000 New York State Environment
Facilities Corp., Water Facilities
Rev. (Long Island Water Corp.)...... 10.000 10/01/17 1,108,110
500 NORCO, California, Sewer and Water
Rev., Refunding..................... 6.700 10/01/13 489,130
500 NORCO, California, Sewer and Water
Rev., Refunding..................... 7.200 10/01/19 493,770
750 Northwest Harris County, Texas,
Municipal Utility, Waterworks and
Sewer System Combination Tax........ 8.100 10/01/15 809,610
2,000 Orlando, Florida, Utilities
Commission, Water & Electric Rev.
Refunding (Prerefunded @ 10/1/95)... 8.625 10/01/05 2,081,240
500 Willow Fork, Texas, Drainage
District, G.O....................... 7.000 03/01/12 517,080
500 Willow Fork, Texas, Drainage
District, G.O....................... 7.000 03/01/13 514,270
1,000 Winters, Texas, Water Works & Sewer
Rev................................. 8.500 08/01/17 1,219,240
-----------
TOTAL UTILITIES--COMBINATION
ELECTRIC, GAS AND/OR WATER.... 34,266,864
-----------
UTILITIES--ELECTRIC 23.2%
2,500 Alaska Energy Authority Power Rev.,
First Series (Bradley Lake
Hydroelectric Project), BIG......... 6.250 07/01/21 2,502,475
850 Georgia State Municipal Electric
Authority, Power Rev................ 6.000 01/01/20 817,114
2,000 Georgia State Municipal Electric
Authority, Power Rev., Series A
(Prerefunded 1/1/96)................ 7.875 01/01/18 2,086,560
1,750 Georgia State Municipal Electric
Authority, Power Rev., Series Q
(Prerefunded 1/1/98)................ 8.375 01/01/16 1,927,730
1,250 Georgia State Municipal Electric
Authority, Power Rev., Series O..... 8.125 01/01/17 1,358,250
9,685 Grand River Dam Authority, Oklahoma,
Rev. Series 1987.................... 5.000 06/01/12 8,598,052
1,850 Intermountain Power Agency, Utah,
Power Supply Authority Rev., 1st
Crossover Series.................... 5.000 07/01/16 1,597,419
1,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
A................................... 6.000 07/01/23 965,630
2,400 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
A................................... 7.750 07/01/17 2,536,824
3,650 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
B................................... 7.750 07/01/20 3,917,070
2,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev.,
Series H............................ 6.000 07/01/21 1,920,740
2,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev.,
Series I............................ 6.000 07/01/21 1,920,740
1,000 Lewis County, Washington, Public
Utility District No. 1 Rev. (Cowlitz
Falls Hydroelectric Project)........ 6.000 10/01/24 966,510
750 Michigan Public Power Agency, Rev.,
Refunding (Belle River Project)..... 7.000 01/01/18 770,467
3,000 Muscatine, Iowa, Electric Authority
Rev................................. 5.000 01/01/08 2,700,330
2,500 New York State Power Authority,
Rev., Series T...................... 7.375 01/01/18 2,601,950
300 Northern California, Public Power
Agency, Rev......................... 5.000 07/01/09 260,835
</TABLE>

See Notes to Financial Statements.

F-29

<PAGE> 240

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 335 North Carolina Eastern Municipal
Power Agency, Power System Rev...... 8.000% 01/01/21 $ 367,971
2,665 North Carolina Eastern Municipal
Power Agency, Power System Rev.
(Prerefunded @ 1/1/98).............. 8.000 01/01/21 2,927,289
7,695 North Carolina Eastern Municipal
Power Agency, Power System Rev.,
Series A............................ 4.500 01/01/24 6,140,379
1,000 North Carolina Municipal Power
Agency No. 1, Catawba Electric Rev.. 6.000 01/01/20 948,150
2,850 North Carolina Municipal Power
Agency No. 1, Catawba Electric Rev.. 7.875 01/01/19 3,121,064
1,070 Piedmont Municipal Power Agency,
South Carolina, Rev................. 5.000 01/01/25 870,552
5,290 Salt River Project, Arizona
Agricultural Improvement & Power
District Electric System Rev........ 7.875 01/01/28 5,785,938
1,000 Sam Rayburn, Texas, Municipal Power
Agency, Refunding, Series A......... 6.250 10/01/17 864,160
1,000 Sam Rayburn, Texas, Municipal Power
Agency, Refunding, Series A......... 6.750 10/01/14 942,280
1,000 South Carolina, Public Service
Authority (Prerefunded @ 1/1/96).... 7.875 07/01/21 1,036,228
2,000 Southern Minnesota Municipal Power
Agency, Power Supply System Rev.,
Series A............................ 5.000 01/01/16 1,730,140
1,250 Southern Minnesota Municipal Power
Agency, Power Supply System Rev.,
Series C............................ 5.000 01/01/17 1,077,400
8,565 Texas Municipal Power Agency Rev.... 5.500 09/01/13 7,990,289
1,250 Washington State Public Power Supply
System Rev., Nuclear Project No. 1,
Series B............................ 7.125 07/01/16 1,350,525
445 Washington State Public Power Supply
System Rev., Nuclear Project No. 1,
Series D............................ 15.000 07/01/17 513,294
2,500 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series B............................ 7.000 07/01/12 2,589,975
1,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series B............................ 7.375 07/01/12 1,120,120
2,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series 1990-C....................... 7.625 07/01/10 2,276,020
3,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 3,
MBIA................................ 5.600 07/01/17 2,773,770
------------
TOTAL UTILITIES--ELECTRIC....... 81,874,240
------------
TOTAL MUNICIPAL BONDS (Cost
$316,710,927).................. 337,510,328
------------
MUNICIPAL VARIABLE RATE DEMAND
NOTES+ 2.9%
540 Anchorage, Alaska, Higher Education
Rev................................. 4.200 07/01/17 540,000
2,100 District Columbia, Series A-4....... 4.750 10/01/07 2,100,000
2,000 District Columbia, Series A-6....... 4.750 10/01/07 2,000,000
300 Illinois Health Facilities Authority
Rev., La Grand Memorial Health
System.............................. 4.600 12/01/16 300,000
900 Illinois Development Finance
Authority Rev....................... 4.200 04/01/07 900,000
</TABLE>

See Notes to Financial Statements.

F-30

<PAGE> 241

PORTFOLIO OF INVESTMENTS (CONTINUED)

March 31, 1995 (Unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$750 Illinois Health Facilities
Authority Rev.................... 4.600% 01/01/18 $ 750,000
355 Jacksonville, Florida,
Industrial Development Rev....... 4.750 09/01/07 355,000
500 Maricopa County, Arizona,
Industrial Development Authority,
Hospital Facility Rev.,
Series B-2....................... 4.500 12/01/08 500,000
300 New York, New York, Subseries
A-7, G.O......................... 4.600 08/01/20 300,000
200 New York, New York, Subseries
E-2, G.O......................... 4.500 08/01/20 200,000
500 New York, New York, Subseries
E-5, G.O......................... 4.500 08/01/16 500,000
575 New York State Job Development
Authority........................ 4.500 03/01/07 575,000
200 Peninsula Ports, Virginia,
Authority Rev., Port Facilities.. 4.450 12/01/05 200,000
500 West Feliciana Parish,
Louisiana........................ 4.750 04/01/16 500,000
500 Wisconsin State Health
Facilities Authority Rev., Series
A-2.............................. 4.100 01/01/16 500,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND
NOTES (Cost $10,220,000).................... 10,220,000
------------
TOTAL INVESTMENTS (Cost $326,930,927) 98.5%.............. 347,730,328
OTHER ASSETS AND LIABILITIES, NET 1.5%................... 5,299,458
------------
NET ASSETS 100%.......................................... $353,029,786
============
</TABLE>

*Zero Coupon bond Insurers:
+Interest rates are as of March 31, 1995 AMBAC--AMBAC Indemnity Corp.
FHA--Federal Housing Administration BIG--Bond Investors Guranty Insurance Co.
G.O.--General obligation bond CONN--Connie Lee
Rev.--Revenue bond FGIC--Financial Guaranty Insurance Corp.
IDR--Industrial Revenue Bond FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investor's Assurance Corp.
</TABLE>

See Notes to Financial Statements.

F-31

<PAGE> 242

STATEMENT OF ASSETS AND LIABILITIES

March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $326,930,927)............... $347,730,328
Cash........................................................... 63,719
Interest receivable............................................ 6,874,209
Receivable for Fund shares sold................................ 409,773
Receivable for investments sold................................ 160,463
Other assets................................................... 2,683
------------
Total Assets................................................ 355,241,175
------------
LIABILITIES
Payable for Fund shares redeemed............................... 923,890
Dividends payable.............................................. 763,698
Due to Distributor............................................. 217,909
Due to Adviser................................................. 147,435
Deferred Director compensation................................. 25,079
Accrued expenses............................................... 133,378
------------
Total Liabilities........................................... 2,211,389
------------
NET ASSETS, equivalent to $9.98 per share for Class A shares,
$9.98 per share for Class B shares and $9.99 per share for
Class C shares................................................ $353,029,786
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 30,671,176 Class A, 3,922,453 Class B
and 794,623 Class C shares outstanding........................ $ 353,883
Capital surplus................................................ 342,630,860
Accumulated net realized loss on securities.................... (9,875,520)
Net unrealized appreciation of investments..................... 20,799,401
Accumulated deficit............................................ (878,838)
------------
NET ASSETS at March 31, 1995................................... $353,029,786
============
</TABLE>

See Notes to Financial Statements.

F-32

<PAGE> 243

STATEMENT OF OPERATIONS

Six Months Ended March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest....................................................... $12,361,124
-----------
EXPENSES
Management fees................................................ 865,032
Service fees--Class A.......................................... 299,675
Distribution and service fees--Class B......................... 186,720
Distribution and service fees--Class C......................... 38,876
Shareholder service agent's fees and expenses.................. 212,684
Accounting services............................................ 66,960
Registration and filing fees................................... 51,672
Reports to shareholders........................................ 32,076
Custodian fees................................................. 10,669
Audit fees..................................................... 10,350
Directors' fees and expenses................................... 9,682
Legal fees..................................................... 1,807
Miscellaneous.................................................. 6,781
-----------
Total expenses.............................................. 1,792,984
-----------
NET INVESTMENT INCOME.......................................... 10,568,140
===========
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................ (406,001)
Net unrealized appreciation of securities during the period.... 5,430,649
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................. 5,024,648
===========
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $15,592,788
===========
</TABLE>

See Notes to Financial Statements.

F-33

<PAGE> 244

STATEMENT OF CHANGES IN NET ASSETS

(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1995 September 30, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $354,257,068 $355,682,180
------------ ------------
Operations
Net investment income.................... 10,568,140 20,505,507
Net realized loss on securities.......... (406,001) (2,005,680)
Net unrealized appreciation (depreciation)
of securities during the period......... 5,430,649 (23,803,245)
------------ ------------
Increase (decrease) in net assets
resulting from operations.............. 15,592,788 (5,303,418)
------------ ------------
Distributions to shareholders from net
investment income
Class A................................ (9,121,444) (18,227,557)
Class B................................ (992,532) (1,534,981)
Class C................................ (205,815) (276,302)
------------ ------------
(10,319,791) (20,038,840)
------------ ------------
Net equalization debits (Note 1F)......... -- (20,289)
------------ ------------
Capital transactions
Proceeds from shares sold
Class A................................ 14,727,341 49,766,921
Class B................................ 5,982,935 25,694,674
Class C................................ 1,089,358 9,071,276
------------ ------------
21,799,634 84,532,871
------------ ------------
Proceeds from shares issued for
distributions reinvested
Class A................................ 5,388,284 10,485,166
Class B................................ 608,782 958,506
Class C................................ 134,811 183,364
------------ ------------
6,131,877 11,627,036
------------ ------------
Cost of shares redeemed
Class A................................ (27,714,382) (60,814,520)
Class B................................ (5,310,821) (9,282,719)
Class C................................ (1,406,587) (2,125,233)
------------ ------------
(34,431,790) (72,222,472)
------------ ------------
Increase (decrease) in net assets
resulting from capital transactions...... (6,500,279) 23,937,435
------------ ------------
DECREASE IN NET ASSETS.................... (1,227,282) (1,425,112)
------------ ------------
NET ASSETS, end of period................. $353,029,786 $354,257,068
============ ============
</TABLE>

See Notes to Financial Statements.

F-34

<PAGE> 245

FINANCIAL HIGHLIGHTS

Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(1)
-----------------------------------------------------
Six Months
Ended Year Ended September 30
March 31, -----------------------------------------
1995 1994 1993(2) 1992 1991 1990
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................. $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
------ ------ ------ ------ ------ ------
Income from investment
operations:
Investment income........ .35 .68 .69 .705 .71 .72
Expenses................. (.05) (.09) (.094) (.09) (.08) (.08)
------ ------ ------ ------ ------ ------
Net investment income..... .30 .59 .596 .615 .63 .64
Net realized and
unrealized gains or losses
on securities............ .1555 (.7255) .558 .349 .5198 (.195)
------ ------ ------ ------ ------ ------
Total from investment
operations............... .4555 (.1355) 1.154 .964 1.1498 .445
------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income.... (.2955) (.5745) (.596) (.624) (.6398) (.645)
Excess of book-basis net
investment income....... -- -- (.008) -- -- --
------ ------ ------ ------ ------ ------
Total distributions....... (.2955) (.5745) (.604) (.624) (.6398) (.645)
------ ------ ------ ------ ------ ------
Net asset value, end of
period................... $ 9.98 $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13
====== ====== ====== ====== ====== ======
TOTAL RETURN(3)........... 4.76% (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $306.0 $309.0 $332.3 $292.3 $266.9 $237.4
Average net assets
(millions)............... $300.9 $324.2 $313.0 $278.6 $253.2 $241.2
Ratios to average net
assets (annualized):
Expenses............... .93% .93% .91% .90% .89% .86%
Net investment income.. 6.23% 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate... 2% 6% 3% 6% 10% 17%
</TABLE>

(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1 stock
split effected July 26, 1991. Additionally, in 1991, the Fund adopted for
financial reporting purposes a method of accounting for debt discounts and
premiums which is the same as is used for federal income tax reporting. The
effect of the change, on a pro forma basis, would have been to increase net
investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amount of $.01 for 1990. Similarly, the
ratio of net investment income to average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized.
Total return does not consider the effect of sales charges.

See Notes to Financial Statements.

F-35

<PAGE> 246

FINANCIAL HIGHLIGHTS

Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B(1) Class C
----------------------------------- --------------------------------------------
August 30,
Six Months Year Ended Six Months 1993(4)
Ended September 30 Ended Year Ended through
March 31, ------------------ March 31, September 30, September 30,
1995 1994 1993(2) 1995 1994(2) 1993(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................ $ 9.83 $10.53 $ 9.98 $ 9.83 $10.54 $10.53
------ ------ ------ ------ ------ ------
Income from investment
operations:
Investment income............ .35 .68 .685 .35 .69 .05
Expenses..................... (.09) (.17) (.175) (.09) (.18) (.015)
------ ------ ------ ------ ------ ------
Net investment Income.......... .26 .51 .51 .26 .51 .035
Net realized and unrealized
gains or losses on securities.. .1485 (.7195) .564 .1585 (.7295) .061
------ ------ ------ ------ ------ ------
Total from investment
operations.................... .4085 (.2095) 1.074 .4185 (.2195) .096
------ ------ ------ ------ ------ ------
Less Distributions from:
Net investment income......... (.2585) (.4905) (.501) (.2585) (.4905) (.007)
Excess of book-basis net
investment income ........... -- -- (.023) -- -- (.079)
------ ------ ------ ------ ------ ------
Total distributions............ (.2585) (.4905) (.524) (.2585) (.4905) (.086)
------ ------ ------ ------ ------ ------
Net asset value, end of
period........................ $ 9.98 $ 9.83 $10.53 $ 9.99 $ 9.83 $10.54
====== ====== ====== ====== ====== ======
TOTAL RETURN(3)................ 4.25% (2.13%) 11.15% 4.25% (2.03%) .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions)............. $ 39.1 $ 37.2 $ 22.1 $ 7.9 $ 8.0 $ 1.3
Average net assets (millions).. $ 37.3 $ 31.2 $ 10.0 $ 7.8 $ 5.4 $ 0.4
Ratios to average net assets
Expenses...................... 1.74%(5) 1.72% 1.71% 1.74%(5) 1.72% 1.69%(5)
Net investment income......... 5.42%(5) 5.00% 4.96% 5.42%(5) 5.03% 4.25%(5)
Portfolio turnover rate........ 2% 6% 3% 2% 6% 3%
</TABLE>

(1) Sales of Class B commenced September 29, 1992 at a net asset value of
$10.00 per share. At September 30, 1992, there were 50 Class B shares
outstanding with a per share net asset value of $9.98. The decrease in net
asset value was due principally to a dividend of $.052 per share. Other
financial highlights for Class B shares for this short period (September
29, 1992 to September 30, 1992) are not presented as they are not
meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Commencement of offering of sales.
(5) Annualized

See Notes to Financial Statements.

F-36

<PAGE> 247

NOTES TO FINANCIAL STATEMENTS

(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

American Capital Municipal Bond Fund (the "Fund") is registered under the In-
vestment Company Act of 1940, as amended, as a diversified open-end management
investment company. The following is a summary of significant accounting poli-
cies consistently followed by the Fund in the preparation of its financial
statements.

A. INVESTMENT VALUATIONS-Investments in municipal bonds are valued at the most
recently quoted bid prices or at bid prices based on a matrix system (which
considers such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service. Municipal variable
rate demand notes are valued at par; periodic rate changes reflect current
market conditions.

Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.

Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.

Fund investments include lower rated debt securities which may be more sus-
ceptible 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. At March 31, 1995, debt securities rated below invest-
ment grade and comparable unrated securities represented approximately 20% of
the investment portfolio.

B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no distri-
butions of net realized capital gains will be made until tax basis capital
loss carryforwards expire or are offset by net realized capital gains.

The net realized capital loss carryforward for federal income tax purposes
of approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.

F-37

<PAGE> 248

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)
- -------------------------------------------------------------------------------
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Interest income is
accrued daily.

D. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.

E. DEBT DISCOUNT AND PREMIUM-The Fund accounts for debt discounts and premiums
on the same basis as is followed for federal income tax reporting. According-
ly, original issue discounts and all premiums are amortized over the life of
the security. Market discounts are recognized at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.

F. EQUALIZATION-At September 30, 1994, the Fund discontinued the accounting
practice of equalization, which it had used since its inception. Equalization
is a practice whereby a portion of the proceeds from sales and costs of re-
demptions of Fund shares, equivalent on a per-share basis to the amount of the
undistributed net investment income, is charged or credited to undistributed
net investment income.

G. WHEN-ISSUED SECURITIES-Delivery and payment for securities purchased on a
when-issued basis may take place up to 45 days after the date of the transac-
tion. The securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid securities
equal to the amount that will be due are set aside with the custodian.

NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Van Kampen American Capital Asset Management, Inc. (the "Adviser") serves as
investment manager of the Fund. Management fees are paid monthly, based on the
rate of .50% per annum of the average daily net assets of the Fund.

Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised or sub-advised by the Adviser. For
the period March 31, 1995, these

F-38

<PAGE> 249

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)
- -------------------------------------------------------------------------------
charges included $5,384 as the Fund's share of the employee costs attributable
to the Fund's accounting officers. A portion of the accounting services ex-
pense was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost.

ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as
shareholder service agent. These services are provided at cost plus a profit.
For the period ended March 31, 1995, the fees for such services were $147,187.

The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retailer Dealer")
both affiliates of the Adviser, received $27,527 and $30,555, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.

Under the Distribution Plans, the Fund pays up to .25% per annum of its av-
erage net assets to reimburse the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts reim-
bursed to the Distributor by the Fund. At March 31, 1995, the unreimbursed ex-
penses incurred by the Distributor under the Class B and Class C plans
aggregated approximately $1.5 million and $110,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from share redemptions or, subject to the annual re-
newal of the plans, future Fund reimbursements of distribution fees.

Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.

Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder services
agent.

NOTE 3--INVESTMENT ACTIVITY

During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $8,215,930 and $12,451,313, re-
spectively.

For federal income tax purposes, the identified cost of investments owned at
March 31, 1995 was $326,964,141. Net unrealized appreciation of investments
aggregated $20,766,187, gross unrealized appreciation of investments aggre-
gated $23,399,469, and gross unrealized depreciation of investments aggregated
$2,633,282.

F-39

<PAGE> 250

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)
- -------------------------------------------------------------------------------
NOTE 4--DIRECTOR COMPENSATION

Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,250 plus a fee of $30 per day for Board and Com-
mittee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $470. During the period, such fees aggregated $7,453.

The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered by the Plan elects to be credited with
an earnings component on amounts deferred equal to the income earned by the
Fund on its short-term investments or equal to the total return of the Fund.

NOTE 5--CAPITAL

The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.

F-40

<PAGE> 251

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)
- -------------------------------------------------------------------------------
The Fund has 200 million shares of each class of shares of $.01 par value of
capital stock authorized. Transactions in shares of capital stock were as fol-
lows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................. 1,519,426 4,883,618
Class B............................................. 617,796 2,518,998
Class C............................................. 110,152 884,668
---------- ----------
2,247,374 8,287,284
========== ==========
Shares issued for distributions reinvested
Class A............................................. 554,575 1,032,887
Class B............................................. 62,597 94,773
Class C............................................. 13,854 18,175
---------- ----------
631,026 1,145,835
========== ==========
Shares redeemed
Class A............................................. (2,866,089) (6,004,203)
Class B............................................. (549,554) (915,403)
Class C............................................. (143,583) (210,194)
---------- ----------
(3,559,226) (7,129,800)
---------- ----------
Increase (decrease) in shares outstanding............ (680,826) 2,303,319
========== ==========
</TABLE>

NOTE 6--SUBSEQUENT DIVIDENDS

The Board of Directors of the Fund declared a dividend of $.05 per share for
Class A shares, $.044 per share for Class B and Class C shares from net in-
vestment income, payable May 15, 1995 to shareholders of record on April 28,
1995.

F-41

<PAGE> 252

APPENDIX C

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 94.9%
EDUCATION 4.5%
1,000,000 Broward County, Florida, Educational Facilities Authority Rev.
(Nova University Project), G.O., 8.50%, 4/1/10................... 1,148,150
625,000 Clear Creek, Texas, Independent School District, G.O., 6.25%,
2/1/11........................................................... 654,156
1,000,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07............... 1,229,150
1,150,000 Florida State Board of Education, Capital Outlay, Series A, 7.25%,
6/1/23........................................................... 1,261,564
Illinois Educational Facilities Authority Rev., G.O.
1,000,000 Lake First College, FSA, 6.75%, 10/1/21............................ 1,020,930
1,000,000 Northwestern University, Series 1985, 6.90%, 12/1/21............... 1,103,630
2,000,000 New Hampshire Higher Education & Daniel Webster College Issue,
G.O., 7.625%, 7/1/16............................................. 1,900,260
1,000,000 New York City, New York, Industrial Development Agency, Civil
Facility Rev. (Marymount Manhattan College Project), G.O., 7.00%,
7/1/23........................................................... 953,620
New York State Dormitory Authority Rev.
1,000,000 City University, 8.125%, 7/1/17; Pre-refunded 7/1/97............... 1,104,280
3,250,000 State University Educational Facility, Series 1990-A, 7.70%,
5/15/12.......................................................... 3,703,960
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, MBIA, G.O., 7.20%, 7/1/19............ 538,005
250,000 Pennsylvania Medical College, Series A, G.O., 7.50%, 3/1/14........ 254,850
University of the Virgin Islands, Series A
500,000 7.50%, 10/1/09..................................................... 497,335
500,000 7.65%, 10/1/14..................................................... 496,965
------------
TOTAL EDUCATION.................................................... 15,866,855
------------
HEALTH CARE 1.7%
500,000 Colorado Health Facilities Authority Rev. (Cleo Wallace Center
Project), 7.00%, 8/1/15.......................................... 481,925
1,500,000 Colorado Health Facilities Authority Rev. (PSL Healthcare System
Project), Series 1991-A, FSA, 6.25%, 2/15/21..................... 1,460,220
1,000,000 Cuyahoga County, Ohio, Health Care Facilities Rev.
(Jennings Hall), 7.30%, 11/15/23................................. 941,580
1,000,000 Lebanon County, Pennsylvania, Health Facilities Authority Health
Center Rev.
(UTD Church of Christ Homes Project), 6.75%, 10/1/10............. 969,620
750,000 Massachusetts State, Industrial Finance Rev., 7.10%, 11/15/18...... 688,673
</TABLE>

C-1
<PAGE> 253

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE -- CONTINUED
235,000 Pinal County, Arizona, Industrial Development Authority (Casa
Grande Regional Medical Center Project), 9.00%, 12/1/13.......... 239,991
1,000,000 St. Petersburg, Florida, Health Facilities Authority Rev.
(Allegany Health Systems), 7.75%, 12/1/15........................ 1,130,990
------------
TOTAL HEALTH CARE.................................................. 5,912,999
------------
HOSPITALS 14.6%
Bexar County, Texas, Health Facilities Development Rev.
(St. Lukes Lutheran Hospital Project)
500,000 7.00%, 5/1/21...................................................... 495,785
1,500,000 7.90%, 5/1/18...................................................... 1,564,290
1,000,000 Boston, Massachusetts, Rev. (Boston City Hospital), FHA, 7.625%,
2/15/21.......................................................... 1,132,060
500,000 Boulder County, Colorado, Industrial Development Rev. (Boulder
Medical Center Project), 8.875%, 1/1/17.......................... 519,905
1,000,000 Charlotte County, Florida, Hospital Authority Rev.
(Bon Secours Health System), 8.25%, 8/15/18...................... 1,128,880
500,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement
(Clarksville Memorial Project), 6.25%, 7/1/13.................... 458,670
995,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project), Series-94, 6.875%, 6/1/16..................... 903,619
800,000 Colorado Health Facilities Authority Rev. (Rocky Mountain
Adventist), 6.625%, 2/1/13....................................... 747,680
2,000,000 Delaware State Economic Development Authority Rev. (Osteopathic
Hospital Association of Delaware), Series A, 6.90%, 1/1/18....... 1,823,740
1,000,000 Ector County, Texas, Hospital District (Medical Center Hospital),
7.125%, 4/15/02.................................................. 1,012,720
500,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health
Center), Series 1992, 7.25%, 7/1/12.............................. 506,535
1,000,000 Harris County, Texas, Health Facilities Development Corp.
(Memorial Hospital System Project), 7.125%, 6/1/15............... 1,039,500
Illinois Health Facilities Authority Rev.
1,000,000 Elmhurst Memorial Hospital, Series 87-A, 8.125%, 1/1/13............ 1,086,380
1,000,000 Improvement Swedish Covenant, Series A, 6.30%, 8/1/13.............. 915,540
2,000,000 Lutheran Health System, Series B, MBIA, 6.00%, 4/1/18.............. 1,868,980
1,000,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19.............. 1,125,770
1,000,000 Memorial Hospital, 7.25%, 5/1/22................................... 977,770
500,000 Mercy Center For Health Care Services, 6.625%, 10/1/12............. 492,770
1,000,000 Northwestern Memorial Hospital, 6.75%, 8/15/11..................... 1,028,770
</TABLE>

C-2
<PAGE> 254

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS -- CONTINUED
1,000,000 Indiana Health Facilities, Financing Hospital Authority Rev.
(Community Hospital of Indiana), Series-H, MBIA, 6.85%, 7/1/22... 1,020,510
1,160,000 Jefferson County, Texas, Health Facility Authority Rev. (Baptist
Health Care Project), 8.30%, 10/1/14............................. 1,249,355
845,000 Lebanon County, Pennsylvania, Good Samaritan Hospital Authority
Rev. (Good Samaritan Hospital Project), 5.85%, 11/15/07.......... 762,367
1,000,000 Marion County, Indiana, Hospital Authority, Facility Rev.
(Methodist Hospital of Indiana), 6.50%, 9/1/13................... 973,060
1,000,000 McKeesport, Pennsylvania, Hospital Authority Rev. (McKeesport
Hospital Project), 6.50%, 7/1/08................................. 924,620
1,000,000 Michigan State Hospital Finance Authority Rev. (St. Joseph Hospital
Corp.), Series A, 8.125%, 7/1/05................................. 1,053,220
1,000,000 Missouri State Health & Educational Facilities Authority (Heartland
Health Systems Project), 8.125%, 10/1/10......................... 1,122,930
2,500,000 New Hampshire Health & Higher Educational Facility Authority Rev.
(Wentworth Douglass Hospital), 8.50%, 1/1/15..................... 2,735,975
New York State Medical Care Facilities Finance Agency Rev.
1,000,000 Columbia Presbyterian Hospital, Series A, FHA, 8.00%, 2/15/25...... 1,104,630
1,965,000 Montefiore Medical Center, 7.25%, 2/15/09.......................... 2,096,262
1,000,000 North General Hospital, Series 89-A, 7.40%, 2/15/19................ 1,040,740
725,000 Philadelphia, Pennsylvania, Hospital & Higher Education Facilities
Authority Rev. (Roxborough Memorial Hospital), Series 2, 7.25%,
3/1/24........................................................... 658,445
1,500,000 Richardson, Texas, Hospital Authority, Refunding & Improvement Rev.
(Richardson Medical Center), 6.75%, 12/1/23...................... 1,416,225
1,000,000 Royal Oak, Michigan, Hospital Finance Authority, Rev. (William
Beaumont Hospital), Series D, 6.75%, 1/1/20...................... 1,006,770
1,750,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project), 7.75%, 4/1/13............. 1,693,405
500,000 Salem, Oregon, Hospitals Facilities Authority Rev., 7.50%,
12/1/24.......................................................... 493,455
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority Rev.
(Moses Taylor Hospital Project)
1,000,000 Series A, 7.375%, 7/15/08.......................................... 983,730
500,000 Series B, 8.25%, 7/1/09............................................ 534,570
South Dakota State Health & Educational Facilities Authority Rev.
(Sioux Valley Hospital)
1,000,000 7.25%, 4/1/20...................................................... 958,700
2,000,000 7.625%, 11/1/13.................................................... 2,216,063
</TABLE>

C-3
<PAGE> 255

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS -- CONTINUED
1,500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA, 6.25%, 8/15/22............... 1,449,990
1,000,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health), Series B, 6.75%, 11/1/25........ 914,870
1,000,000 Washington County, Pennsylvania, Hospital Authority, 7.35%,
6/1/13........................................................... 941,050
1,500,000 Wells County, Indiana, Hospital Authority Rev., Refunding
(Caylor-Nickel Medical Center, Inc.), 8.50%, 4/15/03............. 1,517,085
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical Center
Project), Series-A, 5.25%, 6/1/16................................ 848,500
1,000,000 West Virginia State, Hospital Finance Authority, Refunding &
Improvement (Fairmont General Hospital), Series A, 6.75%,
3/1/14........................................................... 946,270
2,000,000 Wisconsin State Health & Educational Facilities Rev. (Wheaton
Franciscan Services Inc.), 8.20%, 8/15/18........................ 2,254,280
------------
TOTAL HOSPITALS.................................................... 51,746,441
------------
HOUSING 6.2%
1,275,000 Albuquerque, New Mexico, Home Mtg. Rev., 12.00%, 9/1/98............ 1,261,536
1,645,000 Arapahoe County, Colorado, Single Family Mtg. Rev., 8.375%,
8/1/19........................................................... 1,697,311
1,000,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project), 6.75%, 4/1/19................ 965,230
Bexar County, Texas, Housing Finance Corp., Rev.
410,000 8.20%, 4/1/22...................................................... 430,791
435,000 Series B, 9.25%, 4/1/16............................................ 455,692
145,000 El Paso, Texas, Property Finance Authority Inc., Single Family Mtg.
Rev., Series A, 8.70%, 12/1/18................................... 154,960
680,000 Fort Worth, Texas, Housing Finance Corp., Home Mtg. Rev.,
Refunding, 8.50%, 10/1/11........................................ 724,315
800,000 Harris County, Texas, Housing Financing Corp., Single Family Mtg.
Rev., Series 1983-A, 10.125%, 7/15/03............................ 802,592
Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.
705,000 10.00%, 9/15/14.................................................... 725,057
885,000 Series A, FSA, 5.95%, 12/1/10...................................... 866,937
1,000,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding
(Laguna Point Apartments Project), 6.50%, 7/1/09................. 994,250
Massachusetts State Housing Finance Agency
1,000,000 Multi-family Housing Authority, Series A, 8.75%, 8/1/08............ 1,041,250
550,000 Residential Housing Authority, Series A, 8.40%, 8/1/21............. 573,375
</TABLE>

C-4
<PAGE> 256

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING -- CONTINUED
965,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26.................................................... 956,556
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Retirement Community Rev. (GDL Farms Corp. Project),
6.30%, 1/1/13.................................................... 895,260
1,000,000 Mount Clemens, Michigan, Housing Corp., Multi-family Rev.,
Refunding, Series A, 6.60%, 6/1/13............................... 1,000,640
1,000,000 North St. Paul, Minnesota, Multi-family Refunding Housing Rev.
(Cottages North St. Paul), 9.25%, 2/1/22......................... 1,078,020
1,000,000 Pima County, Arizona, IDR, Single Family Mtg. Rev., 6.625%,
11/1/14.......................................................... 1,000,720
1,155,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project),
Series A, 7.75%, 12/1/15......................................... 1,120,997
2,500,000 St. Paul, Minnesota Port Authority, Housing & Redevelopment
Authority, Multi-family Housing Rev., Series J, 9.50%, 12/1/11... 2,375,525
1,000,000 South Dakota State Housing Development Authority, Homeowner Mtg.,
Series D-1, 6.85%, 5/1/26........................................ 1,013,750
1,450,000 Texas State Veterans Housing Assistance, MBIA, G.O., 6.80%,
12/1/23.......................................................... 1,471,344
245,000 Travis County, Texas, Housing Finance Corp., Single Family Mtg.
Rev., 8.20%, 4/1/22.............................................. 252,073
------------
TOTAL HOUSING...................................................... 21,858,181
------------
LIFE CARE 1.6%
2,000,000 Butler County, Pennsylvania, Industrial Development Authority Rev.,
1st Mtg. Rev. (Sherwood Oaks Project), Series A, 8.75%, 6/1/16... 2,119,800
975,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor Project),
9.25%, 12/1/07................................................... 1,013,454
1,000,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg. (Reeds
Landing Project), 8.625%, 10/1/23................................ 1,001,470
500,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple), Series-A, 6.75%, 12/1/13............ 445,875
1,000,000 Wisconsin State Health & Educational Facilities Authority Rev.
(United Lutheran Program for the Aging Inc. Project), 8.50%,
3/1/19........................................................... 1,056,780
------------
TOTAL LIFE CARE.................................................... 5,637,379
------------
MISCELLANEOUS 7.4%
500,000 Berry Creek Metropolitan District, Colorado, G.O.,
Refunding and Improvement, 8.25%, 12/1/11........................ 529,345
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS -- CONTINUED
2,000,000 Compton, California, Certificates of Participation, Refunding,
Series B, 7.50%, 8/1/15.......................................... 2,100,760
1,000,000 Detroit, Michigan, Tax Increment Bonds (Development Area No. 1
Project), Series 89-A, 7.60%, 7/1/10............................. 1,047,540
2,500,000 District of Columbia Rev. (National Public Radio), Series A, 7.70%,
1/1/23........................................................... 2,485,300
1,000,000 Dove Valley Metropolitan District, Arapahoe County, Colorado, G.O.,
9.50%, 12/1/08................................................... 1,026,910
1,000,000 Du Page County, Illinois (Stormwater Project), 6.55%, 1/1/21....... 1,077,360
Fort Bend County, Texas, Levee Improvement District No. 11, G.O.
500,000 8.70%, 3/1/09...................................................... 544,620
440,000 8.70%, 3/1/10...................................................... 479,441
1,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project), 7.75%, 8/15/22.... 1,043,160
1,000,000 Lehigh County, Pennsylvania, IDR (Allentown Interstate Motel),
8.00%, 8/1/12.................................................... 995,130
Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series 1992, G.O.
630,000 7.95%, 12/1/03..................................................... 643,432
500,000 8.10%, 12/1/11..................................................... 525,640
145,000 Pocahontas, Iowa, Industrial Development Rev. (Navistar
International Harvester Co.), 10.25%, 10/1/00.................... 150,690
1,000,000 Port of New Orleans, Louisiana, IDR, Refunding (Avondale
Industries, Inc.), 8.25%, 6/1/04................................. 1,038,230
2,330,000 Somerset County, Pennsylvania, General Authority, Commonwealth
Lease Rev., FGIC, 6.25%, 10/15/11................................ 2,448,830
1,750,000 St. Charles, Illinois, Industrial Development Rev. (Tri-City Center
Project), 7.50%, 11/1/13......................................... 1,693,090
Texas General Services, Community Partner Interests, (Office
Building and Land Acquisition Project)
500,000 7.00%, 8/1/19...................................................... 487,875
500,000 7.00%, 8/1/24...................................................... 487,130
1,000,000 Texas State, Refunding (Superconducting Project), Series C, G.O.,
5.50%, 4/1/20.................................................... 864,050
Utah State Building Ownership Authority Lease Rev. (Dept. of
Employment Security)
1,000,000 7.80%, 8/15/10..................................................... 1,096,710
1,300,000 7.80%, 8/15/11..................................................... 1,425,723
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS -- CONTINUED
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline),
7.125%, 12/1/25.................................................. 1,056,150
1,250,000 Virginia, Port of Authority, Commonwealth, 8.20%, 7/1/08........... 1,372,988
1,500,000 Woodward, Oklahoma, Municipal Auto Sales, Refunding, 8.00%,
11/1/12.......................................................... 1,645,860
------------
TOTAL MISCELLANEOUS................................................ 26,265,964
------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.4%
500,000 Eldridge Road, Texas, MUD, Refunding, 6.125%, 3/1/11............... 452,450
1,000,000 Harris County, Texas, MUD No. 1, 9.75%, 3/1/00; Pre-refunded
3/1/95........................................................... 1,022,650
500,000 Harris County, Texas, MUD, Refunding, G.O., 7.30%, 3/1/14.......... 490,815
1,000,000 Mills Road, Texas, MUD, 6.50%, 9/1/14.............................. 927,450
Mission Bend MUD No. 2, Texas
500,000 10.00%, 9/1/98................................................... 567,770
375,000 10.00%, 9/1/00................................................... 432,881
655,000 Montgomery County, Texas, MUD No. 4 (Water Works System), 8.90%,
9/1/02........................................................... 744,362
500,000 North Mission Glen, Texas, MUD, Refunding, 6.50%, 9/1/14........... 460,755
------------
TOTAL MUD.......................................................... 5,099,133
------------
NURSING HOMES 0.6%
500,000 Fairfield, Ohio, Economic Development Rev., Refunding (Beverly
Enterprises), 8.50%, 1/1/03...................................... 523,690
475,000 Louisiana Public Facilities Authority, Industrial Development Rev.,
Refunding (Beverly Enterprises), 8.25%, 9/1/08................... 490,822
1,315,000 Luzerne County, Pennsylvania, Industrial Development Authority, 1st
Mtg. Rev., Refunding (Birchwood Nursing Center Project),
Series-A, 7.875%, 12/1/13........................................ 1,270,724
------------
TOTAL NURSING HOMES................................................ 2,285,236
------------
POLLUTION CONTROL REVENUE (PCR) 6.1%
3,675,000 Brazos River Authority, Texas, PCR (Texas Utilities Electric Co.
Project A), 9.875%, 10/1/17...................................... 4,151,316
1,000,000 Burke County, Georgia, Development Authority, PCR (Georgia Power
Co.), 9.375%, 12/1/17............................................ 1,133,810
1,000,000 Burlington, Kansas, PCR, MBIA (Kansas Gas & Electric Co. Project),
7.00%, 6/1/31.................................................... 1,054,670
1,595,000 Capital Industrial Development Corp., Texas, PCR (International
Business Machines Corp.), 7.40%, 5/1/12.......................... 1,722,472
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR) 6.1% -- CONTINUED
750,000 County of Coshocton, Ohio, Solid Waste Disposal Rev. (Stone
Container Corp. Project), Series 1992, 7.875%, 8/1/13............ 736,185
1,000,000 Hodge, Louisiana, Utility Rev. (Stone Container Corp. Project),
Series 1990, 9.00%, 3/1/10....................................... 1,020,930
1,280,000 Illinois Development Finance Authority, PCR (Commonwealth Edison
Co.), 11.375%, 10/15/14.......................................... 1,349,747
1,250,000 Mercer County, North Dakota, PCR, Basin Electric Power, Series E,
7.00%, 1/1/19.................................................... 1,285,713
500,000 Monroe County, Michigan, PCR (Detroit Edison Co.), Series A,
10.50%, 12/1/16.................................................. 542,065
New Hampshire State Industrial Development Authority, PCR
1,000,000 New England Power Co., 7.80%, 4/1/16............................. 1,047,310
1,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12............... 1,161,110
1,000,000 Parish of St. Charles, Louisiana, PCR (Louisiana Power & Light
Co.), 8.25%, 6/1/14.............................................. 1,104,010
1,400,000 Parish of West Feliciana, Louisiana, PCR (Gulf States Utilities),
Series A, 7.50%, 5/1/15.......................................... 1,471,904
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power &
Lighting), Series 1993-A, 6.10%, 1/1/16.......................... 936,680
750,000 Pope County, Arkansas, PCR (Arkansas Power & Light Project),
11.00%, 12/1/15.................................................. 814,463
Sabine River Authority, Texas, Refunding, PCR (Texas Utilities Co.
Project)
1,350,000 7.75%, 4/1/16...................................................... 1,411,938
440,000 Series 1986, 9.00%, 9/1/07....................................... 481,743
------------
TOTAL PCR.......................................................... 21,426,066
------------
POOL FINANCING PROGRAMS 2.8%
Emmaus, Pennsylvania, General Authority, Local Government Bond Pool
Program, Rev.
1,750,000 Series A, BIG, 8.15%, 5/15/18.................................... 1,889,650
2,500,000 Series C, BIG, 7.90%, 5/15/18.................................... 2,679,275
Indianapolis, Indiana, Local Public Improvement
1,000,000 Series A, 6.00%, 2/1/20.......................................... 945,280
2,000,000 Series C, 6.70%, 1/1/17.......................................... 1,986,020
450,000 Series D, 6.50%, 2/1/22.......................................... 432,747
550,000 Series D, 6.75%, 2/1/14.......................................... 558,272
1,000,000 Series D, 6.75%, 2/1/20.......................................... 992,680
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
POOL FINANCING PROGRAMS -- CONTINUED
670,000 Tampa, Florida, Capital Improvement Program Rev., Series A, 8.25%,
10/1/18.......................................................... 701,410
------------
TOTAL POOL FINANCING PROGRAMS...................................... 10,185,334
------------
RESOURCE RECOVERY 3.2%
Broward County, Florida, Resource Recovery Rev.
1,810,000 North Project, 7.95%, 12/1/08.................................... 1,971,633
2,365,000 South Project, 7.95%, 12/1/08.................................... 2,576,195
1,000,000 Camden County, New Jersey, PCR, Solid Waste Resource Recovery Rev.,
Series B, 7.50%, 12/1/09......................................... 992,700
1,500,000 Delaware County, Pennsylvania, Industrial Development Authority
Rev. (Resource Recovery Project), 8.10%, 12/1/13................. 1,602,030
1,000,000 El Centro, California, Certificates of Participation, 7.00%,
6/1/19........................................................... 959,170
1,000,000 Montgomery County, Pennsylvania, Industrial Development Authority
Rev., Resource Recovery, 7.50%, 1/1/12........................... 1,037,120
2,000,000 Northeast, Maryland, Solid Waste Disposal Authority Rev.
(Montgomery County Resource Recovery Project), Series A, 6.30%,
7/1/16........................................................... 1,876,260
500,000 Rockdale County, Georgia, Development Authority Rev., Solid Waste
Disposal (Visy Paper, Inc. Project), 7.50%, 1/1/26............... 484,710
------------
TOTAL RESOURCE RECOVERY............................................ 11,499,818
------------
SALES TAX REVENUE 1.5%
1,000,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%,
12/1/08.......................................................... 961,440
1,000,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08............ 931,800
1,000,000 Orange County, Florida, Tourist Development Tax Rev., AMBAC, 6.00%,
10/1/16.......................................................... 950,860
Round Lake Beach, Illinois, Tax Increment Rev.
900,000 Series 1993, 7.20%, 12/1/04...................................... 855,774
500,000 Series 1993, 7.50%, 12/1/13...................................... 444,000
975,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area), Series A, 10.00%, 8/1/10.................................. 1,109,102
------------
TOTAL SALES TAX REVENUE............................................ 5,252,976
------------
TRANSPORTATION 10.0%
3,000,000 Atlanta, Georgia, Airport Facilities Rev. (Atlanta International
Airport), Series 1990, 6.25%, 1/1/21............................. 2,826,810
Chicago, Illinois, O'Hare International Airport Rev.
1,000,000 Series A, 6.00%, 1/1/18.......................................... 913,590
1,000,000 Series B, 6.00%, 1/1/18.......................................... 913,590
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- CONTINUED
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev., 8.00%,
9/15/12.......................................................... 522,285
940,000 Dallas-Fort Worth, Texas, International Airport Facility Rev,
(American Airlines, Inc.), 7.50%, 11/1/25........................ 925,448
2,500,000 Greater Orlando Aviation Authority, Florida, Airport Facilities
Rev., 8.375%, 10/1/16............................................ 2,762,645
500,000 Hawaii State Harbor Capital Improvement Rev., MBIA, 7.00%,
7/1/17........................................................... 525,205
2,000,000 Indiana Transportation Finance Authority, Airport Facilities Lease
Rev., Series A, 6.25%, 11/1/16................................... 1,894,660
Kentucky State Turnpike Authority, Toll Road Rev., Refunding
1,000,000 Series A, 5.50%, 7/1/07.......................................... 948,940
8,000,000 Series 1987-A, 5.00%, 7/1/08..................................... 7,078,800
2,000,000 Los Angeles, California, Regional Airport Facility Improvement
Corp., Lease Rev., 11.25%, 11/1/25............................... 2,203,760
1,500,000 Metropolitan Transportation Authority, New York Transportation
Facilities, Rev., Series G, MBIA, 5.50%, 7/1/15.................. 1,343,295
1,000,000 New Hampshire State Turnpike System, Rev., Refunding, Series A,
FGIC, 6.75%, 11/1/11............................................. 1,045,350
3,200,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16....... 3,281,568
1,000,000 Port Authority of New York and New Jersey, Consolidated Board, 95th
Series, 6.125%, 7/15/22.......................................... 937,910
1,000,000 Philadelphia, Pennsylvania, Industrial Development Authority Rev.
(Parking Garage II Project), 6.125%, 2/15/03..................... 973,780
1,750,000 San Joaquin Hills, California, Transcorridor Agency, Toll Road
Rev., 6.75%, 1/1/32.............................................. 1,637,108
1,000,000 St. Louis, Missouri, Parking Facilities Rev., 6.625%, 12/15/21..... 988,680
1,000,000 Triborough Bridge & Tunnel Authority, New York, Rev., 7.875%,
1/1/18........................................................... 1,101,960
1,000,000 Tulsa, Oklahoma, Municipal Airport Trust, Rev. 7.60%, 12/1/30...... 982,910
800,000 American Airlines, 9.50%, 6/1/20................................... 841,696
825,000 Virgin Islands Port Authority, Marine Division Rev. (Marine
Terminal), Series A, 10.13%, 11/1/05............................. 859,196
------------
TOTAL TRANSPORTATION............................................... 35,509,186
------------
UTILITIES -- COMBINATION ELECTRIC, GAS AND/OR WATER 9.5%
Austin, Texas, Utility System Rev.
1,250,000 FGIC, 7.75%, 11/15/06............................................ 1,334,700
2,280,000 Refunding, 6.00%, 5/15/15........................................ 2,131,686
1,000,000 Series A, 7.80%, 11/15/12........................................ 1,118,640
2,380,000 Series B, 7.80%, 11/15/12........................................ 2,608,147
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- COMBINATION ELECTRIC, GAS AND/OR WATER -- CONTINUED
1,000,000 Chicago, Illinois, Gas Supply Rev. (People's Gas Lighting and Coke
Co.), Series A, 8.10%, 5/1/20.................................... 1,111,720
1,000,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%,
1/1/11........................................................... 1,071,490
700,000 Citronelle, Alabama, Utilities Board, Water, Sewer & Gas Rev.,
9.00%, 5/1/13.................................................... 757,526
10,950,000 Jefferson County, Kentucky, Capital Project Lease Rev., Waste Water
Treatment Plant, Zero Coupon, 8/15/14............................ 2,710,344
750,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16...... 835,193
2,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plant
Rev., 5.375%, 9/1/23............................................. 1,668,520
2,000,000 Massachusetts State Water Resource Authority, Series A, 7.50%,
4/1/16........................................................... 2,240,700
1,000,000 New Hampshire State Business Finance Authority, Electric Facilities
Rev. (Plymouth Cogeneration Light Power), 7.75%, 6/1/14.......... 975,260
New York City Municipal Water Finance Authority, New York, Water &
Sewer Rev.
1,000,000 Series A, 7.625%, 6/15/16........................................ 1,086,040
3,000,000 Series A, MBIA, 7.25%, 6/15/15................................... 3,346,230
4,100,000 Series B, 5.00%, 6/15/17......................................... 3,288,159
1,000,000 New York State Environment Facilities Corp., Water Facilities Rev.
(Long Island Water Corp.), 10.00%, 10/1/17....................... 1,109,150
Norco, California, Sewer and Water Rev., Refunding,
500,000 6.70%, 10/1/13................................................... 488,465
500,000 7.20%, 10/1/19................................................... 487,570
750,000 Northwest Harris County, Texas, Municipal Utility, Waterworks and
Sewer System Combination Tax, 8.10%, 10/1/15..................... 796,117
2,000,000 Orlando, Florida, Utilities Commission, Water & Electric Rev.,
Refunding, 8.625%, 10/1/05; Pre-refunded 10/1/95................. 2,123,880
Willow Fork, Texas, Drainage District, G.O.
500,000 7.00%, 3/1/12.................................................... 502,825
500,000 7.00%, 3/1/13.................................................... 502,540
1,000,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17............ 1,202,170
------------
TOTAL UTILITIES -- COMBINATION ELECTRIC, GAS AND/OR WATER.......... 33,497,072
------------
UTILITIES -- ELECTRIC 23.8%
2,500,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake
Hydroelectric Project), BIG, 6.25%, 7/1/21....................... 2,430,150
1,500,000 Florida State Municipal Power Agency, Refunding (St. Lucie
Project), FGIC, 5.00%, 10/1/01................................... 1,444,245
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- ELECTRIC -- CONTINUED
Georgia State Municipal Electric Authority, Power Rev.
850,000 6.00%, 1/1/20.................................................... 789,582
2,000,000 Series A, 7.875%, 1/1/18; Pre-refunded 1/1/96.................... 2,117,060
1,750,000 Series Q, 8.375%, 1/1/16; Pre-refunded 1/1/98.................... 1,937,880
9,685,000 Grand River Dam Authority, Oklahoma, Rev., Series 1987, 5.00%,
6/1/12........................................................... 8,252,395
Intermountain Power Agency, Utah, Power Supply Authority Rev.
1,850,000 1st Crossover Series, 5.00%, 7/1/16.............................. 1,527,212
1,000,000 Series A, 6.00%, 7/1/23.......................................... 921,820
2,400,000 Series A, 7.75%, 7/1/17.......................................... 2,571,240
3,650,000 Series B, 7.75%, 7/1/20.......................................... 3,963,426
2,000,000 Series H, 6.00%, 7/1/21.......................................... 1,847,580
2,000,000 Series I, 6.00%, 7/1/21.......................................... 1,847,580
1,000,000 Lewis County, Washington, Public Utility District No. 1, Rev.
(Cowlitz Falls Hydroelectric Project), 6.00%, 10/1/24............ 913,580
Massachusetts Municipal Wholesale Electric Co., Rev.
2,060,000 Series B, 13.00%, 7/1/18......................................... 2,145,305
310,000 Series B, 13.625%, 7/1/17; Pre-refunded 1/1/93................... 326,380
750,000 Michigan Public Power Agency, Rev., Refunding (Belle River
Project), 7.00%, 1/1/18.......................................... 778,958
1,250,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd
Crossover Series Rev., 8.125%, 1/1/17............................ 1,374,988
3,000,000 Muscatine, Iowa, Electric Authority Rev., 5.00%, 1/1/08............ 2,628,210
2,500,000 New York State Power Authority, Rev., Series T, 7.375%, 1/1/18..... 2,636,000
300,000 Northern California, Public Power Agency, Rev., 5.00%, 7/1/09...... 254,643
North Carolina Eastern Municipal Power Agency, Power System Rev.
335,000 8.00%, 1/1/21.................................................... 370,279
2,665,000 8.00%, 1/1/21; Pre-refunded 1/1/98............................... 2,945,651
7,695,000 Series A, 4.50%, 1/1/24............................................ 6,076,972
North Carolina Municipal Power Agency No. 1, Catawba Electric Rev.
1,000,000 6.00%, 1/1/20.................................................... 909,550
2,850,000 7.875%, 1/1/19................................................... 3,139,161
1,070,000 Piedmont Municipal Power Agency, South Carolina, Rev., 5.00%,
1/1/25........................................................... 828,587
5,290,000 Salt River Project, Arizona Agricultural Improvement & Power
District Electric System Rev., 7.875%, 1/1/28.................... 5,826,723
Sam Rayburn, Texas, Municipal Power Agency, Refunding
1,000,000 Series A, 6.25%, 10/1/17......................................... 870,840
1,000,000 Series A, 6.75%, 10/1/14......................................... 949,640
1,000,000 South Carolina, Public Service Authority, 7.875%, 7/1/21;
Pre-refunded 1/1/96.............................................. 1,053,297
</TABLE>

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INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- ELECTRIC -- CONTINUED
Southern Minnesota Municipal Power Agency, Power Supply System Rev.
2,000,000 Series A, 5.00%, 1/1/16.......................................... 1,654,780
1,250,000 Series C, 5.00%, 1/1/17.......................................... 1,029,625
8,565,000 Texas Municipal Power Agency Rev., 5.50%, 9/1/13................... 7,621,908
Washington State Public Power Supply System Rev.
1,250,000 Nuclear Project No. 1, Series B, 7.125%, 7/1/16.................. 1,312,438
445,000 Nuclear Project No. 1, Series D, 15.00%, 7/1/17.................. 534,574
2,500,000 Nuclear Project No. 2, Series B, 7.00%, 7/1/12................... 2,596,400
1,000,000 Nuclear Project No. 2, Series B, 7.375%, 7/1/12.................. 1,117,760
2,000,000 Nuclear Project No. 2, Series 1990-C, 7.625%, 7/1/10............. 2,264,820
3,000,000 Nuclear Project No. 3, MBIA 5.60%, 7/1/17........................ 2,626,560
------------
TOTAL UTILITIES-ELECTRIC......................................... 84,437,799
------------
TOTAL MUNICIPAL BONDS (COST $321,111,687)........................ 336,480,439
------------
MUNICIPAL VARIABLE RATE DEMAND NOTES 3.7%+
100,000 Arkansas State Development Finance Authority, 3.65%, 12/1/15....... 100,000
California Statewide Communities Development Corp. Rev., Series A
600,000 3.50%, 6/1/19.................................................... 600,000
1,000,000 3.50%, 8/1/19.................................................... 1,000,000
400,000 Cuyahoga County, Ohio, IDR (Allen Group, Inc. Project), 3.50%,
12/1/15.......................................................... 400,000
500,000 Dade County, Florida, Industrial Development Authority Rev.,
(Dynacolor Graphic Project), 4.00%, 6/1/99....................... 500,000
500,000 Delaware County, Pennsylvania, Industrial Development Authority
Rev. (Ram Motors, Inc.), 4.20%, 9/1/10........................... 500,000
300,000 Fort Wayne, Indiana, Hospital Authority, Series C, 3.90%, 1/1/16... 300,000
900,000 Illinois Development Finance Authority Rev., 3.70%, 4/1/07......... 900,000
100,000 Illinois Health Facilities Authority Rev., 3.70%, 1/1/18........... 100,000
800,000 Indiana Health Facilities Financing Authority Rev., Capital Access
Designated Pool Program, 3.70%, 12/1/02.......................... 800,000
100,000 Maricopa County, Arizona, Industrial Development Authority,Hospital
Facility Rev. (Samaritan Health Services Hospital), Series B-2,
3.60%, 12/1/08................................................... 100,000
New York City, New York, G.O.
500,000 3.70%, 8/1/10.................................................... 500,000
700,000 3.70%, 8/1/17.................................................... 700,000
400,000 3.70%, 8/1/21.................................................... 400,000
1,550,000 New York, New York, Subseries A-7, G.O., 3.95%, 8/1/20............. 1,550,000
100,000 New York State Job Development Authority, 3.60%, 3/1/07............ 100,000
</TABLE>

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AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

INVESTMENT PORTFOLIO -- CONTINUED
September 30, 1994

+ Interest rates are as of September 30, 1994.
FHA -- Federal Housing Administration
G.O. -- General obligation bond
Rev. -- Revenue bond
IDR -- Industrial Revenue Bond

Insurers:
AMBAC -- AMBAC Indemnity Corp.
BIG -- Bond Investors Guaranty Insurance Co.
FGIC -- Financial Guaranty Insurance Corp.
FSA -- Financial Security Assurance Inc.
MBIA -- Municipal Bond Investor's Assurance

Corp.

See Notes to Financial Statements.

C-14
<PAGE> 266

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES
September 30, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $334,061,687).............................. $349,430,439
Cash.......................................................................... 3,191
Interest receivable........................................................... 6,945,043
Receivable for investments sold............................................... 677,921
Receivable for Fund shares sold............................................... 255,397
Other assets.................................................................. 4,370
------------
TOTAL ASSETS................................................................ 357,316,361
------------
LIABILITIES
Payable for Fund shares redeemed.............................................. 1,836,732
Dividends payable............................................................. 752,716
Due to Distributor............................................................ 220,415
Due to Adviser................................................................ 149,623
Accrued expenses.............................................................. 99,807
------------
TOTAL LIABILITIES........................................................... 3,059,293
------------
Net Assets, equivalent to $9.82 per share for Class A shares and $9.83 per
share for Class B and Class C shares........................................ $354,257,068
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 31,463,264 Class A, 3,791,614 Class B and 814,200 Class
C shares outstanding........................................................ $ 360,691
Capital surplus............................................................... 349,124,331
Accumulated net realized loss on securities................................... (9,469,519)
Net unrealized appreciation of investments.................................... 15,368,752
Accumulated deficit........................................................... (1,127,187)
------------
NET ASSETS at September 30, 1994.............................................. $354,257,068
============
</TABLE>

See Notes to Financial Statements.

C-15
<PAGE> 267

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF OPERATIONS
Year Ended September 30, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest...................................................................... $ 24,134,366
------------
EXPENSES
Management fees............................................................... 1,804,381
Service fees -- Class A....................................................... 686,403
Distribution and service fees -- Class B...................................... 311,708
Distribution and service fees -- Class C...................................... 54,489
Shareholder service agent's fees and expenses................................. 407,704
Accounting services........................................................... 115,272
Registration and filing fees.................................................. 109,827
Reports to shareholders....................................................... 64,148
Legal fees.................................................................... 22,177
Audit fees.................................................................... 19,983
Directors' fees and expenses.................................................. 15,386
Miscellaneous................................................................. 17,381
------------
Total expenses.............................................................. 3,628,859
------------
Net investment income....................................................... 20,505,507
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities............................................... (2,005,680)
Net unrealized depreciation of securities during the year..................... (23,803,245)
------------
Net realized and unrealized loss on securities.............................. (25,808,925)
------------
Decrease in net assets resulting from operations............................ $ (5,303,418)
============
</TABLE>

See Notes to Financial Statements.

C-16
<PAGE> 268

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year.................................... $355,682,180 $292,305,914
------------ ------------
OPERATIONS
Net investment income.......................................... 20,505,507 18,722,991
Net realized loss on securities................................ (2,005,680) (61,760)
Net unrealized appreciation (depreciation)
of securities during the year............................... (23,803,245) 18,032,935
------------ ------------
Increase (decrease) in net assets resulting from
operations................................................ (5,303,418) 36,694,166
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A..................................................... (18,227,557) (18,216,098)
Class B..................................................... (1,534,981) (490,357)
Class C..................................................... (276,302) (275)
------------ ------------
(20,038,840) (18,706,730)
------------ ------------
In excess of book-basis net investment income (Note 1D)
Class A..................................................... -- (252,018)
Class B..................................................... -- (55,026)
Class C..................................................... -- (4,939)
------------ ------------
-- (311,983)
------------ ------------
Total dividends and distributions to shareholders................ (20,038,840) (19,018,713)
------------ ------------
NET EQUALIZATION CREDITS (DEBITS) (NOTE 1F)...................... (20,289) 81,721
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A..................................................... 49,766,921 54,755,685
Class B..................................................... 25,694,674 22,802,935
Class C..................................................... 9,071,276 1,280,053
------------ ------------
84,532,871 78,838,673
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A..................................................... 10,485,166 10,718,588
Class B..................................................... 958,506 333,342
Class C..................................................... 183,364 3,626
------------ ------------
11,627,036 11,055,556
------------ ------------
Cost of shares redeemed
Class A..................................................... (60,814,520) (42,583,199)
Class B..................................................... (9,282,719) (1,691,938)
Class C..................................................... (2,125,233) --
------------ ------------
(72,222,472) (44,275,137)
------------ ------------
Increase in net assets resulting from capital
transactions.............................................. 23,937,435 45,619,092
------------ ------------
INCREASE (DECREASE) IN NET ASSETS................................ (1,425,112) 63,376,266
------------ ------------
NET ASSETS, end of year.......................................... $354,257,068 $355,682,180
============ ============
</TABLE>

See Notes to Financial Statements.

C-17
<PAGE> 269

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

American Capital Municipal Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end management
investment company. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.

A. INVESTMENT VALUATIONS

Investments in municipal bonds are valued at the most recently quoted bid
prices or at bid prices based on a matrix system (which considers such
factors as security prices, yields, maturities and ratings) furnished by
dealers and an independent pricing service. Municipal variable rate demand
notes are valued at par; periodic rate changes reflect current market
conditions.

Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued
based on market quotations until the remaining days to maturity becomes less
than 61 days. From such time, until maturity, the investments are valued at
amortized cost.

Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.

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. At September 30, 1994, debt securities
rated below investment grade and comparable unrated securities represented
approximately 19% of the investment portfolio.

B. FEDERAL INCOME TAXES

No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no
distributions of net realized capital gains will be made until tax basis
capital loss carryforwards expire or are offset by net realized capital
gains.

C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME

Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Interest income is accrued daily.

D. DIVIDENDS AND DISTRIBUTIONS

Dividends and distributions to shareholders are recorded on the record date.
The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which

C-18
<PAGE> 270

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

may differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.

E. DEBT DISCOUNT AND PREMIUM

The Fund accounts for debt discounts and premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.

F. EQUALIZATION

At September 30, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is a
practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the amount of
the undistributed net investment income, is charged or credited to
undistributed net investment income.

The balance of equalization included in undistributed net investment income
at the date of change, which was approximately $2.8 million, was reclassified
to capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share of the Fund.

G. WHEN-ISSUED SECURITIES

Delivery and payment for securities purchased on a when-issued basis may take
place up to 45 days after the date of the transaction. The securities
purchased are subject to market fluctuation during this period. To meet the
payment obligation, sufficient cash or liquid securities equal to the amount
that will be due are set aside with the custodian.

NOTE 2 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

American Capital Asset Management, Inc. (the "Adviser") serves as
investment manager of the Fund. Management fees are paid monthly, based on the
rate of .50% per annum of the average daily net assets of the Fund.

Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended September 30, 1994, these charges included $10,303 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.

C-19
<PAGE> 271

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

Under the Distribution Plans, the Fund pays up to .25% per annum of its
average net assets to reimburse the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average daily net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $1.6 million and $130,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.

Legal fees of $11,680 were for services rendered by O'Melveny & Myers,
counsel for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a
director of the Fund.

Certain officers and directors of the Fund are officers and directors of
the Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.

NOTE 3 -- INVESTMENT ACTIVITY

During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $45,734,980 and $21,355,006,
respectively.

For federal income tax purposes, the identified cost of investments owned
at September 30, 1994 was $334,094,902. Net unrealized appreciation of
investments aggregated $15,335,537, gross unrealized appreciation of investments
aggregated $19,847,942, and gross unrealized depreciation of investments
aggregated $4,512,405.

The net realized capital loss carryforward for federal income tax purposes
of approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.

NOTE 4 -- DIRECTOR COMPENSATION

Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $1,320 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $490. During the year, such fees aggregated $13,494.

The directors may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$25,830. The deferred fees have been credited with interest at a rate equal to
that earned by the Fund on its short-term investments.

C-20
<PAGE> 272

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTE 5 -- CAPITAL

The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.

The Fund has 200 million of each class of shares of $.01 par value of
capital stock authorized. Transactions in shares of capital stock were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A............................................................ 4,883,618 5,402,298
Class B............................................................ 2,518,998 2,225,454
Class C............................................................ 884,668 121,207
---------- ----------
8,287,284 7,748,959
---------- ----------
Shares issued for dividends and distributions reinvested
Class A............................................................ 1,032,887 1,047,735
Class B............................................................ 94,773 32,208
Class C............................................................ 18,175 344
---------- ----------
1,145,835 1,080,287
---------- ----------
Shares redeemed
Class A............................................................ (6,004,203) (4,190,132)
Class B............................................................ (915,403) (164,467)
Class C............................................................ (210,194) --
---------- ----------
(7,129,800) (4,354,599)
---------- ----------
Increase in shares outstanding....................................... 2,303,319 4,474,647
========== ==========
</TABLE>

NOTE 6 -- SUBSEQUENT DIVIDENDS

The Board of Directors of the Fund declared a dividend of $.0485 per share
for Class A shares, $.0415 per share for Class B shares and $.0415 for Class C
shares from net investment income, payable November 15, 1994 to shareholders of
record on October 31, 1994.

C-21
<PAGE> 273

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS A(1)
-------------------------------------------------------
YEAR ENDED SEPTEMBER 30
-------------------------------------------------------
1994 1993(2) 1992 1991 1990
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period....... $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .68 .69 .705 .71 .72
Expenses................................... (.09) (.094) (.09) (.08) (.08)
------- ------- ------- ------- -------
Net investment income...................... .59 .596 .615 .63 .64
Net realized and unrealized gains or losses
on securities............................ (.7255) .558 .349 .5198 (.195)
------- ------- ------- ------- -------
Total from investment operations........... (.1355) 1.154 .964 1.1498 .445
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income....... (.5745) (.596) (.624) (.6398) (.645)
Distributions in excess of book-basis net
investment income(3)..................... -- (.008) -- -- --
------- ------- ------- ------- -------
Total distributions........................ (.5745) (.604) (.624) (.6398) (.645)
------- ------- ------- ------- -------
Net asset value, end of period............. $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13
======= ======= ======= ======= =======
TOTAL RETURN(4)............................ (1.33)% 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....... $ 309.0 $ 332.3 $ 292.3 $ 266.9 $ 237.4
Average net assets (millions).............. $ 324.2 $ 313.0 $ 278.6 $ 253.2 $ 241.2
Ratios to average net assets
Expenses................................. .93% .91% .90% .89% .86%
Net investment income.................... 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate.................... 6% 3% 6% 10% 17%
</TABLE>

- ---------------
(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1 stock
split effected July 26, 1991. Additionally, in 1991, the Fund adopted for
financial reporting purposes a method of accounting for debt discounts and
premiums which is the same as is used for federal income tax reporting. The
effect of the change, on a pro forma basis, would have been to increase net
investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amount of $.01 for 1990. Similarly, the
ratio of net investment income to average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information was not restated.
(4) Total return does not consider the effect of sales charges.

See Notes to Financial Statements.

C-22
<PAGE> 274

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

FINANCIAL HIGHLIGHTS -- CONTINUED
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

- -------------------------------------------------------------------------------------------------------
CLASS B(1) CLASS C(2)
------------------- --------------------------------
YEAR ENDED YEAR AUGUST 30,
SEPTEMBER 30, ENDED 1993(5) THROUGH
------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1993(2) 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $ 10.53 $ 9.98 $ 10.54 $ 10.53
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................ .68 .685 .69 .05
Expenses..................................... (.17) (.175 ) (.18) (.015)
------- ------- ------- -------
Net investment income........................ .51 .51 .51 .035
Net realized and unrealized gains or losses
on securities.............................. (.7195) .564 (.7295) .061
------- ------- ------- -------
Total from investment operations............. (.2095) 1.074 (.2195) .096
------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.4905) (.501 ) (.4905) (.007)
Distributions in excess of book-basis net
investment income(3)....................... -- (.023 ) -- (.079)
------- ------- ------- -------
Total distributions.......................... (.4905) (.524 ) (.4905) (.086)
------- ------- ------- -------
Net asset value, end of period............... $ 9.83 $10.53 $ 9.83 $ 10.54
======= ====== ======= =======
TOTAL RETURN(4).............................. (2.13)% 11.15 % (2.03)% .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $ 37.2 $ 22.1 $ 8.0 $ 1.3
Average net assets (millions)................ $ 31.2 $ 10.0 $ 5.4 $ 0.4
Ratios to average net assets
Expenses................................... 1.72% 1.71 % 1.72% 1.69%(6)
Net investment income...................... 5.00% 4.96 % 5.03% 4.25%(6)
Portfolio turnover rate...................... 6% 3 % 6% 3%
</TABLE>

- ---------------
(1) Sales of Class B commenced September 29, 1992 at a net asset value of $10.00
per share. At September 30, 1992, there were 50 Class B shares outstanding
with a per share net asset value of $9.98. The decrease in net asset value
was due principally to a dividend of $.052 per share. Other financial
highlights for Class B shares for this short period (September 29, 1992 to
September 30, 1992) are not presented as they are not meaningful.

(2) Per share amounts based on average month-end shares outstanding.

(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.

(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

(5) Commencement of offering of sales.

(6) Annualized

See Notes to Financial Statements.

C-23
<PAGE> 275

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, 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 American Capital Municipal Bond
Fund, Inc. at September 30, 1994, and the results of its operations, the changes
in its net assets and the selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(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 September 30, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Houston, Texas
November 11, 1994

C-24
<PAGE> 276

APPENDIX D

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 95.6%
EDUCATION 4.6%
1,000 Browrard County, Florida, Educational Facilities
Authority Rev. (Nova University Project),
G.O. ............................................ 8.500 04/01/10 1,143,070
625 Clear Creek, Texas, Independent School District,
G.O. ............................................ 6.250 02/01/11 660,175
1,000 Cook County, Illinois, Community College,
District #508, Certificates of Participation,
FGIC............................................. 8.750 01/01/07 1,252,580
1,150 Florida State Board of Education, Capital Outlay,
Series A......................................... 7.250 06/01/23 1,266,722
1,000 Illinois Educational Facilities Authority Rev.,
G.O. Lake First College, FSA..................... 6.750 10/01/21 1,041,270
1,000 Illinois Educational Facilities Authority Rev.,
G.O.,
Northwestern University, Series 1985............. 6.900 12/01/21 1,113,650
2,000 New Hampshire Higher Education & Daniel Webster
College Issue, G.O. ............................. 7.625 07/01/16 1,960,540
1,000 New York City, New York, Industrial Development
Agency, Civil Facility Rev. (Marymount Manhattan
College Project), G.O. .......................... 7.000 07/01/23 1,009,310
1,000 New York State Dormitory Authority Rev. City
University (Prerefunded @ 7/1/97)................ 8.125 07/01/17 1,091,920
3,250 New York State Dormitory Authority Rev., State
University Education Facility, Series 1990-A..... 7.700 05/15/12 3,705,130
500 Pennsylvania State Higher Educational Facilities
Authority Rev. Hahnemann University Project,
MBIA, G.O. ...................................... 7.200 07/01/19 533,815
250 Pennsylvania State Higher Educational Facilities
Authority Rev., Pennsylvania Medical College,
Series A, G.O. .................................. 7.500 03/01/14 257,635
500 University of the Virgin Islands, Series A....... 7.500 10/01/09 521,130
500 University of the Virgin Islands, Series A....... 7.650 10/01/14 518,185
------------
TOTAL EDUCATION................................ 16,075,132
------------
HEALTH CARE 1.7%
500 Colorado Health Facilities Authority Rev.
(Cleo Wallace Center Project).................... 7.000 08/01/15 502,435
</TABLE>

See Notes to Financial Statements

D-1
<PAGE> 277

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Colorado Health Facilities Authority Rev. (PSL
Healthcare System Project), Series 1991-A, FSA... 6.250 02/15/21 1,518,435
1,000 Cuyahoga County, Ohio, Health Care Facilities
Rev. (Jenning Hall).............................. 7.300 11/15/23 947,300
1,000 Lebanon County, Pennsylvania, Health Facilities
Authority Health Center Rev. (UTD Church of
Christ Homes Project)............................ 6.750 10/01/10 1,004,600
700 Massachusetts State, Industrial Finance Rev. .... 7.100 11/15/18 672,875
230 Pina County, Arizona, Industrial Development
Authority (Casa Grande Regional Medical Center
Project)......................................... 9.000 12/01/13 238,425
1,000 St. Petersburg, Florida, Health Facilities
Authority Rev.
(Allegany Health Systems)........................ 7.750 12/01/15 1,130,330
------------
TOTAL HEALTH CARE.............................. 6,014,400
------------
HOSPITAL 15.5%
500 Bexar County, Texas, Health Facilities
Development Rev. (St. Lukes Lutheran Hospital
Project)......................................... 7.000 05/01/21 509,830
1,500 Bexar County, Texas, Health Facilities
Development Rev. (St. Lukes Lutheran Hospital
Project)......................................... 7.900 05/01/18 1,762,245
1,000 Boston Massachusetts, Rev. (Boston City
Hospital), FHA................................... 7.625 02/15/21 1,133,810
500 Boulder County, Colorado, Industrial Development
Rev. (Boulder Medical Center Project)............ 8.875 01/01/17 518,565
1,000 Charlotte County, Florida, Hospital Authority
Rev.
(Bon Secours Health System)...................... 8.250 08/15/18 1,120,860
500 Clarksville, Tennessee, Hospital Rev., Refunding
& Improvement (Clarksville Memorial Project)..... 6.250 07/01/13 477,960
995 Clearfield, Pennsylvania, Hospital Authority Rev.
(Clearfield Hospital Project), Series-94......... 6.875 06/01/16 995,587
800 Colorado Health Facilities Authority Rev. (Rocky
Mountain Adventist).............................. 6.625 02/01/13 779,520
2,000 Delaware State Economic Development Authority
Rev. (Osteopathic Hospital Association of
Delaware), Series A.............................. 6.900 01/01/18 1,835,120
500 Erie County, Pennsylvania, Hospital Authority
Rev. (Metro Health Center), Series 1992.......... 7.250 07/01/12 514,150
</TABLE>

See Notes to Financial Statements

D-2
<PAGE> 278

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Harris County, Texas, Health Facilities
Development Corp. (Memorial Hospital System
Project)......................................... 7.125 06/01/15 1,057,750
1,000 Illinois Health Facilities Authority Rev.
Elmhurst
Memorial Hospital, Series 87-Ay.................. 8.125 01/01/13 1,073,910
1,000 Illinois Health Facilities Authority Rev.
Improvement Swedish Covenant, Series A........... 6.300 08/01/13 933,080
2,000 Illinois Health Facilities Authority Rev.
Lutheran Health System, Series B, MBIA........... 6.000 04/01/18 1,922,940
1,000 Illinois Health Facilities Authority Rev. Masonic
Medical Center, Series 1989-B.................... 7.700 10/01/19 1,124,910
1,000 Illinois Health Facilities Authority Rev.,
Memorial Hospital................................ 7.250 05/01/22 1,005,850
500 Illinois Health Facilities Authority Rev. Mercy
Center For Health Care Services.................. 6.625 10/01/12 500,350
1,000 Illinois Health Facilities Authority Rev.,
Northwestern Memorial Hospital................... 6.750 08/15/11 1,031,460
1,000 Indiana Health Facilities, Financing Hospital
Authority Rev. (Community Hospital of Indiana),
Series-H,
MBIA............................................. 6.850 07/01/22 1,044,390
1,160 Jefferson County, Texas, Health Facility
Authority Rev. (Baptist Health Care Project)..... 8.300 10/01/14 1,263,426
845 Lebanon County, Pennsylvania, Good Samaritan
Hospital Authority Rev. (Good Samaritan Hospital
Project)......................................... 5.850 11/15/07 772,279
1,000 Marion County, Indiana, Hospital Authority,
Facility Rev., (Methodist Hospital of Indiana)... 6.500 09/01/13 1,006,840
1,000 McKeesport, Pennsylvania, Hospital Authority Rev.
(McKeesport Hospital Project).................... 6.500 07/01/08 979,910
1,000 Michigan State Hospital Finance Authority Rev.
St. Joseph Hospital Corp., Series A.............. 8.125 07/1/05 1,045,100
1,000 Michigan State Hospital Finance Authority Rev.,
Refunding, Genesys Health System, Series A....... 7.500 10/1/07 1,010,500
1,000 Missouri State Health & Educational Facilities
Authority (Heartland Health Systems Project)..... 8.125 10/1/10 1,112,180
1,000 New Hampshire Health & Higher Educational
Facility Authority Rev........................... 7.500 06/1/05 1,042,440
</TABLE>

See Notes to Financial Statements

D-3
<PAGE> 279

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,500 New Hampshire Health & Higher Educational
Facility Authority Rev. (Wentworth Douglass
Hospital)........................................ 8.500 01/1/15 2,700,525
1,000 New York State Medical Care Facilities Finance
Agency Rev. Columbia Presbyterian Hospital,
Series A, FHA.................................... 8.000 02/15/25 1,092,980
1,960 New York State Medical Care Facilities Finance
Agency Rev., Montefiore Medical Center........... 7.250 02/15/09 2,104,080
1,000 New York State Medical Care Facilities Finance
Agency Rev., North General Hospital, Series
89-A............................................. 7.400 02/15/19 1,034,670
1,000 Newton, Kansas, Hospital Rev., Newton Health Care
Corp., Series-A.................................. 7.750 11/15/24 1,018,260
695 Philadelphia, Pennsylvania, Hospital & Higher
Education Facilities Authority Rev. (Roxborough
Memorial Hospital), Series 2..................... 7.250 03/1/24 649,040
1,500 Richardson, Texas, Hospital Authority, Refunding
& Improvement Rev. (Richardson Medical Center)... 6.750 12/01/23 1,507,740
1,000 Royal Oak, Michigan, Hospital Finance Authority,
Rev. (William Beaumont Hospital), Series D....... 6.750 01/1/20 1,027,130
1,750 Rusk County, Texas, Health Facilities Corp.,
Hospital Rev. (Henderson Memorial Hospital
Project)......................................... 7.750 04/1/13 1,801,450
500 Salem, Oregon, Hospitals Facilities Authority
Rev.............................................. 7.500 12/1/24 507,295
1,000 Scranton-Lackawanna, Pennsylvania, Health &
Welfare Authority Rev. (Moses Taylor Hospital
Project), Series A............................... 7.375 07/15/08 1,012,830
500 Scranton-Lackawanna, Pennsylvania, Health &
Welfare Authority Rev. (Moses Taylor Hospital
Project), Series B............................... 8.250 07/1/09 536,310
1,000 South Dakota State Health & Educational
Facilities Authority Rev. (Sioux Valley
Hospital)........................................ 7.250 04/1/20 1,003,450
2,000 South Dakota State Health & Educational
Facilities Authority Rev. (Sioux Valley
Hospital)........................................ 7.625 11/1/13 2,221,598
1,500 St. Joseph County, Indiana, Hospital Authority
Rev. (Memorial Hospital South Bend Project),
MBIA............................................. 6.250 08/15/22 1,504,245
1,000 Tyler, Texas, Health Facilities Development Corp.
(East Texas Medical Center Regional Health),
Series B......................................... 6.750 11/1/25 964,310
1,000 Washington County, Pennsylvania, Hospital
Authority........................................ 7.350 06/1/13 952,800
</TABLE>

See Notes to Financial Statements

D-4
<PAGE> 280

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Wells County, Indiana, Hospital Authority Rev.,
Refunding (Caylor-Nickel Medical Center, Inc.)... 8.500 04/15/03 1,529,550
1,000 Weslaco, Texas, Health Facilities Development
(Knapp Medical Center Project), Series-A......... 5.250 06/1/16 885,540
1,000 West Virginia State, Hospital Finance Authority,
Refunding & Improvement (Fairmont General
Hospital), Series A.............................. 6.750 03/01/14 969,850
2,000 Wisconsin State Health & Educational Facilities
Rev. (Wheaton Franciscan Services Inc.).......... 8.200 08/15/18 2,238,660
------------
TOTAL HOSPITAL................................. 54,837,275
------------
HOUSING 5.8%
1,545 Arapahoe County, Colorado, Single Family Mtg.
Rev. ............................................ 8.375 08/01/19 1,618,094
1,000 Austin, Texas, Housing Finance Corp.,
Multi-family Rev. (Stassey Woods Apartment
Project)......................................... 6.750 04/01/19 979,090
410 Bexar County, Texas, Housing Finance Corp.,
Rev. ............................................ 8.200 04/01/22 431,550
420 Bexar County, Texas, Housing Finance Corp., Rev.,
Series B......................................... 9.250 04/01/16 440,534
135 El Paso, Texas, Property Finance Authority Inc.,
Single Family Mtg. Rev., Series A................ 8.700 12/01/18 145,064
645 Fort Worth, Texas, Housing Finance Corp., Home
Mtg. Rev. Refunding.............................. 8.500 10/01/11 702,605
735 Harris County, Texas, Housing Financing Corp.,
Single Family Mtg. Rev., Series 1983-A........... 10.125 07/15/03 737,742
670 Houston, Texas, Housing Finance Corp., Single
Family Mgt. Rev. ................................ 10.000 09/15/14 689,309
855 Houston, Texas, Housing Finance Corp., Single
Family Mgt. Rev., Series A, FSA.................. 5.950 12/01/10 842,089
1,000 Maricopa County, Arizona, IDR, Multi-Family Rev.,
Refunding (Laguna Point Apartments Project)...... 6.500 07/01/09 1,016,630
1,000 Massachusetts State Housing Finance Agency,
Multi-family Housing Authority, Series A......... 8.750 08/01/08 1,051,250
550 Massachusetts State Housing Finance Agency,
Residential Housing Authority, Series A.......... 8.400 08/01/21 578,875
910 Minnesota State Housing Finance Agency, Single
Family Mtg. Rev. ................................ 6.750 01/01/26 907,725
</TABLE>

See Notes to Financial Statements

D-5
<PAGE> 281

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Montgomery County, Pennsylvania, Industrial
Development Authority, Retirement Community Rev.
(GDL Farms Corp. Project)........................ 6.300 01/01/13 907,690
1,000 Mount Clemens, Michigan, Housing Corp., Multi-
family Rev., Refunding, Series A................. 6.600 06/01/13 1,030,480
1,000 North St. Paul, Minnesota, Multi-family Refunding
Housing Rev. (Cottages North St. Paul)........... 9.250 02/01/22 1,086,250
1,000 Pima County, Arizona, IDR, Single Family Mtg.
Rev.............................................. 6.625 11/01/14 1,018,000
1,155 Ridgeland, Mississippi, Urban Renewal (The
Orchard, Ltd. Project), Series A................. 7.750 12/01/15 1,130,410
2,500 St. Paul, Minnesota Port Authority, Housing &
Redevelopment Authority, Multi-family Housing
Rev., Series J................................... 9.500 12/01/11 2,396,875
1,000 South Dakota State Housing Development Authority,
Homeowner Mtg., Series D-1....................... 6.850 05/01/26 1,017,500
1,450 Texas State Veterans Housing Assistance, MBIA,
G.O.,............................................ 6.800 12/01/23 1,521,616
245 Travis County, Texas, Housing Finance Corp.,
Single Family Mtg. Rev........................... 8.200 04/01/22 253,134
------------
TOTAL HOUSING.................................. 20,502,512
------------
LIFE CARE 2.7%
500 Atlantic Beach, Florida, Rev., Refunding &
Improvement Fleet Landing Project, Series A...... 7.500 10/01/02 506,270
500 Atlantic Beach, Florida, Rev., Refunding &
Improvement Fleet Landing Project, Series A...... 7.875 10/01/08 514,430
2,000 Butler County, Pennsylvania, Industrial
Development Authority Rev., 1st Mgt. Rev.
(Sherwood Oaks Project), Series A................ 8.750 06/01/16 2,099,300
500 Chartiers Valley, Pennsylvania, Industrial &
Commercial Development Authority (Asbury Health
Center Project).................................. 7.250 12/01/11 503,840
500 Chartiers Valley, Pennsylvania, Industrial &
Commercial Development Authority (Asbury Health
Center Project).................................. 7.400 12/01/15 494,195
950 Hanover Park, Illinois, 1st Mgt. Rev. Windsor
Park Manor Project............................... 9.250 12/01/07 1,029,733
1,000 Massachusetts State Industrial Finance Agency
Rev. 1st Mtg. Reeds Landing Project.............. 8.625 10/01/23 1,012,350
</TABLE>

See Notes to Financial Statements

D-6
<PAGE> 282

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Massachusetts State Industrial Finance Agency,
Greater Lynn Mental Health Association Project... 8.800 06/01/14 1,105,680
500 Scottsdale, Arizona, Industrial Development
Authority, Refunding, 1st Mtg. Westminter
Village, Series A................................ 8.250 06/01/15 528,275
500 Tempe, Arizona, Industrial Development Authority
Rev. Friendship Village Temple, Series-A......... 6.750 12/01/13 487,020
1,000 Wisconsin State Health & Educational Facilities
Authority Rev., (United Lutheran Program for the
Aging Inc. Project).............................. 8.500 03/01/19 1,058,750
------------
TOTAL LIFE CARE................................ 9,339,843
------------
MISCELLANEOUS 7.6%
500 Berry Creek Metropolitan District, Colorado,
G.O., Refunding and Improvement.................. 8.250 12/01/11 534,280
2,000 Compton, California, Certificates of
Participation, Refunding, Series B............... 7.500 08/01/15 2,119,320
1,000 Detroit, Michigan, Tax Increment Bonds
(Development Area No. 1 Project) Series 89-A..... 7.600 07/01/10 1,047,270
2,500 District of Columbia Rev. (National Public
Radio), Series A................................. 7.700 01/01/23 2,621,775
1,000 Dove Valley Metropolitan District, Arapahoe
County, Colorado, G.O............................ 9.500 12/01/08 1,048,290
1,000 Du Page County, Illinois (Stormwater Project).... 6.550 01/01/21 1,091,860
500 Fort Bend County, Texas, Levee Improvement
District No. 11, G.O............................. 8.700 03/01/09 547,735
440 Fort Bend County, Texas, Levee Improvement
District No. 11, G.O............................. 8.700 03/01/10 482,007
1,000 Lake Charles, Louisiana, Harbor & Terminal
Facilities Rev. (Trunkline Liquified Natural Gas
Co. Project)..................................... 7.750 08/15/22 1,074,380
1,000 Lehigh County, Pennsylvania, IDR (Allentown
Interstate Motel................................. 8.000 08/01/12 1,022,720
630 Mountain Village Metropolitan District, San
Miguel County, Colorado, Refunding, Series 1992,
G.O. ............................................ 7.950 12/01/03 652,182
500 Mountain Village Metropolitan District, San
Miguel County, Colorado, Refunding, Series 1992,
G.O. ............................................ 8.100 12/01/11 525,605
145 Pocahontas, Iowa, Industrial Development Rev.
(Navistar International Harvester Co.)........... 10.250 10/01/00 150,986
</TABLE>

See Notes to Financial Statements

D-7
<PAGE> 283

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Port of New Orleans, Louisiana, IDR, Refunding
(Avondale Industries, Inc.)...................... 8.250 06/01/04 1,063,900
2,330 Somerset County, Pennsylvania, General Authority,
Commonwealth Lease Rev., FGIC.................... 6.250 10/15/11 2,474,693
1,705 St. Charles, Illinois, Industrial Development
Rev. (Tri-City Center Project)................... 7.500 11/01/13 1,707,302
500 Texas General Services, Community Partner
Interests, (Office Building and Land Acquisition
Project)......................................... 7.000 08/01/19 513,320
500 Texas General Services, Community Partner
Interests, (Office Building and Land Acquisition
Project)......................................... 7.000 08/01/24 513,320
1,000 Texas State, Refunding (Superconducting Project),
Series C, G.O. .................................. 5.500 04/01/20 922,340
1,000 Utah State Building Ownership Authority Lease
Rev. (Dept. of Employment Security).............. 7.800 08/15/10 1,090,020
1,300 Utah State Building Ownership Authority Lease
Rev. (Dept. of Employment Security).............. 7.800 08/15/11 1,417,026
1,000 Valdez, Alaska, Marine Term Rev., Refunding
(Sohio Pipeline)................................. 7.125 12/01/25 1,073,550
1,250 Virginia, Port of Authority, Commonwealth........ 8.200 07/01/08 1,369,200
1,500 Woodward, Oklahoma, Municipal Auto Sales,
Refunding........................................ 8.000 11/01/12 1,629,645
------------
TOTAL MISCELLANEOUS............................ 26,692,726
------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.2%
500 Eldridge Road, Texas, MUD, Refunding............. 6.125 03/01/11 479,860
500 Harris County, Texas, MUD, Refunding, G.O. ...... 7.300 03/01/14 508,790
1,000 Mills Road, Texas, MUD........................... 6.500 09/01/14 973,090
500 Mission Bend MUD No. 2, Texas.................... 10.000 09/01/98 567,845
375 Mission Bend MUD No. 2, Texas.................... 10.000 09/01/00 435,878
655 Montgomery County, Texas, MUD No. 4 (Water Works
System).......................................... 8.900 09/01/02 737,117
500 North Mission Glen, Texas, MUD, Refunding........ 6.500 09/01/14 482,360
------------
TOTAL MUD...................................... 4,184,940
------------
NURSING HOMES 1.2%
500 Fairfield, Ohio, Economic Development Rev.,
Refunding
(Beverly Enterprises) 8.500 01/01/03 525,595
475 Louisiana Public Facilities Authority, Industrial
Development Rev., Refunding (Beverly
Enterprises)..................................... 8.250 09/01/08 500,740
</TABLE>

See Notes to Financial Statements

D-8
<PAGE> 284

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,315 Luzerne County, Pennsylvania, Industrial
Development Authority, 1st Mtg. Rev., Refunding
(Birchwood Nursing Center Project), Series-A..... 7.875 12/01/13 1,377,620
1,555 New Hampshire Health & Higher Educational
Facility Authority Rev., Refunding 1st Mtg. Odd
Fellows Home..................................... 8.800 06/01/09 1,698,635
------------
TOTAL NURSING HOMES............................ 4,102,590
------------
POLLUTION CONTROL REVENUE (PCR) 5.6%
3,675 Brazos River Authority, Texas, PCR (Texas
Utilities Electric Co. Project A)................ 9.875 10/01/17 4,074,031
1,000 Burke County, Georgia, Development Authority, PCR
(Georgia Power Co.).............................. 9.375 12/01/17 1,115,390
1,000 Burlington, Kansas, PCR, MBIA (Kansas Gas &
Electric Co. Project)............................ 7.000 06/01/31 1,050,940
1,595 Capital Industrial Development Corp., Texas, PCR
(International Business Machines Corp.).......... 7.400 05/01/12 1,749,683
750 County of Coshocton, Ohio, Solid Waste Disposal
Rev. (Stone Container Corp. Project), Series
1992............................................. 7.875 08/01/13 753,022
1,000 Hodge, Louisiana, Utility Rev. (Stone Container
Corp. Project), Series 1990...................... 9.000 03/01/10 1,063,530
1,240 Mercer County, North Dakota, PCR, Basin Electric
Power, Series E.................................. 7.000 01/01/19 1,274,174
500 Monroe County, Michigan, PCR (Detroit Edison
Co.), Series A................................... 10.500 12/01/16 531,290
1,000 New Hampshire State Industrial Development
Authority, PCR, New England Power Co. ........... 7.800 04/01/16 1,042,090
1,000 New Hampshire State Industrial Development
Authority, PCR, United Illuminating Co., Series
B................................................ 10.750 10/01/12 1,140,690
1,000 Parish of St. Charles, Louisiana, PCR (Louisiana
Power & Light Co.)............................... 8.250 06/01/14 1,068,750
1,400 Parish of West Feliciana, Louisiana, PCR (Gulf
States Utilities), Series A...................... 7.500 05/01/15 1,432,634
1,000 Petersburg, Indiana, PCR, Refunding (Indianapolis
Power & Lighting), Series 1993-A................. 6.100 01/01/16 981,440
750 Pope County, Arkansas, PCR (Arkansas Power &
Light Project)................................... 11.000 12/01/15 792,983
</TABLE>

See Notes to Financial Statements

D-9
<PAGE> 285

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,350 Sabine River Authority, Texas, Refunding, PCR
(Texas Utilities Co. Project).................... 7.750 04/01/16 1,404,338
440 Sabine River Authority, Texas, Refunding, PCR
(Texas Utilities Co. Project), Series 1986....... 9.000 09/01/07 482,090
------------
TOTAL PCR...................................... 19,957,075
------------
POOL FINANCING PROGRAMS 2.9%
1,750 Emmaus, Pennsylvania, General Authority, Local
Government Bond Pool Program, Rev., Series A,
BIG.............................................. 8.150 05/15/18 1,881,215
2,500 Emmaus, Pennsylvania, General Authority, Local
Government Bond Pool Program, Rev., Series C,
BIG.............................................. 7.900 05/15/18 2,669,750
1,000 Indianapolis, Indiana, Local Public Improvement,
Series A......................................... 6.000 02/01/20 967,350
2,000 Indianapolis, Indiana, Local Public Improvement,
Series C......................................... 6.700 01/01/17 2,010,220
450 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.500 02/01/22 450,410
550 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.750 02/01/14 579,502
1,000 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.750 02/01/20 1,024,400
670 Tampa, Florida, Capital Improvement Program Rev.,
Series A......................................... 8.250 10/01/18 700,237
------------
TOTAL POOL FINANCING PROGRAMS.................. 10,283,084
------------
RESOURCE RECOVERY 2.7%
1,760 Broward County, Florida, Resource Recovery Rev.,
North Project.................................... 7.950 12/01/08 1,920,389
2,295 Broward County, Florida, Resource Recovery Rev.,
South Project.................................... 7.950 12/01/08 2,501,206
1,000 Camden County, New Jersey, PCR, Solid Waste
Resource Recovery Rev., Series B................. 7.500 12/01/09 960,440
1,500 Delaware County, Pennsylvania, Industrial
Development Authority Rev. (Resource Recovery
Project)......................................... 8.100 12/01/13 1,588,005
1,000 El Centro, California, Certificates of
Participation.................................... 7.000 06/01/19 975,990
1,000 Montgomery County, Pennsylvania, Industrial
Development Authority Rev., Resource Recovery.... 7.500 01/01/12 1,054,390
</TABLE>

See Notes to Financial Statements

D-10
<PAGE> 286

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500 Rockdale County, Georgia, Development Authority
Rev. Solid Waste Disposal (Visy Paper, Inc.
Project)......................................... 7.500 01/01/26 504,685
------------
TOTAL RESOURCE RECOVERY........................ 9,505,105
------------
SALES TAX REVENUE 1.5%
1,000 Crestwood, Illinois, Tax Increment Rev.,
Refunding........................................ 7.250 12/01/08 986,250
1,000 Edgewater, Colorado, Redevelopment Rev........... 6.750 12/01/08 1,009,710
1,000 Orange County, Florida, Tourist Development Tax
Rev., AMBAC...................................... 6.000 10/01/16 1,000,930
865 Round Lake Beach, Illinois, Tax Increment Rev.,
Series 1993...................................... 7.200 12/01/04 858,954
500 Round Lake Beach, Illinois, Tax Increment Rev.,
Series 1993...................................... 7.500 12/01/13 448,390
975 St. Louis, Missouri, Tax Increment Rev. (Scullin
Redevelopment Area), Series A.................... 10.000 08/01/10 1,144,367
------------
TOTAL SALES TAX REVENUE........................ 5,448,601
------------
TRANSPORTATION 9.7%
3,000 Atlanta, Georgia, Airport Facilities Rev.
(Atlanta International Airport), Series 1990..... 6.250 01/01/21 2,946,900
1,000 Chicago, Illinois, O'Hare International Airport
Rev., Series A................................... 6.000 01/01/18 940,910
1,000 Chicago, Illinois, O'Hare International Airport
Rev., Series B................................... 6.000 01/01/18 940,910
500 Cleveland, Ohio, Parking Facilities Improvement
Rev. ............................................ 8.000 09/15/12 523,230
940 Dallas-Fort Worth, Texas, International Airport
Facility Rev., (American Airlines, Inc.)......... 7.500 11/01/25 955,623
2,500 Greater Orlando Aviation Authority, Florida,
Airport Facilities Rev. ......................... 8.375 10/01/16 2,746,558
500 Hawaii State Harbor Capital Improvement Rev.,
MBIA............................................. 7.000 07/01/17 525,685
2,000 Indiana Transportation Finance Authority, Airport
Facilities Lease Rev., Series A.................. 6.250 11/01/16 1,962,720
1,000 Kentucky State Turnpike Authority, Toll Road
Rev., Refunding Series A......................... 5.500 07/01/07 967,900
8,000 Kentucky State Turnpike Authority, Toll Road
Rev.,
Refunding Series 1987-A.......................... 5.000 07/01/08 7,261,520
2,000 Los Angeles, California, Regional Airport
Facility Improvement Corp., Lease Rev. .......... 11.250 11/01/25 2,138,200
</TABLE>

See Notes to Financial Statements

D-11
<PAGE> 287

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Metropolitan Transportation Authority, New York
Transportation Facilities, Rev., Series G,
MBIA............................................. 5.500 07/01/15 1,419,315
1,000 New Hampshire State Turnpike System, Rev.,
Refunding Series A, FGIC......................... 6.750 11/01/11 1,087,400
3,200 New Jersey State Turnpike Authority, Series C.... 6.500 01/01/16 3,372,416
1,000 Port Authority of New York and New Jersey,
Consolidated Board, 95th Series.................. 6.125 07/15/22 997,250
915 Philadelphia, Pennsylvania, Industrial
Development Authority Rev. (Parking Garage II
Project)......................................... 6.125 02/15/03 907,049
1,000 St. Louis, Missouri, Parking Facilities Rev. .... 6.625 12/15/21 1,007,690
1,000 Triborough Bridge & Tunnel Authority, New York,
Rev. ............................................ 7.875 01/01/18 1,093,430
1,000 Tulsa, Oklahoma, Municipal Airport Trust,
Rev. ............................................ 7.600 12/01/30 986,530
800 Tulsa, Oklahoma, Municipal Airport Trust, Rev.
(American Airlines).............................. 9.500 06/01/20 832,968
785 Virgin Islands Port Authority, Marine Division
Rev.
(Marine Terminal), Series A...................... 10.125 11/01/05 811,737
------------
TOTAL TRANSPORTATION........................... 34,425,941
------------
UTILITIES -- COMBINATION ELECTRIC, GAS AND/OR
WATER 9.7%
1,250 Austin, Texas, Utility System Rev., FGIC......... 7.750 11/15/06 1,316,662
2,280 Austin, Texas, Utility System Rev., Refunding.... 6.000 05/15/15 2,258,796
1,000 Austin, Texas, Utility System Rev., Series A..... 7.800 11/15/12 1,112,940
2,380 Austin, Texas, Utility System Rev., Series B..... 7.800 11/15/12 2,631,209
1,000 Chicago, Illinois, Gas Supply Rev.
(People's Gas Lighting and Coke Co.), Series A... 8.100 05/01/20 1,103,260
1,000 Chicago, Illinois, Metropolitan Water District,
G.O. ............................................ 7.000 01/01/11 1,122,700
700 Citronelle, Alabama, Utilities Board, Water,
Sewer & Gas Rev. ................................ 9.000 05/01/13 752,171
10,950 Jefferson County, Kentucky, Capital Project Lease
Rev. Waste Water Treatment Plant................. * 08/15/14 2,931,315
750 Jefferson, Wisconsin, Sewer System, Waterworks... 7.400 07/01/16 840,397
2,000 Los Angeles, California, Dept. of Water & Power,
Electric Plant Rev. ............................. 5.375 09/01/23 1,776,940
2,000 Massachusetts State Water Resource Authority,
Series A......................................... 7.500 04/01/16 2,243,440
</TABLE>

See Notes to Financial Statements

D-12
<PAGE> 288

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 New Hampshire State Business Finance Authority,
Electric Facilities Rev.
(Plymouth Cogeneration Light Power).............. 7.750 06/01/14 1,006,120
1,000 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series A........... 7.625 06/15/16 1,075,680
3,000 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series A, MBIA..... 7.250 06/15/15 3,352,200
4,100 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series B........... 5.000 06/15/17 3,510,584
1,000 New York State Environment Facilities Corp.,
Water Facilities Rev. (Long Island Water
Corp.)........................................... 10.000 10/01/17 1,108,110
500 NORCO, California, Sewer and Water Rev.,
Refunding........................................ 6.700 10/01/13 489,130
500 NORCO, California, Sewer and Water Rev.,
Refunding........................................ 7.200 10/01/19 493,770
750 Northwest Harris County, Texas, Municipal
Utility, Waterworks and Sewer System Combination
Tax.............................................. 8.100 10/01/15 809,610
2,000 Orlando, Florida, Utilities Commission, Water &
Electric Rev. Refunding (Prerefunded @
10/01/95)........................................ 8.625 10/01/05 2,081,240
500 Willow Fork, Texas, Drainage District, G.O. ..... 7.000 03/01/12 517,080
500 Willow Fork, Texas, Drainage District, G.O. ..... 7.000 03/01/13 514,270
1,000 Winters, Texas, Water Works & Sewer Rev. ........ 8.500 08/01/17 1,219,240
------------
TOTAL UTILITIES -- COMBINATION ELECTRIC, GAS
AND/OR WATER................................... 34,266,864
------------
UTILITIES -- ELECTRIC 23.2%
2,500 Alaska Energy Authority Power Rev., First Series
(Bradley Lake Hydroelectric Project), BIG........ 6.250 07/01/21 2,502,475
850 Georgia State Municipal Electric Authority, Power
Rev. ............................................ 6.000 01/01/20 817,114
2,000 Georgia State Municipal Electric Authority, Power
Rev., Series A (Prerefunded 01/01/96)............ 7.875 01/01/18 2,086,560
1,750 Georgia State Municipal Electric Authority, Power
Rev., Series Q (Prerefunded 01/01/98)............ 8.375 01/01/16 1,927,730
1,250 Georgia State Municipal Electric Authority, Power
Rev., Series O................................... 8.125 01/01/17 1,358,250
9,685 Grand River Dam Authority, Oklahoma, Rev. Series
1987............................................. 5.000 06/01/12 8,598,052
1,850 Intermountain Power Agency, Utah, Power Supply
Authority Rev., 1st Crossover Series............. 5.000 07/01/16 1,597,419
</TABLE>

See Notes to Financial Statements

D-13
<PAGE> 289

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series A......................... 6.000 07/01/23 965,630
2,400 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series A......................... 7.750 07/01/17 2,536,824
3,650 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series B......................... 7.750 07/01/20 3,917,070
2,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series H......................... 6.000 07/01/21 1,920,740
2,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series I......................... 6.000 07/01/21 1,920,740
1,000 Lewis County, Washington, Public Utility District
No. 1 Rev. (Cowlitz Falls Hydroelectric
Project)......................................... 6.000 10/01/24 966,510
750 Michigan Public Power Agency, Rev., Refunding
(Belle River Project)............................ 7.000 01/01/18 770,467
3,000 Muscatine, Iowa, Electric Authority Rev. ........ 5.000 01/01/08 2,700,330
2,500 New York State Power Authority, Rev., Series T... 7.375 01/01/18 2,601,950
300 Northern California, Public Power Agency,
Rev. ............................................ 5.000 07/01/09 260,835
335 North Carolina Eastern Municipal Power Agency,
Power System Rev. ............................... 8.000 01/01/21 367,971
2,665 North Carolina Eastern Municipal Power Agency,
Power System Rev. (Prerefunded @ 1/1/98)......... 8.000 01/01/21 2,927,289
7,695 North Carolina Eastern Municipal Power Agency,
Power System Rev., Series A...................... 4.500 01/01/24 6,140,379
1,000 North Carolina Municipal Power Agency No. 1,
Catawba Electric Rev. ........................... 6.000 01/01/20 948,150
2,850 North Carolina Municipal Power Agency No. 1,
Catawba Electric Rev. ........................... 7.875 01/01/19 3,121,064
1,070 Piedmont Municipal Power Agency, South Carolina,
Rev. ............................................ 5.000 01/01/25 870,552
5,290 Salt River Project, Arizona Agricultural
Improvement & Power District Electric System
Rev. ............................................ 7.875 01/01/28 5,785,938
1,000 Sam Rayburn, Texas, Municipal Power Agency,
Refunding, Series A.............................. 6.250 10/01/17 864,160
1,000 Sam Rayburn, Texas, Municipal Power Agency,
Refunding, Series A.............................. 6.750 10/01/14 942,280
1,000 South Carolina, Public Service Authority
(Prerefunded @ 1/1/96)........................... 7.875 07/01/21 1,036,228
</TABLE>

See Notes to Financial Statements

D-14
<PAGE> 290

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,000 Southern Minnesota Municipal Power Agency,
Power Supply System Rev., Series A............... 5.000 01/01/16 1,730,140
1,250 Southern Minnesota Municipal Power Agency,
Power Supply System Rev., Series C............... 5.000 01/01/17 1,077,400
8,565 Texas Municipal Power Agency Rev. ............... 5.500 09/01/13 7,990,289
1,250 Washington State Public Power Supply System Rev.,
Nuclear Project No. 1, Series B.................. 7.125 07/01/16 1,350,525
445 Washington State Public Power Supply System Rev.,
Nuclear Project No. 1, Series D.................. 15.000 07/01/17 513,294
2,500 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series B.................. 7.000 07/01/12 2,589,975
1,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series B.................. 7.375 07/01/12 1,120,120
2,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series 1990-C............. 7.625 07/01/10 2,276,020
3,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 3, MBIA...................... 5.600 07/01/17 2,773,770
------------
TOTAL UTILITIES -- ELECTRIC.................... 81,874,240
------------
TOTAL MUNICIPAL BONDS (Cost $316,710,927)...... 337,510,328
------------
MUNICIPAL VARIABLE RATE DEMAND NOTES+ 2.9%
540 Anchorage, Alaska, Higher Education Rev. ........ 4.200 07/01/17 540,000
2,100 District Columbia, Series A-4.................... 4.750 10/01/07 2,100,000
2,000 District Columbia, Series A-6.................... 4.750 10/01/07 2,000,000
300 Illinois Health Facilities Authority Rev., La
Grand Memorial Health System..................... 4.600 12/01/16 300,000
900 Illinois Development Finance Authority Rev. ..... 4.200 04/01/07 900,000
750 Illinois Health Facilities Authority Rev. ....... 4.600 01/01/18 750,000
355 Jacksonville, Florida, Industrial Development
Rev. ............................................ 4.750 09/01/07 355,000
500 Maricopa County, Arizona, Industrial Development
Authority, Hospital Facility Rev., Series B-2.... 4.500 12/01/08 500,000
300 New York, New York, Subseries A-7, G.O. ......... 4.600 08/01/20 300,000
200 New York, New York, Subseries E-2, G.O. ......... 4.500 08/01/20 200,000
500 New York, New York, Subseries E-5, G.O. ......... 4.500 08/01/16 500,000
575 New York State Job Development Authority......... 4.500 03/01/07 575,000
200 Peninsula Ports, Virginia, Authority Rev., Port
Facilities....................................... 4.450 12/01/05 200,000
500 West Feliciana, Parish, Louisiana................ 4.750 04/01/16 500,000
</TABLE>

See Notes to Financial Statements

D-15
<PAGE> 291

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)

*Zero Coupon bond
+Interest rates are as of March 31, 1995
FHA -- Federal Housing Administration
G.O. -- General obligation bond
Rev. -- Revenue bond
IDR -- Industrial Revenue Bond

See Notes to Financial Statements

D-16
<PAGE> 292

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $326,930,927)............................... $347,730,328
Cash........................................................................... 63,719
Interest receivable............................................................ 6,874,209
Receivable for Fund shares sold................................................ 409,773
Receivable for investments sold................................................ 160,463
Other assets................................................................... 2,683
------------
Total Assets................................................................. 355,241,175
------------
LIABILITIES
Payable for Fund shares redeemed............................................... 923,890
Dividends payable.............................................................. 763,698
Due to Distributor............................................................. 217,909
Due to Adviser................................................................. 147,435
Deferred Director compensation................................................. 25,079
Accrued expenses............................................................... 133,378
------------
Total Liabilities............................................................ 2,211,389
------------
NET ASSETS, equivalent to $9.98 per share for Class A shares, $9.98 per share
for Class B shares and $9.99 per share for Class C shares.................... $353,029,786
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 30,671,176 Class A, 3,922,453 Class B and 794,623 Class
C shares outstanding......................................................... $ 353,883
Capital surplus................................................................ 342,630,860
Accumulated net realized loss on securities.................................... (9,875,520)
Net unrealized appreciation of investments..................................... 20,799,401
Accumulated deficit............................................................ (878,838)
------------
NET ASSETS at March 31, 1995................................................... $353,029,786
============
</TABLE>

See Notes to Financial Statements

D-17
<PAGE> 293

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)

<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest........................................................................ $12,361,124
-----------
EXPENSES
Management fees................................................................. 865,032
Service fees -- Class A......................................................... 299,675
Distribution and service fees -- Class B........................................ 186,720
Distribution and service fees -- Class C........................................ 38,876
Shareholder service agent's fees and expenses................................... 212,684
Accounting services............................................................. 66,960
Registration and filing fees.................................................... 51,672
Reports to shareholders......................................................... 32,076
Custodian fees.................................................................. 10,669
Audit fees...................................................................... 10,350
Directors' fees and expenses.................................................... 9,682
Legal fees...................................................................... 1,807
Miscellaneous................................................................... 6,781
-----------
Total expenses............................................................. 1,792,984
-----------
NET INVESTMENT INCOME........................................................... 10,568,140
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................................. (406,001)
Net unrealized appreciation of securities during the period..................... 5,430,649
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.................................. 5,024,648
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $15,592,788
===========
</TABLE>

See Notes to Financial Statements

D-18
<PAGE> 294

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1995 SEPTEMBER 30, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period............................... $354,257,068 $355,682,180
------------- ---------------
Operations
Net investment income....................................... 10,568,140 20,505,507
Net realized loss on securities............................. (406,001) (2,005,680)
Net unrealized appreciation (depreciation) of securities
during the period........................................ 5,430,649 (23,803,245)
------------- ---------------
Increase (decrease) in net assets resulting from
operations............................................. 15,592,788 (5,303,418)
------------- ---------------
Dividends to shareholders from net investment income
Class A..................................................... (9,121,444) (18,227,557)
Class B..................................................... (992,532) (1,534,981)
Class C..................................................... (205,815) (276,302)
------------- ---------------
(10,319,791) (20,038,840)
------------- ---------------
NET EQUALIZATION DEBITS (NOTE 1F)............................. -- (20,289)
------------- ---------------
Capital transactions
Proceeds from shares sold
Class A..................................................... 14,727,341 49,766,921
Class B..................................................... 5,982,935 25,694,674
Class C..................................................... 1,089,358 9,071,276
------------- ---------------
21,799,634 84,532,871
------------- ---------------
Proceeds from shares issued for dividends reinvested
Class A..................................................... 5,388,284 10,485,166
Class B..................................................... 608,782 958,506
Class C..................................................... 134,811 183,364
------------- ---------------
6,131,877 11,627,036
------------- ---------------
Cost of shares redeemed
Class A..................................................... (27,714,382) (60,814,520)
Class B..................................................... (5,310,821) (9,282,719)
Class C..................................................... (1,406,587) (2,125,233)
------------- ---------------
(34,431,790) (72,222,472)
------------- ---------------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL
TRANSACTIONS................................................ (6,500,279) 23,937,435
------------- ---------------
DECREASE IN NET ASSETS........................................ (1,227,282) (1,425,112)
------------- ---------------
NET ASSETS, end of period..................................... $353,029,786 $354,257,068
============= ===============
</TABLE>

See Notes to Financial Statements

D-19
<PAGE> 295

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CLASS A(1)
----------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30
MARCH 31, ---------------------------------------------
1995 1994 1993(2) 1992 1991 1990
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...... $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
---------- ------- ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Investment income....................... .35 .68 .69 .705 .71 .72
Expenses................................ (.05) (.09) (.094 ) (.09) (.08) (.08)
---------- ------- ------- ------ ------- ------
Net investment income..................... .30 .59 .596 .615 .63 .64
Net realized and unrealized gains or
losses on securities.................... .1555 (.7255) .558 .349 .5198 (.195)
---------- ------- ------- ------ ------- ------
Total from investment operations.......... .4555 (.1355) 1.154 .964 1.1498 .445
---------- ------- ------- ------ ------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.2955) (.5745) (.596 ) (.624) (.6398) (.645)
Distributions in excess of book-basis
net investment income(3)............. -- -- (.008 ) -- -- --
---------- ------- ------- ------ ------- ------
Total distributions....................... (.2955) (.5745) (.604 ) (.624) (.6398) (.645)
---------- ------- ------- ------ ------- ------
Net asset value, end of period............ $ 9.98 $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13
======== ======= ====== ====== ======= ======
TOTAL RETURN(4)........................... 4.76% (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...... $ 306.0 $ 309.0 $332.3 $292.3 $ 266.9 $237.4
Average net assets (millions)............. $ 300.9 $ 324.2 $313.0 $278.6 $ 253.2 $241.2
Ratios to average net assets (annualized):
Expenses................................ .93% .93% .91% .90% .89% .86%
Net investment income................... 6.23% 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate................... 2% 6% 3% 6% 10% 17%
</TABLE>

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

(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1 stock
split effected July 26, 1991. Additionally, in 1991, the Fund adopted for
financial reporting purposes a method of accounting for debt discounts and
premiums which is the same as is used for federal income tax reporting. The
effect of the change, on a pro forma basis, would have been to increase net
investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amount of $.01 for 1990. Similarly, the
ratio of net investment income to average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information was not restated.
(4) Total return for a period of less than one full year is not annualized.
Total return does not consider the effect of sales charges.

See Notes to Financial Statements

D-20
<PAGE> 296

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CLASS C
CLASS B(1) ------------------------------------------
---------------------------------- AUGUST 30,
SIX MONTHS YEAR ENDED SIX MONTHS 1993(5)
ENDED SEPTEMBER 30, ENDED YEAR ENDED THROUGH
MARCH 31, ------------------- MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1993(2) 1995 1994(2) 1993(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $ 9.83 $ 10.53 $ 9.98 $ 9.83 $ 10.54 $ 10.53
---------- ------- ------- ---------- ------------- -------------
INCOME FROM INVESTMENT OPERATIONS:
Investment income.................. .35 .68 .685 .35 .69 .05
Expenses........................... (.09) (.17) (.175 ) (.09) (.18) (.015)
---------- ------- ------- ---------- ------------- -------------
Net investment Income................ .26 .51 .51 .26 .51 .035
Net realized and unrealized gains or
losses on securities............... .1485 (.7195) .564 .1585 (.7295) .061
---------- ------- ------- ---------- ------------- -------------
Total from investment operations..... .4085 (.2095) 1.074 .4185 (.2195) .096
---------- ------- ------- ---------- ------------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment
income........................... (.2585) (.4905) (.501 ) (.2585) (.4905) (.007)
Distributions in excess of
book-basis net investment
income(3)........................ -- -- (.023 ) -- -- (.079)
---------- ------- ------- ---------- ------------- -------------
Total distributions.................. (.2585) (.4905) (.524 ) (.2585) (.4905) (.086)
---------- ------- ------- ---------- ------------- -------------
Net asset value, end of period....... $ 9.98 $ 9.83 $10.53 $ 9.99 $ 9.83 $ 10.54
========== ======== ======= ========== ============ ============
TOTAL RETURN(4)...................... 4.25% (2.13)% 11.15 % 4.25% (2.03)% .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions)......................... $ 39.1 $ 37.2 $ 22.1 $ 7.9 $ 8.0 $ 1.3
Average net assets (millions)........ $ 37.3 $ 31.2 $ 10.0 $ 7.8 $ 5.4 $ 0.4
Ratios to average net assets
Expenses........................... 1.74%(6) 1.72% 1.71 % 1.74%(6) 1.72% 1.69%(6)
Net investment income.............. 5.42%(6) 5.00% 4.96 % 5.42%(6) 5.03% 4.25%(6)
Portfolio turnover rate.............. 2% 6% 3 % 2% 6% 3%
</TABLE>

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

(1) Sales of Class B commenced September 29, 1992 at a net asset value of $10.00
per share. At September 30, 1992, there were 50 Class B shares outstanding
with a per share net asset value of $9.98. The decrease in net asset value
was due principally to a dividend of $.052 per share. Other financial
highlights for Class B shares for this short period (September 29, 1992 to
September 30, 1992) are not presented as they are not meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(5) Commencement of offering of sales.
(6) Annualized

See Notes to Financial Statements

D-21
<PAGE> 297

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

American Capital Municipal Bond Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.

A. INVESTMENT VALUATIONS -- Investments in municipal bonds are valued at
the most recently quoted bid prices or at bid prices based on a matrix system
(which considers such factors as security prices, yields, maturities and
ratings) furnished by dealers and an independent pricing service. Municipal
variable rate demand notes are valued at par; periodic rate changes reflect
current market conditions.

Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued based
on market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.

Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.

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. At March 31, 1995, debt securities rated below investment
grade and comparable unrated securities represented approximately 20% of the
investment portfolio.

B. FEDERAL INCOME TAXES -- No provision for federal income taxes is
required because the Fund has elected to be taxed as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code") and
intends to maintain this qualification by annually distributing all of its
taxable net investment income and taxable net realized capital gains to its
shareholders. It is anticipated that no distributions of net realized capital
gains will be made until tax basis capital loss carryforwards expire or are
offset by net realized capital gains.

The net realized capital loss carryforward for federal income tax purposes
of approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.

C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME -- Investment
transactions are accounted for on the trade date. Realized gains and losses on
investments are determined on the basis of identified cost. Interest income is
accrued daily.

D. DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions to
shareholders are recorded on the record date. The Fund distributes tax basis
earnings in accordance with the minimum distribution require-

D-22
<PAGE> 298

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)

ments of the Code, which may differ from generally accepted accounting
principles. Such dividends or distributions may exceed financial statement
earnings.

E. DEBT DISCOUNT AND PREMIUM -- The Fund accounts for debt discounts and
premiums on the same basis as is followed for federal income tax reporting.
Accordingly, original issue discounts and all premiums are amortized over the
life of the security. Market discounts are recognized at the time of sale as
realized gains for book purposes and ordinary income for tax purposes.

F. EQUALIZATION -- At September 30, 1994, the Fund discontinued the
accounting practice of equalization, which it had used since its inception.
Equalization is a practice whereby a portion of the proceeds from sales and
costs of redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or credited to
undistributed net investment income.

G. WHEN-ISSUED SECURITIES -- Delivery and payment for securities purchased
on a when-issued basis may take place up to 45 days after the date of the
transaction. The securities purchased are subject to market fluctuation during
this period. To meet the payment obligation, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.

NOTE 2 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Van Kampen American Capital Asset Management, Inc. (the "Adviser") serves
as investment manager of the Fund. Management fees are paid monthly, based on
the rate of .50% per annum of the average daily net assets of the Fund.

Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among investment companies advised or sub-advised by the Adviser. For
the period March 31, 1995, these charges included $5,384 as the Fund's share of
the employee costs attributable to the Fund's accounting officers. A portion of
the accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services provided by the Adviser are at
cost.

American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent. These services are provided at
cost plus a profit. For the period ended March 31, 1995, the fees for such
services were $147,187.

The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retailer Dealer") both
affiliates of the Adviser, received $27,527 and $30,555, respectively, as their
portion of the commissions charged on sales of Fund shares during the period.

D-23
<PAGE> 299

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)

$1.5 million and $110,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.

Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a Trustee of the Fund.

Certain officers and directors of the Fund are officers and directors of
the Adviser, the Distributor, the Retail Dealer and the shareholder services
agent.

NOTE 3 -- INVESTMENT ACTIVITY

During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $8,215,930 and $12,451,313,
respectively.

For federal income tax purposes, the identified cost of investments owned
at March 31, 1995 was $326,964,141. Net unrealized appreciation of investments
aggregated $20,766,187, gross unrealized appreciation of investments aggregated
$23,399,469, and gross unrealized depreciation of investments aggregated
$2,633,282.

NOTE 4 -- DIRECTOR COMPENSATION

Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $1,250 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $470. During the period, such fees aggregated $7,453.

The directors may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered by the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.

NOTE 5 -- CAPITAL

The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.

D-24
<PAGE> 300

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)

The Fund has 200 million shares of each class of shares of $.01 par value
of capital stock authorized. Transactions in shares of capital stock were as
follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................................ 1,519,426 4,883,618
Class B............................................................ 617,796 2,518,998
Class C............................................................ 110,152 884,668
---------- -------------
2,247,374 8,287,284
---------- -------------
Shares issued for dividends reinvested
Class A............................................................ 554,575 1,032,887
Class B............................................................ 62,597 94,773
Class C............................................................ 13,854 18,175
---------- -------------
631,026 1,145,835
---------- -------------
Shares redeemed
Class A............................................................ (2,866,089) (6,004,203)
Class B............................................................ (549,554) (915,403)
Class C............................................................ (143,583) (210,194)
---------- -------------
(3,559,226) (7,129,800)
---------- -------------
Increase (decrease) in shares outstanding............................ (680,826) 2,303,319
========== =============
</TABLE>

NOTE 6 -- SUBSEQUENT DIVIDENDS

The Board of Directors of the Fund declared a dividend of $.05 per share
for Class A shares, $.044 per share for Class B and Class C shares from net
investment income, payable May 15, 1995 to shareholders of record on April 28,
1995.

D-25
<PAGE> 301

APPENDIX E

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 2.7%
2,805 Alabama Higher Edl Ln Corp.......... AAA Aaa 6.000 9/01/07 2,722,477
2,100 Alabama St Indl Dev Auth Rev Var
Rate Cpn............................ NR NR 7.500 9/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A
(AMBAC Insd)........................ AAA Aaa 6.750 8/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl
Dev Rev Coltec Inds Inc Rfdg........ NR NR 6.500 2/15/09 4,489,851
1,225 IDB of the City of Bessemer, AL Rohn
Inc Ser 91A Var Rate Cpn............ NR NR 9.000 9/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn
Inc Ser 91A Var Rate Cpn............ NR NR 9.500 9/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev
(MBIA Insd)......................... AAA Aaa 5.000 8/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev
(MBIA Insd)......................... AAA Aaa 5.250 8/01/18 880,738
------------
17,907,001
------------
ALASKA 1.6%
5,690 Kasaan, AK Lease Rev................ A- Baa1 8.000 8/15/16 5,979,507
8,000 North Slope Borough, AK Cap
Appreciation Ser B (Cap Gar Insd)... AAA Aa * 6/30/04 4,389,840
------------
10,369,347
------------
ARIZONA 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl
Dev Rev Borden Inc Proj............. NR Ba1 * 10/01/12 964,750
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth
Ser A (Prerefunded @ 07/01/00)...... BB NR 9.500 7/01/10 6,119,458
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev
Lockheed Aermod Cent Inc............ A- Baa1 8.700 9/01/19 7,697,480
------------
14,781,688
------------
</TABLE>

See Notes to Financial Statements

E-1
<PAGE> 302

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARKANSAS 1.0%
5,470 Dogwood Addition PRD Muni Ppty
Owners Multi Purp Impt Dist No 8 AR
Impt Ser A(3)....................... NR NR 9.750 7/01/12 3,440,630
5,470 Dogwood Addition PRD Muni Ppty
Owners Multi Purp Impt Dist No 8 AR
Impt Ser B(3)....................... NR NR 9.750 7/01/12 3,440,630
------------
6,881,260
------------
CALIFORNIA 9.3%
6,880 California Edl Fac Auth Rev College
Of Osteopathic Med Pacific.......... NR NR 7.500 6/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev
Kaiser Permanente Med............... AA Aa2 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev
Dept of Corrections CA St Prison
Susanville Ser D (Cap Guar Insd).... AAA Aaa 5.250 6/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth
Rev Ctfs Partn Sisters Charity...... NR Aa 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth
Rev Ctfs Partn Sisters Charity...... NR Aa 5.000 12/01/23 1,704,461
4,325 Delano, CA Ctfs Partn Ser A......... NR NR 9.250 1/01/22 4,649,375
1,000 Fairfield, CA Hsg Auth Mtg Rev
Creekside Estates Proj Rfdg......... NR NR 7.875 2/01/15 1,000,000
10,000 Los Angeles Cnty, CA Pub Wks Fin
Auth Lease Rev Multi Cap Fac Proj IV
(MBIA Insd)......................... AAA Aaa 5.000% 12/01/08 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy
Cmnty Redev Fin Auth Rev Grand Cent
Sq Ser A............................ A A 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy
Cmnty Redev Fin Auth Rev Grand Cent
Sq Ser A............................ A A 5.900 12/01/26 836,100
1,100 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/05 570,680
</TABLE>

See Notes to Financial Statements

E-2
<PAGE> 303

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA -- CONTINUED
900 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/10 323,415
800 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/11 268,584
700 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/12 219,156
700 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/13 204,295
700 Monterey, CA Regl Wastewater Fin
Auth Wastewater Contract Rev (FSA
Insd)............................... AAA Aaa * 6/01/14 190,358
3,200 Orange Cnty, CA Cmnty Fac Dist Spl
Tax No 88-1 Aliso Viejo Ser A
(Prerefunded @ 08/15/02)............ AAA NR 7.350 8/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease
Rev Ser A Rfdg (AMBAC Insd)......... AAA Aaa 5.400 11/01/20 5,799,500
1,000 San Jose, CA Fin Auth Rev Reassmt
Ser C Rfdg.......................... NR NR 7.000 9/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease
Rev Justice Cent Proj Ser A Rfdg.... NR Baa1 5.900 9/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj
Ser C Rfdg (AMBAC Insd)............. AAA Aaa 5.250 9/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc
Rev Yorba Linda Redev Proj Ser A
(MBIA Insd)......................... AAA Aaa * 9/01/19 951,650
------------
61,607,737
------------
COLORADO 7.2%
3,985 Adams Cnty, CO Single Family Mtg Rev
Ser A............................... AAA Aaa 8.875 8/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev
Ser A (Prerefunded @ 08/01/10)...... AAA Aaa 8.875 8/01/11 3,434,668
</TABLE>

See Notes to Financial Statements

E-3
<PAGE> 304

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COLORADO -- CONTINUED
3,900 Colorado Hlth Fac Auth Rev Hosp
North CO Med Cent (MBIA Insd)....... AAA Aaa 6.000 5/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser
A................................... BB Baa 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser
A................................... BB Baa 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser
A................................... BB Baa 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1
Ser A Rfdg.......................... A+ A * 12/01/06 4,565,145
3,690 Jefferson Cnty, CO Residential Mtg
Rev................................. AAA Aaa 11.500 9/01/12 5,553,856
5,000 Meridian Metro Dist CO Peninsular &
Oriental Steam Navig Co Rfdg........ NR A3 7.500% 12/01/11 5,121,750
5,000 University of CO Hosp Auth Hosp Rev
Ser A (AMBAC Insd).................. AAA Aaa 6.400 11/15/22 4,891,450
------------
47,583,432
------------
CONNECTICUT 1.0%
5,005 Connecticut St Hlth & Edl Fac Auth
Rev Nursing Home Pgm AHF/Hartford... AA- A1 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A................ AA- Aa 5.500 3/15/10 1,839,160
------------
6,885,251
------------
DISTRICT OF COLUMBIA 0.6%
4,000 District of Columbia Ctfs Partn..... BBB NR 7.300 1/01/13 3,808,240
------------
FLORIDA 3.4%
3,000 Emerald Coast, FL Hsg Corp Hsg Rev
Ser A 1991.......................... NR NR 9.500 1/01/22 3,000,000
5,000 Florida St Div Bond Fin Dept Genl
Svcs Rev Environmental Preservation
2000 Ser A.......................... AAA Aaa 4.750 7/01/10 4,114,850
335 Largo, FL Sun Coast Hlth Sys Rev
Hosp Rfdg........................... BBB- NR 5.750 3/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev
Hosp Rfdg........................... BBB- NR 5.750 3/01/05 796,527
</TABLE>

See Notes to Financial Statements

E-4
<PAGE> 305

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA -- CONTINUED
2,875 Martin Cnty, FL Indl Dev Auth Indl
Dev Rev Indiantown Cogeneration Proj
A Rfdg (AMBAC Insd)................. BBB- Baa3 7.875 12/15/25 2,920,425
855 Pinellas Cnty, FL Hlth Fac Auth Sun
Coast Hlth Sys Rev Sun Coast Hosp
Ser A............................... BBB- NR 8.500 3/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun
Coast Hlth Sys Rev Sun Coast Hosp
Ser A (Prerefunded @ 03/01/00)...... AAA NR 8.500 3/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev
Hlthcare Kobernick/Meadow Park...... NR NR 10.000 7/01/22 4,420,486
------------
22,175,786
------------
GEORGIA 0.4%
2,813 Cobb Cnty, GA Dev Auth Rev Grantor
Tr Ctfs Franklin Forest Ser A....... NR NR 8.000 6/01/22 2,925,000
------------
HAWAII 3.6%
4,055 Hawaii St Arpts Sys Rev Ser 1993
(MBIA Insd)......................... AAA Aaa 6.350 7/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp
Rev Hawaiian Elec Co (MBIA Insd).... AAA Aaa 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev
Continental Airls Inc............... NR NR 9.600 6/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev
Continental Airls Inc............... NR NR 9.700 6/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev (FGIC
Insd)............................... AAA Aaa 6.350 7/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev (FGIC
Insd)............................... AAA Aaa 6.400 7/01/08 1,568,268
------------
23,416,754
------------
ILLINOIS 13.4%
4,500 Bedford Park, IL Tax Increment Rev
Sr Lien Bedford City Sq Proj........ NR NR 9.250% 2/01/12 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr
Lien................................ NR NR 8.250 7/01/13 6,895,000
</TABLE>

See Notes to Financial Statements

E-5
<PAGE> 306

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS -- CONTINUED
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser
C1 (MBIA Insd)...................... AAA Aaa 5.750 1/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev Intl Terminal................... AAA Aaa 6.750 1/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc................ BB Baa3 8.500 5/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc Ser A.......... BB Baa2 8.400 5/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc Ser B.......... BB Baa2 8.950 5/01/18 5,436,274
1,700 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor Ser B (FGIC
Insd)............................... AAA Aaa * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor Ser B (FGIC
Insd)............................... AAA Aaa * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor Ser B (FGIC
Insd)............................... AAA Aaa * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor Ser B (FGIC
Insd)............................... AAA Aaa * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor Ser B (FGIC
Insd)............................... AAA Aaa * 12/01/12 514,794
4,800 Hodgkins, IL Tax Increment.......... NR NR 9.500 12/01/09 5,184,000
4,100 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Proj A.................. NR NR 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Proj B.................. NR NR 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks
Med Cent Ser D...................... BBB Baa1 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks
Med Cent Ser D (Prerefunded @
11/15/00)........................... AAA NR 9.500 11/15/15 512,512
</TABLE>

See Notes to Financial Statements

E-6
<PAGE> 307

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS -- CONTINUED
1,150 Illinois Hlth Fac Auth Rev Holy
Cross Hosp Proj..................... NR Baa1 6.700 3/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai
Hosp Med Cent Chicago Ser A......... BB- Ba 10.250 2/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev
Servantcor Proj Ser A (Cap Guar
Insd)............................... AAA Aaa 6.250 8/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev
Servantcor Proj Ser A (Cap Guar
Insd)............................... AAA Aaa 6.375 8/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United
Med Cent (Prerefunded @ 07/01/01)... NR NR 8.375 7/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential
Mtg Rev (Inverse Fltg).............. A+ Aa 9.086 2/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic
Cent Ser B (AMBAC Insd)............. AAA Aaa * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A (AMBAC
Insd)............................... AAA Aaa 8.000 6/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins
Res Recovery Partners Ser A......... NR NR 9.250 10/15/14 7,216,230
1,490 Southern IL Univ Rev Hsg & Aux Fac
Sys Ser A (MBIA Insd)............... AAA Aaa 5.800 4/01/10 1,381,692
------------
88,479,962
------------
INDIANA 0.9%
2,750 Elkhart Cnty, IN Hosp Auth Rev
Elkhart Genl Hosp Inc............... NR A1 7.000% 7/01/12 2,770,818
3,000 Indianapolis, IN Arpt Auth Rev Spl
Fac Federal Express Corp Proj....... BBB Baa2 7.100 1/15/17 2,874,510
------------
5,645,328
------------
IOWA 0.3%
25,000 Iowa Hsg Fin Auth Single Family Hsg
Rev 1984 Ser A...................... AA Aaa * 9/01/16 2,214,250
------------
KENTUCKY 1.7%
1,000 Bowling Green, KY Indl Dev Rev
Coltec Inds Inc Rfdg................ NR NR 6.550 3/01/09 938,510
</TABLE>

See Notes to Financial Statements

E-7
<PAGE> 308

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KENTUCKY -- CONTINUED
2,800 Elizabethtown, KY Indl Dev Rev
Coltec Inds Inc..................... B+ Ba2 9.875 10/01/10 2,842,532
4,000 Jefferson Cnty, KY Hosp Rev Alliant
Hlth Sys Proj (Inverse Fltg) (MBIA
Insd)............................... AAA Aaa 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent
Rev Ashland Hosp Corp Ser A Rfdg &
Impt (Cap Guar Insd)................ AAA Aaa 6.125 2/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D
(FHA/VA Collateralized)............. AAA Aaa 7.450 1/01/23 2,190,924
------------
11,096,429
------------
LOUISIANA 0.8%
2,600 Lafayette, LA Econ Dev Auth Indl Dev
Rev Advanced Polymer Proj Ser
1985................................ NR NR 10.000 12/31/00 2,672,644
10,000 Orleans Parish, LA Sch Brd Rfdg
(FGIC Insd)......................... AAA Aaa * 2/01/15 2,407,600
------------
5,080,244
------------
MAINE 0.5%
1,500 Maine Edl Ln Marketing Corp Student
Ln Rev Ser A4....................... NR Aaa 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student
Ln Rev Ser A4....................... NR Aaa 5.600 11/01/00 1,955,140
------------
3,420,190
------------
MARYLAND 1.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev
Bethlehem Steel Corp Proj Ser A
Rfdg................................ NR NR 7.550 6/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac
Auth Rev Kernan Hosp Issue (Connie
Lee Insd)........................... AAA NR 6.100 7/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid
Waste Rev Montgomery Cnty Res
Recovery Proj Ser A................. NR A 6.200 7/01/10 2,706,960
</TABLE>

See Notes to Financial Statements

E-8
<PAGE> 309

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARYLAND -- CONTINUED
1,165 Rockville, MD Mtg Rev Summit Apts
Proj Ser A Rfdg (MBIA Insd)......... AAA Aaa 5.625 7/01/19 989,353
------------
8,328,038
------------
MASSACHUSETTS 1.7%
1,665 Massachusetts Edl Ln Auth Edl Ln Rev
Issue E Ser A (AMBAC Insd).......... AAA Aaa 7.000 1/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth
Rev New England Med Cent Hosp Ser G
(Embedded Swap) (MBIA Insd)......... AAA Aaa 5.000 7/01/13 3,398,262
6,000 Massachusetts St Hlth & Edl Fac Auth
Rev Saint Mem Med Cent Ser A........ NR B 5.750% 10/01/06 4,272,000
2,000 Plymouth Cnty, MA Ctfs Partn Ser
A................................... A- NR 7.000 4/01/22 2,005,280
------------
11,362,670
------------
MICHIGAN 1.4%
2,000 Grand Traverse Cnty, MI Hosp Fin
Auth Hosp Rev Munson Hlthcare Ser A
Rfdg (AMBAC Insd)................... AAA Aaa 6.250 7/01/12 1,925,960
2,470 Michigan St Hosp Fin Auth Rev Garden
City Hosp........................... BBB- Ba 8.300 9/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg
Rev Ser B (Embedded Swap) (AMBAC
Insd)............................... AAA Aaa 2.870 4/01/04 4,532,416
2,390 Romulus, MI Cmnty Sch Rfdg (FGIC
Insd)............................... AAA Aaa * 5/01/19 465,190
------------
9,400,976
------------
MINNESOTA 0.2%
8,160 Southern MN Muni Pwr Agy Pwr Supply
Sys Rev Ser A (MBIA Insd)........... AAA Aaa * 1/01/22 1,351,949
------------
MISSISSIPPI 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp &
Pollutn Ctl Rev Var Weyerhaeuser Co
Rfdg (Inverse Fltg)................. A A2 6.560 4/01/22 4,706,600
------------
</TABLE>

See Notes to Financial Statements

E-9
<PAGE> 310

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MISSOURI 2.6%
2,000 Lees Summit, MO Indl Dev Auth Hlth
Fac Rev John Knox Vlg Proj Rfdg &
Impt................................ NR NR 7.125 8/15/12 2,001,660
1,890 Missouri St Econ Dev Export &
Infrastructure Brd Med Office Fac
Rev (MBIA Insd)..................... AAA Aaa 7.250 6/01/04 2,014,570
3,920 Missouri St Econ Dev Export &
Infrastructure Brd Med Office Fac
Rev (MBIA Insd)..................... AAA Aaa 7.250 6/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth
Fac Rev Hlth Midwest Ser B (MBIA
Insd)............................... AAA Aaa 6.250 2/15/22 3,790,200
3,000 Missouri St Hlth & Edl Fac Rev
Freeman Hosp Proj Ser A............. AAA Aaa 5.375 2/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth
Nursing Home Rev Mary Queen & Mother
Proj Rfdg........................... NR Aaa 7.125 3/20/23 2,213,258
------------
16,830,355
------------
MONTANA 0.8%
6,000 Montana St Brd Invt Res Recovery Rev
Yellowstone Energy L P Proj......... NR NR 7.000 12/31/19 5,373,240
------------
NEBRASKA 1.2%
5,200 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg).............. AAA Aaa 9.963 9/15/23 4,998,500
850 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg).............. AAA Aaa 9.293 9/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg).............. AAA Aaa 10.542 9/10/30 1,892,250
------------
7,639,812
------------
NEVADA 2.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr
Co Proj Ser A (FGIC Insd)........... AAA Aaa 6.700 6/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev
Southwest Gas Corp Ser A............ BBB- Baa3 6.500 12/01/33 5,403,970
</TABLE>

See Notes to Financial Statements

E-10
<PAGE> 311

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEVADA -- CONTINUED
2,500 Henderson, NV Loc Impt Dist No T-4
Ser A............................... NR NR 8.500% 11/01/12 2,531,100
2,575 Humboldt Genl Hosp Dist NV.......... NR Baa 6.125 6/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc
Downtown Redev Proj Ser E Rfdg...... NR Baa 5.750 9/01/17 3,448,517
------------
17,637,235
------------
NEW JERSEY 2.9%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev
Ser A Rfdg (Inverse Fltg) (MBIA
Insd)............................... AAA Aaa 8.448 8/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt
Transition Fac Rev Ser A (MBIA
Insd)(2)............................ AAA Aaa 5.800 7/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt
Transition Fac Rev Ser A (MBIA
Insd)............................... AAA Aaa 5.800 7/01/08 1,918,720
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin
Auth Rev Pub Svc Elec & Gas Co Proj
B Rfdg (MBIA Insd).................. AAA Aaa 6.250 6/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin
Auth Rev Pub Svc Elec & Gas Co Proj
C Rfdg (MBIA Insd).................. AAA Aaa 6.200 8/01/30 1,165,562
------------
19,363,091
------------
NEW MEXICO 0.4%
2,500 New Mexico St Hosp Equip Ln Council
Hosp Rev San Juan Regl Med Cent Inc
Proj................................ NR A 7.900 6/01/11 2,654,150
------------
NEW YORK 16.0%
4,945 Battery Park City Auth NY Rev Sr Ser
A Rfdg.............................. AA A1 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic
Hosp Rev............................ NR NR 8.000 1/01/20 3,583,155
</TABLE>

See Notes to Financial Statements

E-11
<PAGE> 312

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK 16.0% -- CONTINUED
2,500 Herkimer Cnty, NY Indl Dev Agy Indl
Dev Rev Burrows Paper Corp
Recycling........................... NR NR 8.000 1/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter
Fac Rev Ser A (MBIA Insd)........... AAA Aaa 6.100 7/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs
Contract Tran Fac Ser 5 Rfdg........ BBB Baa1 7.000 7/01/12 5,025,350
5,000 New York City Indl Dev Agy Spl Fac
Rev Terminal One Group Assn Proj.... A A 6.000 1/01/19 4,355,000
4,000 New York City Muni Wtr Fin Auth..... A- A 5.625 6/15/11 3,520,600
20,000 New York City Muni Wtr Fin Auth Wtr
& Swr Sys Rev (MBIA Insd)........... AAA Aaa 5.350 6/15/12 17,209,000
2,500 New York City Ser B................. A- Baa1 7.500 2/01/07 2,606,625
5,000 New York City Ser C Rfdg............ A- Baa1 6.500 8/01/04 4,938,050
7,500 New York City Ser C Subser C-1...... A- Baa1 7.500 8/01/20 7,692,225
5,000 New York City Ser H................. A- Baa1 7.000 2/01/16 4,931,850
2,580 New York City Ser H Subser H-1...... A- Baa1 4.900 8/01/97 2,505,232
14,600 New York St Dorm Auth Rev City Univ
3rd Genl Resources Ser E (MBIA
Insd)............................... AAA Aaa 6.750 7/01/24 14,634,602
2,500 New York St Energy Resh & Dev Auth
Gas Fac Rev (Inverse Fltg).......... A A1 8.041 4/01/20 1,990,625
2,000 New York St Energy Resh & Dev Auth
Pollutn Ctl Rev Niagara Mohawk Pwr
Corp Ser A Rfdg (FGIC Insd)......... AAA Aaa 7.200 7/01/29 2,072,800
7,000 New York St Energy Resh & Dev Auth
Pollutn Ctl Rev NY St Elec & Gas
Corp Ser A Rfdg (MBIA Insd)......... AAA Aaa 6.050 4/01/34 6,371,120
490 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Impt Ser A..... BBB+ Baa1 7.750 8/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Impt Ser A
(Prerefunded @ 02/15/01)............ AAA Aaa 7.750 8/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Ser C.......... BBB+ Baa1 7.300 2/15/21 499,658
</TABLE>

See Notes to Financial Statements

E-12
<PAGE> 313

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK 16.0% -- CONTINUED
1,505 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Ser C
(Prerefunded @ 08/15/01)............ AAA Aaa 7.300 2/15/21 1,663,085
5,000 New York St Urban Dev Corp Rev
Correctional Cap Fac Ser A Rfdg (FSA
Insd)............................... AAA Aaa 6.500 1/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St
Fac................................. BBB Baa1 7.500 4/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy
Rev Proj Res Recovery Fac........... NR Baa 6.875 5/01/06 2,920,380
1,000 Troy, NY Indl Dev Auth Lease Rev
City of Troy Proj................... NR NR 8.000 3/15/22 1,021,980
------------
105,759,358
------------
NORTH DAKOTA 0.3%
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint
Joseph's Hosp Corp Proj............. BBB- NR 8.875 11/15/24 2,022,540
------------
OHIO 2.3%
4,660 Franklin Cnty, OH Hosp Rev Holy
Cross Hlth Sys Ser B Rfdg........... AA- A1 5.250 6/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg
Rev Ser B (Inverse Fltg)............ AAA Aaa 9.213 3/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG
Fdg Ltd Partnership Proj Rfdg (AMBAC
Insd)............................... AAA Aaa 6.375 4/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac
Rev College Cleveland Elec Ser A
Rfdg................................ BB Ba2 8.000 10/01/23 1,962,140
------------
15,195,140
------------
OKLAHOMA 0.5%
2,810 Oklahoma Hsg Fin Agy Single Family
Rev Mtg Class B (Inverse Fltg)...... AAA NR 7.997 8/01/18 3,034,800
------------
PENNSYLVANIA 1.7%
3,000 Allentown, PA Area Hosp Auth Rev
Sacred Heart Hosp Ser A Rfdg........ BBB NR 6.750 11/15/14 2,613,420
</TABLE>

See Notes to Financial Statements

E-13
<PAGE> 314

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA -- CONTINUED
2,000 Delaware Cnty, PA Auth Hosp Rev
Cmnty Hosp Crozer-Chester Mem Cent.. BBB+ A 6.000 12/15/20 1,587,840
1,500 McKean Cnty, PA Hosp Auth Hosp Rev
Bradford Hosp Proj (Crossover Rfdg @
10/01/00)........................... BBB- NR 8.875 10/01/20 1,734,660
3,000 Montgomery Cnty, PA Higher Edl &
Hlth Auth Hosp Rev (Embedded Swap)
(AMBAC Insd)........................ AAA Aaa 5.660 6/01/12 2,588,940
2,000 Philadelphia, PA Hosp & Higher Edl
Fac Auth Hosp Rev Temple Univ Hosp
Ser A............................... BBB+ Baa1 6.500% 11/15/08 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease
Ser B Rfdg.......................... BB Ba 6.400 11/15/16 870,416
------------
11,268,496
------------
RHODE ISLAND 1.4%
2,000 Providence, RI Redev Agy Ctfs Partn
Ser A............................... NR NR 8.000 9/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn
Corp Spl Oblig Ser A (Prerefunded @
08/01/02)........................... AAA Aaa 6.950 8/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp
Rental Hsg Pgm Ser B................ A NR 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A.............. NR Ba 6.800 7/15/98 2,507,501
600 West Warwick, RI Ser A.............. NR Ba 7.300 7/15/08 604,374
------------
9,127,037
------------
TENNESSEE 0.5%
1,500 Maury Cnty, TN Indl Dev Brd Pollutn
Ctl Rev Multi Modal Saturn Corp Proj
Rfdg................................ BBB+ Baa1 6.500 9/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth
Spl Fac & Proj Rev Federal Express
Corp Rfdg........................... BBB Baa2 7.875 9/01/09 1,592,235
------------
2,976,945
------------
</TABLE>

See Notes to Financial Statements

E-14
<PAGE> 315

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS 3.6%
2,500 Garland, TX Econ Dev Auth Indl Dev
Rev Yellow Freight Sys Inc Proj..... A- NR 8.000 12/01/16 2,605,475
3,995 Leander, TX Indpt Sch Dist Cap
Apprec Rfdg......................... NR Aaa * 8/15/16 853,652
3,500 North Cent, TX Hlth Fac Dev Corp Rev
Ser C Presbyterian Hlthcare Sys
(Inverse Fltg) (MBIA Insd).......... AAA Aaa 10.655 6/22/21 3,364,375
13,000 Texas Muni Pwr Agy Rev (MBIA Insd).. AAA Aaa * 9/01/13 3,785,340
5,250 Texas St Dept Hsg & Cmnty Affairs
Home Mtg Rev Coll Ser C Rfdg
(Inverse Fltg)...................... AAA NR 9.207 7/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd
College Student Ln(4)............... NR A 0/7.850 10/01/25 2,391,494
3,954 Texas St............................ NR NR 6.350 12/01/13 3,888,447
2,250 West Side Calhoun Cnty, TX Navig
Dist Solid Waste Disp Union Carbide
Chem & Plastics..................... BBB Baa2 8.200 3/15/21 2,365,897
------------
24,045,305
------------
UTAH 2.1%
3,215 Bountiful, UT Hosp Rev South Davis
Cmnty Hosp Proj..................... NR NR 9.500 12/15/18 3,271,070
11,000 Salt Lake City, UT Hosp Rev IHC Hosp
Inc Rfdg (Inverse Fltg)............. AA Aa 6.150 2/15/12 9,668,560
1,000 Utah St Hsg Fin Agy Single Family
Mtg Ser F2.......................... AAA Aaa 7.000 7/01/27 1,001,560
------------
13,941,190
------------
VIRGINIA 1.8%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp
Rev (AMBAC Insd).................... AAA Aaa 5.500 9/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth
Hosp Fac Rev (Inverse Fltg) (FGIC
Insd)............................... AAA Aaa 6.600 8/15/23 3,403,330
2,080 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)............................... AAA.. Aaa 6.800% 3/01/14 2,102,423
</TABLE>

See Notes to Financial Statements

E-15
<PAGE> 316

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VIRGINIA -- CONTINUED
1,000 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)............................... AAA Aaa 6.900 3/01/19 1,011,500
3,535 Norfolk, VA Wtr Rev................. AAA Aaa 5.250 11/01/13 3,038,014
1,250 Southeastern Pub Svc Auth VA Rev Sr
Regl Solid Waste Sys................ A- A 6.000 7/01/17 1,100,425
------------
11,520,352
------------
WEST VIRGINIA 1.4%
2,500 Harrison Cnty, WV Cnty Comm Solid
Waste Disp Rev Monongahela Pwr Co... A A1 6.875 4/15/22 2,449,900
6,750 South Charleston, WV Indl Dev Rev
Union Carbide Chem & Plastics Ser
A................................... BBB Baa2 8.000 8/01/20 7,020,810
------------
9,470,710
------------
WISCONSIN 0.5%
3,200 Wisconsin Hsg & Econ Dev Auth Home
Ownership Rev Rfdg (Inverse Fltg)... A+ Aa 9.580 10/25/22 3,008,000
------------
WYOMING 0.3%
2,000 Sweetwater Cnty, WY Solid Waste Disp
Rev FMC Corp Proj Ser B............. BBB Baa3 6.900... 9/01/24 1,842,220
------------
TOTAL LONG-TERM INVESTMENTS 98.9%
(Cost $667,323,342)(1).................................................................... 652,138,108
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1%................................................ 7,216,006
------------
NET ASSETS 100%........................................................................... $659,354,114
============
</TABLE>

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

*Zero coupon bond
(1) At December 31, 1994, for federal income tax purposes cost is $667,518,084;
the aggregate gross unrealized appreciation is $30,921,003 and the
aggregate gross unrealized depreciation is $44,250,963, resulting in net
unrealized depreciation including futures transactions of $13,329,960.
(2) Asswte segregated as collateral for open futures transactions.
(3) Non-income producing security.
(4) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.

See Notes to Financial Statements

E-16
<PAGE> 317

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994

<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $667,323,342) (Note 1)......................... $652,138,108
Receivables:
Interest.......................................................................... 12,305,247
Fund Shares Sold.................................................................. 799,516
Investments Sold.................................................................. 535,000
Unamortized Organizational Expenses and Initial Registration Costs (Note 1)....... 17,688
Other............................................................................. 2,841
------------
Total Assets.................................................................... 665,798,400
------------
Liabilities:
Payables:
Fund Shares Repurchased......................................................... 2,429,138
Income Distributions............................................................ 1,627,340
Custodian Bank.................................................................. 879,971
Margin on Futures (Note 5)...................................................... 352,445
Investment Advisory Fee (Note 2)................................................ 273,528
Accrued Expenses................................................................ 881,864
------------
Total Liabilities............................................................... 6,444,286
------------
Net Assets...................................................................... $659,354,114
============
Net Assets Consist of:
Paid in Surplus (Note 3).......................................................... $698,739,659
Accumulated Distributions in Excess of Net Investment Income (Note 1)............. (228,298)
Net Unrealized Depreciation on Investments........................................ (13,135,218)
Accumulated Net Realized Loss on Investments...................................... (26,022,029)
------------
Net Assets........................................................................ $659,354,114
============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$495,814,695 and 34,768,092 shares of beneficial interest issued and
outstanding) (Note 3)......................................................... $ 14.26
Maximum sales charge (4.65%* of offering price)................................. .70
------------
Maximum offering price to public................................................ $ 14.96
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $158,705,886
and
11,128,652 shares of beneficial interest issued and outstanding) (Note 3)....... $ 14.26
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,850,918
and
270,017 shares of beneficial interest issued and outstanding) (Note 3).......... $ 14.26
============
Class D Shares:
Net asset value and offering price per share (Based on net assets of $982,615 and
68,899 shares of beneficial interest issued and outstanding) (Note 3)........... $ 14.26
============
</TABLE>

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

* On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.

See Notes to Financial Statements

E-17
<PAGE> 318

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994

<TABLE>
<S> <C>
Investment Income:
Interest................................................................... $ 49,936,822
Amortization of Discount (Premium) -- Net.................................. (354,986)
-------------
Total Income............................................................... 49,581,836
-------------
Expenses:
Investment Advisory Fee (Note 2)........................................... 3,475,616
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D
of $1,626,311, $1,662,702, $41,554 and $2,828, respectively) (Note 6)... 3,333,395
Shareholder Services....................................................... 829,610
Legal (Note 2)............................................................. 186,400
Amortization of Organizational Expenses and Initial Registration Costs
(Note 1)................................................................ 30,470
Trustees Fees and Expenses (Note 2)........................................ 26,240
Other...................................................................... 411,534
-------------
Total Expenses............................................................. 8,293,265
-------------
Net Investment Income...................................................... $ 41,288,571
=============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales..................................................... $ 692,840,108
Cost of Securities Sold (Including reorganization and restructuring
costs of $144,803)..................................................... (708,359,483)
-------------
Net Realized Loss on Investments (Including realized loss on closed and
expired option transactions and futures transactions of $1,411,955 and
$788,622, respectively)................................................ (15,519,375)
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.................................................... 63,265,059
End of the Period (Including unrealized appreciation on open futures
transactions of $2,050,016)............................................. (13,135,218)
-------------
Net Unrealized Depreciation on Investments During the Period............... (76,400,277)
-------------
Net Realized and Unrealized Loss on Investments............................ $ (91,919,652)
=============
Net Decrease in Net Assets from Operations................................. $ (50,631,081)
=============
</TABLE>

See Notes to Financial Statements

E-18
<PAGE> 319

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1994 and 1993

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................... $ 41,288,571 $ 39,506,461
Net Realized Loss on Investments........................ (15,519,375) (10,384,633)
Net Unrealized Appreciation/Depreciation on Investments
During the Period..................................... (76,400,277) 45,121,848
----------------- -----------------
Change in Net Assets from Operations.................... (50,631,081) 74,243,676
----------------- -----------------
Distributions from Net Investment Income*............... (41,020,921) (39,506,461)
Distributions in Excess of Net Investment Income* (Note
1).................................................... 0 (495,948)
----------------- -----------------
Distributions from and in Excess of Net Investment
Income*............................................... (41,020,921) (40,002,409)
Distributions in Excess of Net Realized Gain on
Investments* (Note 1)................................. 0 (38,069)
----------------- -----------------
Total Distributions..................................... (41,020,921) (40,040,478)
----------------- -----------------
Net Change in Net Assets from Investment Activities..... (91,652,002) 34,203,198
----------------- -----------------
From Capital Transactions (Note 3)
Proceeds from Shares Sold............................... 76,732,460 265,150,384
Net Asset Value of Shares Issued Through Dividend
Reinvestment.......................................... 21,110,678 19,988,555
Cost of Shares Repurchased.............................. (116,770,207) (61,493,977)
----------------- -----------------
Net Change in Net Assets from Capital Transactions...... (18,927,069) 223,644,962
----------------- -----------------
Total Increase/Decrease in Net Assets................... (110,579,071) 257,848,160
Net Assets:
Beginning of the Period.................................... 769,933,185 512,085,025
----------------- -----------------
End of the Period (Including undistributed net investment
income of $(228,298) and $(495,948), respectively)...... $ 659,354,114 $ 769,933,185
============= =============
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
*DISTRIBUTIONS BY CLASS DECEMBER 31, 1994 DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................. $ (32,205,506) $ (33,630,614)
Class B Shares............................................. (8,547,628) (6,329,274)
Class C Shares............................................. (212,571) (42,521)
Class D Shares............................................. (55,216) 0
----------------- -----------------
$ (41,020,921) $ (40,002,409)
============= =============
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares............................................. $ 0 $ (13,619)
Class B Shares............................................. 0 (24,450)
Class C Shares............................................. 0 0
Class D Shares............................................. 0 0
----------------- -----------------
$ 0 $ (38,069)
============= =============
</TABLE>

See Notes to Financial Statements

E-19
<PAGE> 320

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES
--------------------------------------------------------------
AUGUST 1, 1990
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31 OPERATIONS) TO
------------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $16.164 $15.310 $15.071 $14.250 $ 14.263
------- ------- ------- ------- ------------
Net investment income................. .886 .964 1.041 1.066 .406
Net realized and unrealized gain/loss
on investments..................... (1.907) .862 .374 .853 (.049)
------- ------- ------- ------- ------------
Total from investment operations........ (1.021) 1.826 1.415 1.919 .357
------- ------- ------- ------- ------------
LESS:
Distributions from and in excess of
net investment income (note 1)..... .882 .972 1.044 1.098 .370
Distributions from and in excess of
net realized gain on investments
(note 1)........................... .000 .000 .132 .000 .000
------- ------- ------- ------- ------------
Total distributions..................... .882 .972 1.176 1.098 .370
------- ------- ------- ------- ------------
Net asset value, end of period.......... $14.261 $16.164 $15.310 $15.071 $ 14.250
======= ======= ======= ======= ============
TOTAL RETURN* (non-annualized).......... (6.37%) 12.20% 9.69% 13.98% 2.57%
Net assets at end of period (in
millions)............................. $ 495.8 $ 597.6 $ 463.6 $ 293.7 $ 146.6
Ratio of expenses to average net assets*
(annualized).......................... .99% .87% .86% .59% .89%
Ratio of net investment income to
average net assets* (annualized)...... 5.93% 6.08% 6.76% 7.29% 7.11%
Portfolio turnover...................... 74.96% 81.78% 91.57% 105.99% 108.79%
</TABLE>

- ---------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:

<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets
(annualized).......................... N/A .98% 1.00% 1.07% 1.19%
Ratio of net investment income to
average net assets (annualized)....... N/A 5.97% 6.62% 6.81% 6.81%
</TABLE>

N/A = Not Applicable

See Notes to Financial Statements

E-20
<PAGE> 321

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CLASS B SHARES
------------------------------------------------
AUGUST 24, 1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period............... $ 16.139 $ 15.308 $ 15.481
------------ ------------ ------------
Net investment income............................ .780 .852 .320
Net realized and unrealized gain/loss on
investments................................... (1.890) .845 (.033)
------------ ------------ ------------
Total from investment operations................... (1.110) 1.697 .287
------------ ------------ ------------
LESS:
Distributions from and in excess of net
investment income (note 1).................... .768 .866 .328
Distributions from and in excess of net realized
gain on investments (note 1).................. .000 .000 .132
------------ ------------ ------------
Total distributions................................ .768 .866 .460
------------ ------------ ------------
Net asset value, end of period..................... $ 14.261 $ 16.139 $ 15.308
========== ========== ============
TOTAL RETURN* (non-annualized)..................... (6.96%) 11.33% 1.90%
Net assets at end of period (in millions).......... $ 158.7 $ 168.2 $ 48.4
Ratio of expenses to average net assets*
(annualized)..................................... 1.70% 1.65% 1.66%
Ratio of net investment income to average net
assets* (annualized)............................. 5.22% 5.19% 5.23%
Portfolio turnover................................. 74.96% 81.78% 91.57%
- ---------------
*If certain expenses had not been assumed by the Adviser, total return would have been lower and the
ratios would have been as follows:
Ratio of expenses to average net assets
(annualized)..................................... N/A 1.73% 2.42%
Ratio of net investment income to average net
assets (annualized).............................. N/A 5.11% 4.48%
</TABLE>

N/A = Not Applicable

See Notes to Financial Statements

E-21
<PAGE> 322

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period........................... $ 16.141 $ 15.990
---------- ------------
Net investment income........................................ .783 .300
Net realized and unrealized gain/loss on investments......... (1.894) .171
---------- ------------
Total from investment operations............................... (1.111) .471
Less distributions from and in excess of net investment
income (note 1).............................................. .768 .320
---------- ------------
Net asset value, end of period................................. $ 14.262 $ 16.141
========== ============
TOTAL RETURN (non-annualized).................................. (6.97%) 2.96%
Net assets at end of period (in millions)...................... $ 3.9 $ 4.1
Ratio of expenses to average net assets (annualized)........... 1.74% 1.85%
Ratio of net investment income to average net assets
(annualized)................................................. 5.19% 3.95%
Portfolio Turnover............................................. 74.96% 81.78%
</TABLE>

- ---------------
*During the time periods noted, no expenses were assumed by the Adviser.

See Notes to Financial Statements

E-22
<PAGE> 323

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the period indicated.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CLASS D SHARES
----------------
MARCH 14, 1994
(COMMENCEMENT OF
DISTRIBUTION) TO
DECEMBER 31,
1994
- ----------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period....................................... $ 15.290
------------
Net investment income.................................................... .701
Net realized and unrealized loss on investments.......................... (1.031)
------------
Total from investment operations........................................... (.330)
Less distributions from and in excess of net investment income (note 1).... .698
------------
Net asset value, end of period............................................. $ 14.262
============
TOTAL RETURN (non-annualized).............................................. (2.19%)
Net assets at end of period (in millions).................................. $ 1.0
Ratio of expenses to average net assets* (annualized)...................... 1.05%
Ratio of net investment income to average net assets (annualized).......... 5.88%
Portfolio Turnover......................................................... 74.96%
</TABLE>

- ---------------
*During the time period noted, no expenses were assumed by the Adviser.

See Notes to Financial Statements

E-23
<PAGE> 324

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS
December 31, 1994

1. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation -- Investments are stated at value using market
quotations or, if such valuations are not available, estimates obtained from
yield data relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.

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" and "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, 1994, there
were no when issued or delayed delivery purchase commitments.

C. Investment Income -- Interest income is recorded on an accrual basis.
Bond premium and original issue discount are amortized over the expected life of
each applicable security.

D. Organizational Expenses and Initial Registration Costs -- The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $152,425. These costs are being amortized
on a straight line basis over the 60 month period ending July 31, 1995. Van
Kampen American Capital Investment Advisory Corp. (the "Adviser") has agreed
that in the event any of the initial shares of the Fund originally purchased by
VKAC are redeemed during the amortization period, the Fund will be reimbursed
for any unamortized organizational expenses and initial registration costs in
the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.

E. 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.

E-24
<PAGE> 325

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

realized capital gains. At December 31, 1994, the Fund had an accumulated
capital loss carryforward for tax purposes of $18,151,198. Of this amount,
$10,452,715 and $7,698,483 will expire on December 31, 2001 and 2002,
respectively. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of the deferral of post October 31
losses and the capitalization of reorganization and restructuring costs for tax
purposes.

F. Distribution of Income and Gains -- The Fund declares daily and pays
monthly dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes. Due to inherent differences in the recognition of interest income
under generally accepted accounting principles and federal income tax purposes,
for those securities which the Fund has placed on non-accrual status, the amount
of distributable net investment income may differ between book and federal
income tax purposes for a particular period. These differences are temporary in
nature, but may result in book basis distribution in excess of net investment
income for certain periods.

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 $500 million.............................................................. .50 of 1%
Over $500 million............................................................... .45 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended December 31, 1994, the Fund recognized expenses of
approximately $375,000 representing VKAC's cost of providing accounting, legal
and certain shareholder services to the Fund.

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.

At December 31, 1994, VKAC owned 387, 105, 100 and 100 shares of Classes A,
B, C and D, respectively.

3. CAPITAL TRANSACTIONS

The Fund has outstanding four classes of common shares, Classes A, B, C and
D. There are an unlimited number of shares of each class without par value
authorized.

E-25
<PAGE> 326

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

At December 31, 1994, paid in surplus aggregated $518,901,563,
$174,384,111, $4,365,588 and $1,088,397 for Classes A, B, C and D, respectively.
For the year ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................................... 2,891,335 $ 43,601,705
Class B...................................................... 1,909,204 28,989,319
Class C...................................................... 141,638 2,139,693
Class D...................................................... 133,104 2,001,743
---------- -------------
Total Sales.................................................... 5,075,281 $ 76,732,460
========= ============
Dividend Reinvestment:
Class A...................................................... 1,085,808 $ 16,133,995
Class B...................................................... 325,032 4,818,852
Class C...................................................... 9,020 133,759
Class D...................................................... 1,671 24,072
---------- -------------
Total Dividend Reinvestment.................................... 1,421,531 $ 21,110,678
========= ============
Repurchases:
Class A...................................................... (6,182,355) $ (91,457,676)
Class B...................................................... (1,527,736) (22,372,124)
Class C...................................................... (134,564) (2,002,989)
Class D...................................................... (65,876) (937,418)
---------- -------------
Total Repurchases.............................................. (7,910,531) $(116,770,207)
========= ============
</TABLE>

E-26
<PAGE> 327

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

At December 31, 1993, paid in surplus aggregated $550,623,539, $162,948,064
and $4,095,125 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
VALUE
SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................................... 8,915,080 $140,550,519
Class B.......................................................... 7,505,483 118,273,049
Class C.......................................................... 394,838 6,326,816
---------- ------------
Total Sales........................................................ 16,815,401 $265,150,384
========= ===========
Dividend Reinvestment:
Class A.......................................................... 1,031,763 $ 16,387,904
Class B.......................................................... 224,461 3,569,933
Class C.......................................................... 1,914 30,718
---------- ------------
Total Dividend Reinvestment........................................ 1,258,138 $ 19,988,555
========= ===========
Repurchases:
Class A.......................................................... (3,256,771) $(51,726,961)
Class B.......................................................... (471,941) (7,504,607)
Class C.......................................................... (142,829) (2,262,409)
---------- ------------
Total Repurchases.................................................. (3,871,541) $(61,493,977)
========= ===========
</TABLE>

Class B, C and D 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 six years of the purchase for Class B
and one year of the purchase for Classes C and D as detailed in the following
schedule. The Class B, C and D shares bear the expense of their respective
deferred sales arrangements, including higher distribution and service fees and
incremental transfer agency costs.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CONTINGENT DEFERRED
SALES CHARGE
-----------------------------
YEAR OF REDEMPTION CLASS B CLASS C CLASS D
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First............................................................... 4.00% 1.00% 0.75%
Second.............................................................. 3.75% None None
Third............................................................... 3.50% None None
Fourth.............................................................. 2.50% None None
Fifth............................................................... 1.50% None None
Sixth............................................................... 1.00% None None
Seventh and Thereafter.............................................. None None None
</TABLE>

E-27
<PAGE> 328

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

4. INVESTMENT TRANSACTIONS

Aggregate purchases and sales of investment securities, excluding
short-term notes and reorganization and restructuring costs, for the year ended
December 31, 1994, were $541,728,813 and $708,214,680, respectively.

5. DERIVATIVE FINANCIAL INSTRUMENTS

A derivative financial instrument in very general terms refers to a
security whose value is "derived" from the value of an underlying asset,
reference rate or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

A. Option Contracts -- An option contract gives the buyer the right, but
not the obligation to buy (call) or sell (put) an underlying item at a fixed
exercise price during a specified period. These contracts are generally used by
the Fund to manage the portfolio's effective maturity and duration.

Transactions in options for the year ended December 31, 1994, were as
follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
CONTRACTS PREMIUM
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993...................................... 850 $ 429,134
Options Written and Purchased (Net)................................... 13,078 (2,715,877)
Options Terminated in Closing Transactions (Net)...................... (6,870) (166,364)
Options Expired....................................................... (6,458) 2,554,550
Options Exercised..................................................... (600) (101,443)
--------- -----------
Outstanding at December 31, 1994...................................... -0- $ -0-
======= ==========
</TABLE>

B. Futures Contracts -- A futures contract is an agreement involving the
delivery of a particular asset on a specified future date at an agreed upon
price. The Fund generally invests in futures on U.S. Treasury Bonds and the
Municipal Bond index and typically closes the contract prior to the delivery
date. These contracts are generally used to manage the portfolio's effective
maturity and duration.

E-28
<PAGE> 329

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the contracts
are closed or expire.

Transactions in futures contracts for the year ended December 31, 1994,
were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CONTRACTS
- -----------------------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1993................................................... 2,551
Futures Opened..................................................................... 86,779
Futures Closed..................................................................... (70,246)
--------
Outstanding at December 31, 1994................................................... 19,084
=======
</TABLE>

The futures contracts outstanding at December 31, 1994, and the
descriptions and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
Mar 1995 -- Sells to Open............................................ 2,483 $ 903,312
Mar 1995 -- Buys to Open............................................. 4,216 4,185,872
June 1995 -- Sells to Open........................................... 1,061 (837,479)
Two-year U.S. Treasury Note Futures
Mar 1995 -- Buys to Open............................................. 750 (72,470)
Five-year U.S. Treasury Note Futures
Mar 1995 -- Sells to Open............................................ 1,000 1,443,831
Municipal Bond Futures
Mar 1995 -- Buys to Open............................................. 726 (22)
Eurodollar Note Futures
Mar 1995 -- Sells to Open............................................ 4,424 8,328,486
June 1995 -- Buys to Open............................................ 4,424 (11,901,514)
------- -----------
19,084 $ 2,050,016
======= ===========
</TABLE>

C. Indexed Securities -- These instruments are identified in the portfolio
of investments. The price of these securities may be more volatile than the
price of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.

E-29
<PAGE> 330

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

index. As the floating rate rises, the coupon is reduced. Conversely, as the
floating rate declines, the coupon is increased. These instruments are typically
used by the Fund to enhance the yield of the portfolio.

6. DISTRIBUTION AND SERVICE PLANS

Annual fees under the Plans of up to .30% each for Class A and Class D
shares and 1.00% each for Class B and Class C shares are accrued daily. Included
in these fees for the year ended December 31, 1994, are payments to VKAC of
approximately $1,540,000.

E-30
<PAGE> 331

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

INDEPENDENT AUDITORS' REPORT

THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
VAN KAMPEN MERRITT MUNICIPAL INCOME FUND:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Municipal Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods presented. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Van
Kampen Merritt Municipal Income Fund as of December 31, 1994, 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 periods presented, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 14, 1995

E-31
<PAGE> 332

DEAR VAN KAMPEN AMERICAN CAPITAL INSURED MUNICIPAL FUND SHAREHOLDER:

Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Insured Municipal Fund (the "AC
Fund"), a series of the Van Kampen American Capital Tax-Exempt Trust
("Tax-Exempt Trust"). The Reorganization calls for the AC Fund shareholders to
become shareholders of the Van Kampen American Capital Insured Tax Free Income
Fund (the "VK Fund"), a mutual fund which pursues a substantially similar
investment objective.

HOW WILL THE REORGANIZATION AFFECT ME?

Assuming shareholders of the AC Fund approve the Reorganization, the assets
and liabilities of the AC Fund will be combined with those of the VK Fund and
you will become a shareholder of the VK Fund. You will receive shares of the VK
Fund approximately equal in value at the time of issuance to the shares of the
AC Fund that you hold immediately prior to the Reorganization. See the section
of the combined Proxy Statement/Prospectus entitled "Distribution, Purchase,
Valuation, Redemption and Exchange of Shares." Class A shareholders of the AC
Fund will receive Class A shares of the VK Fund; Class B shareholders of the AC
Fund will receive Class B shares of the VK Fund; and Class C shareholders of the
AC Fund will receive Class C shares of the VK Fund.

WHY IS THE REORGANIZATION BEING RECOMMENDED?

the assets and liabilities of the AC Fund with the assets and liabilities of the
VK Fund and consolidating their operations.

The Reorganization is intended to provide various benefits to shareholders of
the AC Fund who become shareholders of the VK Fund (as well as to existing and
future investors in the VK Fund). For example, higher net asset levels should
enable the VK Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
potentially reducing per share expense levels. Higher net asset levels also may
benefit portfolio management by permitting larger individual portfolio
investments that may result in reduced transaction costs or more favorable
pricing and by providing the opportunity for greater portfolio diversity. These
benefits, in turn, should have a favorable effect on the relative performance of
the VK Fund.

WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?

No. The full value of your shares of the AC Fund would be exchanged for shares
of the corresponding class of the VK Fund without any sales load, commission or
other transactional fee being imposed. As more fully discussed in the combined
Proxy Statement/Prospectus, the holding period for shareholders acquiring Class
B or Class C shares in the Reorganization subject to a contingent deferred sales
charge will be measured from the time (i) the holder purchased Class B or C
shares from the AC Fund or (ii) purchased Class B or C shares of any other Van
Kampen American Capital open-end fund and subsequently exchanged into Class B or
C shares of the AC Fund. If the Reorganization is completed, the VK Fund will
bear the costs associated with the Reorganization, such as printing and mailing
costs and other expenses associated with the Special Meeting. If the
Reorganization is not completed VKAC will bear the costs associated with the
Reorganization.

HOW WILL THE FEES PAID BY THE VK FUND COMPARE TO THOSE PAYABLE BY THE AC FUND?

WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND? WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION
IS APPROVED?

If the Reorganization is approved, your interest in Class A, B or C shares,
respectively, of the AC Fund will automatically be converted into the same class
of shares of the VK Fund and we will send you written confirmation that this
change has taken place. You will receive the same class of shares of the VK Fund
approximately equal in value to your Class A, B or C shares of the AC Fund. No
certificates for VK Fund shares will be issued in connection with the
Reorganization, although such certificates will be available upon request. If
you currently hold certificates representing your shares of the AC Fund, it is
not necessary to surrender such certificates.

WHO WILL ADVISE THE VK FUND AND PROVIDE OTHER SERVICES?

VK Adviser provides advisory services to the VK Fund under an arrangement that
is substantially similar to that currently in effect between the AC Fund and AC
Adviser. The contractual advisory fees payable by the VK Fund are no higher than
the contractual advisory fees applicable to the AC Fund. Van Kampen American
Capital Distributors, Inc. serves as distributor of the shares of both the VK
Fund and the AC Fund. In addition, State Street Bank & Trust Company, 225
Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is the
custodian of both the VK Fund and the AC Fund. ACCESS Investor Services, Inc.,
P.O. Box 418256, Kansas City, Missouri 64141-9256, serves as the transfer agent
for both the VK Fund and the AC Fund.

WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the Shares
of the VK Fund in connection with the Reorganization. Additionally, the AC Fund
would not recognize any gain or loss as a result of the transfer of all of its
assets and liabilities solely in exchange for the Shares of the VK Fund or as a
result of its liquidation. The VK Fund expects that it will not recognize any
gain or loss as a result of the Reorganization, that it will take a carryover
basis in the assets acquired from the AC Fund and that its holding period of
such assets will include the period during which the assets were held by AC
Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences" in
the combined Proxy Statement/Prospectus.
<PAGE> 335

WHAT IF I REDEEM MY AC FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?

If you choose to redeem your shares of AC Fund before the Reorganization takes
place, the redemption will be treated as a normal sale of shares and will be a
taxable transaction, unless your account is not subject to taxation, such as an
individual retirement account or other tax-qualified retirement plan.

Thank you for your investment in Van Kampen American Capital Insured Municipal
Fund.

Very truly yours,

Van Kampen American Capital
Insured Municipal Fund

Don G. Powell
President and Trustee
<PAGE> 336

VAN KAMPEN AMERICAN CAPITAL
INSURED MUNICIPAL FUND
2800 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(800) 421-5666

NOTICE OF SPECIAL MEETING
SEPTEMBER 15, 1995

A Special Meeting of Shareholders of Van Kampen American Capital Insured
Municipal Fund (the "AC Fund") will be held at the Hyatt Regency Oak Brook, 1909
Spring Road, Oak Brook, Illinois 60521, on September 15, 1995 at 2:00 p.m. (the
"Special Meeting") for the following purposes:

(1) To approve a plan of reorganization pursuant to which the AC Fund would
transfer all of its assets and liabilities to the Van Kampen American Capital
Insured Tax Free Income Fund (the "VK Fund") in exchange for corresponding
Class A, B and C shares of beneficial interest of the VK Fund, the AC Fund
would distribute such Class A, B and C shares of the VK Fund to holders of
Class A, B and C shares of the AC Fund and the AC Fund would be dissolved.

(2) To transact such other business as may properly come before the Special
Meeting.

Shareholders of record as of the close of business on August 1, 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.

For the Board of Trustees,

Nori L. Gabert
Secretary

August 2, 1995
---------------------

PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 337

VAN KAMPEN AMERICAN CAPITAL
INSURED MUNICIPAL FUND

PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
INSURED MUNICIPAL FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND

This Proxy Statement/Prospectus is being furnished to shareholders of Van
Kampen American Capital Insured Municipal Fund (the "AC Fund"), a series of Van
Kampen American Capital Tax-Exempt Trust, and relates to the Special Meeting of
Shareholders of the AC Fund (the "Special Meeting") called for the purpose of
approving the proposed reorganization of the AC Fund (the "Reorganization")
which would result in shareholders of the AC Fund in effect exchanging their AC
Fund shares for shares of the Van Kampen American Capital Insured Tax Free
Income Fund (the "VK Fund"), a series of the Van Kampen American Capital Tax
Free Trust, a Delaware business trust (the "VKAC Tax Free Trust"). The
Reorganization would be accomplished as follows: (1) the VK Fund would acquire
all the then existing assets and liabilities of the AC Fund in exchange for
Class A, B and C shares of beneficial interest of the VK Fund (the "Shares");
(2) the AC Fund would distribute the Shares to the AC Fund shareholders holding
the same respective class of shares; and (3) the AC Fund would dissolve and all
shares of the AC Fund would be cancelled.

The VK Fund, an open-end, diversified management investment company, is one of
twelve series of the VKAC Tax Free Trust, which is authorized to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, for
each series authorized by its Board of Trustees. Each series represents
interests in a separate portfolio of securities and other assets, with its own
investment objectives and policies. The investment objective of the VK Fund is
to provide investors with a high level of current income exempt from federal
income tax, which is substantially similar to that of the AC Fund. (See "Summary
- -- Investment Objective and Policies" below.) There can be no assurance that the
VK Fund will achieve its investment objective. The address, principal executive
office and telephone number of the VKAC Tax Free Trust is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800) 225-2222. The address,
principal executive office and telephone number of the AC Fund is 2800 Post Oak
Boulevard, Houston, Texas 77056, (800) 421-5666. The enclosed proxy and this
Proxy Statement/ Prospectus are first being sent to AC Fund shareholders on or
about August 2, 1995.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
<PAGE> 338

This Proxy Statement/Prospectus contains information shareholders of the AC
Fund should know before voting on the Reorganization and constitutes an offering
of Class A, B and C Shares of the VK Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated July
31, 1995, relating to this Proxy Statement/Prospectus (the "Reorganization SAI")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. A Prospectus (the "VK Fund Prospectus") and
Statement of Additional Information containing additional information about the
VK Fund, each dated July 31, 1995, have been filed with the SEC and are
incorporated herein by reference. A copy of the VK Fund Prospectus accompanies
this Proxy Statement/Prospectus. A Prospectus and Statement of Additional
Information containing additional information about the AC Fund, each dated
August 1, 1995, have been filed with the SEC and are incorporated herein by
reference. Copies of any of the foregoing may be obtained without charge by
calling or writing to the AC Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI."
---------------------

Each of the VK Fund and the VKAC Tax Free Trust is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and the Investment Company Act of 1940, as amended (the "Act"), and in
accordance therewith files reports and other information with the SEC. Such
reports, other information and proxy statements filed by the VK Fund and the
VKAC Tax Free Trust can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates.

The date of this Proxy Statement/Prospectus is July 31, 1995.

2
<PAGE> 339

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION...........
4
A. SUMMARY................................................... 4
The Reorganization........................................ 4
Comparisons of the VK Fund and the AC Fund................ 5
Investment Objectives and Policies...................... 6
Advisory and Other Fees................................. 8
Distribution, Purchase, Valuation, Redemption and
Exchange of Shares.................................... 9
Federal Income Tax Consequences........................... 14
Reasons for the Proposed Reorganization................... 15
B. RISK FACTORS.............................................. 17
Nature of Investment...................................... 17
Changes in Certain Investment Practices................... 18
C. INFORMATION ABOUT THE FUNDS............................... 18
D. THE PROPOSED REORGANIZATION............................... 19
Terms of the Agreement.................................... 19
Description of Securities to Be Issued.................... 21
Shares of Beneficial Interest........................... 21
Voting Rights of Shareholders........................... 21
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 21
Federal Income Tax Consequences........................... 22
Capitalization............................................ 24
Comparative Performance Information....................... 24
Ratification of Investment Objective, Policies and
Restrictions of the VK Fund............................. 25
Legal Matters............................................. 25
Expenses.................................................. 26
E. RECOMMENDATION OF AC BOARD................................ 26
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING...........
26
OTHER INFORMATION................................................ 26
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND.............. 26
B. SHAREHOLDER PROPOSALS..................................... 27
VOTING INFORMATION AND REQUIREMENTS.............................. 28
EXHIBIT A........................................................
EXHIBIT B........................................................
</TABLE>

3
<PAGE> 340

APPROVAL OR DISAPPROVAL
OF THE PROPOSED REORGANIZATION

A. SUMMARY

The following is a summary of, and is qualified by references to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VK Fund
attached hereto as Exhibit A (the "Agreement"), the prospectus of the AC Fund
dated August 1, 1995 (the "AC Fund Prospectus") incorporated herein by
reference, and the prospectus of the VK Fund dated July 31, 1995 (the "VK Fund
Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of
Class A, B and C Shares of the VK Fund only.

THE REORGANIZATION

On May 11, 1995, the Board of Trustees of the AC Fund (the "AC Board")
approved the Agreement. The Agreement provides that the AC Fund will transfer
all of its assets and liabilities to the VK Fund in exchange for Class A, B and
C Shares of the VK Fund. At the Closing (as defined herein), the VK Fund will
issue Shares of the VK Fund to the AC Fund, which VK Fund Shares will have an
aggregate net asset value approximately equal in amount to the net asset value
of the AC Fund net assets as of the Closing. See "Distribution, Purchase,
Valuation, Redemption and Exchange of Shares" below. The Agreement provides that
the AC Fund will dissolve pursuant to a plan of liquidation and dissolution to
be adopted by the AC Board following the Closing, and as part of such
dissolution, will distribute to each shareholder of the AC Fund Shares of the
respective class of the VK Fund approximately equal in value to their existing
shares in the AC Fund. All members of the AC Board were elected as trustees of
the VKAC Tax Free Trust on July 21, 1995.

The AC Board has unanimously determined that the Reorganization is in the best
interests of the shareholders of each class of shares the AC Fund and that the
interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the VKAC Tax Free Trust (the
"VK Board") has unanimously determined that the Reorganization is in the best
interests of the VK Fund and that the interests of each class of shares of
existing shareholders of the VK Fund will not be diluted as a result of the
Reorganization. Management of the respective funds believes that the proposed
Reorganization of the AC Fund into the VK Fund should allow the VK Fund to
achieve future economies of scale and eliminate certain costs of operating the
AC Fund and the VK Fund separately.

The VK Fund has agreed to pay all of the costs of soliciting approval of the
Reorganization by the AC Fund's Shareholders and related costs of the

4
<PAGE> 341

Reorganization in the event the Reorganization is completed, including expenses
incurred by the AC Fund. Accordingly, if the Reorganization is completed,
shareholders of the VK Fund after the Reorganization will bear a pro rata
portion of such expenses. If the Reorganization is not completed VKAC will bear
the costs associated with the Reorganization.

THE AC BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF THE
REORGANIZATION REQUIRES THE FAVORABLE VOTE OF A MAJORITY OF THE OUTSTANDING
SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS."

COMPARISONS OF THE VK FUND AND THE AC FUND

The principal changes which would result from the Reorganization are listed
below:

(1) The holders of Class A, B and C shares the AC Fund would become
shareholders of the same class of Shares, respectively, of the VK Fund.
The AC Fund and the VK Fund have substantially similar investment
objectives and follow similar investment strategies.

(2) The VK Fund is managed by Van Kampen American Capital Investment Advisory
Corp. ("VK Adviser"), an affiliate of the AC Fund's adviser, Van Kampen
American Capital Asset Management, Inc. ("AC Adviser"). The annual
advisory fee for the VK Fund is 0.525% of its daily net assets up to $500
million, 0.50% on the next $500 million, 0.475% on the next $500 million
and 0.45% on assets over $1,500 million. As of March 31, 1995, the VK
Fund's net assets were approximately $1,222.3 million.

The annual advisory fee for the AC Fund is 0.60% of its daily net assets
up to $300 million, 0.55% on the next $300 million and 0.50% thereafter
(assets are combined with the American Capital High Yield Municipal
Portfolio, a series of the VKAC Tax Free Income Fund, for purposes of
calculating management fees.) As of March 31, 1995, the AC Fund's net
assets were approximately $105.8 million.

(3) Both the AC Fund and the VK Fund offer three classes of shares. Class A
Shares of the VK Fund and the AC Fund are subject to an initial sales
charge of up to 4.75%. Purchases of Class A Shares of the VK Fund or the
AC Fund in amounts of $1,000,000 or more are not subject to an initial
sales charge but a contingent deferred sales charge of 1.00% may be
imposed on certain redemptions made within one year after purchase.
However, the initial sales charge will be waived for Class A Shares
acquired in the

5
<PAGE> 342

Reorganization. Any subsequent purchases of Class A Shares of the VK Fund
will be subject to a sales charge of up to 4.75% excluding Class A Shares
purchased through the dividend reinvestment plan. Class B Shares of the VK
Fund and Class B shares of the AC Fund do not incur a sales charge when
they are purchased, but generally are subject to a sales charge of 4.00%
if redeemed within the first year of purchase, which charge is reduced to
zero over a six year period in the case of the VK Fund and over a five
year period in the case of the AC Fund. However, Class B Shares of the VK
Fund acquired in the Reorganization will remain subject to the contingent
deferred sales charge applicable to Class B shares of the AC Fund. Class C
Shares of the VK Fund and the AC Fund do not incur a sales charge when
they are purchased, but are subject to a contingent deferred sales charge
of 1.00% if redeemed within the first year after purchase.

(4) Both the AC Fund and the VK Fund have adopted distribution plans (the
"Distribution Plans") pursuant to Rule 12b-1 under the Act, and have
adopted service plans (the "Service Plans"). Both the VK Fund and the AC
Fund can pay up to 0.75% of their respective average daily net assets
attributable to Class B and C shares for reimbursement of certain
distribution-related expenses. In addition, both the VK Fund and the AC
Fund can pay up to 0.25% of the their respective average daily net assets
attributable to Class A, B and C shares for the provision of ongoing
services to shareholders. Class B Shares of the VK Fund automatically
convert to Class A Shares after seven years, while Class B shares of the
AC Fund automatically convert to Class A shares after six years. Unlike
Class C Shares of the VK Fund, Class C Shares of the AC Fund automatically
convert to Class A shares after ten years. However, Class B and C Shares
of the VK Fund acquired in the Reorganization will automatically convert
to Class A Shares in accordance with the same conversion schedule
applicable to Class B and C shares of the AC Fund, respectively.

Certain other comparisons between the AC Fund and the VK Fund are discussed
below.

INVESTMENT OBJECTIVES AND POLICIES

The VK Fund and the AC Fund have substantially similar investment objectives,
policies and restrictions. The investment objective of the VK Fund is to provide
investors with a high level of current income exempt from federal income tax.
The investment objective of the AC Fund is to provide investors as high a level
of current interest income exempt from federal income tax as is consistent with
the preservation of capital.

The VK Fund and the AC Fund both attempt to achieve their investment
objectives by generally investing at least 80% of their assets in diversified
portfolios

6
<PAGE> 343

of insured tax-exempt municipal securities rated investment grade at the time of
investment.

There are certain differences in the investment policies of the VK Fund and
the AC Fund. For instance, the VK Fund has a policy of not investing in private
activity bonds, while the AC Fund has invested approximately 16% of its assets
in such securities. The interest on such private activity bonds is an item of
tax preference subject to the alternative minimum tax on individuals and
corporations. In addition, the VK Fund requires that 100% of its assets be
invested in securities which are insured, while the AC Fund has approximately 3%
of its assets invested in uninsured securities. As the table below indicates,
however, the holdings of the VK Fund and the AC Fund have substantially similar
credit quality.

A comparison of the credit quality of the respective portfolios of the VK Fund
and the AC Fund, as of March 31, 1995, is set forth in the table below.

CREDIT QUALITY
(AS OF MARCH 31, 1995)

<TABLE>
<CAPTION>
VK FUND AC FUND
--------------------------- ---------------------------
CREDIT RATING MOODY'S STANDARD & POOR'S MOODY'S STANDARD & POOR'S
- ------------------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Aaa/AAA.................. 97.3% 99.3% 94.7% 95.7%
Aa/AA.................... 0.4 0.4 2.1 3.1
A/A...................... 0.0 0.2 0.0 0.0
Baa/BBB.................. 0.1 0.0 0.0 0.0
B/B...................... 0.0 0.1 0.0 0.0
Unrated.................. 2.2 0.0 3.2 1.2
----- ----- ----- -----
TOTAL................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>

The VK Fund is managed by VK Adviser while the AC Fund is managed by AC
Adviser. VK Adviser and AC Adviser are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which has been developing investment strategies
and products for individuals, businesses and institutions since 1974. VK Adviser
and AC Adviser are the primary investment advisers to the Van Kampen American
Capital funds. VKAC is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
VKAC's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. The business address of VK Adviser is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. VK Adviser and its investment advisory agreement with
the VK Fund are more fully described in the VK Fund Prospectus and Statement of
Additional Information.

7
<PAGE> 344

ADVISORY AND OTHER FEES

The AC Fund pays AC Adviser a monthly fee based on its average daily net asset
value at the annual rate of 0.60% for the first $300 million, 0.55% on the next
300 million and 0.50% thereafter. Assets of the AC Fund are combined with the
Van Kampen American Capital High Yield Portfolio for the purposes of calculating
management fees. In addition, the AC Fund bears most expenses associated with
its operations and the issuance and repurchase or redemption of its securities,
except for the compensation of trustees affiliated with VKAC, and officers of
the AC Fund who are interested persons of VKAC or its subsidiaries. Total
operating expenses for the AC Fund for the period ended November 30, 1994 were
1.15%, 1.91% and 1.89% with respect to Class A, B and C shares, respectively.

The VK Fund pays VK Adviser a monthly fee based on its average daily net asset
value at the annual rates of 0.525% of the first $500 million, 0.50% on the next
$500 million, 0.475% on the next $500 million and 0.45% thereafter. The advisory
fee for the fiscal year ended December 31, 1994 was .51% of the VK Fund's
average daily net asset value. Further, the VK Fund also bears most expenses
associated with its operations and the issuance and repurchase or redemption of
its securities, except for the compensation of trustees affiliated with VKAC and
officers of the VK Fund who are interested persons of VKAC or its subsidiaries.
The total operating expenses of the VK Fund for the period ended December 31,
1994, as adjusted to take into account the increase in the advisory fee approved
by shareholders of the VK Fund on July 21, 1995, would have been 0.97%, 1.80%
and 1.79% of the average daily net assets attributable to Class A, B and C
shares, respectively, of the VK Fund. For a complete description of the VK
Fund's advisory services, see the respective sections in the VK Fund's
Prospectus and Statement of Additional Information entitled "Investment Advisory
Services" and "Investment Advisory and Other Services -- Investment Advisory
Agreement." For a complete description of the AC Fund's advisory services, see
the respective sections in the AC Fund's Prospectus and Statement of Additional
Information entitled "Investment Advisory Services" and "Investment Advisory
Agreement."

In addition, the VK Fund also has adopted the Distribution Plan with respect
to each class of shares pursuant to Rule 12b-1 under the Act and has adopted the
Service Plan with respect to each class of its shares. The Distribution Plan and
the Service Plan provides that the VK Fund can pay up to 0.25%, 1.00% and 1.00%
of the VK Fund's average daily net assets attributable to the Class A, B and C
shares, respectively, for reimbursement of certain distribution-related expenses
and for the provision of ongoing services to shareholders. The Distribution Plan
and the Service Plan are being implemented through an agreement with Van Kampen
American Capital Distributors, Inc. ("VKAC Distributors"), the distributor of
each class of the VK Fund's shares, sub-agreements between VKAC Distributors and
members of the National Association of Securities Dealers, Inc. (the "NASD") who
are

8
<PAGE> 345

acting as securities dealers and NASD members or eligible non-members who are
acting as brokers or agents and similar agreements between the VK Fund and banks
who are acting as brokers for their customers that may provide their customers
or clients certain services or assistance. For a complete description of these
arrangements with respect to the VK Fund, see the section in the VK Fund's
Prospectus entitled "The Distribution and Service Plans." For a complete
description of these arrangements with respect to the AC Fund, see the
respective sections in the Prospectus and Statement of Additional Information
entitled "Distribution Plans."

DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES

Generally, Class A Shares of the VK Fund and the AC Fund are sold at net asset
value applicable at the time of such sale, plus a sales charge of up to 4.75% of
the offering price (which percentage is reduced on investments of $100,000 or
more), and are redeemable at their net asset value applicable at the time of
redemption. Class A shares of the AC Fund are sold at net asset value applicable
at the time of such sale, plus a sales charge of up to 4.75% of the offering
price (which percentage is reduced on investments of $100,000 or more), and are
redeemable at their net asset value applicable at the time of redemption.
Purchases of Class A shares of the VK Fund or the AC Fund in amounts of
$1,000,000 or more are not subject to an initial sales charge but a contingent
deferred sales charge of 1.00% may be imposed on certain redemptions made within
one year of purchase. Class A Shares of the VK Fund acquired in the
Reorganization will not be subject to a sales charge.

Generally, Class B shares do not incur a sales charge when they are purchased,
but generally are subject to a contingent deferred sales charge if redeemed
within a specified period of time from the date of purchase. Class B Shares of
the VK Fund are subject to a contingent deferred sales charge equal to 4.00% of
the lesser of the then current net asset value or the original purchase price on
Class B Shares redeemed during the first year after purchase, which charge is
reduced to zero over a six year period. Class B shares of the AC Fund are
subject to a contingent deferred sales charge equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
shares redeemed during the first year after purchase, which charge is reduced to
zero over a five year period. However, Class B Shares of the VK Fund acquired in
the Reorganization will remain subject to the contingent deferred sales charge
applicable to Class B shares of the AC Fund.

Generally, Class C shares do not incur a sales charge if redeemed after the
first year of purchase. Both Class C shares of the VK Fund and the AC Fund are
subject to a contingent deferred sales charge equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on such shares
redeemed during the first year after purchase and do not incur a sales charge if
redeemed after the first year from the date of purchase. See "Fee Comparisons"
below. Class C shares of the AC Fund automatically convert to Class A shares
after ten years. Class C

9
<PAGE> 346

shares of the VK Fund have no such automatic conversion feature. However, Class
C Shares of the VK Fund acquired in the Reorganization will remain subject to
the conversion schedule applicable to Class B shares of the AC Fund.

With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. eastern time. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share would have been $11.18, $11.18 and
$11.17 on July 21, 1995 for Classes A, B and C, respectively. The AC Fund,
however, generally computes net asset value per share by valuing fixed income
securities using the last reported bid price. When calculating the net assets of
the AC Fund in accordance with this pricing methodology, the net asset value per
share was $11.14, $11.14 and $11.13 on July 21, 1995 for Classes A, B and C,
respectively. In connection with the Reorganization, the net assets of the AC
Fund will be calculated using the current pricing methodology of the VK Fund.
For this reason the value of the VK Fund Shares received in connection with the
Reorganization may be approximately equal in value to the shares of the AC Fund
held immediately prior to the Reorganization rather than identical in value.

Shares of either the AC Fund or the VK Fund may be purchased by check, by
electronic transfer or by bank wire and offer exchange privileges among all
other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors (except Van Kampen American Capital Government Target Fund).

10
<PAGE> 347

have been purchased by check, the respective fund may delay payment of the
redemption proceeds until such fund can verify that payment for the purchase of
the shares has been (or will be) received. No further purchases of the shares of
the AC Fund may be made after the date on which the shareholders of the AC Fund
approve the Reorganization, and the stock transfer books of the AC Fund will be
permanently closed as of the date of Closing. Only redemption requests and
transfer instructions received in proper form by the close of business on the
day prior to the date of Closing will be fulfilled by the AC Fund. Redemption
requests or transfer instructions received by the AC Fund after that date will
be treated by the AC Fund as requests for the redemption or instructions for
transfer of the shares of the VK Fund credited to the accounts of the
shareholders of the AC Fund. Redemption requests or transfer instructions
received by the AC Fund after the close of business on the day prior to the date
of Closing will be forwarded to the VK Fund. For a complete description of these
redemption arrangements, see the section in the VK Fund Prospectus entitled
"Redemption of Shares," and the respective sections in the AC Fund's Prospectus
and Statement of Additional Information entitled "Redemption of Shares" and
"Purchase and Redemption of Shares."

The differences in the distribution, purchase and redemption procedures and
fee structure of the shares of the VK Fund and the shares of the AC Fund are
highlighted in the table below.

FEE COMPARISONS

<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. 4.75%(1) 4.75% 4.75%(1)
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.51% 0.57% 0.50%
Rule 12b-1 Fees.................................... 0.24%(4) 0.24% 0.20%
Other Expenses..................................... 0.22% 0.34% 0.23%
Total Fund Operating Expenses...................... 0.97% 1.15% 0.93%
</TABLE>

11
<PAGE> 348

<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 57 $ 59 $ 57
Three Years...................................... $ 77 $ 82 $ 76
Five Years....................................... $ 99 $ 108 $ 97
Ten Years........................................ $ 161 $ 181 $ 156
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 57 $ 59 $ 57
Three Years...................................... $ 77 $ 82 $ 76
Five Years....................................... $ 99 $ 108 $ 97
Ten Years........................................ $ 161 $ 181 $ 156

CLASS B SHARES
- ---------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge (as a percentage of
the lower of the original purchase price or
redemption proceeds)............................. 4.00%(2) 4.00%(3) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.51% 0.57% 0.50%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.29% 0.34% 0.30%
Total Fund Operating Expenses...................... 1.80% 1.91% 1.80%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 58 $ 59 $ 58
Three Years...................................... $ 92 $ 90 $ 92
Five Years....................................... $ 112 $ 118 $ 112
Ten Years........................................ $ 180 $ 185 $ 178
</TABLE>

12
<PAGE> 349

<TABLE>
<CAPTION>
VK AC
CLASS B SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 18 $ 19 $ 18
Three Years...................................... $ 57 $ 60 $ 57
Five Years....................................... $ 97 $ 103 $ 97
Ten Years........................................ $ 180 $ 185 $ 178

CLASS C SHARES(5)
- ---------------------------------------------------

SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.51% 0.57% 0.50%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.28% 0.32% 0.29%
Total Fund Operating Expenses...................... 1.79% 1.89% 1.79%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period(6)
One Year......................................... $ 28 $ 29 $ 28
Three Years...................................... $ 56 $ 59 $ 56
Five Years....................................... $ 97 $ 102 $ 97
Ten Years........................................ $ 211 $ 221 $ 211
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the
Period(6)
One Year......................................... $ 18 $ 19 $ 18
Three Years...................................... $ 56 $ 59 $ 56
Five Years....................................... $ 97 $ 102 $ 97
Ten Years........................................ $ 211 $ 221 $ 211
</TABLE>

- ---------------
(1) Class A shares of the VK Fund received pursuant to the Reorganization will
not be subject to a sales charge upon purchase.
(2) Class B shares of the VK Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B shares redeemed during the first year
after purchase, which charge is reduced to 0.00% over a six year period as
follows:

13
<PAGE> 350

Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year 4 -- 2.50%; Year
5 -- 1.50%; Year 6 -- 1.00%; and Year 7 -- 0.00%. However, Class B Shares
acquired in the Reorganization will remain subject to the contingent
deferred sales charge schedule applicable to Class B shares of the AC Fund.
(3) Class B shares of the AC Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first year
after purchase, which charge is reduced to 0.00% over a five year period as
follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year 4 -- 2.50%;
Year 5 -- 1.50%; and Year 6 -- 0.00%.
(4) As of June 30, 1995, the Rule 12b-1 fees for the VK Fund's Class A shares
was reduced from 0.30% to 0.25%. Due to pre-12b-1 plan assets, the effective
12b-1 fee for the VK Fund was 0.24%.
(5) Class C shares are subject to a contingent deferred sales charge equal to
1.00% of the lesser of the then current net asset value on the original
purchase price on Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
(6) Expenses examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted in the above table. The Pro Forma column
reflects expenses estimated to be paid on new shares purchased from the
combined fund subsequent to the Reorganization. For those shares issued in
connection with the Reorganization, the following expenses would be incurred
based upon the purchase of the AC Fund immediately prior to the
Reorganization and the Pro Forma expense ratio:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
With Redemption at End of Period
Class A............................... $57 $76 $ 97 $156
Class B............................... $58 $87 $112 $168
Class C............................... $28 $56 $ 97 $211
Without Redemption at End of Period
Class A............................... $57 $76 $ 97 $156
Class B............................... $18 $57 $ 97 $168
Class C............................... $18 $56 $ 97 $211
</TABLE>

* For the fiscal year ended December 31, 1994, except that Management Fees and
Total Fund Operating Expenses reflect the investment advisory fee structure
approved on July 21, 1995.
** For the fiscal year ended November 30, 1994.

FEDERAL INCOME TAX CONSEQUENCES

14
<PAGE> 351

Fund will recognize no gain or loss upon the receipt of solely the shares of the
VK Fund pursuant to the Reorganization. Additionally, the AC Fund would not
recognize any gain or loss as a result of the exchange of all of its assets for
the Shares of the VK Fund or as a result of its liquidation. The VK Fund expects
that it will not recognize any gain or loss as a result of the Reorganization,
that it will take a carryover basis in the assets acquired from the AC Fund and
that its holding period of such assets will include the period during which the
assets were held by the AC Fund. See "The Proposed Reorganization -- Federal
Income Tax Consequences."

The above information is only a summary of more complete information contained
in this Proxy Statement/Prospectus and the related Statement of Additional
Information.

REASONS FOR THE PROPOSED REORGANIZATION

On February 10, 1995, the VK Board and the AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund, in order to seek to achieve certain economies of
scale and efficiencies, (ii) permitting exchangeability of shares between funds
advised by the VK Adviser and the AC Adviser, (iii) selecting a common transfer
agent to facilitate exchangeability and enhance shareholder services, and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").

The VK Board and the AC Board held joint meetings on March 14, 1995 and April
6-7, 1995 to review the findings and recommendations of the Joint

15
<PAGE> 352

Committee. The VK Board unanimously approved each element of the Consolidation,
including the combination of the VK Fund with the AC Fund, on April 7, 1995,
subject to approval of the Consolidation by the AC Board. The AC Board met May
11, 1995, and unanimously approved each element of the Consolidation, including
the combination of the VK Fund with the AC Fund. Each of the VK Board and the AC
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.

At separate shareholder meetings held on July 21, 1995, shareholders of the VK
Fund and the AC Fund approved the reorganization of the VK Fund and the AC Fund
into Delaware business trusts (or series thereof) and the combination of the VK
Board and the AC Board. Shareholders of the AC Fund are now being asked to
approve its consolidation with the VK Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) seek to achieve economies of scale by combining
the assets of the funds and (iii) potentially reduce transaction costs and
obtain greater portfolio diversity.

In connection with approving the combination of the AC Fund with the VK Fund,
the AC Board considered the costs resulting from the separate operations of the
AC Fund and the VK Fund in light of their substantially similar investment
objective, policies and restrictions. The AC Board also considered the potential
expense savings, economies of scale, reduced per-share expenses and benefits to
the portfolio management process that could result from combining the assets and
operations of the AC Fund and the VK Fund. In this regard, the AC Board reviewed
information provided by the AC Adviser, VK Adviser and VKAC Distributors
relating to the anticipated cost savings to the shareholders of the AC Fund and
the VK Fund as a result of the Reorganization.

(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the AC Fund and the VK
Fund should eliminate duplication of services that currently exists as a
result of their separate operations. For example, currently the AC Fund
and the VK Fund are managed separately by different affiliated investment
advisers. Consolidating the separate operations of the AC Fund with those
of the VK Fund should promote more efficient operations on a more cost-
effective basis.

(2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF SCALE.
Combining the assets of the AC Fund with the assets of the VK Fund also
should lead to reduced expenses, on a per share basis, by allowing fixed
and

16
<PAGE> 353

relatively fixed costs, such as accounting, legal and printing expenses,
to be spread over a larger asset base. An increase in the net asset levels
of the VK Fund also could result in achieving future economies of scale,
which should also reduce per share expenses. Any significant reductions in
expenses on a per share basis should, in turn, have a favorable effect on
the relative total return of the VK Fund.

(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset levels
also should enable the VK Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs and/or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.

In determining whether to recommend approval of the Reorganization to
shareholders of the AC Fund, the AC Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of VK Adviser and
other service providers to the VK Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the AC Fund
and the VK Fund before the Reorganization and the estimated expense ratios of
the VK Fund after the Reorganization; (3) the comparative investment performance
of the AC Fund and the VK Fund, as well as the performance of the VK Fund
compared to its peers; (4) the terms and conditions of the Agreement and whether
the Reorganization would result in dilution of AC Fund shareholder interests;
(5) the advantages of eliminating the competition and duplication of effort
inherent in marketing two funds having similar investment objectives, in
addition to the economies of scale realized through the combination of the
funds; (6) the compatibility of the funds' service features available to
shareholders, including the retention of applicable holding periods and exchange
privileges; (7) the costs estimated to be incurred by the respective funds as a
result of the Reorganization; and (8) the anticipated tax consequences of the
Reorganization. Based upon these, and other factors, the AC Board unanimously
determined that the Reorganization is in the best interests of the shareholders
of the AC Fund.

B. RISK FACTORS

NATURE OF INVESTMENT

Each of the VK Fund and the AC Fund invest primarily in a portfolio of tax
exempt insured municipal securities. Investment in either of the VK Fund or the
AC Fund may not be appropriate for all investors.

Certain investment policies and practices of the VK Fund involve special
risks. Investment in municipal securities involves risk of fluctuation in value
as a result of changes in market rates of interest. Although all of the
municipal securities in which the VK Fund invests will be insured by municipal
bond insurers, no representation can be made as to the ability of any insurer to
meet its commitments

17
<PAGE> 354

and the insurance does not guarantee the market value of the municipal
securities or the value of the VK Fund's Shares. Other investment policies and
practices also involve special risks, including investment in municipal
securities whose rates of interest vary inversely with market rates of interest,
investment in municipal lease obligations that have "non-appropriation" clauses,
the use of options, futures and interest rate transactions and the use of when
issued and delayed delivery transactions. For a more complete discussion of the
risks of an investment in the VK Fund, see the sections of the VK Fund
Prospectus entitled "Investment Objectives and Policies," "Municipal Securities"
and "Investment Practices."

CHANGES IN CERTAIN INVESTMENT PRACTICES

Both the VK Fund and the AC Fund may engage in certain options and financial
futures transactions. However, the VK Fund has greater levels of flexibility in
pursuing its investment objectives through practices such as the ability to make
investments in securities of issuers that are new and unseasoned or in
securities having no ready market. Such transactions involve different risks.
See "The VK Fund" below. For a complete description of the VK Fund's investment
practices, see the section in the VK Fund Prospectus entitled "Investment
Practices" and "Investment Objective and Policies" and the section of the VK
Fund's Statement of Additional Information entitled "Additional Investment
Considerations."

C. INFORMATION ABOUT THE FUNDS

VK Fund. Information about the VK Fund is included in its current Prospectus
dated July 31, 1995, which accompanies this Proxy Statement/Prospectus.
Additional information about the VK Fund is included in its Statement of
Additional Information dated the same date as the VK Fund Prospectus. Copies of
the VK Fund's Statement of Additional Information may be obtained without charge
by calling (800) 341-2911. The VK Fund files proxy material, reports and other
information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.

AC Fund. Information about the AC Fund is included in its current Prospectus
dated August 1, 1995. Additional information about the AC Fund is included in
the Statement of Additional Information dated the same date as the AC Fund
Prospectus. Copies of the AC Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666. The AC Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also

18
<PAGE> 355

be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Service, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.

Management's Discussion of VK Fund Performance as of the Annual Report dated
December 31, 1995 and Management's Discussion of AC Fund Performance as of the
Annual Report dated November 30, 1994 are attached hereto as Exhibit B.

The VK Fund, as a series of VKAC Tax Free Trust, a Delaware business trust,
and the AC Fund, as a Delaware business trust, are governed by their respective
Agreements and Declarations of Trust (each, the "Declaration"), their respective
Bylaws and applicable Delaware law.

D. THE PROPOSED REORGANIZATION

TERMS OF THE AGREEMENT

Pursuant to the Agreement, the VK Fund series of the VKAC Tax Free Trust will
acquire all of the assets and liabilities of the AC Fund on the date of the
Closing in exchange for Class A, B and C Shares, respectively, of the VK Fund.

On the date of Closing, the AC Fund will transfer to the VK Fund all of the
assets and liabilities of the AC Fund. The VKAC Tax Free Trust will in turn
transfer to the AC Fund a number of Class A, B and C Shares of the VK Fund equal
in value to the value of the net assets of the AC Fund transferred to the VK
Fund as of the date of Closing as determined in accordance with the valuation
method described in the VK Fund's then current prospectus. In order to minimize
any potential for undesirable federal income and excise tax consequences in
connection with the Reorganization, the VK Fund and the AC Fund may distribute
on or before the Closing all or substantially all of their respective
undistributed net investment income (including net capital gains) as of such
date.

19
<PAGE> 356

The AC Fund expects to distribute the Class A, B and C Shares of the VK Fund
to the shareholders of the AC Fund promptly after the Closing. The AC Fund will
then dissolve pursuant to a plan of liquidation and dissolution adopted by the
AC Board.

The AC Fund and the VKAC Tax Free Trust have made certain representations and
warranties to each other regarding their capitalizations, status and conduct of
business.

Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:

1. the approval of the Reorganization by the AC Fund's shareholders;

2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of transactions
contemplated by the Agreement;

3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;

5. the effectiveness under appliable law of the registration statement of
the VK Fund of which this Proxy Statement/Prospectus forms a part and the
absence of any stop orders under the Securities Act pertaining thereto;
and

6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.

The AC Board recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the AC Fund's
shareholders and that the interests of AC Fund's existing shareholders will not
be diluted as a result of consummation of the proposed Reorganization.

20
<PAGE> 357

DESCRIPTION OF SECURITIES TO BE ISSUED

SHARES OF BENEFICIAL INTEREST

Beneficial interests in the VK Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The VKAC Tax
Free Trust's Declaration of Trust permits the trustees, as they deem necessary
or desirable, to create one or more separate investment portfolios and to issue
a separate series of shares for each portfolio and subject to compliance with
the Act to further sub-divide the shares of a series into one or more classes of
shares for such portfolio.

VOTING RIGHTS OF SHAREHOLDERS

Holders of shares of the VK Fund are entitled to one vote per share on matters
as to which they are entitled to vote; however, separate votes generally are
taken by each series on matters affecting an individual series. The Declaration
of VKAC Tax Free Trust and the Declaration of AC Fund are substantially
identical, except that the Declaration of the VKAC Tax Free Trust permits the VK
Board or shareholders to remove a trustee with or without cause by the act of
two-thirds of such trustees or shareholders, respectively. The Declaration of
the AC Fund permits (i) the AC Fund to remove a trustee with cause by the act of
two-thirds of the trustees and (ii) shareholders holding a majority of the
shares of each series outstanding to remove a trustee with or without cause. The
Declaration of the AC Fund also requires the approval of 80% of the trustees in
office or majority vote of the shares of each series then outstanding to amend
these provisions.

Each of the VK Fund and the AC Fund operate as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
VK Fund, as well as shareholders of the AC Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).

CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES

21
<PAGE> 358

withdrawal plan with respect to AC Fund shares, will retain the same rights and
privileges after the Reorganization in connection with the VK Fund Class A, B or
C Shares, respectively, received in the Reorganization through substantially
similar plans maintained by the VKAC Tax Free Fund. Van Kampen American Capital
Trust Company will continue to serve as custodian for the assets of AC Fund
Shareholders held in IRA accounts after the Reorganization. Such IRA investors
will be sent appropriate documentation to confirm Van Kampen American Capital
Trust Company's custodianship.

It will not be necessary for shareholders of the AC Fund to whom certificates
have been issued to surrender their certificates. Upon liquidation of the AC
Fund, such certificates will become null and void.

FEDERAL INCOME TAX CONSEQUENCES

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
VK Fund and the AC Fund receive an opinion from O'Melveny & Myers substantially
to the effect that, for federal income tax purposes:

22
<PAGE> 359

4. No gain or loss will be recognized by the shareholders of the AC Fund upon
the exchange of their shares of the AC Fund solely for the Class A, B or C
Shares, respectively, of the VK Fund.

5. The aggregate tax basis of the Class A, B and C Shares of the VK Fund
received by the shareholders of the AC Fund will be the same as the aggregate
tax basis of the shares of the AC Fund surrendered in exchange therefor.

In rendering its opinion, O'Melveny & Myers may rely upon certain
representations of the management of the AC Fund and the VKAC Trust and assume
that the Reorganization will be consummated as described in the Agreement and
that redemptions of shares of the AC Fund occurring prior to the Closing will
consist solely of redemptions in the ordinary course of business.

23
<PAGE> 360

CAPITALIZATION

CAPITALIZATION TABLE AS OF MARCH 31, 1995

<TABLE>
<CAPTION>
VK FUND AC FUND PRO FORMA
-------------- ------------ --------------
<S> <C> <C> <C>
NET ASSETS
Class A shares........ $1,185,694,970(1) $ 67,027,202 $1,252,722,172(1)
Class B shares........ 32,859,977 36,534,187 69,394,164
Class C shares........ 3,774,082 2,264,918 6,039,000
-------------- ------------ --------------
Total.......... $1,222,329,029 $105,826,307 $1,328,155,336
============== ============ ==============

NET ASSET VALUE PER
SHARE
Class A shares........ $18.60 $11.09 $18.60
Class B shares........ 18.59 11.09 18.59
Class C shares........ 18.59 11.08 18.59

SHARES OUTSTANDING
Class A shares........ 63,753,108(1) 6,042,102 67,356,721(1)
Class B shares........ 1,767,707 3,294,528 3,732,967
Class C shares........ 202,971 204,359 324,806
-------------- ------------ --------------
Total.......... 65,723,786 9,540,989 71,414,494
============== ============ ==============

SHARES AUTHORIZED
Class A shares........ Unlimited Unlimited Unlimited
Class B shares........ Unlimited Unlimited Unlimited
Class C shares........ Unlimited Unlimited Unlimited
</TABLE>

- ---------------
(1) Includes $27,486 and 1,478 shares representing Class D Shares which were
outstanding as of March 31, 1995.

COMPARATIVE PERFORMANCE INFORMATION

The average annual total return for the AC Fund for the one-year, three-year
and five-year periods ended March 31, 1995 and for the period beginning since
inception through March 31, 1995 were 0.20%, 4.16%, 5.76% and 5.21% in respect
of its Class A shares; for the one year period ended March 31, 1995 and for the
period beginning since inception through March 31, 1995 were 0.55% and 2.91% in
respect of Class B Shares (inception July 20, 1992) and 3.45% and 0.80% in
respect of Class C Shares (inception December 10, 1993). The average annual
total return for the VK Fund for the one-year, three-year, five-year and
ten-year periods ended

24
<PAGE> 361

March 31, 1995 were 1.99%, 5.42%, 6.81% and 9.17% in respect of its Class A
Shares; for the one year period ended March 31, 1995 and for the period
beginning since inception through March 31, 1995 were 2.24% and 0.98% in respect
of Class B Shares (inception April 30, 1993) and 5.18% and 1.37% in respect of
Class C Shares (inception August 13, 1993). The foregoing returns include the
effect of the maximum sales charge applicable to sales of Shares of the VK Fund,
which is not being charged to shareholders of the AC Fund in connection with the
Reorganization.

RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE VK FUND

Approval of the Reorganization will constitute the ratification by AC Fund
shareholders of the investment objective, policies and restrictions,
Distribution Plan and Advisory Agreement of the VK Fund. For a discussion of the
investment objective, policies and restrictions of the VK Fund, see "Summary --
Comparison of the VK Fund and AC Fund" and the VK Fund Prospectus accompanying
this Proxy Statement/Prospectus. Approval of the Reorganization will constitute
approval of amendments to any of the fundamental investment restrictions of the
AC Fund that might otherwise be interpreted as impeding the Reorganization, but
solely for the purpose of and to the extent necessary for, consummation of the
Reorganization.

LEGAL MATTERS

Certain legal matters concerning the issuance of Class A, B and C Shares of
the VK Fund will be passed on by Skadden, Arps, Slate, Meagher & Flom, 333 West
Wacker Drive, Chicago, Illinois 60606, counsel to the VK Fund. Wayne W. Whalen,
a partner of Skadden, Arps, Slate, Meagher & Flom, is a Trustee of the VKAC Tax
Free Trust. On July 21, 1995, Mr. Whalen was elected as a Trustee of the AC
Fund.

25
<PAGE> 362

EXPENSES

The expenses of the Reorganization, including expenses incurred by the AC Fund
will be borne by the VK Fund after the Reorganization. Accordingly, if the
Reorganization is completed the VK Fund and its shareholders after the
Reorganization will bear such expenses of the Reorganization. If the
Reorganization is not completed VKAC will bear the costs associated with the
Reorganization. The AC Board has determined that the arrangements regarding the
payment of expenses and other charges relating to the Reorganization are fair
and equitable.

E. RECOMMENDATION OF THE AC BOARD

The AC Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of the shareholders
of the AC Fund. THE AC BOARD RECOMMENDS VOTING FOR THE PROPOSED REORGANIZATION.

OTHER MATTERS THAT MAY COME
BEFORE THE SPECIAL MEETING

OTHER INFORMATION

A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND

At the close of business on July 21, 1995, there were 6,038,020 Class A
shares, 3,259,298 Class B shares and 118,637 Class C shares, respectively, of
the AC Fund.

Certain officers, directors and employees of VKAC own, in the aggregate, not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail
broker-dealer affiliate of VKAC Distributors, is a wholly owned subsidiary of
VK/AC Holding, Inc. No officer or trustee of the VK Fund or the AC Fund owns or
would be able to acquire 5% or more of the common stock of VK/AC Holding, Inc.

The trustees and officers of the AC Fund as a group own less than 1% of the
outstanding shares of the AC Fund.

As of July 6, 1995, no person was known by the AC Fund to own beneficially as
of record as much as 5% of the Class A shares of the AC Fund except as follows:
9.22% was owned by Smith Barney, Inc., 388 Greenwich Street, 22nd Floor, New

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York, NY 10013-2375 and 5.47% was owned by Merrill Lynch Pierce Fenner & Smith,
4800 Deer Lake Drive East, 3rd Floor, Jacksonville, FL 32246-6484.

As of July 6, 1995, no person was known by the AC Fund to own beneficially or
of record as much as 5% of the Class B shares of the AC Fund except as follows:
6.66% was owned by Donaldson Lufkin Jenrette Secs., P.O. Box 2052, Jersey City,
NJ 07303-2052, 9.07% was owned by National Financial Services, P.O. Box 3730,
New York, NY 10008-3730 and 8.49% was owned by Smith Barney, Inc., 388 Greenwich
Street, 22nd Floor, New York, NY 10013-2375.

As of July 6, 1995, no person was known by the AC Fund to own beneficially or
of record as much as 5% of the Class C shares of the AC Fund except as follows:
5.50% was owned by Vernon & Ruth Maddox, JT TEN, 18402 Tomlinson Dr., Lutz, FL
33 549-5485, 5.30% was owned by Harold J. & Julienne M. Ladovceur, JT TEN, 5604
Wapod Forest Dr., Tampa, FL 33615-3909, 18.83% was owned by R.T. Kelley, P.O.
Box 237, Canadian, TX 79014-0237, 16.18% was owned by B&C Construction, A
Corporation, 4950 Valerty, Chubbuck, ID 83202-1850 and 24.58% was owned by Smith
Barney, Inc., 388 Greenwich Street, 22nd Floor, New York, NY 10013-2375.

At the close of business on July 21, 1995, there were 64,016,138 Class A
shares, 1,814,534 Class B shares and 177,354 Class C shares, respectively, of
the VK Fund.

As of July 17, 1995, the trustees and officers as a group owned less than 1%
of the shares of the VK Fund.

To the knowledge of the VK Fund, as of July 17, 1995 no person owned of record
or beneficially 5% or more of the VK Fund's Class A Shares or Class B Shares.

As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the VK Fund's Class C Shares: Richard K. Bolen, 4000 Club House
Drive, Champaign, IL 61821-9281, 15%; and Robert J. Holuba, Stanley J. Holuba
TR, Angela Holuba Term Trust, FBO Angela Holuba DTD 7/28/87, 2 Hackensack
Avenue, Kearny, NJ 07032-4611, 19%.

B. SHAREHOLDER PROPOSALS

As a general matter, the AC Fund does not intend to hold future regular annual
or special meetings of shareholders unless required by the Act. Any shareholder
who wishes to submit proposals for consideration at a meeting of shareholders of
the VK Fund should send such proposal to the VK Fund at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting, rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the VK Fund
a

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reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.

VOTING INFORMATION AND REQUIREMENTS

Each valid proxy given by a shareholder of the AC Fund will be voted by the
person named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the AC Board "FOR"
approval of the Reorganization.

The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.

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Proxies of shareholders of the AC Fund are solicited by the AC Board. The cost
of solicitation will be paid by the VK Fund after the Reorganization if the
Reorganization is completed. If the Reorganization is not completed VKAC will
bear the costs associated with the Reorganization. In order to obtain the
necessary quorum at the Special Meeting, additional solicitation may be made by
mail, telephone, telegraph or personal interview by representatives of the AC
Fund, the AC Adviser or VKAC, or by dealers or their representatives. In
addition, such solicitation servicing may also be provided by Applied Mailing
Systems, a solicitation firm located in Boston, Massachusetts, at a cost
estimated to be approximately $17,500, plus reasonable expenses.

July 31, 1995

PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.

YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.

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<PAGE> 366
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement") is made as of
July 31, 1995, by and between the Van Kampen American Capital Tax Free Trust,
a Delaware business trust formed under the laws of the State of Delaware (the
"VKM Trust") on behalf of its series, the Van Kampen American Capital Insured
Tax Free Income Fund (the "VKM Fund") and the Van Kampen American Capital
Tax-Exempt Trust, a Delaware business trust formed under the laws of the State
of Delaware (the "AC Trust") on behalf of its series the Van Kampen American
Capital Insured Municipal Fund (the "AC Fund").

W I T N E S S E T H :

WHEREAS, American Capital and TVKMC, through their affiliated companies,
sponsor and manage a number of registered investment companies; and

WHEREAS, the AC Trust was organized as a Massachusetts business trust,
and subsequently reorganized as a Delaware business trust pursuant to an
Agreement and Declaration of Trust subsequently amended and restated as of June
20, 1995 pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest for each series of shares authorized by the
trustees, one of which series is the AC Fund the shares of which have a par
value of $0.01 per share;

WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management") provides
investment advisory and administrative services to the AC Fund;

WHEREAS, the VKM Trust was organized as a Massachusetts business trust,
and subsequently reorganized as a Delaware business trust pursuant to an
Agreement and Declaration of Trust (the "Declaration of Trust") dated May 10,
1995, pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest for each series authorized by the trustees, one
of which series is the VKM Fund, the shares of which have a par value of $0.01
per share;

WHEREAS, Van Kampen American Capital Investment Advisory Corp. (formerly,
Van Kampen Merritt Investment Advisory Corp.") ("Advisory Corp.") provides
investment advisory and administrative services to the VKM Fund;

WHEREAS, the Board of Trustees of each of the VKM Trust and the AC Trust
have determined that entering into this Agreement for the VKM Fund to acquire
the assets and liabilities of the AC Fund is in the best interests of the
shareholders of each respective fund; and

WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");

NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:

1. PLAN OF TRANSACTION.

A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the AC Trust will convey, transfer and deliver
to the VKM Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the AC Fund (including accrued interest to the Closing Date)
consisting of nondefaulted, liquid, and insured municipal securities, due bills,
cash and other marketable securities of the AC Fund acceptable to the VKM Fund
as more fully set forth on Schedule 1 hereto, and as amended from time to time
prior to the Closing Date (as defined below), free and clear of all liens,
encumbrances and claims whatsoever (the assets so transferred collectively being
referred to as the "Assets").

B. CONSIDERATION. In consideration thereof, the VKM Trust agrees that on
the Closing Date the VKM Trust will (i) deliver to the AC Trust, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the VKM
Fund having net asset values per share calculated as provided in Section 3A
hereof, in an amount equal to the

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aggregate dollar value of the Assets net of any liabilities of the AC Fund
described in Section 3E hereof (the "Liabilities") determined pursuant
to Section 3A of this Agreement (collectively, the "VKM Fund Shares") and (ii)
assume all of the AC Fund's Liabilities. All VKM Fund Shares delivered to the
AC Trust in exchange for such Assets shall be delivered at net asset value
without sales load, commission or other transactional fee being imposed.

2. CLOSING OF THE TRANSACTION.

CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and
the final adjournment of the meeting of shareholders of the AC Fund at which
this Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VKM Trust shall deliver to the AC Trust the VKM Fund
Shares in the amount determined pursuant to Section 1B hereof and the AC Trust
thereafter shall, in order to effect the distribution of such shares to the AC
Fund stockholders, instruct the VKM Trust to register the pro rata interest in
the VKM Fund Shares (in full and fractional shares) of each of the holders of
record of shares of the AC Fund in accordance with their holdings of either
Class A, Class B or Class C shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses
and taxpayer identification numbers), and the VKM Trust agrees promptly to
comply with said instruction. The VKM Trust shall have no obligation to inquire
as to the validity, propriety or correctness of such instruction, but shall
assume that such instruction is valid, proper and correct.

3. PROCEDURE FOR REORGANIZATION.

C. FAILURE TO DELIVER SECURITIES. If the AC Trust is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the AC Fund's
securities for the reason that any of such securities purchased by the VKM Trust
have not yet been delivered to it by the AC Fund's broker or brokers, then, in
lieu of such delivery, the AC Trust shall deliver to the Custodian, with respect
to said securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other documents
as may be required by the VKM Trust or Custodian, including brokers'
confirmation slips.

D. SHAREHOLDER ACCOUNTS. The VKM Trust, in order to assist the AC Trust in
the distribution of the VKM Fund Shares to the AC Fund shareholders after
delivery of the VKM Fund Shares to the AC Trust, will establish pursuant to the
request of the AC Trust an open account with the VKM Fund for each shareholder
of the AC Fund and, upon request by the AC Trust, shall transfer to such account
the exact number of full and fractional Class A, Class B and Class C shares of
the VKM Fund then held by the AC Trust specified in the instruction provided
pursuant to Section 2 hereof. The VKM Fund is not required to issue certificates
representing VKM Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the AC Fund, certificates representing shares of
beneficial interest of the AC Fund shall become null and void.

E. LIABILITIES. The Liabilities shall include all of the AC Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.

F. EXPENSES. In the event that the transactions contemplated herein are
consummated the VKM Trust agrees to pay (i) for the reasonable outside expenses
for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the VKM Trust's Registration Statement on Form
N-14 (the "Registration

2
<PAGE> 368

Statement") and the solicitation of the AC Fund shareholder proxies; (ii) AC
Trust's reasonable attorney's fees, which fees shall be payable pursuant to
receipt of an itemized statement; and (iii) the cost of rendering the tax
opinion, more fully referenced in Section 7F below. In the event that the
transactions contemplated herein are not consummated for any reason, then
all reasonable outside expenses incurred to the date of termination of this
Agreement shall be borne by Advisory Corp.

G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the AC Trust shall voluntarily
dissolve and completely liquidate the AC Fund, by taking, in accordance with the
Delaware Business Trust Law and Federal securities laws, all steps as shall be
necessary and proper to effect a complete liquidation and dissolution of the AC
Fund. Immediately after the Closing Date, the stock transfer books relating to
the AC Fund shall be closed and no transfer of shares shall thereafter be made
on such books.

4. AC TRUST'S REPRESENTATIONS AND WARRANTIES.

The AC Trust, on behalf of the AC Fund, hereby represents and warrants to
the VKM Trust which representations and warranties are true and correct on the
date hereof, and agrees with the VKM Trust that:

A. ORGANIZATION. The AC Trust is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The AC Fund is a
separate series of the AC Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The AC Trust or AC Fund are
qualified to do business in all jurisdictions in which they are required to be
so qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on either the AC Trust or the AC Fund. The AC
Trust has all material federal, state and local authorizations necessary to
own all of the properties and assets allocated to the AC Fund and to carry on
its business and the business of the AC Fund as now being conducted, except
authorizations which the failure to so obtain would not have a material
adverse effect on the AC Trust or the AC Fund.

B. REGISTRATION. The AC Trust is registered under the Investment Company
Act of 1940, as amended (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. The AC Trust
is in compliance in all material respects with the 1940 Act and the rules and
regulations thereunder with respect to its activities and those undertaken on
behalf of the AC Fund. All of the outstanding shares of beneficial interest of
the AC Fund have been duly authorized and are validly issued, fully paid and
non-assessable and not subject to pre-emptive or dissenters' rights.

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the AC Fund audited as of and for the year ended
November 30, 1994, true and complete copies of which have been heretofore
furnished to the VKM Trust, fairly represent the financial condition and the
results of operations of the AC Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The AC Trust shall furnish to the VKM Trust (i)
an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the AC Fund for the period ended June 30, 1995; and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the AC Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved and the results of its operations and changes
in financial position for the periods then ended; and such financial statements
shall be certified by the Treasurer of the AC Trust as complying with the
requirements hereof.

E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be,
no contingent Liabilities of the AC Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the AC Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the AC Trust or the AC Fund which would, if adversely determined,
materially affect the AC Fund's financial condition. All Liabilities were
incurred by the AC Fund in the ordinary course of its business.

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<PAGE> 369

F. MATERIAL AGREEMENTS. The AC Trust is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the AC
Fund's Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the AC Fund to which the AC Trust is a party.

G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, Price Waterhouse, auditors
for the AC Trust, shall furnish the VKM Fund with a statement of the earnings
and profits of the AC Fund within the meaning of the Code as of the Closing
Date.

I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the AC Fund required by
law to have been filed by such dates shall have been filed, and all Federal and
other taxes shown thereon shall have been paid so far as due, or provision
shall have been made for the payment thereof, and to the best of the AC Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.

J. CORPORATE AUTHORITY. The AC Trust has the necessary power to enter into
this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the AC Trust's
Board of Trustees, and except for obtaining approval of the holders of the
shares of beneficial interest of the AC Fund, no other corporate acts or
proceedings by the AC Trust or the AC Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the AC Trust and constitutes a legal, valid and
binding obligation of AC Trust enforceable in accordance with its terms subject
to bankruptcy laws and other equitable remedies.

K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Trust does not and will not (i) violate
any provision of the Declaration of Trust or amendment thereof of the AC Trust
or the Designation of Series of the AC Fund, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the AC Trust, (iii) result in a violation or breach of,
or constitute a default under any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the AC Trust
is subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the AC Trust. Except as set forth in
Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or
filing with or notice to any court or governmental authority or agency is
required for the consummation by the AC Trust of the transactions contemplated
by this Agreement and (ii) no consent of or notice to any third party or entity
is required for the consummation by the AC Trust of the transactions
contemplated by this Agreement.

L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:

(2) issued any option to purchase or other right to acquire shares of
the AC Fund granted by the AC Trust to any person other than subscriptions
to purchase shares at net asset value in accordance with terms in the
Prospectus for the AC Fund;

(3) any entering into, amendment or termination of any contract or
agreement by AC Trust, except as otherwise contemplated by this Agreement;

(4) any indebtedness incurred, other than in the ordinary course of
business, by the AC Fund for borrowed money or any commitment to borrow
money entered into by the AC Fund or the AC Trust on behalf of the AC Fund;

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<PAGE> 370

(5) any amendment of the Declaration of Trust of the AC Trust or
Designation of Series of the AC Fund; or

(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the AC Fund other than a lien
for taxes not yet due and payable.

M. TITLE. On the Closing Date, the AC Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the VKM
Fund will receive good and marketable title to such Assets, free and clear of
all liens, mortgages, pledges, encumbrances, charges, claims and equities other
than a lien for taxes not yet due and payable.

N. PROXY STATEMENT. The AC Trust's Proxy Statement, at the time of
delivery by the AC Trust to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the AC Trust's
Prospectus and Statement of Additional Information with respect to the AC Fund
on the forms incorporated by reference into such Proxy Statement and as of their
respective dates (collectively, the "AC Trust's Proxy Statement/Prospectus"),
and at the time the Registration Statement becomes effective, the Registration
Statement insofar as it relates to the AC Trust and the AC Fund and at all times
subsequent thereto and including the Closing Date, as amended or as supplemented
if it shall have been amended or supplemented, conform and will conform, in all
material respects, to the applicable requirements of the applicable Federal and
state securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 4N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the VKM Trust, VKM Fund or their affiliates
furnished to the AC Trust by the VKM Trust.

O. BROKERS. There are no brokers or finders fees payable by the AC Trust
or the AC Fund in connection with the transactions provided for herein.

Q. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the VKM Fund
and those to which the Assets are subject.

R. AC FUND LIABILITIES. Except as otherwise provided for herein, the AC
Trust shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the AC Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.

5. THE VKM TRUST'S REPRESENTATIONS AND WARRANTIES.

The VKM Trust, on behalf of the VKM Fund, hereby represents and warrants to
the AC Trust, which representations and warranties are true and correct on the
date hereof and agrees with the AC Trust, that:

B. REGISTRATION. The VKM Trust is registered under the 1940 Act as an
open-end, diversified management company and such registration has not been
revoked or rescinded. The VKM Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest of the VKM Fund have been duly
authorized and are validly issued, fully paid and non-assessable and not subject
to pre-emptive dissenters rights.

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<PAGE> 371

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the VKM Fund audited as of and for the year ended
December 31, 1994, true and complete copies of which have been heretofore
furnished to the AC Trust fairly represent the financial condition and the
results of operations of the VKM Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Trust (i)
an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended June 30, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the VKM Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the period involved and fairly present the financial position of
the VKM Fund as at the dates thereof and the results of its operations and
changes in financial position for the periods then ended; and such financial
statements shall be certified by the Treasurer of the VKM Trust as complying
with the requirements hereof.

F. MATERIAL AGREEMENTS. The VKM Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
VKM Trust Prospectus there are no material agreements outstanding to which the
VKM Fund is a party.

G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the VKM Fund required by
laws to have been filed by such dates shall have been filed, and all Federal
and other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the VKM Fund's knowledge
no such return is currently under audit and no assessment has been asserted
with respect to any such return.

J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the VKM Fund which
would materially affect its financial condition.

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<PAGE> 372

K. SHARES OF THE VKM FUND: REGISTRATION. The VKM Fund Shares to be issued
pursuant to Section 1 hereof will be duly registered under the Securities Act
and all applicable state securities laws.

L. SHARES OF THE VKM FUND: AUTHORIZATION. Subject to the matters set forth
in the Statement of Additional Information of the VKM Fund, under the heading
"The Fund and the Trust", a copy of which has been furnished to the AC Trust,
the shares of beneficial interest of the VKM Fund to be issued pursuant to
Section 1 hereof have been duly authorized and, when issued in accordance with
this Agreement, will be validly issued and fully paid and non-assessable by
the VKM Trust and conform in all material respects to the description thereof
contained in the VKM Trust's Prospectus furnished to the AC Trust.

N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein filed on Form N-14, the ("Registration Statement"), as of
the effective date of the Registration Statement, and at all times subsequent
thereto up to and including the Closing Date, as amended or as supplemented
if they shall have been amended or supplemented, will conform, in all
material respects, to the applicable requirements of the applicable Federal
securities laws and the rules and regulations of the SEC thereunder, and will
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representations or warranties in this Section 5N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the AC Trust or the AC Fund furnished to the VKM
Trust by the AC Trust.

O. TAX QUALIFICATION. The VKM Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years. For purposes of this Section, any
reference to the VKM Fund shall include its predecessors, a sub-trust of a
Massachusetts business trust organized and designated on August 15, 1985 and
subsequently reorganized by merger with and into the VKM Fund.

6. COVENANTS.

During the period from the date of this Agreement and continuing until the
Closing Date the AC Trust and VKM Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):

B. GOVERNMENT FILINGS; CONSENTS. The AC Trust and VKM Trust shall file all
reports required to be filed by the AC Fund and VKM Trust with the SEC between
the date of this Agreement and the Closing Date and shall deliver to the other
party copies of all such reports promptly after the same are filed. Except where
prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the AC
Trust and the VKM Trust shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.

C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the AC
Trust's Proxy Statement/Prospectus, each party hereto will cooperate with the
other and furnish to the other the information relating to the AC Trust, the AC
Fund, VKM Trust or VKM Fund, as the case may be, required by the Securities Act
or the Exchange Act and the rules and regulations thereunder, as the case may
be, to be set forth in the Registration Statement or the Proxy
Statement/Prospectus, as the case may be. The AC Trust shall promptly prepare
and file with the SEC the Proxy Statement/Prospectus and the VKM Trust shall
promptly prepare and file with the SEC the Registration Statement, in which the
Proxy Statement/Prospectus will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the AC Trust and its
affiliated persons, VKM Trust shall only include such information as is approved
by

7
<PAGE> 373

the AC Trust for use in the Registration Statement. The VKM Trust shall not
amend or supplement any such information regarding the VKM Trust and such
affiliates without the prior written consent of the AC Trust which consent shall
not be unreasonably withheld. The VKM Trust shall promptly notify and provide
the AC Trust with copies of all amendments or supplements filed with respect to
the Registration Statement. The VKM Trust shall use all reasonable efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. The VKM Trust shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
now not so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of the VKM Trust's shares of beneficial
interest in the transactions contemplated by this Agreement, and the AC Trust
shall furnish all information concerning the AC Fund and the holders of the AC
Fund's shares of beneficial interest as may be reasonably requested in
connection with any such action.

D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
AC Trust shall make available to the VKM Trust a copy of each report, schedule,
registration statement and other document (the "Documents") filed or received by
it during such period pursuant to the requirements of Federal or state
securities laws or Federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law or which are not
relevant to the AC Fund). During the period prior to the Closing Date, the VKM
Trust shall make available to the AC Trust each Document pertaining to the
transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).

E. SHAREHOLDERS MEETING The AC Trust shall call a meeting of the AC Fund
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to
each shareholder of the AC Fund as of the record date for such meeting of
shareholders. The AC Trust's Board of Trustees shall recommend to the AC Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.

F. COORDINATION OF PORTFOLIOS. The AC Trust and VKM Trust covenant and
agree to coordinate the respective portfolios of the AC Fund and VKM Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VKM Fund's portfolio, the resulting
portfolio will meet the VKM Fund's investment objective, policies and
restrictions, as set forth in the VKM Trust Prospectus, copies of which have
been delivered to the AC Trust .

G. DISTRIBUTION OF THE SHARES. At Closing the AC Trust covenants that
it shall cause to be distributed the VKM Fund Shares in the proper pro rata
amount for the benefit of AC Fund's shareholders and such that neither the AC
Trust nor the AC Fund shall continue to hold amounts of said shares so as to
cause a violation of Section 12(d)(1) of the 1940 Act. The AC Trust covenants
further that, pursuant to Section 3G, it shall liquidate and dissolve the AC
Fund as promptly as practicable after the Closing Date. The AC Trust covenants
to use all reasonable efforts to cooperate with the VKM Trust and the VKM
Trust's transfer agent in the distribution of said shares.

H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the AC Trust and the VKM Trust represents that
no agent, broker, investment banker, financial advisor or other firm or person
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement, and each party shall hold the other harmless from and against any all
claims, liabilities or obligations with respect to any such fees, commissions or
expenses asserted by any person to be due or payable in connection with any of
the transactions contemplated by this Agreement on the basis of any act or
statement alleged to have been made by such first party or its affiliate.

J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the AC Trust and the VKM Trust will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any

8
<PAGE> 374

press release or make any public statement prior to such consultation, except as
may be required by law or the rules of any national securities exchange on which
such party's securities are traded.

K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund, the AC Trust nor the
AC Fund shall take any action, or cause any action to be taken (including,
without limitation, the filing of any tax return) that is inconsistent with
such treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the VKM Trust, the VKM Fund, the AC Trust and the AC Fund
will take such action, or cause such action to be taken, as is reasonably
necessary to enable O'Melveny & Myers, counsel to the AC Trust and the AC
Fund, to render the tax opinion required herein.

7. CONDITIONS TO OBLIGATIONS OF THE AC TRUST

The obligations of the AC Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
AC Trust, of the following conditions:

A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the VKM Trust contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business properties or assets of the VKM Fund, and the AC Trust
shall have received a certificate of the President or Vice President of the VKM
Trust satisfactory in form and substance to the AC Trust so stating. The VKM
Trust shall have performed and complied in all material respects with all
agreements, obligations and covenants required by this Agreement to be so
performed or complied with by it on or prior to the Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "In-
junction") preventing the consummation of the transactions contemplated by this
Agreement shall be in effect, nor shall any proceeding by any state, local or
federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the transactions
contemplated by this Agreement illegal or which has a material adverse affect on
the business operations of the VKM Fund.

F. TAX OPINION. The AC Trust shall have obtained an opinion from O'Melveny
& Myers, counsel for the AC Trust and the AC Fund, dated as of the Closing
Date, addressed to the AC Trust and AC Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code, substantially in the
form attached as Annex A.

G. OPINION OF COUNSEL. The AC Trust and the AC Fund shall have received
the opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust,
dated as of the Closing Date, addressed to the AC Trust and the AC Fund
substantially in the form and to the effect that: (i) the VKM Trust is duly
formed and in good standing as a business trust under the laws of the State of
Delaware; (ii) the Board of Trustees of the VKM Trust has duly designated the
VKM Fund as a series of the VKM Trust pursuant to the terms of the Declaration
of Trust of the VKM Trust; (iii) the VKM Fund is registered as an open-end,
diversified management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the

9
<PAGE> 375

execution of this Agreement have been duly authorized and approved by
all requisite action of VKM Trust and this Agreement has been duly executed and
delivered by the VKM Trust and (assuming the Agreement is a valid and binding
obligation of the other parties thereto) is a valid and binding obligation of
the VKM Trust; (v) neither the execution or delivery by the VKM Trust of this
Agreement nor the consummation by the VKM Trust or VKM Fund of the transactions
contemplated thereby contravene the VKM Trust's Declaration of Trust, or, to
the best of their knowledge, violate any provision of any statute or any
published regulation or any judgment or order disclosed to us by the VKM Trust
as being applicable to the VKM Trust or the VKM Fund; (vi) to the best of their
knowledge based solely on the certificate of an appropriate officer of the VKM
Trust attached hereto, there is no pending or threatened litigation which would
have the effect of prohibiting any material business practice or the
acquisition of any material property or the conduct of any material business of
the VKM Fund or might have a material adverse effect on the value of any assets
of the VKM Fund; (vii) the VKM Fund's Shares have been duly authorized and upon
issuance thereof in accordance with this Agreement will, subject to certain
matters regarding the liability of a shareholder of a Delaware trust, be
validly issued, fully paid and non-assessable; (viii) except as to financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to VKM Trust and the VKM Fund comply as to form in
all material respects with the requirements of the Securities Act, the
Securities Exchange Act and the 1940 Act and the rules and regulations of the
Commission thereunder and no facts have come to counsel's attention which would
cause them to believe that as of the effectiveness of the portions of the
Registration Statement applicable to VKM Trust and VKM Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; and (ix) to the best of their knowledge and
information and subject to the qualifications set forth below, the execution
and delivery by the VKM Trust of the Agreement and the consummation of the
transactions therein contemplated do not require, under the laws of the States
of Delaware or Illinois or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained). Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or filing (a) which
may be required as a result of the involvement of other parties to the
Agreement in the transactions contemplated by the Agreement because of their
legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the AC Trust or
the AC Fund of any material benefit under the Agreement; or (c) which can be
readily obtained without significant delay or expense to the AC Trust or the AC
Fund, without loss to the AC Trust or the AC Fund of any material benefit under
the Agreement and without any material adverse effect on the AC Trust or the AC
Fund during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Delaware and Illinois and the United States of America
which, in counsel's experience, are normally applicable to transactions of the
type provided for in the Agreement and (c) court orders and judgments disclosed
to us by the VKM Trust in connection with this opinion. In addition, although
counsel need not specifically consider the possible applicability to the VKM
Trust of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the VKM Trust and the VKM
Fund in this transaction that has caused them to conclude that any other
consent, approval, authorization, registration, qualification, order or filing
is required.

H. OFFICER CERTIFICATES. The AC Trust shall have received a certificate of
an authorized officer of the VKM Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the AC Trust.

8. CONDITIONS TO OBLIGATIONS OF VKM TRUST

The obligations of the VKM Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
VKM Trust of the following conditions:

10
<PAGE> 376

A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the AC Trust contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business, properties or assets of the AC Fund since March 31, 1995
and the VKM Trust shall have received a certificate of the Chairman or
President of the AC Trust satisfactory in form and substance to the VKM Trust
so stating. The AC Trust and the AC Fund shall have performed and complied in
all material respects with all agreements, obligations and covenants required
by this Agreement to be so performed or complied with by them on or prior to
the Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

F. TAX OPINION. The VKM Trust shall have obtained an opinion from
O'Melveny & Myers, counsel for the AC Trust and the AC Fund, dated as of the
Closing Date, addressed to the VKM Trust and VKM Fund, that the consummation of
the transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal Revenue Code of
1986 substantially in the form attached as Annex A.

G. OPINION OF COUNSEL. The VKM Trust and VKM Fund shall have received
the opinion of O'Melveny & Myers, counsel for the AC Trust and the AC Fund,
dated as of the Closing Date, addressed to the VKM Trust and VKM Fund,
substantially in the form and to the effect that: (i) the AC Trust is duly
formed and existing as a trust under the laws of the State of Delaware; (ii)
the Board of Trustees of the AC Trust has duly designated the AC Fund as a
Series of the AC Trust pursuant to the terms of the Declaration of Trust of the
AC Trust; (iii) the AC Fund is registered as an open-end, diversified
management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized by all necessary trust action of the AC Trust and this
Agreement has been duly executed and delivered by the AC Trust and (assuming
the Agreement is a valid and binding obligation of the other parties thereto)
is a valid and binding obligation of the AC Trust; (v) neither the execution or
delivery by the AC Trust of this Agreement nor the consummation by the AC Trust
or the AC Fund of the transactions contemplated thereby contravene the AC
Trust's Declaration of Trust or, to their knowledge, violate any provision of
any statute, or any published regulation or any judgment or order disclosed to
them by the AC Trust as being applicable to the AC Trust or the AC Fund; (vi)
to their knowledge based solely on the certificate of an appropriate officer of
the AC Fund attached thereto, there is no pending, or threatened litigation
involving the AC Fund except as disclosed therein; (vii) except as to financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to the AC Trust and the AC Fund comply as to form
in all material respects with their requirements of the Securities Act, the
Securities Exchange Act and the 1940 Act and the rules and regulations of the
Commission thereunder and no facts have come to counsel's attention which cause
them to believe that as of the AC Trust and the AC Fund and effectiveness of
the portions of the Registration Statement applicable to the AC Trust and the
AC Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (viii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the AC Trust of the Agreement and the consummation of
the transactions therein contemplated do not require, under the laws of the
State of Delaware, or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as

11
<PAGE> 377

to any such consent, approval, authorization, registration, qualification, order
or filing (a) which may be required as a result of the involvement of other
parties to the Agreement in the transactions contemplated by the Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them; (b) the absence of which does not deprive the
VKM Trust or VKM Fund of any material benefit under such agreements; or (c)
which can be readily obtained without significant delay or expense to the VKM
Trust or VKM Fund, without loss to the VKM Trust or VKM Fund of any material
benefit under the Agreement and without any material adverse effect on them
during the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
fillings under (a) laws which are specifically referred to in the opinion, (b)
laws of the State of Delaware and the United States of America which,
in our experience, are normally applicable to transactions of the type provided
for in the Agreement and (c) court orders and judgments disclosed to them by the
AC Trust in connection with the opinion. Counsel's opinion as to the validity
and binding nature of this Agreement may be limited to the present law of the
State of Delaware. Counsel's other opinions may be limited to the present
Federal law of the United States and the present general corporation and trust
laws of the State of Delaware.

H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall
consist solely of nondefaulted, liquid and investment grade "utility securities"
(as defined in Section 1A), cash and other marketable securities which are in
conformity with the VKM Fund's investment objective, policy and restrictions as
set forth in the VKM Trust Prospectus, a copy of which has been delivered to
the AC Trust.

I. SHAREHOLDER LIST. The AC Trust shall have delivered to the VKM Trust an
updated list of all shareholders of the AC Fund, as reported by the AC Trust's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the AC Fund, taxpayer identification
numbers, Form W-9 and last known address.

J. OFFICER CERTIFICATES. The VKM Trust shall have received a certificate
of an authorized officer of the AC Trust, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 4 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be furnished
to the VKM Trust.

9. AMENDMENT, WAIVER AND TERMINATION.

(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Trustees amend this Agreement at any time before or after
approval thereof by the shareholders of the AC Fund; provided, however, that
after receipt of AC Fund shareholder approval, no amendment shall be made by
the parties hereto which substantially changes the terms of Sections 1, 2 and
3 hereof without obtaining AC Fund's shareholder approval thereof or that
affect any applications for exemptive relief from the SEC or any orders with
respect thereto without obtaining the approval of the staff of the SEC.

(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:

(i) by the mutual consents of the Board of Trustees of the AC Trust
and the VKM Trust;

(ii) by the AC Trust, if the VKM Trust breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;

12
<PAGE> 378

(iii) by the VKM Trust, if the AC Trust breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;

(iv) by either the AC Trust or VKM Trust, if the Closing has not
occurred on or prior to September 30, 1995 (provided that the rights to
terminate this Agreement pursuant to this subsection (C) (iv) shall not be
available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of
the Closing to occur on or before such date);

(v) by the VKM Trust in the event that: (a) all the conditions
precedent to the AC Trust's obligation to close, as set forth in Section 7
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the VKM Trust gives the AC Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 8 of this Agreement; and (c) the AC Trust then fails or refuses
to close within the earlier of five (5) business days or September 30,
1995; or

(vi) by the AC Trust in the event that: (a) all the conditions
precedent to the VKM Trust's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the AC Trust gives the VKM Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
the conditions precedent to The AC Trust's obligation to close, as set
forth in Section 7 of this Agreement; and (c) the VKM Trust then fails or
refuses to close within the earlier of five (5) business days or September
30, 1995.

10. REMEDIES

In the event of termination of this Agreement by either or both of the AC
Trust and VKM Trust pursuant to Section 9(C), written notice thereof shall
forthwith be given by the terminating party to the other party hereto, and this
Agreement shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without further
action by the parties hereto.

11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.

(A) SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the VKM Trust's and the AC Trust's right to seek
indemnity pursuant to this Agreement shall survive for a period of ninety (90)
days beyond the expiration of the Survival Period of the representation,
warranty, covenant or agreement upon which indemnity is sought. In no event
shall the VKM Trust or the AC Trust be obligated to indemnify the other if
indemnity is not sought within ninety (90) days of the expiration of the
applicable Survival Period.

13
<PAGE> 379

(B) INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and
hold the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a
party or otherwise or with which such Indemnified Party may be or may have
been threatened, (collectively, the "Losses") arising out of or related to any
claim of a breach of any representation, warranty or covenant made herein by
the Indemnitor; provided, however, that no Indemnified Party shall be
indemnified hereunder against any Losses arising directly from such Indemnified
Party's (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv)
reckless disregard of the duties involved in the conduct of such Indemnified
Party's position.

12. SURVIVAL>

The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.

13. NOTICES.

All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the AC Trust shall be addressed to
the AC Trust c/o Van Kampen American Capital Asset Management, Inc., 2800 Post
Oak Boulevard, Houston, TX 77056; Attention: General Counsel, with a copy to
George M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, or at such other address as the AC Trust may designate by
written notice to the VKM Trust. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel or
at such other address and to the attention of such other person as the VKM Trust
may designate by written notice to the AC Trust. Any notice shall be deemed to
have been served or given as of the date such notice is delivered person ally or
mailed.

14. SUCCESSORS AND ASSIGNS.

15. BOOKS AND RECORDS.

The AC Trust and the VKM Trust agree that copies of the books and records
of the AC Fund relating to the Assets including, but not limited to all files,
records, written materials; e.g., closing transcripts, surveillance files and
credit reports shall be delivered by the AC Trust to the VKM Trust at the
Closing Date. In addition to, and without limiting the foregoing, the AC Trust
and the VKM Trust agree to take such action as my be necessary in order that the
VKM Trust shall have reasonable access to such other books and records as may be
reasonably requested, all for

14
<PAGE> 380
three years after the Closing Date for the three tax years ending December 31,
1992, December 31, 1993 and December 31, 1994 namely, general ledger, journal
entries, voucher registers; distribution journal; payroll register; monthly
balance owing report; income tax returns; tax depreciation schedules; and
investment tax credit basis schedules.

16. GENERAL.

17. LIMITATION OF LIABILITY.

Copies of the Declarations of Trust of the AC Trust and the VKM Trust are
on file with the Secretary of State of the Delaware and notice, is hereby given
and the parties hereto acknowledge and agree that this instrument is executed on
behalf of the Trustees of the AC Trust and the VKM Trust, respectively, as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders of the AC Trust and the VKM
Trust individually but binding only upon the assets and property of the VKM
Trust or the AC Trust, as the case may be.

IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.

VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST, a Delaware business trust.

By:

Title:

Attest:

Title:

VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a Delaware business trust.

By:

Title:

Attest:

Title:

15
<PAGE> 381

EXHIBIT B

MANAGEMENT'S DISCUSSION OF
VK FUND AND AC FUND PERFORMANCE

Management's Discussion of VK Fund Performance as of the Annual Report dated
December 31, 1995.

PERFORMANCE RESULTS FOR THE PERIOD

WALL STREET JOURNAL ABBREVIATIONS

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
FUND GROUP VAN KAMPEN MER
- -------------------------------------- --------------------------------
FUND NAME INTF A INTF B N/A
QUOTRON SYMBOL VKMTX VMTBX VMTCX
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
One-year total return based on
NAV(1).............................. (6.31)% (7.03)% (6.98)%
One-year total return(2).............. (10.66)% (10.58)% (7.87)%
Five-year average annual total
return(2)........................... 5.41 % N/A N/A
Life of Fund average annual total
return(2)........................... 8.85 % (2.99)% (3.18)%
Life of Fund cumulative total return
based on NAV(1)..................... 144.98 % (1.53)% (4.47)%
Distribution Rate(3).................. 5.73 % 5.04 % 5.03 %
Taxable Equivalent Distribution
Rate(4)............................. 8.95 % 7.88 % 7.86 %
SEC Yield(5).......................... 5.44 % 4.94 % 4.94 %
Commencement Date..................... 12/14/84 05/01/95 08/13/93
</TABLE>

- -------------------------
N/A Not Applicable.

(1) Assumes reinvestment of all distributions for the period ended December 31,
1994, and does not include payment of the maximum sales charge (4.65% for A
shares) or contingent deferred sales charge (4% for B shares; 1% for C
shares). Effective January 16, 1995, the maximum sales charge for Class A
Shares was changed to 4.75%.

(2) Standardized total return for the period ended December 31, 1994.

(3) Distribution rate represents the monthly annualized distributions of the
Fund at end of December 1994, and not the earnings of the Fund.

(4) Taxable equivalent calculations reflect a federal income tax rate of 36%.

(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending December 30,
1994.

The terms of the insurance are more fully described in the VK Fund Prospectus;
no representation is made as to the insurer's ability to meet its commitments.
In addition, the insurance does not remove market risk, as it does not apply to
the value of the securities in the Fund's portfolio, which may increase or
decrease depending on interest rates and other factors affecting the municipal
credit markets.

VK FUND VS. LEHMAN BROTHERS
MUNICIPAL BOND INDEX
(December 1984 through December 1994)

FUND'S TOTAL RETURN

1 Year Avg. Annual = (10.86%)
5 Year Avg. Annual = 5.41%
10 Year Avg. Annual = 8.72%
Inception Avg. Annual = 8.85%

The following graph compares the value of an investment in the VK Fund's
Class A shares with the value of an investment in the securities comprising the
Lehman Brothers Municipal Bond Index from December 1984 through December 1994,
the last trading day of fiscal year 1994, based upon a $10,000 investment in
Class A shares of the VK Fund and in the securities comprising such index as of
December 1984. The approximate values of such an investment at the end of each
fiscal year were:

1985: Class A shares of VK Fund -- $11,700, Lehman Index -- $12,230;
1986: Class A shares of VK Fund -- $14,000, Lehman Index -- $14,600;
1987: Class A shares of VK Fund -- $14,000, Lehman Index -- $14,800;
1988: Class A shares of VK Fund -- $15,600, Lehman Index -- $16,300;
1989: Class A shares of VK Fund -- $17,100, Lehman Index -- $18,100;
1990: Class A shares of VK Fund -- $18,300, Lehman Index -- $19,400;
1991: Class A shares of VK Fund -- $20,250, Lehman Index -- $21,750;
1992: Class A shares of VK Fund -- $22,200, Lehman Index -- $23,650;
1993: Class A shares of VK Fund -- $24,900, Lehman Index -- $26,550;
1994: Class A shares of VK Fund -- $23,350, Lehman Index -- $25,200.

Performance of Class B and C Shares may vary from Class A Shares illustrated
above due to distribution and administrative expense differentials applicable to
these classes.

The Lehman Index is unmanaged and expense free. Its performance does not
reflect transaction and other costs applicable to the VK Fund's actively managed
portfolio.

Past performance is not predictive of future performance.

Management's Discussion of AC Fund Performance as of the Annual Report dated
November 30, 1994.

The AC Fund invests in long-term municipal bonds with the objective of
providing as high a level of current income exempt from federal income taxes as
is consistent with its investment policies. During the fiscal year ended
November 30, 1994, the performance of the AC Fund was hampered by repeated
increases in interest rates, which reduce the supply of both new issues and
refundings.

Rising interest rates caused a significant decline in both the number and
dollar value of new issues and refundings. Refundings occur when municipalities
issue new, lower-yielding debt to replace existing higher-yielding bonds. The
decrease in
<PAGE> 384

supply made it more difficult to find securities to purchase, but those that
were available carried higher yields, which helped the AC Fund's portfolio
dividend.

As the interest rate environment changed, the AC Fund placed more emphasis on
longer-term bonds, which offer a higher yield, while maintaining the AC Fund's
high credit quality. At the end of the reporting period, more than 90% of the
municipal bonds in the AC Fund were insured for the timely payment of principal
at maturity and, as a result, were AAA-rated bonds in credit quality.

The Class A shares and Class B shares of the AC Fund outperformed the AC
Fund's benchmark -- the Lehman Brothers Municipal Bond Index -- during the
reporting period. Class A shares of the AC Fund achieved a total return at net
asset value (without a sales charge) of -3.88%, including reinvestment of
dividends totalling $.6075 per share. Class B shares achieved a total return at
net asset value of -4.52%, including reinvestment of dividends totalling $.5235
per share. Class C shares achieved a total return at net asset value of -5.38%,
including reinvestment of dividends totalling $.509 per share.

The Lehman Brothers Municipal Bond Index, an unmanaged index used as a
benchmark for many municipal bond funds, achieved a total return of -5.25%. The
Index does not reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents.
<PAGE> 385

INSURED MUNICIPAL PORTFOLIO

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- SINCE INCEPTION
CLASS A (AS OF 11/30/94) 1 YEAR 5 YEARS (1/2/86)
- ----------------------------------- ------ ------- ---------------
<S> <C> <C> <C>
At Net Asset Value................. -3.88% 5.49% 5.18%
With Maximum 4.75% Sales Charge.... -8.47% 4.46% 4.61%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- SINCE INCEPTION
CLASS B (AS OF 11/30/94) 1 YEAR (7/20/92)
- ------------------------------------------ ------ ---------------
<S> <C> <C>
At Net Asset Value........................ -4.52% 1.64%
With Applicable Contingent Deferred Sales
Charge Upon Redemption (Maximum 4%)..... -8.16% 0.48%
</TABLE>

<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN -- SINCE INCEPTION
CLASS C (AS OF 11/30/94) (12/10/93)
- -------------------------------------------------- ---------------
<S> <C>
At Net Asset Value................................ -5.38%
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 1%).................... -6.29%
</TABLE>

CHANGE IN VALUE OF $10,000 INVESTMENT IN
THE AC FUND VS.
LEHMAN BROTHERS MUNICIPAL BOND INDEX
1/2/86-11/30/94

The following graph compares the value of an investment in the AC Fund's
Class A shares with the value of an investment in the Lehman Brothers Municipal
Bond Index from January 1986 through November 1994, the last trading day of
fiscal year 1994, based upon a $10,000 investment in Class A shares of the AC
Fund and in the securities comprising such index as of January 1986. The
approximate values of such an investment in each fiscal year were: 1986: Class
A shares of AC Fund -- $10,000; Lehman Index -- $12,000; 1987: Class A shares
of AC Fund -- $9,000, Lehman Index -- $12,000; 1988: Class A shares of AC Fund
- -- $10,000, Lehman Index -- $13,000; 1989: Class A shares of AC Fund --
$11,000, Lehman Index -- $14,000; 1990: Class A shares of AC Fund -- $12,000,
Lehman Index -- $15,000; 1991: Class A shares of AC Fund -- $12,000, Lehman
Index -- $17,000; 1992: Class A shares of AC Fund -- $13,000, Lehman Index --
$19,000; 1993: Class A shares of AC Fund -- $15,000, Lehman Index -- $21,000;
1994: Class A shares of AC Fund -- $15,000, Lehman Index -- $20,000.

Note: The Proxy Statement/Prospectus to which this Exhibit B is attached does
not relate to the American Capital High Yield Municipal Portfolio. Information
with respect to the American Capital High Yield Municipal Portfolio should not
be considered in evaluating the Reorganization.
<PAGE> 386

Past performance is not indicative of future performance. Performance of other
classes of the AC Fund will be greater or less than the lines shown based on the
differences in loads or fees paid by shareowners investing in the different
classes.

*The Lehman Brothers Municipal Bond Index is a broad-based unmanaged index of
long-term municipal securities. The Index does not reflect any commissions or
fees which would be incurred by an investor purchasing the bonds it represents.
All sales charges and all other fees and expenses are included in the
performance shown for AC Fund Class A shares with ending value of $14,940.
<PAGE> 387

- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
- --------------------------------------------------------------------------------

INVESTORS SHOULD REFER TO THE SECTION OF THE PROSPECTUS ENTITLED "INSURANCE"
FOR A DISCUSSION OF THE NATURE AND LIMITATIONS OF THE INSURANCE APPLICABLE TO
MUNICIPAL SECURITIES HELD IN THE FUND'S PORTFOLIO.

Van Kampen American Capital Insured Tax Free Income Fund, formerly known as
Van Kampen Merritt Insured Tax Free Income Fund (the "Insured Fund"), is a
separate diversified mutual fund, organized as a series of Van Kampen American
Capital Tax Free Trust. The Insured Fund's investment objective is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. Insured municipal
securities in which the Insured Fund may invest include conventional fixed-rate
municipal securities, variable rate municipal securities and other types of
municipal securities described herein. See "Municipal Securities." All of the
municipal securities in the Insured Fund's portfolio will be insured by AMBAC
Indemnity Corporation or by other municipal bond insurers whose claims-paying
ability is rated "AAA" by Standard & Poor's Ratings Group on the date of
purchase.
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
- --------------------------------------------------------------------------------

Van Kampen American Capital California Insured Tax Free Fund, formerly known
as Van Kampen Merritt California Insured Tax Free Fund (the "California Insured
Fund"), is a separate diversified mutual fund, organized as a series of Van
Kampen American Capital Tax Free Trust. The California Insured Fund's investment
objective is to
(Continued on next page.)
------------------

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

Statements of Additional Information, dated July 31, 1995, containing
additional information about the Funds have been filed with the Securities and
Exchange Commission and are hereby incorporated by reference in their entirety
into this Prospectus. A copy of either Fund's respective Statement of Additional
Information may be obtained without charge by calling (800) 421-5666, or for
Telecommunication Device for the Deaf at (800) 772-8889.
------------------

VAN KAMPEN AMERICAN CAPITALSM
------------------

THIS PROSPECTUS IS DATED JULY 31, 1995.
<PAGE> 388

(Continued from previous page.)

provide only California investors with a high level of current income exempt
from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. Insured municipal securities in which the
California Insured Fund may invest include conventional fixed-rate municipal
securities, variable rate municipal securities and other types of municipal
securities described herein. See "Municipal Securities." All of the municipal
securities in the California Insured Fund's portfolio will be insured by AMBAC
Indemnity Corporation or by other municipal bond insurers whose claims-paying
ability is rated "AAA" by Standard & Poor's Ratings Group on the date of
purchase.

Van Kampen American Capital Investment Advisory Corp. is the investment
adviser for both the Insured Fund and the California Insured Fund (each a "Fund"
or collectively the "Funds"). There is no assurance that the Funds will achieve
their respective investment objectives. This Prospectus sets forth certain
information about the Funds that a prospective investor should know before
investing in either of the Funds. Please read it carefully and retain it for
future reference. Each Fund's address is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, and each Fund's telephone number is (800) 421-5666.

The Funds currently offer three classes of shares (the "Alternative Sales
Arrangements") which may be purchased at a price equal to their net asset value
per share, plus sales charges which, at the election of the investor, may be
imposed (i) at the time of purchase ("Class A Shares") or (ii) on a contingent
deferred basis (Class A Share accounts over $1 million, "Class B Shares" and
"Class C Shares"). The Alternative Sales Arrangements permit an investor to
choose the method of purchasing shares that is more beneficial to the investor,
taking into account the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% of a Fund's average
daily net assets attributable to the Class A Shares, (ii) for Class B Shares, up
to 1.00% of a Fund's average daily net assets attributable to the Class B Shares
and (iii) for Class C Shares, up to 1.00% of a Fund's average daily net assets
attributable to the Class C Shares. Investors should understand that the purpose
and function of the deferred sales charge and the distribution and service fees
with respect to the Class A Share accounts over $1 million, Class B Shares and
the Class C Shares are the same as those of the initial sales charge and
distribution and service fees with respect to the Class A Share accounts below
$1 million. Each share of a Fund represents an identical interest in the
investment portfolio of such Fund and has the same rights, except that (i) each
class of shares bears those distribution fees, service fees and administrative
expenses applicable to the respective class of shares as a result of its sales
arrangements, which will cause the different classes of shares to have different
expense ratios and to pay different rates of dividends, (ii) each class has
exclusive voting rights with respect to those provisions of such Fund's Rule
12b-1 distribution plan which relate only to such class and (iii) the classes
have different exchange privileges. Class B Shares of each Fund automatically
will convert to Class A Shares of the respective Fund after the number of years
set forth herein, in the circumstances and subject to the qualifications
described in this Prospectus. See "Alternative Sales Arrangements" and "Purchase
of Shares."

2
<PAGE> 389

- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses -- Insured Fund............... 7
Annual Fund Operating Expenses and Examples -- Insured Fund.... 8
Shareholder Transaction Expenses -- California Insured Fund.... 10
Annual Fund Operating Expenses and Examples -- California
Insured Fund................................................. 11
Financial Highlights -- Insured Fund........................... 13
Financial Highlights -- California Insured Fund................ 15
The Funds...................................................... 17
Investment Objectives and Policies............................. 17
Municipal Securities........................................... 18
Investment Practices........................................... 22
Insurance...................................................... 25
Investment Advisory Services................................... 25
Alternative Sales Arrangements................................. 27
Purchase of Shares............................................. 29
Shareholder Services........................................... 39
Redemption of Shares........................................... 44
The Distribution and Service Plans............................. 47
Distributions from the Funds................................... 49
Tax Status..................................................... 50
Fund Performance............................................... 54
Additional Information......................................... 56
</TABLE>

3
<PAGE> 390

- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------

THE FUNDS. Van Kampen American Capital Insured Tax Free Income Fund (the
"Insured Fund") and Van Kampen American Capital California Insured Tax Free Fund
(the "California Insured Fund") are each separate diversified series of Van
Kampen American Capital Tax Free Trust, an open-end, diversified management
investment company organized as a Delaware business trust (the "Trust"). See
"The Funds."

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

INVESTMENT OBJECTIVES. The INSURED FUND'S investment objective is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities.

The CALIFORNIA INSURED FUND'S investment objective is to provide only
California investors with a high level of current income exempt from federal and
California income taxes, with liquidity and safety of principal, primarily
through investment in a diversified portfolio of insured California municipal
securities. THE CALIFORNIA INSURED FUND IS AVAILABLE ONLY TO CALIFORNIA
RESIDENTS. Distribution to corporations subject to the California franchise tax
will be included in such corporation's gross income for purposes of determining
the California franchise tax. In addition, corporations subject to the
California corporate income tax may, in certain circumstances, be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. See "Tax Status."

INVESTMENT POLICIES. Municipal securities in which the Insured Fund and
California Insured Fund (each a "Fund" or collectively the "Funds") may invest
include fixed and variable rate securities, municipal notes, municipal leases,
tax exempt commercial paper, custodial receipts, participation certificates and
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions (as defined herein) in
which the Funds may engage. Each Fund may invest up to 15% of its total assets
in derivative variable rate securities such as inverse floaters, whose rates
vary inversely with changes in market rates of interest or range or capped
floaters, whose rates are subject to periodic or lifetime caps. There is no
assurance that either Fund will achieve its investment objectives. The net asset
value per share of the Funds may increase or decrease depending on changes in
interest rates and other factors affecting the municipal credit markets. See
"Investment Objectives and Policies."

INVESTMENT PRACTICES. In certain circumstances the Funds may enter into when-
issued or delayed delivery transactions and various strategic transactions,
which entail certain risks. See "Municipal Securities" and "Investment
Practices."

4
<PAGE> 391

INSURANCE. Each municipal security in the portfolio of the respective Funds is
insured as to the timely payment of principal and interest under one or more
policies obtained by the issuer or purchased by such Fund. No representation is
made as to the ability of any insurer to perform its obligations. See
"Insurance."

INVESTMENT RESULTS. The investment results of the Funds since their inception
are shown in the tables under the captions "Financial Highlights -- Insured
Fund" and "Financial Highlights -- California Insured Fund."

ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the tables under the
captions "Annual Fund Operating Expenses and Examples -- Insured Fund" and
"Annual Fund Operating Expenses and Examples -- California Insured Fund," set
forth examples of the charges applicable to each class of shares.

Each Fund currently offer three classes of shares which may be purchased at a
price equal to their net asset value per share plus sales charges which, at the
election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."

Class A Shares. Class A Shares of the Insured Fund are subject to an initial
sales charge equal to 4.75% of the public offering price (4.99% of the net
amount invested), reduced on investments of $100,000 or more. Class A Shares of
the California Insured Fund are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
respective Fund's average daily net assets attributable to the Class A Shares.
Certain purchases of Class A Shares qualify for reduced or no initial sales
charges and may be subject to a CDSC.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased. Class B Shares of the Insured Fund are subject to a CDSC if redeemed
within six years of purchase, which charge is equal to 4.00% of the lesser of
the then current net asset value or the original purchase price of such shares
in the first year after purchase and is reduced each year thereafter. Class B
Shares of the California Insured Fund are subject to a CDSC if redeemed within
four years of purchase, which charge is equal to 3.00% of the lesser of the then
current net asset value or

5
<PAGE> 392

the original purchase price of such shares in the first year after purchase and
is reduced each year thereafter. Class B Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 1.00% of the
respective Fund's average daily net assets attributable to the Class B Shares.
Class B Shares of the Insured Fund automatically will convert to Class A Shares
of the Insured Fund seven years after the end of the calendar month in which the
investor's order to purchase was accepted. Class B Shares of the California
Insured Fund automatically will convert to Class A Shares of the California
Insured Fund six years after the end of the calendar month in which the
investor's order to purchase was accepted.

Class C Shares. Class C Shares do not incur a sales charge when they are
purchased. Class C Shares are subject to a CDSC equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on Class C
Shares redeemed during the first year after purchase. Class C Shares are subject
to ongoing distribution and service fees at an aggregate annual rate of up to
1.00% of the respective Fund's average daily net assets attributable to the
Class C Shares.

REDEMPTION. Class A Shares may be redeemed at net asset value without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary between the Funds and among
each class of CDSC Shares and with the length of time a redeeming shareholder
has owned such shares. CDSC Shares redeemed after the expiration of the CDSC
period applicable to the respective class of CDSC Shares will not be subject to
a deferred sales charge. See "Redemption of Shares."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for both of the Funds. See "Investment Advisory
Services."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

DISTRIBUTIONS FROM THE FUNDS. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner and the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class. See "Distributions from the Funds."

The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.

6
<PAGE> 393

- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as
percentage of the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>

- ----------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares".

7
<PAGE> 394

- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLES -- INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)(1)........................ .51% .51% .51%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... .20%(3) 1.00% 1.00%
Other expenses (as a percentage of average
daily net assets)........................... .22% .29% .28%
Total Expenses (as a percentage of average
daily net assets)(1)........................ .93% 1.80% 1.79%
</TABLE>

- ----------------
(1) The Board of Trustees of the Trust and the shareholders of the Insured Fund
approved a material change to the investment advisory agreement which
increased the investment advisory fees effective on August 1, 1995. For the
year ended December 31, 1994, the Management Fees were (i) 0.42% with
respect to Class A Shares, (ii) 0.42% with respect to Class B Shares, and
(iii) 0.42% with respect to Class C Shares and Total Expenses were (i) 0.88%
with respect to Class A Shares, (ii) 1.71% with respect to Class B Shares
and (iii) 1.70% with respect to Class C Shares. See "Investment Advisory
Services." As of June 30, 1995, the Board of Trustees of the Trust reduced
the 12b-1 and service fees for the Insured Fund's Class A Shares to 0.25%.
See "The Distribution and Service Fees."

(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Insured Fund as compensation for ongoing services rendered to
investors. With respect to each class of shares, amounts in excess of 0.25%,
if any, represent an asset based sales charge. The asset based sales charge
with respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' brokers, dealers or financial intermediaries as
sales compensation. See "The Distribution and Service Fees."

(3) The Insured Fund's distribution and service plans with respect to Class A
Shares provide that 12b-1 and service fees are charged only with respect to
Class A Shares of the Insured Fund sold after the implementation date of
such plans. Due to the incremental "phase-in" of such plans with respect to
Class A Shares, it is anticipated that 12b-1 and service fees attributable
to Class A Shares will increase in accordance with such plans to a maximum
aggregate amount of 0.25% of the net assets attributable to the Insured
Fund's Class A Shares. Accordingly, it is unlikely that future expenses will
remain consistent with those disclosed in the fee table. See "The
Distribution and Service Plans."

8
<PAGE> 395

EXAMPLES:

You would pay the following expenses on a $1,000 investment in the Insured
Fund, assuming (i) an operating expense ratio of 0.93% for Class A Shares, 1.80%
for Class B Shares and 1.79% for Class C Shares, (ii) a 5% annual return and
(iii) redemption at the end of each time period. Insured Fund does not charge a
fee for redemptions (other than any applicable contingent deferred sales
charge):

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 57 $76 $ 97 $ 156
Class B Shares.................... 57 89 108 172*
Class C Shares.................... 29 56 97 211
</TABLE>

An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 57 $76 $ 97 $ 156
Class B Shares.................... 17 54 93 172*
Class C Shares.................... 18 56 97 211
</TABLE>

- ----------------
* Based on conversion to Class A Shares.

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Insured Fund will bear
directly or indirectly. The "Examples" reflect expenses based on the "Annual
Fund Operating Expenses" table as shown above carried out to future years. Due
to the incremental "phase-in" of the Insured Fund's 12b-1 plans and service
plans, it is anticipated that 12b-1 and service fees applicable to Insured Fund
will increase in accordance with such plans to a maximum amount of 0.25% of such
Fund's net assets. The ten year amount with respect to the Class B Shares of the
Insured Fund reflects the lower aggregate 12b-1 and service fees applicable to
such shares after conversion to Class A Shares. Class B Shares acquired through
the exchange privilege are subject to the deferred sales charge schedule
relating to the Class B Shares of the fund from which the purchase of Class B
Shares was originally made. Accordingly, future expenses as projected could be
higher than those determined in the above table if the investor's Class B Shares
were exchanged from a fund with a higher contingent deferred sales charge. THE
INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."

9
<PAGE> 396

- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases (as
percentage of the
offering price).......... 3.25%(1) None None
Maximum sales charge
imposed on reinvested
dividends (as a
percentage of the
offering price).......... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................ None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.50% After--None
Year 3--2.00%
Year 4--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................ None None None
Exchange fees.............. None None None
</TABLE>

- ----------------
(1) Reduced on investments of $25,000 or more. See "Purchase of Shares -- Class
A Shares."

10
<PAGE> 397

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

ANNUAL FUND OPERATING EXPENSES AND EXAMPLES -- CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees(1) (as a percentage of average
daily net assets)............................ .18% .18% .18%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... .25% 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets)........................... .30% .34% .33%
Total Expenses(1) (as a percentage of average
daily net assets)........................... .73% 1.52% 1.51%
</TABLE>

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

(1) Expenses include a waiver of $495,999 of management fees by the Adviser. If
the Adviser did not waive fees for the fiscal year ending December 31, 1994,
the "Management Fee" would have been 0.48% and "Total Expenses" would have
been (i) 1.08% with respect to Class A Shares, (ii) 1.82% with respect to
Class B Shares and (iii) 1.81% with respect to Class C Shares. See
"Investment Advisory Services." As of June 30, 1995, the Board of Trustees
of the Trust reduced the 12b-1 and service fees for the California Insured
Fund's Class A Shares to 0.25%. See "The Distribution and Service Plans."

(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the California Fund as compensation for ongoing services rendered to
investors. With respect to each class of shares, amounts in excess of 0.25%,
if any, represent an asset based sales charge. The asset based sales charge
with respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. See "The
Distribution and Service Plans."

11
<PAGE> 398

EXAMPLES:

You would pay the following expenses on a $1,000 investment in the California
Insured Fund, assuming (i) an operating expense ratio of 0.73% for Class A
Shares, 1.52% for Class B Shares and 1.51% for Class C Shares, (ii) a 5% annual
return and (iii) redemption at the end of each time period. California Insured
Fund does not charge a fee for redemptions (other than any applicable contingent
deferred sales charge):

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 40 $55 $ 72 $ 120
Class B Shares.................... 45 68 83 140*
Class C Shares.................... 45 48 82 180
</TABLE>

An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 40 $55 $ 72 $ 120
Class B Shares.................... 15 48 83 140*
Class C Shares.................... 15 48 82 180
</TABLE>

- ----------------
* Based on conversion to Class A Shares.

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the California Insured Fund
will bear directly or indirectly. The "Examples" reflect expenses based on the
"Annual Fund Operating Expenses" table as shown above carried out to future
years. Additionally, as the California Insured Fund's assets increase, the fees
waived or expenses reimbursed by the Adviser are expected to decrease.
Accordingly, it is unlikely that future expenses as projected will remain
consistent with those determined based on the table of the "Annual Fund
Operating Expenses." The ten year amount with respect to the Class B Shares of
the California Insured Fund reflects the lower aggregate 12b-1 and service fees
applicable to such shares after conversion to Class A Shares. Class B Shares
acquired through the exchange privilege are subject to the deferred sales charge
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made. Accordingly, future expenses as projected
could be higher than those determined in the above table if the investor's Class
B Shares were exchanged from a fund with a higher contingent deferred sales
charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."

12
<PAGE> 399

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSURED FUND (for a share outstanding throughout the
period)
- --------------------------------------------------------------------------------
The following financial highlights for one Class A Share, one Class B Share
and one Class C Share of the Insured Fund outstanding throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods indicated and
their reports thereon appear in Insured Fund's related Statement of Additional
Information. This information should be read in conjunction with the financial
statements and related notes thereto included in the related Statements of
Additional Information.
<TABLE>
<CAPTION>
INSURED FUND -- CLASS A SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................... $ 19.587 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394
------------ ------------ ------------ ------------ ------------ ------
Net Investment Income................ 1.051 1.107 1.146 1.153 1.160 1.182
Net Realized and Unrealized Gain/Loss
on Investments..................... (2.280) 1.145 .561 .681 .037 .391
------------ ------------ ------------ ------------ ------------ ------
Total from Investment Operations...... (1.229) 2.252 1.707 1.834 1.197 1.573
------------ ------------ ------------ ------------ ------------ ------
Less:
Distributions from Net Investment
Income............................. 1.056 1.116 1.140 1.160 1.170 1.169
Distributions from Net Realized
Gain............................... -0- -0- .324 .021 -0- -0-
------------ ------------ ------------ ------------ ------------ ------
Total Distributions................... 1.056 1.116 1.464 1.181 1.170 1.169
------------ ------------ ------------ ------------ ------------ ------
Net Asset Value, End of Period........ $ 17.572 $ 19.857 $ 18.721 $ 18.478 $ 17.825 $ 17.798
============ ============ ============ ============ ============ ============
Total Return
(Non-annualized)..................... (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37%
Net Assets at End of Period (in
millions)............................ $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0
Ratio of Expenses to Average Net
Assets (Annualized).................. .88% .84% .83% .88% .87% .88%
Ratio of Net Investment Income to
Average Net Assets (Annualized)...... 5.70% 5.69% 6.14% 6.39% 6.63% 6.73%
Portfolio Turnover.................... 48.46% 78.73% 111.90% 113.25% 107.79% 81.28%

YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1988 1987 1986 1985
------------ ------------ ------------ ------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................... $ 16.700 $ 17.945 $ 16.189 $ 14.474
------------ ------------ ------ ------
Net Investment Income................ 1.184 1.198 1.249 1.220
Net Realized and Unrealized Gain/Loss
on Investments..................... .682 (1.226) 1.846 1.780
------------ ------------ ------ ------
Total from Investment Operations...... 1.866 (.028) 3.095 3.000
------------ ------------ ------ ------
Less:
Distributions from Net Investment
Income............................. 1.172 1.215 1.231 1.285
Distributions from Net Realized
Gain............................... -0- .002 .108 --
------------ ------------ ------ ------
Total Distributions................... 1.172 1.217 1.339 1.285
------------ ------------ ------ ------
Net Asset Value, End of Period........ $ 17.394 $ 16.700 $ 17.945 $ 16.189
============ ============ ============ ============
Total Return
(Non-annualized)..................... 11.48% .27% 19.73% 21.08%
Net Assets at End of Period (in
millions)............................ $ 555.3 $ 502.5 $ 418.1 $ 188.2
Ratio of Expenses to Average Net
Assets (Annualized).................. .85% .71% .76% .89%
Ratio of Net Investment Income to
Average Net Assets (Annualized)...... 6.92% 7.04% 7.07% 8.00%
Portfolio Turnover.................... 132.85% 119.89% 31.00% 98.19%
</TABLE>

(Table continued on following page)
See Financial Statements and Notes Thereto

13
<PAGE> 400

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSURED FUND
------------------------------
CLASS B SHARES
------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................................ $ 19.824 $19.320
------ ------
Net Investment Income.......................................................................... .899 .619
Net Realized and Unrealized Gain/Loss on Investments........................................... (2.276) .513
------ ------
Total from Investment Operations................................................................ (1.377) 1.132
------ ------
Less:
Distributions from Net Investment Income....................................................... .884 .628
Distributions from Net Realized Gain........................................................... -- --
------ ------
Total Distributions............................................................................. .884 .628
------ ------
Net Asset Value, End of Period.................................................................. $ 17.563 $19.824
============ ===============
Total Return
(Non-annualized)............................................................................... (7.03%) 5.92%
Net Assets at End of Period (in millions)....................................................... $ 30.0 $ 20.8
Ratio of Expenses to Average Net Assets (Annualized)............................................ 1.71% 1.68%
Ratio of Net Investment Income to Average Net Assets (Annualized)............................... 4.88% 4.25%
Portfolio Turnover.............................................................................. 48.46% 78.73%

CLASS C SHARES

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

AUGUST 13,

1993

(COMMENCEMENT

YEAR DISTRIBUTION)

ENDED TO

DECEMBER 31, DECEMBER 31,

1994 1993

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

<S> <C> <C>
Net Asset Value, Beginning of Period............................................................ $ 19.823 $19.650

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

Net Investment Income.......................................................................... .908 .350

Net Realized and Unrealized Gain/Loss on Investments........................................... (2.279) .181

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

Total from Investment Operations................................................................ (1.371) .531

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

Less:
Distributions from Net Investment Income....................................................... .884 .358

Distributions from Net Realized Gain........................................................... -- --

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

Total Distributions............................................................................. .884 .358

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

Net Asset Value, End of Period.................................................................. $ 17.568 $19.823

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

Total Return
(Non-annualized)............................................................................... (6.98%) 2.70%

Net Assets at End of Period (in millions)....................................................... $ 3.5 $ 5.0

Ratio of Expenses to Average Net Assets (Annualized)............................................ 1.70% 1.68%

Ratio of Net Investment Income to Average Net Assets (Annualized)............................... 4.89% 4.21%

Portfolio Turnover.............................................................................. 48.46% 78.73%

</TABLE>

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

See Financial Statements and Notes Thereto

14
<PAGE> 401

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CALIFORNIA INSURED FUND (for a share outstanding
throughout the period)
- --------------------------------------------------------------------------------

The following financial highlights for one Class A Share, one Class B Share
and one Class C Share of the California Insured Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their reports thereon appear in California Insured Fund's related
Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the related Statements of Additional Information.
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227
------ ------ ------ ------ ------ ------
Net Investment Income.................. .912 .967 1.004 .990 .990 .988
Net Realized and Unrealized Gain/Loss
on Investments....................... (2.484) 1.441 .585 .529 .123 .381
------ ------ ------ ------ ------ ------
Total from Investment Operations........ (1.572) 2.408 1.589 1.519 1.113 1.369
Less Distributions from Net
Investment Income...................... .912 .980 .990 .990 .990 .989
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.......... $ 15.802 $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607
============ ============ ============ ============ ============ ============
Total Return(1)
(Non-annualized)....................... (8.75%) 14.54% 10.08% 9.98% 7.44% 9.22%
Net Assets at End of Period (in
millions).............................. $ 130.3 $ 151.1 $ 74.2 $ 60.2 $ 50.6 $ 46.6
Ratio of Expenses to Average Net
Assets(1)
(Annualized)........................... .78% .69% .69% .55% .69% .75%
Ratio of Net Investment Income to
Average Net Assets(1) (Annualized)..... 5.46% 5.37% 6.07% 6.20% 6.42% 6.38%
Portfolio Turnover...................... 56.38% 36.17% 60.70% 69.85% 34.03% 32.18%

DECEMBER 13, 1985
(COMMENCEMENT
YEAR YEAR YEAR OF INVESTMENT
ENDED ENDED ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1988 1987 1986 1985
------------ ------------ ------------ -----------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 14.719 $ 16.274 $ 14.464 $14.265
------------ ------ ------ ------
Net Investment Income.................. .981 1.041 1.034 .024
Net Realized and Unrealized Gain/Loss
on Investments....................... .519 (1.566) 1.832 .175
------------ ------ ------ ------
Total from Investment Operations........ 1.500 (.525) 2.866 .199
Less Distributions from Net
Investment Income...................... .992 1.030 1.056 .000
------------ ------ ------ ------
Net Asset Value, End of Period.......... $ 15.227 $ 14.719 $ 16.274 $14.464
============ ============ ============ =================
Total Return(1)
(Non-annualized)....................... 10.51% (2.72%) 20.01% 1.19%
Net Assets at End of Period (in
millions).............................. $ 37.3 $ 31.5 $ 12.9 $ 1.1
Ratio of Expenses to Average Net
Assets(1)
(Annualized)........................... .65% .14% .16% 1.01%
Ratio of Net Investment Income to
Average Net Assets(1) (Annualized)..... 6.53% 7.02% 6.05% 3.18%
Portfolio Turnover...................... 100.50% 68.82% 21.45% 0%
</TABLE>

- ----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets
(Annualized)............................ 1.08% 1.01% 1.08% 1.04% 1.06% 1.10%
Ratio of net investment income to average
net assets (Annualized)................. 5.16% 5.05% 5.68% 5.71% 6.05% 6.04%

<CAPTION>
Ratio of expenses to average net assets
Ratio of net investment income to average
net assets (Annualized)................. 6.08% 6.19% 3.23% 2.68%

<CAPTION>
(Annualized)............................ 1.11% .97% 2.98% 1.51%
</TABLE>

(Table continued on following page)

See Financial Statements and Notes Thereto

15
<PAGE> 402

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND
-------------------------------
CLASS B SHARES
-------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................................................... $ 18.266 $ 17.570
------ ------
Net Investment Income......................................................................... .785 .549
Net Realized and Unrealized Gain/Loss on Investments.......................................... (2.482) .705
------ ------
Total from Investment Operations............................................................... (1.697) 1.254
Less Distributions from Net Investment Income.................................................. .764 .558
------ ------
Net Asset Value, End of Period................................................................. $ 15.805 $ 18.266
============ ===============
Total Return(1) (Non-annualized)............................................................... (9.39%) 7.25%
Net Assets at End of Period (in millions)...................................................... $ 17.1 $ 15.3
Ratio of Expenses to Average Net Assets(1) (Annualized)........................................ 1.52% 1.45%
Ratio of Net Investment Income to Average Net Assets(1) (Annualized)........................... 4.71% 4.06%
Portfolio Turnover............................................................................. 56.38% 36.17%

CLASS C SHARES

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

AUGUST 13,

1993

(COMMENCEMENT

YEAR DISTRIBUTION)

ENDED TO

DECEMBER 31, DECEMBER 31,

1994 1993

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

<S> <C> <C>
Net Asset Value, Beginning of Period........................................................... $ 18.257 $ 18.010

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

Net Investment Income......................................................................... .773 .307

Net Realized and Unrealized Gain/Loss on Investments.......................................... (2.486) .258

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

Total from Investment Operations............................................................... (1.695) .565

Less Distributions from Net Investment Income.................................................. .764 .318

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

Net Asset Value, End of Period................................................................. $ 15.798 $ 18.257

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

Total Return(1) (Non-annualized)............................................................... (9.40%) 3.17%

Net Assets at End of Period (in millions)...................................................... $ 2.8 $ 4.0

Ratio of Expenses to Average Net Assets(1) (Annualized)........................................ 1.51% 1.45%

Ratio of Net Investment Income to Average Net Assets(1) (Annualized)........................... 4.71% 3.82%

Portfolio Turnover............................................................................. 56.38% 36.17%

</TABLE>

- ----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets (Annualized)........................................... 1.82% 1.77%
Ratio of net investment income to average net assets (Annualized).............................. 4.41% 3.74%

<CAPTION>
Ratio of expenses to average net assets (Annualized)........................................... 1.82% 1.76%

<S> <C> <C>
Ratio of net investment income to average net assets (Annualized).............................. 4.39% 3.52%

</TABLE>

See Financial Statements and Notes Thereto

16
<PAGE> 403

- ------------------------------------------------------------------------------
THE FUNDS
- ------------------------------------------------------------------------------

Van Kampen American Capital Insured Tax Free Income Fund (the "Insured Fund")
and Van Kampen American Capital California Insured Tax Free Fund (the
"California Insured Fund") are each separate diversified series of the Van
Kampen American Capital Tax Free Trust (the "Trust"), an open-end management
investment company, commonly known as a "mutual fund," which is organized as a
Delaware business trust.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Insured Fund and
California Insured Fund (each a "Fund" and collectively the "Funds"). The
Adviser and its affiliates also manage other mutual funds distributed by Van
Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.

- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------

INSURED FUND. The investment objective of the Insured Fund is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the Insured Fund's portfolio, except for investments in tax exempt
money market funds as noted below, will be insured as to timely payment of both
principal and interest. However, there are market risks inherent in all
investments in securities; accordingly there can be no assurance that the
Insured Fund will achieve its objective.

The Insured Fund will generally invest all of its assets in municipal
securities, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax. See
"Municipal Securities." From time to time the Insured Fund temporarily may also
invest up to 10% of its assets in tax exempt money market funds. Such
instruments will be treated as investments in municipal securities.

CALIFORNIA INSURED FUND. The investment objective of the California Insured
Fund is to provide only California investors with a high level of current income
exempt from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. All of the municipal securities in the
California Insured Fund's portfolio, except for investments in tax exempt money
funds as noted below, will be insured as to timely payment of both principal and
interest. However, there are market risks inherent in all investments in
securities; and accordingly there can be no assurance that the California
Insured Fund will achieve its objective. THE CALIFORNIA INSURED FUND IS
AVAILABLE ONLY TO RESIDENTS OF CALIFORNIA.

17
<PAGE> 404

The California Insured Fund will generally invest all of its assets in
California municipal securities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal and California income tax. Distribution to corporations subject to the
California franchise tax will be included in such corporation's gross income for
purposes of determining the California franchise tax. In addition, corporations
subject to the California corporate income tax may, in certain circumstances, be
subject to such taxes with respect to distributions from the California Insured
Fund. Accordingly, an investment in shares of the California Insured Fund may
not be appropriate for corporations subject to either tax. See "Municipal
Securities" and "Tax Status." From time to time the California Insured Fund
temporarily may also invest up to 10% of its assets in California tax exempt
money market funds. Such instruments will be treated as investments in municipal
securities.

Investments in the Funds may not be appropriate for all investors. The Funds
are not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Funds. Investments in the Funds are
intended to be long-term investments and should not be used as trading vehicles.

- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------

GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of each of the
Fund's assets will be invested in such municipal securities. The foregoing is a
fundamental policy of each of the Funds and cannot be changed without approval
of the shareholders of the respective Fund.

The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.

18
<PAGE> 405

of, or are similar in effect to, certain Strategic Transactions (as defined
below) in which the Funds may engage. Variable rate securities bear rates of
interest that are adjusted periodically according to formulae intended to
reflect market rates of interest and include securities whose rates vary
inversely with changes in market rates of interest. Neither Fund will invest
more than 15% of its total assets in derivative municipal securities such as
inverse floaters, whose rates vary inversely with changes in market rates of
interest, or range floaters or capped floaters whose rates are subject to
periodic or lifetime caps. Such securities may also pay a rate of interest
determined by applying a multiple to the variable rate. The extent of increases
and decreases in the value of securities whose rates vary inversely with market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Some municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract or a conditional
sales contract. Some municipal securities may not be backed by the faith, credit
and taxing power of the issuer. Certain of the municipal securities in which the
Funds may invest represent relatively recent innovations in the municipal
securities markets. While markets for such recent innovations progress through
stages of development, such markets may be less developed than more fully
developed markets for municipal securities. A more detailed description of the
types of municipal securities in which the Funds may invest is included in each
Fund's Statement of Additional Information.

The net asset value of each of the Funds will change with changes in the value
of their respective portfolio securities. Because the Funds will invest
primarily in fixed income municipal securities, the net asset value of each of
the Funds can be expected to change as general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested in
fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.

From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal

19
<PAGE> 406

securities. If such a proposal were enacted, the ability of the Funds to pay tax
exempt interest dividends might be adversely affected.

INSURED MUNICIPAL SECURITIES. With respect to its investments in municipal
securities, each of the Insured Fund and the California Insured Fund may invest
only in municipal securities insured under one of the insurance policies meeting
the standards described in this Prospectus. See "Insurance." Although each
insurer's quality standards may vary from time to time, such insurers generally
insure only those municipal securities that are rated at the date of purchase
(1) in the case of long-term debt, in the four highest ratings by Standard &
Poor's Ratings Group (S&P) (AAA, AA, A and BBB) or by Moody's Investors Service,
Inc. (Moody's) (Aaa, Aa, A and Baa); (2) in the case of short-term notes, SP-1+
through SP-2 by S&P or MIG 1 through MIG 4 by Moody's; or (3) in the case of
tax-exempt commercial paper, A-1+ through A-2 by S&P or Prime-1 through Prime-2
by Moody's. Such ratings are relative and subjective and are not absolute
standards of quality. Any insurer may also insure, and each of the Insured Fund
and California Insured Fund may invest in, unrated municipal securities of
similar quality, as determined by the Adviser, if such securities meet the
insurance standards of such insurer. The Insured Fund and California Insured
Fund may invest, without limitation as to rating category, in any securities for
which such Funds obtain insurance coverage. For a description of such ratings
see the respective Fund's Statement of Additional Information incorporated by
reference into this Prospectus.

SPECIAL CONSIDERATIONS REGARDING CALIFORNIA MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of California municipal securities. With respect to an investment in
the Fund, through popular initiative and legislative activity, the ability of
the State of California (the "State") and its local governments to raise money
through property taxes and to increase spending has been the subject of
considerable debate and change in recent years. Various State Constitutional
amendments, for example, have been adopted which have the effect of limiting
property tax and spending increases, while legislation has sometimes added to
these limitations and has at other times sought to reduce their impact. To date,
these Constitutional, legislative and budget developments do not appear to have
severely decreased the ability of the State and local governments to pay
principal and interest on their obligations. It can be expected that similar
types of State legislation or Constitutional proposals will continue to be
introduced. The impact of future developments in these areas is unclear.

From 1990 until 1994, the State experienced the worst economic, fiscal and
budget conditions since the 1930's. The recession seriously affected State tax
revenues and caused increased expenditures for health and welfare programs. As a
result, the State faced several budget imbalances and used up many of its
available cash resources. Accordingly, rating agencies have reduced the State's
credit ratings several times during recent years.

20
<PAGE> 407

Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.

More detailed information concerning California municipal securities is
included in the California Insured Fund's Statement of Additional Information.

SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for each
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the particular
investment policies of such Fund. As a result, the Funds will not necessarily
invest in the highest yielding tax-exempt municipal securities permitted by
their respective investment policies if the Adviser determines that market risks
or credit risks associated with such investments would subject a Fund's
portfolio to excessive risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. There is no limitation as to the maturity of municipal securities
in which a Fund may invest. The Adviser may adjust the average maturity of a
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. Other than for tax purposes, frequency of
portfolio turnover will generally not be a limiting factor if any of the Funds
considers it advantageous to purchase or sell securities. The Funds may have
annual portfolio turnover rates in excess of 100%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
respective Fund and its shareholders. High portfolio turnover may also result in
the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status."

DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing a Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of such Fund's assets. In
implementing these "defensive" strategies, a Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
such Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase

21
<PAGE> 408

agreements with respect to any of the foregoing investments; or any other fixed-
income securities that the Adviser considers consistent with such strategy.

- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------

In connection with the investment policies described above, the Funds also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Funds' 80% investment policy with
respect thereto.

STRATEGIC TRANSACTIONS. The Funds may purchase and sell derivative
instruments such as exchange-listed and over-the-counter put and call options on
securities, financial futures, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and enter into
various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets, to protect such Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of such Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.

22
<PAGE> 409

options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts and
options thereon should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time they tend to limit any potential
gain which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that a Fund may use and some of
their risks are described more fully in the respective Fund's Statement of
Additional Information.

Income earned or deemed to be earned, if any, by a Fund from its Strategic
Transactions will be distributed to its shareholders in taxable distributions.
See "Tax Status."

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

23
<PAGE> 410

OTHER PRACTICES. The Funds have no restrictions on the maturity of municipal
bonds in which they may invest. Each Fund will seek to invest in municipal bonds
of such maturities that, in the judgment of such Fund and the Adviser, will
provide a high level of current income consistent with liquidity requirements
and market conditions.

The Funds may borrow amounts up to 5% of their respective net assets in order
to pay for redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of their respective net
assets to secure such borrowings.

A Fund generally will not invest more than 25% of its total assets in any
industry, nor will a Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that a Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Advisor determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Insured Fund reserves the right to invest more than 25% of its
assets in industrial development bonds or in issuers located in the same state,
although it has no present intention to invest more than 25% of its assets in
issuers located in the same state. If the Insured Fund were to invest more than
25% of its assets in issuers located in the same state, it would be more
susceptible to adverse economic, business, or regulatory conditions in that
state. The California Insured Fund invests primarily in a diversified portfolio
of insured California municipal securities.

ALLOCATION OF BROKERAGE TRANSACTIONS. In effecting purchases and sales of the
Funds' portfolio securities, the Adviser and the Funds may place orders with and
pay brokerage commissions to brokers, including brokers which may be affiliated
with the Funds, the Adviser and the Distributor or dealers participating in the
offering of the Funds' shares. In addition, in selecting among firms to handle a
particular transaction, the Adviser and the Funds may take into account whether
the firm has sold or is selling shares of the Funds.

24
<PAGE> 411

- ------------------------------------------------------------------------------
INSURANCE
- ------------------------------------------------------------------------------

All of the municipal securities in the portfolios of the Insured Fund and the
California Insured Fund will be insured by municipal bond insurers whose claims-
paying ability is rated "AAA" by S&P on the date of purchase. Timely payment of
all principal and interest of each municipal security in the portfolios of the
Insured Fund and the California Insured Fund either will be pre-insured under a
policy obtained for such securities prior to the purchase of the securities by
such Funds or will be insured under policies obtained by such Funds to cover
otherwise uninsured securities. With respect to municipal securities that are
not pre-insured, the Insured Fund and the California Insured Fund have each
obtained a mutual fund portfolio insurance policy from AMBAC Indemnity
Corporation ("AMBAC") whose claims-paying ability is rated "AAA" by S&P. The
Insured Fund and the California Insured Fund may obtain portfolio insurance from
other insurers in the future. No representation is made as to any insurer's
ability to meet its commitments.

Each insurance policy guarantees the timely payment of all principal and
interest on the municipal securities. Each policy provides, in general, that in
the event of nonpayment of interest or principal, when due, in respect of an
insured municipal security, the insurer is obligated to make such payment not
later than 30 days after it has been notified by the respective Fund that such
nonpayment has occurred (but not earlier than the date when such payment is
due). For these purposes, a payment of principal is due only at scheduled
maturity, including required sinking fund payments and mandatory redemptions, of
the security and not at any earlier time. The insurance does not guarantee the
market value of the municipal securities or the value of the shares of the
Funds.

More detailed information concerning such insurance policies, and concerning
AMBAC, is included in the respective Fund's Statement of Additional Information.

- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Funds. The Adviser is a
wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen
American Capital"). Van Kampen American Capital is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and over $50
billion under management or supervision. Van Kampen American Capital's more than
40 open-end and 38 closed-end funds and more than 2,700 unit investment trusts
are professionally distributed by leading financial advisers nationwide.

25
<PAGE> 412

is managed by Clayton, Dubilier & Rice, Inc., a New York based private
investment firm. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general partners
of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A.
Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe
and Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.

ADVISORY AGREEMENT. The business and affairs of each of the Funds will be
managed under the direction of the Board of Trustees of the Trust, of which each
Fund is a separate series. Subject to their authority, the Adviser and the
respective officers of the Funds will supervise and implement the Funds'
investment activities and will be responsible for overall management of the
Funds' business affairs. Each Fund will pay the Adviser a fee equal to a
percentage of the average daily net assets of the respective Fund as follows:

<TABLE>
<CAPTION>
INSURED FUND CALIFORNIA FUND
- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
AVERAGE DAILY NET AVERAGE DAILY NET
ASSETS % PER ANNUM ASSETS % PER ANNUM
- ---------------------- ----------- ---------------------- -----------
First $500 million.... 0.525% First $100 million.... 0.500%
Next $500 million..... 0.500% Next $150 million..... 0.450%
Next $500 million..... 0.475% Next $250 million..... 0.425%
Over $1,500 million... 0.450% Over $500 million..... 0.400%
</TABLE>

Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor, or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.

PERSONAL INVESTING POLICIES. The Funds and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between each Fund and
the Adviser and its employees. The Codes permit trustees/directors, officers and

26
<PAGE> 413

employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.

PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, is
primarily responsible for the day-to-day management of each Fund's portfolio.
Mr. Piraro has been employed by the Adviser since 1992. Prior to 1992, Mr.
Piraro was employed by First Chicago Capital Markets.

- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------

The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Funds, and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Funds.

Each Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts over $1
million, "Class B Shares" and "Class C Shares"). Class A Share accounts over $1
million or otherwise subject to a contingent deferred sales charge ("CDSC"),
Class B Shares and Class C Shares sometimes are referred to herein collectively
as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.

27
<PAGE> 414

such Class A Shares would not have all of his or her funds invested initially
and, therefore, would initially own fewer shares than if Class B Shares or Class
C Shares had been purchased. On the other hand, an investor whose purchase would
not qualify for price discounts applicable to Class A Shares and intends to
remain invested until after the expiration of the applicable CDSC may wish to
defer the sales charge and have all his or her funds initially invested in Class
B Shares or Class C Shares. If such an investor anticipates that he or she will
redeem such shares prior to the expiration of the CDSC period applicable to
Class B Shares, the investor may wish to acquire Class C Shares. Investors must
weigh the benefits of deferring the sales charge and having all of their funds
invested against the higher aggregate distribution and service fee applicable to
Class B Shares and Class C Shares (discussed below). Investors who intend to
hold their shares for a significantly long time may not wish to continue to bear
the ongoing distribution and service expenses of Class C Shares which, in the
aggregate, eventually would exceed the aggregate amount of initial sales charge
and distribution and service expenses applicable to Class A Shares, irrespective
of the fact that a CDSC would eventually not apply to a redemption of Class C
Shares.

Each class of shares represents an interest in the same portfolio of
investments of a Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the respective Fund's Rule 12b-1 distribution plan which relate only to such
class and (iii) has a different exchange privilege. Only the Class B Shares are
subject to a conversion feature (discussed below). Generally, a class of shares
subject to a higher ongoing distribution fee, service fee or, where applicable,
the conversion feature will have a higher expense ratio and pay lower dividends
than a class of shares subject to a lower ongoing distribution fee, service fee
or not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Funds will be
determined as described in this Prospectus under "Purchase of Shares -- Net
Asset Value."

The administrative expenses that may be allocated to a specific class of
shares will consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified

28
<PAGE> 415

that should be properly allocated to one or more classes of shares that shall be
approved by the SEC pursuant to an amended exemptive order. All such expenses
incurred by a class will be borne on a pro rata basis by the outstanding shares
of such class. All allocations of administrative expenses to a particular class
of shares will be limited to the extent necessary to preserve the respective
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code").

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

Shares of the Funds are continuously offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, which
is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are
also offered through members of the National Association of Securities Dealers,
Inc. ("NASD") acting as securities dealers ("dealers") and through NASD members
acting as brokers for investors ("brokers") or eligible non-NASD members acting
as agents for investors ("financial intermediaries"). Each of the Funds reserves
the right to suspend or terminate the continuous public offering of its shares
at any time and without prior notice.

The Funds' shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Funds' shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Funds generally will determine net asset value once
each business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker or dealer at the public offering price during such programs. Other
programs provide, among other things and subject to certain conditions, for
certain favorable distribution arrangements for

29
<PAGE> 416

shares of the Funds. Also, the Distributor in its discretion may from time to
time, pursuant to objective criteria established by it, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediary for
certain services or activities which are primarily intended to result in sales
of shares of the Funds. Fees may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to a Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of such Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. ("Edward D. Jones") or an affiliate thereof based on a
combination of its sales of shares and increases in assets under management.
Such payments to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets of the Funds. These programs will not
change the price an investor will pay for shares or the amount that the
respective Fund will receive from such sale.

CLASS A SHARES

The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The tables below with
respect to the Funds show total sales charges and dealer concessions reallowed
to dealers and agency commissions paid to brokers with respect to sales of Class
A Shares. The sales charge is allocated between the investor's broker, dealer or
financial intermediary and the Distributor. As indicated previously, at the
discretion of the Distributor, the entire sales charge may be reallowed to such
broker, dealer or financial intermediary. The staff of the SEC has taken the
position that brokers, dealers and financial intermediaries who receive more
than 90% or more of the sales charge may be deemed to be "underwriters" as that
term is defined in the Securities Act of 1933.

SALES CHARGE TABLES

INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Less than $100,000.................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000....... 3.75 3.90 3.25
$250,000 but less than $500,000....... 2.75 2.83 2.25
$500,000 but less than $1,000,000..... 2.00 2.04 1.75
$1,000,000 or more*................... * * *
</TABLE>

30
<PAGE> 417

CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Less than $25,000..................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000........ 2.75 2.83 2.50
$250,000 but less than $500,000....... 1.75 1.78 1.50
$500,000 but less than $1,000,000..... 1.50 1.52 1.25
$1,000,000 or more*................... * * *
</TABLE>

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

* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Funds imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales to
$2 million, plus 0.80% on the next million, plus 0.20% on the next $2 million
and 0.08% on the excess over $5 million. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

QUANTITY DISCOUNTS

Investors, or their brokers, dealers or financial intermediaries, must notify
the respective Fund whenever a quantity discount is applicable to purchases.
Upon such notification, an investor will receive the lowest applicable sales
charge. Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.

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<PAGE> 418

VOLUME DISCOUNTS. The size of investment shown in the preceding tables applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of a Fund alone, or in combination with other shares of such Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in Class A
Shares of a Fund with other shares of such Fund and shares of Participating
Funds plus the current offering price of all shares of such Fund and other
Participating Funds which have been previously purchased and are still owned.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
tables. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of a Fund with other shares of such Fund
and shares of the Participating Funds plus the value of all shares of such Fund
and other Participating Funds previously purchased during such 13-month period
and still owned. An investor may elect to compute the 13-month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.

OTHER PURCHASE PROGRAMS

Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
respective Fund or the Distributor. The Funds reserve the right to modify or
terminate these arrangements at any time.

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<PAGE> 419

UNIT TRUST REINVESTMENT PROGRAMS. Each of the Funds permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of such Fund with no minimum initial or subsequent investment
requirement, and with a lower sales charge if the administrator of an investor's
unit investment trust program meets certain uniform criteria relating to cost
savings by such Fund and the Distributor. The total sales charge for all
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the broker, dealer or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their broker, dealer or financial
intermediary or the Distributor.

The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
respective Fund during each distribution period by all investors who choose to
invest in such Fund through the program and (2) provide such Fund's transfer
agent with appropriate backup data for each participating investor in a
computerized format fully compatible with the transfer agent's processing
system.

As further requirements for obtaining these special benefits, the respective
Fund also requires that all dividends and other distributions by such Fund be
reinvested in additional shares without any systematic withdrawal program. There
will be no minimum for reinvestments from unit investment trusts. The Fund will
send account activity statements to such participants on a monthly basis only,
even if their investments are made more frequently.

NAV PURCHASE OPTIONS. Class A Shares of a Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by such Fund,
by:

33
<PAGE> 420

(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of a Fund alone, or in any
combination of shares of such Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.

(7) Investors purchasing shares of a Fund with redemption proceeds from other
mutual fund complexes on which the investor has paid a front-end sales
charge or was subject to a deferred sales charge, whether or not paid, if
such redemption has occurred no more than 30 days prior to such purchase.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the respective Fund imposes a contingent
deferred sales charge of 1.00% in the event of redemptions within one year
of the purchase other than redemptions required to make payments to
participants under the terms of the plan. The contingent deferred sales
charge incurred upon certain redemptions is paid to the Distributor in
reimbursement for distribution-related expenses. A commission will be paid
to dealers who initiate and are responsible for such purchases as follows:
1.00% on sales to $5 million, plus 0.50% on the next $5 million, plus
0.25% on the excess over $10 million.

The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.

Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the respective Fund's transfer agent, the investment adviser,
trust company or bank trust department, provided that such Fund's transfer agent
receives federal funds for the purchase by the close of business on the next
business day following acceptance of the order. An authorized broker, dealer or
financial intermediary may

34
<PAGE> 421

charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
The Funds may terminate, or amend the terms of, offering shares of the Funds at
net asset value to such groups at any time.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Funds may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the respective Fund, at a percentage rate of the dollar value of the
CDSC Shares purchased from such Fund by such brokers, dealers and financial
intermediaries, which percentage rate will be equal to (i) with respect to Class
A Shares, 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million; (ii) 4.00%
with respect to Class B Shares of the Insured Fund; (iii) 3.00% with respect to
Class B Shares of the California Insured Fund; and (iv) 1.00% with respect to
Class C Shares of each Fund. Such compensation will not change the price an
investor will pay for CDSC Shares or the amount that the respective Fund will
receive from such sale.

CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
amount of the contingent deferred sales charge will vary depending on (i) the
class of CDSC Shares to which such shares belong and (ii) the number of years
from the time of payment for the purchase of the CDSC Shares until the time of
their redemption. The charge will be assessed on an amount equal to the lesser
of the then current market value or the original purchase price of the CDSC
Shares being redeemed. Accordingly, no sales charge will be imposed on increases
in net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchase of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
respective Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution and

35
<PAGE> 422

services fees facilitates the ability of the respective Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.

To provide an example, assume an investor purchased 100 Class B Shares of the
Insured Fund (as set forth below) at $10 per share (at a cost of $1,000) and in
the second year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional Class B Shares upon dividend
reinvestment. If at such time the investor makes his first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to charge because of
dividend reinvestment. With respect to the remaining 40 shares, the charge is
applied only to the original cost of $10 per share and not to the increase in
net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.75% (the applicable rate in the second year after
purchase).

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the respective Fund may impose a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are responsible
for purchases of $1 million or more as follows: 1.00% on sales to $2 million,
plus 0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on
the excess over $5 million.

CLASS B SHARES. Class B Shares redeemed within the number of years of purchase
set forth below generally will be subject to a contingent deferred sales

36
<PAGE> 423

charge at the rates set forth below, charged as a percentage of the dollar
amount subject thereto:

INSURED FUND
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C> <C>
First................................ 4.00%
Second............................... 3.75%
Third................................ 3.50%
Fourth............................... 2.50%
Fifth................................ 1.50%
Sixth................................ 1.00%
Seventh and after.................... 0.00%
</TABLE>

CALIFORNIA INSURED FUND
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C> <C>
First................................ 3.0%
Second............................... 2.5%
Third................................ 2.0%
Fourth............................... 1.0%
Fifth and after...................... 0.0%
</TABLE>

The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."

Conversion Feature. Class B Shares of the Insured Fund automatically will
convert to Class A Shares of the Insured Fund seven years after the end of the
month in which a shareholder's order to purchase such Class B Shares was
accepted and thereafter will be subject to the lower aggregate distribution and
service fees applicable to Class A Shares of the Insured Fund. Class B Shares of
the California Insured Fund automatically will convert to Class A Shares of the
California Insured Fund six years after the end of the month in which a
shareholder's order to purchase such Class B Shares was accepted and thereafter
will be subject to the lower aggregate distribution and service fees applicable
to Class A Shares of the California Insured Fund. The purpose of the conversion
feature is to relieve the holders of Class B Shares that have been outstanding
for a period of time sufficient

37
<PAGE> 424

for the Distributor to have been compensated for distribution expenses related
to the Class B Shares from most of the burden of such distribution-related
expenses.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to a Class B Share of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of a Fund prior to conversion, a Class B Share of
such Fund issued in connection with an exercise of the exchange privilege, or a
series of exchanges, shall be deemed to have been issued on the date on which
the investor's order to purchase the exchanged Class B Share was accepted or, in
the case of a series of exchanges, when the investor's order to purchase the
original Class B Share was accepted.

The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and transfer agency costs
with respect to Class B Shares does not result in a Fund's dividends or
distributions constituting "preferential dividends" under the Code and (ii) that
the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.

CLASS C SHARES. Class C Shares of each Fund redeemed within the first twelve
months of purchase generally will be subject to a contingent deferred sales
charge of 1.00% of the dollar amount subject thereto. Class C Shares redeemed
thereafter will not be subject to a contingent deferred sales charge. Class C
Shares of each Fund do not convert to Class A Shares.

38
<PAGE> 425

Services" and "Redemption of Shares" for further discussion of the waiver
provisions.

NET ASSET VALUE

The net asset value per share of each of the Funds is determined by
calculating the total value of such Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares of such Fund
outstanding. The net asset value is computed once daily as of 5:00 p.m. Eastern
time, Monday through Friday, except on customary business holidays, or except on
any day on which no purchase or redemption orders are received, or there is not
a sufficient degree of trading in such Fund's portfolio securities such that the
Fund's net asset value per share might be materially affected. Each of the Funds
reserves the right to calculate the net asset value and to adjust the public
offering price based thereon more frequently than once a day if deemed
desirable.

Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Trust, of which each
Fund is a separate series. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
in good faith by or under the direction of the Board of Trustees of the Trust to
be representative of the fair value at which it is expected such securities may
be resold. Other assets are valued at fair value as determined in good faith by
or under direction of the Trustees. The net asset values per share of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset value of the different classes of
shares may differ.

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

Each of the Funds offers a number of shareholder services designed to
facilitate investment in its shares at little or no extra cost to the investor.
Below is a description of such services. Unless otherwise described below, each
of these services may be modified or terminated by the respective Fund at any
time.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Funds and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing

39
<PAGE> 426

the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.

SHARE CERTIFICATES. Generally, the Funds will not issue share certificates.
However, upon written or telephone request to the respective Fund, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of such Fund. A shareholder will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to Van Kampen American Capital Funds, c/o
ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an "affidavit of
loss" and to obtain a Surety Bond in a form acceptable to ACCESS. On the date
the letter is received ACCESS will calculate a fee for replacing the lost
certificate equal to no more than 2.00% of the net asset value of the issued
shares and bill the party to whom the replacement certificate was mailed.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the respective Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 421-5666 ((800) 772-8889
for the hearing impaired) or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Distributions from the Funds."

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

DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the respective Fund invested into shares of the same class of any
other Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund
so long as a pre-existing account for such class of shares exists for such
shareholder.

40
<PAGE> 427

EXCHANGE PRIVILEGE. Shares of a Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or the
Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. Before effecting an exchange, shareholders in the Fund should obtain
and read a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.

In general, shares of a Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of a Fund registered in a
shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, each of the Funds will increase the number of days shares
must be registered in a shareholder's name prior to an exchange to 30 days.

Exchanges of Class A Shares of a Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to a Fund will have the sales
charge differential imposed upon exchange into such Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of a Fund upon exchange into such
Fund.

No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of a Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.

41
<PAGE> 428

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Funds employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the respective Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. VKAC and the respective
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. If the exchanging shareholder does
not have an account in the fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gains
options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. Each of the Funds reserves the right to reject any order to
acquire its shares through exchange. In addition, each of the Funds may restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.

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

42
<PAGE> 429

Under the plan, sufficient shares of a Fund are redeemed to provide the amount
of the periodic withdrawal payment. Dividends and capital gains distributions on
shares held under the plan are reinvested in additional shares at the next
determined net asset value. If periodic withdrawals continuously exceed
reinvested dividends and capital gains distributions, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted. Withdrawals
made concurrently with purchases of additional shares ordinarily will be
disadvantageous to the shareholder because of the duplication of sales charges.
Each of the Funds reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

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

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

43
<PAGE> 430

of Automated Clearing House. In addition, the shareholder must fill out the
appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.

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

Shareholders may redeem for cash some or all of their shares without charge by
the respective Fund (other than, with respect to CDSC Shares, the applicable
contingent deferred sales charge) at any time by sending a written request in
proper form directly to ACCESS, P. O. Box 418256, Kansas City, Missouri
64141-9256, by placing the redemption request through an authorized dealer or by
calling the respective Fund.

44
<PAGE> 431

DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.

TELEPHONE REDEMPTION REQUESTS. Each of the Funds permits redemption of shares
by telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the respective Fund at
(800) 421-5666 ((800) 772-8889 for the hearing impaired) to request that a copy
of the Telephone Redemption Authorization form be sent to them for completion.
To redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Funds employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the
respective Fund will be liable for following instructions which it reasonably
believes to be genuine. VKAC and the respective Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available if the shareholder
cannot reach ACCESS by telephone, whether because all telephone lines are busy
or for any other reason; in such case, a shareholder would have to use the
respective Fund's other redemption procedures previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for all accounts other than retirement accounts. The
telephone redemption privilege is not available for shares represented by
certificates. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check or wiring redemption proceeds
until it confirms that the purchase check has cleared, usually a period of up to
15 days. If an account has multiple owners, ACCESS may rely on the instructions
of any one owner.

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<PAGE> 432

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

GENERAL REDEMPTION INFORMATION. The respective Fund may redeem any shareholder
account with a net asset value on the date of the notice of redemption less than
the minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.

REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the respective Fund may reinstate any portion or all of the
net

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<PAGE> 433

proceeds of such redemption in Class A Shares of such Fund. Holders of Class C
Shares who have redeemed shares of the respective Fund may reinstate any portion
or all of the net proceeds of such redemption in Class C Shares of such Fund
with credit given for any contingent deferred sales charge paid upon such
redemption. Such reinstatement is made at the net asset value next determined
after the order is received, which must be within 120 days after the date of the
redemption. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge." Reinstatement at net asset value is also offered to participants in
those eligible retirement plans held or administered by Van Kampen American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.

- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------

Each of the Funds has adopted a distribution plan (the "Distribution Plan")
with respect to each class of its shares pursuant to Rule 12b-1 under the 1940
Act. Each of the Funds also has adopted a service plan (the "Service Plan") with
respect to each class of shares. The Distribution Plan and Service Plan of each
Fund provide that the respective Fund may spend a portion of such Fund's average
daily net assets attributable to each class of its shares in connection with the
distribution of respective class of shares and in connection with the provision
of ongoing services to shareholders of each class. Each Distribution Plan and
Service Plan is being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.

CLASS A SHARES. Each of the Funds may spend an aggregate amount up to 0.25%
per year of the average daily net assets attributable to the Class A Shares of
the respective Fund pursuant to its Distribution Plan and Service Plan. From
such amount, the respective Fund may spend up to 0.25% per year of the average
daily net assets attributable to its Class A Shares pursuant to its Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. Each of the
Funds pays the Distributor the lesser of the balance of the 0.25% not paid to
such brokers, dealers or financial intermediaries or the amount of the
Distributor's actual distribution related expense.

CLASS B SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class B Shares of the respective
Fund pursuant to the Distribution Plan. In addition, each of the Funds may spend
up to 0.25% per year of such Fund's average daily net assets attributable to the
Class B Shares of the respective Fund pursuant to its Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor

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<PAGE> 434

and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.

CLASS C SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class C Shares of the respective
Fund pursuant to the Distribution Plan. From such amount, each of the Funds, or
the Distributor as agent for the respective Fund, pays brokers, dealers or
financial intermediaries in connection with the distribution of the Class C
Shares up to 0.75% of the respective Fund's average daily net assets
attributable to Class C Shares maintained in such Fund more than one year by
such broker's, dealer's or financial intermediary's customers. Each of the Funds
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense. In addition, each of the Funds may spend up
to 0.25% per year of the average daily net assets attributable to the Class C
Shares of the respective Fund pursuant to its Service Plan in connection with
the ongoing provision of services to holders of such shares by the Distributor
and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.

OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.

The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the respective Fund (up to the
amount of the actual expenses incurred) in future years so long as such
Distribution Plan is in effect. Except as mandated by applicable law, the Funds
do not impose any limit with respect to the number of years into the future that
such unreimbursed expenses may be carried forward (on a fund level basis).
Because such expenses are accounted on a fund level basis, in periods of extreme
net asset value fluctuation such amounts with respect to a particular CDSC Share
may be greater or less than the amount of the initial commission (including
carrying cost) paid by the Distributor with respect to such CDSC Share. In such
circumstances, a shareholder of such CDSC Share may be deemed to incur expenses
attributable to other shareholders of such class. Each of the Funds will
disclose in its prospectus from time to time the then current amount of any such
unreimbursed expenses with respect to each class of CDSC Shares expressed as a
dollar amount and as a percent of the respective Fund's total net assets. As of
December 31, 1994, there were $38,971 and $2,788 of unreimbursed distribution
expenses with respect to Class B

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<PAGE> 435

Shares and Class C Shares, respectively of the Insured Fund, representing less
than 0.01% and less than 0.01% of the Insured Fund's total net assets. As of
December 31, 1994, there were $20,141 and $4,129 of unreimbursed distribution
expenses with respect to Class B Shares and Class C Shares, respectively of the
California Insured Fund, representing 0.01% and less than 0.01% of the
California Insured Fund's total net assets. If the Distribution Plan was
terminated or not continued, the Funds would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.

Because each of the Funds is a series of the Trust, amounts paid to the
Distributor as reimbursement for expenses of one series of the Trust may
indirectly benefit the other funds which are series of the Trust. The
Distributor will endeavor to allocate such expenses among such funds in an
equitable manner. The Distributor will not use the proceeds from the contingent
deferred sales charge applicable to a particular class of CDSC Shares to defray
distribution related expenses attributable to any other class of CDSC Shares.
Various federal and state laws prohibit national banks and some state-chartered
commercial banks from underwriting or dealing in the Funds' shares. In addition,
state securities laws on this issue may differ from the interpretations of
federal law, and banks and financial institutions may be required to register as
dealers pursuant to state law. In the unlikely event that a court were to find
that these laws prevent such banks from providing such services described above,
the Funds would seek alternate providers and expects that shareholders would not
experience any disadvantage.

- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUNDS
- ------------------------------------------------------------------------------

Each Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of such Fund. Each Fund's net recognized
investment income consists of all of its respective interest income, dividends
and other ordinary income earned by such Fund on its portfolio assets, less all
expenses of such Fund. Expenses of the Funds are accrued each day. Net long- and
short-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.

Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.

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<PAGE> 436

Investors will be entitled to begin receiving dividends on their shares on the
business day after such Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day such Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. Each Fund will
automatically credit dividend distributions and any net long-term capital gain
distributions to a shareholder's account in additional shares of the respective
Fund valued at net asset value, without a sales charge. Unless a shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS.

- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------

FEDERAL TAXES. The Funds each have qualified and intend to continue to
qualify as regulated investment companies under Subchapter M of the Code. To
qualify as a regulated investment company, each Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If each Fund so qualifies and if it
distributes to its shareholders at least 90% of its net investment income
(including tax-exempt interest and other taxable income including net short-term
capital gains, but not net capital gains, which is the excess of net long-term
capital gains over net short-term capital losses), it will not be required to
pay federal income taxes on any income distributed to shareholders. Each Fund
intends to distribute at least the minimum amount of net investment income to
satisfy the 90% distribution requirement. Each Fund will not be subject to
federal income tax on any net capital gain distributed to its shareholders. In
order to avoid a 4% excise tax each Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, a Fund will be treated
as having been distributed.

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<PAGE> 437

If a Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of such Fund's
taxable year, at least 50% of the total of such Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), such Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from
such Fund.

The Internal Revenue Service has publicly ruled that payments of insurance
proceeds representing interest on defaulted tax-exempt obligations are
excludable from gross income to the same extent that such payments would have
been excludable if they had been directly made by the issuer of the insured
obligations. Accordingly, insurance proceeds received by the Insured Fund and
the California Insured Fund under a policy obtained for such securities prior to
their purchase by such Funds or from AMBAC and any other insurer with whom the
Insured Fund and the California Insured Fund maintains a policy described in
this Prospectus will be tax-exempt interest income of the Insured Fund and the
California Insured Fund to the same extent as if such payments were made by the
issuer of the insured obligations, and will be includable by the Insured Fund
and the California Insured Fund in calculating their exempt-interest dividends.
With respect to municipal leases with "non-appropriation" clauses, however,
there can be no assurance that payments made by the insurers on such lease
obligations will be tax-exempt interest income of the Insured Fund or the
California Insured Fund to the same extent as if such payments were made by the
issuer of the obligations and, therefore, includable by the Funds in calculating
their exempt-interest dividends.

Distributions of a Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of a Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of such Fund
have been held by such shareholders. Distributions in excess of the Funds'
earnings and profits, such as distributions of principal, will first reduce the
adjusted tax basis of the shares held by the shareholders and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholders (assuming such shares are held as a capital asset). Each Fund will
inform shareholders of the source and tax status of such distributions promptly
after the

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<PAGE> 438

close of each calendar year. Distributions from the Funds will not be eligible
for the dividends received deduction for corporations.

Exempt-interest dividends allocable to interest received by a Fund on certain
"private activity" obligations issued after August 7, 1986 will be treated as
interest on such obligations and thus will give rise to an item of tax
preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in a Fund may cause shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.

Redemption or resale of shares of a Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of such Fund and the amount received. If such shares are held as a capital
asset, the gain or loss will be a capital gain or loss and will generally be
long-term if such shareholders have held shares for more than one year. Any loss
realized on shares held for six months or less will be disallowed to the extent
of any exempt-interest dividends received with respect to such shares. If such
loss is not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
shares.

Some of the Funds' investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of a Fund
and affect the holding period of the securities held by a Fund and the character
of gains or losses realized by a Fund. These provisions may also require a Fund
to mark-to-market some of the positions in its portfolio (i.e., treat them as if
they were closed out), which may cause such Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the 90% distribution requirement and the distribution requirement for avoiding
income taxes. Each Fund will monitor its transactions and may make certain tax
elections in order to mitigate the effect of these rules and prevent
disqualification of such Fund as a regulated investment company.

Investments of each Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, each
Fund will be required

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<PAGE> 439

to accrue as income each year a portion of the discount and to distribute such
income each year in order to maintain its qualification as a regulated
investment company and to avoid federal income taxes. In order to generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and avoid federal income taxes, a Fund may have to dispose of
securities that it would otherwise have continued to hold. Discount relating to
certain stripped tax-exempt obligations may constitute taxable income when
distributed to shareholders.

A Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of a Fund's gross income be derived from the disposition of securities held
for less than three months.

Each Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.

CALIFORNIA TAX STATUS. Under existing California income tax law, if at the
close of each quarter of the California Insured Fund's taxable year at least 50%
of the value of its total assets consists of obligations of the State of
California and its political subdivisions, shareholders of the California
Insured Fund who are subject to the California personal income tax will not be
subject to such tax on distributions with respect to their shares of the
California Insured Fund to the extent that such distributions are attributable
to such tax-exempt interest from such obligations (less expenses applicable
thereto). If such distributions are received by a corporation subject to the
California franchise tax, however, the distributions will be includable in its
gross income for purposes of determining its California franchise tax.
Corporations subject to the California corporate income tax may be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. Under California personal
property tax law, securities owned by the California Insured Fund and any
interest thereon are exempt from such personal property tax. Any proceeds paid
to the California Insured Fund under the insurance policy which represents
matured interest on

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<PAGE> 440

defaulted obligations should be exempt from California personal income tax if,
and to the same extent as, such interest would have been exempt if paid by the
issuer of such defaulted obligations. Recent amendments to California tax laws
substantially incorporate those provisions of the Code governing the treatment
of regulated investment companies.

GENERAL. The federal and California income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisors regarding the specific federal and California tax consequences of
holding and disposing of shares as well as the effects of other state, local and
foreign tax laws.

- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------

From time to time advertisements and other sales materials for each respective
Fund may include information concerning the historical performance of such Fund.
Any such information will include the average total return of such Fund
calculated on a compounded basis for specified periods of time. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of a Fund's shares. In lieu of or in addition to total
return and yield calculations, such information may include performance rankings
and similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.

The yield quotations are determined for each class of a Fund's shares on a
monthly basis with respect to the immediately preceding 30 day period. Yield is
computed by dividing the respective Fund's net investment income per share
earned during such 30 day period by such Fund's maximum offering price per share
on the last day of such period. Net investment income per share for a class of
shares is determined by taking the interest earned by the respective Fund during
the period and allocable to the class of shares, subtracting the expenses (net
of reimbursements) accrued for the period and allocable to the class of shares,
and dividing the result by the product of (a) the average daily number of such
class of shares of the respective Fund outstanding during the period that were
entitled to receive dividends and (b) such Fund's maximum offering price per
share on the last day of the period. The yield calculation formula assumes net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six month period.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of a Fund's yield. A tax-equivalent yield
quotation for a 30 day period as described above is computed for each class of a
Fund's shares by dividing that portion of the yield of such Fund (as computed
above) which is tax-exempt by a percentage equal to 100% minus a stated
percentage income tax rate and adding the result to that portion of such Fund's
yield, if any, that is not tax-exempt.

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<PAGE> 441

The average compounded total return for each class of a Fund's shares is
calculated by determining the redemption value at the end of specified periods
(after adding back all dividends and other distributions made during the period)
of a $1,000 investment in a class of shares of such Fund (less the maximum sales
charge) at the beginning of the period, annualizing the increase or decrease
over the specified period with respect to such initial investment and expressing
the result as a percentage.

Total return figures utilized by each Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.

Each of the Funds may, in supplemental sales literature, advertise
non-standardized total return figures representing the cumulative,
non-annualized total return of such Fund from a given date to a subsequent given
date. Cumulative non-standardized total return is calculated by measuring the
value of an initial investment in such Fund at a given time, including or
excluding any applicable sales charge as indicated, deducting the respective
Fund's maximum sales charge, determining the value of all subsequent reinvested
distributions, and dividing the net change in the value of the investment as of
the end of the period by the amount of the initial investment and expressing the
result as a percentage.

From time to time either Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for the
respective Fund. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate is determined by annualizing the distributions per share for a
stated period and dividing the result by the public offering price for the same
period. It differs from yield, which is a measure of the income actually earned
by a Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of, such investments during a stated period. Distribution rate
is, therefore, not intended to be a complete measure of a Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by a Fund. Distribution rates will be calculated separately for each
class of a Fund's shares.

From time to time, a Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, a Fund may utilize sales literature that
includes hypotheticals.

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<PAGE> 442

Further information about the respective Fund's performance is contained in
its Annual Report and its Statement of Additional Information each of which can
be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).

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

Shareholders will receive annual and semiannual reports with financial
statements, as well as proxy statements for shareholders' meetings, if any. Each
Fund is a separate series of the Trust, a Delaware business trust. The Insured
Fund was originally organized as a Maryland corporation under the name Van
Kampen Merritt Insured Tax Free Fund Inc., was subsequently reorganized into a
sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts business trust,
under the name Van Kampen Merritt Insured Tax Free Income Fund as of February
22, 1988 and was again reorganized as a series of the Trust on July 31, 1995.
The California Insured Fund was organized under the name Van Kampen Merritt
California Insured Tax Free Fund as a sub-trust of Van Kampen Merritt Tax Free
Fund and was reorganized as a series of the Trust on July 31, 1995. Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each series on matters affecting an individual series. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of two-thirds of the shares then outstanding cast in person or by proxy at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Funds to the extent required by the 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information of each Fund.

Each Fund's fiscal year ends on December 31. Each of the Funds send to their
shareholders, at least semi-annually, reports showing the respective Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent public accountants, is sent to shareholders
each year. After the end of each year, shareholders will receive federal income
tax information regarding dividends and capital gains distributions.

Shareholder inquiries should be directed to the Van Kampen American Capital
Insured Tax Free Income Fund or Van Kampen American Capital California Insured
Tax Free Fund, as applicable, One Parkview Plaza, Oakbrook Terrace, Illinois
60181, Attn: Correspondence.

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<PAGE> 443

For Automated Telephone Service which provides 24 hour direct dial access to
fund facts and shareholder account information dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) Dial (800)
772-8889.

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<PAGE> 444

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
- ------------------
VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
- ------------------
One Parkview Plaza
Oakbrook Terrace, IL 60181
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital Funds

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds

Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 445

INSURED TAX FREE
INCOME FUND
------------------------------------------------------------------------------
CALIFORNIA INSURED
TAX FREE FUND

P R O S P E C T U S
JULY 31, 1995

- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 446

VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000

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

STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL INSURED MUNICIPAL FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND

DATED JULY 31, 1995

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

This Statement of Additional Information provides information about the Van
Kampen American Capital Insured Tax Free Income Fund (the "VK Fund"), an
open-end diversified management investment company, a series of the Van Kampen
American Capital Tax Free Trust ("VKAC Tax Free Trust"), in addition to
information contained in the Proxy Statement/Prospectus of the VKAC Tax Free
Fund, dated August 1, 1995, which also serves as the Proxy Statement of the Van
Kampen American Capital Insured Municipal Portfolio (the "AC Fund"), in
connection with the issuance of Class A, B and C Shares of the VK Fund to
shareholders of the AC Fund. This Statement of Additional Information is not a
prospectus. It should be read in conjunction with the Proxy
Statement/Prospectus, into which it has been incorporated by reference and which
may be obtained by contacting the VKAC Tax Free Fund located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181 (telephone no. (708) 684-6000 or (800)
225-2222) or the AC Fund located at 2800 Post Oak Boulevard, Houston, Texas
77056 (telephone no. (800) 421-5666).

TABLE OF CONTENTS

1
<PAGE> 447

PROPOSED REORGANIZATION OF THE AC FUND

The shareholders of the AC Fund are being asked to approve the sale of all
the assets and liabilities of the AC Fund in exchange for Class A, B and C
Shares of the VK Fund, a series of the VKAC Tax Free Trust (the
"Reorganization").

For detailed information about the Reorganization, shareholders should
refer to the Proxy Statement/ Prospectus.

ADDITIONAL INFORMATION ABOUT THE VK FUND AND THE VKAC TAX FREE TRUST

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Fund, dated July 31, 1995, attached as Appendix
A to this Statement of Additional Information.

ADDITIONAL INFORMATION ABOUT THE AC FUND

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the AC Fund, dated August 1, 1995, attached as
Appendix B to this Statement of Additional Information.

FINANCIAL STATEMENTS

Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the VK Fund for fiscal year ended December 31,
1994, attached as Appendix C to this Statement of Additional Information, and
(ii) the audited financial statements of the AC Fund for fiscal year ended
November 30, 1994, attached as Appendix D to this Statement of Additional
Information.

PRO FORMA FINANCIAL STATEMENTS

In connection with the Reorganization, the VK Fund will acquire all of the
assets of the AC Fund in exchange for a number of shares of the VK Fund equal to
the net asset value of such assets of the AC Fund being acquired. Based on the
respective net asset values of the VK Fund and the AC Fund as of May 19, 1995,
the net asset value of the AC Fund does not exceed 10% of the VK Fund's net
asset value. Accordingly, pro forma financial statements are not included
herein.

2
<PAGE> 448

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND

The Van Kampen American Capital Insured Tax Free Income Fund, formerly known
as Van Kampen Merritt Insured Tax Free Income Fund (the "Fund"), is a separate
diversified series of Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "Trust"). The Trust is an open-end management investment
company, commonly known as a mutual fund. The Fund's investment objective is to
provide investors with a high level of current income exempt from federal income
taxes, with liquidity and safety of principal primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the portfolios of the Fund will be insured by AMBAC Indemnity
Corporation or by other municipal bond insurers whose claims-paying ability is
rated "AAA" by Standard & Poor's Ratings Group on the date of purchase. The
Fund's portfolio is managed by Van Kampen American Capital Investment Advisory
Corp. (the "Adviser").

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling (800) 421-5666.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust.................................................................. B-2

Investment Policies and Restrictions.................................................... B-2

Additional Investment Considerations.................................................... B-4

Description of Municipal Securities Ratings............................................. B-15

Officers and Trustees................................................................... B-20

Investment Advisory and Other Services.................................................. B-26

Custodian and Independent Auditors...................................................... B-27

Portfolio Transactions and Brokerage Allocations........................................ B-27

Tax Status of the Fund.................................................................. B-28

The Distributor......................................................................... B-28

Legal Counsel........................................................................... B-30

Performance Information................................................................. B-30

Independent Auditors' Report............................................................ B-32

Financial Statements.................................................................... B-33

Notes to Financial Statements........................................................... B-49
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.

B-1
<PAGE> 449

THE FUND AND THE TRUST

The Fund is a separate diversified series of the Trust is an unincorporated
business trust established under the laws of the State of Delaware by an
Agreement and Declaration of Trust dated as of May 10, 1995, (the "Declaration
of Trust"). The Declaration of Trust permits the Trustees to create one or more
separate investment portfolios and issue a series of shares for each portfolio.
The Trustees can further sub-divide each series of shares into one or more
classes of shares for each portfolio. At present, the Fund, Van Kampen American
Capital Tax Free High Income Fund, Van Kampen American Capital California
Insured Tax Free Fund, Van Kampen American Capital Municipal Income Fund, Van
Kampen American Capital Limited Term Municipal Income Fund, Van Kampen American
Capital Florida Insured Tax Free Income Fund, Van Kampen American Capital New
Jersey Tax Free Income Fund and Van Kampen American Capital New York Tax Free
Income Fund have been organized as series of the Trust and have commenced
investment operations. Van Kampen American Capital California Tax Free Income
Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen
American Capital Missouri Tax Free Income Fund and Van Kampen American Capital
Ohio Tax Free Income Fund have been organized as series of the Trust but have
not commenced investment operations. Other series may be organized and offered
in the future. The Fund was originally organized as a Maryland corporation under
the name Van Kampen Merritt Insured Tax Free Fund Inc., was subsequently
reorganized into a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust, under the name Van Kampen Merritt Insured Tax Free
Income Fund as of February 22, 1988 and was again reorganized as a series of the
Trust on July 31, 1995.

Each share in a series of the Trust represents an equal proportionate interest
in the assets of such series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights other than
those described in the Prospectus. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.

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

INVESTMENT POLICIES AND RESTRICTIONS

The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its objective.

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer.

B-2
<PAGE> 450

3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described in the
Prospectus.

4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.

5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.

6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.

7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

8. Make investments for the purpose of exercising control or participation in
management.

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax exempt money market funds that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax exempt money market fund or securities of any tax exempt money
market fund aggregating in value more than 5% of the total assets of the
Fund.

10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.

11. Purchase or sell real estate, commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities the Fund may invest in are considered to be interests in real
estate.

The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.

B-3
<PAGE> 451

The Fund does not intend to invest in certain "private activity" obligations
issued after August 7, 1986. Interest on such "private activity" obligations is
treated as a preference item for the purpose of calculating the alternative
minimum tax. If the Fund were to invest in such "private activity" obligations,
dividends paid to an investor who is subject to the alternative minimum tax
might not be completely tax exempt or might cause an investor to be subject to
such tax.

ADDITIONAL INVESTMENT CONSIDERATIONS

MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed.

Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.

Also included within the term Municipal Securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract. Some
municipal leases and participation certificates may not be readily marketable.

B-4
<PAGE> 452

plus accrued interest. The interest rate on a floating rate demand note is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand note is adjusted automatically at specified intervals.

The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.

The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.

Although the municipal securities in which the Fund may invest will be insured
as to timely payment of both principal and interest, municipal securities, like
other debt obligations, are subject to the risk of non-payment. The ability of
issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income.

INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference

B-5
<PAGE> 453

between the value of the index at the close of the last trading day of the
contract and the price at which the future was originally written. A financial
future is an agreement between two parties to buy and sell a security for a set
price on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash rather
than the underlying securities. An example is the Long-Term Municipal Bond
futures contract traded on the Chicago Board of Trade. It is based on the Bond
Buyer's Municipal Bond Index, which represents an adjusted average price of the
forty most recent long-term municipal issues of $50 million or more ($75 million
in the instance of housing issues) rated A or better by either Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"), maturing
in no less than nineteen years, having a first call in no less than seven nor
more than sixteen years, and callable at par.

The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.

STRATEGIC TRANSACTIONS.

In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.

B-6
<PAGE> 454

price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.

B-7
<PAGE> 455

relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.

B-8
<PAGE> 456

changes, for duration management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The purchase of
a futures contract creates a firm obligation by the Fund, as purchaser, to take
delivery from the seller the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.

B-9
<PAGE> 457

desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.

B-10
<PAGE> 458

equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.

Illiquid Securities. The Fund may invest up to 15% of its total assets in
illiquid securities, securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable. The sale of restricted and illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.

INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.

Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments

B-11
<PAGE> 459

shall become due but shall not be paid by the issuer, except that in the event
of any acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default or otherwise, the payments insured may be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer is responsible for such payments less
any amounts received by the holder from any trustee for the municipal security
issuers or from any other source. Original Issue Insurance generally does not
insure payment on an accelerated basis, the payment of any redemption premium
(except with respect to certain premium payments in the case of certain small
issue industrial development and pollution control municipal securities), the
value of the Shares of the Fund or the market value of municipal securities, or
payments of any under purchase price upon the tender of the municipal
securities. Original Issue Insurance does not insure against nonpayment of
principal of or interest on municipal securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.

In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instruments of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.

Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.

Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.

One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.

Portfolio Insurance. The portfolio insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof,
and compliance with investment restrictions imposed under the

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<PAGE> 460

policy will reduce the yield to shareholders of the Fund. If a municipal
security already is covered by Original Issue Insurance or Secondary Market
Insurance, the Fund is not required to additionally insure any such municipal
security under any policy of Portfolio Insurance that the Fund may purchase.

Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.

In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.

Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.

Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.

One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.

Because such Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
by Original Issue Insurance or Secondary Market Insurance that are in default or
in significant risk of default.

It is anticipated that certain of the municipal securities to be purchased by
the Fund will be insured under policies obtained by persons other than the Fund.
In instances in which the Fund purchases municipal securities insured under
policies obtained by persons other than the Fund, the Fund does not pay the

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premiums for such policies; rather the cost of such policies may be reflected in
a higher purchase price for such municipal securities. Accordingly, the yield on
such municipal securities may be lower than that on similar uninsured municipal
securities. Premiums for a Portfolio Insurance Policy generally are paid by the
Fund monthly, and are adjusted for purchases and sales of municipal securities
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered municipal securities held by
the Fund. In the event the Fund were to purchase Secondary Market Insurance with
respect to any municipal securities then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.

There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
or if the Adviser anticipates such a lowering or otherwise does not believe an
insurer's claims-paying ability merits its existing triple-A rating, the Fund
could seek to obtain additional insurance from an insurer whose claims-paying
ability is rated AAA by S&P or, if the Adviser determines that the cost of
obtaining such additional insurance outweigh the benefits, the Fund may elect
not to obtain additional insurance. In making such determination, the Adviser
will consider the cost of the additional insurance, the new claims-paying
ability rating and financial condition of the existing insurer and the
creditworthiness of the issuer and/or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims-paying ability rating to be restored promptly.

Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor their
obligations under all circumstances. In that regard, it should be noted that the
claims-paying abilities and debt ratings of several large insurers (at least one
of which insured municipal securities) recently have been lowered by one or more
of the nationally recognized securities rating agencies and that many insurers
currently are experiencing adverse results in their investment portfolios. In
addition, certain insurers' operations recently have been assumed by their state
regulatory agencies. The Fund cannot predict the consequences of a state
takeover of an insurer's obligations and, in particular, whether such an insurer
(or its state regulatory agency) could or would honor all of the insurer's
contractual obligations including any outstanding insurance contracts insuring
the timely payment of principal and interest on municipal securities. The Fund
cannot predict the impact which such events might have on the market values of
such municipal security. In the event of a default by an insurer on its
obligations with respect to any municipal securities in the Fund's portfolio,
the Fund would look to the issuer and/or guarantor of the relevant municipal
securities for payments of principal and interest and such issuer and/or
guarantor may not be rated AAA by S&P. Accordingly, the Fund could be exposed to
greater risk of non-payment in such circumstances which could adversely affect
the Fund's net asset value and the market price per Share. Alternatively, the
Fund could elect to dispose of such municipal securities; however, the market
prices for such municipal securities may be lower than the Fund's purchase price
for them and the Fund could sustain a capital loss as a result.

Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Shares.

AMBAC Indemnity Corporation. AMBAC Indemnity is a Wisconsin-domiciled stock
insurance corporation regulated by the Insurance Department of the State of
Wisconsin and licensed to do business in 50 states and the District of Columbia.
On December 31, 1991, AMBAC Indemnity had admitted assets of approximately
$1,431,000,000, total liabilities of approximately $684,400,000 and statutory
capital of approximately $830,000,000. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory

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<PAGE> 462

contingency reserve. AMBAC Indemnity was formerly a wholly-owned subsidiary of
Citicorp Financial Guaranty Holdings, Inc. ("Holdings") (formerly known as AMBAC
Inc.), a financial holding company and itself a wholly-owned subsidiary of
Citibank, N.A. ("Citibank"). According to Best Insurance Report (1991 edition),
AMBAC Indemnity's aggregate exposure under all Class I (municipal bond
insurance) financial guaranty bonds, the only class set forth therein, in force
as of December 31, 1990 was $86,200,000,000.

On May 1, 1991, AMBAC Inc. ("AMBAC Inc."), a financial holding company formed
by Holdings, registered for sale with the Securities and Exchange Commission
17,600,000 shares of its common stock. The registration statement with respect
to such sale was declared effective on July 11, 1991. As a result of the sale,
Citibank, through its affiliate Holdings, owns approximately 49% of the total
equity of AMBAC Inc., with a right to cast 20% of the total number of votes of
all shares of outstanding common stock of AMBAC Inc. until such time as
Citibank, including its affiliates, reduces its equity ownership to less than
25% of AMBAC Inc. (at which time the shares owned by it become non-voting). As
of the date of the consummation of the sale of common stock, AMBAC Indemnity
became a direct wholly owned subsidiary of AMBAC Inc. The Wisconsin Insurance
Department has stated that the sale of common stock described herein does not
require its prior approval. Both Moody's and S&P have reaffirmed that the sale
of the common stock of AMBAC Inc. does not affect AMBAC Indemnity's triple-A
claims-paying ability ratings.

AMBAC Indemnity has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC Indemnity has been and will be assumed by a number
of foreign and domestic unaffiliated reinsurers.

Copies of AMBAC Indemnity's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC Indemnity. The address
of AMBAC Indemnity's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.

DESCRIPTION OF MUNICIPAL SECURITIES RATINGS

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:

1. DEBT

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.

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

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

1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

2. Nature of and provisions of the obligation;

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

<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
</TABLE>

B-15
<PAGE> 463

<TABLE>
<S> <C>
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.

CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.

CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.

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

<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
</TABLE>

B-16
<PAGE> 464

<TABLE>
<S> <C>
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.

* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.

NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>

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) are generally regarded as eligible for bank investment. In
addition, 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
generally.

2. MUNICIPAL NOTES

A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.

-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

Note rating symbols are as follows:

<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) 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.
</TABLE>

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<PAGE> 465

<TABLE>
<S> <C>
SP-3 Speculative capacity to pay principal and interest.
</TABLE>

3. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest-quality obligations to 'D' for the lowest. These
categories are as follows:

A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.

B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.

C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.

A commercial paper rating is not a recommendation to purchase, sell a security. The
ratings are based on current information furnished to S&P by the issuer or obtained by
S&P from other sources it considers reliable. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of, such information.
</TABLE>

4. TAX-EXEMPT DUAL RATINGS

MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:

1. LONG-TERM MUNICIPAL BONDS

B-18
<PAGE> 466

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

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

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

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

CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.

2. SHORT-TERM EXEMPT NOTES

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<PAGE> 467

MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.

SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.

3. TAX-EXEMPT COMMERCIAL PAPER

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

Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.

Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.

Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.

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

OFFICERS AND TRUSTEES

TRUSTEES

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<PAGE> 468

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

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<PAGE> 469

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
</TABLE>

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<PAGE> 470

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.

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<PAGE> 471

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
- --------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>

B-24
<PAGE> 472

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
- -------------------------------- ------------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy................ $ 21,968 $ 45 $2,500 $62,362
Philip G. Gaughan............... 21,928 996 2,500 63,250
Donald C. Miller................ 23,768 2,017 2,500 62,178
Jack A. Nelson.................. 23,858 520 2,500 62,362
Jerome L. Robinson.............. 23,801 832 2,500 58,475
Wayne W. Whalen................. 17,553 339 2,500 49,875
</TABLE>

- ---------------
(1) Messrs. McDonnell and Powell, trustees of the Trust are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its 1994 fiscal year.

(2) The Registrant is Van Kampen American Capital Tax Free Trust (the "Trust")
which currently is comprised of 8 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 8 series during such series' fiscal year ended December 31,
1994. Beginning in October 1994, each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation. The total
combined amount of deferred compensation (including interest) accrued with
respect to each trustee from the Fund Complex (as defined herein) as of
December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr. Miller $14,553;
Mr. Nelson $14,737 and Mr. Robinson $13,725.

(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant. The
amounts in this column are the retirement benefits accrued during the Fund's
fiscal year ended December 31, 1994.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.

(5) As of December 31, 1994 the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual funds
in the Fund Complex during the calendar year ended December 31, 1994. The VK
Adviser also serves as investment adviser for other investment companies;
however, with the exception of Messrs. Powell, McDonnell and Whalen, such
investment companies do not have the same trustees as the Fund Complex.
Combining the Fund Complex with other investment companies advised by the VK
Adviser, Mr. Whalen received Total Compensation of $161,850.

As of July 17, 1995, the trustees and officers as a group owned less than 1%
of the shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

To the knowledge of the Fund, as of July 17, 1995 no person owned of record or
beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Richard K. Bolen, 4000 Club House Drive,
Champaign, IL 61821-9281, 15%; and Robert J. Holuba, Stanley J. Holuba TR,
Angela Holuba Term Trust, FBO Angela Holuba DTD 7/28/87, 2 Hackensack Avenue,
Kearny, NJ 07032-4611, 19%.

B-25
<PAGE> 473

INVESTMENT ADVISORY AND OTHER SERVICES

The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 11% of the common stock of VK/AC
Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.

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

The advisory agreement will continue in effect from year to year if
specifically approved by the Trustees of the Trust, of which the Fund is a
separate series, (or by the Fund's shareholders) and by the disinterested
Trustees in compliance with the requirements of the 1940 Act. The agreement may
be terminated without penalty upon 60 days written notice by either party and
will automatically terminate in the event of assignment.

The investment advisory agreement specifies that the Adviser will reimburse
each of the Funds for annual expenses of such Funds which exceed the most
stringent limit prescribed by any State in which the Fund's shares are offered
for sale. Currently, the most stringent limit in any State would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of any of the Funds.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $5,028,401, $4,796,312 and $3,877,766, respectively.

OTHER AGREEMENTS.

B-26
<PAGE> 474

services are expected to enable the Fund to more closely monitor and maintain
its accounts and records. The Fund shares with the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor in
the cost of providing such services, with 25% of such costs shared
proportionately based on the number of outstanding classes of securities per
Fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $31,650, $19,250 and $18,300, respectively,
representing the VK Adviser's cost of providing accounting services.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $25,100, $22,700 and $11,300, respectively,
representing Van Kampen American Capital's cost of providing legal services.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services is made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital funds distributed by
the Distributor, shared such costs proportionately among themselves based upon
their respective net asset values.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $597,765, $423,425 and $359,270, respectively,
representing the Distributor's cost of providing certain support services.

CUSTODIAN AND INDEPENDENT AUDITORS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firms' professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the

B-27
<PAGE> 475

Fund's net assets. Any research benefits derived are available for all clients
of the investment adviser. Since statistical and other research information is
only supplementary to the research efforts of the Adviser and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to materially reduce its expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters.

If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.

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

TAX STATUS OF THE FUND

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
STRATEGIC INSIGHT. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

B-28
<PAGE> 476

The public offering price of Class A Shares for purchasers choosing the
initial sales charge alternative is equal to the net asset value plus an initial
sales charge which is a variable percentage of the offering price depending upon
the amount of the sale. The net asset value will be determined as described in
the Prospectus under "Net Asset Value." It is the responsibility of an investor,
or an investor's broker, dealer or financial intermediary, to promptly forward
payment to the Fund for shares being purchased.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein collectively as the Plans. The Plans provide that the
Fund may spend a portion of the Fund's average daily net assets attributable to
each class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."

Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement or Selling Agreement. To the
extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.

B-29
<PAGE> 477

with respect to either class of shares without approval by a vote of a majority
of the outstanding voting shares of such class, and all material amendments to
either of the Plans must be approved by the Trustees and also by the
disinterested Trustees. Each of the Plans may be terminated with respect to
either class of shares at any time by a vote of a majority of the disinterested
Trustees or by a vote of a majority of the outstanding voting shares of such
class.

For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $2,804,735, $270,245 and $46,842 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $2,469,995 and $63,660
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares and Class B Shares, respectively. For the year ended December 31,
1994, the Fund has reimbursed the Distributor $208,207 and $8,129 for
advertising expenses, and $58,830 and $7,493 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

PERFORMANCE INFORMATION

CLASS A SHARES

The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1994 was (10.66%); (ii) the five year period ended December 31, 1994 was 5.41%;
(iii) the ten year period ended December 31, 1994 was 8.72%; and (iv) the period
from December 14, 1984 (the commencement of investment operations of the Fund)
through December 31, 1994 was 8.85%.

The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.44%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 8.50%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.73%.

The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 133.54%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 144.98%.

CLASS B SHARES

The average total return, including payment of CDSC, with respect to the Class
B Shares for (i) the one year period ended December 31, 1994 was (10.58%) and
(ii) the approximately one year, eight month period from May 1, 1993 (the
commencement of distribution) through December 31, 1994 was (2.99%).

The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.94%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 7.72%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.04%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (4.94%).

B-30
<PAGE> 478

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (1.53%).

CLASS C SHARES

The average total return, including payment of CDSC, with respect to the Class
C Shares for (i) the one year period ended December 31, 1994 was (7.87%) and
(ii) the approximately one year, five month period from August 13, 1993
(commencement of distribution) through December 31, 1994 was (3.18%).

The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.94%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 7.72%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.03%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.47%).

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.47%).

B-31
<PAGE> 479

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Independent Auditors' Report

The Board of Trustees and Shareholders of
Van Kampen Merritt Insured Tax Free Income Fund:

We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt Insured Tax Free Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the periods presented. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Van Kampen Merritt Insured Tax Free Income Fund as of December 31,
1994, 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 periods presented, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 7, 1995

B-32
<PAGE> 480

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds
Alabama 2.7%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA Insd) ......... AAA Aaa 6.000% 10/01/14 $ 2,116,057
2,000 Alabama Wtr Pollutn Ctl Auth Ser A (AMBAC Insd) .................... AAA Aaa 6.750 8/15/17 2,025,480
4,700 Huntsville, AL Hlthcare Auth Hlthcare Fac Rev Ser B (MBIA Insd) ..... AAA Aaa 6.500 6/01/13 4,645,057
5,500 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd) ..................... AAA Aaa 7.700 12/01/19 5,783,910
1,450 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd) ..................... AAA Aaa 5.250 12/01/20 1,183,824
2,930 Montgomery, AL BMC Spl Care Fac Fin Auth Rev Baptist
Med Cent (AMBAC Insd) <F3> .......................................... A A 9.750 10/01/15 3,089,626
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur
Genl Hosp Rfdg (Connie Lee Insd) ................................... AAA NR 6.250 3/01/13 5,235,945
2,100 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd) ................. AAA Aaa 6.400 4/01/13 2,062,074
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd) ................. AAA Aaa 6.500 4/01/16 2,365,728
500 Pelham, AL Single Family Mtg Rev Warrants (AMBAC Insd) <F3> ......... AAA Aaa 6.250 11/01/22 474,130
1,600 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FSA Insd) ............ AAA Aaa 6.800 8/15/14 1,613,888
------------
30,595,719
------------
Alaska 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd) ........................ AAA Aaa 6.600 12/01/07 2,395,930
------------
Arizona 1.1%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd) <F3> .................. AAA Aaa 6.250 9/01/10 10,858,320
2,000 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Ser A
Irvington Proj Rfdg (FSA Insd) ..................................... AAA Aaa 7.250 7/15/10 2,101,680
------------
12,960,000
------------
California 24.8%
2,000 Alameda Cnty, CA Ctfs Partn Santa Rita Jail Proj Rfdg (MBIA Insd) ... AAA Aaa 5.700 12/01/14 1,781,680
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool A
(Cap Guar Insd) .................................................... AAA Aaa 6.000 12/15/14 2,621,099
2,555 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) .................... AAA Aaa 5.875 8/01/12 2,346,333
1,985 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) .................... AAA Aaa 5.875 8/01/14 1,809,665
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (Inverse Fltg)
(MBIA Insd) ......................................................... AAA Aaa 5.650 6/01/15 4,365,150
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg
(AMBAC Insd) ....................................................,... AAA Aaa 6.700 1/01/13 10,048,800
2,000 California Hsg Fin Agy Rev Multi Unit Rent Hsg Ser C 11
(MBIA Insd) ......................................................... AAA Aaa 6.150 8/01/14 1,884,980
3,655 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (BIGI Insd)... AAA Aaa 8.100 3/01/18 3,947,400
15,000 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/15 13,929,900
16,900 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/16 15,667,483
10,875 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/19 9,962,805
2,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison Coalinga Ser B (MBIA Insd) ................................ AAA Aaa 5.375 12/01/19 1,653,720
15,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA St
Prison Susanville Ser D (Cap Guar Insd) ............................. AAA Aaa 5.250 6/01/15 12,452,700
16,250 California St Pub Wks Brd Lease Rev Var Univ CA Projs Ser A
(AMBAC Insd) ........................................................ AAA Aaa 6.400 12/01/16 15,874,950
600 California St Var Purp (FGIC Insd) .................................. AAA Aaa 6.500 9/01/10 606,996
3,700 California St Var Purp (MBIA Insd) ................................. AAA Aaa 6.000 10/01/10 3,561,102
4,210 California Statewide Cmnty Dev Auth Rev Ctfs Partn Sisters
Charity Leavenworth (MBIA Insd) .................................... AAA Aaa 5.375 12/01/12 3,613,148
</TABLE>

See Notes to Financial Statements

B-33

<PAGE> 481

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$ 9,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt Proj Ser A
Rfdg (MBIA Insd) ....................................................... AAA Aaa 6.000% 8/01/18 $ 8,267,670
10,500 Cerritos, CA Pub Fin Auth Rev Los Coyotes Redev Proj Ln
Ser A (AMBAC Insd) ..................................................... AAA Aaa 5.750 11/01/22 9,153,060
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd) ............................. AAA Aaa 6.200 9/01/18 2,822,820
200 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
(Prerefunded @ 07/01/96) (AMBAC Insd) .................................. AAA Aaa 9.000 7/01/13 214,946
220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
Ser 3 (BIGI Insd) ...................................................... AAA Aaa 8.000 7/01/18 237,582
10,280 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
Ser 3 (Prerefunded @ 07/01/98) (BIGI Insd) ............................. AAA Aaa 8.000 7/01/18 11,269,039
2,595 Contra Costa Cnty, CA Santn Dist No 7 A Ctfs Partn Sub-Delta
Diablo Fin Corp (Prerefunded @ 12/01/98) (BIGI Insd) ................... AAA Aaa 7.600 12/01/08 2,826,578
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refinancing
(FGIC Insd) ............................................................ AAA Aaa 6.300 9/01/12 1,221,250
2,500 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refinancing
(FGIC Insd) ............................................................ AAA Aaa 6.500 9/01/22 2,449,425
5,000 East Bay, CA Muni Util Dist Wtr Sys Rev Sub Rfdg (MBIA Insd) ........... AAA Aaa 5.000 6/01/14 4,069,850
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd) ............... AAA Aaa * 11/15/21 960,765
1,166 Kern Cnty, CA Home Mtg Rev Ser A (MBIA Insd) ........................... AAA Aaa * 3/01/14 146,332
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ......... AAA Aaa 6.500 11/01/12 998,830
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ......... AAA Aaa 6.625 11/01/22 6,950,720
4,750 Lodi, CA Unified Sch Dist Ctfs Partn Edl Support Cent Rfdg
(FSA Insd) ............................................................. AAA Aaa 5.750 9/01/20 4,168,600
500 Long Beach, CA Redev Agy Downtown Redev Proj A
(Prerefunded @ 11/01/98) (AMBAC Insd) .................................. AAA Aaa 7.750 11/01/10 546,495
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev
Rfdg (AMBAC Insd) ..................................................... AAA Aaa 6.000 12/01/16 3,235,400
6,420 Los Angeles, CA Unified Sch Dist Ctfs Partn Multi Ppty Proj
Rfdg (FSA Insd) ....................................................... AAA Aaa 5.625 11/01/13 5,705,775
4,750 Los Angeles, CA Wastewtr Sys Rev Ser A Rfdg (MBIA Insd) ................ AAA Aaa 5.700 6/01/20 4,137,108
24,820 Los Angeles, CA Wastewtr Sys Rev Ser C Rfdg (MBIA Insd) ................ AAA Aaa 5.600 6/01/20 21,318,395
1,000 Los Angeles, CA Wastewtr Sys Rev Ser D Rfdg (FGIC Insd) ................ AAA Aaa 5.200 11/01/21 803,710
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg
(MBIA Insd) ............................................................ AAA Aaa 6.700 10/01/21 7,523,100
1,000 Martinez, CA Ctfs Partn Martinez Pub Impt Corp
(Prerefunded @ 12/01/98) (AMBAC Insd) .................................. AAA Aaa 7.700 12/01/18 1,100,800
5,830 Moreno Vly, CA Spl Tax Towngate Cmnty Fac 87-1-A Rfdg
(Cap Guar Insd) ....................................................... AAA Aaa 5.875 12/01/15 5,238,313
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area
No 1 Rfdg (MBIA Insd) .................................................. AAA Aaa 6.250 3/01/19 12,880,096
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg
(AMBAC Insd) ........................................................... AAA Aaa 6.000 6/01/17 2,574,257
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A
(MBIA Insd) ............................................................ AAA Aaa 6.000 9/01/15 2,574,335
2,180 Petaluma, CA City Jt Union High Sch Dist Formerly Petaluma, CA
City High Sch Dist Ser B (FGIC Insd) .................................. AAA Aaa * 8/01/18 419,214
1,000 Riverside, CA Swr Rev (Prerefunded @ 08/01/97) (AMBAC Insd) ............ AAA Aaa 7.700 8/01/12 1,073,180
4,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA Insd) ......... AAA Aaa 5.750 8/15/13 3,618,360
</TABLE>

See Notes to Financial Statements
B-34

<PAGE> 482

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd) .............................................................. AAA Aaa 5.310% 7/01/16 $ 11,162,682
1,775 San Jose, CA Redev Agy Tax Alloc Merged Area Redev Proj
(MBIA Insd) .............................................................. AAA Aaa 6.000 8/01/15 1,654,016
3,900 San Mateo Cnty, CA Tran Dist Sales Tax Rev Crossover Ser A
Rfdg (MBIA Insd) ......................................................... AAA Aaa 5.200 6/01/14 3,265,704
3,720 San Pablo, CA Redev Agy Sub Tax Alloc Merged Proj Area
(FGIC Insd) .............................................................. AAA Aaa 5.250 12/01/16 3,063,941
2,500 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement
Proj Ser A (AMBAC Insd) .................................................. AAA Aaa 6.875 11/15/14 2,555,725
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC Insd) ........... AAA Aaa 6.200 7/02/09 979,420
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd) ........................... AAA Aaa 6.200 9/01/09 1,958,360
2,050 Santee, CA Redev Agy Tax Alloc Santee Cmnty Redev Proj Rfdg
(MBIA Insd) .............................................................. AAA Aaa 7.900 11/01/13 2,153,197
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA Insd) .............. AAA Aaa 5.750 8/01/14 2,244,291
2,000 Stockton, CA Hlth Fac Rev Saint Joseph Med Cent Ser A
(MBIA Insd) .............................................................. AAA Aaa 5.625 6/01/13 1,778,160
4,460 University of CA Rev Hsg Sys Ser A Rfdg (MBIA Insd) ...................... AAA Aaa 5.500 11/01/18 3,793,988
5,000 University of CA Rev Multi Purp Proj Ser C Rfdg (AMBAC Insd) ............. AAA Aaa 5.000 9/01/23 3,855,150
10,000 University of CA Rev Multi Purp Proj Ser D (MBIA Insd) ................... AAA Aaa 6.250 9/01/13 9,636,700
3,845 Vista, CA Unified Sch Dist Ctfs Partn Ser A Rfdg (FSA Insd) ............. AAA Aaa * 11/01/17 745,430
-------------
283,480,680
-------------
Colorado 4.4%
2,500 Aurora, CO Muni Bldg Corp Rev 1st Mtg Rfdg
(Prerefunded @ 12/01/97) (FGIC Insd) ..................................... AAA Aaa 9.200 12/01/09 2,781,075
300 Colorado Hlth Fac Auth Rev Kaiser Permanente Med Care
Proj Ser A (AMBAC Insd) .................................................. AA NR 9.125 8/01/15 309,450
12,750 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A (FSA Insd) ............ AAA Aaa 7.250 2/15/16 13,287,667
2,340 Colorado Hlth Fac Auth Rev Sisters Of Charity Hlth Care Ser A
(MBIA Insd) .............................................................. AAA Aaa 6.000 5/15/13 2,232,220
1,000 Colorado Wtr Res & Pwr Dev Auth Small Wtr Res Rev Ser A
(Prerefunded @ 11/01/00) (FGIC Insd) ..................................... AAA Aaa 7.400 11/01/10 1,086,900
3,100 Denver, CO City & Cnty Excise Tax Rev (Prerefunded @ 09/01/97)
(BIGI Insd) .............................................................. AAA Aaa 8.250 9/01/07 3,349,023
795 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA Insd) ......... AAA Aaa 8.875 10/01/13 845,570
1,000 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(AMBAC Insd) ............................................................. A- Baa2 6.125 1/01/07 945,210
1,500 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(AMBAC Insd) ............................................................. AAA Aaa 6.125 1/01/07 1,499,820
2,050 Thornton, CO Rfdg (FGIC Insd) ............................................ AAA Aaa * 12/01/11 690,174
1,700 Thornton, CO Rfdg (FGIC Insd) ............................................ AAA Aaa * 12/01/15 436,220
9,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ................... AAA Aaa 6.250 11/15/12 8,809,740
13,900 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ................... AAA Aaa 6.400 11/15/22 13,598,231
-------------
49,871,300
-------------
Connecticut 0.1%
1,700 Connecticut St Hlth & Edl Fac Auth Rev Newington Childrens
Hosp Ser A (MBIA Insd) ................................................... AAA Aaa 6.250 7/01/15 1,644,750
-------------
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 483

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
District of Columbia 0.4%
$ 4,140 District of Columbia Hsg Fin Agy Mtg Rev Ser D Rfdg (MBIA Insd) ........ AAA Aaa 6.375% 7/01/24 $ 3,892,262
250 District of Columbia Ser B Rfdg (MBIA Insd) ............................ AAA Aaa * 6/01/04 137,883
500 District of Columbia Ser C (Prerefunded @ 06/01/98)
(AMBAC Insd)............................................................ AAA Aaa 8.000 6/01/08 547,080
------------
4,577,225
------------
Florida 3.7%
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/03 1,154,723
690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/04 793,431
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/05 1,362,817
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/06 1,493,560
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/07 1,610,730
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd) <F3> ..................... AAA Aaa 12.000 10/01/04 3,026,165
305 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd) ............................................................ AAA Aaa 7.650 9/01/10 321,321
1,090 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd) ............................................................ AAA Aaa 7.700 9/01/24 1,159,171
1,000 Hillsborough Cnty, FL Indl Dev Auth Indl Dev Rev Univ
Cmnty Hosp (MBIA Insd) ................................................ AAA Aaa 5.750 8/15/14 915,340
1,000 Hillsborough Cnty, FL Indl Dev Auth Indl Dev Rev Univ
Cmnty Hosp (MBIA Insd) ................................................ AAA Aaa 6.500 8/15/19 1,001,120
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd) ...................... AAA Aaa * 10/01/13 303,030
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA Insd) .......... AAA Aaa 9.013 4/01/20 3,920,000
1,000 Marion Cnty, FL Hosp Dist Rev Rfdg Munroe Regl Med Cent
(FGIC Insd) ............................................................ AAA Aaa 6.250 10/01/12 980,980
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA Insd) ........... AAA Aaa 8.290 10/29/21 5,617,500
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd) .............. AAA Aaa 6.375 8/01/15 1,978,400
1,090 Sarasota Cnty, FL Util Sys Rev (FGIC Insd) ............................. AAA Aaa 6.500 10/01/14 1,094,295
5,000 Sunrise, FL Pub Svcs Tax Rev (Prerefunded @ 10/01/97)
(AMBAC Insd) ........................................................... AAA Aaa 8.750 10/01/04 5,519,650
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd) ....................................................... AAA Aaa 6.625 12/01/13 10,151,600
------------
42,403,833
------------
Georgia 4.0%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ..... AAA Aaa 6.250 12/01/08 1,249,913
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ..... AAA Aaa 6.250 12/01/17 1,670,078
2,560 Burke Cnty, GA Dev Auth Pollutn Ctl Rev Oglethorpe Pwr Co
Vogtle Proj Rfdg (MBIA Insd) ........................................... AAA Aaa 7.800 1/01/08 2,852,096
2,500 Fayette Cnty, GA Wtr Rev (Prerefunded @ 10/01/97) (AMBAC Insd) ......... AAA Aaa 8.000 10/01/20 2,711,750
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd) .................. AAA Aaa * 1/01/07 3,084,185
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd) .................. AAA Aaa * 1/01/08 2,099,452
3,000 Georgia Muni Elec Auth Pwr Rev Genl Ser B (FGIC Insd) .................. AAA Aaa 6.250 1/01/12 2,932,530
8,430 Metropolitan Atlanta Rapid Tran Auth GA Sales Tax Rev Bonds
Ser J (Prerefunded @ 07/01/98) (FGIC Insd) ............................. AAA Aaa 8.000 7/01/18 9,238,268
14,550 Municipal Elec Auth GA Spl Oblig Fifth Crossover Ser Proj One
(AMBAC Insd) ........................................................... AAA Aaa 6.400 1/01/13 14,473,030
5,000 Municipal Elec Auth, GA Spl Oblig Fifth Crossover Proj Ser One
(MBIA Insd) ............................................................ AAA Aaa 6.500 1/01/17 4,959,550
------------
45,270,852
------------
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 484

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hawaii 1.1%
$12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd) ....................... AAA Aaa 6.400% 7/01/08 $ 12,852,760
-------------
Illinois 12.0%
565 Aurora, IL Hosp Fac Rev Mercy Cent Hlthcare Svcs Ser A
(AMBAC Insd) ........................................................... AAA Aaa 9.625 10/01/09 594,742
15,200 Chicago, IL Brd Edl Lease Ctfs Ser A Rfdg (MBIA Insd) ................. AAA Aaa 6.000 1/01/20 13,815,128
1,000 Chicago, IL Gas Supply Rev Peoples Gas Lt & Coke Proj Ser D
(AMBAC Insd) ........................................................... AA- Aa3 10.250 3/01/15 1,030,760
5,000 Chicago, IL O'Hare Intl Arpt Rev Genl Arpt Second Lien
Ser A Rfdg (MBIA Insd) ................................................. AAA Aaa 6.375 1/01/15 4,811,700
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) .................. AAA Aaa * 1/01/06 1,742,158
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) .................. AAA Aaa * 1/01/07 1,447,830
1,000 Chicago, IL St Univ Rev Aux Fac Sys (MBIA Insd) ........................ AAA Aaa 6.000 12/01/12 936,420
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.400 1/01/01 1,129,140
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) . .......................................................... AAA Aaa 8.750 1/01/03 6,524,192
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) <F3> ....................................................... AAA Aaa 8.750 1/01/04 10,040,751
2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.750 1/01/05 2,942,775
3,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.750 1/01/07 3,626,700
1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor
(AMBAC Insd) ........................................................... AAA Aaa * 12/01/05 643,482
8,280 Cook Cnty, IL Cnty Juvenile Detention A (AMBAC Insd) ................... AAA Aaa * 11/01/08 3,515,274
2,500 Des Plaines, IL Hosp Fac Rev Holy Family Hosp Rfdg
(AMBAC Insd) ........................................................... AAA Aaa 9.250 1/01/14 2,635,825
915 Eastern IL Univ Rev Aux Fac Sys Rfdg (AMBAC Insd) ..................... A- NR 9.500 4/01/16 943,008
11,000 Illinois Dev Fin Auth Pollutn Ctl Rev Con Edison Co Proj Ser D
Rfdg (AMBAC Insd) ..................................................... AAA Aaa 6.750 3/01/15 10,986,580
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A 1st
Mtg Rfdg (MBIA Insd) ................................................... AAA Aaa 7.400 12/01/24 36,898,400
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205
(FSA Insd) ............................................................. AAA Aaa 6.650 2/01/11 2,031,500
1,332 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B
(MBIA Insd) ............................................................ AAA Aaa 7.900 8/15/03 1,379,339
20 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B
(Prerefunded @ 08/15/95) (MBIA Insd) ................................... AAA Aaa 7.900 8/15/03 20,735
210 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg
(MBIA Insd) ............................................................ AAA Aaa 7.900 8/15/03 237,445
500 Illinois Hlth Fac Auth Rev Grant Hosp Chicago Ser A Rfdg
(Prerefunded @ 06/01/95) (AMBAC Insd) .................................. AAA NR 10.300 6/01/13 522,235
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg)
(MBIA Insd) ............................................................ AAA Aaa 9.117 6/19/15 4,831,250
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse Fltg)
(MBIA Insd) ............................................................ AAA Aaa 9.111 5/01/21 4,981,250
3,400 Illinois Hlth Fac Auth Rev Rush Presb Saint Luke Hosp
(Inverse Fltg) (MBIA Insd) ............................................. AAA Aaa 9.361 10/01/24 3,302,250
1,230 Kankakee Cnty, IL Sch Dist No 111 Kankakee (AMBAC Insd) ................ AAA Aaa 6.375 1/01/12 1,208,118
1,660 Lake Cnty, IL Sch Dist No 037 Cap Appreciation (Cap Guar Insd) ......... AAA Aaa * 12/01/12 480,719
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 485

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

13,504,186
----------
Iowa 0.0%
30 Iowa Hsg Fin Auth Single Family Hsg Rev Ser 1984 A (AMBAC Insd) ........ AA Aaa 10.750 9/01/04 31,194
----------

Kansas 3.6%
36,250 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) ............................................................ AAA Aaa 7.000 6/01/31 36,808,975
4,500 Kansas City, KS Util Sys Rev Rfdg & Impt (FGIC Insd) ................... AAA Aaa 6.375 9/01/23 4,403,880
----------
41,212,855
----------
Kentucky 0.2%
500 Daviess Cnty, KY Hosp Rev Mercy Hlth Care Sys Ser A
(Prerefunded @ 09/01/97) (AMBAC Insd) .................................. AAA Aaa 9.750 9/01/11 554,115
500 Jefferson Cnty, KY Pollutn Ctl Rev Louisville Gas & Elec
Ser 85 A (AMBAC Insd) ................................................. AA Aa2 9.250 7/01/15 520,350
105 Kentucky Cntys, 1987 Single Family Mtg Rev Rfdg (MBIA Insd) ............ AAA Aaa 8.625 9/01/15 112,677
1,500 Kentucky Econ Dev Fin Auth Hosp Fac Rev Saint Claire Med Cent
Proj Rfdg (Connie Lee Insd) ............................................ AAA NR 5.625 9/01/21 1,268,055
----------
2,455,197
----------
Louisiana 1.6%
4,065 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee Insd) .................................. AAA NR 6.375 12/01/12 3,903,498
5,530 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee Insd) .................................. AAA NR 6.500 12/01/18 5,309,685
3,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac C Our Lady
Med Cent (BIGI Insd) ................................................... AAA Aaa 8.200 12/01/15 3,440,902
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985
Ser A (MBIA Insd) ...................................................... AAA Aaa * 9/15/16 993,900
13,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ............................ AAA Aaa * 2/01/15 3,129,880

</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 486

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Louisiana (Continued)
$ 2,000 Saint Tammany Parish, LA Hosp Svc Dist No 2 Hosp Rev
Slidell Mem Hosp & Med Cent (Connie Lee Insd) .......................... AAA NR 6.250% 10/01/14 $ 1,872,900
------------
18,650,765
------------
Maine 0.5%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC Insd).......... AA- NR 9.200 8/01/99 2,765,290
1,000 Maine Hlth & Higher Edl Fac Auth Rev Ser A (FSA Insd) ................. AAA Aaa 6.000 7/01/24 894,070
1,750 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) ................. AAA Aaa 7.100 7/01/14 1,787,222
------------
5,446,582
------------
Maryland 0.4%
1,000 Anne Arundel Cnty, MD Mtg Rev Mill Pond Apts Ser A Rfdg
(MBIA Insd) ............................................................ AAA Aaa 6.000 1/01/26 879,740
500 Baltimore, MD Ctfs Partn Ser A Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd) ............................................................ AAA Aaa 7.200 4/01/10 542,675
195 Baltimore, MD Ctfs Partn Ser C Rfdg (MBIA Insd) ........................ AAA Aaa 7.200 4/01/10 204,106
55 Baltimore, MD Ctfs Partn Ser C Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd) ............................................................ AAA Aaa 7.200 4/01/10 59,694
2,000 Maryland St Hlth & High Edl Fac Auth Rev Kernan Hosp Issue
(Connie Lee Insd) ...................................................... AAA NR 6.000 7/01/14 1,852,920
40 Maryland St Hlth & High Edl Fac Auth Rev North Arundel
Hosp Issue (Prerefunded @ 07/01/98) (BIGI Insd) ........................ AAA Aaa 7.875 7/01/21 43,638
700 Prince Georges Cnty, MD Ctfs Partn Real Estate Acquisition
Prog II (MBIA Insd) .................................................... AAA Aaa 6.000 9/15/14 658,378
------------
4,241,151
------------
Massachusetts 1.6%
1,550 Chelsea, MA Sch Proj Ln Act 1948 (AMBAC Insd) .......................... AAA Aaa 6.000 6/15/14 1,455,295
3,240 Massachusetts St Hlth & Edl Fac Auth Rev MA Genl Hosp Ser F1
(AMBAC Insd) ........................................................... AAA Aaa 6.000 7/01/15 3,006,104
1,400 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser A
(Prerefunded @ 07/01/98) (MBIA Insd) ................................... AAA Aaa 7.875 7/01/18 1,530,116
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp
Ser B-1 (MBIA Insd) .................................................... AAA Aaa 6.250 8/15/14 1,638,494
4,000 Massachusetts St Hlth & Edl Fac Auth Rev Newton-Wellesley
Hosp Issue C (BIGI Insd) ............................................... AAA Aaa 8.000 7/01/18 4,258,240
6,800 Massachusetts St Hsg Fin Agy Hsg Proj Ser A (AMBAC Insd) ............... AAA Aaa 6.150 10/01/15 6,268,920
------------
18,157,169
------------
Michigan 2.2%
1,535 Airport, MI Cmnty Sch Dist Rfdg (AMBAC Insd) .......................... AAA Aaa 5.125 5/01/22 1,230,333
2,325 Bay City, MI (AMBAC Insd) .............................................. AAA Aaa * 6/01/15 598,316
1,000 Bay City, MI (AMBAC Insd) .............................................. AAA Aaa * 6/01/16 239,790
3,785 Chippewa Vly, MI Schs Rfdg (FGIC Insd) ................................. AAA Aaa 5.125 5/01/15 3,146,130
500 Kalkaska, MI Pub Sch (AMBAC Insd) ..................................... AAA Aaa * 5/01/15 129,385
14,750 Livonia, MI Pub Sch Dist Ser II (Crossover Refunding @ 05/01/07)
(FGIC Insd) ............................................................ AAA Aaa * 5/01/14 3,855,797
21,000 Livonia, MI Pub Sch Dist Ser II (Crossover Refunding @ 05/01/07)
(FGIC Insd) ............................................................ AAA Aaa * 5/01/21 3,379,950
2,015 Marquette, MI Area Pub Sch Rfdg (FGIC Insd) ............................ AAA Aaa 5.250 5/01/21 1,647,081
1,580 Michigan High Edl Fac Auth Rev Ltd Oblig Hope College Proj
Rfdg (Connie Lee Insd) ................................................. AAA NR 7.000 10/01/13 1,616,609
1,680 Michigan High Edl Fac Auth Rev Ltd Oblig Hope College Proj
Rfdg (Connie Lee Insd) ................................................. AAA NR 7.000 10/01/14 1,717,565
</TABLE>

See Notes to Financial Statements

B-39
<PAGE> 487

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michigan (Continued)
$ 2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Inverse Fltg)
(AMBAC Insd) ............................................................ AAA Aaa 3.160% 4/01/04 $ 1,618,720
1,500 Monroe Cnty, MI Pollutn Ctl Rev Insd Detroit Edison Co Ser A
(AMBAC Insd) ............................................................ AAA Aaa 9.625 12/01/15 1,604,325
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec
(Prerefunded @ 05/01/07) (MBIA Insd) .................................... AAA Aaa * 5/01/17 1,117,250
1,500 Romulus, MI Cmnty Sch Rfdg (FSA Insd) .................................. AAA Aaa * 5/01/15 388,155
2,210 Romulus, MI Cmnty Sch Rfdg (FSA Insd) .................................. AAA Aaa * 5/01/16 532,875
3,490 Warren, MI Cons Sch Dist Ser 2 Rfdg (FGIC Insd) ......................... AAA Aaa 5.250 5/01/21 2,856,425
------------
25,678,706
------------
Minnesota 0.6%
5,600 Minneapolis-Saint Paul, MN Hsg & Redev Auth Hlthcare Sys Rev
Hlth One Ser A (MBIA Insd) ............................................. AAA Aaa 7.400 8/15/11 5,963,608
1,000 Plymouth, MN Hlth Fac Rev Westhealth Proj Ser A (Cap Guar Insd) ......... AAA Aaa 6.250 6/01/16 958,990
------------
6,922,598
------------
Mississippi 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment
Fac Ser A Rfdg (FGIC Insd) .............................................. AAA Aaa 8.500 2/01/13 1,195,840
------------
Missouri 3.4%
2,700 Central MO St Univ Rev Hsg Sys (Prerefunded @ 07/01/01)
(MBIA Insd) ............................................................. AAA Aaa 7.000 7/01/14 2,927,502
6,290 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd) ...................... AAA Aaa * 12/01/16 688,503
920 Jackson Cnty, MO Pub Fac Auth Insd Leasehold Rev Cap Impts
Proj Rfdg & Impt (MBIA Insd) ............................................ AAA Aaa 6.125 12/01/15 878,756
2,015 Jackson Cnty, MO Single Family Mtg Rev Tax Exempt
Multiplier Bond (AMBAC Insd) ............................................ AAA Aaa * 12/01/16 217,338
2,250 Kansas City, MO Muni Assistance Corp Rev Leasehold H Roe
Bartle Ser B1 Rfdg (AMBAC Insd) ......................................... AAA Aaa 7.125 4/15/16 2,313,900
2,150 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @ 02/15/01) (FGIC Insd) ....................... AAA Aaa 6.800 2/15/06 2,298,802
2,350 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @ 02/15/01) (FGIC Insd) ....................... AAA Aaa 6.875 2/15/21 2,525,427
2,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Heartland Hlth Sys
Proj (AMBAC Insd) ....................................................... AAA Aaa 6.350 11/15/17 1,935,480
7,650 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlthcare Proj
Rfdg (MBIA Insd) ........................................................ AAA Aaa 6.250 6/01/16 7,323,651
9,250 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlthcare Proj
Rfdg (Prerefunded @ 06/01/98) (BIGI Insd) ............................... AAA Aaa 7.750 6/01/16 10,040,690
1,000 Missouri St Hlth & Edl Fac Auth Rev Saint Lukes Hosp KC Proj
Rfdg & Impt (Prerefunded @ 11/15/01) (MBIA Insd) ........................ AAA Aaa 7.000 11/15/13 1,086,590
680 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd) ................ AAA Aaa 9.250 10/01/16 712,654
1,550 Saint Louis, MO Muni Fin Corp Leasehold Rev Rfdg & Impt
(FGIC Insd) ............................................................. AAA Aaa 6.250 2/15/12 1,517,993
1,000 Saint Louis, MO Wtr Rev Rfdg & Impt (FGIC Insd) ......................... AAA Aaa 6.000 7/01/14 943,060
2,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd) .................................. AAA Aaa 6.200 6/01/10 1,974,500
1,000 Springfield, MO Sch Dist No R12 Ser B Rfdg (FGIC Insd) ................. AAA Aaa 9.500 3/01/07 1,286,420
------------
38,671,266
------------
</TABLE>

See Notes to Financial Statements

B-40

<PAGE> 488

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nebraska 0.3%
$ 1,250 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd) ......................................................... AAA Aaa 6.900% 9/01/11 $ 1,291,775
1,500 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd) ......................................................... AAA Aaa 7.000 9/01/21 1,531,995
500 Lancaster Cnty, NE Hosp Auth No 1 Hosp Rev Bryan Mem Hosp Proj
(MBIA Insd) .......................................................... AAA Aaa 6.700 6/01/22 501,345
------------
3,325,115
------------
Nevada 1.4%
3,200 Clark Cnty, NV Pollutn Ctl Rev NV Pwr Co Proj Ser B Rfdg
(FGIC Insd) .......................................................... AAA Aaa 6.600 6/01/19 3,161,536
2,040 Las Vegas, NV Ltd Tax Remarketed Rfdg (Prerefunded @ 11/01/97)
(MBIA Insd) .......................................................... AAA Aaa 7.625 11/01/02 2,194,958
3,320 Reno, NV Hosp Rev Dates Saint Marys Hosp Inc Ser B
(Prerefunded @ 01/01/00) (BIGI Insd) ................................. AAA Aaa 7.750 7/01/15 3,673,480
5,035 Reno, NV Hosp Rev Dates Saint Marys Hosp Inc Ser C
(Prerefunded @ 01/01/00) (BIGI Insd) ................................. AAA Aaa 7.750 7/01/15 5,571,077
3,720 Washoe Cnty, NV Impt & Rfdg (MBIA Insd) .............................. AAA Aaa * 7/01/07 1,664,105
------------
16,265,156
------------
New Hampshire 0.2%
2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC Insd) ......... AAA Aaa 9.292 11/01/17 2,500,000
------------
New Jersey 1.7%
3,120 Atlantic Cnty, NJ Util Auth Swr Rev Formerly Atlantic Cnty, NJ
Sewage Auth Ser A Rfdg (AMBAC Insd) .................................. AAA Aaa 5.850 1/15/15 2,881,320
1,950 Camden Cnty, NJ Muni Util Auth Swr Rev (FGIC Insd) ................... AAA Aaa 8.250 12/01/17 2,114,950
1,250 Middlesex Cnty, NJ Ctfs Partn (MBIA Insd) ............................ AAA Aaa 6.000 8/15/14 1,183,775
1,000 New Jersey Hlthcare Fac Fin Auth Rev Burdette Tomlin Mem Hosp
Ser C (Prerefunded @ 07/01/97) (FGIC Insd) ........................... AAA Aaa 8.125 7/01/12 1,082,210
1,750 New Jersey Hlthcare Fac Fin Auth Rev Saint Clares Riverside
Med Cent (MBIA Insd) ................................................ AAA Aaa 5.750 7/01/14 1,586,358
3,700 New Jersey Hlthcare Fac Fin Newark Bethlehem Israel Med Cent
(FSA Insd) ........................................................... AAA Aaa 6.000 7/01/16 3,454,912
3,940 New Jersey St Hsg & Mtg Fin Agy Rev (MBIA Insd) ...................... AAA Aaa 8.100 10/01/17 4,127,386
2,250 Sussex Cnty, NJ Muni Util Auth Solid Waste Rev Ser A
(Prerefunded @ 12/01/98) (BIGI Insd) ................................. AAA Aaa 7.875 12/01/13 2,476,530
------------
18,907,441
------------
New York 4.0%
2,000 New York City Ser B (MBIA Insd) ..................................... AAA Aaa 6.950 8/15/12 2,059,260
1,750 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ................................................. AAA Aaa 6.375 11/15/14 1,714,160
5,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A
(Prerefunded @ 06/15/97) (BIGI Insd) ................................. AAA Aaa 8.750 6/15/10 5,501,150
2,250 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B
(Prerefunded @ 06/15/97) (MBIA Insd) ................................. AAA Aaa 8.250 6/15/16 2,449,845
1,000 New York City Ser A (Prerefunded @ 11/01/97) (AMBAC Insd) ............ A- Aaa 8.500 11/01/12 1,100,500
50 New York City Ser C Subser C-1 (MBIA Insd) .......................... AAA Aaa 6.250 8/01/09 49,199
1,500 New York St Dorm Auth Rev March Of Dimes Fndtn
(Prerefunded @ 07/01/97) (AMBAC Insd) ................................ AAA Aaa 9.200 7/01/12 1,661,010
675 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (MBIA Insd) .................................................... AAA Aaa 7.750 8/15/10 725,821
435 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (Prerefunded @ 02/15/00) (MBIA Insd) ........................... AAA Aaa 7.750 8/15/10 482,063

</TABLE>

See Notes to Financial Statements

B-41
<PAGE> 489

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York (Continued)
$ 1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Ser E
(Cap Guar Insd) ......................................................... AAA Aaa 6.500% 8/15/15 $ 980,990
13,600 New York St Med Care Fac Fin Agy Rev New York Hosp Mtg Ser A
(AMBAC Insd) <F2> ....................................................... AAA Aaa 6.750 8/15/14 13,631,960
50 New York St Med Care Fac Fin Agy Rev Saint Marys Hosp Private
Ins Pgm (Prerefunded @ 11/01/95) (AMBAC Insd) ........................... AAA Aaa 8.375 11/01/14 52,403
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A
(MBIA Insd) ............................................................. AAA Aaa 6.625 3/15/06 3,497,988
1,500 New York St Thruway Auth Hwy & Brdg Trust Fd Ser B (FGIC Insd) ......... AAA Aaa 6.000 4/01/14 1,411,830
6,000 New York St Thruway Auth Svc Contract Rev Loc Hwy & Brdg
(MBIA Insd) ............................................................. AAA Aaa 5.750 4/01/13 5,522,340
5,400 New York St Urban Dev Corp Rev Youth Fac (MBIA Insd) .................... AAA Aaa 5.700 4/01/14 4,868,478
------------
45,708,997
------------
North Carolina 0.2%
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd) ............... AAA Aaa 6.625 6/01/14 1,255,363
500 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev Ser A
(AMBAC Insd) ............................................................ AAA Aaa 12.900 1/01/97 571,410
------------
1,826,773
------------
North Dakota 0.1%
1,250 Grand Forks, ND Hlthcare Fac Rev United Hosp Oblig Group
(MBIA Insd) ............................................................. AAA Aaa 6.100 12/01/09 1,203,763
------------
Ohio 2.6%
3,600 Akron Bath Copley, OH St Twp Hosp Dist Rev Akron Genl Med
Cent Proj (AMBAC Insd) .................................................. AAA Aaa 6.500 1/01/19 3,561,192
1,000 Akron Bath Copley, OH St Twp Hosp Dist Rev Childrens Hosp
Med Cent Akron (Prerefunded @ 11/15/00) (AMBAC Insd) .................... AAA Aaa 7.450 11/15/20 1,104,310
250 Clermont Cnty, OH Hosp Fac Rev Mercy Hlth Care Sys Prov
Cincinnati Ser A (AMBAC Insd) ........................................... AAA Aaa 9.750 9/01/13 262,628
5,000 Clermont Cnty, OH Hosp Fac Rev Muni (Inverse Fltg)
(AMBAC Insd) ............................................................ AAA Aaa 9.641 10/05/21 4,968,750
2,010 Cleveland, OH (MBIA Insd) ............................................... AAA Aaa 6.500 11/15/09 2,041,376
2,285 Cleveland, OH (MBIA Insd) ............................................... AAA Aaa 6.500 11/15/10 2,314,956
1,000 Cuyahoga Cnty, OH Hosp Rev Richmond Heights Genl Hosp
Rfdg (AMBAC Insd) ...................................................... B NR 10.000 12/01/11 988,610
8,625 Hamilton, OH Elec Sys Mtg Rev Mtg City of Hamilton Ser B
(Prerefunded @ 10/15/98) (FGIC Insd) .................................... AAA Aaa 8.000 10/15/22 9,499,489
2,100 Lakota, OH Local Sch Dist (AMBAC Insd) .................................. AAA Aaa 6.250 12/01/14 2,062,347
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison A Rfdg
(FGIC Insd) ............................................................. AAA Aaa 7.450 3/01/16 2,629,675
650 Richland Cnty, OH Hosp Impt Mtg Rev Mansfield Genl Hosp Rfdg
(AMBAC Insd) ............................................................ AAA Aaa 9.375 12/01/09 687,375
------------
30,120,708
------------
Oklahoma 0.5%
1,000 Norman, OK Regl Hosp Auth Hosp Rev (MBIA Insd) ......................... AAA Aaa 6.900 9/01/21 1,003,740
4,700 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA Insd) ........... AAA Aaa 7.200 3/01/11 4,845,371
------------
5,849,111
------------
Oregon 0.7%
2,750 Emerald Peoples Util Dist OR Elec Sys Rev Rfdg (AMBAC Insd) ............. AAA Aaa 5.750 11/01/16 2,513,885
2,145 Marion County, OR Union High Sch Dist No 007
Silverton (FSA Insd)..................................................... AAA Aaa 6.000 6/01/13 2,052,808
</TABLE>

See Notes to Financial Statements

B-42
<PAGE> 490

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Oregon (Continued)
$ 1,960 Tillamook Cnty, OR (FGIC Insd) .......................................... AAA Aaa 6.250% 1/01/14 $ 1,927,915
1,000 Wasco Cnty, OR Vets Home (FSA Insd) ..................................... AAA Aaa 6.200 6/01/13 981,120
------------
7,475,728
------------
Pennsylvania 3.2%
5,500 Berks Cnty, PA Muni Auth Hosp Rev Reading Hosp & Med Cent
Proj B (MBIA Insd) ...................................................... AAA Aaa 6.000 10/01/14 5,115,055
2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp
Proj B (FGIC Insd) ..................................................... AAA Aaa 6.125 7/01/10 1,919,880
1,000 Emmaus, PA Genl Auth Rev Var Loc Govt Bond Pool Pgm Ser B Var
Rate Cpn (BIGI Insd) .................................................... AAA Aaa 8.000 5/15/18 1,049,420
2,050 Harrisburg, PA Redev Auth Rev Cap Impt Ser A (FGIC Insd) ................ AAA Aaa 7.875 11/02/16 2,209,900
1,000 Montgomery Cnty, PA High Edl & Hlth Auth Hosp Rev Abington
Mem Hosp Ser A Rfdg (AMBAC Insd) ........................................ AAA Aaa 6.000 6/01/22 904,520
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg
(MBIA Insd) ............................................................. AAA Aaa 6.700 12/01/21 3,757,162
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne
Cnty Cmnty College (AMBAC Insd) <F2> .................................... AAA Aaa 6.625 8/15/15 992,680
12,600 Pennsylvania Intergvtl Coop Auth Spl Tax Rev City Of Philadelphia
Funding Pgm (MBIA Insd) ................................................. AAA Aaa 5.600 6/15/15 11,068,092
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd) ................. AAA Aaa 6.375 7/01/14 2,192,490
1,000 Saint Mary Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Saint Mary Ser A (MBIA Insd) ............................................ AAA Aaa 6.500 7/01/22 975,010
1,000 Saint Mary Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth Sys
Ser B (MBIA Insd) ....................................................... AAA Aaa 6.500 7/01/12 993,800
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist
Ser D (MBIA Insd) <F2> .................................................. AAA Aaa 6.500 2/01/14 993,440
4,500 Upper Darby, PA Sch Dist (AMBAC Insd) ................................... AAA Aaa 5.250 2/15/13 3,867,120
1,250 Westmoreland Cnty, PA Indl Dev Auth Rev Hosp Westmoreland
Hlth Sys Ser A (AMBAC Insd) ............................................. AAA Aaa 6.000 7/01/22 1,133,475
------------
37,172,044
------------
Rhode Island 1.7%
2,000 Rhode Island St Hlth & Edl Bldg Corp Rev Higher Edl Fac
Roger Williams (Connie Lee Insd) ........................................ AAA NR 7.250 11/15/24 2,046,120
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp
(Inverse Fltg) (FGIC Insd) .............................................. AAA Aaa 8.701 8/15/21 17,932,500
------------
19,978,620
------------
South Carolina 1.2%
1,500 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) ........................ AAA Aaa 6.875 6/01/14 1,529,595
3,000 Florence Cnty, SC Pub Fac Corp Ctfs Partn Law Enforcement Proj
Civic Cent (Prerefunded @ 03/01/00) (AMBAC Insd) ........................ AAA Aaa 7.600 3/01/14 3,286,890
1,000 Greenville, SC Hosp Sys Hosp Fac Rev Ser A
(Prerefunded @ 05/01/98) (FGIC Insd) .................................... AAA Aaa 7.800 5/01/15 1,085,490
1,500 Greenwood Cnty, SC Hosp Rev Self Mem Hosp Ser A
(Prerefunded @ 10/01/97) (BIGI Insd) .................................... AAA Aaa 8.375 10/01/17 1,641,270
1,700 Greenwood Cnty, SC Hosp Rev Self Mem Hosp Ser B
(Prerefunded @ 10/01/97) (BIGI Insd) .................................... AAA Aaa 8.375 10/01/17 1,860,106
2,000 Lexington Cnty, SC Sch Dist No 1 Ctfs Partn Pgm Ser A
(FGIC Insd) ............................................................. AAA Aaa 6.000 9/01/09 1,935,460

</TABLE>

See Notes to Financial Statements

B-43
<PAGE> 491

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

3,320 Johnson City, TN Sch Sales Tax (AMBAC Insd) ................................ AAA Aaa 6.700 5/01/18 3,327,404
----------
5,607,404
----------
Texas 5.2%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) ................................................. AAA Aaa 8.838 1/03/22 2,793,750
12,500 Austin, TX Util Sys Rev Comb Ser A Rfdg (MBIA Insd) ....................... AAA Aaa * 11/15/10 4,411,875
9,000 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj B Rfdg
(BIGI Insd) ............................................................... AAA Aaa 8.250 5/01/15 9,747,810
6,515 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj C Rfdg
(BIGI Insd) ............................................................... AAA Aaa 8.100 5/01/19 7,029,229
4,040 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg
(MBIA Insd) ............................................................... AAA Aaa 7.700 7/01/11 4,294,359
7,000 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/07 3,106,670
7,250 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/08 2,875,350
8,600 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/09 3,164,800
3,500 East TX Criminal Justice Fac Fin Corp Mtg Rev City Of Henderson
Proj (AMBAC Insd) ......................................................... AAA Aaa 6.125 11/01/14 3,328,290
29,765 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC Insd) ............... AAA Aaa * 11/01/16 2,918,458
2,000 Grand Prarie, TX Hlth Fac Dev Corp Hosp Rev Dallas-Ft Worth
Med Cent (Prerefunded @ 11/01/95) (AMBAC Insd) ............................ AAA Aaa 9.500 11/01/10 2,113,660
7,250 Harris Cnty, TX Toll Rd Sr Lien Rfdg (FGIC Insd) .......................... AAA Aaa 5.000 8/15/16 5,838,135
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC Insd) ............ AAA Aaa * 8/15/07 2,068,443
1,400 Lubbock, TX Hlth Fac Dev Corp Hosp Rev Methodist Hosp Ser A
Rfdg (AMBAC Insd) ........................................................ AAA Aaa 5.875 12/01/13 1,281,266
3,000 Northeast Hosp Auth TX Rev Northeast Med Cent Hosp Ser A
Rfdg (FGIC Insd) .......................................................... AAA Aaa 6.125 7/01/11 2,875,440
1,975 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser A (FGIC Insd) ......... AAA Aaa 5.000 9/01/15 1,579,526
400 Texas Muni Pwr Agy Rev (Prerefunded @ 09/01/95) (AMBAC Insd) .............. A+ NR 7.000 9/01/14 406,352
----------
59,833,413
----------
Utah 1.3%
5,085 Beaver Cnty, UT Sch Dist (Prerefunded @ 11/01/02) (AMBAC Insd) ............ AAA Aaa 6.625 11/01/12 5,355,420
1,680 Payson City, UT Cnty UT Elec Pwr Rev (BIGI Insd) .......................... AAA Aaa 8.000 8/15/03 1,829,285
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd) ........................... AAA Aaa 10.375 9/15/15 1,065,923
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd) .............................................................. AAA Aaa 9.515 5/15/20 3,395,000
500 Uintah Cnty, UT Pollutn Ctl Rev Natl Rural Util Deseret Ser 1984 F
(Prerefunded @ 06/15/01) (AMBAC Insd) ..................................... AA- Aaa 10.000 6/15/09 614,785
</TABLE>

See Notes to Financial Statements

B-44
<PAGE> 492

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

Total Long-Term Investments 99.2%
(Cost $1,137,588,569) <F1>................................................................................... 1,134,367,200
Short-Term Investments at Amortized Cost 1.1% ............................................................... 13,300,000
Liabilities in Excess of Other Assets (0.3%) ............................................................... (3,917,393)
--------------

Net Assets 100%.............................................................................................. $1,143,749,807
--------------
*Zero coupon bond

<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is
$1,137,588,569; the aggregate gross unrealized appreciation is $30,579,096 and
the aggregate gross unrealized depreciation is $33,668,935, resulting in net
unrealized depreciation including open futures transactions of $3,089,839.
<F2>Securities purchased on a when issued or delayed delivery basis.
<F3>Assets segregated as collateral for when issued or delayed delivery
purchase commitments and open futures transactions.
</FN>

</TABLE>

See Notes to Financial Statements

B-45
<PAGE> 493

Van Kampen Merritt Insured Tax Free Income Fund
- ------------------------------------------------------------------------------

Statement of Assets and Liabilities
December 31, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $1,137,588,569) <F1>......................................... $ 1,134,367,200
Short-Term Investments <F1>..................................................................... 13,300,000
Receivables:
Interest........................................................................................ 18,601,231
Investments Sold................................................................................ 2,350,354
Fund Shares Sold................................................................................ 750,384
Margin on Futures <F5>.......................................................................... 78,257
Other........................................................................................... 32,230
----------------
Total Assets.................................................................................... 1,169,479,656
----------------
Liabilities:
Payables:
Investments Purchased........................................................................... 16,998,148
Custodian Bank.................................................................................. 3,083,680
Fund Shares Repurchased ....................................................................... 2,280,231
Income Distributions............................................................................ 1,776,026
Investment Advisory Fee <F2>.................................................................... 404,896
Accrued Expenses................................................................................ 1,186,868
----------------
Total Liabilities............................................................................... 25,729,849
----------------
Net Assets...................................................................................... $ 1,143,749,807
----------------
Net Assets Consist of:
Paid in Surplus <F3> ........................................................................... $ 1,153,762,159
Accumulated Undistributed Net Investment Income................................................. 37,808
Net Unrealized Depreciation on Investments...................................................... (3,089,839)
Accumulated Net Realized Loss on Investments ................................................... (6,960,321)
----------------
Net Assets...................................................................................... $ 1,143,749,807
----------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $1,110,223,546 and
63,181,868 shares of beneficial interest issued and outstanding) <F3>........................... $ 17.57
Maximum sales charge (4.65%* of offering price)................................................. .86
----------------
Maximum offering price to public ............................................................... $ 18.43
----------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $30,025,336 and
1,709,564 shares of beneficial interest issued and outstanding) <F3>............................ $ 17.56
----------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,498,975 and
199,168 shares of beneficial interest issued and outstanding) <F3>.............................. $ 17.57
----------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,950 and
111 shares of beneficial interest issued and outstanding) <F3> ................................. $ 17.57
----------------
*On sales of $100,000 or more, the sales charge will be reduced. Effective January 16, 1995, the
maximum sales charge was changed to 4.75%.
</TABLE>

See Notes to Financial Statements

B-46

<PAGE> 494

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Statement of Operations
For the Year Ended December 31, 1994
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest.......................................................................................... $ 79,444,087
Amortization of Premium........................................................................... (588,068)
----------------
Total Income...................................................................................... 78,856,019
----------------
Expenses:
Investment Advisory Fee <F2>...................................................................... 5,028,401
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $2,804,735, $270,245,
$46,842 and $5, respectively) <F6> ............................................................... 3,121,827
Shareholder Services ............................................................................. 1,726,834
Legal <F2>........................................................................................ 110,910
Insurance <F1>.................................................................................... 69,569
Trustees Fees and Expenses <F2>................................................................... 34,965
Other............................................................................................. 750,655
----------------
Total Expenses.................................................................................... 10,843,161
----------------
Net Investment Income............................................................................. $ 68,012,858
----------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................... $ 677,790,889
Cost of Securities Sold........................................................................... (671,450,339)
----------------
Net Realized Gain on Investments (Including realized loss on expired option
transactions of $161,820 and realized gain on futures transactions of $10,301,737)................ 6,340,550
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period........................................................................... 151,851,300
End of the Period (Including unrealized appreciation on open futures transactions of $131,530).... (3,089,839)
----------------
Net Unrealized Depreciation on Investments During the Period...................................... (154,941,139)
----------------
Net Realized and Unrealized Loss on Investments................................................... $ (148,600,589)
----------------
Net Decrease in Net Assets from Operations........................................................ $ (80,587,731)
----------------
</TABLE>

See Notes to Financial Statements

B-47
<PAGE> 495

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 68,012,858 $ 64,573,993
Net Realized Gain/Loss on Investments....................................... 6,340,550 (13,356,769)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (154,941,139) 78,379,445
---------------- ----------------
Change in Net Assets from Operations ....................................... (80,587,731) 129,596,669
---------------- ----------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (66,735,561) (64,718,505)
Class B Shares.............................................................. (1,291,269) (289,225)
Class C Shares.............................................................. (222,010) (32,671)
Class D Shares.............................................................. (92) -0-
---------------- ----------------
(68,248,932) (65,040,401)
---------------- ----------------
Distributions from Net Realized Gain on Investments:
Class A Shares.............................................................. -0- (8,548)
---------------- ----------------
Total Distributions......................................................... (68,248,932) (65,048,949)
---------------- ----------------
Net Change in Net Assets from Investment Activities......................... (148,836,663) 64,547,720
---------------- ----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 145,835,342 245,132,660
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 46,938,996 44,478,881
Cost of Shares Repurchased.................................................. (155,893,379) (98,393,313)
---------------- ----------------
Net Change in Net Assets from Capital Transactions.......................... 36,880,959 191,218,228
---------------- ----------------
Total Increase/Decrease in Net Assets....................................... (111,955,704) 255,765,948
Net Assets:
Beginning of the Period..................................................... 1,255,705,511 999,939,563
---------------- ----------------
End of the Period (Including undistributed net investment income of
$37,808 and $273,882, respectively)......................................... $ 1,143,749,807 $ 1,255,705,511
---------------- ----------------
</TABLE>

See Notes to Financial Statements

B-48

<PAGE> 496

Van Kampen Merritt Insured Tax Free Income Fund
- ------------------------------------------------------------------------------

Notes to Financial Statements
December 31, 1994
- ------------------------------------------------------------------------------

1. Significant Accounting Policies
Van Kampen Merritt Insured Tax Free Income Fund (the "Fund") was incorporated
under Maryland law on July 1, 1984, and is registered as a diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on December 14, 1984 and was
reorganized as a sub-trust of Van Kampen Merritt Tax Free Fund (the "Trust"), a
Massachusetts business trust as of February 22, 1988. On May 1, 1993, the Fund
commenced the distribution of its Class B shares. The distribution of the
Fund's Class C shares, which were initially introduced as Class D shares and
subsequently renamed Class C shares on March 7, 1994, commenced on August 13,
1993. The distribution of the Fund's fourth class of shares, Class D shares,
commenced on March 14, 1994.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are
valued at amortized cost.

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" and "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.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.

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.

The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $12,774 which will expire on December 31, 2001.
Net realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.

E. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

F. Insurance Expenses-The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.

2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (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 $100 million... .500 of 1%
Next $150 million.... .450 of 1%
Next $250 million.... .425 of 1%
Over $500 million.... .400 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended December 31, 1994, the Fund recognized expenses of
approximately $654,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal and
certain shareholder services to the Fund.

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.

At December 31, 1994, VKAC owned 100 shares each of Classes B, C and D.

B-49

<PAGE> 497

Van Kampen Merritt Insured Tax Free Income Fund
- ------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994
- ------------------------------------------------------------------------------

3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $1,116,662,803, $33,016,541,
$4,080,719 and $2,096 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 6,865,303 $ 128,013,313
Class B....................... 806,590 15,092,543
Class C....................... 151,670 2,727,397
Class D....................... 111 2,089
----------- ----------------
Total Sales .................. 7,823,674 $ 145,835,342
----------- ----------------
Dividend Reinvestment:
Class A....................... 2,505,940 $ 45,999,603
Class B....................... 41,052 750,173
Class C....................... 10,294 189,213
Class D....................... -0- 7
----------- ----------------
Total Dividend Reinvestment... 2,557,286 $ 46,938,996
----------- ----------------
Repurchases:
Class A....................... (8,130,723) $ (148,756,423)
Class B....................... (185,936) (3,383,930)
Class C....................... (213,783) (3,753,026)
Class D....................... -0- -0-
----------- ----------------
Total Repurchases............. (8,530,442) $ (155,893,379)
----------- ----------------
</TABLE>

At December 31, 1993, paid in surplus aggregated $1,091,406,310, $20,557,755
and 4,917,135 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 11,298,011 $ 219,727,668
Class B........................ 1,045,650 20,514,210
Class C........................ 249,650 4,890,782
----------- ---------------
Total Sales ................... 12,593,311 $ 245,132,660
----------- ---------------
Dividend Reinvestment:
Class A........................ 2,269,086 $ 44,286,925
Class B........................ 8,399 165,603
Class C........................ 1,337 26,353
----------- ---------------
Total Dividend Reinvestment ... 2,278,822 $ 44,478,881
----------- ---------------
Repurchases:
Class A........................ (5,037,816) $ (98,271,255)
Class B........................ (6,191) (122,058)
Class C........................ -0- -0-
----------- ---------------
Total Repurchases.............. (5,044,007) $ (98,393,313)
----------- ---------------

</TABLE>

Contingent Deferred
Sales Charge
<TABLE>
<CAPTION>
Year of Redemption Class B Class C Class D
- ---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>

For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$648,100 and CDSC on the redeemed shares of Classes B, C and D of approximately
$56,300. Sales charges do not represent expenses of the Fund.

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $588,246,932 and
$656,359,642, respectively.

5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

B-50
<PAGE> 498

Van Kampen Merritt Insured Tax Free Income Fund
- -------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

Transactions in options for the year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Contracts Premium
- -----------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 . 500 $ 161,820
Options Expired (Net) ............ (500) (161,820)
-------- -----------
Outstanding at December 31, 1994 . -0- $ -0-
-------- -----------

</TABLE>

The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.

Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Contracts
<S> <C>
Outstanding at December 31, 1993... 800
Futures Opened..................... 25,685
Futures Closed..................... (25,750)
--------
Outstanding at December 31, 1994... 735
--------
</TABLE>

The futures contracts outstanding as of December 31, 1994, and the descriptions
and unrealized appreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Contracts Appreciation
- ----------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Mar 1995 - Sells to Open... 300 $ 72,576
Municipal Bond Futures
Mar 1995 - Sells to Open... 435 58,954
--------- ------------
735 $ 131,530
--------- ------------
</TABLE>

C. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

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

Annual fees under the Plans of up to .30% each of Class A and Class D shares and
1.00% each of Class B and Class C shares are accrued daily. Included in these
fees for the year ended December 31, 1994, are payments to VKAC of approximately
$512,700.

B-51

<PAGE> 499

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
AUGUST 1, 1995

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
MUNICIPAL SECURITIES.......................................................... 3
TEMPORARY INVESTMENTS......................................................... 5
REPURCHASE AGREEMENTS......................................................... 5
FUTURES CONTRACTS AND RELATED OPTIONS......................................... 6
INVESTMENT RESTRICTIONS....................................................... 9
TRUSTEES AND EXECUTIVE OFFICERS............................................... 10
INVESTMENT ADVISORY AGREEMENT................................................. 14
DISTRIBUTOR................................................................... 16
DISTRIBUTION PLANS............................................................ 16
TRANSFER AGENT................................................................ 18
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 18
DETERMINATION OF NET ASSET VALUE.............................................. 19
PURCHASE AND REDEMPTION OF SHARES............................................. 20
EXCHANGE PRIVILEGE............................................................ 23
CHECK WRITING PRIVILEGE....................................................... 24
FEDERAL TAX INFORMATION....................................................... 24
TRUST PERFORMANCE............................................................. 27
OTHER INFORMATION............................................................. 28
FINANCIAL STATEMENTS.......................................................... 28
APPENDIX...................................................................... 29
</TABLE>
<PAGE> 500

GENERAL INFORMATION

Van Kampen American Capital Tax-Exempt Trust (the "Trust") was originally
organized as a business trust under the laws of Massachusetts on December 5,
1984 and reorganized under the laws of Delaware on July 31, 1995. The Trust is
comprised of two Funds: the Van Kampen American Capital High Yield Municipal
Fund ("High Yield Municipal Fund") and the Van Kampen American Capital Insured
Municipal Fund ("Insured Municipal Fund").

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.

VKAC offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight, July 1995. VKAC's roots in money management extend back to
1926. Today, we manage or supervise more than $50 billion in mutual funds,
closed-end funds and unit investment trusts -- assets which have been entrusted
to VKAC in more than 2 million investor accounts. VKAC has one of the largest
research teams (outside of the rating agencies) in the country, with 86 analysts
devoted to various specializations. Each of our high yield analysts, based
either in San Francisco, Chicago, Houston or Boston, has the responsibility to
cover a specific region of the country. This regional focus enables each high
yield analyst to provide more specialized coverage of the market and alert the
portfolio manager to issues of local importance.

As of July 6, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any portfolio
except the following:

HIGH YIELD MUNICIPAL FUND

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER JULY 6, 1995 SHARES OWNERSHIP
--------------------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
PaineWebber Inc. 1,115,985 shares Class B 5.48%
Genises Jungco -- Lincoln Harbor owned of record
1000 Harbor Blvd., 6th Floor 146,205 shares Class C 5.47%
Weehawken, NJ 07087-6727 owned of record

Smith Barney, Inc. 9,356,192 shares Class A 20.16%
388 Greenwich Street, 22nd Floor owned of record
New York, NY 10013-2375 Class B 41.85%
8,528,851 shares
owned of record Class C 69.27%
1,852,843 shares
owned of record
</TABLE>

2
<PAGE> 501

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER JULY 6, 1995 SHARES OWNERSHIP
--------------------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith 2,437,543 shares Class A 5.37%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
1,766,097 shares Class B 8.67%
owned of record

INSURED MUNICIPAL FUND

Vernon & Ruth Maddox 6,509 shares of Class C 5.50%
JT TEN beneficial
18402 Tomlinson Dr. interest
Lutz, FL 33549-5485

Harold J. & Julienne M. Ladouceur 6,281 shares of Class C 5.30%
JT TEN beneficial
5604 Wopod Forest Dr. interest
Tampa, FL 33615-3909

R. T. Kelley 22,274 shares Class C 18.83%
P.O. Box 237 of beneficial
Canadian, TX 79014-0237 interest

B&C Construction 19,142 shares Class C 16.18%
A Corporation of beneficial
4950 Valenty interest
Chubbuck, ID 83202-1850

Donaldson Lufkin Jenrette Secs. 217,452 shares Class B 6.66%
P.O. Box 2052 owned of record
Jersey City, NJ 07303-2052

National Financial Services 296,221 shares Class B 9.07%
P.O. Box 3730 owned of record
New York, NY 10008-3730

Smith Barney, Inc. 557,149 shares Class A 9.22%
388 Greenwich Street, 22nd Floor owned of record Class B 8.49%
New York, NY 10013-2375 277,303 shares Class C 24.58%
owned of record
29,074 shares
owned of record

Merrill Lynch Pierce Fenner & Smith 330,792 shares Class A 5.47%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
</TABLE>

With respect to the High Yield Municipal Fund, the term "Adviser" refers to
both the Adviser, Van Kampen American Capital Asset Management, Inc., and the
Subadviser, Van Kampen American Capital Advisors, Inc. With respect to the
Insured Municipal Fund, the term "Adviser" refers only to Van Kampen American
Capital Asset Management, Inc.

MUNICIPAL SECURITIES

Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development obligations are issued by or
on behalf of public authorities to finance various privately-

3
<PAGE> 502

operated facilities. Such obligations are included within the term Municipal
Securities if the interest paid thereon is exempt from federal income tax.
Municipal Securities also include short-term tax-exempt municipal obligations
such as tax anticipation notes, bond anticipation notes, revenue anticipation
notes, and variable rate demand notes.

The two principal classifications of Municipal Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. Industrial
development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund may also
include "moral obligation" bonds which are normally issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.

When a Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.

Each Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper provided that such obligations have the ratings
described in the Prospectus for such Fund or if unrated are of comparable
quality as determined by the Adviser. Demand notes are obligations which
normally have a stated maturity in excess of one year, but permit any holder to
demand payment of principal plus accrued interest upon a specified number of
days' notice. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. The issuer of such notes
normally has a corresponding right, after a given period, to prepay at its
discretion the outstanding principal of the note plus accrued interest upon a
specified number of days' notice to the noteholders. Demand notes may also
include Municipal Securities subject to a Stand-By Commitment as described in
the Prospectus. The interest rate on a demand note may be based on a known
lending rate, such as a bank's prime rate, and may be adjusted when such rate
changes, or the interest rate on a demand note may be a market rate that is
adjusted at specified intervals. Participation interests in variable rate demand
notes will be purchased only if in the opinion of counsel interest income on
such interests will be tax-exempt when distributed as dividends to shareholders.

Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of a Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the obligations
of the issuers of such Municipal Securities may be subject to applicable
bankruptcy, insolvency and similar laws and court decisions affecting the rights
of creditors generally, and such laws, if any, which may be enacted by Congress
or state legislatures imposing a moratorium on the payment of principal and
interest or imposing other constraints or conditions on the payments of
principal of and interest on Municipal Securities.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Trust to pay "exempt interest" dividends may be adversely affected and the Trust
would re-evaluate its investment objective and policies and consider changes in
its structure.

4
<PAGE> 503

ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES

Additional risks of lower rated Municipal Securities include limited
liquidity and secondary market support. As a result, the prices of lower rated
Municipal Securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer,
an industry or lower rated Municipal Securities generally could reduce market
liquidity for such securities and make their sale by the Fund more difficult, at
least in the absence of price concessions. Reduced liquidity could also create
difficulties in accurately valuing such securities at certain times. The high
yield bond market has grown primarily during a period of long economic expansion
and it is uncertain how it would perform during an economic downturn. An
economic downturn or an increase in interest rates could severely disrupt the
market for high yield bonds and adversely affect the value of outstanding bonds
and the ability of the issuers to repay principal and interest. The Fund will
take such actions as it considers appropriate in the event of anticipated
financial difficulties, default or bankruptcy of either the issuer or any
Municipal Security owned by the Fund or the underlying source of funds for debt
service. Such action may include retaining the services of various persons and
firms to evaluate or protect any real estate, facilities or other assets
securing any such obligation or acquired by the Fund as a result of any such
event. The Fund incurs additional expenditures in taking protective action with
respect to Fund obligations in default and assets securing such obligations.
Investment in lower rated Municipal Securities are not generally meant for
short-term investment.

TEMPORARY INVESTMENTS

The taxable securities in which the Funds may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. In the case of each Fund, the taxable securities are subject to the
same rating requirements applicable to the Municipal Securities in which the
Fund invests, including, in the case of unrated securities, that such
obligations be in the opinion of the Adviser of comparable quality.

United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following: (a)
the full faith and credit of the United States Government, (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the United
States Government, (c) discretionary authority of the United States Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
Federal Land Banks, and the Farmer's Home Administration. A Fund may not invest
in any security issued by a commercial bank unless the bank is organized and
operating in the United States and has total assets of at least $500 million and
is a member of the Federal Deposit Insurance Corporation.

REPURCHASE AGREEMENTS

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

5
<PAGE> 504

including: (a) possible decline in the value of the underlying security during
the period while the Trust seeks to enforce its rights thereto, (b) possible
lack of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights. A Fund will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid security owned by such Fund, exceeds ten percent of the
value of its net assets. See "Investment Practices -- Repurchase Agreements" in
the Prospectus for further information.

FUTURES CONTRACTS AND RELATED OPTIONS

FUTURES CONTRACTS

A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a price-weighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.

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

For example, when a Fund purchases a futures contract and the price of the
underlying security or index rises, that position increases in value, and the
Fund receives from the broker a variation margin payment equal to that increase
in value. Conversely, where the Fund purchases a futures contract and the value
of the underlying security or index declines, the position is less valuable, and
the Fund is required to make a variation margin payment to the broker.

Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. A Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.

6
<PAGE> 505

incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.

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

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

7
<PAGE> 506

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

OPTIONS ON FUTURES CONTRACTS

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

ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS

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

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

8
<PAGE> 507

INVESTMENT RESTRICTIONS

The Trust has adopted the following restrictions which, along with its
investment objective, cannot be changed with respect to any Fund without
approval by the holders of a majority of the outstanding shares of such Fund.
Such majority is defined by the 1940 Act as the lesser of (i) 67% or more of the
voting securities present in person or by proxy at the meeting, if the holders
of more than 50% of the outstanding voting securities are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities. In
addition to the fundamental investment limitations set forth in the Prospectus,
a Fund shall not:

1. Purchase or hold securities of any issuer if any of the Trust's
officers or trustees, or officers or directors of its investment
adviser, who beneficially owns more than 1/2% of the securities of that
issuer, together own beneficially more than five percent of the
securities of such issuer;

2. Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Trust of an
initial or maintenance margin in connection with futures contracts or
related option transactions is not considered the purchase of a
security on margin;

3. Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire at no additional
cost securities identical to those sold short;

4. Make loans of money or securities to other persons except that a Fund
may purchase or hold debt instruments and enter into repurchase
agreements in accordance with its investment objective and policies;

5. Invest in real estate or mortgage loans (but this shall not prevent a
Fund from investing in Municipal Securities or Temporary Investments
secured by real estate or interests therein); or in interests in oil,
gas, or other mineral exploration or development programs; or in any
security not payable in United States currency;

6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including repurchase
agreements maturing in more than seven days;

7. Invest in securities of any one issuer with a record of less than three
years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Securities (except that in the case of industrial
revenue bonds, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid), if such investments by
any Fund would exceed five percent of the value of its total assets
(taken at market value);

8. Underwrite the securities of other issuers, except insofar as a Fund
may be deemed an underwriter under the Securities Act of 1933 by virtue
of disposing of portfolio securities;

9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined herein), stand-by commitments, futures
contracts described in the next paragraph, and options on such
contracts;

10. Purchase or sell commodities or commodity contracts except that a Fund
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of Municipal
Securities;

11. Invest more than five percent of its total assets at market value at
the time of purchase in the securities of any one issuer (other than
obligations of the United States Government or any agency or
instrumentality thereof);

12. Borrow money, except that a Fund may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the Fund at
market value at the time of borrowing. Any such borrowing may be
secured provided

9
<PAGE> 508

that not more than ten percent of the total assets of the Fund at
market value at the time of pledging may be used as security for such
borrowings;

13. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall
not apply to Municipal Securities or governmental guarantees of
Municipal Securities; and provided, further, that for the purpose of
this limitation only, industrial development bonds that are considered
to be issued by non-governmental users shall not be deemed to be
Municipal Securities; or

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

Because of the nature of the securities in which the Trust may invest, no
Fund may invest in voting securities, or invest for the purpose of exercising
control or management, or invest in securities of other investment companies. If
a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value will
not constitute a violation of such restriction.

TRUSTEES AND EXECUTIVE OFFICERS

The Trust's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
</TABLE>

10
<PAGE> 509

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by Van Kampen American Capital
Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital, a Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
</TABLE>

11
<PAGE> 510

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Trust by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Trust by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.

The Trust's officers other than Messrs. Godlin, McDonnell, Nyberg and
Piraro are located at 2800 Post Oak Blvd., Houston, Texas 77056. Messrs.
McDonnell, Nyberg and Piraro are located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. Mr. Godlin is located at 40 Broad St., Boston,
Massachusetts 02110.

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH TRUST DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.

Wayne D. Godlin.......... Vice President Vice President of Van Kampen American
Age: 34 Capital Advisors, Inc.; formerly Securities
Analyst and Associate Portfolio Manager of
the Adviser.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.

Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
</TABLE>

12
<PAGE> 511

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH TRUST DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 48 Treasurer investment companies advised by the
Adviser.

Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital. Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.

Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.

Joseph A. Piraro......... Vice President Agent of the Adviser. Employed since 1992
Age: 47 with Van Kampen American Capital Investment
Advisory Corp., an affiliate of the
Adviser. Prior to that time he was employed
by First Chicago Capital Markets.

J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.

The Trustees and Officers of the Trust as a group own less than one percent
of the outstanding shares of the Trust. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Trust during
its last fiscal year. During the fiscal year ending November 30, 1994, Trustees
who were not affiliated with the Adviser or its parent received as a group
$15,738 and $10,514 in trustees' fees from the High Yield Municipal Fund and
Insured Municipal Fund, respectively, in addition to certain out-of-pocket
expenses. Such Trustees also received compensation for serving as directors or
trustees of other investment companies advised by the Adviser as identified in
the notes to the foregoing table. For legal services rendered during the fiscal
year ended November 30, 1994, the Trust paid legal fees of $24,750 and $11,762
for High Yield Municipal Fund and Insured Municipal Fund, respectively, to the
law firm of O'Melveny & Myers, of which Mr. Sheehan is Of Counsel. The firm also
serves as legal counsel to other Van Kampen American Capital Funds.

Additional information regarding compensation paid by the Trust and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Trust is for the most recent
fiscal year and the total compensation shown for the Trust and other related
mutual funds is for the calendar year ended December 31, 1994, is set forth
below. Mr. Powell is not compensated for his service as Trustee because of his
affiliation with the Adviser.

13
<PAGE> 512

COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL
FROM REGISTRANT PENSION OR COMPENSATION
------------------------ RETIREMENT FROM REGISTRANT
HIGH YIELD INSURED BENEFITS ACCRUED AND TRUST
MUNICIPAL MUNICIPAL AS PART OF TRUST COMPLEX PAID TO
NAME OF PERSONS FUND FUND EXPENSES DIRECTORS(1)(5)
- ----------------------------------------- ---------- --------- ---------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan........................ $2,550 $ 1,515 -0- $64,000
Dr. Richard E. Caruso(3)................. 2,550(2) 1,515(2) -0- 64,000
Dr. Roger Hilsman........................ 2,630 1,565 -0- 66,000
David Rees............................... 2,550 1,515 -0- 64,000
Lawrence J. Sheehan...................... 2,670 1,590 -0- 67,000
Dr. Fernando Sisto(3).................... 3,280 1,940 -0- 82,000
William S. Woodside(4)................... 690 395 -0- 18,000
</TABLE>

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

(1) Represents 29 investment company portfolios in the fund complex.

(2) Amount reflects deferred compensation of $2,470 and $1,465 for High Yield
Municipal Fund and Insured Municipal Fund, respectively.

(3) Messrs. Caruso and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Funds is as follows for Dr.
Caruso: High Yield Muni, $6,448; Insured Muni, $4,078; and as follows for
Dr. Sisto; High Yield Muni, $1,525; Insured Muni, $1,086.

(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second, third and fifth columns,
$1,500, $895 and $36,000, respectively, was paid by the Adviser directly.

Beginning July 21, 1995, the Trust pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,562, and $738
and a meeting fee of $45 and $21 per Board meeting plus expenses for High Yield
Municipal Fund and Insured Municipal Fund, respectively. No additional fees are
paid for committee meetings or to the chairman of the board. In order to
alleviate an additional expense that might be caused by the new compensation
arrangement, the trustees have approved a reduction in the compensation per
trustee and have agreed to an aggregate annual compensation cap with respect to
the combined fund complex of $84,000 per trustee until December 31, 1996, based
upon the net assets and the number of Van Kampen American Capital funds as of
July 21, 1995 (except that Mr. Whalen, who is a trustee of 34 closed-end funds
advised by an affiliate of the Adviser, would receive an additional $119,000 for
serving as a trustee of such funds). In addition, the Adviser has agreed to
reimburse the Trust through December 31, 1996 for any increase in the aggregate
trustees' compensation paid by the Trust over their 1994 fiscal year aggregate
compensation.

INVESTMENT ADVISORY AGREEMENT

The Trust and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Trust retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of each Fund's
investment objectives. The Adviser also furnishes at no cost to the Trust
(except as noted herein) the services of sufficient executive and clerical
personnel for the Trust as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation materials.
In addition, the Adviser furnishes at no cost to the Trust the services of a
President of the Trust, one or more Vice Presidents as needed, and a Secretary.

Under the Advisory Agreement, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial

14
<PAGE> 513

officer and the personnel operating under his direction. The services are
provided at cost which is allocated among the investment companies advised by
the Adviser. The Trust also pays transfer agency fees, distribution fees,
service fees, custodian fees, legal fees, the costs of reports to shareholders
and all other ordinary expenses not specifically assumed by the Adviser.

Under the Advisory Agreement, the Trust pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the High Yield Municipal
Fund and the Insured Municipal Fund, at an annual rate of 0.60% of the first
$300 million of such Funds' aggregate average net assets, 0.55% of the next $300
million of such Funds' aggregate average net assets and 0.50% of such Funds'
aggregate average net assets in excess of $600 million. Each of the Funds will
pay the same percentage of its average net assets.

The Adviser has entered into a subadvisory agreement (the "Subadvisory
Agreement") with the Subadviser to assist it in performing its investment
advisory function with respect to High Yield Municipal Fund. Pursuant to the
Subadvisory Agreement, the Subadviser receives an annual fee, payable monthly,
of 0.40% of the first $20 million of High Yield Municipal Fund's average daily
net assets, 0.25% of the next $30 million of such Fund's average daily net
assets and 0.15% of the excess over $50 million. The Adviser and Subadviser are
hereinafter referred to as the "Advisers."

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

The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Trust for any fiscal year exceed 0.95% of the average
daily net assets, the compensation due the Adviser will be reduced by the amount
of such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Trust monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses do not include (1) interest and taxes, (2) brokerage
commissions, (3) payments made pursuant to distribution plans (described below),
(4) certain litigation and indemnification expenses as described in the Advisory
Agreement, and (5) insurance premiums paid by the Trust to insure the timely
payment of principal and interest on its portfolio obligations. The Advisory
Agreement also provides that the Adviser shall not be liable to the Trust for
any actions or omissions if it acted in good faith without negligence or
misconduct.

For the period ended December 1, 1987 to March 31, 1990, in addition to the
contractual expense limitation, the Adviser elected to reimburse each Fund for
all ordinary business expenses, exclusive of taxes and interest, in excess of
0.85% of the average daily net assets.

The following table shows expenses payable under the Advisory Agreement
during the fiscal years ending November 30, 1992, 1993 and 1994.

<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/92: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $1,562,047 $ 355,391
Accounting Services $ 102,088 $ 58,211
Contractual Expense Reimbursement $ -0- $ 41,687
</TABLE>

15
<PAGE> 514

<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/93: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $2,390,833 $ 555,067
Accounting Services $ 132,407 $ 82,231
Contractual Expense Reimbursement $ -0- $ -0-
Voluntary Expense Reimbursement $ -0- $ 96,000
</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/94: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $3,172,407 $ 641,145
Accounting Services $ 163,929 $ 86,031
Contractual Expense Reimbursement $ 0 $ 0
</TABLE>

The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Trust's Trustees or (ii) by vote of a
majority of the Trust's outstanding voting securities, and (b) by the
affirmative vote of a majority of the Trustees who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on 30 days' written notice.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement (the "Underwriting Agreement"). The
Distributor has the exclusive right to distribute shares of each Fund through
affiliated and unaffiliated dealers. The Distributor's obligation is an agency
or "best efforts" arrangement under which the Distributor is required to take
and pay for only such shares of the Trust as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Trust's Trustees or by a vote of a majority of the Trust's outstanding voting
securities, and (b) by the affirmative vote of a majority of Trustees who are
not parties to the Underwriting Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Underwriting
Agreement provides that it will terminate if assigned, and that it may be
terminated without penalty by either party on 60 days' written notice.

For the fiscal years ending November 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the High Yield Municipal Fund
and Insured Municipal Fund were $3,499,659, $4,146,051, and $2,667,572, and
$531,280, $427,753 and $176,026, respectively. Of such totals, the amount
retained by the Distributor was $226,654, $635,449, and $27,152, and $41,203,
$61,827 and $406,466, respectively. The remainder was reallowed to dealers. Of
such dealer reallowances, $164,406, $168,470, and $81,508, and $62,735, $35,042,
and $8,526, respectively, was received by Advantage Capital Corporation.

DISTRIBUTION PLANS

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

The Trustees have authorized payments by the Trust under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Trust
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Trust shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service

16
<PAGE> 515

Organizations for personal service and/or the maintenance of shareholder
accounts. With respect to the Class B and Class C Plans, authorized payments by
the Trust include payments at an annual rate of up to 0.25% of the net assets of
the shares of the respective class to reimburse the Distributor for payments for
personal service and/or the maintenance of shareholder accounts. With respect to
the Class B Plan, authorized payments by the Trust also include payments at an
annual rate of up to 0.75% of the net assets of the Class B shares of each Fund
to reimburse the Distributor for (1) commissions and transaction fees of up to
four percent of the purchase price of the Class B shares purchased by the
clients of broker-dealers and other Service Organizations, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professions, (5) advertising and promotion expenses,
including conducting and organizing sales seminars, marketing support salaries
and bonuses, and travel-related expenses, and (6) interest expense at the three
month LIBOR rate plus one and one half percent compounded quarterly on the
unreimbursed distribution expenses. With respect to the Class C Plan, authorized
payments by the Trust also include payments at an annual rate of up to 0.75% of
the net assets of the Class C shares of each Portfolio to reimburse the
Distributor for (1) upfront commissions and transaction fees of up to 0.75% of
the purchase price of Class C shares purchased by the clients of broker-dealers
and other Service Organizations and ongoing commissions and transaction fees
paid to broker-dealers and other Service Organizations in an amount up to 0.75%
of the average daily net assets of the Trust's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses, and (6) interest expense at
the three month LIBOR rate plus one and one half percent compounded quarterly on
the unreimbursed distribution expenses. Such reimbursements are subject to the
maximum sales charge limits specified by the NASD for asset-based charges.

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

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

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

Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by a vote of a majority of the outstanding voting shares of the
respective class of any Fund. Any change in any of the Plans that would
materially increase the distribution or service expenses borne by the Trust
requires shareholder approval, voting separately by class of any Fund;
otherwise, it may be amended by a majority of the Trustees, including a majority
of the Independent Trustees, by vote cast in person at a meeting called for the
purpose of

17
<PAGE> 516

voting upon such amendment. So long as the Plans are in effect, the selection or
nomination of the Independent Trustees is committed to the discretion of the
Independent Trustees.

For the fiscal year ending November 30, 1994, the High Yield Municipal
Fund's and Insured Municipal Fund's gross aggregate expenses under the Class A
Plan were $1,029,318 and $180,174, or 0.25% and 0.24%, respectively, of the
Funds' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to Service Organizations for servicing Trust
shareholders and administering the Class A Plan.

For the fiscal year ended November 30, 1994, the aggregate expenses under
the Class B Plan for the High Yield Fund and the Insured Municipal Fund were
$1,335,592 and $378,659, or 1.00% and 1.00%, respectively, of the Funds' average
daily net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $1,001,694 and $283,994, respectively, for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class B shares of the Trust and $333,898 and $94,665,
respectively, for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan.

The offering of Class C shares commenced on December 10, 1993. For the
fiscal year ended November 30, 1994, the aggregate expenses under the Class C
Plan for the High Yield Fund and the Insured Municipal Fund were $65,351 and
$15,952, or 0.97% and 0.97%, respectively, of the Funds' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $49,013 and $11,964, respectively, for the commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class C shares of the Trust and $16,338 and $3,988 respectively, for fees
paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan.

TRANSFER AGENT

During the fiscal year ended November 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Trust, received fees aggregating
$561,481 and $92,670 from the High Yield Municipal Fund and Insured Municipal
Fund, respectively. These services are provided at cost plus a profit.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Advisers are responsible for decisions to buy and sell securities for
the Trust and for the placement of its portfolio business and the negotiation of
any commissions, if any, paid on such transactions. As most transactions made by
the Trust are principal transactions at net prices, the Trust incurs little or
no brokerage costs except for commissions paid with respect to transactions in
future contracts and options. Fund securities are normally purchased directly
from the issuer or from an underwriter or market maker for the securities.
Purchases from underwriters of portfolio securities include a commission or
concession paid by the issuer to the underwriter and purchases from dealers
serving as market makers include the spread between the bid and asked price.
Sales to dealers are effected at bid prices.

The Advisers are responsible for placing portfolio transactions and do so
in a manner deemed fair and reasonable to the Trust and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating commissions, the Advisers consider
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, consideration may be given to firms which also provide research
services to the Trust or the Advisers. No specific value can be assigned to such
research services which are furnished without cost to the Advisers. The
investment advisory fee is not reduced as a result of the Advisers' receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of the securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of the accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Trust effects
its securities transactions may be used by the Advisers in

18
<PAGE> 517

servicing all of their advisory accounts; not all of such services may be used
by the Advisers in connection with the Trust.

Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution of such other
policies as the Trustees may determine, the Advisers may consider sales of
shares of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.

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

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

During the fiscal years ended November 30, 1992, 1993 and 1994, the High
Yield Municipal Fund paid $17,325, $5,481 and $79,957, respectively, in
brokerage commissions on portfolio transactions and Insured Municipal Fund paid
no brokerage commissions. The negotiated commission paid to an affiliated broker
on any transaction would be comparable to that payable to a non-affiliated
broker in a similar transaction.

The Trust conducted no affiliated brokerage transactions through affiliated
brokers during the last three fiscal years.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of each Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of the New York Stock Exchange (currently
4:00 p.m., New York time) on each business day on which the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Each Fund's investments in bonds are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
bonds are readily available and are representative of the bid side of the
market, these bonds are valued at such quoted bid prices (as obtained by the
Service from dealers in such securities). Other bonds are carried at fair value
as determined by the Service, based on methods which include consideration of:
yields or prices of municipal bonds of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The
Service may employ electronic data processing techniques and/or a matrix system
to determine valuations. Options are valued at the last sale price or, if no
sales are reported, at the mean between the bid and asked prices. Any bonds
which are not valued by the independent pricing service would be valued at fair
value using methods determined in good faith by the Trustees. Expenses and fees,
including the investment advisory fee are accrued daily and taken into account
for the purpose of determining the net asset value of shares of each Fund.
Short-term instruments having remaining maturities of 60 days or less are valued
at amortized cost.

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

19
<PAGE> 518

PURCHASE AND REDEMPTION OF SHARES

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

PURCHASE OF SHARES

Each Fund's shares are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.

ALTERNATIVE SALES ARRANGEMENTS

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

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

INVESTMENTS BY MAIL

A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more in any Fund, in the form
of a check payable to the Trust, must accompany the application. This minimum
may be waived by the Distributor for plans involving continuing investments.
Subsequent investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of the Fund's shares next
computed following receipt of payment by ACCESS. Confirmations of the opening of
an account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.

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

CUMULATIVE PURCHASE DISCOUNT

The reduced sales charges reflected in the sales charge table as shown in
the Prospectus under "Sales Charge Table" apply to purchases of Class A shares
of each Fund where the aggregate investment is $100,000 or more. For purposes of
determining eligibility for volume discounts, spouses and their minor children
are treated as a single purchaser, as is a trustee or other fiduciary purchasing
for a single fiduciary account. An aggregate investment includes all shares of
the Trust and all shares of certain other participating Van Kampen American
Capital mutual funds described in the Prospectus (the "Participating Funds"),
which have been previously purchased and are still owned, plus the shares being
purchased. The current offering price is used to determine the value of all such
shares. If, for example, an investor has previously purchased and still holds
Class A shares of the Trust and shares of other Participating Funds having a
current offering price of $40,000 and that person purchases $65,000 of
additional Class A shares of the Trust, the charge applicable to the $65,000
purchase would be four percent of the offering price. The same reduction is
applicable to purchases under a Letter of Intent as described in the next
paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED
FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF
PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN
ORDER IS PLACED BY MAIL. The reduced

20
<PAGE> 519

sales charge will not be applied if such notification is not furnished at the
time of the order. The reduced sales charge will also not be applied should a
review of the records of the Distributor or ACCESS fail to confirm the
investor's represented holdings.

LETTER OF INTENT

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

REDEMPTION OF SHARES

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

CONTINGENT DEFERRED SALES CHARGE -- CLASS A

For investments in the amount of $1,000,000 or more of Class A shares of
the Trust ("Qualified Purchaser"), the front-end sales charge will be waived and
a contingent deferred sales charge ("CDSC-Class A") of one percent is imposed in
the event of certain redemptions within one year of the purchase. If a
CDSC-Class A is imposed upon redemption, the amount of the CDSC-Class A will be
equal to the lesser of one percent of the net asset value of shares at the time
of purchase, or one percent of the net asset value of the shares at the time of
redemption.

21
<PAGE> 520

As described herein under "Purchase and Redemption of Shares," redemptions
of Class B and Class C shares will be subject to a contingent deferred sales
charge.

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

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

(a) Redemption Upon Disability or Death

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

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

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

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

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

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

22
<PAGE> 521

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

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

The Trust reserves the right to redeem shareholder accounts with balances
of less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Trust will waive the CDSC -- Class B and C
upon such involuntary redemption.

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

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

(f) Redemption by Adviser

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

EXCHANGE PRIVILEGE

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

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

23
<PAGE> 522

the date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.

CHECK WRITING PRIVILEGE

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

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

FEDERAL TAX INFORMATION

The following is only a summary of certain additional federal, state and
local tax considerations generally affecting the Funds and their shareholders
that are not described in the Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of a Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.

GENERAL

By maintaining its qualification as a "regulated investment company" under
the Internal Revenue Code, a Fund will not incur any liability for federal
income taxes to the extent its taxable ordinary income and any capital gain net
income are distributed in accordance with Subchapter M of the Code.

A Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve-months ended December 31, plus 98% of its
capital gain net income for the twelve months ended October 31 of such calendar
year. Each Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. By qualifying as a regulated investment company, a Fund is not
subject to federal income taxes to the extent it distributes its taxable net
investment income and taxable net realized capital gains. If for any taxable
year a Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income, including any net realized
capital gains, would be subject to tax at regular corporate rates (without any
deduction for distributions to shareholders).

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

The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for a Fund to be
eligible to pay exempt-interest dividends during any taxable year, at the close
of each fiscal quarter, at least 50% of the aggregate value of the Fund's assets
must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
income" (i.e., its

24
<PAGE> 523

ordinary taxable income and the excess, if any, of its net short-term capital
gains over any net long-term capital losses) recognized by the Fund during the
taxable year (the "Distribution Requirements").

Not later than 60 days after the close of its taxable year, each Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
"exempt-interest" dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.

Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the purchaser would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Fund, or by the Trust if it is required to
qualify as a regulated investment company as described below. "Substantial user"
is defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses in his trade or business a part of any facilities financed with
the tax-exempt obligations and whose gross revenues derived from such facilities
exceed five percent of the total revenues derived from the facilities by all
users, or who occupies more than five percent of the useable area of the
facilities or for whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. Examples of "related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year. If
a shareholder receives an exempt-interest dividend with respect to any shares
and such shares are held for six months or less, any short-term capital loss on
the sale or exchange of the shares will be disallowed to the extent of the
amount of such exempt-interest dividend.

If, during any taxable year, a Fund realizes net capital gains (the excess
of net long-term capital gains over net short-term capital losses) from the sale
or other disposition of Municipal Securities or other assets, the Fund will have
no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held his shares. Not later than 60 days after the close of the Fund's
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.

A capital gain dividend received after the purchase of the shares of any
one of the Funds reduces the net asset value of the shares by the amount of the
distribution and will be subject to income taxes. A loss on the sale of shares
held for less than six months (to the extent not disallowed on account of the
receipt of exempt-interest dividends) attributable to a capital gain dividend is
treated as a long-term capital loss for Federal income tax purposes.

TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS

In connection with its operations, a Fund may effect transactions in U.S.
Government securities and municipal bond futures contracts ("Futures Contracts")
and in options thereon ("Futures Options"). Gains or losses recognized by a Fund
from transactions in such Futures Contracts and Futures Options constitute
capital gains and losses for federal income tax purposes and do not therefore
qualify as exempt-interest income.

With respect to a Futures Contract closed out by a Fund, any realized gain
or loss will be treated as long-term capital gain or loss to the extent of 60%
thereof and short-term capital gain or loss to the extent of 40%

25
<PAGE> 524

thereof (hereinafter "60/40 gain or loss"). Open Futures Contracts held by a
Fund at the end of any fiscal year will be required to be treated as sold at
market value on the last day of such fiscal year for federal income tax purposes
(i.e. "marked-to-market"). Gain or loss recognized under this mark-to-market
rule is 60/40 gain or loss. The federal income tax treatment accorded to Futures
Options will be the same as that accorded Futures Contracts. The Distribution
Requirements may limit a Fund's ability to hold Futures Contracts and Futures
Options at the end of a year.

A portion of a Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined in
Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.

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

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

A Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments" in the Prospectus. The Trust has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Trust. Counsel has pointed
out that although the Internal Revenue Service has issued a favorable published
ruling on a similar but not identical situation, it could reach a different
conclusion from that of counsel. Counsel has also advised the Trust that the
Internal Revenue Service presently will not ordinarily issue private letter
rulings regarding the ownership of securities subject to stand-by commitments.

RESTRICTIONS ON FUTURES CONTRACTS AND RELATED OPTIONS

Among the requirements for qualification as a regulated investment company
under the Code, a Fund must derive less than 30% of its gross income each year
from sales of securities held for less than three months. This requirement and
the mark-to-market rule may restrict a Fund's ability to: (i) effect closing
purchase transactions in Futures Contracts and Futures Options which have been
held for less than three months and (ii) enter into various other short-term
transactions.

In addition, the Code requires that the Trust satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of the Trust's assets may be invested
in the securities of any one issuer and at least 50% of the value of the Trust's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Trust. Consequently, the Trust's ability to invest in Futures Contracts and
Futures Options may be limited.

TREATMENT OF DIVIDENDS

While each Fund expects that a major portion of its investment income will
constitute tax-exempt interest, a significant portion may consist of "investment
company taxable income" and "net capital gains." As pointed out above, a Fund
will be subject to tax for any year on its undistributed investment company
taxable income and net capital gains.

26
<PAGE> 525

It is anticipated that substantially all of a Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level. Distributions
that are not designated as capital gain dividends will be taxable to
shareholders as ordinary income. Dividends and distributions declared payable to
shareholders of record after September 30 of any year and paid before February 1
of the following year, are considered taxable income to shareholders on the
record date even though paid in the next year.

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

The Tax Reform Act added a provision that, for taxable years beginning
after December 31, 1989, 75% of the excess of a corporation's adjusted current
earnings (generally, earning and profits, with adjustments) over its other
alternative minimum taxable income is an item of tax preference for
corporations. All tax-exempt interest is included in the definition of "adjusted
current earnings" so a portion of such interest is included in computing the
alternative minimum tax on corporations. For shareholders that are financial
institutions, the Tax Reform Act eliminated their ability to deduct interest
payments to the extent allocated on a pro rata basis to the purchase of Trust
shares.

BACK-UP WITHHOLDING

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

TRUST PERFORMANCE

The average annual total return for Class A shares of each Fund for the
one-year, five-year and eight-year periods ending November 30, 1994 was -4.68%,
5.83% and 6.11% for the High Yield Municipal Fund, and - 8.47%, 4.44% and 4.61%
for the Insured Municipal Fund, respectively. Results from inception through
April 1, 1990, reflect expense reimbursement described under "Investment
Advisory Agreement." The average annual total return for Class B shares of each
Fund one-year period and the 28 month period ending November 30, 1994, was
- -4.49% and 2.80% for the High Yield Municipal Fund and -8.24% and 0.48% for the
Insured Municipal Fund, respectively. The aggregate total return for Class C
shares of each Fund for the period December 10, 1993 through November 30, 1994
was -2.73% and -6.29% for the High Yield Municipal Fund and Insured Municipal
Fund, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.

The following chart lists the High Yield Municipal Fund's and Insured
Municipal Fund's annualized current yield and tax equivalent yield for the
30-day period ending November 30, 1994.

<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
---------------------------- ---------------------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B C A B C
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current yield 6.60% 6.19% 6.17% 4.68% 4.16% 4.15%
Tax-equivalent
yield 10.31% 9.66% 9.64% 7.31% 6.49% 6.48%
</TABLE>

Neither the High Yield Municipal Fund's nor the Insured Municipal Fund's
yield is fixed and will fluctuate in response to prevailing interest rates and
the market value of portfolio securities, and as a function of the type of
securities owned by the Fund, Fund maturity and the Fund's expenses.

27
<PAGE> 526

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

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

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

OTHER INFORMATION

Dividends and Distributions -- Shareholders are informed as to the sources
of distributions at the time of payment. Any capital gain distribution paid
shortly after a purchase of shares by an investor will have the effect of
reducing the per share net asset value of the shares owned by the amount of the
distribution. See "Distributions from the Fund" in the Prospectus for further
information.

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

Shareholder Reports -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.

Independent Accountants -- Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent accountants for the Trust, performs an annual audit
of the Trust's financial statements.

FINANCIAL STATEMENTS

The attached financial statements in the form in which they appear in the
Annual Report to Shareholders, including the related Report of Independent
Accountants on the November 30, 1994 Financial Statements are included in the
Statement of Additional Information.

Set forth below is an example of the method of computing the offering price
of the Trust's Class A shares. The example assumes a purchase of Class A shares
of a Fund aggregating less than $100,000 subject to the schedule of sales
charges set forth in the Prospectus at a price based upon the net asset value of
Class A shares of such Fund on November 30, 1994.

<TABLE>
<CAPTION>
HIGH YIELD INSURED
MUNICIPAL MUNICIPAL
FUND FUND
------------ ------------
NOVEMBER 30, NOVEMBER 30,
1994 1994
------------ ------------
<S> <C> <C>
Net Asset Value Per Class A Share $10.44 $10.55
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ 0.52 $ 0.53
------------ ------------
Class A Per Share Offering Price to the Public $10.96 $11.08
</TABLE>

28
<PAGE> 527

APPENDIX

RATINGS OF INVESTMENTS

RATINGS OF MUNICIPAL BONDS

DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS:

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

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

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

29
<PAGE> 528

undeniable strength of the preceding grades"; MIG 4 notes are of "adequate
quality, carrying specific risk but having protection...and not distinctly or
predominantly speculative."

Beginning in 1985, Moody's started new rating categories for variable rate
demand obligations ("VRDO's"). VRDO's receive two ratings. The first rating,
depending on the maturity of the VRDO, is assigned either a bond or MIG rating
which represents an evaluation of the risk associated with scheduled principal
and interest payments. The second rating, designated as "VMIG," represents an
evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:

VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.

VMIG 2: ample margins of protection, high quality.

VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well established.

VMIG 4: adequate quality, not predominantly speculative but there is risk.

DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS:

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.

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

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL ("S&P") DEBT RATINGS:

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

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

I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

II. Nature of and provisions of the obligation;

30
<PAGE> 529

AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.

AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.

BB-B-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC" or "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

CI This rating is reserved for income bonds on which no interest is
being paid.

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

NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.

A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:

A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designation 1, 2 and 3 to indicate the relative degree of
safety.

A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.

A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated "A-1".

A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.

B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

31
<PAGE> 530

considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.

S&P ratings of certain municipal note issues with a maturity of less than
three years are:

SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.

SP-2 A satisfactory capacity to pay principal and interest.

SP-3 A speculative capacity to pay principal and interest.

S&P may continue to rate note issues with a maturity greater than three years in
accordance with the same rating scale currently employed for municipal bond
ratings.

Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e. different ratings by Moody's and S&P) and dual rated securities
as described above.

32
<PAGE> 531

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Municipal Bonds 96.7%
AIR FREIGHT 1.5%
(3)$ 7,625,000 Dayton, Ohio, Special Facilities Rev. (Emery Air Freight Corp.)
Series A, 12.50%, 10/1/09 .............................................. $ 8,797,115
------------
EDUCATION 2.1%
2,610,000 California Educational Facilities Authority Rev. (College of
Osteopathic Medicine) 7.50%, 6/1/18 .................................... 2,493,881
5,000,000 New Hampshire Higher Education & Health (Daniel Webster
College Issue) 7.625%, 7/1/16 .......................................... 4,613,750
1,500,000 New Jersey State Educational Facilities Authority Rev. (Fairleigh
Dickinson University) Series C, 6.625%, 7/1/23 ......................... 1,256,250
1,500,000 New York, New York, City Industrial Development Agency,
Marymount-Manhattan College, 7.00%, 7/1/23 ............................. 1,355,415
Pennsylvania State Higher Educational Facilities Authority,
College and University Rev., (College of Science & Agriculture)
645,000 6.90%, 4/1/14 .......................................................... 595,870
1,000,000 7.00%, 4/1/22 .......................................................... 902,710
1,000,000 Vermont Educational & Health Buildings Finance Authority,
7.15%, 4/15/14 ......................................................... 939,190
------------
TOTAL EDUCATION......................................................... 12,157,066
------------
GENERAL OBLIGATIONS 8.3%
1,000,000 Arrowhead Metropolitan District, Colorado, 8.125%, 12/1/11 ............... 978,420
2,000,000 Beaver Creek Metropolitan District, Colorado, 9.25%, 12/1/05 ............. 2,178,200
1,060,000 Berry Creek Metropolitan District, Colorado, Refunding,
7.30%, 12/1/12 ......................................................... 1,000,406
1,000,000 Brush Creek Village, Colorado, Water District, 8.875%, 11/15/09 .......... 1,161,490
(3)6,720,000 California State, Veterans Bonds, 7.375%, 4/1/19 ......................... 6,900,028
1,250,000 Cordillera Metropolitan District, Colorado, Eagle County,
8.25%, 12/1/13 ......................................................... 1,210,525
470,000 Detroit, Michigan, Local Development Finance Authority, Series A
9.50%, 5/1/21 .......................................................... 493,726
1,650,000 Dove Valley Metropolitan District, Arapahoe County, Colorado,
9.50%, 12/1/08 ......................................................... 1,717,287
4,000,000 Fairlake Metropolitan District, City & County of Denver, Colorado,
Series 1991, 9.625%, 12/1/10 ........................................... 4,450,000
2,000,000 Greenwood Metropolitan District, Colorado, 7.30%, 12/1/06 ................ 1,988,960
2,000,000 Highlands Ranch, Colorado, Metropolitan District 1,
7.30%, 9/1/12 ........................................................ 2,021,920
2,000,000 Illinois Development Finance Authority,
(Debt Restructure - East St. Louis), 7.375%, 11/15/11 .................. 1,917,940
2,175,000 Jefferson County, Colorado, Section 14 Metropolitan District,
Refunding, 9.00%, 12/1/09 .............................................. 2,522,522
1,000,000 Landmark Metropolitan District, Colorado, 8.75%, 12/1/05 ................ 1,005,280
Mountain Village Metropolitan District, San Miguel County,
Colorado
225,000 10.50%, 12/1/05 ........................................................ 237,866
355,000 11.00%, 12/1/04 ........................................................ 377,017
(3)3,000,000 11.00%, 12/1/07, Pre-refunded, 12/1/98 ................................. 3,621,870
3,000,000 New York, New York, Series B, 7.30%, 8/15/10 ............................. 2,988,450
Panorama Metropolitan District, Colorado
500,000 Series B, 9.00%, 12/1/09 ............................................... 514,540
265,000 9.50%, 12/1/05 ......................................................... 273,255
</TABLE>

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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Prinicpal Market
Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>

GENERAL OBLIGATIONS--continued
$ 200,000 Skyland Metropolitan District, Colorado Facilities,
Zero Coupon, 12/1/08 ....................................... $ 59,612
Southtech Metropolitan District, Colorado, Refunding
1,500,000 6.875%, 12/1/11 ............................................ 1,360,695
2,175,000 9.50%, 12/1/11 ............................................. 2,437,697
Superior, Colorado, Metropolitan District No. 2,
Refunding, Series A
660,000 7.25%, 12/1/02 ............................................. 636,035
840,000 7.75%, 12/1/13 ............................................. 779,629
University of the Virgin Islands, Public Finance Authority,
Series A
1,210,000 7.50%, 10/1/09 ............................................. 1,171,014
1,965,000 7.65%, 10/1/14 ............................................. 1,874,394
3,000,000 Virgin Islands, Public Finance Authority, 7.25%, 10/1/18 ..... 2,853,180
-------------
TOTAL GENERAL OBLIGATIONS................................. 48,731,958
-------------
HEALTH CARE 3.5%
Brevard County, Florida, Health Facilities Authority Rev.,
1,730,000 7.375%, 11/15/04 ........................................... 1,634,573
2,200,000 7.75%, 11/15/17 (Courtenay Springs Village) ................ 2,102,584
Colorado Health Facilities Authority Rev.
1,000,000 Cleo Wallace Center Project, 7.00%, 8/1/15 ................. 919,330
400,000 Mile High Transplant Bank, 8.50%, 6/1/07 ................... 394,272
2,460,000 Presbyterian/St. Luke Healthcare System Project, Series A,
6.75%, 2/15/13 ........................................... 2,195,377
1,000,000 Connecticut State Development Authority, Health Care Rev.
(Independent Living Project) Series B, 8.00%, 7/1/17 ....... 941,470
1,000,000 Lowndes County, Mississippi, Hospital Rev., Refunding
(Golden Triangle Medical Center) 8.50%, 2/1/10 ............. 1,054,510
Massachusetts State, Industrial Finance Rev.,
1,250,000 7.10%, 11/15/18 ........................................... 1,112,650
3,785,000 8.80%, 6/1/14 ............................................. 4,092,796
New Jersey Economic Development Authority, 1st Mtg. Gross Rev.
(1)1,240,000 Dover Residential Healthcare Facilities, 13.375%, 11/1/14 .. 1,199,638
1,000,000 Franciscan Oaks Project, Series A, 8.50%, 10/1/23 .......... 981,890
1,000,000 The Evergreens, 9.25%, 10/1/22 ............................. 966,920
1,000,000 North Canton, Ohio, Health Care Facilities Rev. (Waterford at
St. Luke Project) 8.625%, 11/15/21 ......................... 964,770
Pinal County, Arizona, Industrial Development Authority
(Casa Grande Regional Medical Center Project)
1,025,000 Series A, 8.125%, 12/1/22 ................................... 973,197
475,000 Series B, 8.125%, 12/1/22 .................................. 426,764
715,000 9.00%, 12/1/13 ............................................. 728,120
-------------
TOTAL HEALTH CARE........................................... 20,688,861
-------------
</TABLE>

F-2
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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS 14.3%
(3)$ 2,000,000 Alabama Special Care Facilities Financing Authority Rev.
(Montgomery Hospital) 10.25%, 11/1/15 ................................ $ 2,105,060
1,470,000 Arizona Health Facilities Authority, Hospital System Rev.,
Refunding (St. Lukes Health System) 7.25%, 11/1/14 ................... 1,336,568
1,500,000 Athens County, Ohio, Hospital Facilities Rev. (O'Bleness
Memorial Hospital Project) 7.10%, 11/15/23 ............................ 1,289,205
Bay County, Florida, Hospital Systems Rev.,
1,500,000 8.00%, 10/1/12 ........................................................ 1,484,325
500,000 8.00%, 10/1/19 ........................................................ 488,855
1,130,000 Bell County, Texas, Health Facilities Development Corp.
(King's Daughters Hospital) 9.25%, 7/1/08 ............................. 1,218,625
1,500,000 Bexar County, Texas, Health Facilities Development Rev.
(St. Lukes Hospital Project) 7.90%, 5/1/18 ............................ 1,513,575
3,150,000 Clark County, Ohio, Hospital Improvement Rev., Refunding
(Community Hospital) Series A, 9.375%, 4/1/08 ......................... 3,332,164
1,990,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project) Series 1994, 6.875%, 6/1/16 ......................... 1,787,099
Delaware State Economic Development Authority Rev.,
(Osteopathic Hospital Association of Delaware) Series A
3,000,000 6.90%, 1/1/18 ......................................................... 2,565,660
980,000 9.50%, 1/1/22 ......................................................... 1,006,117
(2)1,000,000 Dickinson County, Michigan, Memorial Hospital,
8.00%, 11/1/14 ........................................................ 987,170
1,350,000 Doylestown, Pennsylvania, Hospital Authority Rev. (Pine Run)
Series A, 7.20%, 7/1/23 ............................................... 1,234,805
385,000 Edinburg, Texas, Hospital Authority Rev., Project 86 (Edinburg
General Hospital) 10.00%, 7/1/11 ...................................... 398,910
1,500,000 Glendale, California, Hospital Rev., Refunding (Glendale
Memorial Hospital & Health) Series A, 9.00%, 11/1/17 .................. 1,567,500
Illinois Health Facilities Authority Rev. (Holy Cross Hospital
Project)
500,000 6.25%, 3/1/04 ......................................................... 472,105
1,250,000 6.70%, 3/1/14 ......................................................... 1,120,763
Illinois Health Facilities Authority Rev. (St. Elizabeths Hospital)
1,250,000 7.625%, 7/1/10 ........................................................ 1,181,488
1,500,000 7.75%, 7/1/16 ......................................................... 1,416,180
1,000,000 Jackson County, Oklahoma, Memorial Hospital Authority Rev.
(Jackson Memorial Hospital) 9.00%, 8/1/15 ............................. 1,105,600
(1)1,500,000 Jackson Park Hospital Foundation, Chicago, Illinois (Jackson
Park Hospital) 9.00%, 3/1/05 .......................................... 1,245,000
500,000 Leflore County, Oklahoma, Hospital Authority Improvement Rev.,
9.40%, 5/1/06 ......................................................... 525,620
2,000,000 Lorain, Ohio, Hospital Improvement Rev., Refunding (Lakeland
Community Hospital, Inc. Project) 9.50%, 11/1/12 ...................... 2,125,460
765,000 Loves Park, Illinois, 1st Mtg. Rev. (Hossier Care Project)
Series A, 9.75%, 8/1/19 ............................................... 799,547
470,000 Maine Health & Higher Educational Facilities Authority Rev.
(Franklin Memorial Hospital) 9.875%, 7/1/13 ........................... 532,322
Massachusetts State Health & Educational Facilities Authority Rev.,
Series B
1,080,000 Holyoke Hospital, 6.50%, 7/1/15 ......................................... 942,116
1,000,000 Milford-Whitinsville Regional Project, 7.75%, 7/15/17 ................... 906,550
</TABLE>

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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOSPITALS-CONTINUED
$ 500,000 Massachusetts State Industrial Finance Agency, Rev. (Atlanticare
Medical Center) Series B, 10.125%, 11/1/14.............................. $ 540,680
400,000 McCormick County, South Carolina, Hospital Facilities Rev.,
Series 88 (McCormick Hospital) 10.50%, 3/1/18........................... 421,356
2,585,000 Mercer County, West Virginia, Commercial Development Rev.
(Rehabilitation Hospital) 12.00%, 12/1/15............................... 2,744,133
2,900,000 Michigan State Hospital Finance Authority Rev., Refunding
(Saratoga Community Hospital) 8.75%, 6/1/10............................. 3,003,878
Missouri State Health & Educational Facilities, Series A
1,075,000 Bethesda Health Group, Inc. Project, 7.50%, 8/15/12..................... 981,841
1,500,000 6.625%, 8/15/05......................................................... 1,362,270
820,000 Montgomery County, Texas, Health Facilities Development Corp.,
Hospital Mortgage Rev. (Woodlands Medical Center Project)
8.85%, 8/15/14........................................................... 861,353
1,495,000 Newark-Wayne Community Hospital, Inc., New Jersey, Hospital Rev.,
Refunding & Improvement, Series A, 7.60%, 9/1/15......................... 1,440,492
1,455,000 New Hampshire Higher Educational & Health Facility Authority
Hospital Rev. (Monadnock Community Hospital),
Series 1990, 9.125%, 10/1/20............................................. 1,597,925
2,500,000 New Jersey Health Care Facilities Authority Rev., (Raritan Bay
Medical Center), 7.25%, 7/1/14 ......................................... 2,288,225
Newton, Kansas, Hospital Rev., Series A,
2,000,000 7.375%, 11/15/14........................................................ 1,865,920
1,500,000 7.75%, 11/15/24......................................................... 1,409,205
170,000 Ohio County, Kentucky, Hospital Facilities Rev. (Ohio County
Hospital) 12.00%, 10/1/15 .............................................. 178,709
Philadelphia, Pennsylvania, Hospitals & Higher Education
750,000 Children's Seashore House, Series B, 7.00%, 8/15/12..................... 713,460
2,000,000 Facilities Authority, Hospital Rev. (Roxborough Memorial
Hospital) Series 2, 7.25%, 3/1/24....................................... 1,712,400
500,000 Facilities Authority, Hospital Rev. (Temple University Hospital)
Series A, 6.625%, 11/15/23.............................................. 440,835
500,000 Randolph County, West Virginia, Building Commission, Refunding
& Improvement (Davis Memorial Hospital Project)
7.65%, 11/1/21.......................................................... 500,590
3,255,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project) 7.75%, 4/1/13..................... 3,096,091
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Allied Services Rehabilition Hospital), Series A
1,500,000 7.125%, 7/15/05......................................................... 1,422,900
3,000,000 7.375%, 7/15/08......................................................... 2,823,210
300,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Moses Taylor Hospital Project) Series B, 8.25%, 7/1/09............ 308,868
400,000 Selma, Alabama, Special Care Facilities Financing Authority
Hospital Rev. (Vaughan Regional Medical Center Project)
9.50%, 6/1/14........................................................... 448,416
South Dakota State Health and Educational Authority Rev.
(Huron Regional Medical Center)
1,000,000 7.00%, 4/1/10........................................................... 920,650
1,000,000 7.25%, 4/1/20........................................................... 910,170
</TABLE>

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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

HOTELS 0.5%
1,575,000 Gulf Shores, Alabama, Rev. (Quality Inn, Beachsiding Project)
Series 1986, 11.00%, 6/1/16............................................. 1,597,097
800,000 Minneapolis, Minnesota, Commercial Development Rev.
(Holiday Inn Metrodome Project) 10.50%, 6/1/03.......................... 805,000
(1)650,000 Minneapolis, Minnesota, Community Development Agency,
Commercial Development Rev. (Standard Mill Whitney Hotel
Project) 12.00%, 4/1/10................................................. 515,125
------------
TOTAL HOTELS............................................................ 2,917,222
------------
HOUSING 10.4%
(1)1,000,000 Atlanta, Georgia, Urban Residential Finance Authority, Multi-family
Mtg. Rev. (Peachtree Apartments) 10.50%, 12/1/10........................ 840,830
Austin, Minnesota, Multi-family Rev., Refunding
(Cedars of Austin Project)
1,020,000 7.50%, 4/1/17........................................................... 974,100
2,000,000 7.50%, 4/1/18........................................................... 1,915,000
1,710,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project) 6.75%, 4/1/19........................ 1,563,709
2,500,000 Berks County, Pennsylvania, Municipal Authority Rev. (Phoebe
Berks Village, Inc. Project) 8.25%, 5/15/22............................. 2,420,925
</TABLE>

F-5
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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
Harris County, Texas, Housing Finance Corp., Single Family Mtg. Rev.
$ 355,000 Series 1983-A, 10.125%, 7/15/03......................................... $ 349,934
1,800,000 Series 1983-A, 10.375%, 7/15/14......................................... 1,755,522
300,000 9.875%, 3/15/14......................................................... 300,378
80,000 11.25%, 4/15/06......................................................... 79,222
2,770,000 Iowa Finance Authority, Multi-family Rev., Refunding (Park West
Project) 8.00%, 10/1/23................................................. 2,785,152
Lebanon County, Pennsylvania, Health Facilities Authority Rev.,
(Church of Christ Homes Project)
1,250,000 7.00%, 10/1/14.......................................................... 1,128,813
1,250,000 7.25%, 10/1/19.......................................................... 1,119,825
1,500,000 Massachusetts State Health & Educational Facilities Authority Rev.
(Independent Living) 8.10%, 7/1/18...................................... 1,461,435
Massachusetts State Housing Finance Agency,
1,000,000 Series 38, 7.20%, 12/1/26............................................... 983,750
2,750,000 Single family, 6.75%, 6/1/26............................................ 2,554,063
3,780,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Rev., (Assisted Living Facilities), 8.25%, 5/1/23............ 3,578,715
New Hampshire State Housing Finance Authority (Single Family
Residential Mortgage)
500,000 6.85%, 7/1/16........................................................... 480,000
190,000 6.95%, 1/1/26........................................................... 180,975
New Hope, Minnesota, Multi-family Rev., Refunding (Broadway
Lanel Project)
950,000 7.75%, 9/1/07........................................................... 912,741
2,320,000 8.00%, 9/1/18........................................................... 2,215,600
2,615,000 North Miami, Florida, Health Care Facilities Rev. (Imperial Club
Project) Series A, 9.25%, 1/1/13........................................ 2,679,957
North St. Paul, Minnesota, Multi-family, Refunding
(Cottages North St. Paul)
980,000 9.00%, 2/1/09........................................................... 997,150
2,220,000 9.25%, 2/1/22........................................................... 2,328,225
2,000,000 North Syracuse, New York, Housing Authority Rev., (Janus Park
Project), 8.00%, 6/1/14................................................. 1,876,740
1,430,000 Oklahoma Housing Finance Agency, Single Family, Class A,
7.997%, 8/1/18.......................................................... 1,508,650
675,000 Rhode Island Housing & Mortgage Finance, 7.60%, 10/1/21................... 675,959
3,105,000 Richmond, California, Redevelopment Agency, 7.50%, 9/1/23................. 2,930,344
300,000 Richmond County, Georgia, Development Authority, Nursing
Home Rev., Refunding (Beverly Enterprises, Inc.-
Georgia Project) 8.75%, 6/1/11.......................................... 309,978
(1)7,000,000 Richmond, Virginia, Redevelopment & Housing Authority,
Multi-family Mtg. Rev. (Triton/Richmond) Series A, 10.50%, 12/1/05...... 6,020,000
3,000,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd.
Project) Series A, 7.75%, 12/1/15....................................... 2,767,650
Santa Rosa, California, (Fountaingrove Parkway Extension)
500,000 7.40%, 9/2/13........................................................... 465,535
1,000,000 7.625%, 9/2/19.......................................................... 931,780
750,000 Snowmass Village, Colorado, Multi-family, Refunding, Series A,
8.00%, 9/1/14........................................................... 699,383
</TABLE>

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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
$ 2,000,000 Spring Lake Park, Minnesota, Multi-family Rev., Refunding,
8.375%, 1/1/22.......................................................... $ 1,965,000
4,000,000 St. Charles, Illinois, Multi-family Rev. (Wessel Court Project)
7.60%, 4/1/24........................................................... 3,738,520
Telluride, Colorado, Housing Authority, Housing Rev.
2,000,000 Refunding (Shandoka Apartments Project) 7.875%, 6/1/17.................. 1,915,000
1,500,000 Series 1991, 9.10%, 6/1/01.............................................. 1,677,255
------------
TOTAL HOUSING........................................................... 61,087,815
------------
INDUSTRIAL DEVELOPMENT REVENUE 14.4%
500,000 Casa Grande, Arizona, Industrial Development Authority,
Refunding, 8.25%, 12/1/15............................................... 477,995
Chandler, Arizona, Industrial Development Authority Rev.
(Chandler Financial Center Project) Series 1986,
2,955,000 7.125%, 12/1/16......................................................... 3,008,071
(1)875,000 10.75%, 12/1/15......................................................... 798,691
200,000 Charlotte County, Florida, Industrial Development Authority,
Refunding (Beverly Enterprises) 10.00%, 6/1/11.......................... 216,364
1,000,000 Chartiers Valley, Pennsylvania, Inc., 1st Mtg. Rev.
(United Methodist Health Center) Series A, 9.50%, 12/1/15............... 1,154,160
1,500,000 Chesterfield, Missouri, Industrial Development Authority Rev.
(St. Andrews Episcopal-Presbyterian) Series A, 8.50%, 12/1/19........... 1,510,005
1,820,000 Collier County, Florida, Industrial Development Authority Rev.,
Retirement Rent Housing, Refunding (Beverly Enterprises,
Inc.) 10.75%, 3/1/03.................................................... 2,009,061
400,000 Connecticut State Development Authority, Industrial Development
(Stone Container Corp.) 11.625%, 6/1/11................................. 411,140
1,095,000 Covington-Alleghany County, Virginia, Industrial Development
Authority Rev., Refunding (Beverly Enterprises, Inc. Project)
9.375%, 9/1/01.......................................................... 1,156,123
(4)915,000 Decatur, Georgia, Downtown Development Authority,
(Decatur Hotel Association Project) 7.125%, 11/1/16..................... 621,834
2,925,000 Delaware State, Economic Development Authority, Refunding,
1st Mtg. (Dover Health Care) 7.875%, 4/1/08............................. 2,893,673
Denver, Colorado, City and County, Industrial Development Rev.,
(Jewish Community Centers Project)
1,055,000 7.375%, 3/1/09.......................................................... 1,003,178
1,130,000 7.50%, 3/1/14........................................................... 1,069,477
815,000 7.875%, 3/1/19.......................................................... 768,798
875,000 Fort Walton Beach, Florida, 1st Mtg. (Shoney's Inn & Restaurant)
10.50%, 12/1/16......................................................... 893,139
2,030,000 Harrison, Ohio, Refunding (Harrison Avenue K Mart Corp.
Project) Series A, 8.125%, 12/1/02...................................... 2,003,123
285,000 Hernando County, Florida, Refunding (Beverly Enterprises, Inc.)
10.00%, 9/1/11.......................................................... 308,664
2,500,000 Hialeah Gardens, Florida, (Waterford Convalescent) Series A,
8.25%, 12/1/14.......................................................... 2,367,175
1,500,000 Homestead, Florida, (Brookwood Gardens Center Project)
Series A, 8.25%, 12/1/14................................................ 1,420,305
860,000 Lee County, Virginia, Industrial Development Authority Hospital
Facility Rev. (Lee County Community Hospital) 10.50%, 8/1/11............ 917,990
4,000,000 Lehigh County, Pennsylvania, (Allentown Interstate Motel)
8.00%, 8/1/12........................................................... 3,849,720
</TABLE>

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HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 1,300,000 Marion County, Florida, Industrial Development Authority Rev.
(Marion Ross Corp.) 11.875%, 8/1/11..................................... $ 1,315,015
1,000,000 Martin County, Florida, Industrial Development Rev. (Indiantown
Cogeneration Project), Series A, 7.875%, 12/15/25....................... 1,001,480
910,000 Montgomery County, Pennsylvania (Pennsburg Nursing &
Rehabilitation Center) 7.625%, 7/1/18................................... 784,711
Montgomery County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Meadowood Corp. Project)
1,550,000 Series A, 9.25%, 12/1/00................................................ 1,583,434
2,025,000 Series A, 10.00%, 12/1/19............................................... 2,154,762
2,199,150 Series B, Zero Coupon, 12/1/20.......................................... 162,649
2,660,000 7.75%, 9/1/14........................................................... 2,477,285
2,500,000 10.25%, 12/1/20......................................................... 2,688,825
3,595,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Health Care (Advanced Geriatric) Series A,
8.375%, 7/1/23.......................................................... 3,370,133
New Jersey Economic Development Authority
1,000,000 Electric Energy Facilities Rev. (Vineland Cogeneration L.P.
Project) 7.875%, 6/1/19............................................... 1,016,680
1,000,000 Series E (Borg Warner Corp.) 11.20%, 8/1/04............................. 1,080,560
North Hampton County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Kirkland Village Project)
750,000 7.375%, 12/15/18........................................................ 658,223
750,000 7.50%, 12/15/23......................................................... 653,820
2,000,000 Ohio State, Refunding, 1st Mtg. (Swifton Commons)
8.125%, 12/1/15......................................................... 1,852,860
480,000 Orange County, Florida, Industrial Development Authority Rev.,
Refunding (Beverly Enterprises, Inc.) 9.25%, 8/1/10..................... 504,605
Philadelphia, Pennsylvania (FFE/Maplewood)
2,000,000 8.00%, 1/1/14........................................................... 1,839,300
1,000,000 8.00%, 1/1/24........................................................... 900,160
Philadelphia, Pennsylvania, Industrial Development Authority Rev.
1,500,000 Cathedral Village, 7.25%, 4/1/15........................................ 1,362,630
1,000,000 Lutheran Retirement Home, Series B, 5.00%, 1/1/17....................... 639,470
1,185,000 1st Mtg., RHA/Care Pavilion Project, 10.25%, 2/1/18..................... 1,203,782
1,000,000 Pittsylvania County, Virginia, Series A, 7.45%, 1/1/09.................. 934,760
510,000 Pocahontas, Iowa (International Harvester Co.) 10.25%, 10/1/00.......... 531,711
Port of Corpus Christi, Texas (Valero Refining & Marketing Co.)
500,000 Series B, 10.625%, 6/1/08............................................... 556,950
4,505,000 10.25%, 6/1/17.......................................................... 4,977,034
2,000,000 Port of New Orleans, Louisiana (Avondale Industries Inc., Project)
8.25%, 6/1/04........................................................... 2,003,900
Port of New Orleans, Louisiana (Continental Grain Co.)
3,000,000 Refunding, 7.50%, 7/1/13................................................ 2,716,680
1,000,000 Series A, 14.50%, 2/1/02................................................ 1,115,870
1,000,000 14.50%, 1/1/02.......................................................... 1,111,910
735,000 Santa Fe, New Mexico, Refunding (Casa Real Nursing Home)
9.75%, 1/1/13........................................................... 754,632
250,000 Santa Rosa County, Florida, Industrial Development Authority
Rev., 1st Mtg. (Sandy Ridge Care Center) 10.50%, 4/1/16................. 252,208
1,380,000 Scott County, Tennessee (Fruehauf Corp.) 10.75%, 1/1/09................... 1,429,997
2,540,000 Scottsdale, Arizona, Industrial Development Authority Rev.,
1st Mtg. (Westminister Village) 10.00%, 6/1/17.......................... 2,710,434
</TABLE>

F-8
<PAGE> 539

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 3,190,000 St. Charles, Illinois (Tri-City Center Project) 7.50%, 11/1/13............ $ 2,911,545
St. John's County, Florida, Industrial Development Authority,
Refunding (Vicars Landing Project) Series A
500,000 6.25%, 2/15/04.......................................................... 458,280
2,080,000 6.75%, 2/15/12 ......................................................... 1,842,464
St. Louis, Missouri, Industrial Development Authority Rev.,
1st Mtg. (Deaconess Manor Association)
500,000 7.50%, 6/1/16........................................................... 435,575
500,000 7.50%, 6/1/23........................................................... 430,190
470,000 Sunrise, Florida, Series 86 (Sunshine Palms Adult Congregate
Living Facility) 10.75%, 12/1/16........................................ 471,058
1,400,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple) Series A, 6.75%, 12/1/13.................... 1,244,194
750,000 Vincent, Alabama, Industrial Development Board (Shelby Motel
Group, Inc. Project) 10.50%, 9/1/16..................................... 744,375
(4)1,500,000 Walton County, Florida, Industrial Development Authority
(International Medical Institute) 10.50%, 1/1/17........................ 589,380
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.................................... 84,332,217
------------
LIFE CARE 5.7%
Atlantic Beach, Florida, Rev., Series A,
1,590,000 7.50%, 10/1/02.......................................................... 1,539,644
2,085,000 7.875%, 10/1/08......................................................... 1,991,946
Chartiers Valley, Pennsylvania, Industrial & Commercial
Development Authority (Ashbury Health Center Project)
500,000 6.70%, 12/1/05.......................................................... 474,685
500,000 6.75%, 12/1/06.......................................................... 471,410
1,000,000 7.25%, 12/1/11.......................................................... 954,090
2,000,000 7.40%, 12/1/15.......................................................... 1,882,720
1,150,000 Cumberland County, Pennsylvania, Municipal Authority Rev.,
1st Mtg. (Carlisle Hospital & Health) 6.80%, 11/15/14................... 1,011,425
500,000 Fayetteville, Arkansas, Public Facilities Board Rev. (Butterfield
Trail Village Project) Series B, 9.50%, 9/1/14.......................... 517,340
1,350,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project) 9.50%, 12/1/14................................................. 1,433,268
Illinois Health Facilities Authority Rev.
1,000,000 Covenant Retirement Communities, Series A, 7.60%, 12/1/12............... 912,650
1,000,000 Fairview Obligated Group Project, Series A, 9.50%, 10/1/22.............. 1,003,550
Illinois Health Facilities Authority Rev. (Friendship Village)
1,000,000 6.65%, 12/1/06.......................................................... 936,490
1,645,000 6.75%, 12/1/08.......................................................... 1,529,751
Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
1,000,000 Brookhaven Community, Series A, 7.00%, 1/1/15........................... 933,750
500,000 Brookhaven Community, 10.25%, 1/1/18.................................... 577,660
500,000 Orchard Cove, Inc., 8.00%, 5/1/99....................................... 499,085
2,000,000 Orchard Cove, Inc., 9.00%, 5/1/22....................................... 2,082,000
130,000 Pioneer Valley, 7.00%, 10/1/01.......................................... 131,399
500,000 Pioneer Valley, 7.00%, 10/1/20.......................................... 496,250
3,000,000 Reeds Landing Project, 8.625%, 10/1/23.................................. 2,882,700
500,000 Montgomery County, Pennsylvania, Higher Education & Health
Authority Rev., Retirement Community (GDL Farms) Series A,
9.50%, 1/1/20........................................................... 585,500
</TABLE>

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<PAGE> 540

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
LIFE CARE-CONTINUED
$ 3,000,000 Palm Beach County, Florida, Health Facilities Authority Rev.,
Refunding (Waterford Project) 7.75%, 10/1/15............................ $ 2,868,570
(1)1,083,000 Peoria, Arizona, Industrial Development Authority (Sierra Winds
Life Care Community Project) 10.75%, 11/1/17............................ 893,962
Plantation, Florida, Health Facilities Authority Rev. (Covenant
Retirement Communities, Inc.)
1,000,000 7.625%, 12/1/12......................................................... 945,010
750,000 7.75%, 12/1/22.......................................................... 717,908
2,500,000 Riverside County, California, Refunding (Air Force Village West,
Inc.) Series A, 8.125%, 6/15/20......................................... 2,445,025
Salem, Oregon, Hospital Facility Authority Rev.,
700,000 7.25%, 12/1/15.......................................................... 643,692
2,000,000 7.50%, 12/1/24.......................................................... 1,886,880
------------
TOTAL LIFE CARE......................................................... 33,248,360
------------
MISCELLANEOUS 4.2%
1,800,000 Brea & Olinda, California, University School District, Certificate
of Participation (High School Refunding Program) Series B,
7.00%, 8/1/18........................................................... 1,645,290
500,000 Brevard County, Florida, Tourist Development Tax Rev.,
6.875%, 3/1/13.......................................................... 434,975
3,500,000 District of Columbia Rev. (National Public Radio) Series A,
7.70%, 1/1/23........................................................... 3,401,895
1,250,000 Erlanger, Kentucky, Assessment Rev. (Public Improvement
Project) 7.50%, 8/1/18.................................................. 1,104,850
2,960,000 Fresno, California, Certificates of Participation, 8.50%, 5/1/16.......... 3,001,440
500,000 Hopewell, Virginia, Industrial Development Authority, Resource
Recovery Rev., Refunding (Stone Container Corp. Project)
8.25%, 6/1/16........................................................... 500,700
2,500,000 Hyland Hills Metropolitan Park & Recreation District, Colorado,
Special Rev., Series A, 8.625%, 12/15/12................................ 2,529,900
(3)4,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project) 7.75%, 8/15/22............ 4,051,480
Pennsylvania Convention Center Authorities Rev., Refunding, Series A
1,000,000 6.60%, 9/1/09........................................................... 912,050
1,555,000 6.70%, 9/1/14........................................................... 1,393,871
700,000 6.75%, 9/1/19........................................................... 624,022
1,000,000 South Orange County, California, Public Funding Authority Rev.,
Series B, 7.00%, 9/1/07.................................................. 955,300
Texas General Services, Community Partner Interests (Office
Building and Land Acquisition Project)
1,000,500 7.00%, 8/1/09............................................................ 945,282
1,090,500 7.00%, 8/1/19............................................................ 1,014,492
1,400,500 7.00%, 8/1/24............................................................ 1,297,199
790,000 Virgin Islands Port Authority, Marine Division Rev. (Marine
Terminal) Series A, 10.125%, 11/1/05..................................... 816,465
------------
TOTAL MISCELLANEOUS...................................................... 24,629,211
------------

</TABLE>

F-10
<PAGE> 541

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL UTILITY DISTRICT 0.4%
$ 750,000 Clarksburg, West Virginia, Water Rev., 10.875%, 2/1/20,
Pre-refunded, 2/1/95.................................................... $ 772,582
275,000 Fort Bend County, Texas, Refunding, #25, 8.00%, 10/1/15................... 280,063
955,000 Hawaii County, Hawaii, Improvement District No. 17, Special
Assessment--Kaloko Subdivision, 9.50%, 8/1/11........................... 967,663
200,000 Northwest Harris County, Texas, Municipal Utility #22, Refunding,
Combined Tax and Rev., Water Works and Sewer System,
8.00%, 10/1/15.......................................................... 203,932
------------
TOTAL MUNICIPAL UTILITY DISTRICT........................................ 2,224,240
------------
NURSING HOMES 8.1%
720,000 Albuquerque, New Mexico, Nursing Home Rev., Refunding
(Albuquerque Health Care) 9.75%, 12/1/14................................ 765,050
500,000 Carmel, Indiana, Retirement Rental Housing Rev., Refunding
(Beverly Enterprises, Inc.) 8.75%, 12/1/08.............................. 523,750
Charleston County, South Carolina, Health Facilities Rev.,
Refunding, 1st Mtg.
750,000 Episcopal Project, 9.75%, 4/1/16........................................ 805,800
1,500,000 Roper Geriatric Center, Inc. Project, 7.75%, 5/1/17..................... 1,476,375
Colorado Health Facilities Authority Rev. (Beth Israel at Shalom,
Park Project)
585,000 7.40%, 12/15/07......................................................... 575,868
250,000 8.00%, 12/15/22......................................................... 254,215
1,025,000 Columbia County, Pennsylvania, Industrial Development Authority,
Refunding (1st Street Association Project) 9.00%, 5/1/14................ 1,071,812
Cuyahoga County, Ohio, Health Care Facilities Rev. (Jennings Hall)
1,000,000 7.20%, 11/15/14......................................................... 889,130
1,500,000 7.30%, 11/15/23......................................................... 1,328,940
2,500,000 DeSoto, Texas, Health Facilities Development Corp. Rev. (Park
Manor Senior Care, Inc. Project) 11.00%, 12/1/16........................ 2,588,150
500,000 Fairfield, Ohio, Economic Development Rev., Refunding (Beverly
Enterprises, Inc.) 8.50%, 1/1/03........................................ 508,680
1,000,000 Gardendale, Alabama, Hospital & Nursing Home Medical Clinic
Board Rev., Series A, 9.50%, 4/1/20..................................... 1,034,090
Indiana Health Facilities Authority (St. Anthony Home)
1,500,000 7.00%, 5/15/17.......................................................... 1,337,520
1,000,000 7.25%, 5/15/24.......................................................... 920,750
250,000 Lee County, Florida, Industrial Development Authority, Economic
Development Rev., Refunding (Encore Nursing Center Partner)
8.125%, 12/1/07......................................................... 240,715
Lehigh County, Pennsylvania, 1st Mtg, (Bible Fellowship Project)
250,000 7.15%, 12/15/08......................................................... 230,478
1,700,000 8.00%, 12/15/23......................................................... 1,584,757
710,000 Louisiana Public Facilities Authority Rev., Refunding
Industrial Development (Beverly Enterprises, Inc.)
8.25%, 9/1/08........................................................... 703,539
2,000,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project)
Series A, 7.875%, 12/1/13............................................... 1,896,600
1,200,000 Maplewood, Minnesota, Health Care Facilities Rev.,
(VOA Care Centers Project) 7.45%, 10/1/16............................... 1,114,752
</TABLE>

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<PAGE> 542

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
NURSING HOMES-CONTINUED
$ 500,000 Massachusetts Industrial Finance Agency, Industrial Development
Authority, Refunding (Beverly Enterprises, Inc.)
8.375%, 5/1/09........................................................ $ 502,350
1,500,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.,
7.70%, 1/1/14 ........................................................ 1,449,075
Massachusetts State Industrial Finance, Refunding, 1st Mtg.,
Series A
2,000,000 Evanswood Bethzatha, 7.625%, 1/15/14.................................. 1,870,440
1,000,000 Healthcare Corp Project, 7.625%, 4/1/13............................... 945,300
1,005,000 7.40%, 1/15/09........................................................ 942,298
Minneapolis, Minnesota, Health Care Facilities Authority Rev.
1,950,000 Ebenezer Society Project, Series A, 7.20%, 7/1/23 .................... 1,716,644
1,000,000 St. Olaf Residence, Inc. Project, 7.10%, 10/1/23...................... 886,230
2,410,000 Nevada State Department Community Health Facilities, Rev.,
Refunding (Washoe Convalescent Center Project)
8.125%, 6/1/03........................................................ 2,386,792
New Jersey Economic Development Authority Rev., Refunding
500,000 Burnt Tavern Convalescent, Series A, 9.00%, 11/15/13.................. 516,370
840,000 Stone Arch Nursing Home Project, 8.75%, 12/1/10....................... 855,649
1,500,000 United Methodist Homes of New Jersey, 6.50%, 7/1/23................... 1,196,880
500,000 Zirbser-Greenbriar, Inc., Series A, 7.375%, 7/15/03................... 472,565
915,000 Zirbser-Greenbriar, Inc., Series A, 7.75%, 7/15/08.................... 855,214
750,000 1st Mtg., Delaire Nursing, Series A, 8.75%, 11/1/10................... 755,888
New Jersey, Economic Development Rev., Series A
500,000 8.00%, 1/1/09......................................................... 470,290
1,000,000 8.25%, 1/1/17......................................................... 929,360
500,000 Oakland County, Michigan, Economic Development (Pontiac
Osteopathic Hospital Project) 9.625%, 1/1/20 ......................... 588,100
500,000 San Antonio, Texas, Health Facilities Development Corp. Rev.
(Encore Nursing Center Partner) 8.25%, 12/1/19........................ 492,210
Sherman, Illinois (Villa Health Care) 1st Mtg., Series A
500,000 8.25%, 10/1/14........................................................ 474,760
500,000 8.50%, 10/1/24........................................................ 471,675
Smith County, Tennessee, Health and Educational Facilities,
(Healthcare Corporation Project) Refunding
250,000 7.00%, 4/1/08......................................................... 232,393
500,000 7.40%, 4/1/13......................................................... 459,660
South Carolina Jobs Economic Dev. Authority, Health Facilities
Rev., 1st Mtg. (Lutheran Homes South Carolina Project)
250,000 7.75%, 10/1/12........................................................ 240,523
750,000 8.00%, 10/1/22........................................................ 719,175
1,000,000 St. Paul, Minnesota, Housing & Redevelopment Authority,
Commercial Development Rev., Refunding (Beverly
Enterprises, Inc.) 7.75%, 11/1/02..................................... 978,750
470,000 Truth or Consequences, New Mexico, Nursing Home Rev.,
Refunding & Improvement (Sierra Health Care)
9.75%, 12/1/14........................................................ 502,515
4,030,000 Valparaiso, Indiana, Economic Development Rev., Refunding,
1st Mtg. (Whispering Pines) 9.50%, 1/1/07............................. 4,240,688
250,000 Warren County, Pennsylvania, Industrial Development Authority
Rev., Refunding (Beverly Enterprises, Inc.) 9.00%, 11/1/12............ 258,913
</TABLE>

F-12
<PAGE> 543
High Yield Municipal Portfolio Investment Portfolio, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NURSING HOMES-CONTINUED
Westmoreland County, Virginia, Industrial Development Authority,
Health Facilities Rev., 1st Mtg. (Mary Washington Health Center)
$ 250,000 7.00%, 2/1/13.................................................... $ 221,228
1,500,000 7.00%, 2/1/23 ................................................... 1,281,450
------------
TOTAL NURSING HOMES.............................................. 47,764,356
------------
POLLUTION CONTROL REVENUE 10.3%
Baltimore County, Maryland (Bethlehem Steel Corp.
Project), Series A
500,000 7.50%, 6/1/15.................................................... 474,525
560,000 7.55%, 6/1/17.................................................... 532,212
Beaver County, Pennsylvania, Industrial Development Authority
2,500,000 Cleveland Electric Illuminating Co., 10.50%, 9/1/15.............. 2,629,525
2,000,000 Cleveland Electric Illuminating Co., 11.125%, 11/15/14........... 2,110,540
(3)4,075,000 Ohio Edison, 10.50%, 10/1/15..................................... 4,339,100
650,000 Toledo Edison, Series A, 10.75%, 11/15/15........................ 688,766
(3)6,235,000 Toledo Edison, 13.25%, 11/15/14 ................................. 6,588,960
565,000 Brazos River Authority, Texas (Texas Utilities Electric Co.
Project A) 9.875%, 10/1/17....................................... 626,652
Clairborne County, Mississippi (Middle South Energy)
1,355,000 Series D, 12.50%, 6/15/15........................................ 1,442,424
1,500,000 9.50%, 4/1/16.................................................... 1,597,770
(3)5,575,000 9.875%, 12/1/14.................................................. 6,283,526
1,300,000 Hodge, Louisiana, Utility Rev. (Stone Container) Series 1990,
9.00%, 3/1/10.................................................... 1,320,345
Illinois Development Finance Authority (Illinois Power Co. Project)
1,500,000 Refunding, Series A, 8.30%, 4/1/17 .............................. 1,598,265
1,245,000 10.75%, 3/1/15................................................... 1,283,956
3,000,000 Monroe County, Georgia Development Authority (Georgia
Power Co. Project) 10.50%, 9/1/15................................ 3,172,890
New Hampshire State Industrial Development Authority Rev.
3,420,000 Public Service Co. of New Hampshire Project, Series A,
7.65%, 5/1/21 ................................................... 3,288,877
4,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12............... 4,566,960
2,500,000 New York State Energy Research & Development Authority
(Long Island Lighting) Series B, 7.15%, 2/1/22................... 2,296,375
Ohio State Air Quality Development Authority Rev.
3,000,000 Cincinnati Gas & Electric, 10.125%, 12/1/15...................... 3,205,830
4,930,000 Toledo Edison, Series B, 9.875%, 11/1/22......................... 5,344,465
2,000,000 Ohio State Water Development Authority Pollution Control
Facilities Rev., Series A, 8.00%, 10/1/23........................ 1,872,400
Parish of West Feliciana, Louisiana (Gulf States Utilities Project)
500,000 Series A, 7.50%, 5/1/15.......................................... 488,735
440,000 Series A, 10.625%, 5/1/14........................................ 454,947
500,000 Series D, 12.00%, 5/1/14......................................... 517,995
600,000 12.00%, 5/1/14................................................... 621,594
1,515,000 Pope County, Arkansas (Arkansas Power & Light Project)
11.00%, 12/1/15.................................................. 1,620,823
1,500,000 Sabine River Authority, Texas, Refunding (Texas Utilities Co.
Project) 7.75%, 4/1/16........................................... 1,552,530
------------
TOTAL POLLUTION CONTROL REVENUE.................................. 60,520,987
------------
</TABLE>

F-13
<PAGE> 544

HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLIC IMPROVEMENT 1.9%
$ 1,300,000 Emeryville, California, Improvement Bonds, 7.30%, 9/2/21.................. $ 1,212,094
Fresno, California, JT Powers Financing Authority, Local
Agency Rev.
2,000,000 Series A, 6.55%, 9/2/12................................................. 1,814,900
2,600,000 Series B, 6.75%, 9/2/01................................................. 2,513,680
1,000,000 Series B, 7.35%, 9/2/12................................................. 931,610
Las Vegas, Nevada, Local Improvement Bonds
990,000 Special Improvement District No. 404, 7.30%, 11/1/09.................... 909,236
1,000,000 Special Improvement District No. 505 (Elkhorn Springs) 8.00%, 9/15/13... 925,180
Rancho Cucamonga, California, Community Facilities District
100,000 8.00%, 9/1/20........................................................... 97,640
1,500,000 8.25%, 9/1/19........................................................... 1,458,165
Riverside County, California, Improvement Bonds
500,000 7.40%, 9/2/09........................................................... 477,515
1,000,000 7.625%, 9/2/14.......................................................... 949,140
------------
TOTAL PUBLIC IMPROVEMENT................................................ 11,289,160
------------
RETIREMENT CENTERS 0.4%
1,055,000 Albuquerque, New Mexico, Retirement Facilities Rev., Refunding
(La Vida Liena Project) Series A, 8.85%, 2/1/23......................... 1,056,171
1,130,000 Jefferson County, Missouri, Industrial Development Authority,
1st Mtg., Rev. (Cedar Hills Retirement Village Project)
12.00%, 12/1/15......................................................... 1,184,104
------------
TOTAL RETIREMENT CENTERS................................................ 2,240,275
------------
SALES TAX REVENUE 4.5%
Bedford Park, Illinois, Tax Increment Rev.
1,000,000 Bedford City Project, 9.25%, 2/1/12..................................... 1,061,260
1,500,000 Mark IV Project, 9.75%, 3/1/12.......................................... 1,639,035
3,000,000 Broadview, Illinois, Tax Increment Rev., 8.25%, 7/1/13.................... 2,988,360
3,000,000 Crestwood, Cook County, Illinois, Tax Increment Rev., 7.25%, 12/1/08...... 2,767,560
2,000,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Rev.,
8.50%, 5/1/16........................................................... 2,002,500
1,315,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08................... 1,212,246
2,000,000 Hodgkins, Illinois, Tax Increment Rev., 9.50%, 12/1/09.................... 2,150,020
1,500,000 Huntington Park, California, Series C, 7.60%, 9/1/18...................... 1,424,190
1,000,000 Moreno Valley, California, Special Tax Rev., Towngate Community
Facilities District 87-1, 7.125%, 10/1/23............................... 882,100
4,250,000 New York City, New York, Industrial Development Agency,
8.50%, 12/30/22......................................................... 4,282,938
1,500,000 Richmond, California, JT Powers Financing Authority,
Improvement District No. 851 & No. 853, Series A, 7.40%, 9/2/19......... 1,414,095
Round Lake Beach, Illinois, Tax Increment Rev., Series 1993
1,900,000 7.20%, 12/1/04.......................................................... 1,797,932
500,000 7.50%, 12/1/13.......................................................... 420,035
2,000,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area) Series A, 10.00%, 8/1/10.......................................... 2,182,128
------------
TOTAL SALES TAX REVENUE................................................. 26,224,399
------------
</TABLE>

F-14
<PAGE> 545
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 3.1%
$ 1,000,000 Chicago, Illinois, O'Hare International Airport,
Special Facilities Rev. (American Airlines,
Inc. Project) 8.25%, 12/1/24.................. $ 1,003,780
Chicago, Illinois, Skyway Tollbridge Rev.,
Refunding
2,000,000 6.50%, 1/1/10.................................. 1,846,380
2,000,000 6.75%, 1/1/17.................................. 1,823,160
(3)3,000,000 Cleveland, Ohio, Parking Facilities Rev., 8.00%,
9/15/12........................................ 3,019,620
Dallas-Fort Worth, Texas, International Airport
Facilities Improvement Corp. Rev.
500,000 American Airlines, Inc., 7.50%, 11/1/25........ 453,105
1,500,000 American Airlines, Inc., 7.25%, 11/1/30........ 1,327,995
1,000,000 Delta Airlines, Inc., 7.625%, 11/1/21.......... 917,170
1,195,000 Kenton County, Kentucky, Airport Board, Special
Facilities, Rev. (Delta Airlines, Inc.
Project) 8.10%, 12/1/15........................ 1,166,786
2,000,000 New Jersey, Economic Development Authority Rev.
(Holt Hauling) Series D, 10.25%, 9/15/14....... 2,136,840
1,000,000 New York City, New York, Industrial Development
Agency, 6.90%, 8/1/24.......................... 923,310
Philadelphia, Pennsylvania, Parking Authority,
Parking Rev.
500,000 8.75%, 3/1/05.................................. 502,405
1,785,000 8.875%, 3/1/10................................. 1,794,104
1,000,000 Port Authority of New York & New Jersey,
Consolidated Board, 53rd Series, 8.70%,
7/15/20........................................ 1,051,540
------------
TOTAL TRANSPORTATION........................... 17,966,195
------------

UTILITIES 2.0%
3,000,000 Luzerne County, Pennsylvania, Industrial
Development Authority, Exempt Facilities Rev.,
Refunding (Pennsylvania Gas & Water Co.
Project) Series A, 7.20%, 10/1/17............... 2,861,070
Massachusetts Municipal Wholesale Electric Co.,
Power Supply Systems Rev.
1,515,000 Seabrook Plant, Series B, 13.625%, 7/1/17,
Pre-refunded 1/1/95............................. 1,571,661
5,000 13.625%, 7/1/17, Pre-refunded, 7/1/94........... 5,038
5,000 13.625%, 7/1/17, Pre-refunded, 1/1/95........... 5,257
4,110,000 New Hampshire State Business Finance Authority,
Electric Facilities Rev. (Plymouth Cogeneration
Light Power) 7.75%, 6/1/14...................... 3,931,462
Norco, California, Sewer and Water Rev., Refunding
1,530,000 7.20%, 10/1/19.................................. 1,415,541
935,000 6.70%, 10/1/13.................................. 869,831
1,000,000 Swanton Village, Vermont, Electric Systems
Rev., 6.70%, 12/1/23............................ 842,160
-----------
TOTAL UTILITIES................................. 11,502,020
-----------
WASTE DISPOSAL 1.1%
1,750,000 Greater Detroit, Michigan, Resource Recovery
Agency Rev. Series C, 9.25%, 12/13/08........... 1,836,590
1,500,000 Parish of St. James, Louisiana, Solid Waste
Disposal Rev. (Kaiser Aluminum Project)
7.75%, 8/1/22................................... 1,454,970
1,500,000 Rockdale County, Georgia, Development Authority
Rev., Solid Waste Disposal (Visy Paper, Inc.
Project) 7.50%, 1/1/26.......................... 1,393,365
</TABLE>

F-15
<PAGE> 546
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<Caption)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
WASTE DISPOSAL-CONTINUED
$ 1,825,000 Sweetwater County, Wyoming, Solid Waste
Disposal Rev. (FMC Corporate Project)
Series A, 7.00%, 6/1/24....................... $ 1,684,858
------------
TOTAL WASTE DISPOSAL.......................... 6,369,783
------------
TOTAL MUNICIPAL BONDS (Cost $585,729,914)..... 566,490,190
------------

Private Placement 0.4%
2,425,000 New Hampshire, Higher Educational & Health Care,
7.25%, 9/1/23, purchased 9/23/93
(Cost $2,381,908)............................. 2,183,713
------------

Repurchase Agreement 0.9%
5,100,000 Salomon Brothers, Inc., dated 11/30/94, 5.70%
due 12/1/94 (collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $5,100,808
(Cost $5,100,000)............................. 5,100,000
------------
TOTAL INVESTMENTS (Cost $593,211,822) 98.0%..... 573,773,903
Other assets and liabilities, net 2.0%......... 11,944,408
------------

NET ASSETS 100%................................. $585,718,311
</TABLE> ============

(1) SECURITY IS NOT ACCRUING AT THE STATED RATE, BUT A LESSER INTEREST RATE.

(2) WHEN ISSUED SECURITY (NOTE 1H)

(3) SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $39.8 MILLION WERE PLACED
AS COLLATERAL FOR FUTURES CONTRACTS (NOTE 1C).

(4) NON-INCOME PRODUCING SECURITY

REV.--REVENUE BOND.

See Notes to Financial Statements.

F-16

<PAGE> 547

HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $593,211,822)................. $573,773,903
Interest receivable.............................................. 14,996,820
Receivable for investments sold.................................. 9,979,675
Receivable for Fund shares sold.................................. 2,828,465
Other assets..................................................... 2,678
------------
601,581,541
------------
LIABILITIES
Payable for investments purchased................................ 10,967,185
Dividends payable................................................ 1,959,605
Payable for Fund shares redeemed................................. 1,680,399
Accrued expenses and other payables.............................. 351,585
Due to Distributor............................................... 344,067
Due to Adviser................................................... 270,239
Due to broker-variation margin................................... 239,150
Due to shareholder service agent................................. 51,000
------------
15,863,230
------------
NET ASSETS, equivalent to $10.44 per share for Class A shares,
$10.43 per share for Class B shares and $10.42 per share for
Class C shares................................................. $585,718,311
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 39,398,176 Class A and
15,273,330 Class B and 1,465,808 Class C shares outstanding.... $ 561,373
Capital surplus.................................................. 632,480,720
Accumulated net realized loss on securities...................... (27,601,474)
Net unrealized depreciation of securities
Investments.................................................... (19,437,919)
Futures contracts.............................................. (506,300)
Undistributed net investment income.............................. 221,911
------------
NET ASSETS at November 30, 1994.................................. $585,718,311
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-17
<PAGE> 548

HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS

Year Ended November 30, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 44,680,531
------------
EXPENSES
Management fees........................................................... 3,172,407
Service fees-Class A...................................................... 1,029,318
Distribution and service fees-Class B..................................... 1,335,592
Distribution and service fees-Class C..................................... 65,351
Shareholder service agent's fees and expenses............................. 676,716
Accounting services....................................................... 163,929
Registration and filing fees.............................................. 93,269
Reports to shareholders................................................... 91,596
Audit fees................................................................ 30,582
Legal fees................................................................ 24,750
Trustees' fees and expenses............................................... 18,546
Custodian fees............................................................ 16,424
Miscellaneous............................................................. 30,424
------------
Total expenses........................................................... 6,748,904
------------
Net investment income.................................................... 37,931,627
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.............................................................. (11,274,136)
Futures contracts........................................................ 4,523,306
Net unrealized depreciation of securities during the year
Investments.............................................................. (30,992,247)
Futures transactions..................................................... (279,550)
------------
Net realized and unrealized loss on securities.......................... (38,022,627)
------------
Decrease in net assets resulting from operations........................ $ (91,000)
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-18
<PAGE> 549

HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year........................... $512,768,709 $330,485,088
------------ ------------
OPERATIONS
Net investment income................................. 37,931,627 28,908,357
Net realized gain (loss) on securities................ (6,750,830) 104,748
Net unrealized appreciation (depreciation) of
securities during the year....... ................. (31,271,797) 5,397,218
------------ ------------
Increase (decrease) in net assets resulting
from operations .................................... (91,000) 34,410,323
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A............................................... (29,486,022) (25,476,080)
Class B............................................... (8,334,914) (3,395,580)
Class C............................................... (399,671) --
------------ ------------
(38,220,607) (28,871,660)
------------ ------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A............................................. 98,704,070 136,200,777
Class B............................................. 70,654,239 86,185,026
Class C............................................. 15,954,972 --
------------ ------------
185,313,281 222,385,803
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A............................................. 11,857,412 10,482,082
Class B............................................. 3,702,608 1,527,476
Class C............................................. 230,780 --
------------ ------------
15,790,800 12,009,558
------------ ------------
Cost of shares redeemed
Class A............................................. (78,622,401) (54,058,845)
Class B............................................. (10,751,774) (3,591,558)
Class C............................................. (468,697) --
------------ ------------
(89,842,872) (57,650,403)
------------ ------------
Increase in net assets resulting from
share transactions.................................. 111,261,209 176,744,958
------------ ------------
INCREASE IN NET ASSETS.................................. 72,949,602 182,283,621
------------ ------------
NET ASSETS, end of year................................. $585,718,311 $512,768,709
============ ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-19

<PAGE> 550

INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 96.6%
EDUCATION 4.7%
$ 500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07.................... $ 587,605
1,000,000 Corona-Norco, California, University School District Lease Rev., FSA,
6.00%, 4/15/19........................................................ 868,080
425,000 Earlimart, California, Elementary School District, Series 1, AMBAC,
6.70%, 8/1/21......................................................... 397,056
500,000 Indiana State University Rev., Building 3 (Student Fee) Series E,
MBIA, 7.375%, 10/1/10................................................. 540,505
1,000,000 Pennsylvania State Higher Education, Assistance Agency, Student
Loan Rev., Series D, AMBAC, 6.05%, 1/1/19............................. 875,440
1,000,000 University of Washington, Housing & Dining Rev., MBIA, 7.00%, 12/1/21.... 1,006,620
750,000 Wisconsin State Health & Educational Facilities Rev.,
FGIC 6.25%, 12/1/10................................................... 695,685
------------
TOTAL EDUCATION....................................................... 4,970,991
------------
GENERAL OBLIGATIONS 6.9%
1,000,000 Berwyn Illinois Corp., MBIA, 7.00%, 11/15/10............................. 1,002,370
1,075,000 Cicero, Illinois, Refunding, Tax Increment, Series A, MBIA,
5.70%, 12/1/13........................................................ 921,318
245,000 Henderson, Texas, Limited Tax, AMBAC, 9.125%, 5/15/04.................... 295,499
1,000,000 Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series-92, 8.10%, 12/1/11........................ 1,026,280
800,000 Regional Transportation Authority, Illinois, Series A, AMBAC,
6.125%, 6/1/22........................................................ 696,296
1,000,000 St. Clair County, Illinois, FGIC, 5.75%, 10/1/15......................... 843,680
965,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23............ 925,049
500,000 Travis County, Texas, Series A, MBIA, 5.50%, 3/1/03...................... 480,095
1,000,000 Webb County, Texas, Limited Tax, CGIC, Series-89,
7.25%, 2/15/09........................................................ 1,053,340
------------
TOTAL GENERAL OBLIGATIONS............................................. 7,243,927
------------
HOSPITALS 28.5%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project)
AMBAC, 5.75%, 8/15/22................................................. 412,400
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev.
(Bon Secours Health System Project) FSA, 5.625%, 8/15/25.............. 801,320
190,000 Clermont County, Ohio, Hospital Facilities Rev. (Mercy Health Care
System) Series A, AMBAC, 9.75%, 9/1/13................................ 200,805
750,000 Decatur, Illinois, Health Care Facilities Rev. (DMH Community
Services Corp. Project) BIG, 8.10%, 11/15/18.......................... 793,597
750,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital
MedLantic) Series A, MBIA, 7.10%, 11/1/11............................. 756,037
500,000 Florence County, South Carolina, Hospital Rev. (McLeod Regional
Medical Center Project) Series B, FGIC, 8.75%, 11/1/09,
Pre-refunded, 11/1/95................................................. 528,030
1,650,000 Fort Wayne, Indiana, Hospital Authority Rev. (Ancilla Health
Systems, Inc.) Series C, BIG, 8.125%, 7/1/18, Pre-refunded, 1/1/99 ... 1,826,550
1,250,000 Harris County, Texas Health Facilities, (Development Corp. Thermal
Utility Rev.), Series A, AMBAC, 7.25%, 2/15/15........................ 1,275,050
1,500,000 Harris County, Texas, Hospital District Mtg. Rev., BIG,
8.50%, 4/1/15, Pre-refunded, 4/1/96.................................... 1,594,950
</TABLE>

F-20

<PAGE> 551
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-continued
Illinois Health Facilities Authority Rev.
$ 1,685,000 Brokaw Mennonite Association, FGIC, 8.00%, 8/15/17.................. $ 1,843,441
775,000 Franciscan Sisters Health Project, MBIA, 7.875%, 9/1/18............. 836,644
1,695,000 Sisters of St. Mary's Health Care, Series B, MBIA, 8.00%, 6/1/14.... 1,850,703
Indiana Health Facility Financing Authority (Lutheran Hospital
Indiana, Inc.)
1,000,000 MBIA, 6.85%, 7/1/22................................................. 964,000
1,000,000 AMBAC, 7.00%, 2/15/19............................................... 995,230
500,000 Kent Hospital Finance Authority, Michigan Hospital Facility Rev.
(Pine Rest Christian Hospital Association) FGIC, 9.00%, 11/1/10..... 529,140
1,000,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital
Project) AMBAC, 6.70%, 5/1/12....................................... 970,970
1,000,000 Louisiana Public Facilities Authority, Health & Educational Capital
Facilities Rev. (Our Lady of the Lake Medical Center) Series A,
BIG, 8.20%, 12/1/15................................................. 1,075,660
Louisiana Public Facilities Authority, Hospital Rev.
500,000 Southern Baptist Hospital Project, FSA, 6.80%, 5/15/12.............. 493,940
500,000 Touro Infirmary Project, Series A, BIG, 8.00%, 6/1/02............... 545,930
500,000 Maine Health & Higher Educational Facilities Authority Rev.,
Series-91, FSA, 6.375%, 7/1/21...................................... 455,490
250,000 Marion County, Florida, Hospital District Rev., Refunding, Ocala,
Florida (Munroe Regional Medical Center) FGIC,
6.25%, 10/1/12...................................................... 230,798
Massachusetts State Health & Educational Facilities Authority Rev.
1,000,000 Children's Hospital Corp., Series B, 11.00%, 1/1/05................. 1,024,270
1,000,000 University Hospital, Series C, MBIA, 7.25%, 7/1/19.................. 1,017,370
500,000 Mississippi, Hospital Equipment & Facilities (Wesley Health
System, Inc.) CONN, Series A, 6.05%, 4/1/12......................... 436,805
475,000 Missouri State Health & Educational Facilities Authority Rev.,
Heartland Health Systems Project, AMBAC, 6.35%, 11/15/17............ 437,428
500,000 North Central Texas, Health Facility Development Corp. Rev.
(Presbyterian Healthcare Project) Series B, BIG,
8.875%, 12/1/15, Pre-refunded, 12/1/97.............................. 556,025
1,000,000 Parish of Jefferson, Louisiana, Hospital Services (West Jefferson
General Hospital Project) FGIC, 9.875%, 1/1/10...................... 1,024,280
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series H-2,
AMBAC, 7.625%, 12/1/15.............................................. 1,068,360
1,000,000 St. Joseph County, Indiana, Hospital Authority, Hospital Facilities
Rev. (Memorial Hospital South Bend Project) MBIA,
6.25%, 8/15/12...................................................... 924,320
280,000 Waco, Texas, Health Facilities Development Corp., Hospital Rev.
(Hillcrest Baptist Medical Center) MBIA, 9.20%, 9/1/14,
Pre-refunded, 9/1/95................................................ 294,798
Washington State Health Care Facilities Authority Rev.,
Refunding, MBIA
1,395,000 Empire Health Services Spokane, 8.375%, 11/1/06..................... 1,529,311
1,000,000 Virginia-Mason Medical Center, 8.00%, 7/1/15........................ 1,060,380
500,000 West Virginia State Hospital Finance Authority, Hospital Rev.
(Monongalia General Hospital) BIG, 8.60%, 7/1/17,
Pre-refunded, 7/1/97................................................ 538,100
1,000,000 Wisconsin State Health & Educational Rev. (Milwaukee Regional
Medical Center, Inc. Project) AMBAC, 7.50%, 8/1/11.................. 1,012,400
------------
TOTAL HOSPITALS..................................................... 29,904,532
------------

</TABLE>

F-21
<PAGE> 552
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING 4.3%
$ 265,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B,
9.25%, 4/1/16..................................................... $ 271,503
1,280,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10..................................... 1,170,214
960,000 Louisiana Public Facilities Authority, Multi-family Housing Rev.
(One Lakeshore Place Apartments) 9.25%, 7/20/20................... 993,658
1,195,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26..................................................... 1,121,209
1,000,000 South Dakota State Housing Development Authority, 6.85%, 5/1/26...... 971,250
------------
TOTAL HOUSING..................................................... 4,527,834
------------
INDUSTRIAL DEVELOPMENT REVENUE 4.0%
2,000,000 Clark County, Nevada (Nevada Power Co. Project), AMBAC,
7.20%, 10/1/22.................................................... 2,019,340
850,000 Manatee County, Florida (Manatee Hospital & Health System) MBIA,
8.25%, 8/15/14.................................................... 907,996
720,000 Pima County, Arizona, Refunding, FSA, 7.25%, 7/15/10................. 723,542
500,000 Parish of St. Charles, Louisiana, Solid Waste Disposal Rev.,
7.05, 4/1/22...................................................... 498,730
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.............................. 4,149,608
------------
MISCELLANEOUS 6.9%
600,000 Arizona State Municipal Financing Program, Certificates of
Participation, Series 17, BIG, 8.125%, 8/1/17..................... 635,088
1,000,000 Charleston County, South Carolina, Certificates of Participation,
Charleston Public Facilities Corp., MBIA, 7.10%, 6/1/11........... 1,072,130
875,000 Chicago, Illinois, Public Building Commission, Building Rev.
(Community College, District #508) Series B, BIG,
8.75%, 1/1/07..................................................... 937,807
1,000,000 Dade County, Florida, Special Obligation (Miami Beach Convention
Center Project) Series B, FGIC, 8.80%, 12/1/02.................... 1,097,280
310,000 Louisiana Public Facilities Authority Rev. (Medical Center Louisiana
at New Orleans Project) CONN, 6.25%, 10/15/10..................... 290,148
1,000,000 Pennsylvania Convention Center Authority Rev., Series A, FGIC,
6.00%, 9/1/19..................................................... 906,920
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding
Lease, Series A, FGIC, 5.625%, 11/15/14........................... 1,289,190
1,000,000 South Dakota, Lease Rev., Series A, CGIC, 6.625%, 9/1/12............. 956,690
------------
TOTAL MISCELLANEOUS............................................... 7,185,253
------------
MUNICIPAL UTILITY DISTRICT 0.7%
425,000 Maple Run at Austin, Texas Contract, Rev., FGIC, 8.25%, 11/15/05..... 456,238
250,000 Montgomery County, Texas, MBIA, 6.25%, 3/1/14........................ 235,838
------------
TOTAL MUNICIPAL UTILITY DISTRICT.................................. 692,076
------------
POLLUTION CONTROL REVENUE 14.2%
Beaver County, Pennsylvania, Industrial Development Authority,
Refunding (Ohio Edison Co. Mansfield), Series A, FGIC
1,000,000 7.10%, 6/1/18..................................................... 990,980
500,000 7.75%, 9/1/24..................................................... 531,030
</TABLE>

F-22
<PAGE> 553
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE-continued
Brazos River Authority, Texas, Rev.
$ 1,870,000 Houston Lighting & Power, Refunding, Series B, FGIC,
7.20%, 12/1/18...................................................... $ 1,941,153
1,000,000 Series C, BIG, 8.10%, 5/1/19........................................ 1,074,210
1,270,000 Texas Utilities Electric Co., FGIC, 9.875%, 10/1/17................. 1,419,136
1,000,000 Emery County, Utah, Refunding (Pacificorp Project) Series A,
AMBAC, 5.65%, 11/1/23............................................... 808,160
1,000,000 Lehigh County, Pennsylvania, Industrial Development Authority
(Pennsylvania Power & Light Co. Project) Series A, MBIA,
6.40%, 11/1/21...................................................... 908,650
1,000,000 Matagorda County, Texas, Navigation District #1 (Houston
Lighting & Power) Series D, FGIC, 7.60%, 10/1/19.................... 1,072,490
Monroe County, Michigan (Detroit Edison Co.)
750,000 Series A, AMBAC, 9.625%, 12/1/15.................................... 805,065
1,000,000 Series I-B, MBIA, 6.55%, 9/1/24..................................... 905,940
1,500,000 Ohio State Air Quality Development Authority Rev. (Cleveland Co.
Project) FGIC, 8.00%, 12/1/13....................................... 1,659,780
200,000 Parish of West Feliciana, Louisiana (Gulf State Utilities) Series A,
7.50%, 5/1/15....................................................... 195,494
1,000,000 Pope County, Arkansas (Arkansas Power & Light Co. Project) FSA,
10.625%, 12/1/15.................................................... 1,072,820
1,000,000 Rockport, Indiana (Indiana & Michigan Electric Co.) Series A,
BIG, 9.25%, 8/1/14.................................................. 1,041,100
500,000 Warren County, New Jersey, Pollution Control Financing Authority,
Series A, FGIC, 9.00%, 12/1/06...................................... 550,920
------------
TOTAL POLLUTION CONTROL REVENUE..................................... 14,976,928
------------
PUBLIC IMPROVEMENT 0.5%
465,000 Dallas, Texas, Civic Center, Sr. Lien, AMBAC, 7.00%, 1/1/10............ 479,554
------------
SALES TAX REVENUE 2.4%
Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement,
FGIC
250,000 6.25%, 12/1/12...................................................... 235,597
500,000 6.25%, 12/1/17...................................................... 463,330
250,000 Broken Arrow, Oklahoma, Municipal Authority Utility System &
Sales Tax Rev., FGIC, 9.75%, 5/1/05................................. 262,620
1,000,000 Marion County, Indiana, Convention & Recreational Facilities,
Series A, AMBAC, 7.00%, 6/1/21...................................... 1,012,090
500,000 Rhode Island, Depositors Economic Corp., Special Obligation,
Series A, FSA, 6.625%, 8/1/19, Pre-refunded, 8/1/02................. 521,990
------------
TOTAL SALES TAX REVENUE............................................. 2,495,627
------------
TRANSPORTATION 6.3%
Chicago, Illinois, O'Hare International Airport, Special Facility Rev.
(International Terminal) Series A, MBIA
500,000 7.50%, 1/1/17....................................................... 505,135
500,000 7.625%, 1/1/10...................................................... 516,480
500,000 Harris County, Texas, Refunding, Toll Road Sr. Lien, Series B,
AMBAC, 6.625%, 8/15/17.............................................. 516,970
Hawaii State, Airports System Rev.
350,000 AMBAC, 7.375%, 7/1/11............................................... 356,052
500,000 2nd Series, MBIA, 7.00%, 7/1/18..................................... 498,810
1,250,000 Louisville & Jefferson County, Kentucky, Regional Airport Authority
Rev., Series A, MBIA, 8.50%, 7/1/17................................. 1,339,900

</TABLE>

F-23

<PAGE> 554
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>

TRANSPORTATION-CONTINUED
$ 500,000 Memphis-Shelby County, Tennessee, Airport Authority Rev., MBIA,
8.125%, 2/15/12 ......................................................... $ 536,490
1,700,000 Palm Beach County, Florida, Airport System Rev., MBIA,
7.75%, 10/01/10.......................................................... 1,829,710
500,000 Tulsa, Oklahoma, Airport Improvement, General Rev., MBIA,
7.50%, 6/1/08............................................................ 525,585
------------
TOTAL TRANSPORTATION...................................................... 6,625,132
------------
UTILITIES 16.4%
1,000,000 Austin, Texas, Utility Systems Rev., BIG, 8.625%, 11/15/12 ................. 1,149,170
1,000,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC,
6.30%, 1/1/12 ............................................................ 1,018,420
565,000 City of Brownsville, Texas, Utilities System Priority Rev., Series 1990,
AMBAC, 6.50%, 9/1/17 ..................................................... 539,790
1,000,000 Colorado River, Texas, Municipal Water District (Water
Transmission Facilities Project-A) AMBAC, 6.625%, 1/1/21 ................. 1,031,150
100,000 Farmington, New Mexico, Utility System Rev., FGIC,
9.75%, 5/15/13, Pre-refunded, 5/15/96 .................................... 108,458
2,000,000 Lower Colorado River Authority, Texas, Rev., Refunding, FSA,
5.625%, 1/1/17 ........................................................... 1,704,565
700,000 Missouri State Environmental Improvement & Energy Resource
Authority, Environment Improvement Rev., AMBAC,
7.40%, 5/1/20 ............................................................ 730,303
2,000,000 M-S-R Public Power Agency, California, San Juan Project Rev.,
Refunding, Series F, AMBAC, 6.00%, 7/1/20 ................................ 1,741,980
200,000 New York City, New York, Municipal Water Finance Authority,
Water & Sewer System Rev., Series A, 9.00%, 6/15/17,
Pre-refunded, 6/15/97 .................................................... 220,624
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev.,
MBIA, 5.75%, 1/1/20 ...................................................... 842,820
1,000,000 Northern Minnesota, Municipal Power Agency, Series A, AMBAC,
7.25%, 1/1/16 ............................................................ 1,039,670
215,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
Refunding, Series A, AMBAC, 9.25%, 1/1/19, Pre-refunded,
1/1/96 ................................................................... 230,639
500,000 Provo City, Utah, Energy System Rev., Series A, AMBAC,
9.50%, 11/1/10 ........................................................... 536,160
1,500,000 Reedy Creek, Florida, Improvement District Utilities Rev., Series 1,
MBIA, 9.00%, 10/1/07 ..................................................... 1,646,280
400,000 Rock Hill, South Carolina, Utility Systems Rev., FGIC,
8.00%, 1/1/18 ............................................................ 433,580
600,000 Tacoma, Washington, Electric Systems Rev., AMBAC,
8.00%, 1/1/11, Pre-refunded, 1/1/98 ...................................... 650,370
Washington State Public Power Supply System Rev. (Nuclear
Project No. 3)
450,000 BIG, 7.25%, 7/1/16 ....................................................... 482,841
2,000,000 MBIA, 5.60%, 7/1/15 ...................................................... 1,647,900
1,500,000 MBIA, 5.60%, 7/1/17 ...................................................... 1,218,330
250,000 Refunding, Rev., BIG, 6.00%, 7/1/18 ...................................... 213,170
------------
TOTAL UTILITIES........................................................... 17,186,220
------------
WASTE DISPOSAL 0.8%
1,000,000 Montgomery County, Maryland, Solid Waste System Rev., Series A,
AMBAC, 5.875%, 6/1/13 .................................................... 867,010
------------
TOTAL MUNICIPAL BONDS (Cost $105,401,512)................................. 101,304,692
------------
</TABLE>

F-24
<PAGE> 555
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994

+ Interest rates are as of November 30, 1994
Rev.--Revenue bond

Insurers:
AMBAC--AMBAC Indemnity Corp.
BIG--Bond Investors Guaranty Insurance Corp.
CGIC--Capital Guaranty Insurance Corp.
CONN--Connie Lee
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance Corp.
MBIA--Municipal Bond Investors' Assurance Corp.

See Notes to Financial Statements

F-25
<PAGE> 556

INSURED MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $106,701,512)................ $102,604,692
Interest receivable............................................. 2,431,085
Receivable for investments sold................................. 541,086
Receivable for Fund shares sold................................. 79,996
Other assets.................................................... 16,979
------------
105,673,838
------------
LIABILITIES
Payable for Fund shares redeemed................................ 364,842
Dividends payable............................................... 234,220
Due to Distributor.............................................. 68,938
Due to Adviser.................................................. 49,969
Bank overdraft.................................................. 47,535
Accrued expenses................................................ 45,995
Due to shareholder service agent................................ 7,850
------------
819,349
------------
NET ASSETS, equivalent to $10.55 per share for Class A and
Class B shares, and $10.54 per share for Class C shares....... $104,854,489
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 6,379,617 Class A and
3,379,577 Class B and 180,188 Class C shares outstanding...... $ 99,394
Capital surplus................................................. 114,706,725
Accumulated net realized loss on securities..................... (5,876,339)
Net unrealized depreciation of securities....................... (4,096,820)
Undistributed net investment income............................. 21,529
------------
NET ASSETS at November 30, 1994................................. $104,854,489
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-26
<PAGE> 557

INSURED MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>

INVESTMENT INCOME
Interest..................................................... $7,473,020
----------
EXPENSES
Management fees.............................................. 641,145
Service fees-Class A......................................... 180,174
Distribution and service fees-Class B........................ 378,659
Distribution and service fees-Class C........................ 15,952
Shareholder service agent's fees and expenses................ 118,640
Registration and filing fees................................. 92,838
Accounting services.......................................... 86,031
Reports to shareholders...................................... 28,650
Audit fees................................................... 22,702
Trustees' fees and expenses.................................. 11,975
Legal fees................................................... 11,762
Custodian fees............................................... 6,915
Miscellaneous................................................ 7,096
------------
Total expenses............................................. 1,602,539
------------
Net investment income...................................... 5,870,481
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.............................. (464,507)
Net unrealized depreciation of securities during the year.... (10,201,344)
------------
Net realized and unrealized loss on securities............. (10,665,851)
------------
Decrease in net assets resulting from operations...........$ (4,795,370)
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-27
<PAGE> 558

INSURED MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------
1994 1993
------------ -------------
<S> <C> <C>

NET ASSETS, beginning of year............................... $109,719,511 $ 74,387,518
------------ -------------
OPERATIONS
Net investment income..................................... 5,870,481 5,137,222
Net realized loss on securities........................... (464,507) (228,375)
Net unrealized appreciation (depreciation) of securities
during the year......................................... (10,201,344) 2,393,531
------------ -------------
Increase (decrease) in net assets resulting
from operations........................................... (4,795,370) 7,302,378
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A................................................. (3,998,830) (4,006,512)
Class B................................................. (1,770,263) (1,129,616)
Class C................................................. (73,782) --
------------ -------------
(5,842,875) (5,136,128)
------------ -------------
In excess of net investment income
Class A................................................. -- (21,356)
Class B................................................. -- (9,946)
Class C................................................. -- --
------------ -------------
-- (31,302)
------------ -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS....................... (5,842,875) (5,167,430)
------------ -------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................. 11,790,509 17,447,835
Class B................................................. 10,898,379 25,351,509
Class C................................................. 2,707,049 --
------------ -------------
25,395,937 42,799,344
------------ -------------
Proceeds from shares issued for dividends reinvested
Class A................................................. 2,032,068 2,050,353
Class B................................................. 1,023,631 657,194
Class C................................................. 58,216 --
------------ -------------
3,113,915 2,707,547
------------ -------------
Cost of shares redeemed
Class A................................................. (14,932,364) (10,204,699)
Class B................................................. (7,093,131) (2,105,147)
Class C................................................. (711,134) --
------------ -------------
(22,736,629) (12,309,846)
------------ ------------
Increase in net assets resulting from share transactions.. 5,773,223 33,197,045
------------ ------------
INCREASE (DECREASE) IN NET ASSETS........................... (4,865,022) 35,331,993
------------ ------------
NET ASSETS, end of year..................................... $104,854,489 $109,719,511
============ ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-28
<PAGE> 559

NOTES TO FINANCIAL STATEMENTS

Note 1-Significant Accounting Policies

American Capital Tax-Exempt Trust (the "Fund") is comprised of two municipal
bond portfolios: High Yield Municipal Portfolio ("High Yield") and Insured
Municipal Portfolio ("Insured"), and is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management
investment company.

Each portfolio is accounted for as a separate entity. The following is a
summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial statements.

A. Investment Valuations

Municipal bonds are valued at the most recently quoted bid prices or at
bid prices based on a matrix system (which considers such factors as
security prices, yields, maturities and ratings) furnished by dealers
and an independent pricing service. Securities for which market
quotations are not readily available are valued at a fair value as
determined in good faith by the Board of Directors of the Fund.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value.
Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days
to maturity becomes less than 61 days. From such time, until maturity,
the investments are valued at amortized cost.

High yield investments include lower rated and unrated debt securities
which may be more susceptible to adverse economic conditions than
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. Securities
rated below investment grade and comparable unrated securities
represented approximately 74% of High Yield's investment portfolio at
November 30, 1994.

Issuers of certain securities owned by Insured have obtained insurance
guaranteeing their timely payment of principal at maturity and interest.
The insurance reduces credit risk but not market risk of the security.

B. Repurchase Agreements

A repurchase agreement is a short-term investment in which a 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
Manager, Inc. ("The Adviser"), the daily aggregate of which is invested
in repurchase agreements. Repurchase agreements are collateralized by
the underlying debt securities. The Fund will make payment for such
securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.

C. Futures Contracts

Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments by increasing or decreasing
the percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.

Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is
held as collateral in an account in the name of the broker, the Fund's
agent in acquiring the futures position. During the period the futures
contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains and losses are realized. The cost
of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.

F-29
<PAGE> 560

D. Federal Income Taxes

No provision for federal income taxes is required because the Fund has
elected to be taxed as "regulated investment companies" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards, if any, expire or are offset by
net realized capital gains.

E. Investment Transactions and Related Investment Income

Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.

F. Dividends and Distributions

The Fund declares dividends from net investment income of each portfolio
on each business day. The Fund intends to continue to invest principally
in tax-exempt obligations sufficient in amount to qualify it to pay
"exempt-interest dividends" as defined in the Internal Revenue Code.

The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed a portfolio's financial statement earnings.

G. Debt Discount or Premium

The Fund accounts for discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue debt
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains
for book purposes and ordinary income for tax purposes.

H. When-Issued Securities

Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the day of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligations, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.

Note 2-Management Fees and Other Transactions with Affiliates

The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the aggregate average daily net assets of the Fund at an
annual rate of .60% of the first $300 million of the aggregate average daily
net assets, .55% of the next $300 million, and .50% of the amount in excess of
$600 million, and are allocated on a pro-rata basis to each portfolio. From
time to time, the Adviser may voluntarily elect to subsidize a portion of the
Fund's expenses. The voluntary subsidy may be discontinued at any time without
prior notice. There were no subsidies during the fiscal year ended November 30,
1994.

Other transactions with affiliates during the year were as follows:

<TABLE>
<CAPTION>
High Yield Insured
---------- --------
<S> <C> <C>
Accounting services (accounting officers cost... $ 12,752 $ 7,296
Legal fees...................................... 19,142 10,864
Shareholder service agent's fees................ 561,481 92,670
Sales of Fund shares:
Distributor commissions....................... 406,466 27,152
Retail Dealer commissions..................... 81,508 8,526
</TABLE>

Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
These charges included the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services. These services provided by the
Adviser are at cost.

Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.

F-30

<PAGE> 561
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.

The Fund was informed that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corporation (the "Retail Dealer"),
both affiliates of the Adviser, received commissions charged on sales of Fund
shares during the year.

Under the terms of the Distribution plans, each portfolio pays up to .25% per
annum of its average daily net assets to reimburse the Distributor for
expenses and service fees incurred. Class B and Class C shares pay an
additional distribution fee of up to .75% per annum of their average net
assets to reimburse the Distributor for its distribution expenses. Actual
distribution expenses incurred by the Distributor for Class B and Class C
shares may exceed the amounts reimbursed to the Distributor by the portfolios.
At November 30, 1994, the unreimbursed expenses by the Distributor under the
Class B and Class C plans aggregated approximately $5.8 million and $126,000,
respectively, for High Yield and approximately $1.5 million and $36,000,
respectively, for Insured and may be carried forward and reimbursed through
either the collection of the contingent deferred sales charges from share
redemptions or, subject to the annual renewal of the plans, future
reimbursements of distribution fees.

Certain officers and trustees of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.

NOTE 3-INVESTMENT ACTIVITY

During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments were:

<TABLE>
<CAPTION>
High Yield Insured
------------ -----------
<S> <C> <C>

Purchases............................... $297,374,429 $16,297,871
Sales................................... 183,879,756 5,427,250
</TABLE>

The following table presents the identified cost of investments at November
30, 1994 for the federal income tax purposes with the associated net
unrealized depreciation and the net realized capital loss carryforward.

<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Identified cost......................... $593,217,322 $106,701,512
============ ============
Gross unrealized appreciation........... $ 9,456,793 $ 2,150,516
Gross unrealized depreciation........... (28,900,212) (6,247,336)
------------ ------------
Net unrealized depreciation............. $(19,443,419) $ (4,096,820)
============ ============
Net realized capital loss carryforward . $ 27,073,800 $ 5,876,339
============ ============
</TABLE>

The net realized capital loss carryforwards at November 30, 1994 may be
utilized to offset any future capital gains until expiration from 1995
through 2002. Additionally, approximately $1 million of financial
statement capital losses for High Yield are deferred for tax purposes
to the 1995 fiscal year.

At November 30, 1994, High Yield held 405 short United States Treasury Bond
financial futures contracts expiring in March 1995. The market value of such
contracts at November 30, 1994 was $39,715,313 and the unrealized
depreciation was $506,300.

During the year, the cost of purchases and proceeds from sales of investments
resulting from transactions between High Yield, Insured and other investment
companies advised by the Adviser were:

<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Purchases................................ $9,650,000 $1,240,000
Sales.................................... 2,450,000 6,185,000

</TABLE>

Such transactions were at current market prices on the dates of the
transactions for cash payment against prompt delivery, with no brokerage
commissions. The sales transactions did not result in a net realized gain or
loss to either High Yield or Insured.

F-31
<PAGE> 562

Note 4-Trustee Compensation

Trustee fees for the year and the liability for deferred compensation at
November 30, 1994 were:

<TABLE>
<CAPTION>
High Yield Insured
---------- -------
<S> <C> <C>
Trustee fees.............................. $15,738 $10,514
Deferred compensation liability........... 10,326 7,238
</TABLE>

Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $2,510 plus a fee of $65 per day for the Board and Committee
meetings attended. The Chairman receives additional fees at an annual rate of
$940. The trustees may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the general accounts. Funds for the payment of obligations
under the Plan will not be reserved or set aside by any form of trust or
escrow. Each director covered by the Plan has elected to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.

Note 5-Capital

Each portfolio offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time
of purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of a higher distribution services fee and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each class
of shares based upon the relative proportion of net assets of each class. Class
B shares and Class C shares automatically convert to Class A shares six years
and ten years after purchase, respectively, subject to certain conditions.

Each portfolio has an unlimited number of $.01 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:

<TABLE>
<CAPTION>
High Yield Insured
------------------------- ------------------------
Year Ended November 30 Year Ended November 30
------------------------- ------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares sold
Class A.............................. 9,122,951 12,107,184 1,040,502 1,513,883
Class B.............................. 6,562,885 7,638,462 959,397 2,200,973
Class C.............................. 1,487,816 -- 240,049 --
---------- ---------- ---------- ----------
17,173,652 19,745,646 2,239,948 3,714,856
---------- ---------- ---------- ----------
Shares issued for dividends reinvested
Class A.............................. 1,092,261 934,043 182,323 177,668
Class B.............................. 342,025 135,852 91,999 56,831
Class C.............................. 21,563 -- 5,302 --
---------- ---------- ---------- ----------
1,455,849 1,069,895 279,624 234,499
---------- ---------- ---------- ----------
Shares redeemed
Class A.............................. (7,290,648) (4,825,070) (1,344,232) (882,537)
Class B.............................. (999,142) (318,824) (640,367) (181,615)
Class C.............................. (43,571) -- (65,163) --
----------- ---------- ---------- ----------
(8,333,361) (5,143,894) (2,049,762) (1,064,152)
----------- ---------- ---------- ----------
Increase in shares outstanding......... 10,296,140 15,671,647 469,810 2,885,203
=========== ========== ========== ==========

</TABLE>

F-32
<PAGE> 563

HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED NOVEMBER 30
---------------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.......... $11.19 $10.95 $10.78 $10.72 $10.91
------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .87 .9310 .93 .885 1.005
Expenses................................... (.11) (.1178) (.115) (.115) (.105)
------- -------- ------- ------- -------
Net investment income...................... .76 .8132 .815 .77 .90
Net realized and unrealized gain
or loss on securities.................... (.744) .2303 .195 .13 (.23)
------- -------- ------- ------- -------
Total from investment operations........... .016 1.0435 1.01 .90 .67
------- -------- ------- ------- -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.766) (.8035) (.84) (.84) (.86)
------- -------- ------- ------- -------
Net asset value, end of year............... $10.44 $11.19 $10.95 $10.78 $10.72
======= ======== ======= ======= =======
TOTAL RETURN(1)............................ .10% 9.65% 9.77% 8.73% 6.43%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(millions).......... $411.1 $408.0 $309.5 $225.3 $222.3
Average net assets (millions).............. $419.5 $357.8 $257.5 $220.5 $226.8

Ratios to average net assets(2)
Expenses................................. 1.02% 1.03% 1.07% 1.06% 0.97%
Expenses, without expense reimbursement.. -- -- -- -- 1.06%
Net investment income.................... 6.98% 7.13% 7.45% 7.20% 8.34%
Net investment income, without expense...
reimbursement.......................... -- -- -- -- 8.27%

Portfolio turnover rate.................... 33% 27% 24% 20% 29%

</TABLE>

(1) Total return does not consider the effect of sales charges.
(2) See note 2.

See Notes to Financial Statements.

F-33

<PAGE> 564

HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- -----------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
---------------------- NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year............. $11.18 $10.96 $11.08 $11.29
------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .87 .8905 .35 .81
Expenses....................................... (.19) (.1986) (.08) (.18)
------- -------- -------- --------
Net investment income.......................... .68 .6919 .27 .63
Net realized and unrealized gain
or loss on securities......................... (.748) .2476 (.1122) (.8363)
------- -------- -------- --------
Total from investment operations............... (.068) .9395 .1578 (.2063)
------- -------- -------- --------
DIVIDENDS FROM NET INVESTMENT INCOME........... (.682) (.7195) (.2778) (.6637)
------- -------- -------- --------
Net asset value, end of year................... $10.43 $11.18 $10.96 $10.42
======= ======== ======== ========
TOTAL RETURN(3)................................ (.76%) 8.84% 1.45% (1.80%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)............. $159.3 $104.8 $21.0 $15.3
Average net assets (millions).................. $133.6 $54.9 $13.4 $6.7

Ratios to average net assets
Expenses...................................... 1.77% 1.77% 1.71%(4) 1.75%(4)
Net investment income......................... 6.19% 6.15% 5.88%(4) 6.07%(4)

Portfolio turnover rate........................ 33% 27% 24% 33%
</TABLE>

(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.

See Notes to Financial Statements.

F-34

<PAGE> 565

INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED NOVEMBER 30
------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.... $11.59 $11.30 $11.07 $10.86 $10.95
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .74 .790 .810 .86 .84
Expenses.............................. (.13) (.127) (.135) (.13) (.12)
Net investment income................. .61 .663 .675 .73 .72
Net realized and unrealized gain or
loss on securities................... (1.0425) .274 .240 .19 (.07)
Total from investment operations...... (.4325) .937 .915 .92 .65
DIVIDENDS FROM NET INVESTMENT INCOME.. (.6075) (.647) (.685) (.71) (.74)
Net asset value, end of year.......... $10.55 $11.59 $11.30 $11.07 $10.86

TOTAL RETURN(1)....................... (3.88%) 8.47% 8.48% 8.73% 6.21%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions).... $67.3 $75.3 $64.3 $52.2 $42.3
Average net assets (millions)......... $73.6 $72.0 $57.8 $48.6 $39.3

Ratios to average net assets(2)
Expenses............................. 1.15% 1.07% 1.20% 1.20% 1.08%
Expenses, without expense
reimbursement ...................... -- 1.17% -- -- 1.20%
Net investment income................ 5.45% 5.57% 5.98% 6.59% 6.63%
Net investment income, without
expense reimbursement............... -- 5.47% -- -- 6.51%

Portfolio turnover rate............... 5% 5% 3% 5% 1%

</TABLE>

(1) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(2) SEE NOTE 2.

SEE NOTES TO FINANCIAL STATEMENTS.

F-35

<PAGE> 566

INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued

Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.

<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- ------------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
------------------------ NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year......... $11.58 $11.30 $11.39 $11.66
-------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .74 .754 .28 .77
Expenses................................... (.21) (.205) (.08) (.22)
-------- ------- ------ -------
Net investment income...................... .53 .549 .20 .55
Net realized and unrealized gain or
loss on securities....................... (1.0365) .294 (.07) (1.161)
-------- ------- ------ -------
Total from investment operations........... (.5065) .843 .13 (.611)
-------- ------- ------ -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.5235) (.563) (.22) (.509)
-------- ------- ------ -------
Net asset value, end of year............... $10.55 $11.58 $11.30 $10.54
======== ======= ======= =======
TOTAL RETURN(3)............................ (4.52%) 7.59% 1.16% (5.38%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)......... $35.6 $34.4 $10.1 $ 1.9
Average net assets (millions).............. $37.9 $23.8 $ 5.2 $ 1.6

Ratios to average net assets(4)
Expenses................................. 1.91% 1.77% 1.82%(5) 1.89%(5)
Expenses, without expense reimbursement.. -- 1.87% -- --
Net investment income.................... 4.71% 4.74% 4.33%(5) 4.64%(5)
Net investment income, without
expense reimbursement.................. -- 4.64% -- --

Portfolio turnover rate.................... 5% 5% 3% 5%
</TABLE>

See Notes to Financial Statements.

F-36
<PAGE> 567
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Trustees of American Capital Tax-Exempt Trust

In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios of High Yield Municipal Portfolio and
Insured Municipal Portfolio 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 each of the two portfolios
constituting American Capital Tax-Exempt Trust (the "Trust") at November 30,
1994, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period
then ended and the selected per share data and ratios for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and selected per share data and ratios (hereafter referred
to as "financial statements") are the reponsibility of the Trust'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 obtian reasonable assurance about whether the
financial statements are free of material misstatements. 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 November 30, 1994 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinon expressed above.

/s/ PRICE WATERHOUSE LLP

Houston, Texas
January 16, 1995

F-37
<PAGE> 568

APPENDIX C

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 2.7%
2,250 Alabama St Brd Edl Rev Shelton St
Cmnty College (MBIA Insd)........ AAA Aaa 6.000 10/01/14 2,116,057
2,000 Alabama Wtr Pollutn Ctl Auth Ser
A (AMBAC Insd)................... AAA Aaa 6.750 8/15/17 2,025,480
4,700 Huntsville, AL Hlthcare Auth
Hlthcare Fac Rev Ser B (MBIA
Insd)............................ AAA Aaa 6.500 6/01/13 4,645,057
5,500 Limestone Cnty, AL Wtr Auth Wtr
Rev (FGIC Insd).................. AAA Aaa 7.700 12/01/19 5,783,910
1,450 Limestone Cnty, AL Wtr Auth Wtr
Rev (FGIC Insd).................. AAA Aaa 5.250 12/01/20 1,183,824
2,930 Montgomery, AL BMC Spl Care Fac
Fin Auth Rev Baptist Med Cent
(AMBAC Insd)(3).................. A A 9.750 10/01/15 3,089,626
5,500 Morgan Cnty Decatur, AL Hlthcare
Auth Hosp Rev Decatur Genl Hosp
Rfdg (Connie Lee Insd)........... AAA NR 6.250 3/01/13 5,235,945
2,100 Muscle Shoals, AL Util Brd Wtr &
Swr Rev (FSA Insd)............... AAA Aaa 6.400 4/01/13 2,062,074
2,400 Muscle Shoals, AL Util Brd Wtr &
Swr Rev (FSA Insd)............... AAA Aaa 6.500 4/01/16 2,365,728
500 Pelham, AL Single Family Mtg Rev
Warrants (AMBAC Insd)(3)......... AAA Aaa 6.250 11/01/22 474,130
1,600 West Morgan East Lawrence Wtr
Auth AL Wtr Rev (FSA Insd)....... AAA Aaa 6.800 8/15/14 1,613,888
--------------
30,595,719
--------------
ALASKA 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R
(FSA Insd)....................... AAA Aaa 6.600 12/01/07 2,395,930
--------------
</TABLE>

See Notes to Financial Statements

C-1
<PAGE> 569

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA 1.1%
11,000 Arizona St Ctfs Partn Ser B Rfdg
(AMBAC Insd)(3).................. AAA Aaa 6.250 9/01/10 10,858,320
2,000 Pima Cnty, AZ Indl Dev Auth Indl
Rev Lease Oblig Ser A Irvington
Proj Rfdg (FSA Insd)............. AAA Aaa 7.250 7/15/10 2,101,680
--------------
12,960,000
--------------
CALIFORNIA 24.8%
2,000 Alameda Cnty, CA Ctfs Partn Santa
Rita Jail Proj Rfdg (MBIA
Insd)............................ AAA Aaa 5.700 12/01/14 1,781,680
2,835 Bay Area Govt Assn CA Rev Tax
Alloc CA Redev Agy Pool A (Cap
Guar Insd)....................... AAA Aaa 6.000 12/15/14 2,621,099
2,555 Berkeley, CA Unified Sch Dist Ser
C (AMBAC Insd)................... AAA Aaa 5.875 8/01/12 2,346,333
1,985 Berkeley, CA Unified Sch Dist Ser
C (AMBAC Insd)................... AAA Aaa 5.875 8/01/14 1,809,665
5,000 Beverly Hills, CA Pub Fin Auth
Lease Rev Ser A (Inverse Fltg)
(MBIA Insd)...................... AAA Aaa 5.650 6/01/15 4,365,150
10,000 California Hlth Fac Fin Auth Rev
Sutter Hosp Ser A Rfdg (AMBAC
Insd)............................ AAA Aaa 6.700 1/01/13 10,048,800
2,000 California Hsg Fin Agy Rev Multi
Unit Rent Hsg Ser C 11 (MBIA
Insd)............................ AAA Aaa 6.150 8/01/14 1,884,980
3,655 California Pub Cap Impt Fin Auth
Rev Pooled Proj Ser B (BIGI
Insd)............................ AAA Aaa 8.100 3/01/18 3,947,400
15,000 California St (FGIC Insd)........ AAA Aaa 6.000 8/01/15 13,929,900
16,900 California St (FGIC Insd)........ AAA Aaa 6.000 8/01/16 15,667,483
10,875 California St (FGIC Insd)........ AAA Aaa 6.000 8/01/19 9,962,805
2,000 California St Pub Wks Brd Lease
Rev Dept of Corrections CA St
Prison Coalinga Ser B (MBIA
Insd)............................ AAA Aaa 5.375 12/01/19 1,653,720
</TABLE>

See Notes to Financial Statements

C-2
<PAGE> 570

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA -- CONTINUED
15,000 California St Pub Wks Brd Lease
Rev Dept of Corrections CA St
Prison Susanville Ser D (Cap Guar
Insd)............................ AAA Aaa 5.250 6/01/15 12,452,700
16,250 California St Pub Wks Brd Lease
Rev Var Univ CA Projs Ser A
(AMBAC Insd)..................... AAA Aaa 6.400 12/01/16 15,874,950
600 California St Var Purp (FGIC
Insd)............................ AAA Aaa 6.500 9/01/10 606,996
3,700 California St Var Purp (MBIA
Insd)............................ AAA Aaa 6.000 10/01/10 3,561,102
4,210 California Statewide Cmnty Dev
Auth Rev Ctfs Partn Sisters
Charity Leavenworth (MBIA
Insd)............................ AAA Aaa 5.375 12/01/12 3,613,148
9,000 Castaic Lake Wtr Agy CA Ctfs
Partn Wtr Sys Impt Proj Ser A
Rfdg (MBIA Insd)................. AAA Aaa 6.000 8/01/18 8,267,670
10,500 Cerritos, CA Pub Fin Auth Rev Los
Coyotes Redev Proj Ln Ser A
(AMBAC Insd)..................... AAA Aaa 5.750 11/01/22 9,153,060
3,000 Chino, CA Ctfs Partn Redev Agy
(MBIA Insd)...................... AAA Aaa 6.200 9/01/18 2,822,820
200 Concord, CA Redev Agy Tax Alloc
Cent Concord Redev Proj
(Prerefunded @ 07/01/96) (AMBAC
Insd)............................ AAA Aaa 9.000 7/01/13 214,946
220 Concord, CA Redev Agy Tax Alloc
Cent Concord Redev Proj Ser 3
(BIGI Insd)...................... AAA Aaa 8.000 7/01/18 237,582
10,280 Concord, CA Redev Agy Tax Alloc
Cent Concord Redev Proj Ser 3
(Prerefunded @ 07/01/98) (BIGI
Insd)............................ AAA Aaa 8.000 7/01/18 11,269,039
2,595 Contra Costa Cnty, CA Santn Dist
No 7 A Ctfs Partn Sub-Delta
Diablo Fin Corp (Prerefunded @
12/01/98) (BIGI Insd)............ AAA Aaa 7.600 12/01/08 2,826,578
</TABLE>

See Notes to Financial Statements

C-3
<PAGE> 571

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA -- CONTINUED
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs
Partn Fac Refinancing (FGIC
Insd)............................ AAA Aaa 6.300 9/01/12 1,221,250
2,500 Cucamonga, CA Cnty Wtr Dist Ctfs
Partn Fac Refinancing (FGIC
Insd)............................ AAA Aaa 6.500 9/01/22 2,449,425
5,000 East Bay, CA Muni Util Dist Wtr
Sys Rev Sub Rfdg (MBIA Insd)..... AAA Aaa 5.000 6/01/14 4,069,850
6,500 Grossmont, CA Union High Sch Dist
Ctfs Partn (MBIA Insd)........... AAA Aaa * 11/15/21 960,765
1,166 Kern Cnty, CA Home Mtg Rev Ser A
(MBIA Insd)...................... AAA Aaa * 3/01/14 146,332
1,000 La Habra, CA Ctfs Partn Pk La
Habra & Viewpark Proj (FSA
Insd)............................ AAA Aaa 6.500 11/01/12 998,830
7,000 La Habra, CA Ctfs Partn Pk La
Habra & Viewpark Proj (FSA
Insd)............................ AAA Aaa 6.625 11/01/22 6,950,720
4,750 Lodi, CA Unified Sch Dist Ctfs
Partn Edl Support Cent Rfdg (FSA
Insd)............................ AAA Aaa 5.750 9/01/20 4,168,600
500 Long Beach, CA Redev Agy Downtown
Redev Proj A (Prerefunded @
11/01/98) (AMBAC Insd)........... AAA Aaa 7.750 11/01/10 546,495
3,500 Los Angeles Cnty, CA Cap Asset
Lease Corp Leasehold Rev Rfdg
(AMBAC Insd)..................... AAA Aaa 6.000 12/01/16 3,235,400
6,420 Los Angeles, CA Unified Sch Dist
Ctfs Partn Multi Ppty Proj Rfdg
(FSA Insd)....................... AAA Aaa 5.625 11/01/13 5,705,775
4,750 Los Angeles, CA Wastewtr Sys Rev
Ser A Rfdg (MBIA Insd)........... AAA Aaa 5.700 6/01/20 4,137,108
24,820 Los Angeles, CA Wastewtr Sys Rev
Ser C Rfdg (MBIA Insd)........... AAA Aaa 5.600 6/01/20 21,318,395
1,000 Los Angeles, CA Wastewtr Sys Rev
Ser D Rfdg (FGIC Insd)........... AAA Aaa 5.200 11/01/21 803,710
</TABLE>

See Notes to Financial Statements

C-4
<PAGE> 572

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA -- CONTINUED
7,500 Manteca, CA Redev Agy Tax Alloc
Redev Proj No 1 Ser A Rfdg (MBIA
Insd)............................ AAA Aaa 6.700 10/01/21 7,523,100
1,000 Martinez, CA Ctfs Partn Martinez
Pub Impt Corp (Prerefunded @
12/01/98) (AMBAC Insd)........... AAA Aaa 7.700 12/01/18 1,100,800
5,830 Moreno Vly, CA Spl Tax Towngate
Cmnty Fac 87-1-A Rfdg (Cap Guar
Insd)............................ AAA Aaa 5.875 12/01/15 5,238,313
13,610 Norco, CA Redev Agy Tax Alloc
Norco Redev Proj Area No 1 Rfdg
(MBIA Insd)...................... AAA Aaa 6.250 3/01/19 12,880,096
2,860 Orange Cnty, CA Ctfs Partn
Juvenile Justice Cent Fac Rfdg
(AMBAC Insd)..................... AAA Aaa 6.000 6/01/17 2,574,257
2,760 Palmdale, CA Civic Auth Rev
Merged Redev Proj Areas Ser A
(MBIA Insd)...................... AAA Aaa 6.000 9/01/15 2,574,335
2,180 Petaluma, CA City Jt Union High
Sch Dist Formerly Petaluma, CA
City High Sch Dist Ser B (FGIC
Insd)............................ AAA Aaa * 8/01/18 419,214
1,000 Riverside, CA Swr Rev
(Prerefunded @ 08/01/97) (AMBAC
Insd)............................ AAA Aaa 7.700 8/01/12 1,073,180
4,000 Sacramento, CA Muni Util Dist
Elec Rev Ser A Rfdg (MBIA
Insd)............................ AAA Aaa 5.750 8/15/13 3,618,360
13,800 San Bernardino Cnty, CA Ctfs
Partn Ser B (Embedded Swap) (MBIA
Insd)............................ AAA Aaa 5.310 7/01/16 11,162,682
1,775 San Jose, CA Redev Agy Tax Alloc
Merged Area Redev Proj (MBIA
Insd)............................ AAA Aaa 6.000 8/01/15 1,654,016
3,900 San Mateo Cnty, CA Tran Dist
Sales Tax Rev Crossover Ser A
Rfdg (MBIA Insd)................. AAA Aaa 5.200 6/01/14 3,265,704
</TABLE>

See Notes to Financial Statements

C-5
<PAGE> 573

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA -- CONTINUED
3,720 San Pablo, CA Redev Agy Sub Tax
Alloc Merged Proj Area (FGIC
Insd)............................ AAA Aaa 5.250 12/01/16 3,063,941
2,500 Santa Clara Cnty, CA Fin Auth
Lease Rev VMC Fac Replacement
Proj Ser A (AMBAC Insd).......... AAA Aaa 6.875 11/15/14 2,555,725
1,000 Santa Rosa, CA Wastewtr Svc Fac
Dist Rfdg & Impt (AMBAC Insd).... AAA Aaa 6.200 7/02/09 979,420
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg
(FGIC Insd)...................... AAA Aaa 6.200 9/01/09 1,958,360
2,050 Santee, CA Redev Agy Tax Alloc
Santee Cmnty Redev Proj Rfdg
(MBIA Insd)...................... AAA Aaa 7.900 11/01/13 2,153,197
2,510 Solano Cnty, CA Ctfs Partn Solano
Park Hosp Proj (FSA Insd)........ AAA Aaa 5.750 8/01/14 2,244,291
2,000 Stockton, CA Hlth Fac Rev Saint
Joseph Med Cent Ser A (MBIA
Insd)............................ AAA Aaa 5.625 6/01/13 1,778,160
4,460 University of CA Rev Hsg Sys Ser
A Rfdg (MBIA Insd)............... AAA Aaa 5.500 11/01/18 3,793,988
5,000 University of CA Rev Multi Purp
Proj Ser C Rfdg (AMBAC Insd)..... AAA Aaa 5.000 9/01/23 3,855,150
10,000 University of CA Rev Multi Purp
Proj Ser D (MBIA Insd)........... AAA Aaa 6.250 9/01/13 9,636,700
3,845 Vista, CA Unified Sch Dist Ctfs
Partn Ser A Rfdg (FSA Insd)...... AAA Aaa * 11/01/17 745,430
--------------
283,480,680
--------------
COLORADO 4.4%
2,500 Aurora, CO Muni Bldg Corp Rev 1st
Mtg Rfdg (Prerefunded @ 12/01/97)
(FGIC Insd)...................... AAA Aaa 9.200 12/01/09 2,781,075
300 Colorado Hlth Fac Auth Rev Kaiser
Permanente Med Care Proj Ser A
(AMBAC Insd)..................... AA NR 9.125 8/01/15 309,450
</TABLE>

See Notes to Financial Statements

C-6
<PAGE> 574

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COLORADO -- CONTINUED
12,750 Colorado Hlth Fac Auth Rev PSL
Hlth Sys Proj Ser A (FSA Insd)... AAA Aaa 7.250 2/15/16 13,287,667
2,340 Colorado Hlth Fac Auth Rev
Sisters Of Charity Hlth Care Ser
A (MBIA Insd).................... AAA Aaa 6.000 5/15/13 2,232,220
1,000 Colorado Wtr Res & Pwr Dev Auth
Small Wtr Res Rev Ser A (Prer-
efunded @ 11/01/00) (FGIC Insd).. AAA Aaa 7.400 11/01/10 1,086,900
3,100 Denver, CO City & Cnty Excise Tax
Rev (Prerefunded @ 09/01/97)
(BIGI Insd)...................... AAA Aaa 8.250 9/01/07 3,349,023
795 Jefferson Cnty, CO Single Family
Mtg Rev Ser A Rfdg
(MBIA Insd)...................... AAA Aaa 8.875 10/01/13 845,570
1,000 Moffat Cnty, CO Pollutn Ctl Rev
Tri-State Generation &
Transmission (AMBAC Insd)........ A- Baa2 6.125 1/01/07 945,210
1,500 Moffat Cnty, CO Pollutn Ctl Rev
Tri-State Generation &
Transmission (AMBAC Insd)........ AAA Aaa 6.125 1/01/07 1,499,820
2,050 Thornton, CO Rfdg (FGIC Insd).... AAA Aaa * 12/01/11 690,174
1,700 Thornton, CO Rfdg (FGIC Insd).... AAA Aaa * 12/01/15 436,220
9,000 University of CO Hosp Auth Hosp
Rev Ser A (AMBAC Insd)........... AAA Aaa 6.250 11/15/12 8,809,740
13,900 University of CO Hosp Auth Hosp
Rev Ser A (AMBAC Insd)........... AAA Aaa 6.400 11/15/22 13,598,231
--------------
49,871,300
--------------
CONNECTICUT 0.1%
1,700 Connecticut St Hlth & Edl Fac
Auth Rev Newington Childrens Hosp
Ser A (MBIA Insd)................ AAA Aaa 6.250 7/01/15 1,644,750
--------------
DISTRICT OF COLUMBIA 0.4%
4,140 District of Columbia Hsg Fin Agy
Mtg Rev Ser D Rfdg (MBIA Insd)... AAA Aaa 6.375 7/01/24 3,892,262
</TABLE>

See Notes to Financial Statements

C-7
<PAGE> 575

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DISTRICT OF COLUMBIA -- CONTINUED
250 District of Columbia Ser B Rfdg
(MBIA Insd)...................... AAA Aaa * 6/01/04 137,883
500 District of Columbia Ser C (Prer-
efunded @ 06/01/98) (AMBAC
Insd)............................ AAA Aaa 8.000 6/01/08 547,080
--------------
4,577,225
--------------
FLORIDA 3.7%
1,010 Dade Cnty, FL Seaport Rev Ser E
Rfdg (MBIA Insd)................. AAA Aaa 8.000 10/01/03 1,154,723
690 Dade Cnty, FL Seaport Rev Ser E
Rfdg (MBIA Insd)................. AAA Aaa 8.000 10/01/04 793,431
1,180 Dade Cnty, FL Seaport Rev Ser E
Rfdg (MBIA Insd)................. AAA Aaa 8.000 10/01/05 1,362,817
1,275 Dade Cnty, FL Seaport Rev Ser E
Rfdg (MBIA Insd)................. AAA Aaa 8.000 10/01/06 1,493,560
1,375 Dade Cnty, FL Seaport Rev Ser E
Rfdg (MBIA Insd)................. AAA Aaa 8.000 10/01/07 1,610,730
2,095 Dade Cnty, FL Util Pub Impt Rfdg
(FGIC Insd)(3)................... AAA Aaa 12.000 10/01/04 3,026,165
305 Duval Cnty, FL Hsg Fin Auth
Single Family Mtg Rev Ser C (FGIC
Insd)............................ AAA Aaa 7.650 9/01/10 321,321
1,090 Duval Cnty, FL Hsg Fin Auth
Single Family Mtg Rev Ser C (FGIC
Insd)............................ AAA Aaa 7.700 9/01/24 1,159,171
1,000 Hillsborough Cnty, FL Indl Dev
Auth Indl Dev Rev Univ Cmnty Hosp
(MBIA Insd)...................... AAA Aaa 5.750 8/15/14 915,340
1,000 Hillsborough Cnty, FL Indl Dev
Auth Indl Dev Rev Univ Cmnty Hosp
(MBIA Insd)...................... AAA Aaa 6.500 8/15/19 1,001,120
1,000 Key West, FL Util Brd Elec Rev
Ser D (AMBAC Insd)............... AAA Aaa * 10/01/13 303,030
4,000 Lee Cnty, FL Hosp Brd Dir Hosp
Rev (Inverse Fltg) (MBIA Insd)... AAA Aaa 9.013 4/01/20 3,920,000
</TABLE>

See Notes to Financial Statements

C-8
<PAGE> 576

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA -- CONTINUED
1,000 Marion Cnty, FL Hosp Dist Rev
Rfdg Munroe Regl Med Cent (FGIC
Insd)............................ AAA Aaa 6.250 10/01/12 980,980
6,000 Orange Cnty, FL Hlth Fac Auth Rev
(Inverse Fltg) (MBIA Insd)....... AAA Aaa 8.290 10/29/21 5,617,500
2,000 Palm Beach Cnty, FL Sch Brd Ctfs
Partn Ser A (AMBAC Insd)......... AAA Aaa 6.375 8/01/15 1,978,400
1,090 Sarasota Cnty, FL Util Sys Rev
(FGIC Insd)...................... AAA Aaa 6.500 10/01/14 1,094,295
5,000 Sunrise, FL Pub Svcs Tax Rev
(Prerefunded @ 10/01/97) (AMBAC
Insd)............................ AAA Aaa 8.750 10/01/04 5,519,650
10,000 Tallahassee, FL Hlth Fac Rev
Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd)................. AAA Aaa 6.625 12/01/13 10,151,600
--------------
42,403,833
--------------
GEORGIA 4.0%
1,250 Atlanta, GA Ctfs Partn Atlanta
Pretrial Detention Cent (MBIA
Insd)............................ AAA Aaa 6.250 12/01/08 1,249,913
1,750 Atlanta, GA Ctfs Partn Atlanta
Pretrial Detention Cent (MBIA
Insd)............................ AAA Aaa 6.250 12/01/17 1,670,078
2,560 Burke Cnty, GA Dev Auth Pollutn
Ctl Rev Oglethorpe Pwr Co Vogtle
Proj Rfdg (MBIA Insd)............ AAA Aaa 7.800 1/01/08 2,852,096
2,500 Fayette Cnty, GA Wtr Rev (Prer-
efunded @ 10/01/97) (AMBAC
Insd)............................ AAA Aaa 8.000 10/01/20 2,711,750
6,500 Georgia Muni Elec Auth Pwr Rev
Genl Ser B (BIGI Insd)........... AAA Aaa * 1/01/07 3,084,185
4,750 Georgia Muni Elec Auth Pwr Rev
Genl Ser B (BIGI Insd)........... AAA Aaa * 1/01/08 2,099,452
3,000 Georgia Muni Elec Auth Pwr Rev
Genl Ser B (FGIC Insd)........... AAA Aaa 6.250 1/01/12 2,932,530
</TABLE>

See Notes to Financial Statements

C-9
<PAGE> 577

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GEORGIA -- CONTINUED
8,430 Metropolitan Atlanta Rapid Tran
Auth GA Sales Tax Rev Bonds Ser J
(Prerefunded @ 07/01/98) (FGIC
Insd)............................ AAA Aaa 8.000 7/01/18 9,238,268
14,550 Municipal Elec Auth GA Spl Oblig
Fifth Crossover Ser Proj One
(AMBAC Insd)..................... AAA Aaa 6.400 1/01/13 14,473,030
5,000 Municipal Elec Auth, GA Spl Oblig
Fifth Crossover Proj Ser One
(MBIA Insd)...................... AAA Aaa 6.500 1/01/17 4,959,550
--------------
45,270,852
--------------
HAWAII 1.1%
12,785 Hawaii St Arpt Sys Rev Ser 1993
Rfdg (MBIA Insd)................. AAA Aaa 6.400% 7/01/08 12,852,760
--------------
ILLINOIS 12.0%
565 Aurora, IL Hosp Fac Rev Mercy
Cent Hlthcare Svcs Ser A (AMBAC
Insd)............................ AAA Aaa 9.625 10/01/09 594,742
15,200 Chicago, IL Brd Edl Lease Ctfs
Ser A Rfdg (MBIA Insd)........... AAA Aaa 6.000 1/01/20 13,815,128
1,000 Chicago, IL Gas Supply Rev
Peoples Gas Lt & Coke Proj Ser D
(AMBAC Insd)..................... AA- Aa3 10.250 3/01/15 1,030,760
5,000 Chicago, IL O'Hare Intl Arpt Rev
Genl Arpt Second Lien Ser A Rfdg
(MBIA Insd)...................... AAA Aaa 6.375 1/01/15 4,811,700
3,480 Chicago, IL Pub Bldg Comm Bldg
Rev Ser A (MBIA Insd)............ AAA Aaa * 1/01/06 1,742,158
3,105 Chicago, IL Pub Bldg Comm Bldg
Rev Ser A (MBIA Insd)............ AAA Aaa * 1/01/07 1,447,830
1,000 Chicago, IL St Univ Rev Aux Fac
Sys (MBIA Insd).................. AAA Aaa 6.000 12/01/12 936,420
</TABLE>

See Notes to Financial Statements

C-10
<PAGE> 578

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS -- CONTINUED
1,000 Cook Cnty, IL Cmnty College Dist
No 508 Chicago Ctfs Partn (FGIC
Insd)............................ AAA Aaa 8.400 1/01/01 1,129,140
5,550 Cook Cnty, IL Cmnty College Dist
No 508 Chicago Ctfs Partn (FGIC
Insd)............................ AAA Aaa 8.750 1/01/03 6,524,192
8,460 Cook Cnty, IL Cmnty College Dist
No 508 Chicago Ctfs Partn (FGIC
Insd)............................ AAA Aaa 8.750 1/01/04 10,040,751
2,460 Cook Cnty, IL Cmnty College Dist
No 508 Chicago Ctfs Partn (FGIC
Insd)............................ AAA Aaa 8.750 1/01/05 2,942,775
3,000 Cook Cnty, IL Cmnty College Dist
No 508 Chicago Ctfs Partn (FGIC
Insd)............................ AAA Aaa 8.750 1/01/07 3,626,700
1,280 Cook Cnty, IL Cmnty High Sch Dist
No 233 Homewood & Flossmor (AMBAC
Insd)............................ AAA Aaa * 12/01/05 643,482
8,280 Cook Cnty, IL Cnty Juvenile
Detention A (AMBAC Insd)......... AAA Aaa * 11/01/08 3,515,274
2,500 Des Plaines, IL Hosp Fac Rev Holy
Family Hosp Rfdg (AMBAC Insd).... AAA Aaa 9.250 1/01/14 2,635,825
915 Eastern IL Univ Rev Aux Fac Sys
Rfdg (AMBAC Insd)................ A- NR 9.500 4/01/16 943,008
11,000 Illinois Dev Fin Auth Pollutn Ctl
Rev Con Edison Co Proj Ser D Rfdg
(AMBAC Insd)..................... AAA Aaa 6.750 3/01/15 10,986,580
35,000 Illinois Dev Fin Auth Pollutn Ctl
Rev IL Pwr Co Proj Ser A 1st Mtg
Rfdg (MBIA Insd)................. AAA Aaa 7.400 12/01/24 36,898,400
2,000 Illinois Dev Fin Auth Rev Sch
Dist Pgm Rockford Sch 205 (FSA
Insd)............................ AAA Aaa 6.650 2/01/11 2,031,500
1,332 Illinois Hlth Fac Auth Rev Cmnty
Prov Pooled Pgm Ser B (MBIA
Insd)............................ AAA Aaa 7.900 8/15/03 1,379,339
</TABLE>

See Notes to Financial Statements

C-11
<PAGE> 579

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS -- CONTINUED
20 Illinois Hlth Fac Auth Rev Cmnty
Prov Pooled Pgm Ser B (Prer-
efunded @ 08/15/95) (MBIA Insd).. AAA Aaa 7.900 8/15/03 20,735
210 Illinois Hlth Fac Auth Rev Cmnty
Prov Pooled Pgm Ser B Rfdg (MBIA
Insd)............................ AAA Aaa 7.900 8/15/03 237,445
500 Illinois Hlth Fac Auth Rev Grant
Hosp Chicago Ser A Rfdg (Prer-
efunded @ 06/01/95) (AMBAC
Insd)............................ AAA NR 10.300 6/01/13 522,235
5,000 Illinois Hlth Fac Auth Rev Hosp
Sisters Svcs (Inverse Fltg) (MBIA
Insd)............................ AAA Aaa 9.117 6/19/15 4,831,250
5,000 Illinois Hlth Fac Auth Rev
Methodist Hlth Proj (Inverse
Fltg) (MBIA Insd)................ AAA Aaa 9.111 5/01/21 4,981,250
3,400 Illinois Hlth Fac Auth Rev Rush
Presb Saint Luke Hosp (Inverse
Fltg) (MBIA Insd)................ AAA Aaa 9.361 10/01/24 3,302,250
1,230 Kankakee Cnty, IL Sch Dist No 111
Kankakee (AMBAC Insd)............ AAA Aaa 6.375 1/01/12 1,208,118
1,660 Lake Cnty, IL Sch Dist No 037 Cap
Appreciation (Cap Guar Insd)..... AAA Aaa * 12/01/12 480,719
1,825 Lake Cnty, IL Sch Dist No 037 Cap
Appreciation (Cap Guar Insd)..... AAA Aaa * 12/01/13 488,662
2,000 Lake Cnty, IL Sch Dist No 037 Cap
Appreciation (Cap Guar Insd)..... AAA Aaa * 12/01/14 499,420
4,060 Madison, Macoupin Cntys, IL Cmnty
College Dist No 536 Ser A (AMBAC
Insd)............................ AAA Aaa 6.450 11/01/19 3,890,211
2,210 Northwest Suburban Muni Jt Action
Wtr Agy IL Wtr Supply Sys Rev Ser
A Rfdg (MBIA Insd)............... AAA Aaa 5.900 5/01/15 2,005,862
6,110 Rosemont, IL C Tax Increment 3
(FGIC Insd)...................... AAA Aaa * 12/01/06 2,860,824
</TABLE>

See Notes to Financial Statements

C-12
<PAGE> 580

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ILLINOIS -- CONTINUED
3,000 Rosemont, IL C Tax Increment 3
(FGIC Insd)...................... AAA Aaa * 12/01/07 1,306,530
1,185 Saint Clair Cnty, IL Ctfs Partn
(MBIA Insd)...................... AAA Aaa 8.000 12/01/04 1,353,471
1,285 Saint Clair Cnty, IL Ctfs Partn
(MBIA Insd)...................... AAA Aaa 8.000 12/01/05 1,473,034
--------------
137,137,720
--------------
INDIANA 1.2%
2,000 Indiana Bond Bank Spl Pgm Ser A
(AMBAC Insd)..................... AAA Aaa 9.750 8/01/09 2,424,920
3,840 Indiana Hlth Fac Fin Auth Hosp
Rev Cmnty Hosp of IN (MBIA
Insd)............................ AAA Aaa 7.000 7/01/21 3,874,176
5,000 Indiana Hlth Fac Fin Auth Hosp
Rev Cmnty Hosp Proj Rfdg & Impt
(MBIA Insd)...................... AAA Aaa 6.400 5/01/12 4,881,950
1,375 Indiana St Edl Fac Auth Rev
Butler Univ Ser B (MBIA Insd).... AAA Aaa * 1/01/15 358,187
1,200 Indiana St Edl Fac Auth Rev
Butler Univ Ser B (MBIA Insd).... AAA Aaa * 1/01/16 291,084
650 Petersburg, IN Pollutn Ctl Rev
Indianapolis Pwr & Lt Co Proj
(AMBAC Insd)..................... AA- Aa2 10.625 12/01/14 664,339
1,000 Saint Joseph Cnty, IN Hosp Auth
Hosp Fac Rev Mem Hosp of South
Bend Ser A Rfdg (MBIA Insd)...... AAA Aaa 7.000... 8/15/20 1,009,530
--------------
13,504,186
--------------
IOWA 0.0%
30 Iowa Hsg Fin Auth Single Family
Hsg Rev Ser 1984 A (AMBAC
Insd)............................ AA Aaa 10.750 9/01/04 31,194
--------------
</TABLE>

See Notes to Financial Statements

C-13
<PAGE> 581

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
KANSAS 3.6%
36,250 Burlington, KS Pollutn Ctl Rev KS
Gas & Elec Co Proj Rfdg (MBIA
Insd)............................ AAA Aaa 7.000 6/01/31 36,808,975
4,500 Kansas City, KS Util Sys Rev Rfdg
& Impt (FGIC Insd)............... AAA Aaa 6.375 9/01/23 4,403,880
--------------
41,212,855
--------------
KENTUCKY 0.2%
500 Daviess Cnty, KY Hosp Rev Mercy
Hlth Care Sys Ser A (Prerefunded
@ 09/01/97) (AMBAC Insd)......... AAA Aaa 9.750 9/01/11 554,115
500 Jefferson Cnty, KY Pollutn Ctl
Rev Louisville Gas & Elec Ser 85
A (AMBAC Insd)................... AA Aa2 9.250 7/01/15 520,350
105 Kentucky Cntys, 1987 Single
Family Mtg Rev Rfdg (MBIA
Insd)............................ AAA Aaa 8.625 9/01/15 112,677
1,500 Kentucky Econ Dev Fin Auth Hosp
Fac Rev Saint Claire Med Cent
Proj Rfdg (Connie Lee Insd)...... AAA NR 5.625 9/01/21 1,268,055
--------------
2,455,197
--------------
LOUISIANA 1.6%
4,065 Calcasieu Parish, LA Mem Hosp
Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee
Insd)............................ AAA NR 6.375 12/01/12 3,903,498
5,530 Calcasieu Parish, LA Mem Hosp
Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee
Insd)............................ AAA NR 6.500 12/01/18 5,309,685
3,150 Louisiana Pub Fac Auth Rev Pgm
Hlth & Edl Cap Fac C Our Lady Med
Cent (BIGI Insd)................. AAA Aaa 8.200 12/01/15 3,440,902
10,000 New Orleans, LA Home Mtg Auth
Single Family Mtg Rev 1985 Ser A
(MBIA Insd)...................... AAA Aaa * 9/15/16 993,900
</TABLE>

See Notes to Financial Statements

C-14
<PAGE> 582

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOUISIANA -- CONTINUED
13,000 Orleans Parish, LA Sch Brd Rfdg
(FGIC Insd)...................... AAA Aaa * 2/01/15 3,129,880
2,000 Saint Tammany Parish, LA Hosp Svc
Dist No 2 Hosp Rev Slidell Mem
Hosp & Med Cent (Connie Lee
Insd)............................ AAA NR 6.250 10/01/14 1,872,900
--------------
18,650,765
--------------
MAINE 0.5%
2,750 Easton, ME Indl Dev McCain Food
Inc Proj Ser 1985 (AMBAC Insd)... AA- NR 9.200 8/01/99 2,765,290
1,000 Maine Hlth & Higher Edl Fac Auth
Rev Ser A (FSA Insd)............. AAA Aaa 6.000 7/01/24 894,070
1,750 Maine Hlth & Higher Edl Fac Auth
Rev Ser B (FSA Insd)............. AAA Aaa 7.100 7/01/14 1,787,222
--------------
5,446,582
--------------
MARYLAND 0.4%
1,000 Anne Arundel Cnty, MD Mtg Rev
Mill Pond Apts Ser A Rfdg (MBIA
Insd)............................ AAA Aaa 6.000 1/01/26 879,740
500 Baltimore, MD Ctfs Partn Ser A
Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd)...................... AAA Aaa 7.200 4/01/10 542,675
195 Baltimore, MD Ctfs Partn Ser C
Rfdg (MBIA Insd)................. AAA Aaa 7.200 4/01/10 204,106
55 Baltimore, MD Ctfs Partn Ser C
Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd)...................... AAA Aaa 7.200 4/01/10 59,694
2,000 Maryland St Hlth & High Edl Fac
Auth Rev Kernan Hosp Issue (Con-
nie Lee Insd).................... AAA NR 6.000 7/01/14 1,852,920
40 Maryland St Hlth & High Edl Fac
Auth Rev North Arundel Hosp Issue
(Prerefunded @ 07/01/98) (BIGI
Insd)............................ AAA Aaa 7.875 7/01/21 43,638
</TABLE>

See Notes to Financial Statements

C-15
<PAGE> 583

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARYLAND -- CONTINUED
700 Prince Georges Cnty, MD Ctfs
Partn Real Estate Acquisition
Prog II (MBIA Insd).............. AAA Aaa 6.000 9/15/14 658,378
--------------
4,241,151
--------------
MASSACHUSETTS 1.6%
1,550 Chelsea, MA Sch Proj Ln Act 1948
(AMBAC Insd)..................... AAA Aaa 6.000 6/15/14 1,455,295
3,240 Massachusetts St Hlth & Edl Fac
Auth Rev MA Genl Hosp Ser F1
(AMBAC Insd)..................... AAA Aaa 6.000 7/01/15 3,006,104
1,400 Massachusetts St Hlth & Edl Fac
Auth Rev Mt Auburn Hosp Ser A
(Prerefunded @ 07/01/98) (MBIA
Insd)............................ AAA Aaa 7.875 7/01/18 1,530,116
1,700 Massachusetts St Hlth & Edl Fac
Auth Rev Mt Auburn Hosp Ser B-1
(MBIA Insd)...................... AAA Aaa 6.250 8/15/14 1,638,494
4,000 Massachusetts St Hlth & Edl Fac
Auth Rev Newton-Wellesley Hosp
Issue C (BIGI Insd).............. AAA Aaa 8.000 7/01/18 4,258,240
6,800 Massachusetts St Hsg Fin Agy Hsg
Proj Ser A (AMBAC Insd).......... AAA Aaa 6.150 10/01/15 6,268,920
--------------
18,157,169
--------------
MICHIGAN 2.2%
1,535 Airport, MI Cmnty Sch Dist Rfdg
(AMBAC Insd)..................... AAA Aaa 5.125 5/01/22 1,230,333
2,325 Bay City, MI (AMBAC Insd)........ AAA Aaa * 6/01/15 598,316
1,000 Bay City, MI (AMBAC Insd)........ AAA Aaa * 6/01/16 239,790
3,785 Chippewa Vly, MI Schs Rfdg (FGIC
Insd)............................ AAA Aaa 5.125 5/01/15 3,146,130
500 Kalkaska, MI Pub Sch (AMBAC
Insd)............................ AAA Aaa * 5/01/15 129,385
</TABLE>

See Notes to Financial Statements

C-16
<PAGE> 584

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MICHIGAN -- CONTINUED
14,750 Livonia, MI Pub Sch Dist Ser II
(Crossover Refunding @ 05/01/07)
(FGIC Insd)...................... AAA Aaa * 5/01/14 3,855,797
21,000 Livonia, MI Pub Sch Dist Ser II
(Crossover Refunding @ 05/01/07)
(FGIC Insd)...................... AAA Aaa * 5/01/21 3,379,950
2,015 Marquette, MI Area Pub Sch Rfdg
(FGIC Insd)...................... AAA Aaa 5.250 5/01/21 1,647,081
1,580 Michigan High Edl Fac Auth Rev
Ltd Oblig Hope College Proj Rfdg
(Connie Lee Insd)................ AAA NR 7.000 10/01/13 1,616,609
1,680 Michigan High Edl Fac Auth Rev
Ltd Oblig Hope College Proj Rfdg
(Connie Lee Insd)................ AAA NR 7.000 10/01/14 1,717,565
2,000 Michigan St Hsg Dev Auth Rental
Hsg Rev Ser B (Inverse Fltg)
(AMBAC Insd)..................... AAA Aaa 3.160 4/01/04 1,618,720
1,500 Monroe Cnty, MI Pollutn Ctl Rev
Insd Detroit Edison Co Ser A
(AMBAC Insd)..................... AAA Aaa 9.625 12/01/15 1,604,325
5,000 Mount Clemens, MI Cmnty Sch Dist
Cap Apprec (Prerefunded @
05/01/07) (MBIA Insd)............ AAA Aaa * 5/01/17 1,117,250
1,500 Romulus, MI Cmnty Sch Rfdg (FSA
Insd)............................ AAA Aaa * 5/01/15 388,155
2,210 Romulus, MI Cmnty Sch Rfdg (FSA
Insd)............................ AAA Aaa * 5/01/16 532,875
3,490 Warren, MI Cons Sch Dist Ser 2
Rfdg (FGIC Insd)................. AAA Aaa 5.250 5/01/21 2,856,425
--------------
25,678,706
--------------
MINNESOTA 0.6%
5,600 Minneapolis-Saint Paul, MN Hsg &
Redev Auth Hlthcare Sys Rev Hlth
One Ser A (MBIA Insd)............ AAA Aaa 7.400 8/15/11 5,963,608
</TABLE>

See Notes to Financial Statements

C-17
<PAGE> 585

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MINNESOTA 0.6% -- CONTINUED
1,000 Plymouth, MN Hlth Fac Rev Wes-
thealth Proj Ser A (Cap Guar
Insd)............................ AAA Aaa 6.250 6/01/16 958,990
--------------
6,922,598
--------------
MISSISSIPPI 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt
Dist Rev Wastewtr Treatment Fac
Ser A Rfdg (FGIC Insd)........... AAA Aaa 8.500 2/01/13 1,195,840
--------------
MISSOURI 3.4%
2,700 Central MO St Univ Rev Hsg Sys
(Prerefunded @ 07/01/01) (MBIA
Insd)............................ AAA Aaa 7.000 7/01/14 2,927,502
6,290 Green Cnty, MO Single Family Mtg
Rev (AMBAC Insd)................. AAA Aaa * 12/01/16 688,503
920 Jackson Cnty, MO Pub Fac Auth
Insd Leasehold Rev Cap Impts Proj
Rfdg & Impt (MBIA Insd).......... AAA Aaa 6.125 12/01/15 878,756
2,015 Jackson Cnty, MO Single Family
Mtg Rev Tax Exempt Multiplier
Bond (AMBAC Insd)................ AAA Aaa * 12/01/16 217,338
2,250 Kansas City, MO Muni Assistance
Corp Rev Leasehold H Roe Bartle
Ser B1 Rfdg (AMBAC Insd)......... AAA Aaa 7.125 4/15/16 2,313,900
2,150 Missouri St Hlth & Edl Fac Auth
Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @
02/15/01) (FGIC Insd)............ AAA Aaa 6.800 2/15/06 2,298,802
2,350 Missouri St Hlth & Edl Fac Auth
Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @
02/15/01) (FGIC Insd)............ AAA Aaa 6.875 2/15/21 2,525,427
2,000 Missouri St Hlth & Edl Fac Auth
Hlth Fac Rev Heartland Hlth Sys
Proj (AMBAC Insd)................ AAA Aaa 6.350 11/15/17 1,935,480
</TABLE>

See Notes to Financial Statements

C-18
<PAGE> 586

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MISSOURI 3.4% -- CONTINUED
7,650 Missouri St Hlth & Edl Fac Auth
Hlth Fac Rev SSM Hlthcare Proj
Rfdg (MBIA Insd)................. AAA Aaa 6.250 6/01/16 7,323,651
9,250 Missouri St Hlth & Edl Fac Auth
Hlth Fac Rev SSM Hlthcare Proj
Rfdg (Prerefunded @ 06/01/98)
(BIGI Insd)...................... AAA Aaa 7.750 6/01/16 10,040,690
1,000 Missouri St Hlth & Edl Fac Auth
Rev Saint Lukes Hosp KC Proj Rfdg
& Impt (Prerefunded @ 11/15/01)
(MBIA Insd)...................... AAA Aaa 7.000 11/15/13 1,086,590
680 Saint Louis Cnty, MO Single
Family Mtg Rev (AMBAC Insd)...... AAA Aaa 9.250 10/01/16 712,654
1,550 Saint Louis, MO Muni Fin Corp
Leasehold Rev Rfdg & Impt (FGIC
Insd)............................ AAA Aaa 6.250 2/15/12 1,517,993
1,000 Saint Louis, MO Wtr Rev Rfdg &
Impt (FGIC Insd)................. AAA Aaa 6.000 7/01/14 943,060
2,000 Sikeston, MO Elec Rev Rfdg (MBIA
Insd)............................ AAA Aaa 6.200 6/01/10 1,974,500
1,000 Springfield, MO Sch Dist No R12
Ser B Rfdg (FGIC Insd)........... AAA Aaa 9.500 3/01/07 1,286,420
--------------
38,671,266
--------------
NEBRASKA 0.3%
1,250 Douglas Cnty, NE Hosp Auth No 1
Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd)..................... AAA Aaa 6.900% 9/01/11 1,291,775
1,500 Douglas Cnty, NE Hosp Auth No 1
Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd)..................... AAA Aaa 7.000 9/01/21 1,531,995
500 Lancaster Cnty, NE Hosp Auth No 1
Hosp Rev Bryan Mem Hosp Proj
(MBIA Insd)...................... AAA Aaa 6.700 6/01/22 501,345
--------------
3,325,115
--------------
</TABLE>

See Notes to Financial Statements

C-19
<PAGE> 587

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEVADA 1.4%
3,200 Clark Cnty, NV Pollutn Ctl Rev NV
Pwr Co Proj Ser B Rfdg (FGIC
Insd)............................ AAA Aaa 6.600 6/01/19 3,161,536
2,040 Las Vegas, NV Ltd Tax Remarketed
Rfdg (Prerefunded @ 11/01/97)
(MBIA Insd)...................... AAA Aaa 7.625 11/01/02 2,194,958
3,320 Reno, NV Hosp Rev Dates Saint
Marys Hosp Inc Ser B (Prerefunded
@ 01/01/00) (BIGI Insd).......... AAA Aaa 7.750 7/01/15 3,673,480
5,035 Reno, NV Hosp Rev Dates Saint
Marys Hosp Inc Ser C (Prerefunded
@ 01/01/00) (BIGI Insd).......... AAA Aaa 7.750 7/01/15 5,571,077
3,720 Washoe Cnty, NV Impt & Rfdg (MBIA
Insd)............................ AAA Aaa * 7/01/07 1,664,105
--------------
16,265,156
--------------
NEW HAMPSHIRE 0.2%
2,500 New Hampshire St Tpk Sys Rev Rfdg
(Inverse Fltg) (FGIC Insd)....... AAA Aaa 9.292 11/01/17 2,500,000
--------------
NEW JERSEY 1.7%
3,120 Atlantic Cnty, NJ Util Auth Swr
Rev Formerly Atlantic Cnty, NJ
Sewage Auth Ser A Rfdg (AMBAC
Insd)............................ AAA Aaa 5.850 1/15/15 2,881,320
1,950 Camden Cnty, NJ Muni Util Auth
Swr Rev (FGIC Insd).............. AAA Aaa 8.250 12/01/17 2,114,950
1,250 Middlesex Cnty, NJ Ctfs Partn
(MBIA Insd)...................... AAA Aaa 6.000 8/15/14 1,183,775
1,000 New Jersey Hlthcare Fac Fin Auth
Rev Burdette Tomlin Mem Hosp Ser
C (Prerefunded @ 07/01/97) (FGIC
Insd)............................ AAA Aaa 8.125 7/01/12 1,082,210
1,750 New Jersey Hlthcare Fac Fin Auth
Rev Saint Clares Riverside Med
Cent (MBIA Insd)................. AAA Aaa 5.750 7/01/14 1,586,358
</TABLE>

See Notes to Financial Statements

C-20
<PAGE> 588

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEW JERSEY -- CONTINUED
3,700 New Jersey Hlthcare Fac Fin New-
ark Bethlehem Israel Med Cent
(FSA Insd)....................... AAA Aaa 6.000 7/01/16 3,454,912
3,940 New Jersey St Hsg & Mtg Fin Agy
Rev (MBIA Insd).................. AAA Aaa 8.100 10/01/17 4,127,386
2,250 Sussex Cnty, NJ Muni Util Auth
Solid Waste Rev Ser A
(Prerefunded @ 12/01/98) (BIGI
Insd)............................ AAA Aaa 7.875 12/01/13 2,476,530
--------------
18,907,441
--------------
NEW YORK 4.0%
2,000 New York City Ser B (MBIA Insd).. AAA Aaa 6.950 8/15/12 2,059,260
1,750 New York City Indl Dev Agy Civic
Fac Rev USTA Natl Tennis Cent
Proj (FSA Insd).................. AAA Aaa 6.375 11/15/14 1,714,160
5,000 New York City Muni Wtr Fin Auth
Wtr & Swr Sys Rev Ser A (Prer-
efunded @ 06/15/97) (BIGI Insd).. AAA Aaa 8.750 6/15/10 5,501,150
2,250 New York City Muni Wtr Fin Auth
Wtr & Swr Sys Rev Ser B (Prer-
efunded @ 06/15/97) (MBIA Insd).. AAA Aaa 8.250 6/15/16 2,449,845
1,000 New York City Ser A (Prerefunded
@ 11/01/97) (AMBAC Insd)......... A- Aaa 8.500 11/01/12 1,100,500
50 New York City Ser C Subser C-1
(MBIA Insd)...................... AAA Aaa 6.250 8/01/09 49,199
1,500 New York St Dorm Auth Rev March
Of Dimes Fndtn (Prerefunded @
07/01/97) (AMBAC Insd)........... AAA Aaa 9.200 7/01/12 1,661,010
675 New York St Med Care Fac Fin Agy
Rev IBC Mental Hlth Svcs Ser A
(MBIA Insd)...................... AAA Aaa 7.750 8/15/10 725,821
</TABLE>

See Notes to Financial Statements

C-21
<PAGE> 589

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK -- CONTINUED
435 New York St Med Care Fac Fin Agy
Rev IBC Mental Hlth Svcs Ser A
(Prerefunded @ 02/15/00) (MBIA
Insd)............................ AAA Aaa 7.750 8/15/10 482,063
1,000 New York St Med Care Fac Fin Agy
Rev Mental Hlth Ser E (Cap Guar
Insd)............................ AAA Aaa 6.500 8/15/15 980,990
13,600 New York St Med Care Fac Fin Agy
Rev New York Hosp Mtg Ser A
(AMBAC Insd)(2).................. AAA Aaa 6.750 8/15/14 13,631,960
50 New York St Med Care Fac Fin Agy
Rev Saint Marys Hosp Private Ins
Pgm (Prerefunded @ 11/01/95)
(AMBAC Insd)..................... AAA Aaa 8.375 11/01/14 52,403
3,400 New York St Muni Bond Bank Agy
Spl Pgm Rev Rochester Ser A (MBIA
Insd)............................ AAA Aaa 6.625 3/15/06 3,497,988
1,500 New York St Thruway Auth Hwy &
Brdg Trust Fd Ser B (FGIC
Insd)............................ AAA Aaa 6.000 4/01/14 1,411,830
6,000 New York St Thruway Auth Svc
Contract Rev Loc Hwy & Brdg (MBIA
Insd)............................ AAA Aaa 5.750 4/01/13 5,522,340
5,400 New York St Urban Dev Corp Rev
Youth Fac (MBIA Insd)............ AAA Aaa 5.700 4/01/14 4,868,478
--------------
45,708,997
--------------
NORTH CAROLINA 0.2%
1,250 Franklin Cnty, NC Ctfs Partn Jail
& Sch Projs (FGIC Insd).......... AAA Aaa 6.625 6/01/14 1,255,363
500 North Carolina Eastn Muni Pwr Agy
Pwr Sys Rev Ser A (AMBAC Insd)... AAA Aaa 12.900 1/01/97 571,410
--------------
1,826,773
--------------
</TABLE>

See Notes to Financial Statements

C-22
<PAGE> 590

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NORTH DAKOTA 0.1%
1,250 Grand Forks, ND Hlthcare Fac Rev
United Hosp Oblig Group (MBIA
Insd)............................ AAA Aaa 6.100 12/01/09 1,203,763
--------------
OHIO 2.6%
3,600 Akron Bath Copley, OH St Twp Hosp
Dist Rev Akron Genl Med Cent Proj
(AMBAC Insd)..................... AAA Aaa 6.500 1/01/19 3,561,192
1,000 Akron Bath Copley, OH St Twp Hosp
Dist Rev Childrens Hosp Med Cent
Akron (Prerefunded @ 11/15/00)
(AMBAC Insd)..................... AAA Aaa 7.450 11/15/20 1,104,310
250 Clermont Cnty, OH Hosp Fac Rev
Mercy Hlth Care Sys Prov Cincin-
nati Ser A (AMBAC Insd).......... AAA Aaa 9.750 9/01/13 262,628
5,000 Clermont Cnty, OH Hosp Fac Rev
Muni (Inverse Fltg) (AMBAC
Insd)............................ AAA Aaa 9.641 10/05/21 4,968,750
2,010 Cleveland, OH (MBIA Insd)........ AAA Aaa 6.500 11/15/09 2,041,376
2,285 Cleveland, OH (MBIA Insd)........ AAA Aaa 6.500 11/15/10 2,314,956
1,000 Cuyahoga Cnty, OH Hosp Rev Rich-
mond Heights Genl Hosp Rfdg
(AMBAC Insd)..................... B NR 10.000 12/01/11 988,610
8,625 Hamilton, OH Elec Sys Mtg Rev Mtg
City of Hamilton Ser B (Prer-
efunded @ 10/15/98) (FGIC Insd).. AAA Aaa 8.000 10/15/22 9,499,489
2,100 Lakota, OH Local Sch Dist (AMBAC
Insd)............................ AAA Aaa 6.250 12/01/14 2,062,347
2,500 Ohio St Air Quality Dev Auth Rev
Pollutn Ctl OH Edison A Rfdg
(FGIC Insd)...................... AAA Aaa 7.450 3/01/16 2,629,675
650 Richland Cnty, OH Hosp Impt Mtg
Rev Mansfield Genl Hosp Rfdg
(AMBAC Insd)..................... AAA Aaa 9.375 12/01/09 687,375
--------------
30,120,708
--------------
</TABLE>

See Notes to Financial Statements

C-23
<PAGE> 591

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OKLAHOMA 0.5%
1,000 Norman, OK Regl Hosp Auth Hosp
Rev (MBIA Insd).................. AAA Aaa 6.900 9/01/21 1,003,740
4,700 Oklahoma Hsg Fin Agy Single Fam-
ily Rev Mtg Ser A (MBIA Insd).... AAA Aaa 7.200 3/01/11 4,845,371
--------------
5,849,111
--------------
OREGON 0.7%
2,750 Emerald Peoples Util Dist OR Elec
Sys Rev Rfdg (AMBAC Insd)........ AAA Aaa 5.750 11/01/16 2,513,885
2,145 Marion County, OR Union High Sch
Dist No 007 Silverton (FSA
Insd)............................ AAA Aaa 6.000 6/01/13 2,052,808
1,960 Tillamook Cnty, OR (FGIC Insd)... AAA Aaa 6.250 1/01/14 1,927,915
1,000 Wasco Cnty, OR Vets Home (FSA
Insd)............................ AAA Aaa 6.200 6/01/13 981,120
--------------
7,475,728
--------------
PENNSYLVANIA 3.2%
5,500 Berks Cnty, PA Muni Auth Hosp Rev
Reading Hosp & Med Cent Proj B
(MBIA Insd)...................... AAA Aaa 6.000 10/01/14 5,115,055
2,000 Dauphin Cnty, PA Genl Auth Hosp
Rev Hapsco Phoenixville Hosp Proj
B (FGIC Insd).................... AAA Aaa 6.125 7/01/10 1,919,880
1,000 Emmaus, PA Genl Auth Rev Var Loc
Govt Bond Pool Pgm Ser B Var Rate
Cpn (BIGI Insd).................. AAA Aaa 8.000 5/15/18 1,049,420
2,050 Harrisburg, PA Redev Auth Rev Cap
Impt Ser A (FGIC Insd)........... AAA Aaa 7.875 11/02/16 2,209,900
1,000 Montgomery Cnty, PA High Edl &
Hlth Auth Hosp Rev Abington Mem
Hosp Ser A Rfdg (AMBAC Insd)..... AAA Aaa 6.000 6/01/22 904,520
</TABLE>

See Notes to Financial Statements

C-24
<PAGE> 592

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA -- CONTINUED
3,750 Montgomery Cnty, PA Indl Dev Auth
Rev Pollutn Ctl Ser E Rfdg (MBIA
Insd)............................ AAA Aaa 6.700 12/01/21 3,757,162
1,000 Northeastern PA Hosp & Edl Auth
College Rev Gtd Luzerne Cnty
Cmnty College (AMBAC Insd)(2).... AAA Aaa 6.625 8/15/15 992,680
12,600 Pennsylvania Intergvtl Coop Auth
Spl Tax Rev City Of Philadelphia
Funding Pgm (MBIA Insd).......... AAA Aaa 5.600 6/15/15 11,068,092
2,250 Philadelphia, PA Gas Wks Rev 14th
Ser A Rfdg (FSA Insd)............ AAA Aaa 6.375 7/01/14 2,192,490
1,000 Saint Mary Hosp Auth Bucks Cnty,
PA Rev Franciscan Hlth Saint Mary
Ser A (MBIA Insd)................ AAA Aaa 6.500 7/01/22 975,010
1,000 Saint Mary Hosp Auth Bucks Cnty,
PA Rev Franciscan Hlth Sys Ser B
(MBIA Insd)...................... AAA Aaa 6.500 7/01/12 993,800
1,000 State Pub Sch Bldg Auth PA Sch
Rev Burgettstown Sch Dist Ser D
(MBIA Insd)(2)................... AAA Aaa 6.500 2/01/14 993,440
4,500 Upper Darby, PA Sch Dist (AMBAC
Insd)............................ AAA Aaa 5.250 2/15/13 3,867,120
1,250 Westmoreland Cnty, PA Indl Dev
Auth Rev Hosp Westmoreland Hlth
Sys Ser A (AMBAC Insd)........... AAA Aaa 6.000 7/01/22 1,133,475
--------------
37,172,044
--------------
RHODE ISLAND 1.7%
2,000 Rhode Island St Hlth & Edl Bldg
Corp Rev Higher Edl Fac Roger
Williams (Connie Lee Insd)....... AAA NR 7.250 11/15/24 2,046,120
18,000 Rhode Island St Hlth & Edl Bldg
Corp Rev RI Hosp (Inverse Fltg)
(FGIC Insd)...................... AAA Aaa 8.701 8/15/21 17,932,500
--------------
19,978,620
--------------
</TABLE>

See Notes to Financial Statements

C-25
<PAGE> 593

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOUTH CAROLINA 1.2%
1,500 Charleston Cnty, SC Ctfs Partn
Ser B (MBIA Insd)................ AAA Aaa 6.875 6/01/14 1,529,595
3,000 Florence Cnty, SC Pub Fac Corp
Ctfs Partn Law Enforcement Proj
Civic Cent (Prerefunded @
03/01/00) (AMBAC Insd)........... AAA Aaa 7.600 3/01/14 3,286,890
1,000 Greenville, SC Hosp Sys Hosp Fac
Rev Ser A (Prerefunded @
05/01/98) (FGIC Insd)............ AAA Aaa 7.800 5/01/15 1,085,490
1,500 Greenwood Cnty, SC Hosp Rev Self
Mem Hosp Ser A (Prerefunded @
10/01/97) (BIGI Insd)............ AAA Aaa 8.375 10/01/17 1,641,270
1,700 Greenwood Cnty, SC Hosp Rev Self
Mem Hosp Ser B (Prerefunded @
10/01/97) (BIGI Insd)............ AAA Aaa 8.375 10/01/17 1,860,106
2,000 Lexington Cnty, SC Sch Dist No 1
Ctfs Partn Pgm Ser A (FGIC
Insd)............................ AAA Aaa 6.000 9/01/09 1,935,460
$1,235 Piedmont Muni Pwr Agy SC Elec Rev
Rfdg (FGIC Insd)................. AAA Aaa 6.750% 1/01/20 $ 1,251,450
635 Saint Andrews, SC Pub Svcs Dist
Swr Sys Rev (FGIC Insd).......... AAA Aaa 7.750 1/01/18 667,703
--------------
13,257,964
--------------
SOUTH DAKOTA 0.7%
4,205 South Dakota St Lease Rev Trust
Ctfs Ser A (Cap Guar Insd)....... AAA Aaa 6.625 9/01/12 4,210,971
4,000 South Dakota St Lease Rev Trust
Ctfs Ser A (Cap Guar Insd)....... AAA Aaa 6.700 9/01/17 3,971,840
--------------
8,182,811
--------------
TENNESSEE 0.5%
2,000 Chattanooga-Hamilton Cnty, TN
Hosp Auth Hosp Rev Erlanger Med
Cent Ser B (Inverse Fltg) (Prer-
efunded @ 05/01/01) (FSA Insd)... AAA Aaa 9.115 5/25/21 2,280,000
</TABLE>

See Notes to Financial Statements

C-26
<PAGE> 594

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TENNESSEE 0.5% -- CONTINUED
3,320 Johnson City, TN Sch Sales Tax
(AMBAC Insd)..................... AAA Aaa 6.700 5/01/18 3,327,404
--------------
5,607,404
--------------
TEXAS 5.2%
3,000 Amarillo, TX Hlth Fac Corp Hosp
Rev High Plains Baptist Hosp (In-
verse Fltg) (FSA Insd)........... AAA Aaa 8.838 1/03/22 2,793,750
12,500 Austin, TX Util Sys Rev Comb Ser
A Rfdg (MBIA Insd)............... AAA Aaa * 11/15/10 4,411,875
9,000 Brazos River Auth TX Rev Coll
Houston Lt & Pwr Co Proj B Rfdg
(BIGI Insd)...................... AAA Aaa 8.250 5/01/15 9,747,810
6,515 Brazos River Auth TX Rev Coll
Houston Lt & Pwr Co Proj C Rfdg
(BIGI Insd)...................... AAA Aaa 8.100 5/01/19 7,029,229
4,040 Corpus Christi, TX Hsg Fin Corp
Single Family Mtg Rev Ser A Rfdg
(MBIA Insd)...................... AAA Aaa 7.700 7/01/11 4,294,359
7,000 Dallas Cnty, TX Util &
Reclamation Dist Rfdg & Impt
(MBIA Insd)...................... AAA Aaa * 2/15/07 3,106,670
7,250 Dallas Cnty, TX Util &
Reclamation Dist Rfdg & Impt
(MBIA Insd)...................... AAA Aaa * 2/15/08 2,875,350
8,600 Dallas Cnty, TX Util &
Reclamation Dist Rfdg & Impt
(MBIA Insd)...................... AAA Aaa * 2/15/09 3,164,800
3,500 East TX Criminal Justice Fac Fin
Corp Mtg Rev City Of Henderson
Proj (AMBAC Insd)................ AAA Aaa 6.125 11/01/14 3,328,290
29,765 El Paso, TX Hsg Fin Corp Mtg Rev
Single Family (FGIC Insd)........ AAA Aaa * 11/01/16 2,918,458
2,000 Grand Prarie, TX Hlth Fac Dev
Corp Hosp Rev Dallas-Ft Worth Med
Cent (Prerefunded @ 11/01/95)
(AMBAC Insd)..................... AAA Aaa 9.500 11/01/10 2,113,660
</TABLE>

See Notes to Financial Statements

C-27
<PAGE> 595

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS 5.2% -- CONTINUED
7,250 Harris Cnty, TX Toll Rd Sr Lien
Rfdg (FGIC Insd)................. AAA Aaa 5.000 8/15/16 5,838,135
4,615 Harris Cnty, TX Toll Rd Tax & Sub
Lien Ser A Rfdg (FGIC Insd)...... AAA Aaa * 8/15/07 2,068,443
1,400 Lubbock, TX Hlth Fac Dev Corp
Hosp Rev Methodist Hosp Ser A
Rfdg (AMBAC Insd)................ AAA Aaa 5.875 12/01/13 1,281,266
3,000 Northeast Hosp Auth TX Rev
Northeast Med Cent Hosp Ser A
Rfdg (FGIC Insd)................. AAA Aaa 6.125 7/01/11 2,875,440
1,975 Tarrant Cnty, TX Hlth Fac Dev
Corp Hlth Sys Rev Ser A (FGIC
Insd)............................ AAA Aaa 5.000 9/01/15 1,579,526
400 Texas Muni Pwr Agy Rev (Prer-
efunded @ 09/01/95) (AMBAC
Insd)............................ A+ NR 7.000 9/01/14 406,352
--------------
59,833,413
--------------
UTAH 1.3%
5,085 Beaver Cnty, UT Sch Dist (Prer-
efunded @ 11/01/02) (AMBAC
Insd)............................ AAA Aaa 6.625 11/01/12 5,355,420
1,680 Payson City, UT Cnty UT Elec Pwr
Rev (BIGI Insd).................. AAA Aaa 8.000 8/15/03 1,829,285
750 Provo, UT Elec Rev 1984 Ser A
Rfdg (AMBAC Insd)................ AAA Aaa 10.375 9/15/15 1,065,923
3,500 Salt Lake City, UT Hosp Rev IHC
Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd)..................... AAA Aaa 9.515 5/15/20 3,395,000
500 Uintah Cnty, UT Pollutn Ctl Rev
Natl Rural Util Deseret Ser 1984
F (Prerefunded @ 06/15/01) (AMBAC
Insd)............................ AA- Aaa 10.000 6/15/09 614,785
</TABLE>

See Notes to Financial Statements

C-28
<PAGE> 596

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAR
AMOUNT S&P MOODY'S ($)MARKET
($000) DESCRIPTION RATING RATING COUPON(%) MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UTAH 1.3% -- CONTINUED
5 Utah St Hsg Fin Agy Single Family
Mtg Private Insd Mtg Ser A (AMBAC
Insd)............................ AA Aa 10.750 7/01/08 5,031
7,385 Utah St Muni Fin Coop Loc Govt
Rev Pool Cap Salt Lake (FSA
Insd)............................ AAA Aaa * 3/01/09 2,911,167
--------------
15,176,611
--------------
VIRGINIA 1.1%
2,500 Augusta Cnty, VA Indl Dev Auth
Hosp Rev Augusta Hosp Corp Rfdg
(AMBAC Insd)..................... AAA Aaa 5.500 9/01/15 2,161,650
2,315 Chesapeake Bay Brdg & Tunl Comm
VA Dist Rev Genl Resolution Rfdg
(MBIA Insd)...................... AAA Aaa 6.375 7/01/22 2,232,262
4,000 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)............................ AAA Aaa 6.800 3/01/14 4,043,120
2,500 Roanoke Cnty, VA Wtr Sys Rev Rfdg
(FGIC Insd)...................... AAA Aaa 5.000 7/01/21 1,968,525
1,125 Roanoke, VA Indl Dev Auth Hosp
Rev Roanoke Mem Hosp Proj
(Prerefunded @ 07/01/00) (MBIA
Insd)............................ AAA Aaa 6.500 7/01/25 1,166,996
750 University of VA Hosp Rev Ser C
Rfdg (Prerefunded @ 06/01/00)
(AMBAC Insd)..................... AAA NR * 6/01/07 714,825
--------------
12,287,378
--------------
WASHINGTON 2.4%
1,250 Franklin Cnty, WA Pub Util Dist
No 1 Elec Rev (Prerefunded @
09/01/01) (AMBAC Insd)........... AAA Aaa 7.100 9/01/08 1,347,988
350 Pierce Cnty, WA Swr Rev Ser A
(MBIA Insd)...................... AAA Aaa 9.000 2/01/05 416,255
1,000 Snohomish Cnty, WA Solid Waste
Rev (MBIA Insd).................. AAA Aaa 7.000 12/01/10 1,040,220
</TABLE>

See Notes to Financial Statements

C-29
<PAGE> 597

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

See Notes to Financial Statements

C-30
<PAGE> 598

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994

- ---------------
* Zero coupon bond
(1) At December 31, 1994, cost for federal income tax purposes is
$1,137,588,569; the aggregate gross unrealized appreciation is $30,579,096
and the aggregate gross unrealized depreciation is $33,668,935, resulting
in net unrealized depreciation including open futures transactions of
$3,089,839.
(2) Securities purchased on a when issued or delayed delivery basis.
(3) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.

See Notes to Financial Statements

C-31
<PAGE> 599

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994

<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $1,137,588,569) (Note 1).......................... $1,134,367,200
Short-Term Investments (Note 1)...................................................... 13,300,000
Receivables:
Interest............................................................................. 18,601,231
Investments Sold..................................................................... 2,350,354
Fund Shares Sold..................................................................... 750,384
Margin on Futures (Note 5)........................................................... 78,257
Other................................................................................ 32,230
--------------
Total Assets........................................................................... 1,169,479,656
--------------
Liabilities:
Payables:
Investments Purchased.............................................................. 16,998,148
Custodian Bank..................................................................... 3,083,680
Fund Shares Repurchased............................................................ 2,280,231
Income Distributions............................................................... 1,776,026
Investment Advisory Fee (Note 2)................................................... 404,896
Accrued Expenses................................................................... 1,186,868
--------------
Total Liabilities...................................................................... 25,729,849
--------------
Net Assets............................................................................. $1,143,749,807
==============
Net Assets Consist of:
Paid in Surplus (Note 3)............................................................. $1,153,762,159
Accumulated Undistributed Net Investment Income...................................... 37,808
Net Unrealized Depreciation on Investments........................................... (3,089,839)
Accumulated Net Realized Loss on Investments......................................... (6,960,321)
--------------
Net Assets............................................................................. $1,143,749,807
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $1,110,223,546
and 63,181,868 shares of beneficial interest issued and outstanding) (Note 3)...... $ 17.57
Maximum sales charge (4.65%* of offering price)...................................... .86
--------------
Maximum offering price to public..................................................... $ 18.43
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $30,025,336 and
1,709,564 shares of beneficial interest issued and outstanding) (Note 3)........... $ 17.56
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,498,975 and
199,168 shares of beneficial interest issued and outstanding) (Note 3)............. $ 17.57
==============
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,950 and 111
shares of beneficial interest issued and outstanding) (Note 3)..................... $ 17.57
==============
</TABLE>

- ---------------
* On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.

See Notes to Financial Statements

C-32
<PAGE> 600

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994

<TABLE>
<S> <C>
Investment Income:
Interest................................................................... $ 79,444,087
Amortization of Premium.................................................... (588,068)
-------------
Total Income............................................................... 78,856,019
-------------
Expenses:
Investment Advisory Fee (Note 2)........................................... 5,028,401
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D
of $2,804,735, $270,245, $46,842 and $5, respectively) (Note 6)......... 3,121,827
Shareholder Services....................................................... 1,726,834
Legal (Note 2)............................................................. 110,910
Insurance (Note 1)......................................................... 69,569
Trustees Fees and Expenses (Note 2)........................................ 34,965
Other...................................................................... 750,655
-------------
Total Expenses............................................................. 10,843,161
-------------
Net Investment Income...................................................... $ 68,012,858
=============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales........................................................ $ 677,790,889
Cost of Securities Sold.................................................... (671,450,339)
-------------
Net Realized Gain on Investments (Including realized loss on expired option
transactions of $161,820 and realized gain on futures transactions of
$10,301,737)............................................................ 6,340,550
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.................................................... 151,851,300
End of the Period (Including unrealized appreciation on open futures
transactions of $131,530)............................................... (3,089,839)
-------------
Net Unrealized Depreciation on Investments During the Period............... (154,941,139)
-------------
Net Realized and Unrealized Loss on Investments............................ $(148,600,589)
=============
Net Decrease in Net Assets from Operations................................. $ (80,587,731)
=============
</TABLE>

See Notes to Financial Statements

C-33
<PAGE> 601

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1994 and 1993

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................... $ 68,012,858 $ 64,573,993
Net Realized Gain/Loss on Investments................... 6,340,550 (13,356,769)
Net Unrealized Appreciation/Depreciation on Investments
During the Period..................................... (154,941,139) 78,379,445
----------------- -----------------
Change in Net Assets from Operations......................... (80,587,731) 129,596,669
----------------- -----------------
Distributions from Net Investment Income:
Class A Shares............................................. (66,735,561) (64,718,505)
Class B Shares............................................. (1,291,269) (289,225)
Class C Shares............................................. (222,010) (32,671)
Class D Shares............................................. (92) -0-
----------------- -----------------
(68,248,932) (65,040,401)
----------------- -----------------
Distributions from Net Realized Gain on Investments:
Class A Shares............................................. -0- (8,548)
----------------- -----------------
Total Distributions.......................................... (68,248,932) (65,048,949)
----------------- -----------------
Net Change in Net Assets from Investment Activities.......... (148,836,663) 64,547,720
----------------- -----------------
From Capital Transactions (Note 3)
Proceeds from Shares Sold.................................... 145,835,342 245,132,660
Net Asset Value of Shares Issued Through Dividend
Reinvestment............................................... 46,938,996 44,478,881
Cost of Shares Repurchased................................... (155,893,379) (98,393,313)
----------------- -----------------
Net Change in Net Assets from Capital Transactions........... 36,880,959 191,218,228
----------------- -----------------
Total Increase/Decrease in Net Assets...................... (111,955,704) 255,765,948
Net Assets:
Beginning of the Period.................................... 1,255,705,511 999,939,563
----------------- -----------------
End of the Period (Including undistributed net investment
income of $37,808 and $273,882, respectively)........... $ 1,143,749,807 $ 1,255,705,511
================= =================
</TABLE>

See Notes to Financial Statements

C-34
<PAGE> 602

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

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

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 19.857 $ 18.721 $18.478 $17.825 $17.798 $17.394 $16.700 $17.945 $16.189 $14.474
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income......... 1.051 1.107 1.146 1.153 1.160 1.182 1.184 1.198 1.249 1.220
Net realized and
unrealized
gain/loss on
investments.... (2.280) 1.145 .561 .681 .037 .391 .682 (1.226) 1.846 1.780
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations....... (1.229) 2.252 1.707 1.834 1.197 1.573 1.866 (.028) 3.095 3.000
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
LESS:
Distributions
from net
investment
income......... 1.056 1.116 1.140 1.160 1.170 1.169 1.172 1.215 1.231 1.285
Distributions
from net
realized gain
on
investments.... 0 0 .324 .021 0 0 0 .002 .108 0
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions.... 1.056 1.116 1.464 1.181 1.170 1.169 1.172 1.217 1.339 1.285
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of
period........... $ 17.572 $ 19.857 $18.721 $18.478 $17.825 $17.798 $17.394 $16.700 $17.945 $16.189
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN
(non-annualized)... (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37% 11.48% .27% 19.73% 21.08%
Net assets at end
of period
(in millions).... $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0 $ 555.3 $ 502.5 $ 418.1 $ 188.2
Ratio of expenses
to average net
assets
(annualized)..... .88% .84% .83% .88% .87% .88% .85% .71% .76% .89%
Ratio of net
investment
income to average
net assets
(annualized)..... 5.70% 5.69% 6.14% 6.39% 6.63% 6.73% 6.92% 7.04% 7.07% 8.00%
Portfolio
Turnover......... 48.46% 78.73% 111.90% 113.25% 107.79% 81.28% 132.85% 119.89% 31.00% 98.19%
</TABLE>

See Notes to Financial Statements

C-35
<PAGE> 603

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CLASS B SHARES
-------------------------------
MAY 1, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period............................. $ 19.824 $ 19.320
---------- ------------
Net investment income.......................................... .899 .619
Net realized and unrealized gain/loss on investments........... (2.276) .513
---------- ------------
Total from investment operations................................. (1.377) 1.132
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME.................... .884 .628
---------- ------------
Net asset value, end of period................................... $ 17.563 $ 19.824
========== ============
TOTAL RETURN (non-annualized).................................... (7.03%) 5.92%
Net assets at end of period (in millions)........................ $ 30.0 $ 20.8
Ratio of expenses to average net assets (annualized)............. 1.71% 1.68%
Ratio of net investment income to average net assets
(annualized)................................................... 4.88% 4.25%
Portfolio turnover............................................... 48.46% 78.73%
</TABLE>

See Notes to Financial Statements

C-36
<PAGE> 604

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

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

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period........................... $ 19.823 $ 19.650
---------- ----------
Net investment income........................................ .908 .350
Net realized and unrealized gain/loss on investments......... (2.279) .181
---------- ----------
Total from investment operations............................... (1.371) .531
Less distributions from net investment income.................. .884 .358
---------- ----------
Net asset value, end of period................................. $ 17.568 $ 19.823
========== ==========
TOTAL RETURN (non-annualized).................................. (6.98%) 2.70%
Net assets at end of period (in millions)...................... $ 3.5 $ 5.0
Ratio of expenses to average net assets (annualized)........... 1.70% 1.68%
Ratio of net investment income to average net assets
(annualized)................................................. 4.89% 4.21%
Portfolio turnover............................................. 48.46% 78.73%
</TABLE>

See Notes to Financial Statements

C-37
<PAGE> 605

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

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

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CLASS D SHARES
----------------
MARCH 14, 1994
(COMMENCEMENT OF
DISTRIBUTION) TO
DECEMBER 31,
1994
- ----------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period....................................... $ 18.890
----------
Net investment income.................................................... .811
Net realized and unrealized loss on investments.......................... (1.313)
----------
Total from investment operations........................................... (.502)
Less distributions from net investment income.............................. .820
----------
Net asset value, end of period............................................. $ 17.568
==========
TOTAL RETURN (non-annualized).............................................. (2.68%)
Net assets at end of period (in thousands)................................. $ 2.0
Ratio of expenses to average net assets (annualized)....................... .97%
Ratio of net investment income to average net assets (annualized).......... 5.64%
Portfolio turnover......................................................... 48.46%
</TABLE>

See Notes to Financial Statements

C-38
<PAGE> 606

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1994

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen Merritt Insured Tax Free Income Fund (the "Fund") was
incorporated under Maryland law on July 1, 1984, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on December
14, 1984 and was reorganized as a sub-trust of Van Kampen Merritt Tax Free Fund
(the "Trust"), a Massachusetts business trust as of February 22, 1988. On May 1,
1993, the Fund commenced the distribution of its Class B shares. The
distribution of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993. The distribution of the Fund's fourth class of
shares, Class D shares, commenced on March 14, 1994.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

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" and "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.

C. Investment Income -- Interest income is recorded on an accrual basis.
Bond premium and original issue discount are amortized over the expected life of
each applicable security.

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.

E. Distribution of Income and Gains -- The Fund declares daily and pays
monthly dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

C-39
<PAGE> 607

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

F. Insurance Expenses -- The Fund typically invests in insured bonds. Any
portfolio securities not specifically covered by a primary insurance policy are
insured secondarily through the Fund's portfolio insurance policy. Insurance
premiums are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (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 $100 million.............................................................. .500 of 1%
Next $150 million............................................................... .450 of 1%
Next $250 million............................................................... .425 of 1%
Over $500 million............................................................... .400 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

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.

At December 31, 1994, VKAC owned 100 shares each of Classes B, C and D.

3. CAPITAL TRANSACTIONS

The Fund has outstanding four classes of common shares, Classes A, B, C and
D. There are an unlimited number of shares of each class without par value
authorized.

C-40
<PAGE> 608

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

At December 31, 1994, paid in surplus aggregated $1,116,662,803,
$33,016,541, $4,080,719 and $2,096 for Classes A, B, C and D, respectively. For
the year ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................................... 6,865,303 $ 128,013,313
Class B...................................................... 806,590 15,092,543
Class C...................................................... 151,670 2,727,397
Class D...................................................... 111 2,089
---------- -------------
Total Sales.................................................. 7,823,674 $ 145,835,342
---------- -------------
Dividend Reinvestment:
Class A...................................................... 2,505,940 $ 45,999,603
Class B...................................................... 41,052 750,173
Class C...................................................... 10,294 189,213
Class D...................................................... -0- 7
---------- -------------
Total Dividend Reinvestment.................................. 2,557,286 $ 46,938,996
---------- -------------
Repurchases:
Class A...................................................... (8,130,723) $(148,756,423)
Class B...................................................... (185,936) (3,383,930)
Class C...................................................... (213,783) (3,753,026)
Class D...................................................... -0- -0-
---------- -------------
Total Repurchases............................................ (8,530,442) $(155,893,379)
---------- -------------
</TABLE>

C-41
<PAGE> 609

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

At December 31, 1993, paid in surplus aggregated $1,091,406,310,
$20,557,755 and 4,917,135 for Classes A, B and C, respectively. For the year
ended December 31, 1993, transactions were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................................... 11,298,011 $219,727,668
Class B....................................................... 1,045,650 20,514,210
Class C....................................................... 249,650 4,890,782
---------- ------------
Total Sales................................................... 12,593,311 $245,132,660
---------- ------------
Dividend Reinvestment:
Class A....................................................... 2,269,086 $ 44,286,925
Class B....................................................... 8,399 165,603
Class C....................................................... 1,337 26,353
---------- ------------
Total Dividend Reinvestment................................... 2,278,822 $ 44,478,881
---------- ------------
Repurchases:
Class A....................................................... (5,037,816) $(98,271,255)
Class B....................................................... (6,191) (122,058)
Class C....................................................... -0- -0-
---------- ------------
Total Repurchases............................................. (5,044,007) $(98,393,313)
---------- ------------
</TABLE>

Class B, C and D 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 six years of the purchase for Class B
and one year of the purchase for Classes C and D as detailed in the following
schedule. The Class B, C and D shares bear the expense of their respective
deferred sales arrangements, including higher distribution and service fees and
incremental transfer agency costs.

CONTINGENT DEFERRED
SALES CHARGE

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR OF REDEMPTION CLASS B CLASS C CLASS D
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First........................................................ 4.00% 1.00% 0.75%
Second....................................................... 3.75% None None
Third........................................................ 3.50% None None
Fourth....................................................... 2.50% None None
Fifth........................................................ 1.50% None None
Sixth........................................................ 1.00% None None
Seventh and Thereafter....................................... None None None
</TABLE>

C-42
<PAGE> 610

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

4. INVESTMENT TRANSACTIONS

Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $588,246,932 and
$656,359,642, respectively.

5. DERIVATIVE FINANCIAL INSTRUMENTS

A derivative financial instrument in very general terms refers to a
security whose value is "derived" from the value of an underlying asset,
reference rate or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

Transactions in options for the year ended December 31, 1994, were as
follows:

The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the contracts
are closed or expire.

C-43
<PAGE> 611

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
December 31, 1994

Transactions in futures contracts, each with a par value of $100,000, for
the year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CONTRACTS
- -----------------------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1993................................................... 800
Futures Opened..................................................................... 25,685
Futures Closed..................................................................... (25,750)
---------
Outstanding at December 31, 1994................................................... 735
=======
</TABLE>

The futures contracts outstanding as of December 31, 1994, and the
descriptions and unrealized appreciation are as follows:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
UNREALIZED
CONTRACTS APPRECIATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures Mar 1995 -- Sells to Open...................... 300 $ 72,576
Municipal Bond Futures Mar 1995 -- Sells to Open........................ 435 58,954
--- ------------
735 $131,530
======= =========
</TABLE>

C. Indexed Securities -- These instruments are identified in the portfolio
of investments. The price of these securities may be more volatile than the
price of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.

An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to enhance
the yield of the portfolio.

6. DISTRIBUTION AND SERVICE PLANS

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

Annual fees under the Plans of up to .30% each of Class A and Class D
shares and 1.00% each of Class B and Class C shares are accrued daily. Included
in these fees for the year ended December 31, 1994, are payments to VKAC of
approximately $512,700.

C-44
<PAGE> 612

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
INDEPENDENT AUDITORS' REPORT

THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Insured Tax Free Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods presented. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 Van
Kampen Merritt Insured Tax Free Income Fund as of December 31, 1994, 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 periods presented, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 7, 1995

C-45
<PAGE> 613

APPENDIX D

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 96.6%
EDUCATION 4.7%
500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07............... 587,605
1,000,000 Corona-Norco, California, University School District Lease Rev.,
FSA, 6.00%, 4/15/19.............................................. 868,080
425,000 Earlimart, California, Elementary School District, Series 1, AMBAC,
6.70%, 8/1/21.................................................... 397,056
500,000 Indiana State University Rev., Building 3 (Student Fee) Series E,
MBIA, 7.375%, 10/1/10............................................ 540,505
1,000,000 Pennsylvania State Higher Education, Assistance Agency, Student
Loan Rev., Series D, AMBAC, 6.05%, 1/1/19........................ 875,440
1,000,000 University of Washington, Housing & Dining Rev., MBIA, 7.00%,
12/1/21.......................................................... 1,006,620
750,000 Wisconsin State Health & Educational Facilities Rev., FGIC 6.25%,
12/1/10.......................................................... 695,685
------------
TOTAL EDUCATION.................................................. 4,970,991
------------
GENERAL OBLIGATIONS 6.9%
1,000,000 Berwyn Illinois Corp., MBIA, 7.00%, 11/15/10....................... 1,002,370
1,075,000 Cicero, Illinois, Refunding, Tax Increment, Series A, MBIA, 5.70%,
12/1/13.......................................................... 921,318
245,000 Henderson, Texas, Limited Tax, AMBAC, 9.125%, 5/15/04.............. 295,499
1,000,000 Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series-92, 8.10%, 12/1/11................... 1,026,280
800,000 Regional Transportation Authority, Illinois, Series A, AMBAC,
6.125%, 6/1/22................................................... 696,296
1,000,000 St. Clair County, Illinois, FGIC, 5.75%, 10/1/15................... 843,680
965,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23...... 925,049
500,000 Travis County, Texas, Series A, MBIA, 5.50%, 3/1/03................ 480,095
1,000,000 Webb County, Texas, Limited Tax, CGIC, Series-89, 7.25%, 2/15/09... 1,053,340
------------
TOTAL GENERAL OBLIGATIONS........................................ 7,243,927
------------
HOSPITALS 28.5%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project)
AMBAC, 5.75%, 8/15/22............................................ 412,400
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev. (Bon
Secours Health System Project) FSA, 5.625%, 8/15/25.............. 801,320
190,000 Clermont County, Ohio, Hospital Facilities Rev. (Mercy Health Care
System) Series A, AMBAC, 9.75%, 9/1/13........................... 200,805
750,000 Decatur, Illinois, Health Care Facilities Rev. (DMH Community
Services Corp. Project) BIG, 8.10%, 11/15/18..................... 793,597
</TABLE>

D-1
<PAGE> 614

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS -- CONTINUED
750,000 District of Columbia Hospital Rev. (National Rehabilitation
Hospital MedLantic) Series A, MBIA, 7.10%, 11/1/11............... 756,037
500,000 Florence County, South Carolina, Hospital Rev. (McLeod Regional
Medical Center Project) Series B, FGIC, 8.75%, 11/1/09,
Pre-refunded, 11/1/95............................................ 528,030
1,650,000 Fort Wayne, Indiana, Hospital Authority Rev. (Ancilla Health
Systems, Inc.) Series C, BIG, 8.125%, 7/1/18, Pre-refunded,
1/1/99........................................................... 1,826,550
1,250,000 Harris County, Texas Health Facilities, (Development Corp. Thermal
Utility Rev.), Series A, AMBAC, 7.25%, 2/15/15................... 1,275,050
1,500,000 Harris County, Texas, Hospital District Mtg. Rev., BIG, 8.50%,
4/1/15, Pre-refunded, 4/1/96..................................... 1,594,950
Illinois Health Facilities Authority Rev.
1,685,000 Brokaw Mennonite Association, FGIC, 8.00%, 8/15/17................. 1,843,441
775,000 Franciscan Sisters Health Project, MBIA, 7.875%, 9/1/18............ 836,644
1,695,000 Sisters of St. Mary's Health Care, Series B, MBIA, 8.00%, 6/1/14... 1,850,703
Indiana Health Facility Financing Authority (Lutheran Hospital
Indiana, Inc.)
1,000,000 MBIA, 6.85%, 7/1/22................................................ 964,000
1,000,000 AMBAC, 7.00%, 2/15/19.............................................. 995,230
500,000 Kent Hospital Finance Authority, Michigan Hospital Facility Rev.
(Pine Rest Christian Hospital Association) FGIC, 9.00%,
11/1/10.......................................................... 529,140
1,000,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital Project)
AMBAC, 6.70%, 5/1/12............................................. 970,970
1,000,000 Louisiana Public Facilities Authority, Health & Educational Capital
Facilities Rev. (Our Lady of the Lake Medical Center) Series A,
BIG, 8.20%, 12/1/15.............................................. 1,075,660
Louisiana Public Facilities Authority, Hospital Rev.
500,000 Southern Baptist Hospital Project, FSA, 6.80%, 5/15/12............. 493,940
500,000 Touro Infirmary Project, Series A, BIG, 8.00%, 6/1/09.............. 545,930
500,000 Maine Health & Higher Educational Facilities Authority Rev.,
Series-91, FSA, 6.375%, 7/1/21................................... 455,490
250,000 Marion County, Florida, Hospital District Rev., Refunding, Ocala,
Florida (Munroe Regional Medical Center) FGIC, 6.25%, 10/1/12.... 230,798
Massachusetts State Health & Educational Facilities Authority Rev.
1,000,000 Children's Hospital Corp., Series B, 11.00%, 1/1/05................ 1,024,270
1,000,000 University Hospital, Series C, MBIA, 7.25%, 7/1/19................. 1,017,370
500,000 Mississippi, Hospital Equipment & Facilities (Wesley Health System,
Inc.) CONN, Series A, 6.05%, 4/1/12.............................. 436,805
475,000 Missouri State Health & Educational Facilities Authority Rev.,
Heartland Health Systems Project, AMBAC, 6.35%, 11/15/17......... 437,428
</TABLE>

D-2
<PAGE> 615

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS -- CONTINUED
500,000 North Central Texas, Health Facility Development Corp. Rev.
(Presbyterian Healthcare Project) Series B, BIG, 8.875%, 12/1/15,
Pre-refunded, 12/1/97............................................ 556,025
1,000,000 Parish of Jefferson, Louisiana, Hospital Services (West Jefferson
General Hospital Project) FGIC, 9.875%, 1/1/10................... 1,024,280
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series
H-2, AMBAC, 7.625%, 12/1/15...................................... 1,068,360
1,000,000 St. Joseph County, Indiana, Hospital Authority, Hospital Facilities
Rev. (Memorial Hospital South Bend Project) MBIA, 6.25%,
8/15/12.......................................................... 924,320
280,000 Waco, Texas, Health Facilities Development Corp., Hospital Rev.
(Hillcrest Baptist Medical Center) MBIA, 9.20%, 9/1/14,
Pre-refunded, 9/1/95............................................. 294,798
Washington State Health Care Facilities Authority Rev., Refunding,
MBIA
1,395,000 Empire Health Services Spokane, 8.375%, 11/1/06.................... 1,529,311
1,000,000 Virginia-Mason Medical Center, 8.00%, 7/1/15....................... 1,060,380
500,000 West Virginia State Hospital Finance Authority, Hospital Rev.
(Monongalia General Hospital) BIG, 8.60%, 7/1/17, Pre-refunded,
7/1/97........................................................... 538,100
1,000,000 Wisconsin State Health & Educational Rev. (Milwaukee Regional
Medical Center, Inc. Project) AMBAC, 7.50%, 8/1/11............... 1,012,400
------------
TOTAL HOSPITALS.................................................. 29,904,532
------------
HOUSING 4.3%
265,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B, 9.25%,
4/1/16........................................................... $ 271,503
1,280,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10.................................... 1,170,214
960,000 Louisiana Public Facilities Authority, Multi-family Housing Rev.
(One Lakeshore Place Apartments) 9.25%, 7/20/20.................. 993,658
1,195,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26.................................................... 1,121,209
1,000,000 South Dakota State Housing Development Authority, 6.85%, 5/1/26.... 971,250
------------
TOTAL HOUSING.................................................... 4,527,834
------------
INDUSTRIAL DEVELOPMENT REVENUE 4.0%
2,000,000 Clark County, Nevada (Nevada Power Co. Project), AMBAC, 7.20%,
10/1/22.......................................................... 2,019,340
850,000 Manatee County, Florida (Manatee Hospital & Health System) MBIA,
8.25%, 8/15/14................................................... 907,996
720,000 Pima County, Arizona, Refunding, FSA, 7.25%, 7/15/10............... 723,542
500,000 Parish of St. Charles, Louisiana, Solid Waste Disposal Rev., 7.05,
4/1/22........................................................... 498,730
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE............................. 4,149,608
------------
</TABLE>

D-3
<PAGE> 616

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS 6.9%
600,000 Arizona State Municipal Financing Program, Certificates of
Participation, Series 17, BIG, 8.125%, 8/1/17.................... 635,088
1,000,000 Charleston County, South Carolina, Certificates of Participation,
Charleston Public Facilities Corp., MBIA, 7.10%, 6/1/11.......... 1,072,130
875,000 Chicago, Illinois, Public Building Commission, Building Rev.
(Community College, District #508) Series B, BIG, 8.75%,
1/1/07........................................................... 937,807
1,000,000 Dade County, Florida, Special Obligation (Miami Beach Convention
Center Project) Series B, FGIC, 8.80%, 12/1/02................... 1,097,280
310,000 Louisiana Public Facilities Authority Rev. (Medical Center
Louisiana at New Orleans Project) CONN, 6.25%, 10/15/10.......... 290,148
1,000,000 Pennsylvania Convention Center Authority Rev., Series A, FGIC,
6.00%, 9/1/19.................................................... 906,920
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding
Lease, Series A, FGIC, 5.625%, 11/15/14.......................... 1,289,190
1,000,000 South Dakota, Lease Rev., Series A, CGIC, 6.625%, 9/1/12........... 956,690
------------
TOTAL MISCELLANEOUS.............................................. 7,185,253
------------
MUNICIPAL UTILITY DISTRICT 0.7%
425,000 Maple Run at Austin, Texas Contract, Rev., FGIC, 8.25%, 11/15/05... 456,238
250,000 Montgomery County, Texas, MBIA, 6.25%, 3/1/14...................... 235,838
------------
TOTAL MUNICIPAL UTILITY DISTRICT................................. 692,076
------------
POLLUTION CONTROL REVENUE 14.2%
Beaver County, Pennsylvania, Industrial Development Authority,
Refunding (Ohio Edison Co. Mansfield), Series A, FGIC
1,000,000 7.10%, 6/1/18...................................................... 990,980
500,000 7.75%, 9/1/24...................................................... 531,030
Brazos River Authority, Texas, Rev.
1,870,000 Houston Lighting & Power, Refunding, Series B, FGIC, 7.20%,
12/1/18.......................................................... 1,941,153
1,000,000 Series C, BIG, 8.10%, 5/1/19....................................... 1,074,210
1,270,000 Texas Utilities Electric Co., FGIC, 9.875%, 10/1/17................ 1,419,136
1,000,000 Emery County, Utah, Refunding (Pacificorp Project) Series A, AMBAC,
5.65%, 11/1/23................................................... 808,160
1,000,000 Lehigh County, Pennsylvania, Industrial Development Authority
(Pennsylvania Power & Light Co. Project) Series A, MBIA, 6.40%,
11/1/21.......................................................... 908,650
1,000,000 Matagorda County, Texas, Navigation District #1 (Houston Lighting &
Power) Series D, FGIC, 7.60%, 10/1/19............................ 1,072,490
Monroe County, Michigan (Detroit Edison Co.)
750,000 Series A, AMBAC, 9.625%, 12/1/15................................... 805,065
</TABLE>

D-4
<PAGE> 617

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE 14.2% -- CONTINUED
1,000,000 Series I-B, MBIA, 6.55%, 9/1/24.................................... 905,940
1,500,000 Ohio State Air Quality Development Authority Rev. (Cleveland Co.
Project) FGIC, 8.00%, 12/1/13.................................... 1,659,780
200,000 Parish of West Feliciana, Louisiana (Gulf State Utilities) Series
A, 7.50%, 5/1/15................................................. 195,494
1,000,000 Pope County, Arkansas (Arkansas Power & Light Co. Project) FSA,
10.625%, 12/1/15................................................. 1,072,820
1,000,000 Rockport, Indiana (Indiana & Michigan Electric Co.) Series A, BIG,
9.25%, 8/1/14.................................................... 1,041,100
500,000 Warren County, New Jersey, Pollution Control Financing Authority,
Series A, FGIC, 9.00%, 12/1/06................................... 550,920
------------
TOTAL POLLUTION CONTROL REVENUE.................................. 14,976,928
------------
PUBLIC IMPROVEMENT 0.5%
465,000 Dallas, Texas, Civic Center, Sr. Lien, AMBAC, 7.00%, 1/1/10........ 479,554
------------
SALES TAX REVENUE 2.4%
Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement,
FGIC
250,000 6.25%, 12/1/12..................................................... 235,597
500,000 6.25%, 12/1/17..................................................... 463,330
250,000 Broken Arrow, Oklahoma, Municipal Authority Utility System & Sales
Tax Rev., FGIC, 9.75%, 5/1/05.................................... 262,620
1,000,000 Marion County, Indiana, Convention & Recreational Facilities,
Series A, AMBAC, 7.00%, 6/1/21................................... 1,012,090
500,000 Rhode Island, Depositors Economic Corp., Special Obligation, Series
A, FSA, 6.625%, 8/1/19, Pre-refunded, 8/1/02..................... 521,990
------------
TOTAL SALES TAX REVENUE........................................... 2,495,627
------------
TRANSPORTATION 6.3%
Chicago, Illinois, O'Hare International Airport, Special Facility
Rev. (International Terminal) Series A, MBIA
500,000 7.50%, 1/1/17.................................................... 505,135
500,000 7.625%, 1/1/10................................................... 516,480
500,000 Harris County, Texas, Refunding, Toll Road Sr. Lien, Series B,
AMBAC, 6.625%, 8/15/17........................................... 516,970
Hawaii State, Airports System Rev.
350,000 AMBAC, 7.375%, 7/1/11............................................ 356,052
500,000 2nd Series, MBIA, 7.00%, 7/1/18.................................. 498,810
1,250,000 Louisville & Jefferson County, Kentucky, Regional Airport Authority
Rev., Series A, MBIA, 8.50%, 7/1/17.............................. 1,339,900
</TABLE>

D-5
<PAGE> 618

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
($)PRINCIPAL ($)MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION -- CONTINUED
500,000 Memphis-Shelby County, Tennessee, Airport Authority Rev., MBIA,
8.125%, 2/15/12.................................................. 536,490
1,700,000 Palm Beach County, Florida, Airport System Rev., MBIA, 7.75%,
10/01/10......................................................... 1,829,710
500,000 Tulsa, Oklahoma, Airport Improvement, General Rev., MBIA, 7.50%,
6/1/08........................................................... 525,585
------------
TOTAL TRANSPORTATION............................................. 6,625,132
------------
UTILITIES 16.4%
1,000,000 Austin, Texas, Utility Systems Rev., BIG, 8.625%, 11/15/12......... 1,149,170
1,000,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC, 6.30%,
1/1/12........................................................... 1,018,420
565,000 City of Brownsville, Texas, Utilities System Priority Rev., Series
1990, AMBAC, 6.50%, 9/1/17....................................... 539,790
1,000,000 Colorado River, Texas, Municipal Water District (Water Transmission
Facilities Project-A) AMBAC, 6.625%, 1/1/21...................... 1,031,150
100,000 Farmington, New Mexico, Utility System Rev., FGIC, 9.75%, 5/15/13,
Pre-refunded, 5/15/96............................................ 108,458
2,000,000 Lower Colorado River Authority, Texas, Rev., Refunding, FSA,
5.625%, 1/1/17................................................... 1,704,565
700,000 Missouri State Environmental Improvement & Energy Resource
Authority, Environment Improvement Rev., AMBAC, 7.40%, 5/1/20.... 730,303
2,000,000 M-S-R Public Power Agency, California, San Juan Project Rev.,
Refunding, Series F, AMBAC, 6.00%, 7/1/20........................ 1,741,980
200,000 New York City, New York, Municipal Water Finance Authority, Water &
Sewer System Rev., Series A, 9.00%, 6/15/17, Pre-refunded,
6/15/97.......................................................... 220,624
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev., MBIA,
5.75%, 1/1/20.................................................... 842,820
1,000,000 Northern Minnesota, Municipal Power Agency, Series A, AMBAC, 7.25%,
1/1/16........................................................... 1,039,670
215,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
Refunding, Series A, AMBAC, 9.25%, 1/1/19, Pre-refunded,
1/1/96........................................................... 230,639
500,000 Provo City, Utah, Energy System Rev., Series A, AMBAC, 9.50%,
11/1/10.......................................................... 536,160
1,500,000 Reedy Creek, Florida, Improvement District Utilities Rev., Series
1, MBIA, 9.00%, 10/1/07.......................................... 1,646,280
400,000 Rock Hill, South Carolina, Utility Systems Rev., FGIC, 8.00%,
1/1/18........................................................... 433,580
600,000 Tacoma, Washington, Electric Systems Rev., AMBAC, 8.00%, 1/1/11,
Pre-refunded, 1/1/98............................................. 650,370
Washington State Public Power Supply System Rev. (Nuclear Project
No. 3)
450,000 BIG, 7.25%, 7/1/16............................................... 482,841
2,000,000 MBIA, 5.60%, 7/1/15.............................................. 1,647,900
1,500,000 MBIA, 5.60%, 7/1/17.............................................. 1,218,330
</TABLE>

D-6
<PAGE> 619

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

INVESTMENT PORTFOLIO -- CONTINUED
November 30, 1994

- ---------------
+ Interest rates are as of November 30, 1994
Rev. -- Revenue bond

Insurers:
AMBAC -- AMBAC Indemnity Corp.
BIG -- Bond Investors Guaranty Insurance Corp.
CGIC -- Capital Guaranty Insurance Corp.
CONN -- Connie Lee
FGIC -- Financial Guaranty Insurance Corp.
FSA -- Financial Security Assurance Inc.
MBIA -- Municipal Bond Investors' Assurance Corp.

See Notes to Financial Statements

D-7
<PAGE> 620

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $106,701,512).............................. $102,604,692
Interest receivable........................................................... 2,431,085
Receivable for investments sold............................................... 541,086
Receivable for Fund shares sold............................................... 79,996
Other assets.................................................................. 16,979
------------
105,673,838
------------
LIABILITIES
Payable for Fund shares redeemed.............................................. 364,842
Dividends payable............................................................. 234,220
Due to Distributor............................................................ 68,938
Due to Adviser................................................................ 49,969
Bank overdraft................................................................ 47,535
Accrued expenses.............................................................. 45,995
Due to shareholder service agent.............................................. 7,850
------------
819,349
------------
NET ASSETS, equivalent to $10.55 per share for Class A and Class B shares, and
$10.54 per share for Class C shares......................................... $104,854,489
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 6,379,617 Class A and 3,379,577 Class B
and 180,188 Class C shares outstanding...................................... $ 99,394
Capital surplus............................................................... 114,706,725
Accumulated net realized loss on securities................................... (5,876,339)
Net unrealized depreciation of securities..................................... (4,096,820)
Undistributed net investment income........................................... 21,529
------------
NET ASSETS at November 30, 1994............................................... $104,854,489
============
</TABLE>

See Notes to Financial Statements.

D-8
<PAGE> 621

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

STATEMENT OF OPERATIONS
Year Ended November 30, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest...................................................................... $ 7,473,020
------------
EXPENSES
Management fees............................................................... 641,145
Service fees -- Class A....................................................... 180,174
Distribution and service fees -- Class B...................................... 378,659
Distribution and service fees -- Class C...................................... 15,952
Shareholder service agent's fees and expenses................................. 118,640
Registration and filing fees.................................................. 92,838
Accounting services........................................................... 86,031
Reports to shareholders....................................................... 28,650
Audit fees.................................................................... 22,702
Trustees' fees and expenses................................................... 11,975
Legal fees.................................................................... 11,762
Custodian fees................................................................ 6,915
Miscellaneous................................................................. 7,096
------------
Total expenses........................................................... 1,602,539
------------
Net investment income.................................................... 5,870,481
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities............................................... (464,507)
Net unrealized depreciation of securities during the year..................... (10,201,344)
------------
Net realized and unrealized loss on securities........................... (10,665,851)
------------
Decrease in net assets resulting from operations......................... $ (4,795,370)
============
</TABLE>

See Notes to Financial Statements.

D-9
<PAGE> 622

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED NOVEMBER 30
----------------------------
1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of year.................................... $109,719,511 $ 74,387,518
------------ ------------
OPERATIONS
Net investment income.......................................... 5,870,481 5,137,222
Net realized loss on securities................................ (464,507) (228,375)
Net unrealized appreciation (depreciation) of securities during
the year.................................................... (10,201,344) 2,393,531
------------ ------------
Increase (decrease) in net assets resulting from operations...... (4,795,370) 7,302,378
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A..................................................... (3,998,830) (4,006,512)
Class B..................................................... (1,770,263) (1,129,616)
Class C..................................................... (73,782) --
------------ ------------
(5,842,875) (5,136,128)
------------ ------------
In excess of net investment income
Class A..................................................... -- (21,356)
Class B..................................................... -- (9,946)
Class C..................................................... -- --
------------ ------------
-- (31,302)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS......................... (5,842,875) (5,167,430)
------------ ------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A..................................................... 11,790,509 17,447,835
Class B..................................................... 10,898,379 25,351,509
Class C..................................................... 2,707,049 --
------------ ------------
25,395,937 42,799,344
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A..................................................... 2,032,068 2,050,353
Class B..................................................... 1,023,631 657,194
Class C..................................................... 58,216 --
------------ ------------
3,113,915 2,707,547
------------ ------------
Cost of shares redeemed
Class A..................................................... (14,932,364) (10,204,699)
Class B..................................................... (7,093,131) (2,105,147)
Class C..................................................... (711,134) --
------------ ------------
(22,736,629) (12,309,846)
------------ ------------
Increase in net assets resulting from share transactions....... 5,773,223 33,197,045
------------ ------------
INCREASE (DECREASE) IN NET ASSETS................................ (4,865,022) 35,331,993
------------ ------------
NET ASSETS, end of year.......................................... $104,854,489 $109,719,511
============ ============
</TABLE>

See Notes to Financial Statements.

D-10
<PAGE> 623

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES

American Capital Tax-Exempt Insured Municipal Portfolio (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified open-end management investment company.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. INVESTMENT VALUATIONS

Municipal bonds are valued at the most recently quoted bid prices or at bid
prices based on a matrix system (which considers such factors as security
prices, yields, maturities and ratings) furnished by dealers and an
independent pricing service. Securities for which market quotations are not
readily available are valued at a fair value as determined in good faith by
the Board of Directors of the Fund. Short-term investments with a maturity of
60 days or less when purchased are valued at amortized cost, which
approximates market value. Short-term investments with a maturity of more
than 60 days when purchased are valued based on market quotations until the
remaining days to maturity becomes less than 61 days. From such time, until
maturity, the investments are valued at amortized cost.

Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal at maturity and interest. The
insurance reduces credit risk but not market risk of the security.

B. REPURCHASE AGREEMENTS

A repurchase agreement is a short-term investment in which a 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 Manager, Inc. ("The Adviser"), the daily aggregate of
which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt securities. The Fund will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the repurchase
proceeds due the Fund.

C. FUTURES CONTRACTS

Transactions in futures contracts are utilized in strategies to manage the
market risk of the Fund's investments by increasing or decreasing the
percentage of assets effectively invested. The purchase of a futures contract
increases the impact of changes in the market price of investments on net
asset value. There is also a risk that the market movement of such
instruments may not be in the direction forecasted.

D-11
<PAGE> 624

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

During the period the futures contract is open, changes in the value of the
contract ("variation margin") are recognized by marking the contract to
market on a daily basis. As unrealized gains or losses are incurred,
variation margin payments are received from or made to the broker. Upon the
closing or cash settlement of a contract, gains and losses are realized. The
cost of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.

D. FEDERAL INCOME TAXES

No provision for federal income taxes is required because the Fund has
elected to be taxed as "regulated investment companies" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no
distributions of capital gains will be made until tax basis capital loss
carryforwards, if any, expire or are offset by net realized capital gains.

E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME

Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Interest income is accrued daily.

F. DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends from net investment income on each business day.
The Fund intends to continue to invest principally in tax-exempt obligations
sufficient in amount to qualify it to pay "exempt-interest dividends" as
defined in the Internal Revenue Code.

The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or distributions may
exceed financial statement earnings.

G. DEBT DISCOUNT OR PREMIUM

The Fund accounts for discounts and premiums on the same basis as is used for
federal income tax reporting. Accordingly, original issue debt discounts and
all premiums are amortized over the life of the security. Market discounts
are recognized at the time of sale as realized gains for book purposes and
ordinary income for tax purposes.

H. WHEN-ISSUED SECURITIES

Delivery and payment for securities purchased on a when-issued basis may take
place up to 45 days after the day of the transaction. The securities
purchased are subject to market fluctuation during this period. To meet the
payment obligations, sufficient cash or liquid securities equal to the amount
that will be due are set aside with the custodian.

D-12
<PAGE> 625

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

NOTE 2 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Adviser serves as the investment manager of the Fund. Management fees
are paid monthly, based on the aggregate average daily net assets of the Fund at
an annual rate of .60% of the first $300 million of the aggregate average daily
net assets, .55% of the next $300 million, and .50% of the amount in excess of
$600 million. From time to time, the Adviser may voluntarily elect to subsidize
a portion of the Fund's expenses. The voluntary subsidy may be discontinued at
any time without prior notice. There were no subsidies during the fiscal year
ended November 30, 1994.

Other transactions with affiliates during the year were as follows:

<TABLE>
<S> <C>
Accounting services (accounting officers cost)..................................... $ 7,296
Legal fees......................................................................... 10,864
Shareholder service agent's fees................................................... 92,670
Sales of Fund shares:
Distributor commissions.......................................................... 27,152
Retail Dealer commissions........................................................ 8,526
</TABLE>

Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
These charges included the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services. These services provided by the Adviser are
at cost.

Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.

Under the terms of the Distribution plans, the Fund pays up to .25% per
annum of its average daily net assets to reimburse the Distributor for expenses
and service fees incurred. Class B and Class C shares pay an additional
distribution fee of up to .75% per annum of their average net assets to
reimburse the Distributor for its distribution expenses. Actual distribution
expenses incurred by the Distributor for Class B and Class C shares may exceed
the amounts reimbursed to the Distributor by the Fund. At November 30, 1994, the
unreimbursed expenses by the Distributor under the Class B and Class C plans
aggregated approximately $1.5 million and $36,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from share redemptions or, subject to the annual renewal
of the plans, future reimbursements of distribution fees.

D-13
<PAGE> 626

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

Certain officers and trustees of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.

NOTE 3 -- INVESTMENT ACTIVITY

During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments were:

<TABLE>
<S> <C>
Purchases...................................................................... $16,297,871
Sales.......................................................................... 5,427,250
</TABLE>

The following table presents the identified cost of investments at November
30, 1994 for the federal income tax purposes with the associated net unrealized
depreciation and the net realized capital loss carryforward.

<TABLE>
<S> <C>
Identified cost............................................................... $106,701,512
============
Gross unrealized appreciation................................................. $ 2,150,516
Gross unrealized depreciation................................................. (6,247,336)
------------
Net unrealized depreciation................................................... $ (4,096,820)
============
Net realized capital loss carryforward........................................ $ 5,876,339
============
</TABLE>

The net realized capital loss carryforwards at November 30, 1994 may be
utilized to offset any future capital gains until expiration from 1995 through
2002.

During the year, the cost of purchases and proceeds from sales of
investments resulting from transactions between the Fund and other investment
advised by the Adviser were:

<TABLE>
<S> <C>
Purchases....................................................................... $1,240,000
Sales........................................................................... 6,185,000
</TABLE>

NOTE 4 -- TRUSTEE COMPENSATION

Trustee fees for the year and the liability for deferred compensation at
November 30, 1994 were:

<TABLE>
<S> <C>
Trustee fees....................................................................... $10,514
Deferred compensation liability.................................................... 7,238
</TABLE>

D-14
<PAGE> 627

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the general accounts. Funds for the payment of obligations under
the Plan will not be reserved or set aside by any form of trust or escrow. Each
director covered by the Plan has elected to be credited with an earnings
component on amounts deferred equal to the income earned by the Fund on its
short-term investments or equal to the total return of the Fund.

NOTE 5 -- CAPITAL

The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of a higher distribution services fee and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each class
of shares based upon the relative proportion of net assets of each class. Class
B shares and Class C shares automatically convert to Class A shares six years
and ten years after purchase, respectively, subject to certain conditions.

The Fund has an unlimited number of $.01 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A............................................................ 1,040,502 1,513,883
Class B............................................................ 959,397 2,200,973
Class C............................................................ 240,049 --
---------- ----------
2,239,948 3,714,856
---------- ----------
Shares issued for dividends reinvested
Class A............................................................ 182,323 177,668
Class B............................................................ 91,999 56,831
Class C............................................................ 5,302 --
---------- ----------
279,624 234,499
---------- ----------
Shares redeemed
Class A............................................................ (1,344,232) (882,537)
Class B............................................................ (640,367) (181,615)
Class C............................................................ (65,163) --
---------- ----------
(2,049,762) (1,064,152)
---------- ----------
Increase in shares outstanding....................................... 469,810 2,885,203
========== ==========
</TABLE>

D-15
<PAGE> 628

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

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

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------
YEAR ENDED NOVEMBER 30
---------------------------------------------------
1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year............. $ 11.59 $ 11.30 $ 11.07 $ 10.86 $ 10.95
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .74 .790 .810 .86 .84
Expenses....................................... (.13) (.127) (.135) (.13) (.12)
------- ------- ------- ------- -------
Net investment income.......................... .61 .663 .675 .73 .72
Net realized and unrealized gain or loss on
securities................................... (1.0425) .274 .240 .19 (.07)
------- ------- ------- ------- -------
Total from investment operations............... (.4325) .937 .915 .92 .65
------- ------- ------- ------- -------
DIVIDENDS FROM NET INVESTMENT INCOME........... (.6075) (.647) (.685) (.71) (.74)
------- ------- ------- ------- -------
Net asset value, end of year................... $ 10.55 $ 11.59 $ 11.30 $ 11.07 $ 10.86
======= ======= ======= ======= =======
TOTAL RETURN(1)................................ (3.88%) 8.47% 8.48% 8.73% 6.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)............. $ 67.3 $ 75.3 $ 64.3 $ 52.2 $ 42.3
Average net assets (millions).................. $ 73.6 $ 72.0 $ 57.8 $ 48.6 $ 39.3
Ratios to average net assets(2)
Expenses..................................... 1.15% 1.07% 1.20% 1.20% 1.08%
Expenses, without expense reimbursement...... -- 1.17% -- -- 1.20%
Net investment income........................ 5.45% 5.57% 5.98% 6.59% 6.63%
Net investment income, without expense
reimbursement............................. -- 5.47% -- -- 6.51%
Portfolio turnover rate........................ 5% 5% 3% 5% 1%
</TABLE>

- ---------------
(1) Total return does not consider the effect of sales charges.

(2) See Note 2.

See Notes to Financial Statements.

D-16
<PAGE> 629

AMERICAN CAPITAL TAX-EXEMPT
INSURED MUNICIPAL PORTFOLIO

FINANCIAL HIGHLIGHTS -- CONTINUED

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CLASS B CLASS C
---------------------------------- ------------
JULY 20, DECEMBER 10,
YEAR ENDED 1992(2) 1993(2)
NOVEMBER 30 THROUGH THROUGH
------------------ NOVEMBER 30, NOVEMBER 30,
1994 1993(1) 1992(1) 1994(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year................ $ 11.58 $ 11.30 $ 11.39 $ 11.66
------- ------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................. .74 .754 .28 .77
Expenses.......................................... (.21) (.205) (.08) (.22)
------- ------- -------- --------
Net investment income............................. .53 .549 .20 .55
Net realized and unrealized gain or loss on
securities...................................... (1.0365) .294 (.07) (1.161)
------- ------- -------- --------
Total from investment operations.................. (.5065) .843 .13 (.611)
------- ------- -------- --------
DIVIDENDS FROM NET INVESTMENT INCOME.............. (.5235) (.563) (.22) (.509)
------- ------- -------- --------
Net asset value, end of year...................... $ 10.55 $ 11.58 $ 11.30 $ 10.54
======= ======= ======== ========
TOTAL RETURN(3)................................... (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)................ $ 35.6 $ 34.4 $ 10.1 $ 1.9
Average net assets (millions)..................... $ 37.9 $ 23.8 $ 5.2 $ 1.6
Ratios to average net assets(4)
Expenses........................................ 1.91% 1.77% 1.82%(5) 1.89%(5)
Expenses, without expense reimbursement......... -- 1.87% -- --
Net investment income........................... 4.71% 4.74% 4.33%(5) 4.64%(5)
Net investment income, without expense
reimbursement................................ -- 4.64% -- --
Portfolio turnover rate........................... 5% 5% 3% 5%
</TABLE>

- ---------------
(1) Based on average month-end shares.

(2) Commencement of offering of sales.

(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.

(4) See Note 2.

(5) Annualized.

See Notes to Financial Statements.

D-17
<PAGE> 630

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
AMERICAN CAPITAL TAX-EXEMPT INSURED MUNICIPAL PORTFOLIO

In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio and the related statement of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Tax-Exempt Insured
Municipal Portfolio (the "Fund") at November 30, 1994, 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 selected per share data and
ratios for each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (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
misstatements. 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 November 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

/s/ PRICE WATERHOUSE LLP

Houston, Texas
January 16, 1995

D-18