VAN KAMPEN MERRITT TAX FREE FUND /IL/, 485BPOS, 1995-04-24

VAN KAMPEN MERRITT TAX FREE FUND /IL/
485BPOS, 1995-04-24

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1995

FILE NO. 2-99715
811-4386
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 35 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 36 /X/
</TABLE>

VAN KAMPEN MERRITT
TAX FREE FUND

(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)

One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)

(708) 684-6000
(Registrant's Telephone Number)

Dennis J. McDonnell
President, Van Kampen Merritt
Tax Free Fund
One Parkview Plaza,
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)

Copies to:

<TABLE>
<S> <C>
Wayne W. Whalen, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom General Counsel and Director,
333 West Wacker Drive Van Kampen American Capital
Chicago, IL 60606 Investment Advisory Corp.
(312) 407-0700 One Parkview Plaza
Oakbrook Terrace, IL 60181
</TABLE>

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)

___ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)

_X_ ON APRIL 30, 1995 PURSUANT TO PARAGRAPH (B)

___ 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)

___ ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
___ 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
___ ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
DECLARATION PURSUANT TO RULE 24F-2

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND HAS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1994 ON FEBRUARY 28, 1995.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains seven Prospectuses and eight
Statements of Additional Information describing eight sub-trusts of the
Registrant. The Registration Statement is organized as follows:

Facing Page

Cross Reference Sheet with respect to Van Kampen Merritt Tax Free High
Income Fund

Cross Reference Sheet with respect to Van Kampen Merritt Municipal Income
Fund

Cross Reference Sheet with respect to Van Kampen Merritt Insured Tax Free
Fund and Van Kampen Merritt California Insured Tax Free Fund

Cross Reference Sheet with respect to Van Kampen Merritt Limited Term
Municipal Income Fund

Cross Reference Sheet with respect to Van Kampen Merritt Florida Insured
Tax Free Income Fund

Cross Reference Sheet with respect to Van Kampen Merritt New Jersey Tax
Free Income Fund

Cross Reference Sheet with respect to Van Kampen Merritt New York Tax Free
Income Fund

Prospectus relating to Van Kampen Merritt Tax Free High Income Fund

Statement of Additional Information relating to Van Kampen Merritt Tax Free
High Income Fund

Prospectus relating to Van Kampen Merritt Municipal Income Fund

Statement of Additional Information relating to Van Kampen Merritt
Municipal Income Fund

Prospectus relating to Van Kampen Merritt Insured Tax Free Income Fund and
Van Kampen Merritt California Insured Tax Free Fund

Statement of Additional Information relating to Van Kampen Merritt Insured
Tax Free Income Fund

Statement of Additional Information relating to Van Kampen Merritt
California Insured Tax Free Fund

Prospectus relating to the Van Kampen Merritt Limited Term Municipal Income
Fund

Statement of Additional Information relating to Van Kampen Merritt Limited
Term Municipal Income Fund

Prospectus relating to Van Kampen Merritt Florida Insured Tax Free Income
Fund
<PAGE> 3

Statement of Additional Information relating to Van Kampen Merritt Florida
Insured Tax Free Income Fund

Prospectus relating to Van Kampen Merritt New Jersey Tax Free Income Fund

Statement of Additional Information relating to Van Kampen Merritt New
Jersey Tax Free Income Fund

Prospectus relating to Van Kampen Merritt New York Tax Free Income Fund

Statement of Additional Information relating to Van Kampen Merritt New York
Tax Free Income Fund

Part C Information

Exhibits
-------------------------

The Prospectuses and Statements of Additional Information with respect to
Van Kampen Merritt California Tax Free Income Fund, Van Kampen Merritt Michigan
Tax Free Income Fund, Van Kampen Merritt Missouri Tax Free Income Fund and Van
Kampen Merritt Ohio Tax Free Income Fund included in Post-Effective Amendment
No. 31 to the Registration Statement of the Registrant are included herein by
reference and no changes thereto are affected hereby.
<PAGE> 4

VAN KAMPEN MERRITT TAX FREE HIGH INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 8. Redemption or Repurchase.... REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>

i
<PAGE> 5

<TABLE>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Custodian and
Independent Auditors; Investment Advisory and Other
Services; Officers and Trustees; The Distributor;
Legal Counsel; Notes to Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in the Prospectus under caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............. Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS;
REDEMPTION OF SHARES; NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Officers and Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

ii
<PAGE> 6

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SPECIAL CONSIDERATIONS REGARDING THE FUND; SHAREHOLDER
SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES; DESCRIPTION OF
SHARES OF THE FUND
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES; DESCRIPTION OF
SHARES OF THE FUND
Item 8. Redemption or Repurchase.... REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>

iii
<PAGE> 7

<TABLE>
<CAPTION>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory
and Other Services; Officers and Trustees; The
Distributor; Legal Counsel; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in the Prospectus under captions:
DESCRIPTION OF SHARES OF THE FUND; The Fund and the
Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES;
NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Officers and Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

iv
<PAGE> 8

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
VAN KAMPEN MERRITT CALIFORNIA INSURED TAX FREE FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION
EXPENSES--INSURED FUND; SHAREHOLDER TRANSACTION
EXPENSES--CALIFORNIA INSURED FUND; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLES--INSURED FUND; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLES--CALIFORNIA INSURED FUND
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES--
INSURED FUND; SHAREHOLDER TRANSACTION
EXPENSES--CALIFORNIA INSURED FUND; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLES--INSURED FUND; ANNUAL
FUND OPERATING EXPENSES AND EXAMPLES--
CALIFORNIA INSURED FUND; FINANCIAL HIGHLIGHTS; FUND
PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER REPORTS
AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUNDS; INVESTMENT OBJECTIVES
AND POLICIES; MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; INSURANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--INSURED
FUND; ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--
CALIFORNIA INSURED FUND; INVESTMENT ADVISORY SERVICES;
ALLOCATION OF BROKERAGE TRANSACTIONS; SHAREHOLDER
SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 8. Redemption or Repurchase.... REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>

v
<PAGE> 9

<TABLE>
<CAPTION>
PART B
<S> <C> <C>
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Custodian and
Independent Auditors; Investment Advisory and Other
Services; Officers and Trustees; The Distributor;
Legal Counsel; Notes to Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocations
Item 18. Capital Stock and
Other Securities.......... The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES;
NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Officers and Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

vi
<PAGE> 10

VAN KAMPEN MERRITT LIMITED TERM MUNICIPAL INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

vii
<PAGE> 11

<TABLE>
<CAPTION>
PART B
<S> <C> <C>
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Shares of the Fund; Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Custodian and
Independent Auditors; Investment Advisory and Other
Services; Officers and Trustees; The Distributor;
Legal Counsel; Notes to Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in the Prospectus under caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES;
NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under captions: TAX STATUS;
Tax Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Officers and Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

viii
<PAGE> 12

VAN KAMPEN MERRITT FLORIDA INSURED TAX FREE INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT
OBJECTIVE AND POLICIES; MUNICIPAL SECURITIES;
INVESTMENT PRACTICES; SPECIAL CONSIDERATIONS REGARDING
THE FUND; SHAREHOLDER SERVICES; SHAREHOLDER REPORTS
AND INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET ASSET
VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 8. Redemption or
Repurchase................ REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>

ix
<PAGE> 13

<TABLE>
<CAPTION>
PART B
<S> <C> <C>
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Fund...................... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Legal Counsel; Investment Advisory and Other Services;
Officers and Trustees; The Distributor
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES; NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND PERFORM-
ANCE; FINANCIAL HIGHLIGHTS; Performance Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL HIGH-
LIGHTS; Independent Auditor's Report; Financial State-
ments; Notes to Financial Statements
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

x
<PAGE> 14

VAN KAMPEN MERRITT NEW JERSEY TAX FREE INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND;
INVESTMENT OBJECTIVE AND POLICIES;
MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; SPECIAL CONSIDERATIONS REGARDING THE FUND;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT ADVISORY SERVICES; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; SHAREHOLDER
SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 8. Redemption or
Repurchase................ REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>

xi
<PAGE> 15

<TABLE>
<CAPTION>
PART B
<S> <C> <C>
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Fund...................... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Legal Counsel; Investment Advisory and Other Services;
Officers and Trustees; The Distributor
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES; NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND
PERFORMANCE; FINANCIAL HIGHLIGHTS; Performance
Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditor's Report; Financial
Statements; Notes to Financial Statements
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

xii
<PAGE> 16

VAN KAMPEN MERRITT NEW YORK TAX FREE INCOME FUND

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; SHAREHOLDER
REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND;
INVESTMENT OBJECTIVES AND POLICIES;
MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; SPECIAL CONSIDERATIONS REGARDING THE FUND;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 5. Management of the
Funds..................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT ADVISORY SERVICES; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; SHAREHOLDER
SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER REPORTS AND INQUIRIES; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUNDS; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 8. Redemption or
Repurchase................ REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>

xiii
<PAGE> 17

<TABLE>
<CAPTION>
PART B
<S> <C> <C>
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Funds..................... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Legal Counsel; Investment Advisory and Other Services;
Officers and Trustees; The Distributor
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER
PROGRAMS; REDEMPTION OF SHARES; NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND
PERFORMANCE; FINANCIAL HIGHLIGHTS; Performance
Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditor's Report; Financial
Statements; Notes to Financial Statements
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

xiv
<PAGE> 18

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

VAN KAMPEN MERRITT
TAX FREE HIGH INCOME FUND

Van Kampen Merritt Tax Free High Income Fund (the "Fund") is a separate
diversified mutual fund, organized as a sub-trust of Van Kampen Merritt Tax Free
Fund. The Fund's investment objective is to provide investors with a high level
of current income exempt from federal income taxes primarily through investment
in a diversified portfolio of medium and lower grade municipal securities. The
Fund may invest in medium and lower grade municipal securities rated between BBB
and B- (inclusive) by Standard & Poor's Ratings Group, Baa and B3 (inclusive) by
Moody's Investors Service, Inc., comparably rated short-term municipal
obligations and municipal securities determined by the Fund's investment adviser
to be of comparable quality. 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." There is no assurance that the Fund will achieve its
investment objective.

The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth certain information about the Fund
that a prospective investor should know before investing. Please read and retain
this Prospectus for future reference. The address of the Fund is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is (800)
225-2222, ext. 6504.
(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 April 30, 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 Statement of Additional Information may be
obtained without charge, by calling 1-800-225-2222, ext. 6504, or, for
Telecommunication Device for the Deaf, 1-800-772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL(SM)

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

THIS PROSPECTUS IS DATED APRIL 30, 1995.

<PAGE> 19

(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 ("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 0.30% 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 seven 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 "Purchasing
Shares of the Fund."

2
<PAGE> 20

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................. 4
Shareholder Transaction Expenses.................................... 8
Annual Fund Operating Expenses and Example.......................... 9
Financial Highlights................................................ 11
The Fund............................................................ 13
Investment Objective and Policies................................... 13
Municipal Securities................................................ 16
Investment Practices................................................ 20
Purchasing Shares of the Fund....................................... 22
Alternative Sales Arrangements.................................... 22
Initial Sales Charge Alternative.................................. 25
Quantity Discounts................................................ 26
Other Purchase Programs........................................... 27
Deferred Sales Charge Alternatives................................ 29
Distributions from the Fund......................................... 32
Purchase of Additional Shares With Distributions.................. 33
Redemption of Shares................................................ 33
Net Asset Value..................................................... 36
Investment Advisory Services........................................ 36
Portfolio Transactions and Brokerage Allocations.................... 38
The Distribution and Service Plans.................................. 38
Tax Status.......................................................... 40
Shareholder Programs................................................ 43
Fund Performance.................................................... 46
Shareholder Services................................................ 48
Description of Shares of the Fund................................... 49
Shareholder Reports and Inquiries................................... 49
Additional Information.............................................. 50
Appendix A: Description of Municipal Securities Ratings............. 51
</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 THE FUND, THE ADVISER, OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND 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 FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.

3
<PAGE> 21

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

THE FUND The Van Kampen Merritt Tax Free High Income Fund (the "Fund") is a
separate diversified sub-trust of the Van Kampen Merritt Tax Free Fund, an
open-end management investment company organized as a Massachusetts business
trust. See "The Fund."

INVESTMENT OBJECTIVES AND POLICIES The Fund's investment objective is to
provide investors with a high level of current income exempt from federal income
taxes primarily through investment in a diversified portfolio of medium and
lower grade municipal securities. 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 or lifetime caps.
The Fund may invest in medium and lower grade municipal securities rated, at the
time of investment, between BBB and B- (inclusive) by Standard & Poor's Ratings
Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), comparably rated short-term municipal obligations and municipal
securities determined by Van Kampen American Capital Investment Advisory Corp.
(the "Adviser"), the Fund's investment adviser, to be of comparable quality.
There is no assurance that the Fund will achieve its investment objective.

Medium grade municipal securities are those rated BBB by S&P or Baa by
Moody's, comparably rated short-term municipal obligations and municipal
securities determined by the Adviser to be of comparable quality. Municipal
securities rated BBB by S&P generally are regarded by S&P as having an adequate
capacity to pay interest and repay principal; adverse economic conditions or
changing circumstances are, however, more likely in S&P's view to lead to a
weakened capacity to pay interest and repay principal as compared with higher
rated municipal securities. Municipal securities rated Baa by Moody's generally
are considered by Moody's as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. In Moody's view, 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. In Moody's view, such securities lack outstanding investment
characteristics and have speculative characteristics as well.

4
<PAGE> 22

are outweighed by large uncertainties or major risk exposure to adverse
conditions. Securities rated B by Moody's are viewed by Moody's as generally
lacking characteristics of the desirable investment. In Moody's view, assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.

The Fund will not make initial investments in municipal securities rated, at
the time of investment, below B- by S&P and below B3 by Moody's, in comparably
rated short-term municipal obligations or in municipal securities determined by
the Adviser to be of comparable quality. The Fund may retain municipal
securities which are downgraded after investment. There is no minimum rating
with respect to municipal securities which may be retained in the Fund's
portfolio, and the Fund may thus hold securities that are in default, or with
respect to which payment of interest and/or repayment of principal is in
arrears. A complete description of the various S&P and Moody's rating categories
is included as Appendix A to this Prospectus.

Investment in medium and lower grade municipal securities involves special
risks as compared with investment in higher grade municipal securities,
including potentially greater sensitivity to a general economic downturn,
greater market price volatility and less liquid secondary market trading. The
Fund may not be an appropriate investment for all investors. The net asset value
per share of the Fund can be expected to increase or decrease depending on real
or perceived changes in the credit risks associated with its portfolio
investments, changes in interest rates and other factors affecting the municipal
credit markets. See "Investment Objectives and Policies," "Municipal Securities"
and "Appendix A."

INVESTMENT PRACTICES In certain circumstances the Fund may enter into when-
issued or delayed delivery transactions and various strategic transactions,
which practices entail certain risks. See "Investment Practices."

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 services 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 $1,000,000 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.

5
<PAGE> 23

The minimum initial investment with respect to the Class A Shares, Class B
Shares and Class C Shares is $1,000. The minimum subsequent investment with
respect to each class of shares is $100.

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 services fees at an aggregate annual rate of up to 0.30% 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 contingent deferred sales charge.

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 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 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 will automatically convert to Class A Shares seven 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.

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 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 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.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. is the investment adviser for the Fund. The annual advisory fee
for the Fund is .50% of its average daily net assets, reduced on net assets over
$500 million. The Adviser utilizes at its own expense certain research services
of its affiliate, McCarthy, Crisanti & Maffei, Inc. See "Investment Advisory
Services."

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."

6
<PAGE> 24

CDSC Shares will not be subject to a deferred sales charge. The Fund may require
redemption of its shares if the value of the account in the Fund is $500 or
less. See "Redemption of Shares."

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

7
<PAGE> 25

- --------------------------------------------------------------------------------
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 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 original purchase price on
redemption proceeds)................ None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
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.

(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."

8
<PAGE> 26

- --------------------------------------------------------------------------------
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)..................................... 0.49% 0.49% 0.49%
12b-1 Fees(1) (as a percentage of average daily
net assets)..................................... 0.27%(2) 1.00% 1.00%
Other expenses (as a percentage of average daily
net assets)..................................... 0.11% 0.15% 0.15%
Total Expenses (as a percentage of average daily
net assets)..................................... 0.87% 1.64% 1.64%
</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.

(2) The 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 Fund sold after the implementation date of such plans. Due to
the incremental "phase-in" of the Fund's 12b-1 and service 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 0.30% of the net assets attributable to the
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."

9
<PAGE> 27

EXAMPLES:

<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 0.87% for Class A Shares, 1.64% for Class
B Shares, and 1.64% for Class C Shares, (ii) 5%
annual return and (iii) redemption at the end of
each time period:
Class A Shares.................................... $56 $74 $ 93 $150
Class B Shares.................................... $57 $87 $104 $155
Class C Shares.................................... $27 $52 $ 89 $194
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of each period:
Class A Shares.................................... $56 $74 $ 93 $150
Class B Shares.................................... $17 $52 $ 89 $155
Class C Shares.................................... $17 $52 $ 89 $194
</TABLE>

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the 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 Fund's 12b-1 plan with respect to Class A Shares,
it is anticipated that 12b-1 expenses will increase in accordance with such plan
to a maximum amount of 0.30% of the Class A Share's net assets. Accordingly, it
is unlikely that future expenses as projected will remain consistent with those
determined based on the table captioned "Annual Fund Operating Expenses." 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 to
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."

10
<PAGE> 28

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
--------------------------------------------------------------------------------------------------------
JUNE 28, 1985
(COMMENCEMENT
OF
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR DISTRIBUTION)
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1994 31, 1993 31, 1992 31, 1991 31, 1990 31, 1989 31, 1988 31, 1987 31, 1986 31, 1985
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 15.629 $14.529 $15.687 $15.632 $16.378 $16.183 $15.874 $16.769 $15.004 $14.288
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Net Investment Income... .956 1.052 1.064 1.173 1.269 1.306 1.311 1.307 1.316 .572
Net Realized and
Unrealized Gain/Loss on
Investments............ (1.717) 1.158 (1.047) .097 (.755) .205 .319 (.908) 1.796 .676
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Total from Investment
Operations............. (.761) 2.210 .017 1.27 .514 1.511 1.630 .399 3.112 1.248
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Less Distributions from
and in Excess of Net
Investment Income(1)... 1.020 1.110 1.175 1.215 1.260 1.316 1.321 1.294 1.347 .532
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Net Asset Value at End
of Period.............. $ 13.848 $15.629 $14.529 $15.687 $15.632 $16.378 $16.183 $15.874 $16.769 $15.004
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (Non-
annualized)............ (4.93%) 15.82% 0.08% 8.51% 3.23% 9.71% 10.66% 2.87% 21.59% 8.30%
Net Assets at End of
Period (in millions)... $ 603.0 $ 636.2 $ 566.1 $ 626.7 $ 630.3 $ 623.0 $ 453.6 $ 336.8 $ 230.1 $ 37.8
Ratio of Expenses to
Average Net Assets
(annualized)........... .87% 1.03% 1.08% 1.09% 1.04% .90% .84% .74% .67% 1.13%
Ratio of Net Investment
Income to Average Net
Assets (annualized).... 6.48% 6.95% 7.07% 7.54% 7.95% 8.02% 8.16% 8.06% 7.96% 8.52%
Portfolio Turnover...... 101.11% 90.82% 44.48% 65.39% 97.37% 66.32% 79.24% 85.30% 31.74% 48.95%
</TABLE>

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

(1) Distributions in excess of net investment income 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> 29

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
----------------------- -----------------------
AUGUST 13,
MAY 1, 1993 1993
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR DISTRIBUTION) YEAR DISTRIBUTION)
ENDED TO ENDED TO
DECEMBER DECEMBER DECEMBER DECEMBER
31, 1994 31, 1993 31, 1994 31, 1993
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 15.621 $14.670 $ 15.610 $15.030
-------- ------- -------- -------
Net Investment Income....................... .841 .656 .824 .369
Net Realized and Unrealized Gain/Loss on
Investments............................... (1.718) .945 (1.694) .580
-------- ------- -------- -------
Total from Investment Operations............ (.877) 1.601 (.870) .949
-------- ------- -------- -------
Less Distributions from and in Excess of Net
Investment Income(1)...................... .894 .650 .894 .369
-------- ------- -------- -------
Net Asset Value at End of Period............ $ 13.850 $15.621 $ 13.846 $15.610
======= ======= ======= =======
Total Return (Non-annualized)............... (5.69%) 11.12% (5.62%) 6.37%
Net Assets at End of Period (in millions)... $ 112.4 $ 56.6 $ 7.6 $ 5.2
Ratio of Expenses to Average Net Assets
(annualized).............................. 1.64% 1.74% 1.64% 1.82%
Ratio of Net Investment Income to Average
Net Assets (annualized)................... 5.70% 5.95% 5.71% 5.21%
Portfolio Turnover.......................... 101.11% 90.82% 101.11% 90.82%
</TABLE>

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

See Financial Statements and Notes Thereto

12
<PAGE> 30

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

Van Kampen Merritt Tax Free High Income Fund ("Fund") is a separate
diversified sub-trust of Van Kampen Merritt Tax Free Fund (the "Trust"), which
is an open-end management investment company, commonly known as a "mutual fund,"
organized as a Massachusetts 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 taxes primarily through investment
in a diversified portfolio of medium and lower grade municipal securities. The
Fund may invest in medium and lower grade municipal securities rated, at the
time of investment, between BBB and B- (inclusive) by Standard & Poor's Ratings
Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), comparably rated short-term municipal obligations and municipal
securities determined by the Adviser to be of comparable quality. There is no
assurance that the Fund will achieve its investment objective.

The Fund generally invests 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." In
normal circumstances, up to 100%, but not less than 80%, of the Fund's net
assets will be invested in such municipal securities. The foregoing is a
fundamental policy and cannot be changed without shareholder approval. Any
"private activity" obligations in which the Fund may invest will not be treated
as municipal securities for purposes of the 80% test. The Fund also may invest
up to 10% of its assets in tax-exempt money market funds that invest in
securities rated comparably to those in which the Fund may invest. Such
instruments will be treated as municipal securities for purposes of the 80%
test.

13
<PAGE> 31

generally are regarded by S&P as having an adequate capacity to pay interest and
repay principal; adverse economic conditions or changing circumstances are,
however, more likely in S&P's view to lead to a weakened capacity to pay
interest and repay principal as compared with higher rated municipal securities.
Municipal securities rated Baa by Moody's generally are considered by Moody's as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. In Moody's view, 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. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.

The Fund may invest in lower grade municipal securities rated, at the time of
investment, either not lower than B- by S&P or not lower than B3 by Moody's, in
comparably rated short-term municipal obligations and in municipal securities
determined by the Adviser to be of comparable quality. Municipal securities
rated B by S&P generally are regarded by S&P, on balance, as predominantly
speculative with respect to capacity to pay interest or repay principal in
accordance with the terms of the obligation. While such securities will likely
have some quality and protective characteristics, in S&P's view these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
Securities rated B by Moody's are viewed by Moody's as generally lacking
characteristics of the desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.

The Fund will not make initial investments in municipal securities rated, at
the time of investment, below B- by S&P and below B3 by Moody's, in comparably
rated short-term municipal obligations or in municipal securities determined by
the Adviser to be of comparable quality. The Fund may retain municipal
securities which are downgraded after investment. There is no minimum rating
with respect to municipal securities which may be retained in the Fund's
portfolio, and the Fund may thus hold securities that are in default or with
respect to which payment of interest and/or repayment of principal is in
arrears. A complete description of the various S&P and Moody's rating categories
is included as Appendix A to this Prospectus.

Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn, greater market price
volatility and less liquid secondary market trading. See "Municipal
Securities--Special Considerations and Risk Factors Regarding Medium and Lower
Grade Municipal Securities." There can be no assurance that the Fund will
achieve its investment objective, and the Fund may not be an appropriate
investment for all investors. Furthermore, interest on certain "private
activity" obligations in which the Fund may invest is treated as a preference
item for the purpose of calculating the alternative minimum tax and,
accordingly, a portion of the income produced by the Fund may be taxable under
the alternative minimum tax. The Fund may not be a suitable investment for
investors who are already subject to the federal alternative

14
<PAGE> 32

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."

At times the Adviser may judge that conditions in the markets for medium and
lower grade municipal securities make pursuing the Fund's basic investment
strategy of investing primarily in such municipal securities inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade municipal securities and in municipal
securities determined by the Adviser to be of comparable quality. Although such
higher grade municipal securities generally entail less credit risk, such higher
grade municipal securities may have a lower yield than medium and lower grade
municipal securities and investment in such higher grade municipal securities
may result in a lower yield to Fund shareholders. The Adviser may also judge
that conditions in the markets for long- and intermediate-term municipal
securities in general make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times,
the Fund may pursue strategies primarily designed to reduce fluctuations in the
value of the Fund's assets, including investing the Fund's assets in
high-quality, short-term municipal securities and in high-quality, short-term
taxable securities. See "Tax Status."

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.................................... 23.80% 1.14%
AA/Aa...................................... 7.35% 0.00%
A/A........................................ 9.35% 0.00%
BBB/Baa.................................... 19.01% 15.96%
BB/Ba...................................... 1.98% 7.77%
B/B........................................ 0.55% 3.98%
CCC/Caa.................................... 0.00% 2.79%
CC/Ca...................................... 0.00% 0.18%
C/C........................................ 0.00% 0.00%
D.......................................... 0.00% 6.14%
------- -------

Percentage of Rated and Unrated
Securities............................... 62.04% 37.96%
======= =======
</TABLE>

Securities rated D are in default, and payment of interest and/or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest and/or repayment of principal is in arrears present special
risk considerations. The Fund

15
<PAGE> 33

may incur additional expenses to the extent that it is required to seek recovery
of interest or principal, and the Fund may be unable to obtain full recovery
thereof. See "Municipal Securities--Special Considerations and Risk Factors
Regarding Medium and Lower Grade Municipal Securities."

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
medium and 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.

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

GENERAL. Municipal securities in which the Fund may invest 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.

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.

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 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

16
<PAGE> 34

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 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 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 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 securities. If such a proposal were enacted, the ability of the Fund
to pay tax-exempt interest dividends might be adversely affected.

SPECIAL CONSIDERATIONS REGARDING MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES.
The Fund invests in medium and lower grade municipal securities. Municipal
securities which are in the medium and lower grade categories generally offer a
higher current yield than is offered by higher grade municipal securities, but
they also generally involve greater price volatility and greater credit and
market risk. Credit risk relates to the issuer's ability to make timely payment
of interest and principal when due. Market risk relates to the changes in market
value that occur as a result of variation in the level of prevailing interest
rates and yield relationships in the municipal securities market. Debt
securities rated BB or below by S&P and Ba or below by Moody's are commonly
referred to as "junk bonds." Although the Fund primarily will invest in medium
and lower grade municipal securities, the Fund may invest in higher grade
municipal securities for temporary defensive purposes. Such investments may
result in lower current income than if the Fund were fully invested in medium
and lower grade securities.

The value of the Fund's portfolio securities can be expected to fluctuate over
time. When interest rates decline, the value of a portfolio invested in fixed
income securities

17
<PAGE> 35

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. However, the secondary market prices of medium and lower
grade municipal securities are less sensitive to changes in interest rates and
are more sensitive to adverse economic changes or individual issuer developments
than are the secondary market prices of higher grade debt securities. A
significant increase in interest rates or a general economic downturn could
severely disrupt the market for medium and lower grade municipal securities and
adversely affect the market value of such securities. Such events also could
lead to a higher incidence of defaults by issuers of medium and lower grade
municipal securities as compared with historical default rates. In addition,
changes in interest rates and periods of economic uncertainty can be expected to
result in increased volatility in the market price of the municipal securities
in the Fund's portfolio and thus in the net asset value of the Fund. Also,
adverse publicity and investor perceptions, whether or not based on rational
analysis, may affect the value and liquidity of medium and lower grade municipal
securities. The secondary market value of municipal securities structured as
zero coupon securities and payment-in-kind securities may be more volatile in
response to changes in interest rates than debt securities which pay interest
periodically in cash. Investment in such securities also involves certain tax
considerations. See "Tax Status."

Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium and lower grade municipal securities to pay
interest and to repay principal, to meet projected financial goals and to obtain
additional financing. 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 assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.

To the extent that there is no established retail market for some of the
medium or 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 medium and 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.

18
<PAGE> 36

The Adviser seeks to minimize the risks involved in investing in medium and
lower grade municipal securities through portfolio diversification, careful
investment analysis, and attention to current developments and trends in the
economy and financial and credit markets. The Fund will rely on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issue. In its analysis, 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. As described under "Investment Advisory Services," the
Adviser will utilize at its own expense credit analysis and research services
provided by its affiliate, McCarthy, Crisanti & Maffei, Inc. ("MCM"). The
Adviser may consider the credit ratings of Moody's and S&P in evaluating
municipal securities, although it does not rely primarily on these ratings. 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 municipal securities held in
the Fund's portfolio.

Municipal securities generally are not listed for trading on any national
securities exchange, and many issuers of medium and lower grade municipal
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. The amount of information
available about the financial condition of an issuer of unlisted or unrated
securities generally is not as extensive as that which is available with respect
to issuers of listed or rated securities. Because of the nature of medium and
lower rated municipal securities, achievement by the Fund of its investment
objective may be more dependent on the credit analysis of the Adviser than is
the case for an investment company which invests primarily in exchange listed,
higher grade securities.

SPECIAL CONSIDERATIONS REGARDING CERTAIN MUNICIPAL SECURITIES. The Fund may
invest in zero coupon and payment-in-kind municipal securities. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The Internal Revenue
Code of 1986, as amended, requires that regulated investment companies
distribute at least 90% of their net investment income each year, including
tax-exempt and non-cash income. Accordingly, although the Fund will receive no
coupon payments on zero coupon securities prior to their maturity, the Fund is
required, in order to maintain its desired tax treatment, to include in its
distributions to shareholders in each year any income attributable to zero
coupon securities that is in excess of 10% of the Fund's net investment income
in that year. The Fund may be required to borrow or to liquidate portfolio
securities at a time that it otherwise would not have done so in order to make
such distributions. Payment-in-kind securities are securities that pay interest
through the issuance of additional securities. Such securities generally are
more volatile in response to changes in interest rates and are more speculative
investments than are securities that pay interest periodically in cash. As of
December 31, 1994, approximately 6.49% and 0.04% of

19
<PAGE> 37

the Fund's total net assets were invested in zero coupon securities and
payment-in-kind securities, respectively.

The Fund may invest in derivative municipal income securities such as inverse
floaters, range floaters and capped floaters. Investment in such securities
involves special risks as compared to investment in conventional floating or
variable rate municipal income securities. The extent of increases and decreases
in the value of such securities and the corresponding changes to the per share
net asset value of the Fund in response to changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate income security having similar credit quality,
redemption provisions and maturity. The markets for such securities may be less
developed than the markets for conventional floating or variable rate municipal
income securities.

- --------------------------------------------------------------------------------
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 risk. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Fund's 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.

20
<PAGE> 38

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 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 be distributed to its shareholders in taxable distributions.
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
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 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. 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. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do

21
<PAGE> 39

so for the purpose of acquiring securities for the Fund's portfolio consistent
with its investment objective and policies and not for the purpose of investment
leverage.

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.

It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market, such as Hospital Revenue Bonds,
Housing Agency Bonds, Airport Bonds or Industrial Development Bonds. In such
circumstances, economic, business, political or other changes affecting one bond
might also affect other bonds in the same segment, thereby potentially
increasing market risk with respect to the bonds in such segment. Such changes
could include, but are not limited to, proposed or suggested legislation
involving the financing of projects within such segments, declining markets or
needs for such projects and shortages or price increases of materials needed for
such projects.

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund has designated three classes of 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 also are offered through members
of the National Association of Securities Dealers, Inc. ("NASD") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The Fund
reserves the right to suspend or terminate the continuous public offering at any
time and without prior notice.

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.

22
<PAGE> 40

(Class A Share accounts over $1 million, "Class B Shares" and "Class C Shares").
Class A Share accounts over $1,000,000 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 $1,000.
For purposes of purchasing shares of the Fund, "any person" shall have the
meaning set forth in the section of the Prospectus captioned "Purchasing Shares
of the Fund -- Initial Sales Charge Alternative -- Quantity Discounts." The
minimum subsequent investment with respect to each class of shares is $100. 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 $1,000,000 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 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.

23
<PAGE> 41

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 "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"Commission") 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 approved by
the Commission 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 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
securities broker, dealer or financial intermediary or with the Distributor plus
any applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's 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 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. See "Net Asset Value."

24
<PAGE> 42

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 shares of the
Fund. 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
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. or
an affiliate thereof based on a combination of its sales of shares and increases
in assets under management. Such payments 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 will pay for shares or the amount that the Fund
will receive from such sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase 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 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 or 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 the 1933.

<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>

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

25
<PAGE> 43

the next $2 million and 0.08% on the excess over $5 million. See "Purchasing
Shares of the Fund -- Deferred Sales Charge Alternatives" for additional
information with respect to contingent deferred sales charges.

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
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, financial intermediary or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, by any of the foregoing; or

(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act.

1. Combination of Investments. Purchases of Class A Shares of the Fund, or of
other Van Kampen Merritt funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" may combine their current purchase with the current public offering
price of Class A Shares of the Fund or, which are owned by such person. If the
account an investor is combining for rights of accumulation differs from the
account into which the investor's current purchase is placed, the investor must
indicate to the Transfer Agent the account number (and, if applicable, fund
name) of such other account.

26
<PAGE> 44

applied towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer, or financial intermediary and the Distributor, agree
to refund the appropriate portion of their respective concessions to the Fund,
the sales charge on an investor's previous purchases made within 90 days may be
adjusted to the reduced sales charge under the Letter of Intent, and the
refunded concession will be used to purchase shares of the Fund at the public
offering price next determined after receipt of such monies. Each investment
made after signing the Letter of Intent will be entitled to the sales charge
applicable to the total investment indicated in the Letter of Intent. If an
investor does not complete the necessary purchases under the Letter of Intent
within 13 months from the date of the first purchase included thereunder, the
sales charge will be adjusted upward, corresponding to the amount actually
purchased.

When an investor signs a Letter of Intent, Class A Shares purchased with a
value of 5% of the amount specified in the Letter of Intent will be restricted;
that is, these Class A Shares cannot be sold or redeemed until the Letter of
Intent is satisfied or the additional sales charges have been paid. If the total
purchases made under the Letter of Intent, less redemptions, equal or exceed the
amount specified in the Letter of Intent, these Class A Shares will no longer be
restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities broker, dealer or financial
intermediary will, upon request, remit their respective portions of the sales
concession and with that amount, purchase additional Class A Shares of the Fund
for the investor's account at the next computed offering price. If an investor
does not complete the necessary purchases under the Letter of Intent, the sales
charges will be adjusted upward and if, after written notice, the investor does
not pay the increased sales charge, sufficient restricted Class A Shares will be
redeemed to pay such charge.

OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced 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.

1. Unit Trust Reinvestment Programs. The Fund will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund and ISC Shares 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 securities broker, dealer, financial
intermediary or the Distributor.

27
<PAGE> 45

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
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc. or John Govett & Co. Limited and such persons'
families and their beneficial accounts. The term "families" includes a
person's spouse, children and grandchildren, parents, and a person's
spouse's parents.

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

(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling 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.

(d) 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 the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by the
Distributor as described herein under "Purchasing Shares of the Fund --
Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals at
least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.

28
<PAGE> 46

(e) 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% for such purchases.

(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts"), provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.

(g) 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.

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 the
assets of the Fund, at 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) 1.00% with respect to Class A Shares
in an amount of $1 million or more; (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. Sales compensation with respect to Class A
Shares subject to a CDSC is set forth under "Purchasing Shares of the Fund --
Initial Sales Charge Alternative".

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

29
<PAGE> 47

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 for selling such shares. The
combination of the contingent deferred sales charge and the distribution and
services 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 per share since the time of
purchase.

To provide an example, assume an investor purchased 100 Class B Shares (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).

The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.

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 $1,000,000 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% 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.

30
<PAGE> 48

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>
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 Program. See
"Shareholder Programs -- Systematic Withdrawal Program."

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.

CONVERSION FEATURE. Seven 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.

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 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.

31
<PAGE> 49

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 and service fees 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 Internal Revenue
Code of 1986, as amended (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.

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

The Fund's policy 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 or a portion of the interest income, dividends, other ordinary
income earned by the Fund on its portfolio assets, less all expenses of the
Fund. Expenses of the Fund are accrued each day. Net realized 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.

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 information under the "Distributions" section of the
Account Application bound in this Prospectus or available from Van Kampen
Merritt Funds, State Street Bank and Trust Company, c/o National Financial Data
Services, P.O. Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent").
After the Transfer Agent receives this completed form, distribution checks will
be sent to the bank or other person so designated by such shareholder.

32
<PAGE> 50

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

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular Fund, identify the account number and
be signed exactly as the shares are registered. If the amount being redeemed is
in excess of $50,000 or if the redemption proceeds will be sent to an address
other than the address of record, the signature(s) must be guaranteed by a
member firm of a principal stock exchange, a commercial bank or trust company
which is a member of the Federal Deposit Insurance Corporation, a credit union
or a savings association. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. If certificates are held for
the shares being redeemed, such certificates must be sent and endorsed for
transfer or accompanied by an endorsed stock power. Share certificates should be
sent by registered mail to National Financial Data Services, 1004 Baltimore
Avenue, Dwight Building, 6th Floor, Kansas City, MO 64105. Shareholders will
receive the net asset value per share next computed after the Transfer Agent
receives the redemption request and certificates (if any) in proper form. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder.

TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption.
For inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m. Central Standard
Time. There is a $500 minimum and a $1,000,000 maximum per request if the
redemption proceeds are to be mailed to the shareholder. If the redemption
proceeds are to be wired to a bank, there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")

33
<PAGE> 51

must be completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association unless the
Authorization is completed at the time an account is originally established. A
redemption requested by telephone will be processed at the net asset value next
determined after receipt of the request. The proceeds will then be made payable
to the registered shareowner(s) and mailed to the address registered on the
account or wired to a bank, as requested on the Authorizations. Shareholders
cannot redeem shares by telephone if stock certificates are held for those
shares. This service is not available with respect to shares held in an
Individual Retirement Account (IRA) for which State Street Bank and Trust
Company acts as custodian. In addition, this service is not available with
respect to shares purchased by check until 15 days after purchase.

By establishing the telephone redemption service, a shareholder authorizes the
Fund or its agent to act upon the instructions of any person by telephone to
redeem shares for any account for which such service has been authorized. The
Fund, the Distributor, the Transfer Agent and National Financial Data Services,
Inc. ("NFDS") employ procedures reasonably believed to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring a
person attempting to redeem shares by telephone to provide, on a recorded line,
the name on the account, a social security number or tax identification number
and such additional information as may be included in the Authorization. A
shareholder also agrees that none of the Fund, the Distributor, the Transfer
Agent or National Financial Data Services ("NFDS") will be liable for any loss,
liability, cost or expense arising out of any request, including any fraudulent
or unauthorized request. This service may be amended or terminated at any time
by the Transfer Agent or the Fund. If a shareholder is unable to reach the Fund
by telephone, he or she may redeem shares pursuant to the procedures set forth
above under the caption "Written Redemption Requests." During periods of extreme
economic or market changes, it may be difficult for investors to reach the Fund
by telephone and to effect telephone redemptions.

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<PAGE> 52

The fund does not charge for this transaction (other than an applicable
contingent deferred sales charge). Shareholders must submit a written redemption
request in proper form to their securities dealer within five business days
after calling the dealer with the sell order. The request should indicate the
number of shares to be redeemed, identify the account number and the order or
confirmation number assigned to the trade, and be signed by the shareholder
exactly as the shares are registered. If the amount of the redemption exceeds
$50,000 or if the redemption proceeds will be sent to an address other than the
address of record, signature(s) must be guaranteed by a member firm of a
principal stock exchange, a commercial bank or trust company which is a member
of the Federal Deposit Insurance Corporation, credit unions and savings
association. The guarantee must state the words "Signature Guaranteed" along
with the name of the granting institution. Shareholders should verify with the
institution that it is an eligible guarantor prior to signing. A guarantee from
a notary public is not acceptable. If certificates are held for the shares being
redeemed, such certificates must be sent endorsed for transfer or accompanied by
an endorsed stock power. Certificates should be sent by registered mail to Van
Kampen Merritt Funds, c/o National Financial Data Services, 1004 Baltimore
Avenue, Dwight Building, 6th Floor, Kansas City, MO 64105.

REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share
redemptions following the disability of a Class B 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 Fund will
require satisfactory proof of disability before it determines to waive the CDSC
on Class B Shares.

In cases of disability, the CDSC on Class B 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 death or initial determination of disability. This waiver of the CDSC on
Class B 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. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer as the case may be
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,

35
<PAGE> 53

which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.

The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the Commission, or during any period when
the Commission has by order permitted such suspension or postponement.

- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of the Fund is determined by calculating the
total value of the Fund's assets, deducting its total liabilities, and dividing
the result by the number of shares of the 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 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 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 the
Fund is a separate sub-trust. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
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 the direction of the Trustees. 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.

- --------------------------------------------------------------------------------
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 nearly $50 billion under management or
supervision. Van Kampen American Capital's more than

36
<PAGE> 54

40 open-end and 38 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, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc.

ADVISORY AGREEMENT. The business and affairs of the Fund are managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate sub-trust. Subject to their authority, the Adviser and the 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................................................... 0.50 of 1%
Over $500 million.................................................... 0.45 of 1%
</TABLE>

Under its investment advisory agreement with the Adviser dated February 17,
1993, and approved by shareholders of the Fund at a meeting held on January 14,
1993, 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, of the Adviser, Van Kampen American Capital Distributors, Inc. or Van
Kampen American Capital, Inc.), 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.

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 circumstances, preclearance of trades.

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<PAGE> 55

PORTFOLIO MANAGEMENT. David C. Johnson, a First 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.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
- --------------------------------------------------------------------------------

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

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 Investment
Company Act of 1940. 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 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 each class. The Distribution
Plan and the Service Plan are being implemented through an 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. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

CLASS A SHARES. The Fund may spend an aggregate amount up to 0.30% 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 financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such 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

38
<PAGE> 56

ongoing provision of services to holders of such shares by the Distributor and
by 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 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
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of 0.75% not paid to such 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 holders of
such shares by the Distributor and by 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
$149,879 and $17,410 of unreimbursed distribution expenses with respect to Class
B Shares and Class C Shares, respectively, representing 0.02% and 0.00% 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.

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<PAGE> 57

Because the Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts 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 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.

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

FEDERAL TAXES. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (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 to its shareholders at least 90% of its net
investment income (including tax-exempt interest and other taxable income
including net short-term capital gain, 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. As a sub-trust of a Massachusetts business trust, the Fund will
not be subject to any excise or income taxes in Massachusetts as long as it
qualifies as a regulated investment company for federal income tax purposes.

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.

40
<PAGE> 58

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.

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 such 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 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.

41
<PAGE> 59

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 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 federal 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 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. Discount
relating to certain stripped tax-exempt obligations may constitute taxable
income when distributed 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.

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

42
<PAGE> 60

tax consequences of holding and disposing of shares as well as the effects of
state, local and foreign tax laws.

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, 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. In addition, if such certificates are lost, the shareholder must
write to State Street Bank and Trust Company, c/o National Financial Data
Services, P.O. Box 419001, Kansas City, MO 64141-6001, Attn: Van Kampen Merritt
Funds, requesting an "affidavit of loss" and to obtain a Surety Bond in a form
acceptable to the Transfer Agent. On the date the letter is received the
Transfer Agent will calculate no more than 2.00% of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, and such shareholder's
dividends are being reinvested, a requested dollar amount may be paid from such
account to any person monthly, quarterly, semiannually or annually. The minimum
amount that may be withdrawn each period is $50; withdrawals will be made on the
seventh business day of the month in which they are scheduled to occur.
Depending upon the size of the payments requested and the fluctuations in the
net asset value of the shares redeemed, redemptions for the purpose of making
such payments may reduce or even exhaust the amounts in such account. If an
investor acquires additional shares of the Fund after joining the Systematic
Withdrawal Program, the investor must inform the Fund if he or she wants the new
shares to be subject to the Systematic Withdrawal Program by telephoning the
Fund at 1-800-341-2911.

With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares or, if the investor
does not join the program on the date of his or her initial investment, the net
asset value of the investor's Class B Shares on the date the investor elects to
participate in the Systematic Withdrawal Program. The Fund will waive the
contingent deferred sales charge applicable to Class B Shares redeemed pursuant
to the Fund's Systematic Withdrawal Program.

It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge to purchase shares
at the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, the Fund will not knowingly permit a
shareholder to make additional investments in shares of less than $5,000 if at
the same time such shareholder is making systematic withdrawals at a rate
greater than the distribution being paid on such shareholder's shares. The Fund
reserves the right to amend or terminate the systematic withdrawal program on
thirty days' notice, and a shareholder may withdraw from the program at any
time.

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<PAGE> 61

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares of
any other Van Kampen Merritt mutual fund distributed by the Distributor offers
as exchange privilege. Under the exchange privilege, the Fund offers to exchange
its Class A Shares for ISC Shares on the basis of relative net asset value per
share. Any ISC Shares exchanged into the Fund that have been charged a sales
load lower than the sales load applicable to Class A Shares of the Fund will be
charged the applicable sales load differential upon exchange. ISC Shares of the
Van Kampen Merritt Money Market Fund and Van Kampen Merritt Tax Free Money Fund
which have not previously been charged a sales load (except for shares purchased
via the reinvestment option) will be charged the applicable sales load upon
exchange into the Fund.

Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of the Fund acquired through use
of the exchange privilege will be 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.

Class C Shares of the Fund are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen Merritt money market fund sponsored by the Distributor
is not available for Class C Shareholders.

In order to qualify for the exchange privilege, it is required the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders also may effect an exchange by
telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m. Central
Standard Time and requesting the exchange. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889, during the
hours of 7:30 a.m. to 3:00 p.m. Central Standard Time. The exchange will be
processed at the net asset value next determined after receipt of such request.
By utilizing the telephone exchange service, a shareholder authorizes the Fund
or the Transfer Agent to act upon the instructions of any person by telephone to
exchange shares from any account for which such service has been authorized to
any identically registered account(s) with any Van Kampen Merritt fund
distributed by the Distributor which offers an exchange privilege. In addition,
a shareholder also agrees that none of the Fund, the Distributor, the Transfer
Agent nor NFDS will be liable for any loss, liability, cost or expense arising
out of any request, including any fraudulent request. The staff of the SEC
currently is reviewing its position with respect to such agreements. This
service may be amended or terminated at any time by the Transfer Agent or the
Fund. If a shareholder has certificates for any shares being exchanged, such
certificates must be surrendered prior to the exchange in the same manner as in
redemption of such shares (see "Redemption of

44
<PAGE> 62

Shares--Telephone Redemptions"). Any shares exchanged between the Fund and any
of the other funds will begin earning dividends on the next business day after
the exchange is effected. 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.

An exchange between Van Kampen Merritt funds pursuant to the exchange
privilege is treated as a sale for federal income tax purposes and, depending
upon the circumstances, a short- or long-term capital gain or loss may be
realized.

The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Fund give prominent notice thereof at least 60 days
prior to the effective date of the modification or termination in certain
circumstances. The Fund reserves the right to limit the number of times a
shareholder may exercise the exchange privilege.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).

1. 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
the Transfer Agent 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 the Transfer
Agent.

2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically deposit the distributions from a shareholder's
account directly into a shareholder's bank account.

3. Dividend Diversification. In addition to the foregoing, monthly
distributions and any net long-term capital gain distributions to a
shareholder's account may be invested upon election by the shareholder in shares
of any other Van Kampen Merritt mutual fund distributed by the Distributor at
the then current net asset value, WITHOUT A SALES CHARGE. This election may be
made on the account application bound in this prospectus, by written notice to
the Transfer Agent or by calling the Fund directly at 1-800-341-2911, during the
hours of 7:00 a.m. to 7:00 p.m. Central Standard Time. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. In order to
qualify for this privilege, a shareholder must have established an account in
the other fund prior to electing this privilege. This privilege may be modified
or terminated by the Fund at any time.

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<PAGE> 63

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
Application attached to this Prospectus or the EASESM application which is
available from the Transfer Agent, the Fund, such shareholder's broker or
dealer, or the Distributor. Once the Transfer Agent has received this
application, such shareholder's checking account at his or her designated local
bank will be debited each month in the amount authorized by such shareholder to
purchase shares of the Fund. Once enrolled in the EASESM program, a shareholder
may change the monthly amount or terminate participation at any time by writing
or calling the Transfer Agent. Shareholders in the EASESM program will receive a
confirmation of these transactions from the Fund at least quarterly and their
regular bank account statements will show the debit transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the Application in performing such services by either
withdrawing funds for deposit in the Fund pursuant to the EASESM Plan, or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.

Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss being disallowed under the "wash sale" rules.

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

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<PAGE> 64

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.

The Fund's yield quotation is determined for each class of the Fund's shares
on a monthly basis with respect to the immediately preceding 30 day period.
Yield is computed by dividing the Fund's net investment income per share earned
during such 30 day period by the 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 Fund during the period and
allocable to the class of shares, subtracting the expenses (net of any
reimbursement) 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 the Fund's shares outstanding during the period that were entitled to receive
dividends and (b) the 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 the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed for each class of the Fund's shares 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 for each class of the
Fund's shares 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 the 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 the 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.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
the 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 the Fund at a given time, deducting the maximum sales charge of
4.75%, determining the value of all subsequent reinvested distributions, and
dividing the net change in the value of the investment as of the end of

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<PAGE> 65

the period by the amount of the initial investment and expressing the result as
a percentage.

From time to time the Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for 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 calculated 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.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.

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

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Fund, an account will be opened for each shareholder on the Fund's books and
shareholders will receive a confirmation of the opening of the account.
Shareholders will receive monthly statements giving details of all activity in
their account during the quarter and will also receive a statement whenever an
investment or withdrawal is made in or from their account. Information for
federal income tax purposes will be provided at the end of the year. Such
statements will present separately information with respect to each class of a
Fund's shares. It is expected that the transfer agency costs attributable to the
Class B Shares and Class C Shares will be higher than the transfer agency costs
attributable to the Class A Shares.

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<PAGE> 66

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

The Fund is a separate sub-trust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust organized August 15, 1985 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust.

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 represent 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 Plan and Service Plan."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of share 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 Class B Shareholders and Class C Shareholders 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 Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

The Fund's fiscal year ends on December 31. The Fund sends to its shareholders
at least semi-annually, reports showing the Fund's portfolio and other
information. An annual report, containing financial statements audited by
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 The Van Kampen Merritt Family of
Funds, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence. The telephone number is 1-800-341-2911.

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<PAGE> 67

For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.

For Automated Telephone Service which provides 24 hour direct dial access to
Fund facts and Shareholder account information dial 1-800-542-4344.

- --------------------------------------------------------------------------------
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.

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<PAGE> 68

APPENDIX A

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.
</TABLE>

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<PAGE> 69

<TABLE>
<S> <C>
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
B balance, as predominantly speculative with respect to capacity
CCC to pay interest and repay principal. 'BB' indicates the least
CC degree of speculation and 'C' the highest. While such debt
C will likely have some quality and protective characteristics,
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.

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.
</TABLE>

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<PAGE> 70

<TABLE>
<S> <C>
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.

L The letter 'L' indicates that the rating pertains to the
principal amount of these 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 judgment 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.

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.

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<PAGE> 71

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 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 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:

<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.
</TABLE>

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<PAGE> 72

<TABLE>
<S> <C>
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.

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 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

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.
</TABLE>

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<PAGE> 73

<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.

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.

CON (..) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally and designed 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.
</TABLE>

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<PAGE> 74

<TABLE>
<S> <C>
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>

ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.

3. There is a lack of essential data pertaining to the issue or
issuer.

4. The issue was privately placed, in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.

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

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<PAGE> 75

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 bonds 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.

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.

58
<PAGE> 76

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344
VAN KAMPEN MERRITT
TAX FREE HIGH
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

STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt 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> 77

Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time such
amendment to the registration statement becomes effective. This statement
of additional information shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT TAX FREE HIGH INCOME FUND

Van Kampen Merritt Tax Free High Income Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust (the "Trust") an open-end management investment company, commonly
known as a mutual fund. The Fund's investment objective is to attempt to provide
investors with a high level of current income exempt from federal income taxes
primarily through investment in a diversified portfolio of medium and lower
grade municipal securities. 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 April 30, 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 1-800-341-2911.

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
Officers and Trustees................................................................ B-11
Investment Advisory and Other Services............................................... B-15
Custodian and Independent Auditors................................................... B-16
Portfolio Transactions and Brokerage Allocation...................................... B-17
Tax Status of the Fund............................................................... B-17
The Distributor...................................................................... B-18
Legal Counsel........................................................................ B-19
Performance Information.............................................................. B-19
Independent Auditors' Report......................................................... B-21
Financial Statements................................................................. B-22
Notes to Financial Statements........................................................ B-33
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

<PAGE> 78

THE FUND AND THE TRUST

The Fund is a separate diversified sub-trust of Van Kampen Merritt Tax Free
Fund (the "Trust"), an open-end diversified management investment company,
commonly known as a mutual fund. The Trust is an unincorporated business trust
established under the laws of the Commonwealth of Massachusetts by a Declaration
of Trust dated August 15, 1985. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares in separate sub-trusts.
At present, the Fund, Van Kampen Merritt Insured Tax Free Income Fund, Van
Kampen Merritt California Insured Tax Free Fund, Van Kampen Merritt Municipal
Income Fund, Van Kampen Merritt Limited Term Municipal Income Fund, Van Kampen
Merritt Florida Insured Tax Free Income Fund, Van Kampen Merritt New Jersey Tax
Free Income Fund and Van Kampen Merritt New York Tax Free Income Fund have been
organized as sub-trusts of the Trust and have commenced investment operations.
Van Kampen Merritt California Tax Free Income Fund, Van Kampen Merritt Michigan
Tax Free Income Fund, Van Kampen Merritt Missouri Tax Free Income Fund and Van
Kampen Merritt Ohio Tax Free Income Fund have been organized as sub-trusts of
the Trust but have not commenced investment operations. Other sub-trusts may be
organized and offered in the future. The Fund originally was organized as a
Maryland corporation under the name Van Kampen Merritt Tax Free High Income Fund
Inc., and was reorganized into a sub-trust of the Trust as of February 22, 1988.

Each share of the Trust represents an equal proportionate interest in the
assets of its respective sub-trust with each other share in such sub-trust and
no interest in any other sub-trust. No sub-trust is subject to the liabilities
of any other sub-trust. The Declaration of Trust provides that shareholders are
not liable for any liabilities of the Trust or any of its sub-trusts, requires
inclusion of a clause to that effect in every agreement entered into by the
Trust or any of its sub-trusts 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 sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust 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 a
majority of the shares present and voting at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust 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 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> 79

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." 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 their respective portfolios.

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 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
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 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. Certain of the medium and lower
grade municipal securities in which the Fund may invest may be,

B-3
<PAGE> 80

subsequent to the Fund's investment in such securities, downgraded by Moody's or
S&P or may be deemed by the Adviser to be of a lower quality as a result of
impairment of the creditworthiness of the issuer of such securities or of the
project the revenues from which are the source of payment of interest and
repayment of principal with respect to such securities. In such instances, the
secondary market for such municipal securities may become less liquid, with the
possibility that more than 10% of the Fund's assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable, together
with any other securities subject to investment restriction eight above, to less
than 10% of the Fund's assets as soon as is reasonably practicable.

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%.

Interest on certain "private activity" obligations issued after August 7, 1986
is treated as a preference item for the purpose of calculating the alternative
minimum tax. The Fund may invest up to 20% of its assets in such "private
activity" obligations. To the extent that the Fund does 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. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities. They may take the form of a lease, an installment purchase contract,
a conditional sales contract, or a participation certificate in any of the
above. Some municipal leases and participation certificates may not be
considered readily marketable. Such non-marketable municipal leases, together
with other restricted or non-marketable securities in the Fund's portfolio will
not at the time of purchase exceed 10% of the total assets of the Fund. The
"issuer" of municipal securities is generally deemed to be the governmental
agency, authority, instrumentality or other political subdivision, or the
non-governmental user of a 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.

B-4
<PAGE> 81

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 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.

MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES. Discussion concerning the
special risk factors relating to the Fund's investments in medium and lower
grade municipal securities appears in the "Municipal Securities" section of the
Prospectus under the subheading "Special Considerations Regarding Medium and
Lower Grade Municipal Securities."

INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
any of 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 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.

When the Fund engages in the purchase or sale of futures contracts or the sale
of options thereon it will deposit the initial margin required for such
contracts in a segregated account maintained with the Fund's custodian, in the
name of the futures commission merchant with whom the Fund maintains the related
account. Thereafter, if the Fund is required to make maintenance margin payments
with respect to the futures contracts, or mark-to-market payments with respect
to such option sale positions, the Fund will make such payments directly to such
futures commission merchant. The SEC currently requires mutual funds to demand

B-5
<PAGE> 82

promptly the return of any excess maintenance margin or mark-to- market credits
in its account with futures commission merchants. Each Fund will comply with SEC
requirements concerning such excess margin.

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.

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.

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.

B-6
<PAGE> 83

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 ("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.

B-7
<PAGE> 84

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.

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.

B-8
<PAGE> 85

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.

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.

B-9
<PAGE> 86

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 Investment Company Act of 1940 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 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.

B-10
<PAGE> 87

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 Internal Revenue Code for qualification as a
regulated investment company. See "Tax Status" in the Prospectus.

OFFICERS AND TRUSTEES

The officers and Trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with the Adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
Van Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc. and Van Kampen American Capital Management, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

R. CRAIG KENNEDY, Trustee
Dennis Trading Group, Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President and Chief Executive Officer, Director and member
of the Investment Committee of the Joyce Foundation, a private foundation.

B-11
<PAGE> 88

PHILIP P. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February 1989, former Managing Director and Manager of Municipal
Bond Department, W. H. Newbold's Son & Co., Inc.

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President, Nelson Investment Planning Services, Inc., a financial planning
company.

JEROME L. ROBINSON, Trustee
115 River Road, Edgewater, New Jersey 07020
President of Robinson Technical Products Corporation, a processor and
distributor of welding alloys, supplies and equipment.
Director of Pacesetter Software, a software programming company
specializing in white collar productivity.
Director and majority shareholder Hilarius Haarlem B.V., Haarlem, Holland,
a manufacturer and distributor of welding alloys.

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy; Crisanti & Maffei, Inc.

RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.

Executive Vice President, General Counsel, and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March, 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

EDWARD C. WOOD, III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

B-12
<PAGE> 89

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc., and Van Kampen American Capital, Inc.

First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc., and
Van Kampen American Capital Distributors, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti, & Maffei, Inc.

WESTON B. WETHERELL* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer

One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.

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

* Interested persons of the Fund as defined in the 1940 Act.

Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser, each of the foregoing officers holds the same positions
with each of the investment companies advised by the Adviser.

The compensation of the officers and Trustees who are affiliated persons (as
defined in the Investment Company Act of 1940) of the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. is paid
by the respective entity. The Fund pays the compensation of all other officers
and Trustees. During the next year, the Fund expects to pay Trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc. $2,500 per year and $250 per meeting
of the Board of Trustees, plus expenses. Under the Fund's retirement plan,
trustees who are not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc., have at least ten years
of service and retire at or after attaining the age of 60, are eligible to
receive a retirement benefit equal to the annual retainer for each of the ten
years following such trustees's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. can
elect to defer receipt of all or a portion of the trustee's fees earned by such
trustee until such trustee's retirement. The deferred compensation earns a rate
of return determined by reference to the Fund or other Van Kampen Merritt mutual
funds advised by the Adviser as selected by the trustee. To the extent permitted
by the Investment Company Act, the Fund may invest in securities of other Van
Kampen Merritt mutual funds advised by the Adviser in order to match the
deferred compensation obligation. The deferred compensation plan is not funded
and obligations thereunder represent general unsecured claims against the
general assets of the Fund.

B-13
<PAGE> 90

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
NAME REGISTRANT(2) EXPENSES(3) RETIREMENT(4) PAID TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 21,968 $0 $2,500 $ 62,362
Philip G. Gaughan.............. 21,928 0 2,500 63,250
Donald C. Miller............... 23,768 0 2,500 62,178
Jack A. Nelson................. 23,858 0 2,500 62,362
Jerome L. Robinson............. 23,801 0 2,500 58,475
Wayne W. Whalen................ 17,553 0 2,500 49,875
</TABLE>

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

(1) Messrs. Merritt and McDonnell, Trustees of each Fund during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Funds.

(2) The Registrant is Van Kampen Merritt Tax Free Fund (the "Trust") which
currently is comprised of 8 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of
each of these 8 sub-trusts during such sub-trust's last completed fiscal
year prior to the date of this Statement of Additional Information.
Beginning in October 1994 each Trustee except Messrs. Gaughan and Whalen,
began deferring his entire aggregate compensation paid by the Fund. The
total combined amount of deferred compensation (including interest)
accrued with respect to each Trustee 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. As of
the end of the Fund's 1994 fiscal year, no amounts had been accrued for
retirement benefits because such amounts were either zero or considered to
be immaterial to the net assets of the Fund at such time. During the
Fund's 1995 fiscal year, the Fund will accrue amounts for retirement
benefits and include an amount, if any, for such Fund's 1994 fiscal year.

(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, retires at or after attaining the age of 60 and the annual retainer
in the year prior to the Trustee's retirement is $2,500. 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) The Fund Complex consists of 20 mutual funds advised by the Adviser. The
amounts shown in this column are accumulated from the Aggregate
Compensation of each of these 20 mutual funds in the Fund Complex during
each fund's last completed fiscal year prior to the date of this Statement
of Additional Information. The Adviser also serves as investment adviser
for other mutual funds and closed-end investment companies; however, with
the exception of Messrs. Merritt, McDonnell and Whalen, such mutual funds
and closed-end investment companies do not have the same trustees as the
Fund Complex. Combining the Fund Complex with other mutual funds and
investment companies advised by the Adviser, Mr. Whalen received Total
Compensation of $161,850.

As of April 13, 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.

The authorized stock of the Fund currently consists of an unlimited number of
full and fractional shares of beneficial interest, without par value.

To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of such Fund's Class A Shares or Class B Shares.

B-14
<PAGE> 91

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Stanley Jacob Holuba and Robert Joseph
Holuba CO TR, U/A 10/31/86 Article 6, Stanley Joseph Holuba Trust, 2 Hackensack
Ave., Kearny, NJ 07032-4611, 5%; and Angela, 2 Hackenstack Ave., Kearny NJ
07032-4611, 5%.

INVESTMENT ADVISORY AND OTHER SERVICES

Van Kampen American Capital Investment Advisory Corp. (the "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 6% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 10% of the common stock of VK/AC Holding, Inc.

The investment advisory agreement dated February 17, 1993, and approved by
shareholders of the Fund at a meeting held on January 14, 1993, 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. 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 sub-trust, to whom the
Adviser renders periodic reports of the Fund's investment activities.

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 any of the Fund.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $3,519,429, $2,939,428 and $2,980,018, respectively.

OTHER AGREEMENTS

B-15
<PAGE> 92

Such 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
Merritt mutual funds 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% of such
cost being paid by the Fund and such other Van Kampen Merritt funds based
proportionally on their respective net assets.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $18,255, $13,900 and $9,810, respectively,
representing the Adviser's cost of providing accounting services.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee paid to the Transfer Agent.
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. The
Fund, and the other Van Kampen Merritt mutual funds distributed by the
Distributor, share 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 $111,300, $246,825 and $201,796, respectively,
representing the Distributor's cost of providing certain support services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. 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. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor,
share one half (50%) of such costs equally. The remaining one half (50%) of such
costs are allocated to specific funds based on specific time allocations, or in
the event services are attributable only to types of funds (i.e. closed-end or
open-end), the relative amount of time spent on each type of fund and then
further allocated between funds of that type based upon their respective net
asset values. The Fund has not yet incurred any expenses in connection with this
Agreement.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $40,000, $20,300 and $8,800, respectively,
representing Van Kampen American Capital, Inc.'s cost of providing legal
services.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $5,845, $15,600 and $13,000, respectively,
representing the Adviser's cost of providing pricing services.

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.

B-16
<PAGE> 93

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 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 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.

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 sub-trust.

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.

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 sub-trusts, 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.

B-17
<PAGE> 94

THE DISTRIBUTOR

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 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. 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 its shares. The Distribution Plan and the Service Plan 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 Distribution Plan and
the Service Plan are being implemented through an agreement (the "Distribution
Agreement") with the 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 banks 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 banks 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 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 Agreement and/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 Agreement will be less
than the maximum percentage amount permissible with respect to such class of
shares under the Distribution Agreement.

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a sub-trust, 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 $1,678,218, $906,729 and $77,984 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which

B-18
<PAGE> 95

$1,363,530 and $224,918 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 $147,920
and $710 for advertising expenses, and $91,343 and $44,696 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 (9.35%); (ii) the 5 year period ending December 31, 1994 was 3.31%; and
(iii) the approximately 7 year, 8 month period from June 28, 1985 (the
commencement of investment operations of the Fund) through December 31, 1994 was
7.20%.

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 5.87%. 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 9.17%. 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 7.02%.

The Class A Share'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 93.58%.

The Class A Share'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 103.02%.

CLASS B SHARES

The average annual total return, including payment of the CDSC, with respect
to the Class B Shares for (i) the one year period ending December 31, 1994 was
(9.23%) and (ii) the approximately 1 year, 8 month period from May 1, 1993
(commencement of distribution) through December 31, 1994 was 0.75%.

The Class B Share's yield 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 Class
B Share's current distribution rate for the month ending December 31, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 6.45%.

The Class B Share's cumulative non-standardized total return including payment
of the CDSC from its inception to the end of the current period was 1.26%.

The Class B Share's cumulative non-standardized total return excluding payment
of the CDSC from its inception to the end of the current period was 4.80%.

CLASS C SHARES

The average total annual return, including payment of the CDSC, with respect
to the Class C Shares for (i) the one year period ended December 31, 1994 was
(6.51%) and (ii) the approximately 1 year, 5 month period from August 13, 1993
(commencement of distribution) through December 31, 1994 was 0.27%.

The Class C Share's yield for the 30 day period ending December 30, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.45%. The tax-equivalent yield for

B-19
<PAGE> 96

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 Class C Share's current distribution rate for the month
ending December 31, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 6.45%.

The Class C Share's cumulative non-standardized total return, including
payment of the CDSC from its inception to the end of the current period was
0.39%.

The Class C Share's cumulative non-standardized total return, excluding
payment of the CDSC from its inception to the end of the current period was
0.39%.

B-20
<PAGE> 97
Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Independent Auditors' Report

The Board of Trustees and Shareholders of
Van Kampen Merritt Tax Free High Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Tax Free High 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 Tax Free High 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-21
<PAGE> 98

Van Kampen Merritt Tax Free High 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>
Municipal Bonds
Alaska 0.5%
$ 3,790 Kasaan, AK Lease Rev .................................................... A- Baa1 8.000% 8/15/16 $ 3,982,835
-----------
Arizona 2.9%
6,410 Chandler, AZ Indl Dev Auth Indl Dev Rev Chandler Fin
Cent Proj <F4> ........................................................... NR NR 9.875 12/01/16 5,929,250
7,775 Chandler, AZ Indl Dev Auth Indl Dev Rev SMP II Ltd
Partnership Proj ......................................................... NR NR 7.500 12/01/15 7,775,000
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj ............. NR Ba1 5.040 10/01/12 964,750
8,000 Maricopa Cnty, AZ Unified Sch Dist No 41 Gilbert Rfdg (FGIC Insd).......... AAA Aaa * 1/01/07 3,730,320
2,700 Maricopa Cnty, AZ Unified Sch Dist No 41 Gilbert Rfdg (FGIC Insd).......... AAA Aaa * 1/01/08 1,171,044
1,425 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A ............................... BB NR 11.000 7/01/00 1,588,904
-----------
21,159,268
-----------
Arkansas 0.8%
2,170 Arkansas St Dev Fin Auth Single Family Mtg Rev Replacement Ser C........... A+ NR 8.600 2/01/17 2,311,549
2,740 Maumelle, AR Waterside Addition Muni Ppty Owners Multi-purp
Impt Dist No 6 ........................................................... NR NR 9.500 12/01/10 2,466,000
1,190 Maumelle, AR West Pointe Addition Muni Ppty Owners Multi-purp
Impt Dist No 7 ........................................................... NR NR 9.500 12/01/10 1,071,000
-----------
5,848,549
-----------
California 4.3%
2,250 California St Pub Wks Brd Lease Rev Dept Corrections CA St Prison
Ser D Susanville ......................................................... A- A 5.375 6/01/18 1,792,620
8,000 California St Rfdg (Cap Guar Insd) <F3> .................................. AAA Aaa 5.125 10/01/17 6,435,280
3,500 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi Cap
Fac Proj IV (MBIA Insd) .................................................. AAA Aaa 5.000 12/01/07 3,020,745
2,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi Cap
Fac Proj IV (MBIA Insd) .................................................. AAA Aaa 5.250 12/01/16 1,645,320
6,610 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev Second Issue .............. AA Aa 4.750 10/15/20 4,863,638
8,230 San Diego, CA Swr Rev Ser A (AMBAC Insd) <F3> ............................ AAA Aaa 5.000 5/15/13 6,748,189
7,625 San Francisco, CA City & Cnty Redev Agy Lease Rev Gains
(Crossover Rfdg @ 07/01/04) <F7> ......................................... A- A 0/8.500 7/01/14 4,689,375
3,000 Westminster, CA Redev Agy Tax Alloc Rev Commercial Redev
Proj No 1 ................................................................ BBB+ Baa1 6.200 8/01/23 2,327,610
-----------
31,522,777
-----------
Colorado 7.4%
66 Arapahoe Cnty, CO Centennial Downs Metro Dist Cash
Payment Deficiency Bond .................................................. NR NR 8.090 12/01/34 63,044
317 Arapahoe Cnty, CO Centennial Downs Metro Dist Interest
Certificate <F6> ......................................................... NR NR 6.00/8.09 12/01/34 301,290
650 Arapahoe Cnty, CO Centennial Downs Metro Dist Ltd Tax Bond
Ser 1993 Rfdg ............................................................ NR NR 8.090 12/01/34 617,869
6,540 Colorado Hlth Fac Auth Rev Christian Living Campus Proj .................. NR NR 10.500 1/01/19 7,163,785
6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj .................. NR NR 9.000 1/01/25 6,200,000
3,071 Colorado Hlth Fac Auth Rev Univ Hills Christian Nursing Rfdg ............ NR NR 8.750 12/01/11 3,168,089
810 Colorado Hsg Fin Auth Single Family Residential Rev Ser C Rfdg .......... NR Aa 8.750 9/01/17 838,731
1,000 Denver, CO City & Cnty Arpt Rev Ser A .................................... BB Baa 6.900 11/15/98 987,700
1,175 Denver, CO City & Cnty Arpt Rev Ser A .................................... BB Baa 8.400 11/15/98 1,236,218
10,000 Denver, CO City & Cnty Arpt Rev Ser A .................................... BB Baa 8.500 11/15/23 10,100,800
2,500 Denver, CO City & Cnty Arpt Rev Ser D <F3> ................................ BB Baa 7.750 11/15/13 2,448,800
</TABLE>

See Notes to Financial Statements

B-22

<PAGE> 99

Van Kampen Merritt Tax Free High 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>
Colorado (Continued)
$ 1,117 East River Regl Santn Dist CO Var Rfdg .................................... NR NR * % 12/01/08 $ 799,325
3,316 Gunnison Cnty, CO Indl Rev Bond Crested Butte Mtn Resort Inc .............. NR NR 9.250 10/01/07 3,349,160
3,355 Himalaya Wtr & Santn Dist CO Rfdg & Impt <F5> ............................. NR NR 9.500 02/15/07 2,013,000
5,385 Littleton, CO Riverfront Auth Rev Rfdg <F5> ............................... NR NR 9.625 12/01/00 1,884,750
11,428 Skyland Metro Dist CO Gunnison Cnty Crested Butte Rfdg <F5> ............... NR NR 8.500 02/29/96 1,999,971
4,750 Skyland Metro Dist CO Gunnison Cnty Rfdg .................................. NR NR * 12/01/08 3,399,100
11,325 Tower Metro Dist CO Rfdg & Impt <F5> ...................................... NR NR 9.500 02/15/07 6,795,000
-----------
53,366,632
-----------
Connecticut 0.5%
3,740 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home
Pgm AHF/Windsor Proj ...................................................... AA- A1 7.125 11/01/24 3,749,836
-----------
District of Columbia 1.9%
2,200 District of Columbia Ser A1 Rfdg (MBIA Insd) .............................. AAA Aaa 6.500 06/01/10 2,168,298
6,000 Metropolitan WA, DC Arpts Auth Genl Arpt Rev Ser A (MBIA Insd) ........... AAA Aaa 5.875 10/01/15 5,392,920
7,000 Metropolitan WA, DC Arpts Auth Genl Arpt Rev Ser A (MBIA Insd) ........... AAA Aaa 5.750 10/01/20 6,020,840
-----------
13,582,058
-----------
Florida 6.5%
7,400 Charlotte Cnty, FL Hlth Care Fac Rev Hlth Sys (Inverse Fltg)
(FSA Insd) ................................................................. AAA Aaa 6.545 08/26/27 6,068,000
5,400 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent ...................... NR NR 10.250 07/01/11 5,400,000
2,265 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent Ser A ............... NR NR 10.250 07/01/11 2,265,000
12,000 Florida Hsg Fin Agy Hsg Bradley Park Apts Proj <F5> ...................... NR NR 9.750 12/01/19 6,325,200
2,750 Florida Hsg Fin Agy Multi-Family Mtg Lincoln Plz Ser K <F5> .............. NR NR 9.375 12/01/19 28
290 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ................................ BBB- NR 5.750 03/01/03 264,834
850 Largo, FL Sun Coast Hlth Sys Rev Hosp Ser 1993 Rfdg ....................... BBB- NR 5.750 03/01/04 764,515
5,500 Miramar, FL Wastewater Impt Assmt Rev (FGIC Insd) ........................ AAA Aaa 6.750 10/01/25 5,515,895
4,030 Monroe Cnty, FL Indl Dev Auth First Mtg Med Fac Rev
Kennedy Dr Invt Ltd Proj Rfdg ............................................. NR NR 11.000 11/01/12 4,030,000
680 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A ...................................................... BBB- NR 8.500 03/01/20 681,666
4,030 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A (Prerefunded @ 03/01/00) ............................. AAA NR 8.500 03/01/20 4,602,502
16,065 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A <F5> ................... NR NR 10.000 12/15/11 11,406,150
-----------
47,323,790
-----------
Georgia 1.9%
15,000 Atlanta, GA Urban Residential Fin Auth Multi-Family Mtg
Rev Hsg Peachtree Apts Proj <F5> .......................................... NR NR 10.500 12/01/10 14,125,500
-----------
Idaho 1.6%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc Rfdg (Inverse Fltg) .................. AA Aa 6.560 02/15/21 7,398,480
4,000 Owyhee Cnty, ID Indl Dev Corp Indl Dev Rev Envirosafe
Services Of ID Inc ........................................................ NR NR 8.250 11/01/02 3,909,520
-----------
11,308,000
-----------
Illinois 13.2%
1,000 Alton, IL Hosp Fac Rev Saint Anthony's Hlth Cent Proj .................... BBB NR 8.375 09/01/14 1,036,620
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev American Airls Inc
Proj Ser A ............................................................... BB+ Baa2 7.875 11/01/25 2,933,310
25,280 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser 84A <F3>...... BB Baa2 8.850 05/01/18 26,954,547
1,800 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B ............ BB Baa2 8.950 05/01/18 1,914,930
</TABLE>

See Notes to Financial Statements

B-23

<PAGE> 100

Van Kampen Merritt Tax Free High 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>
Illinois (Continued)
$ 4,400 Chicago, IL Rev Chatham Ridge Tax Increment ............................. NR NR 10.250% 01/01/07 $ 4,692,116
3,085 Chicago, IL Wtr Rev Rfdg (FGIC Insd) ..................................... AAA Aaa 6.500 11/01/10 3,105,886
7,435 Illinois Dev Fin Auth Rev Mercy Hsg Corp Proj Rfdg ....................... NR A 7.000 08/01/24 7,564,146
5,365 Illinois Dev Fin Auth Rev Sch Dist Pgm No 300 (FGIC Insd) ............... AAA Aaa * 12/01/07 2,380,772
6,010 Illinois Dev Fin Auth Rev Sch Dist Pgm No 300 (FGIC Insd) ............... AAA Aaa * 12/01/08 2,480,868
5,040 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ....................... BBB Baa1 9.500 11/15/15 5,679,022
3,825 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00) ................................................. AAA NR 9.500 11/15/15 4,612,606
995 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A ......... BB- Ba 10.250 02/01/13 999,348
2,500 Illinois Hlth Fac Auth Rev Rush Presbyterian Saint Lukes Rfdg
(MBIA Insd) .............................................................. AAA Aaa 5.250 11/15/13 2,117,075
3,000 Illinois Hlth Fac Auth Rev Servantcor Ser A Var Rate Cpn
(Prerefunded @ 08/15/01) ................................................. BBB+ NR 8.000 08/15/21 3,401,310
9,500 Illinois Hlth Fac Auth Rev Univ Of Chicago Hosp Proj (MBIA Insd)........... AAA Aaa 6.125 08/15/21 8,628,660
4,430 Illinois Hsg Dev Auth Residential Mtg Rev 1983 Ser B....................... A+ Aa * 02/01/15 553,396
7,050 Metropolitan Pier & Expo Auth IL Dedicated St Tax Rev
McCormick Pl Expansion Ser A (FGIC Insd) ................................. AAA Aaa * 06/15/18 1,436,015
6,200 Metropolitan Pier & Expo Auth IL Dedicated St Tax Rev
McCormick Pl Expansion Ser A (FGIC Insd) ................................. AAA Aaa * 06/15/19 1,174,466
2,095 Regional Tran Auth IL Ser B (AMBAC Insd) ................................. AAA Aaa 8.000 06/01/17 2,411,219
8,000 Robbins, IL Res Recovery Rev Robbins Res Recovery Partners Ser A ......... NR NR 9.250 10/15/14 8,247,120
3,865 Rosemont, IL Ser A Corp Purp Rfdg (FGIC Insd) ............................ AAA Aaa * 12/01/13 1,090,896
7,730 Rosemont, IL Ser A Corp Purp Rfdg (FGIC Insd) ............................ AAA Aaa * 12/01/14 2,032,835
-----------
95,447,163
-----------
Indiana 1.4%
370 Indiana St Hsg Fin Auth Single Family Mtg Rev Ser B ...................... NR Aa1 9.500 01/01/17 383,657
46,215 Indiana St Hsg Fin Auth Single Family Mtg Rev Ser C ...................... NR Aa1 * 01/01/15 6,077,272
4,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal Express Corp Proj .......... BBB Baa2 7.100 01/15/17 3,832,680
-----------
10,293,609
-----------
Kansas 0.8%
4,740 Kansas City, KS Crawford Cnty Leavenworth Single Family Mtg
Rev (AMBAC Insd) <F3> .................................................... AAA Aaa * 04/01/16 465,373
5,500 Kansas City, KS Util Sys Rev Rfdg & Impt (FGIC Insd) ..................... AAA Aaa 6.375 09/01/23 5,382,520
-----------
5,847,893
-----------
Kentucky 0.4%
2,700 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse Fltg)
(MBIA Insd) .............................................................. AAA Aaa 7.380 10/01/08 2,646,000
-----------
Louisiana 1.1%
3,000 Louisiana Pub Fac Auth Rev Student Ln Subser A3 .......................... NR A 7.000 09/01/06 3,043,740
12,500 New Orleans, LA Rfdg (AMBAC Insd) ........................................ AAA Aaa * 09/01/17 2,745,625
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) <F5> .......................... AAA Aaa * 02/01/15 2,407,600
-----------
8,196,965
-----------
</TABLE>

See Notes to Financial Statements

B-24

<PAGE> 101

Van Kampen Merritt Tax Free High 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>
Maine 0.2%
$ 1,250 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) .................... AAA Aaa 7.000% 07/01/24 $ 1,261,775
-----------
Maryland 0.5%
1,440 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Multi-Family Hsg Rev Ser A Rfdg .......................................... NR Aa 8.300 05/15/17 1,509,091
1,750 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Rev
Single Family Pgm 7th Ser ................................................ NR Aa 7.300 04/01/25 1,780,590
-----------
3,289,681
-----------
Massachusetts 5.3%
13,770 Canton, MA Hsg Auth Multi-Family Hsg Mtg Rev Canton
Arboretum Apts <F4> ...................................................... NR NR 9.000 09/01/19 11,016,000
5,000 Massachusetts St Hlth & Edl Fac Auth Rev New England
Med Cent Hosp Ser G (Embedded Swap) (MBIA Insd) .......................... AAA Aaa 5.000 07/01/13 4,045,550
2,415 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem
Med Cent Ser A Rfdg ...................................................... NR B 5.500 10/01/02 1,823,397
9,250 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem
Med Cent Ser A Rfdg ...................................................... NR B 6.000 10/01/23 5,795,402
6,200 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental
Ser A Rfdg (AMBAC Insd) .................................................. AAA Aaa 6.650 07/01/19 6,017,906
640 Massachusetts St Hsg Fin Agy Hsg Rev Ser A ............................... AAA Aaa 9.000 12/01/18 678,285
7,500 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl Composting ............. NR NR 9.250 06/01/10 7,802,925
1,525 Massachusetts St Indl Fin Agy Solid Waste Disp Rev Res
Recovery Sys ............................................................. NR NR 9.200 12/01/99 1,526,678
-----------
38,706,143
-----------
Michigan 3.6%
2,000 Battle Creek, MI Downtown Dev Auth Tax Increment Rev ..................... BBB+ NR 7.600 5/01/16 2,017,820
8,205 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg
Burcham Hills Ser A ...................................................... NR NR 9.625 7/01/19 8,796,991
4,175 Michigan St Hosp Fin Auth Rev Garden City Hosp .......................... BBB- Ba 8.300 9/01/02 4,187,525
10,000 Michigan St Strategic Fund Ltd Oblig Rev Great Lakes
Pulp & Fibre Proj ........................................................ NR NR 10.250 12/01/16 10,045,900
1,500 North Branch, MI Area Sch Lapeer Cnty Rfdg (AMBAC Insd) <F3> ............ AAA Aaa 5.250 05/01/13 1,293,465
-----------
26,341,701
-----------
Minnesota 2.3%
495 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj Ser B ......... NR NR * 01/15/20 590,238
5,490 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj Ser A ......... NR NR 10.000 01/15/20 4,117,500
2,800 Minneapolis, MN Coml Dev Rev Holiday Inn Metrodome Proj Rfdg ............. NR NR 10.000 06/01/98 2,844,520
1,750 Minnesota St Hsg Fin Agy Single Family Mtg Ser D ........................ AA+ Aa 8.800 07/01/16 1,801,188
35,460 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A (MBIA Insd) ............ AAA Aaa * 01/01/20 6,810,093
5,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A (MBIA Insd) ............ AAA Aaa * 01/01/21 892,150
-----------
17,055,689
-----------
Mississippi 0.3%
1,840 Hancock Cnty, MS Hosp Rev Hancock Genl Hosp Proj
(Prerefunded @ 08/01/95) ................................................. NR NR 11.500 08/01/12 1,951,706
-----------
Missouri 1.9%
2,750 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Freeman Hosp
Proj Ser A (FSA Insd) .................................................... AAA Aaa 5.500 2/15/24 2,308,075
1,250 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Saint Lukes
Hlth Sys Rfdg (MBIA Insd) ................................................ AAA Aaa 5.125 11/15/19 1,001,600
5,025 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Skaggs
Cmnty Hosp Rfdg .......................................................... NR NR 9.500 5/15/13 5,332,932
</TABLE>

See Notes to Financial Statements

B-25

<PAGE> 102

Van Kampen Merritt Tax Free High 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>
Missouri (Continued)
$ 905 Oak Grove, MO Combined Wtrwks & Swr Sys Rev Rfdg
(Prerefunded @ 11/01/96) ................................................. NR NR 9.250% 11/01/07 $ 993,491
615 Oak Grove, MO Combined Wtrwks & Swr Sys Rev Rfdg
(Prerefunded @ 11/01/96) ................................................. NR NR 9.375 11/01/12 676,463
3,500 Saint Louis, MO Muni Fin Corp Leasehold Rev Ser A Rfdg .................. AA- Aa3 6.000 07/15/13 3,327,310
------------
13,639,871
------------
Montana 0.5%
4,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj ......... NR NR 7.000 12/31/19 3,582,160
------------
Nebraska 0.9%
2,700 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) <F3> .......... AAA Aaa 9.102 09/15/23 2,595,375
3,600 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) <F3> .......... AAA Aaa 10.542 09/10/30 3,784,500
------------
6,379,875
------------
Nevada 1.5%
8,000 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp Ser A .................... BBB- Baa3 6.500 12/01/33 6,651,040
1,945 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .............. NR Baa 5.600 09/01/09 1,725,293
3,145 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .............. NR Baa 5.650 09/01/13 2,720,677
------------
11,097,010
------------
New Hampshire 0.6%
4,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp Catholic
Med Cent Rfdg ............................................................ BBB+ NR 8.250 07/01/13 4,086,360
------------
New Jersey 2.4%
6,835 New Jersey Econ Dev Auth First Mtg Gross Rev Oakridge
Manor Proj Rfdg .......................................................... NR NR 9.500 11/01/14 7,240,794
1,035 New Jersey Econ Dev Auth First Mtg Gross Rev Trenton
Convales Ser A ........................................................... NR NR 9.500 01/01/16 1,067,313
10,255 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pollutn Ctl
Pub Svc Elec & Gas Ser A Rfdg (MBIA Insd) ................................ AAA Aaa 5.700 05/01/28 8,809,147
------------
17,117,254
------------
New Mexico 0.6%
5,835 Albuquerque, NM Retirement Fac Rev OGL Retirement Fac Rfdg <F4> .......... NR NR 10.000 10/01/13 4,261,884
------------
New York 12.3%
4,420 Battery Park City Auth NY Rev Sr Ser A Rfdg <F3> ........................ AA A1 5.000 11/01/08 3,699,407
5,000 Battery Park City Auth NY Rev Sr Ser A Rfdg .............................. AA A1 5.250 11/01/17 4,004,400
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal One
Group Assn Proj .......................................................... A A 6.000 01/01/19 4,355,000
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal One
Group Assn Proj .......................................................... A A 6.125 01/01/24 4,365,700
10,000 New York City Ser A Rfdg ................................................. A- Baa1 7.000 08/01/04 10,267,500
2,500 New York City Ser C Rfdg ................................................. A- Baa1 6.500 08/01/04 2,469,025
650 New York City Ser G Rfdg ................................................. A- Baa1 5.625 08/01/17 535,288
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) ............ A A1 8.041 04/01/20 1,990,625
6,000 New York St Energy Resh & Dev Auth Gas Fac Rev Ser D
(Inverse Fltg) (MBIA Insd) .............................................. AAA Aaa 5.635 07/08/26 5,049,900
4,815 New York St Local Govt Assistance Corp Ser C Rfdg ........................ A A 5.000 04/01/21 3,702,446
8,450 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(AMBAC Insd) <F2> ....................................................... AAA Aaa 6.500 08/15/29 8,145,715
5,000 New York St Med Care Fac Fin Agy Rev Presbyterian Hosp
Ser A Rfdg ............................................................... AAA Aa 5.375 02/15/25 4,048,350
3,000 New York St Thruway Auth Svc Contract Rev Loc Hwy & Brdg .................. BBB Baa1 5.875 04/01/14 2,619,930
</TABLE>

See Notes to Financial Statements

B-26

<PAGE> 103

Van Kampen Merritt Tax Free High 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>
New York (Continued)
$ 6,815 New York St Urban Dev Corp Rev Correctional Cap Fac Ser 4 ................ BBB Baa1 5.250% 01/01/09 $ 5,734,414
10,000 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A Rfdg ........... BBB Baa1 5.500 01/01/08 8,818,600
6,190 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A Rfdg
(FSA Insd) .............................................................. AAA Aaa 6.500 01/01/11 6,239,025
1,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.000 11/15/03 1,005,370
1,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.100 11/15/04 1,007,280
1,830 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.250 11/15/05 1,854,321
3,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.250 11/15/06 3,042,420
2,500 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.375 11/15/07 2,540,350
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.400 11/15/08 2,023,020
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ..................................................... AAA Aaa 6.500 11/15/09 2,029,560
------------
89,547,646
------------
North Carolina 1.2%
8,765 Eastern Band Cherokee Indians NC Spl Oblig Rev Carolina
Mirror Co Proj ........................................................... NR NR 10.250 09/01/09 8,765,000
------------
North Dakota 0.3%
2,100 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp Proj ............. BBB- NR 8.875 11/15/24 2,123,667
------------
Ohio 3.8%
2,000 East Liverpool, OH Hosp Rev East Liverpool City Hosp Ser A ............... BBB- Baa 8.125 10/01/11 2,012,620
1,730 Franklin Cnty, OH First Mtg Rev Heinzerling Fndtn Proj Rfdg .............. NR NR 10.000 08/01/11 1,861,930
5,000 Lucas Cnty, OH Econ Dev Rev Rossford Geriatric Care Proj ................. NR NR 10.125 12/01/06 4,750,000
2,000 Montgomery Cnty, OH Hlth Care Fac Rev First Mtg Friendship
Vlg Dayton (Prerefunded @ 11/01/95) ...................................... NR NR 11.750 11/01/15 2,167,680
8,000 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) ............. AAA Aaa 9.213 03/31/31 7,580,000
8,500 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College Cleveland Elec
Ser A Rfdg ............................................................... BB Ba2 8.000 10/01/23 8,339,095
500 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev OH Edison Co Proj ............... BBB- Baa2 10.625 07/01/15 527,645
------------
27,238,970
------------
Oklahoma 0.5%
4,000 Tulsa, OK Muni Arpt Tran Rev American Airls Inc .......................... BB+ Baa2 7.375 12/01/20 3,744,480
------------
Pennsylvania 4.3%
2,000 Butler Cnty, PA Indl Dev Auth First Mtg Rev Sherwood Oaks Proj
Ser A Rfdg (Crossover Rfdg @ 06/01/96) ................................... A- NR 8.750 06/01/16 2,125,880
4,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem Steel
Corp Proj Rfdg ........................................................... NR NR 7.500 09/01/15 3,865,200
1,000 Chartiers Vly, PA Indl & Coml Dev Auth First Mtg Rev United
Methodist Home (Prerefunded @ 10/01/95) .................................. NR NR 12.000 10/01/15 1,081,060
2,000 Cumberland Cnty, PA Auth Rev First Mtg Carlisle Hosp & Hlth ............. BBB- Baa 6.800 11/15/14 1,808,680
1,800 Lackawanna Cnty, PA Indl Dev Auth Indl Dev Rev Nytronics Inc Proj ........ NR NR 12.000 09/01/05 1,853,874
3,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res Recovery Sys Rev
Ser A .................................................................... BBB A1 8.500 12/15/10 3,059,820
2,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00) ............................................... BBB- NR 8.875 10/01/20 2,312,880
</TABLE>

See Notes to Financial Statements

B-27

<PAGE> 104

Van Kampen Merritt Tax Free High 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>
Pennsylvania (Continued)
$ 3,845 Montgomery Cnty, PA Higher Edl & Hlth Auth Nursing Home
Rev Delco Sys Svcs Proj A ................................................ NR NR 9.875% 11/01/18 $ 3,915,171
8,100 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg
Meadowood Corp Proj A .................................................... NR NR 10.000 12/01/19 8,505,000
463 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg
Meadowood Corp Proj B .................................................... NR NR * 12/01/20 36,549
500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn Ctl Metro
Edison Co Ser A .......................................................... BBB+ Baa1 10.500 09/01/95 520,010
1,785 Philadelphia, PA Auth for Indl Dev Rev Baptist Home of Philadelphia ...... NR NR 10.000 04/01/02 1,839,121
-------------
30,923,245
-------------
Rhode Island 0.9%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ................................ NR NR 8.000 09/01/24 1,959,700
4,355 Rhode Island Hsg & Mtg Fin Corp Issues Homeownership
Oppty Ser 1B ............................................................. AA+ Aa 8.400 10/01/21 4,440,706
-------------
6,400,406
-------------
South Carolina 0.5%
2,500 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) ......................... AAA Aaa 7.000 06/01/19 2,561,000
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84
Var Rate Cpn ............................................................. NR NR 6.344 06/15/04 1,000,000
-------------
3,561,000
-------------
Tennessee 3.0%
4,710 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser A ........................................................... NR NR 9.750 08/01/19 5,034,849
4,775 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser C ........................................................... NR NR 9.750 08/01/19 5,104,332
6,220 Sullivan Cnty, TN Hlth Edl & Hsg Fac Brd Rev First Mtg
RHA/Sullivan Inc Fac Rev ................................................. NR NR 9.750 09/01/19 6,472,905
4,550 Trenton, TN Hlth & Edl Fac Brd Rev ICF/MR RHA/Trenton
Golden Door ............................................................. NR NR 10.000 05/01/19 4,877,099
-------------
21,489,185
-------------
Texas 3.7%
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) <F3> ........................................... AAA Aaa 7.568 01/03/22 1,862,500
3,905 Brazos, TX Higher Ed Auth Inc Student Ln Rev Subser C2 Rfdg .............. NR A 5.875 06/01/04 3,718,966
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR * 08/01/00 753,114
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR * 08/01/01 692,534
335 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR * 08/01/02 183,443
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR * 08/01/11 474,974
775 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR 8.750 08/01/11 795,367
2,670 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg ................................ NR NR 8.750 08/01/12 2,740,168
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84 Rfdg ......... NR NR 5.525 04/01/04 2,533,450
3,929 Texas St ................................................................. A NR 6.350 12/01/13 3,864,295
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd) <F2> ............................................. AAA Aaa 6.750 01/01/15 2,022,940
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd) <F2> ............................................. AAA Aaa 6.600 01/01/23 1,992,400
5,000 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp
Union Carbide Chem & Plastics ............................................ BBB Baa2 8.200 03/15/21 5,257,550
-------------
26,891,701
-------------
</TABLE>

See Notes to Financial Statements

B-28

<PAGE> 105

Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

[FN]
<F1>At December 31, 1994, for federal income tax purposes, cost is
$773,376,910, and the aggregate gross unrealized appreciation is $22,828,965
and the aggregate gross unrealized depreciation is $61,150,987, resulting in
net unrealized depreciation including open futures transactions of $38,322,022.
<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.
<F4>Security is producing income of less than the stated coupon.
<F5>Non-Income producing security.
<F6> Currently is a Payment-in-Kind security which will convert to a cash
paying security with a higher coupon at a predetermined date.
<F7>Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.

See Notes to Financial Statements

B-29
<PAGE> 106

Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

Statement of Assets and Liabilities
December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $771,437,676) <F1>............................................. $ 731,338,279
Short-Term Investments <F1>....................................................................... 4,900,591
Receivables:
Interest.......................................................................................... 16,944,307
Fund Shares Sold.................................................................................. 1,983,360
Investments Sold.................................................................................. 1,705,109
Margin on Futures <F5>............................................................................ 151,062
Other............................................................................................. 1,871,141
---------------
Total Assets...................................................................................... 758,893,849
---------------
Liabilities:
Payables:
Investments Purchased............................................................................. 28,065,012
Income Distributions.............................................................................. 2,443,594
Fund Shares Repurchased ......................................................................... 1,743,483
Custodian Bank.................................................................................... 332,438
Investment Advisory Fee <F2>...................................................................... 297,100
Accrued Expenses.................................................................................. 1,072,221
---------------
Total Liabilities................................................................................. 33,953,848
---------------
Net Assets........................................................................................ $ 724,940,001
---------------
Net Assets Consist of:
Paid in Surplus <F3> ............................................................................. $ 834,735,432
Accumulated Distributions in Excess of Net Investment Income <F1>................................. (11,937,829)
Net Unrealized Depreciation on Investments........................................................ (36,382,788)
Accumulated Net Realized Loss on Investments ..................................................... (61,474,814)
---------------
Net Assets........................................................................................ $ 724,940,001
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $602,960,342 and 43,541,483
shares of beneficial interest issued and outstanding) <F3>........................................ $ 13.85
Maximum sales charge (4.65%* of offering price)................................................... .68
---------------
Maximum offering price to public ................................................................. $ 14.53
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $112,377,744 and
8,114,129 shares of beneficial interest issued and outstanding) <F3>.............................. $ 13.85
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $7,562,068 and
546,145 shares of beneficial interest issued and outstanding) <F3>................................ $ 13.85
--------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $2,039,847 and
147,327 shares of beneficial interest issued and outstanding) <F3>................................ $ 13.85
--------------
*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-30

<PAGE> 107

Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

Statement of Operations
For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest................................................................................................... $ 53,532,776
Amortization of Discount (Premium) - Net................................................................... (192,660)
--------------
Total Income............................................................................................... 53,340,116
--------------
Expenses:
Investment Advisory Fee <F2>............................................................................... 3,519,429
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $1,678,218, $906,729, $77,984
and $4,701, respectively) <F6> ............................................................................ 2,667,632
Shareholder Services ...................................................................................... 678,547
Trustees Fees and Expenses <F2>............................................................................ 24,990
Other...................................................................................................... 184,009
--------------
Total Expenses............................................................................................. 7,074,607
--------------
Net Investment Income...................................................................................... $ 46,265,509
--------------
Realized and Unrealized Gain/Loss on Investments:
Net Realized Gain/Loss on Investments:
Proceeds from Sales........................................................................................ $ 665,105,817
Cost of Securities Sold (Including reorganization and restructuring costs of $529,278)..................... (720,722,539)
--------------
Net Realized Loss on Investments (Including realized loss on closed and expired option transactions
and futures transactions of $930,603 and $8,497,712, respectively)......................................... (55,616,722)
--------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.................................................................................... (7,763,865)
End of the Period (Including unrealized appreciation on open futures transactions of $3,716,609)........... (36,382,788)
--------------
Net Unrealized Depreciation on Investments During the Period............................................... (28,618,923)
--------------
Net Realized and Unrealized Loss on Investments............................................................ $ (84,235,645)
--------------
Net Decrease in Net Assets from Operations................................................................. $ (37,970,136)
--------------
</TABLE>

See Notes to Financial Statements

B-31

<PAGE> 108

Van Kampen Merritt Tax Free High 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........................................................ $ 46,265,509 $ 41,430,204
Net Realized Gain/Loss on Investments........................................ (55,616,722) 5,031,081
Net Unrealized Appreciation/Depreciation on Investments During the Period ... (28,618,923) 42,010,114
----------------- -----------------
Change in Net Assets from Operations ........................................ (37,970,136) 88,471,399
----------------- -----------------
Distributions from Net Investment Income*.................................... (46,265,509) (41,430,204)
Distributions in Excess of Net Investment Income* <F1>....................... (3,817,529) (2,574,643)
----------------- -----------------
Total Distributions*......................................................... (50,083,038) (44,004,847)
----------------- -----------------
Net Change in Net Assets from Investment Activities.......................... (88,053,174) 44,466,552
----------------- -----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold.................................................... 185,185,601 151,095,287
Net Asset Value of Shares Issued Through Dividend Reinvestment............... 22,347,994 20,158,107
Cost of Shares Repurchased................................................... (92,646,623) (83,682,325)
----------------- -----------------
Net Change in Net Assets from Capital Transactions .......................... 114,886,972 87,571,069
----------------- -----------------
Total Increase in Net Assets................................................. 26,833,798 132,037,621
Net Assets:
Beginning of the Period...................................................... 698,106,203 566,068,582
----------------- -----------------
End of the Period (Including undistributed net investment income of
$(11,937,829) and $(8,120,300), respectively)................................ $ 724,940,001 $ 698,106,203
----------------- -----------------
</TABLE>

See Notes to Financial Statements

B-32

<PAGE> 109

Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements
December 31, 1994
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Tax Free High Income Fund (the "Fund") was incorporated
under Maryland law on March 6, 1985, 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 June 28, 1985 and was
reorganized as a sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust (the "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. Investments
valued using estimates of market value are generally those non-rated securities
in which the Fund owns over 90% of the original bond issue. At December 31,
1994, 20% of the Fund's net assets consisted of such securities. 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 $43,939,891. Of this amount, $438,972 and
$43,500,919 will expire on December 31, 1999 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.

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. 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 distributions 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, 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 $500 million... .50 of 1%
Over $500 million.... .45 of 1%
</TABLE>

For the year ended December 31, 1994, the Fund recognized expenses of
approximately $101,700 representing legal services provided by 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 $175,400 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal,
portfolio pricing 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.

B-33
<PAGE> 110

Van Kampen Merritt Tax Free High Income Fund
- -------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

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 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.

At December 31, 1994, paid in surplus aggregated $702,830,574, $121,326,140,
$8,415,602 and $2,163,116 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 ...................... 6,540,259 $ 96,207,344
Class B ...................... 5,443,468 79,716,260
Class C....................... 489,407 7,098,890
Class D....................... 147,327 2,163,107
------------ ----------------
Total Sales .................. 12,620,461 $ 185,185,601
------------ ----------------
Dividend Reinvestment:
Class A ...................... 1,375,201 $ 19,853,939
Class B ...................... 153,310 2,201,274
Class C....................... 20,355 292,772
Class D....................... -0- 9
------------ ----------------
Total Dividend Reinvestment... 1,548,866 $ 22,347,994
------------ ----------------
Repurchases:
Class A ...................... (5,083,863) $ (72,707,633)
Class B ...................... (1,108,781) (15,819,604)
Class C....................... (298,471) (4,119,386)
Class D....................... -0- -0-
------------ ----------------
Total Repurchases............. (6,491,115) $ (92,646,623)
------------ ----------------
</TABLE>

At December 31, 1993, paid in surplus aggregated $659,476,924, $55,228,210 and
$5,143,326 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........................ 5,992,304 $ 90,039,895
Class B........................ 3,672,116 55,935,127
Class C........................ 333,367 5,120,265
------------ ----------------
Total Sales ................... 9,997,787 $ 151,095,287
------------ ----------------
Dividend Reinvestment:
Class A........................ 1,319,893 $ 19,769,519
Class B........................ 23,754 365,527
Class C........................ 1,487 23,061
------------ ----------------
Total Dividend Reinvestment ... 1,345,134 $ 20,158,107
------------ ----------------
Repurchases:
Class A........................ (5,563,284) $ (82,609,881)
Class B........................ (69,738) (1,072,444)
Class C........................ -0- -0-
------------ ----------------
Total Repurchases.............. (5,633,022) $ (83,682,325)
------------ ----------------
</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>

B-34
<PAGE> 111

Van Kampen Merritt Tax Free High Income Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

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
$536,200 and CDSC on the redeemed shares of Classes B, C and D of approximately
$295,300. 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 and reorganization and restructuring costs, for the year ended
December 31, 1994, were $720,256,501 and $720,193,261, 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 .... 1,000 $ (932,645)
Options Written and Purchased (Net) . 7,433 (969,919)
Options Terminated in Closing
Transactions (Net) .................. (3,950) (70,073)
Options Expired (Net) ............... (3,650) 1,753,424
Options Exercised (Net) ............ (833) 219,213
--------- -------------
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... 3,222
Futures Opened..................... 46,345
Futures Closed..................... (38,981)
---------
Outstanding at December 31, 1994... 10,586
---------
</TABLE>

The futures contracts outstanding as of December 31, 1994, and the descriptions
and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
<S> <C> <C>
-----------------------------------------------------
US Treasury Bond Futures
Mar 1995 - Buys to Open.... 750 $ 470,503
Mar 1995 - Sells to Open... 3,018 (1,600,167)
Municipal Bond Futures
Mar 1995 - Buys to Open.... 2,318 4,883,708
Eurodollar Note Futures
Mar 1995 - Sells to Open... 1,750 377,573
June 1995 - Buys to Open... 2,750 (415,008)
--------- ---------------
10,586 $ 3,716,609
--------- ---------------
</TABLE>

B-35

<PAGE> 112

Van Kampen Merritt Tax Free High Income Fund
- -------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994
- -------------------------------------------------------------------------------

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
security's 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, 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 $997,400.

B-36
<PAGE> 113

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

VAN KAMPEN MERRITT
MUNICIPAL INCOME FUND

Van Kampen Merritt Municipal Income Fund (the "Fund") is a separate
diversified mutual fund, organized as a sub-trust of Van Kampen Merritt Tax Free
Fund. 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 ("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 objectives.

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) 225-2222, ext. 6504.
(Continued on next page)
------------------

A Statement of Additional Information, dated April 30, 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 1-800-225-2222, ext. 6504, or for
Telecommunication Device for the Deaf, 1-800-772-8889.

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

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

THIS PROSPECTUS IS DATED APRIL 30, 1995.

Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time such
amendment to the registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
<PAGE> 114

(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 0.30% 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 "Purchasing Shares of
the Fund."

2
<PAGE> 115

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........................... 19
Purchasing Shares of the Fund....................................... 20
Alternative Sales Arrangements.................................... 20
Initial Sales Charge Alternative -- Class A Shares................ 23
Quantity Discounts................................................ 24
Other Purchase Programs........................................... 26
Deferred Sales Charge Alternatives................................ 27
Distributions from the Fund......................................... 30
Purchase of Additional Shares With Distributions.................. 31
Redemption of Shares................................................ 31
Net Asset Value..................................................... 34
Investment Advisory Services........................................ 35
Portfolio Transactions and Brokerage Allocation..................... 36
The Distribution and Service Plans.................................. 37
Tax Status.......................................................... 39
Shareholder Programs................................................ 42
Fund Performance.................................................... 46
Shareholder Services................................................ 46
Description of Shares of the Fund................................... 47
Shareholder Reports and Inquiries................................... 48
Additional Information.............................................. 48
</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> 116

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

THE FUND Van Kampen Merritt Municipal Income Fund (the "Fund") is a separate
diversified sub-trust of an open-end, diversified sub-trust of an open-end
management investment company organized as a Massachusetts business trust. See
"The Fund."

INVESTMENT OBJECTIVE AND POLICIES 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. 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 ("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 objectives. 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 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."

4
<PAGE> 117

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.

The minimum initial investment with respect to each of the Class A Shares,
Class B Shares and Class C Shares is $1,000. The Minimum subsequent investment
with respect to each class of shares is $100.

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 0.30% 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 contingent deferred sales charge.

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 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 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.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser"), is the investment adviser for the Fund. The
annual advisory fee for the Fund is 0.50% of its average daily net assets,
reduced on net assets over certain amounts. See "Investment Advisory Services."

5
<PAGE> 118

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. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."

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

6
<PAGE> 119

- --------------------------------------------------------------------------------
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 original purchase
price on redemption proceeds)... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
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.

7
<PAGE> 120

<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)........................... 0.48% 0.48% 0.48%
12b-1 Fees (as a percentage of average daily
net assets)(1).............................. 0.30% 1.00% 1.00%
Other expenses (as a percentage of average
daily net assets)........................... 0.21% 0.22% 0.26%
Total (as a percentage of average daily net
assets)..................................... 0.99% 1.70% 1.74%
</TABLE>

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

8
<PAGE> 121

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 0.99% 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 $78 $100 $163
Class B Shares................................. $57 $89 $107 $165
Class C Shares................................. $28 $55 $ 94 $205
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares................................. $57 $78 $100 $163
Class B Shares................................. $17 $54 $ 92 $165
Class C Shares................................. $18 $55 $ 94 $205
</TABLE>

9
<PAGE> 122

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
-------------------------------------------------------------------------
AUGUST 1,
1990
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 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(2)....................... .882 .972 1.044 1.098 .370
Distributions from and in Excess of Net
Realized Gains(2).......................... .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)(1).............. (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)(1).............................. .99% .87% .86% .59% .89%
Ratio of Net Investment Income to Average Net
Assets(1) (annualized)....................... 5.93% 6.08% 6.76% 7.29% 7.11%
Portfolio Turnover............................ 74.96% 81.78% 91.57% 105.99% 108.79%
</TABLE>

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

(1) 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>
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%
</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

10
<PAGE> 123

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

FINANCIAL HIGHLIGHTS -- CONTINUED

(for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
---------------------------------------------- -------------------------------
AUGUST 24, 1992 AUGUST 13, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED YEAR ENDED DISTRIBUTION) TO YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1994 1993
------------ ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................... $ 16.139 $ 15.308 $ 15.481 $ 16.141 $ 15.990
Net Investment Income................ .780 .852 .320 .783 .300
Net Realized and Unrealized Gain/Loss
on Investments..................... (1.890) .845 (.033) (1.893) .171
-------- -------- -------- -------- --------
Total from Investment Operations...... (1.110) 1.697 .287 (1.111) .471
-------- -------- -------- -------- --------
Less:
Distributions from and in Excess of
Net Investment Income(2)........... .768 .866 .328 .768 .320
Distributions from and in Excess of
Net Realized Gains(2).............. .000 .000 .132 .000 .000
-------- -------- -------- -------- --------
Total Distributions................... .768 .866 .460 .768 .320
-------- -------- -------- -------- --------
Net Asset Value,
End of Period........................ $ 14.261 $ 16.139 $ 15.308 $ 14.262 $ 16.141
======== ======== ========= ======== ========
Total Return (Non-annualized)(1)...... (6.96%) 11.33% 1.90% (6.97%) 2.96%
Net Assets at End of Period
(in millions)........................ $ 158.7 $ 168.2 $ 48.4 $ 3.9 $ 4.1
Ratio of Expenses to Average Net
Assets (annualized)(1)............... 1.70% 1.65% 1.66% 1.74% 1.85%
Ratio of Net Investment Income to
Average Net Assets(1) (annualized)... 5.22% 5.19% 5.23% 5.19% 3.95%
Portfolio Turnover.................... 74.96% 81.78% 91.57% 74.96% 81.78%
</TABLE>

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

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

See Financial Statements and Notes Thereto

11
<PAGE> 124

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

Van Kampen Merritt Municipal Income Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Tax Free Fund (the "Trust"), which
is an open-end management investment company, commonly known as a "mutual fund,"
organized as a Massachusetts 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.

- --------------------------------------------------------------------------------
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 ("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 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.

12
<PAGE> 125

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.

- --------------------------------------------------------------------------------
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> 126

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 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

14
<PAGE> 127

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."

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.

15
<PAGE> 128

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

16
<PAGE> 129

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 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."

17
<PAGE> 130

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 objectives 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.

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.

18
<PAGE> 131

- --------------------------------------------------------------------------------
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.

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.

19
<PAGE> 132

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.

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund has designated three classes of 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") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The Fund
reserves the right to suspend or terminate the continuous public offering of its
shares at any time and without prior notice.

ALTERNATIVE SALES ARRANGEMENTS

20
<PAGE> 133

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 $1,000,000
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 $1,000.
For purposes of purchasing shares of the Fund, "any person" shall have the
meaning set forth in the section of the Prospectus captioned "Purchasing Shares
of the Fund -- Initial Sales Charge Alternative -- Quantity Discounts." The
minimum subsequent investment with respect to each class of shares is $100. 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 $1,000,000 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 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.

21
<PAGE> 134

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 "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 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 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
securities 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. See "Net Asset
Value."

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

22
<PAGE> 135

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, 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. In addition, the Distributor
is sponsoring a sales contest for INVEST Financial Corporation ("INVEST")
relating to the Fund and other funds distributed by the Distributor, pursuant to
which the Distributor may provide an INVEST broker an award valued up to $750.00
for sales of such funds during the period April 1, 1995, through May 31, 1995.
Such payments 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.

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES

The public offering price of Class A Shares for purchasers choosing the
initial sales charge alternative 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

23
<PAGE> 136

90% or more of the sales charge may be deemed to be "underwriters" as that term
is defined in the Securities Act of 1933.

<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
$1,000,000 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% 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 "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if an investor is not making an
investment of a size that normally would qualify for a quantity discount).
Investors, or their broker, dealer or financial intermediary, 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.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act of 1940 (the "Investment Company Act").

24
<PAGE> 137

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares, "any
person" may combine their current purchase with the current public offering
price of Class A Shares of the Fund or ISC Shares, which are owned by such
person. If the account an investor is combining for rights of accumulation
differs from the account into which the investor's current purchase is placed,
the investor must indicate to the Transfer Agent the account number (and, if
applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor agree to
refund the appropriate portion of their respective concessions to the Fund, the
sales charge on an investor's previous purchases made within 90 days may be
adjusted to the reduced sales charge under the Letter of Intent, and the
refunded concession will be used to purchase shares of the Fund at the public
offering price next determined after receipt of such monies. Each investment
made after signing the Letter of Intent will be entitled to the initial sales
charge applicable to the total investment indicated in the Letter of Intent. If
an investor does not complete the necessary purchases under the Letter of Intent
within 13 months from the date of the first purchase included thereunder, the
sales charge will be adjusted upward, corresponding to the amount actually
purchased.

When an investor signs a Letter of Intent, Class A Shares of the Fund
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these Class A Shares cannot be sold or redeemed
until the Letter of Intent is satisfied or the additional sales charges have
been paid. If the total purchases made under the Letter of Intent, less
redemptions, equal or exceed the amount specified in the Letter of Intent, these
Class A Shares will no longer be restricted. If the total purchases, less
redemptions, exceed the amount so specified, and qualify an investor for a
further quantity discount, the Distributor and the investor's securities broker,
dealer or financial intermediary will, upon request, remit their respective
portions of the sales concession and with that amount, purchase additional Class
A Shares of the Fund for the investor's account at the next determined public
offering price. If an investor does not complete the necessary purchases under
the Letter of Intent, the sales charges will be adjusted upward and if, after
written notice, the investor does not pay the increased sales charge, sufficient
restricted Class A Shares will be redeemed to pay such charge.

25
<PAGE> 138

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.

1. 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 and other ISC Shares 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 dealer or broker, 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 securities broker or dealer or the Distributor.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

(b) Current or retired directors, officers and employees of VK/AC Holdings,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc., employees
of an investment

26
<PAGE> 139

subadviser to any such fund or an affiliate of such subadviser; and such
persons' families and their beneficial accounts.

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 other financial
intermediaries which percentage rate will be equal to (i) 1.00% with respect to
Class A Shares in an amount of $1 million or more; (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. Sales compensation with
respect to Class A Shares subject to a CDSC is set forth under "Purchasing
Shares of the Fund--Initial Sales Charge Alternative".

27
<PAGE> 140

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 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.

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).

28
<PAGE> 141

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <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>

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.

29
<PAGE> 142

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 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 Internal Revenue
Code of 1986, as amended (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.

- --------------------------------------------------------------------------------
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.

30
<PAGE> 143

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 information under the "Distributions" section of the
Account Application bound in this Prospectus or available from State Street Bank
and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, P.O. Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent"). After
the Transfer Agent receives this completed form, distribution checks will be
sent to the bank or other person so designated by such shareholder.

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

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular fund and the class designations of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
the signature(s) must be guaranteed by a member firm of a principal stock
exchange, a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Dwight Building, Sixth
Floor, Kansas City, MO 64105-1807. Shareholders will receive the net asset value
per share next computed after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.

31
<PAGE> 144

TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For inquiries through Telecommunications Device for the Deaf (TDD),
dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m. Central Standard
Time. There is a $500 minimum and a $1,000,000 maximum per request if the
redemption proceeds are to be mailed to the shareholder. If the redemption
proceeds are to be wired to a bank there is a minimum of $5,000 and a $1,000,000
maximum per request. Prior to redeeming shares by telephone the "Expedited
Telephone Redemption" section of either the Account Application or Expedited
Telephone Redemption and Exchange Request Form (the "Authorization") must be
completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association unless the
Authorization is completed at the time an account is originally established. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. A redemption requested by telephone will be processed at the net
asset value next determined after receipt of the request. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder. The proceeds would then be made payable to the registered
shareowner(s) and mailed to the address registered on the account or wired to a
bank, as requested on the Authorizations. Shareholders cannot redeem shares by
telephone if stock certificates are held for those shares. This service is not
available with respect to shares held in an Individual Retirement Account for
which State Street Bank and Trust Company acts as custodian. In addition, this
service is not available with respect to shares purchased by check until 15 days
after purchase.

By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized. The Fund, the Distributor, the Transfer Agent and National Financial
Data Services, Inc. ("NFDS") employ procedures reasonably believed to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring a person attempting to redeem shares by telephone to provide, on a
recorded line, the name on the account, a social security number or tax
identification number and such additional information as may be included in the
Authorization. In addition, a shareholder agrees that none of the Fund, the
Distributor, the Transfer Agent or National Financial Data Services will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent or unauthorized request. This service may be amended or
terminated at any time by the Transfer Agent or the Fund. If a shareholder is
unable to reach the Fund by telephone, he or she may redeem shares pursuant to
the procedures set forth above under the caption "Written Redemption Request."
During periods of extreme economic or market changes, it may be difficult for
investors to reach the Fund by telephone and to effect telephone redemptions.

32
<PAGE> 145

REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the shareholder's
broker, dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, sell orders placed through a
shareholder'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 shareholder's order to be fulfilled on the basis of the
net asset value to be determined that day. Any change in the redemption price
due to the failure of the Distributor to receive a sell order prior to such time
must be settled between the shareholder and the broker, dealer or financial
intermediary submitting the order. The Fund does not charge for this transaction
(other than any applicable contingent deferred sales charge). Shareholders must
submit a written redemption request in proper form to their securities dealer
within five business days after calling the dealer with the sell order. The
request should indicate the number of shares to be redeemed and the class
designation of such shares, identify the account number and the order or
confirmation number assigned to the trade and be signed by the shareholder
exactly as the shares are registered. If the amount of the redemption exceeds
$50,000 or if the redemption proceeds will be sent to an address other than the
address of record, signature(s) must be guaranteed by a member firm of a
principal stock exchange, a commercial bank or trust company which is a member
of the Federal Deposit Insurance Corporation, a credit union or a savings
association. The guarantee must state the words "Signature Guaranteed" along
with the name of the granting institution. Shareholders should verify with the
institution that it is an eligible guarantor prior to signing. A guarantee from
a notary public is not acceptable. If certificates are held for the shares being
redeemed, such certificates must be sent endorsed for transfer or accompanied by
an endorsed stock power. Certificates should be sent by registered mail to State
Street Bank and Trust Company, c/o National Financial Data Services, Van Kampen
Merritt Funds, 1004 Baltimore Avenue, Dwight Building, Sixth Floor, Kansas City,
MO 64105-1807. Shareholders whose shares are held in an Individual Retirement
Account ("IRA") for which State Street Bank and Trust Company acts as custodian
may not sell their shares through their securities dealers.

33
<PAGE> 146

require satisfactory proof of disability before it determines to waive the CDSC
on Class B Shares.

In cases of disability, the CDSC on Class B 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 CDSC on Class B
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. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer, as the case may be,
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.

The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.

- --------------------------------------------------------------------------------
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 more
frequently than once a day if deemed desirable. The net asset

34
<PAGE> 147

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 sub-trust. 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.

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

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 The Van Kampen
American Capital, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc.

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<PAGE> 148

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 the Adviser,
Van Kampen American Capital Distributors, Inc. or Van Kampen American Capital,
Inc.), 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.

PORTFOLIO MANAGEMENT. David C. Johnson, a First 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.

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

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<PAGE> 149

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 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,
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.
- --------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- --------------------------------------------------------------------------------

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 Investment
Company Act of 1940. 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 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 each class. The Distribution
Plan and the Service Plan are being implemented through an 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, 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. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

37
<PAGE> 150

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 financial intermediaries and in
connection with the maintenance of such shareholders' accounts.

38
<PAGE> 151

expenses with respect to Class B Shares and Class C Shares, respectively,
representing 0.06% and 0.00% 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.

- --------------------------------------------------------------------------------
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 Internal
Revenue Code of 1986, as amended (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. As a sub-trust of a
Massachusetts business trust, the Fund will not be subject to any excise or
income taxes in Massachusetts as long as each qualifies as a regulated
investment company for federal income tax purposes. 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

39
<PAGE> 152

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.

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.

40
<PAGE> 153

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.

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.

41
<PAGE> 154

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.

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.

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
Upon written or telephone request to the Fund, however, 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. In addition, if such certificates are lost the shareholder must
write to State Street Bank and Trust Company, c/o National Financial Data
Services, P.O. Box 419001, Kansas City, MO 64141-6001, Attn: Van Kampen Merritt
Funds, requesting an "affidavit of loss" and to obtain a Surety Bond in a form
acceptable to the Transfer Agent. On the date the letter is received the
Transfer Agent will calculate no more than 2.00% of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Shares account or
Class B Shares account is valued at $10,000 or more, such shareholder's
dividends are being reinvested and the shareholder's account is held in the Open
Account Program, a requested dollar amount may be paid from such account to any
person monthly, quarterly, semiannually or annually. The minimum amount that may
be withdrawn each period is $50; withdrawals will be made on the seventh
business day of the month in which they are scheduled to occur. Depending upon
the size of the payments requested and the fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the amounts in such account. If an investor acquires
additional shares of the Fund after joining the Systematic Withdrawal Program,
the investor must inform the Fund if he or she wants the new shares to be
subject to the Systematic Withdrawal Program by telephoning the Fund at
1-800-341-2911.

42
<PAGE> 155

Class B Shares on the date the investor elects to participate in the Systematic
Withdrawal Program. The Fund will waive the contingent deferred sales charge
applicable to Class B Shares redeemed pursuant to the Fund's Systematic
Withdrawal Program.

It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge, or will become
subject to a contingent deferred sales charge, in order to purchase shares at
the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, the Fund will not knowingly permit a
shareholder to make additional investments in shares of less than $5,000 if at
the same time such shareholder is making systematic withdrawals at a rate
greater than the distribution being paid on such shareholder's shares. The Fund
reserves the right to amend or terminate the systematic withdrawal program on
thirty days' notice, and a shareholder may withdraw from the program at any
time.

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days will be able to be exchanged for
ISC Shares of other Van Kampen Merritt mutual funds distributed by the
Distributor that offer an exchange privilege. Under the exchange privilege, the
Fund will offer to exchange its Class A Shares for ISC Shares on the basis of
relative net asset value per share. Any ISC Shares exchanged into the Fund that
have been charged a sales load lower than the sales load applicable to Class A
Shares of the Fund will be charged the applicable sales load differential upon
exchange. ISC Shares of the Van Kampen Merritt Money Market Fund and Van Kampen
Merritt Tax Free Money Fund which have not previously been charged a sales load
(except for shares purchased via the reinvestment option) will be charged the
applicable sales load upon exchange into the Fund.

Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be 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.

43
<PAGE> 156

requesting the exchange. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m.
Central Standard Time. The exchange will be processed at the net asset value
next determined after receipt of such request. By utilizing the telephone
exchange service, a shareholder authorizes the Fund or the Transfer Agent to act
upon the instructions of any person by telephone to exchange shares from any
account for which such service has been authorized to any identically registered
account(s) with any Van Kampen Merritt fund distributed by the Distributor that
offers an exchange privilege. In addition, a shareholder agrees that none of the
Fund, the Distributor, the Transfer Agent or National Financial Data Services
("NFDS") will be liable for any loss, liability, cost or expense arising out of
any request, including any fraudulent request. The staff of the SEC currently is
reviewing its position with respect to such agreements. This service may be
amended or terminated at any time by the Transfer Agent or the Fund. If a
shareholder has certificates for any shares being exchanged, such certificates
must be surrendered prior to the exchange in the same manner as in redemption of
such shares. See "Redemption of Shares -- Telephone Redemptions". Any shares
exchanged between the Fund and any of the other funds will begin earning
dividends on the next business day after the exchange is effected. 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.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).

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<PAGE> 157

2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.

3. Dividend Diversification. Monthly distributions and any net long-term
capital gain distributions to a shareholder's account may be invested in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE,
upon election by a shareholder. This election may be made on the account
application bound in this Prospectus, by written notice to the Transfer Agent or
by calling the Fund directly at 1-800-341-2911, during the hours of 7:00 a.m. to
7:00 p.m. Central Standard Time. For inquiries through Telecommunications Device
for the Deaf (TDD), dial 1-800-772-8889. In order to qualify for this privilege,
a shareholder must have established an account in the other mutual fund prior to
electing this privilege. This privilege may be modified or terminated by the
Fund at any time.

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
application attached to this Prospectus or the EASESM application which is
available from the Transfer Agent, the Fund, such shareholder's broker or dealer
or the Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASESM program, a shareholder may
change the monthly amount or terminate participation at any time by writing or
calling the Transfer Agent. Shareholders in the EASESM program will receive a
confirmation of these transactions from the Fund monthly, and their regular bank
account statements will show the debit transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the Application in performing such services by either
withdrawing funds for deposit in the Fund pursuant to the EASESM Plan or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election and/or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.

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<PAGE> 158

may repurchase Class C Shares of the Fund, or shares of other Van Kampen Merritt
mutual funds distributed by the Distributor with credit given for any contingent
deferred sales charge paid upon such redemption.

- --------------------------------------------------------------------------------
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.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.

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

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<PAGE> 159

accounts. When an initial investment is made in the Fund, an account will be
opened for each shareholder on the Fund's books and shareholders will receive a
confirmation of the opening of the account. Shareholders will receive monthly
statements giving details of all activity in their account(s) during the quarter
and will also receive a statement whenever an investment or withdrawal is made
in or from their account. Information for federal income tax purposes will be
provided at the end of the year. Such statements will present separately
information with respect to each class of the Fund's shares. It is expected that
the transfer agency costs attributable to the Class B Shares and Class C Shares
will be higher than the transfer agency costs attributable to the Class A
Shares.

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

The Fund is a sub-trust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust organized August 15, 1985 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust.

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 Class B Shareholders 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 Investment Company Act of
1940. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.

47
<PAGE> 160

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

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 annual report, containing financial statements audited by
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 The Van Kampen Merritt Family of
Funds, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence. Its telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.

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

48
<PAGE> 161

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344

VAN KAMPEN MERRITT
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
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt 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> 162

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT
OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT MUNICIPAL INCOME FUND

The 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 sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts 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 April 30, 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 1-800-341-2911. 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-21
Portfolio Transactions and Brokerage Allocation....................................... B-23
Tax Status of the Fund................................................................ B-24
The Distributor....................................................................... B-24
Legal Counsel......................................................................... B-25
Performance Information............................................................... B-25
Independent Auditors' Report.......................................................... B-28
Financial Statements.................................................................. B-29
Notes to Financial Statements......................................................... B-42
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

B-1
<PAGE> 163

THE FUND AND THE TRUST

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

The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated August 15,
1985. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts 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 sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust 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.

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

B-2
<PAGE> 164

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.

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.

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.

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
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> 165

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 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> 166

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, 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.

B-5
<PAGE> 167

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 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.

B-6
<PAGE> 168

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.

B-7
<PAGE> 169

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.

B-8
<PAGE> 170

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.

B-9
<PAGE> 171

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.

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.

B-10
<PAGE> 172

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.

B-11
<PAGE> 173

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.

B-12
<PAGE> 174

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.

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> 175

<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> 176

<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> 177

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> 178

<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.

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.

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> 179

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 officers and Trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with the Adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
Van Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc., and Van Kampen American Capital Management, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

PHILIP G. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co.

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.

B-18
<PAGE> 180

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

Executive Vice President, General Counsel and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer

One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.

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

* Interested persons of each respective Fund as defined in the 1940 Act.

B-19
<PAGE> 181

Each of the foregoing trustees of the Fund acts as a trustee for other
investment companies advised by the Adviser, and each of the foregoing officers
holds the same positions with other investment companies advised by the Adviser.

The compensation of the officers and trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
trustees of the Fund. During the next year, the Fund expects to pay trustees who
are not affiliated persons of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital Companies, Inc. $2,500 per
year, and $250 per meeting of the Board of Trustees, plus expenses. Under the
Fund's retirement plan, trustees who are not affiliated with the Adviser, Van
Kampen American Capital Distributors, Inc. or Van Kampen American Capital, Inc.,
have at least ten years of service and retire at or after attaining the age of
60, are eligible to receive a retirement benefit equal to the annual retainer
for each of the ten years following such trustee's retirement. Under certain
conditions, reduced benefits are available for early retirement. Under the
Fund's deferred compensation plan, a trustee who is not affiliated with the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc. can elect to defer receipt of all or a portion of the trustee's
fees earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
Van Kampen Merritt mutual funds advised by the Adviser as selected by the
trustee. To the extent permitted by the Investment Company Act, the Fund may
invest in securities of other Van Kampen Merritt mutual funds advised by the
Adviser in order to match the deferred compensation obligation. The deferred
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund.

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 $0 $2,500 $62,362
Philip G. Gaughan.............. 21,928 0 2,500 63,250
Donald C. Miller............... 23,768 0 2,500 62,178
Jack A. Nelson................. 23,858 0 2,500 62,362
Jerome L. Robinson............. 23,801 0 2,500 58,475
Wayne W. Whalen................ 17,553 0 2,500 49,875
</TABLE>

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

(1) Messrs. Merritt and McDonnell, Trustees of each Fund during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Funds.

(2) The Registrant is Van Kampen Merritt Tax Free Fund (the "Trust") which
currently is comprised of 8 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of each
of these 8 sub-trusts during such sub-trust's last completed fiscal year
prior to the date of this Statement of Additional Information. Beginning in
October 1994 each Trustee, except Messrs. Gaughan and Whalen, began
deferring his entire aggregate compensation paid by the Fund. The total
combined amount of deferred compensation (including interest) accrued with
respect to each Trustee 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. As of the
end of the Fund's 1994 fiscal year, no amounts had been accrued for
retirement benefits because such amounts were either zero or considered to
be immaterial to the net assets of the Fund at such time. During the Fund's
1995 fiscal year, the Fund will accrue amounts for retirement benefits and
include an amount, if any, for such Fund's 1994 fiscal year.

B-20
<PAGE> 182

(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, retires at or after attaining the age of 60 and the annual retainer in
the year prior to the Trustee's retirement is $2,500. 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) The Fund Complex consists of 20 mutual funds advised by the Adviser. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 20 mutual funds in the Fund Complex during each fund's last
completed fiscal year prior to the date of this Statement of Additional
Information. The Adviser also serves as investment adviser for other mutual
funds and closed-end investment companies; however, with the exception of
Messrs. Merritt, McDonnell and Whalen, such mutual funds and closed-end
investment companies do not have the same trustees as the Fund Complex.
Combining the Fund Complex with other mutual funds and investment companies
advised by the Adviser, Mr. Whalen received Total Compensation of $161,850.

As of April 13, 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.

The authorized stock of the Fund currently consists of an unlimited number of
full and fractional shares of beneficial interest, without par value.

To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of April 13, 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, 6%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen Merritt Investment Advisory Corp. (the "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 6% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 10% of the common stock of VK/AC Holding, Inc.

B-21
<PAGE> 183

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 sub-trust, 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 sub-trust (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.

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 the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
to the Transfer Agent if the Transfer Agent had provided such services. 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. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor,
share 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 also entered into an accounting
services agreement pursuant to which the 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 Merritt mutual funds
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 Merritt 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 Adviser's cost of providing accounting services.

B-22
<PAGE> 184

the Fund's minute books and records, preparation and oversight of the Fund's
regulatory reports, and other information provided to shareholders, as well as
responding to day-to-day legal issues on behalf of the Fund. 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. The Fund, and the other Van Kampen Merritt mutual funds
distributed by the Distributor, share one half (50%) of such costs equally. The
remaining one half (50%) of such costs are allocated to specific funds based on
specific time allocations, or in the event services are attributable only to
types of funds (i.e. closed-end or open-end), the relative amount of time spent
on each type of fund and then further allocated between funds of that type based
upon their respective net asset values.

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, Inc.'s cost of providing legal
services.

CUSTODIAN AND INDEPENDENT AUDITORS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

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.

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

B-23
<PAGE> 185

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 sub-trust.

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.

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 DISTRIBUTOR

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 banks 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

B-24
<PAGE> 186

and banks 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 and/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.

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.

B-25
<PAGE> 187

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 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%.

B-26
<PAGE> 188

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%.

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

(Shares of the Fund referred to as Class C Shares in this Prospectus were
referred to as Class D Shares in prospectuses dated prior to March 7, 1994.)

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-27
<PAGE> 189

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-28
<PAGE> 190

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-29

<PAGE> 191

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-30
<PAGE> 192

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-31
<PAGE> 193

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-32
<PAGE> 194

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-33
<PAGE> 195

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-34

<PAGE> 196

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-35
<PAGE> 197

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-36

<PAGE> 198

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-37
<PAGE> 199

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-38

<PAGE> 200

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-39

<PAGE> 201

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-40

<PAGE> 202

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-41
<PAGE> 203

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.

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-42
<PAGE> 204

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.

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-43
<PAGE> 205

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>

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.

B-44
<PAGE> 206

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>

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 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-45
<PAGE> 207

Van Kampen Merritt Municipal Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
December 31, 1994

6. Distribution and Service Plans

B-46

<PAGE> 208

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

VAN KAMPEN MERRITT
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.

The Van Kampen Merritt Insured Tax Free Income Fund (the "Insured Fund") is
a separate diversified mutual fund, organized as a sub-trust of Van Kampen
Merritt Tax Free Fund. 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 MERRITT
CALIFORNIA INSURED TAX FREE FUND

The Van Kampen Merritt California Insured Tax Free Fund (the "California
Insured Fund") is a separate diversified mutual fund, organized as a sub-trust
of Van Kampen Merritt Tax Free Fund. The California Insured Fund's investment
objective is to provide only California
(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 April 30, 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 1-800-225-2222, ext. 6504,
or for Telecommunication Device for the Deaf, 1-800-772-8889.

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

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

THIS PROSPECTUS IS DATED APRIL 30, 1995.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 209

(Continued from previous page.)

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 of the Insured Fund and the California Insured Fund
(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) 225-2222, ext. 6504.

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 0.30% 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 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 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 "Purchasing Shares of the Fund."

2
<PAGE> 210

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......... 9
Annual Fund Operating Expenses and Examples -- California Insured
Fund.............................................................. 10
Financial Highlights................................................ 13
The Funds........................................................... 17
Investment Objectives and Policies.................................. 17
Municipal Securities................................................ 18
Investment Practices................................................ 21
Insurance........................................................... 24
Purchasing Shares of the Funds...................................... 24
Distributions from the Funds........................................ 35
Purchase of Additional Shares With Distributions.................. 36
Redemption of Shares................................................ 36
Net Asset Value..................................................... 39
Fund Performance.................................................... 40
Tax Status.......................................................... 42
Investment Advisory Services........................................ 45
The Distribution and Service Plans.................................. 47
Allocation of Brokerage Transactions................................ 49
Shareholder Programs................................................ 49
Shareholder Services................................................ 53
Shareholder Reports and Inquiries................................... 53
Additional Information.............................................. 54
</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> 211

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

THE FUNDS The Van Kampen Merritt Insured Tax Free Income Fund and Van Kampen
Merritt California Insured Tax Free Fund (each a "Fund" and collectively the
"Funds") each is a separate diversified sub-trust of Van Kampen Merritt Tax Free
Fund, an open-end, diversified management investment company organized as a
Massachusetts business trust. See "The Funds."

INVESTMENT OBJECTIVES AND POLICIES 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."

Municipal securities in which 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."

INSURANCE Each municipal security in the portfolio of the Insured Fund and the
California Insured Fund is insured as to the timely payment of principal and
interest under one or more policies obtained by the issuer or purchased by such
Funds. No representation is made as to the ability of any insurer to perform its
obligations. See "Insurance."

ALTERNATIVE SALES ARRANGEMENTS The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the

4
<PAGE> 212

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 Examples" sets forth examples of the charges
applicable to each class of shares.

The Funds 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.

The minimum initial investment with respect to the Class A Shares, Class B
Shares and Class C Shares is $1,000. The minimum subsequent investment with
respect to each class of shares is $100.

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 0.30% 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 contingent deferred sales charge.

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 contingent
deferred sales charge 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 contingent deferred sales charge 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 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.

5
<PAGE> 213

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 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.
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.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for both of the Funds.
The annual advisory fee for each Fund is 0.50% of its average daily net assets,
reduced on net assets over certain amounts. See "Investment Advisory Services."

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."

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. Both Funds may require redemption of their shares if
the value of the account in the respective Fund is $500 or less. See "Redemption
of Shares."

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

6
<PAGE> 214

- --------------------------------------------------------------------------------
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 original purchase
price on redemption proceeds)... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
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.

7
<PAGE> 215

- --------------------------------------------------------------------------------
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)....................................... 0.42% 0.42% 0.42%
12b-1 Fees(1) (as a percentage of average daily net
assets)........................................... 0.24%(2) 1.00% 1.00%
Other expenses (as a percentage of average daily net
assets)........................................... 0.22% 0.29% 0.28%
Total (as a percentage of average daily net
assets)........................................... 0.88% 1.71% 1.70%
</TABLE>

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

(1) 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' broker-dealers as sales compensation.

(2) 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 0.30% 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> 216

- --------------------------------------------------------------------------------
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 original
purchase price on redemption
proceeds)..................... None(2) Year 1--3.0% Year 1--1.00%
Year 2--2.5%
Year 3--2.0%
Year 4--1.0%
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.

9
<PAGE> 217

- --------------------------------------------------------------------------------
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)................................. 0.18% 0.18% 0.18%
12b-1 Fees(2) (as a percentage of average daily net
assets).......................................... 0.30% 1.00% 1.00%
Other Expenses (as a percentage of average daily
net assets)...................................... 0.30% 0.34% 0.33%
Total(1) (as a percentage of average daily net
assets).......................................... 0.78% 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" 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.

(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.

10
<PAGE> 218

EXAMPLES

You would pay the following expenses on a $1,000 investment in the Insured
Fund, assuming (i) an operating expense ratio of 0.88% for Class A Shares, 1.71%
for Class B Shares and 1.70% for Class C Shares, (ii) a 5% annual return and
(iii) redemption at the end of each time period. The 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.......................... $ 56 $74 $ 94 $ 151
Class B Shares.......................... 57 89 108 170
Class C Shares.......................... 27 54 92 201
</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.......................... $ 56 $74 $ 94 $ 151
Class B Shares.......................... 17 54 93 170
Class C Shares.......................... 17 54 92 201
</TABLE>

You would pay the following expenses on a $1,000 investment in the California
Insured Fund, assuming (i) an operating expense ratio of 0.78% 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. The 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 $57 $ 74 $ 126
Class B Shares.......................... 45 68 83 143
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 $57 $ 74 $ 126
Class B Shares.......................... 15 48 83 143
Class C Shares.......................... 15 48 82 180
</TABLE>

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Funds 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 Funds' 12b-1 plans and service plans, it is
anticipated that 12b-1 and service fees applicable to such Funds will increase
in accordance with such plans to a maximum amount of 0.30% of each Fund's net
assets. Additionally, as California Fund assets increase, the fees waived or
expenses reimbursed by the Adviser are expected to decrease. Accordingly, it is
unlikely

11
<PAGE> 219

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 each 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> 220

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(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 each of the Funds 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 each 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 YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning
of
Period.... $ 19.587 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394 $ 16.700 $ 17.945
-------- -------- -------- -------- -------- -------- -------- --------
Net
Investment
Income... 1.051 1.107 1.146 1.153 1.160 1.182 1.184 1.198
Net
Realized
and
Unrealized
Gain/Loss
on
Invest-
ments... (2.280) 1.145 .561 .681 .037 .391 .682 (1.226)
-------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment
Operations... (1.229) 2.252 1.707 1.834 1.197 1.573 1.866 (.028)
-------- -------- -------- -------- -------- -------- -------- --------
Less:
Distributions
from Net
Investment
Income... 1.056 1.116 1.140 1.160 1.170 1.169 1.172 1.215
Distributions
from Net
Realized
Gain.... -0- -0- .324 .021 -0- -0- -0- .002
Total
Distri-
butions... 1.056 1.116 1.464 1.181 1.170 1.169 1.172 1.217
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset
Value, End
of
Period.... $ 17.572 $ 19.857 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394 $ 16.700
======== ======== ======== ======== ======== ======== ======== ========
Total
Return
(Non-
annual-
ized)... (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37% 11.48% .27%
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
Ratio of
Expenses
to Average
Net Assets
(annualized)... .88% .84% .83% .88% .87% .88% .85% .71%
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%
Portfolio
Turnover... 48.46% 78.73% 111.90% 113.25% 107.79% 81.28% 132.85% 119.89%
</TABLE>

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

See Financial Statements and Notes Thereto

13
<PAGE> 221

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

FINANCIAL HIGHLIGHTS--CONTINUED

(for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
INSURED FUND --
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------- --------------------------- ---------------------------
MAY 1, AUGUST 13,
1993 1993
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR YEAR YEAR DISTRIBUTION) YEAR DISTRIBUTION)
ENDED ENDED ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1986 1985 1994 1993 1994 1993
------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 16.189 $ 14.474 $ 19.824 $19.320 $ 19.823 $19.650
-------- -------- -------- ------- -------- -------
Net Investment Income............... 1.249 1.220 .899 .619 .908 .350
Net Realized and Unrealized
Gain/Loss on Investments.......... 1.846 1.780 (2.276) .513 (2.279) .181
-------- -------- -------- ------- -------- -------
Total from Investment
Operations.......................... 3.095 3.000 (1.377) 1.132 (1.371) .531
-------- -------- -------- ------- -------- -------
Less:
Distributions from Net Investment
Income............................ 1.231 1.285 .884 .628 .884 .358
Distributions from Net Realized
Gain.............................. .108 -- -- -- -- --
-------- -------- -------- ------- -------- -------
Total Distributions.................. 1.339 1.285 .884 .628 .884 .358
-------- -------- -------- ------- -------- -------
Net Asset Value, End
of Period........................... $ 17.945 $ 16.189 $ 17.563 $19.824 $ 17.568 $19.823
======== ======== ======== ======= ======== =======
Total Return (Non-annualized)........ 19.73% 21.08% (7.03%) 5.92% (6.98%) 2.70%
Net Assets at End of Period
(in millions)....................... $ 418.1 $ 188.2 $ 30.0 $ 20.8 $ 3.5 $ 5.0
Ratio of Expenses to Average Net
Assets (annualized)................. .76% .89% 1.71% 1.68% 1.70% 1.68%
Ratio of Net Investment Income to
Average Net Assets (annualized)..... 7.07% 8.00% 4.88% 4.25% 4.89% 4.21%
Portfolio Turnover................... 31.00% 98.19% 48.46% 78.73% 48.46% 78.73%
</TABLE>

See Financial Statements and Notes Thereto

14
<PAGE> 222

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

FINANCIAL HIGHLIGHTS--CONTINUED

(for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period... $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227 $ 14.719
-------- -------- -------- -------- -------- -------- -------
Net Investment
Income.............. .912 .967 1.004 .990 .990 .988 .981
Net Realized and
Unrealized Gain/Loss
on Investments...... (2.484) 1.441 .585 .529 .123 .381 .519
-------- -------- -------- -------- -------- -------- -------
Total from Investment
Operations............ (1.572) 2.408 1.589 1.519 1.113 1.369 1.500
Less Distributions from
Net Investment
Income................ .912 .980 .990 .990 .990 .989 .992
-------- -------- -------- -------- -------- -------- -------
Net Asset Value, End of
Period................ $ 15.802 $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227
======== ======== ======== ======== ======== ======== ========
Total Return(1)
(Non-annualized)...... (8.75%) 14.54% 10.08% 9.98% 7.44% 9.22% 10.51%
Net Assets at End of
Period (in
millions)............. $ 130.3 $ 151.1 $ 74.2 $ 60.2 $ 50.6 $ 46.6 $ 37.3
Ratio of Expenses to
Average Net Assets(1)
(annualized).......... .78% .69% .69% .55% .69% .75% .65%
Ratio of Net Investment
Income to Average Net
Assets(1)
(annualized).......... 5.46% 5.37% 6.07% 6.20% 6.42% 6.38% 6.53%
Portfolio Turnover..... 56.38% 36.17% 60.70% 69.85% 34.03% 32.18% 100.50%
</TABLE>

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

(1) If certain expenses had not been assumed or waived by the investment
adviser, the Total Return would be reduced and the ratios would have been as
follows:

<TABLE>
<S> <C> <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% 1.11%
Ratio of net investment
income to average net
assets (annualized)... 5.16% 5.05% 5.68% 5.71% 6.05% 6.04% 6.08%
</TABLE>

See Financial Statements and Notes Thereto

15
<PAGE> 223

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

FINANCIAL HIGHLIGHTS--CONTINUED

(for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------------------------- ----------------------------- -----------------------------
MAY 1, AUGUST 13,
DECEMBER 13, 1993 1993
1985 (COMMENCEMENT (COMMENCEMENT
(COMMENCEMENT OF OF
YEAR YEAR OF INVESTMENT YEAR DISTRIBUTION) YEAR DISTRIBUTION)
ENDED ENDED OPERATIONS) TO ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1987 1986 1985 1994 1993 1994 1993
------------ ------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period.......... $ 16.274 $ 14.464 $ 14.265 $ 18.266 $ 17.570 $ 18.257 $ 18.010
-------- -------- -------- -------- -------- -------- --------
Net Investment
Income........... 1.041 1.034 .024 .785 .549 .773 .307
Net Realized and
Unrealized
Gain/Loss
on Investments... (1.566) 1.832 .175 (2.482) .705 (2.486) .258
-------- -------- -------- -------- -------- -------- --------
Total from
Investment
Operations......... (.525) 2.866 .199 (1.697) 1.254 (1.695) .565
Less Distributions
from Net Investment
Income............. 1.030 1.056 .000 .764 .558 .764 .318
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End
of Period.......... $ 14.719 $ 16.274 $ 14.464 $ 15.805 $ 18.266 $ 15.718 $ 18.257
======== ======== ========== ======== ======== ======== ========
Total Return(1)
(Non-annualized)... (2.72%) 20.01% 1.19% (9.39%) 7.25% (9.40%) 3.17%
Net Assets at End of
Period
(in millions)...... $ 31.5 $ 12.9 $ 1.1 $ 17.1 $ 15.3 $ 2.8 $ 4.0
Ratio of Expenses to
Average Net
Assets(1)
(annualized)....... .14% .16% 1.01% 1.52% 1.45% 1.51% 1.45%
Ratio of Net
Investment Income
to Average Net
Assets(1)
(annualized)....... 7.02% 6.05% 3.18% 4.71% 4.06% 4.71% 3.82%
Portfolio
Turnover........... 68.82% 21.45% 0% 56.38% 36.17% 56.38% 36.17%
- ----------------
(1) If certain expenses had not been assumed or waived by the investment adviser, the Total Return would be reduced and the
ratios would have been as follows:

Ratio of expenses to
average net assets
(annualized)....... .97% 2.98% 1.51% 1.82% 1.77% 1.82% 1.76%
Ratio of net
investment income
to average net
assets
(annualized)....... 6.19% 3.23% 2.68% 4.41% 3.74% 4.39% 3.52%
</TABLE>

See Financial Statements and Notes Thereto

16
<PAGE> 224

- --------------------------------------------------------------------------------
THE FUNDS
- --------------------------------------------------------------------------------

The Insured Fund and the California Insured Fund are each separate diversified
sub-trusts of Van Kampen Merritt Tax Free Fund (the "Trust"), an open-end
management investment company, commonly known as a "mutual fund," which is
organized as a Massachusetts 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 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> 225

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.

- --------------------------------------------------------------------------------
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.

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 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

18
<PAGE> 226

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 the Statement
of Additional Information.

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 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
(Moody's) (Aaa, Aa, A and Baa); (2) in the case of short-term notes,

19
<PAGE> 227

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 Statements 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.

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

20
<PAGE> 228

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 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.

21
<PAGE> 229

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.

Income earned or deemed to be earned, if any, by the 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 transac-

22
<PAGE> 230

tions 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 of
the Funds' respective assets which may be used to acquire securities on a "when
issued" or "delayed delivery" basis. To the extent the Funds engage in "when
issued" and "delayed delivery" transactions, they will do so for the purpose of
acquiring securities for the Funds' respective portfolios consistent with the
Funds' respective investment objectives and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of the
Funds' assets which may be used to acquire securities on a "when issued" or
"delayed delivery" basis.

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 Advisor, 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,

23
<PAGE> 231

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.

- --------------------------------------------------------------------------------
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 Insured Fund's and the California Insured Fund's
Statements of Additional Information.

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUNDS
- --------------------------------------------------------------------------------

The Funds currently offer three classes of shares as discussed below. 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

24
<PAGE> 232

National Association of Securities Dealers, Inc. ("NASD") who are acting as
securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). 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.

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."

25
<PAGE> 233

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 "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 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.

26
<PAGE> 234

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
securities 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. See "Net Asset Value."

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 shares of the Fund. 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. In addition, the Distributor
is sponsoring a sales contest for INVEST Financial Corporation ("INVEST")
relating to the Funds and other funds distributed by the Distributor, pursuant
to which the Distributor may provide an INVEST broker an award valued up to
$750.00 for sales of such funds during the period April 1, 1995, through May 31,
1995. Such payments 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 Fund will receive from such
sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an

27
<PAGE> 235

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.
- --------------------------------------------------------------------------------
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>
$100 but 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>

- --------------------------------------------------------------------------------
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
$1,000,000 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% 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 "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

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<PAGE> 236

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
Investors, or their dealers or brokers, must notify the proper 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 dealer or broker or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act of 1940 (the "Investment Company Act").

1. Combination of Investments. Purchases of shares of the Funds, or of other
Van Kampen Merritt funds distributed by the Distributor subject to an initial
sales charge ("ISC Shares") which are made at any one time by "any person" may
be combined to receive a quantity discount.

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" (as defined above) may combine their current purchase with the current
public offering price of shares of Class A Shares of a Fund or ISC Shares which
are owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase, during a 13 month
period, an amount of Class A Shares that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker or dealer, and the Distributor, agree to refund the
appropriate portion of their respective concessions

29
<PAGE> 237

to the Funds, the sales charge on an investor's previous purchases made within
90 days may be adjusted to the reduced sales charge under the Letter of Intent,
and the refunded concession will be used to purchase shares of the designated
Fund or Funds at the offering price next determined after receipt of such
monies. Each investment made after signing the Letter of Intent will be entitled
to the sales charge applicable to the total investment indicated in the Letter
of Intent. If an investor does not complete the necessary purchases under the
Letter of Intent within 13 months from the date of the first purchase included
thereunder, the sales charge will be adjusted upward, corresponding to the
amount actually purchased.

When an investor signs a Letter of Intent, Class A Shares of the Funds
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these shares cannot be sold or redeemed until the
Letter of Intent is satisfied or the additional sales charges have been paid. If
the total purchases made under the Letter of Intent, less redemptions, equal or
exceed the amount specified in the Letter of Intent, these shares will no longer
be restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities dealer or broker will, upon request,
remit their respective portions of the sales concession and with that amount,
purchase additional shares of any of the Funds for the investor's account at the
next computed offering price. If an investor does not complete the necessary
purchases under the Letter of Intent, the sales charges will be adjusted upward
and if, after written notice, the investor does not pay the increased sales
charge, sufficient restricted shares will be redeemed to pay such charge.

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

1. Unit Trust Reinvestment Programs. The Funds will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Funds and ISC Shares 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 Funds 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 dealer, broker 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 securities broker, dealer or financial
intermediary, or the Distributor.

30
<PAGE> 238

distribution period by all investors who choose to invest in the Funds through
the program and (2) provide the Funds' 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 Funds also
require that all dividends and other distributions by the Funds be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Funds will send
account activity statements to such participants on a quarterly basis only, even
if their investment period is monthly or more frequently. The Funds reserves the
right to modify or terminate this program at any time.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Funds at net asset
value are as follows:

(b) 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 such fund or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.

(d) 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 either Fund alone, or in any combination
of Class A Shares of the Funds and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The Funds
-- Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals at
least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.

31
<PAGE> 239

(g) Investors purchasing shares of the Funds 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.

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 Funds, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Funds by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) 1.00% with respect to Class A Shares
in an amount of $1 million or more; (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 Funds will receive from such sale. Sales compensation with
respect to Class A Shares subject to a CDSC is set forth under "Purchasing
Shares Of The Fund -- Initial Sales Charge Alternative".

32
<PAGE> 240

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
Funds 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 services fees facilitates the ability of the Funds 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 $1,000,000 or more,
although for such investments the Funds 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% 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.

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<PAGE> 241

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 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>
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
- --------------------------------------------------------------------------------

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

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.

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

34
<PAGE> 242

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 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 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 Internal Revenue
Code of 1986, as amended (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.

- --------------------------------------------------------------------------------
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 the 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

35
<PAGE> 243

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 Funds' transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Funds' 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 monthly distributions and any annual 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 elects otherwise to the Transfer Agent. This election may be made by
telephone by calling 1-800-341-2911 or in writing to the Transfer Agent. For
inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889, during the hours of 7:30 a.m. to 4:00 p.m. Central Standard
Time. If a shareholder elects to change the method of distribution, such change
will be effective only with regard to distributions for which the record date is
seven or more business days after the Transfer Agent has received the request.

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

36
<PAGE> 244

must state the words "Signature Guaranteed" along with the name of the granting
institution. Shareholders should verify with the institution that it is an
eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Dwight Building, 6th
Floor, Kansas City, MO 64105. Shareholders will receive the net asset value per
share next computed after the Transfer Agent receives the redemption request and
certificates (if any) in proper form. Any applicable contingent deferred sales
charge with respect to CDSC Shares redeemed will be deducted from the redemption
proceeds prior to transmittal of such proceeds to the shareholder.

TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Funds at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption
for a particular Fund. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m.
Central Standard Time. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the shareholder. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")
must be completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association unless the
Authorization is completed at the time an account is originally established. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. A redemption requested by telephone will be processed at the net
asset value next determined after receipt of the request. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder. The proceeds would then be made payable to the registered
shareowner(s) and mailed to the address registered on the account or wired to a
bank, as requested on the Authorizations. Shareholders cannot redeem shares by
telephone if stock certificates are held for those shares. This service is not
available with respect to shares held in an Individual Retirement Account (IRA)
for which State Street Bank and Trust Company acts as custodian. In addition,
this service is not available with respect to shares purchased by check until 15
days after purchase.

By establishing the telephone redemption service, a shareholder authorizes a
Fund or its agent to act upon the instructions of any person by telephone to
redeem shares for any account for which such service has been authorized. The
Fund, the Distributor, the Transfer Agent and National Financial Data Services,
Inc. ("NFDS") employ procedures reasonably believed to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring a
person attempting to redeem shares by telephone to

37
<PAGE> 245

provide, on a recorded line, the name on the account, a social security number
or tax identification number and such additional information as may be included
in the Authorization. A shareholder also agrees that none of the Funds, the
Distributor, the Transfer Agent or National Financial Data Services ("NFDS")
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent or unauthorized request. This service may be
amended or terminated at any time by the Transfer Agent or the Funds. If a
shareholder is unable to reach a Fund by telephone, he or she may redeem shares
pursuant to the procedures set forth above under the caption "Written Redemption
Requests." During periods of extreme economic or market changes, it may be
difficult for investors to reach the Funds by telephone and to effect telephone
redemptions.

REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the shareholder's
broker, dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Funds generally determine net asset value once each
business day as of the close of business, sell orders placed through a
shareholder'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 shareholder's order to be fulfilled on the basis of the
net asset value to be determined that day. Any change in the redemption price
due to the failure of the Distributor to receive a sell order prior to such time
must be settled between the investor and the broker, dealer, or financial
intermediary submitting the order. The Funds do not charge for this transaction
(other than any applicable contingent deferred sales charge). Shareholders must
submit a written redemption request in proper form to their securities dealer
within five business days after calling the dealer with the sell order. The
request should indicate the number of shares to be redeemed, identify the
account number and the order or confirmation number assigned to the trade, and
be signed by the shareholder exactly as the shares are registered. If the amount
of the redemption exceeds $50,000 or if the redemption proceeds will be sent to
an address other than the address of record, signature(s) must be guaranteed by
a member firm of a principal stock exchange, a commercial bank or trust company
which is a member of the Federal Deposit Insurance Corporation, a credit union
or a savings association. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. If certificates are held for
the shares being redeemed, such certificates must be sent endorsed for transfer
or accompanied by an endorsed stock power. Certificates should be sent by
registered mail to Van Kampen Merritt Funds, c/o National Financial Data
Services, 1004 Baltimore Avenue, Dwight Building, 6th Floor, Kansas City, MO
64105-1807.

38
<PAGE> 246

In cases of disability, the CDSC on Class B 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 CDSC on Class B
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. Whether shares are redeemed by a Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer as the case may be
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from a Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the respective
Fund will not mail the proceeds until checks received for the purchase of shares
have cleared, which may take 10 days or more. The proceeds, of course, may be
more or less than the cost of the shares.

The right of redemption or resale to the Funds may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.

The Funds reserve the right to redeem any investment if the value of an
account falls below $500. Before any Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $500.

- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of each of the Funds is determined by
calculating the total value of a Fund's assets, deducting its total liabilities,
and dividing the result by the

39
<PAGE> 247

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 a Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Funds reserve 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 sub-trust. 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.

- --------------------------------------------------------------------------------
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 the Funds' 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 Funds' yield quotations are determined for each class of the Funds' 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 the 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) the 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.

40
<PAGE> 248

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. A Fund's tax-equivalent
yield quotation for a 30 day period as described above is computed for each
class of the Funds' shares 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 Funds calculate average compounded total return for each class of the
Funds' shares 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 the respective 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 a given 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 the Funds' shares.

From time to time, the Funds may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Funds. Such characteristics may include, but are not limited to, tax
features, guarantees,

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insurance and the fluctuation of principal and/or return. In addition, from time
to time, the Funds may utilize sales literature that includes hypotheticals.

Please consult the Statements of Additional Information for more information
regarding the Funds' performance.

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

FEDERAL TAXES. The Funds each have qualified and intend to continue to
qualify as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (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. As sub-trusts of a Massachusetts
business trust, the Funds will not be subject to any excise or income taxes in
Massachusetts as long as each qualifies as a regulated investment company for
federal income tax purposes. 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.

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

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<PAGE> 250

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 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.

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<PAGE> 251

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 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.

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<PAGE> 252

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 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.

- --------------------------------------------------------------------------------
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 nearly $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.

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

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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 6% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 10% of the common stock of VK/AC Holding, Inc.

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 sub-trust. 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 AND
CALIFORNIA FUND
------------------------------------------------------------
<S> <C>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ -----------
First $100 million............................. 0.500 of 1%
Next $150 million.............................. 0.450 of 1%
Next $250 million.............................. 0.425 of 1%
Over $500 million.............................. 0.400 of 1%
</TABLE>

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 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.

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<PAGE> 254

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.

Each Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the Investment
Company Act. Each Fund 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,
distributor of each class of the Funds' shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, NASD
members or eligible non-members who are acting as brokers or agents and similar
agreements between the Funds and financial intermediaries who are acting as
brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Funds are referred to herein as "financial
intermediaries."

Class A Shares. Each Fund may spend an aggregate amount up to 0.30% 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 financial intermediaries and in connection with the
maintenance of such shareholders' accounts. Each Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such financial intermediaries or
the amount of the Distributor's actual distribution related expense.

Class B Shares. Each Fund 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 Fund 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 and by
financial intermediaries and in connection with the maintenance of such
shareholders' accounts.

Class C Shares. Each Fund 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 Fund, or the Distributor as agent
for the respective Fund, pays financial intermediaries in connection with the
distribution of the

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<PAGE> 255

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 financial intermediary's customers. Each Fund pays the Distributor the
lesser of the balance of 0.75% not paid to such financial intermediaries or the
amount of the Distributor's actual distribution related expense. In addition,
each Fund 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 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 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 Funds' total net assets. As of December 31, 1994, there
were $38,971 and $2,788 of unreimbursed distribution expenses with respect to
Class B Shares and Class C Shares, respectively of the Insured Fund,
representing 0.00% and 0.00% 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 0.00% 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 Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts of the Trust. The Distributor will
endeavor to allocate such

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<PAGE> 256

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.

- --------------------------------------------------------------------------------
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,
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.

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, 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 the respective 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 State Street Bank and Trust
Company, c/o National Financial Data Services, P.O. Box 419001, Kansas City, MO
64141-6001, Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss"
and to obtain a Surety Bond in a form acceptable to the Transfer Agent. On the
date the letter is received the Transfer Agent will calculate no more than 2.00%
of the net asset value of the issued shares, and bill the party to whom the
certificate was mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, and such shareholder's
dividends are being reinvested, a requested dollar amount may be paid from such
account to any person monthly, quarterly, semiannually or annually. The minimum
amount that may be withdrawn each period is $50; withdrawals will be made on the
seventh business day of the month in which they are scheduled to occur.
Depending upon the size of the payments requested and the fluctuations in the
net asset value of the shares redeemed, redemptions for the purpose of making
such payments may reduce or even exhaust the amounts in such account. If an
investor acquires additional shares of a Fund after joining the Systematic
Withdrawal Program, the investor must inform the respective Fund if he or she
wants the new shares to be subject to the Systematic Withdrawal Program by
telephoning the respective Fund at 1-800-341-2911.

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<PAGE> 257

With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares of a Fund or, if
the investor does not join the program on the date of his or her initial
investment, the net asset value of the investor's Class B Shares on the date the
investor elects to participate in the Systematic Withdrawal Program. Each Fund
will waive the contingent deferred sales charge applicable to Class B Shares
redeemed pursuant to the respective Fund's Systematic Withdrawal Program.

It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge to purchase shares
at the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, neither Fund will knowingly permit a
shareholder to make additional investments of less than $5,000 if at the same
time such shareholder is making systematic withdrawals at a rate greater than
the distribution being paid on such shareholder's shares. The Funds reserve the
right to amend or terminate the systematic withdrawal program on thirty days
notice, and a shareholder may withdraw from the program at any time.

EXCHANGE PRIVILEGE. Any Class A Shares of a Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for shares of any
other Van Kampen Merritt mutual fund distributed by the Distributor that offers
an exchange privilege. Under the exchange privilege, each Fund offers to
exchange its Class A Shares for Class A Shares of other such funds on the basis
of relative net asset value per share. Any ISC Shares exchanged into either Fund
that have been charged a sales load lower than the sales load applicable to
Class A Shares of the respective Fund will be charged the applicable sales load
differential upon exchange. ISC Shares of the Van Kampen Merritt Money Market
Fund and Van Kampen Merritt Tax Free Money Fund which have not previously been
charged a sales load (except for shares purchased via the reinvestment option)
will be charged the applicable sales load upon exchange into either Fund.

Class B Shareholders of the Funds may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be 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.

Class C Shares of the Funds are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen Merritt money market fund sponsored by the Distributor
is not available for Class C Shareholders.

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<PAGE> 258

In order to qualify for the exchange privilege, it is required the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the respective Fund). Shareholders also may effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time and requesting the exchange. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889, during the
hours of 7:30 a.m. to 3:00 p.m. Central Standard Time. The exchange will be
processed at the net asset value next determined after receipt of such request.
By utilizing the telephone exchange service, a shareholder authorizes the
respective Fund or its agent to act upon the instructions of any person by
telephone to exchange shares from any account for which such service has been
authorized to any identically registered account(s) with any Van Kampen Merritt
fund distributed by the Distributor that offers an exchange privilege. A
shareholder also agrees that none of the Funds, the Distributor, the Transfer
Agent nor NFDS will be liable for any loss, liability, cost or expense arising
out of any request, including any fraudulent request. The staff of the SEC
currently is reviewing its position with respect to such agreements. This
service may be amended or terminated at any time by the Transfer Agent or the
Funds. If a shareholder has certificates for any shares being exchanged, such
certificates must be surrendered prior to the exchange in the same manner as in
redemption of such shares (see "Redemption of Shares--Telephone Redemptions").
Any shares exchanged between one of the Funds and any of the other funds will
begin earning dividends on the next business day after the exchange is effected.
Before effecting an exchange, shareholders in either of the Funds 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.

An exchange between Van Kampen Merritt funds pursuant to the exchange
privilege is treated as a sale for federal income tax purposes, and depending
upon the circumstances, a short- or long-term capital gain or loss may be
realized.

The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Funds give prominent notice thereof at least 60 days
prior to the modification or termination in certain circumstances. Each Fund
reserves the right to limit the number of times a shareholder may exercise the
exchange privilege.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASS(SM)).

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<PAGE> 259

proceeds of such redemption. Once enrolled in the ACH plan, a shareholder may
terminate participation at any time by writing the Transfer Agent.

2. Automated Dividend Programs. The Funds will, upon the election of a
shareholder, automatically deposit distributions from a shareholder's account
directly into a shareholder's bank account.

3. Dividend Diversification. In addition to the foregoing, monthly
distributions and any net long-term capital gain distributions to a
shareholder's account may be invested in the same class of shares of any other
Van Kampen Merritt mutual fund distributed by the Distributor at the then
current net asset value, WITHOUT A SALES CHARGE, upon election by a shareholder.
This election may be made on the account application bound in this Prospectus,
by written notice to the Transfer Agent or by calling a Fund directly at 1-800-
341-2911, during the hours of 7:00 a.m. to 7:00 p.m. Central Standard Time. For
inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889. In order to qualify for this privilege, a shareholder must have
established an account in the other fund prior to electing this privilege. This
privilege may be modified or terminated by the Funds at any time.

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the respective Fund. In order to
utilize this option, a shareholder must fill out and sign the appropriate
section of the application attached to this Prospectus or the EASESM application
which is available from the Transfer Agent, the Funds, such shareholder's broker
or dealer, or the Distributor. Once the Transfer Agent has received this
application, such shareholder's checking account at his or her designated local
bank will be debited each month in the amount authorized by such shareholder to
purchase shares of the respective Fund. Once enrolled in the EASESM program, a
shareholder may change the monthly amount or terminate participation at any time
by writing or calling the Transfer Agent. Shareholders in the EASESM program
will receive a confirmation of these transactions from the respective Fund at
least quarterly, and their regular bank account statements will show the debit
transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the application in performing such services by either
withdrawing funds for deposit in the Funds pursuant to the EASESM Plan, or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that none of the Funds, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Funds.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares of either Fund may, within 120 days, repurchase Class A Shares of
the respective

52
<PAGE> 260

Fund, or shares of other Van Kampen Merritt mutual funds distributed by the
Distributor, in an amount of at least $500 and not exceeding the redemption
proceeds received, at a purchase price equal to the net asset value next
determined after the reinstatement request is received by the Transfer Agent or
the Distributor. A Class C Shareholder who has redeemed shares of either Fund
may repurchase Class C Shares of the respective Fund, or shares of other Van
Kampen Merritt mutual funds distributed by the Distributor with credit given for
any contingent deferred sales charge paid upon such redemption.

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

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Funds,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Funds, an account will be opened for each shareholder on the respective Fund's
books and shareholders will receive a confirmation of the opening of the
account. Shareholders will receive monthly statements giving details of all
activity in their account(s) and will also receive a statement whenever an
investment or withdrawal is made in or from their account. Information for
federal income tax purposes will be provided at the end of the year. Such
statements will present separately information with respect to each class of a
Fund's shares. It is expected that the transfer agency costs attributable to the
Class B Shares and Class C Shares will be higher than the transfer agency costs
attributable to the Class A Shares.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

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 sub-trust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust organized August 15, 1985 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust. 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 Funds to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.

Each Fund's fiscal year ends on December 31. The Funds send to their
shareholders, at least semi-annually, reports showing the Funds' portfolios and
other information. An

53
<PAGE> 261

annual report, containing financial statements audited by 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 The Van Kampen Merritt Family of
Funds, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence. Its telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD) Dial
1-800-772-8889.

For Automated Telephone Service which provides 24 hour direct dial access to
Fund facts and Shareholder account information dial 1-800-542-4344.

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

54
<PAGE> 262

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344

VAN KAMPEN MERRITT
INSURED TAX FREE INCOME FUND
- ------------------
VAN KAMPEN MERRITT
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
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt 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> 263

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND

The Van Kampen Merritt Insured Tax Free Income Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
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").

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-24

Custodian and Independent Auditors...................................................... B-25

Portfolio Transactions and Brokerage Allocations........................................ B-26

Tax Status of the Fund.................................................................. B-26

The Distributor......................................................................... B-26

Legal Counsel........................................................................... B-28

Performance Information................................................................. B-28

Independent Auditors' Report............................................................ B-30

Financial Statements.................................................................... B-31

Notes to Financial Statements........................................................... B-47
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

B-1
<PAGE> 264

THE FUND AND THE TRUST

The Fund is a separate diversified sub-trust of Van Kampen Merritt Tax Free
Fund (the "Trust"), an open-end diversified management investment company. The
Trust is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated August 15, 1985.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate sub-trusts. At present, the Fund, Van
Kampen Merritt Tax Free High Income Fund, Van Kampen Merritt California Insured
Tax Free Fund, Van Kampen Merritt Municipal Income Fund, Van Kampen Merritt
Limited Term Municipal Income Fund, Van Kampen Merritt Florida Insured Tax Free
Income Fund, Van Kampen Merritt New Jersey Tax Free Income Fund and Van Kampen
Merritt New York Tax Free Income Fund have been organized as sub-trusts of the
Trust and have commenced investment operations. Van Kampen Merritt California
Tax Free Income Fund, Van Kampen Merritt Michigan Tax Free Income Fund, Van
Kampen Merritt Missouri Tax Free Income Fund and Van Kampen Merritt Ohio Tax
Free Income Fund have been organized as sub-trusts of the Trust but have not
commenced investment operations. Other sub-trusts 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. and was reorganized into
a sub-trust of the Trust as of February 22, 1988.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust 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 a
majority of the shares present and voting at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by 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 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:

B-2
<PAGE> 265

4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.

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.

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.

B-3
<PAGE> 266

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

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.

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.

B-4
<PAGE> 267

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 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, 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> 268

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.

STRATEGIC TRANSACTIONS.

B-6
<PAGE> 269

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> 270

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> 271

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> 272

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> 273

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.

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.

B-11
<PAGE> 274

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 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.

B-12
<PAGE> 275

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 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

B-13
<PAGE> 276

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
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

B-14
<PAGE> 277

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 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;

B-15
<PAGE> 278

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.

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.

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.

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<PAGE> 279

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.

* 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).

B-17
<PAGE> 280

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.

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:

<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.

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

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 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.
</TABLE>

B-18
<PAGE> 281

<TABLE>
<S> <C>
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.

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.

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

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.

B-19
<PAGE> 282

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 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.

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

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt, Inc.

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<PAGE> 283

PHILIP G. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co.

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

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<PAGE> 284

EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer

One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.

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

* Interested persons of the Fund as defined in the 1940 Act.

The compensation of the officers and Trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
Trustees. During the next year, the Fund expects to pay trustees who are not
interested persons of the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc., $2,500 per year and $250 per meeting
of the Board of Trustees, plus expenses. Under the Fund's retirement plan,
trustees who are not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc., have at least ten years
of service and retire at or after attaining the age of 60, are eligible to
receive a retirement benefit equal to the annual retainer for each of the ten
years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. can
elect to defer receipt of all or a portion of the trustee's fees earned by such
trustee until such trustee's retirement. The deferred compensation earns a rate
of return determined by reference to the Fund or other Van Kampen Merritt mutual
funds advised by the Adviser as selected by the trustee. To the extent permitted
by the Investment Company Act, the Fund may invest in securities of other Van
Kampen Merritt mutual funds advised by the Adviser in order to match the
deferred compensation obligation. The deferred compensation plan is not funded
and obligations thereunder represent general unsecured claims against the
general assets of the Fund.

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<PAGE> 285

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 $0 $2,500 $62,362
Philip G. Gaughan.............. 21,928 0 2,500 63,250
Donald C. Miller............... 23,768 0 2,500 62,178
Jack A. Nelson................. 23,858 0 2,500 62,362
Jerome L. Robinson............. 23,801 0 2,500 58,475
Wayne W. Whalen................ 17,553 0 2,500 49,875
</TABLE>

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

(1) Messrs. Merritt and McDonnell, Trustees of each Fund during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Funds.

(2) The Registrant is Van Kampen Merritt Tax Free Fund (the "Trust") which
currently is comprised of 8 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of
each of these 8 sub-trusts during such sub-trust's last completed fiscal
year prior to the date of this Statement of Additional Information.
Beginning in October 1994 each Trustee, except Messrs. Gaughan and Whalen,
began deferring his entire aggregate compensation paid by the Fund. The
total combined amount of deferred compensation (including interest)
accrued with respect to each Trustee 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.

As of April 13, 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.

The authorized stock of the Fund currently consists of an unlimited number of
full and fractional shares of beneficial interest, without par value.

To the knowledge of the Fund, as of April 13, 1995 no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of April 13, 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, 13%; Stanley Jacob Holuba,

B-23
<PAGE> 286

Robert Joseph Holuba COTR, U/A 11/9/87 ART 9th, Stanley Joseph Holuba Trust, 2
Hackensack Ave., Kearny, NJ 07032-4611, 13%; 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, 16%.

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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 10% 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 investment advisory agreement dated February 17, 1993, was approved by the
shareholders of the Fund at a shareholders meeting held on January 14, 1993.
Accordingly, the 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 sub-trust, (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.

B-24
<PAGE> 287

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.

ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the 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 with the other Van Kampen Merritt mutual funds 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 Merritt 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 Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. 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. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor,
share one-half (50%) of such costs equally. The remaining one-half (50%) of such
costs are allocated to specific funds based on specific time allocations, or in
the event services are attributable only to types of funds (i.e. closed-end or
open-end), the relative amount of time spent on each type of fund and then
further allocated between funds of that type based upon their respective net
asset values. The Fund has not yet incurred any expenses in connection with this
Agreement.

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, Inc.'s cost of providing legal
services.

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

B-25
<PAGE> 288

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS

TAX STATUS OF THE FUND

THE DISTRIBUTOR

B-26
<PAGE> 289

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 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. 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 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 Investment
Company Act of 1940. 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 banks 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 banks 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-27
<PAGE> 290

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%).

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%).

B-28
<PAGE> 291

CLASS C SHARES

(Shares of the Fund referred to as Class C Shares in this Prospectus were
referred to as Class D Shares in prospectuses dated prior to March 7, 1994.)

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-29
<PAGE> 292

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.

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-30
<PAGE> 293

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-31

<PAGE> 294

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-32

<PAGE> 295

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-33
<PAGE> 296

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-34
<PAGE> 297

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-35
<PAGE> 298

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-36
<PAGE> 299

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-37
<PAGE> 300

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-38

<PAGE> 301

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-39
<PAGE> 302

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-40
<PAGE> 303

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-41
<PAGE> 304

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-42
<PAGE> 305

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-43
<PAGE> 306

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-44

<PAGE> 307

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-45
<PAGE> 308

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-46

<PAGE> 309

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.

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-47

<PAGE> 310

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.

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.

B-48
<PAGE> 311

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-49

<PAGE> 312

SUBJECT TO COMPLETION -- DATED APRIL 24, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT CALIFORNIA INSURED TAX FREE FUND

Van Kampen Merritt California Insured Tax Free Fund (the "Fund") is a separate
diversified sub- trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
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 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 portfolio 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
Advisory Corp. (the "Adviser").

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-23

Officers and Trustees................................................................... B-28

Investment Advisory and Other Services.................................................. B-31

Custodian and Independent Auditors...................................................... B-33

Portfolio Transactions and Brokerage Allocation......................................... B-33

Tax Status of the Fund.................................................................. B-34

The Distributor......................................................................... B-34

Legal Counsel........................................................................... B-35

Performance Information................................................................. B-35

Independent Auditors' Report............................................................ B-37

Financial Statements.................................................................... B-38

Notes to Financial Statements........................................................... B-46
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

B-1
<PAGE> 313

THE FUND AND THE TRUST

The Fund is a separate diversified sub-trust of Van Kampen Merritt Tax Free
Fund (the "Trust"), an open-end diversified management investment company
commonly known as a mutual fund. The Trust is an unincorporated business trust
established under the laws of the Commonwealth of Massachusetts by a Declaration
of Trust dated August 15, 1985. The Declaration of Trust permits the Trustees to
issue an unlimited number of full and fractional shares in separate sub-trusts.
At present, the Fund, Van Kampen Merritt Tax Free High Income Fund, Van Kampen
Merritt Municipal Income Fund, Van Kampen Merritt Insured Tax Free Income Fund,
Van Kampen Merritt Limited Term Municipal Income Fund, Van Kampen Merritt
Florida Insured Tax Free Income Fund, Van Kampen Merritt New Jersey Tax Free
Income Fund and Van Kampen Merritt New York Tax Free Income Fund have been
organized as sub-trusts of the Trust and have commercial investment operations.
Van Kampen Merritt California Tax Free Income Fund, Van Kampen Merritt Michigan
Tax Free Income Fund, Van Kampen Merritt Missouri Tax Free Income Fund and Van
Kampen Merritt Ohio Tax Free Income Fund have been organized as sub-trusts of
the Trust but have not commenced investment operations. Other sub-trusts may be
organized and offered in the future.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust 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 a
majority of the shares present and voting at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by 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.

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:

B-2
<PAGE> 314

4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.

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 in which the Fund may
invest 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 in which the Fund may invest are considered to be interests in
real estate.

B-3
<PAGE> 315

ADDITIONAL INVESTMENT CONSIDERATIONS

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.

B-4
<PAGE> 316

Although the municipal securities in which the Fund may invest will be insured
as to timely payment of 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, 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. See
"Taxation."

B-5
<PAGE> 317

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.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES. As
described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in California municipal securities. The
portfolio of the Fund may include securities issued by the State of California
(the "State"), by its various public bodies (the "Agencies") and/or by other
municipal entities located within the State (securities of all such entities are
referred to herein as "municipal securities").

In addition, the specific California municipal securities in which the Fund
will invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of California municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund and the Fund assumes no responsibility for
the completeness or accuracy of such information. Additionally, many factors,
including national, economic, social and environmental policies and conditions,
which are not within the control of such issuers, could have an adverse impact
on the financial condition of such issuers. The Fund cannot predict whether or
to what extent such factors or other factors may affect the issuers of
California municipal securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on or principal of such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no assurance on the part of the State of California to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of California municipal securities.

Constitutional Limits on Spending and Taxes. Certain California municipal
securities may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem real property taxes as a source of
revenue. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, the Jarvis/Gann Initiative, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues. On June 18, 1992, the United
States Supreme Court upheld the constitutionality of Article XIIIA.

In 1979, the voters of California passed an amendment adding Article XIIIB to
the California Constitution, the effect of which is to significantly limit
spending by State government and by "local government" (defined as "any city,
county, city and county, school district, special district, authority, or other
political subdivision of or within the state"). Excluded from these limitations
on government entities is "debt service" (defined as "appropriations required to
pay the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally authorized as of January 1, 1979 or on bonded indebtedness
thereafter approved" by the voters of the issuing entity).

In November 1986, California voters approved an amendment to the California
Government Code known as Proposition 62 which added Article 3.7 to Title 5,
Division 2, Chapter 4 of the California Government Code. The effect of Article
3.7 is to limit the abilities of local governments to impose new taxes or
increase

B-6
<PAGE> 318

existing taxes by requiring certain legislative and voter approvals prior to the
imposition of certain taxes by any local government (defined as any county,
city, city and county, including a chartered city or county, or any public or
municipal corporation) or district (defined as any agency of the state, formed
pursuant to general law or special act, for the local performance of
governmental or proprietary functions within limited boundaries). Article 3.7
can be amended only by a vote of the electorate of the State of California. In
particular, Article 3.7, among other things, requires (i) two-thirds approval of
all members of the applicable legislative body followed by majority approval of
the voters voting in an election in order for a local government or district to
impose any general tax (defined as any tax imposed for general governmental
purposes), and (ii) two-thirds approval of the voters voting in an election in
order for a local government or district to impose any special tax (defined as
any tax imposed for a specific purpose). Those voting requirements do not apply
to ad valorem taxes to pay interest and redemption charges on any indebtedness
approved by the voters prior to the effective date of Article XIIIA of the
California Constitution. Article 3.7 requires (1) that the revenues from a
special tax be used only for the purpose or service for which the tax was
imposed, and (2) any tax subject to the measure imposed by any local government
or district on or after August 1, 1985 be ratified by majority vote of the
voters voting in an election held within two years after the effective date of
the measure in order for the tax to continue to be imposed on and after November
15, 1988. Article 3.7 contains a provision which diminishes the property tax
revenues allocated to a local government or district to the extent that the
local government or district imposed any tax not in compliance with Article 3.7.
Article 3.7 also provides that no local government or district may impose any ad
valorem tax on real property other than as permitted by Section 1 of Article
XIIIA of the California Constitution, and that no local government or district
may impose any transaction tax or sales tax on the sale of real property within
the city, county or district. A 1988 decision of the Fourth Appellate District
of the California Court of Appeals declared that the requirement of local voter
ratification provided for in Article 3.7 violated the California Constitution.
An initiative proposed to re-enact the ratification provisions of Article 3.7 as
a constitutional amendment was defeated by the voters in November 1990, but such
a proposal may be renewed in the future.

On December 19, 1991, the California Supreme Court declared a 1988 San Diego
County Ballot measure that raised sales taxes for the purpose of financing
construction of criminal detention and courthouse facilities unconstitutional
because it was not passed with two-thirds voter approval. The court concluded
that the agency established to finance the facilities is a special district
created to circumvent Article XIIIA. However, in May 1992, the California
Supreme Court let stand two lower court decisions involving sales tax increases
passed by a majority vote. The lower courts had held that the Los Angeles County
Transportation Commission and the Orange County Transportation Authority, the
agencies entitled to collect the taxes, were not formed to circumvent Article
XIIIA, and that, therefore, the taxes were validly passed. On November 10, 1993,
in a closely watched case involving a Santa Clara County transportation
authority created with the parameters of the California Supreme Court's 1991
decision in mind, a California Court of Appeal overturned a sales tax approved
by less than two-thirds of the voters. The case is currently on appeal before
the California Supreme Court. These decisions may continue to cast doubt on
other projects around the State that have been financed with sales tax increases
imposed without two-thirds voter approval.

Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and
possible inconsistencies in their respective terms, and the applicability of
their respective exemptions and exceptions and the impossibility of predicting
future appropriations, it is not presently possible to determine the impact of
Article XIIIA or XIIIB or any implementing or related legislation on the
California municipal securities in which the Fund may invest, or the abilities
of State or local governments to pay the interest on, or repay the principal of
such California municipal securities.

Recent Developments. From 1990 until 1994 the State experienced the worst
economic fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, have
all been severely affected. Job losses were the worst of any post-war recession.

The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-14
education, health, welfare and corrections -- growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of chronic budget imbalance, with

B-7
<PAGE> 319

expenditures exceeding revenues for four of the last five fiscal years ending
with 1991-2 but being essentially equal in 1992-1993. By June 30, 1992, the
State's Fund had a deficit, on a budget basis, of approximately $2.8 billion.

A further consequence of the large budget imbalances in the 1990-91 and
1991-92 fiscal years was that the State used up all of its available cash
resources. In late June, 1992, the State was required to issue $475 million of
short-term revenue anticipation warrants to cover General Fund obligations
coming due on June 30. These warrants were repaid on July 24, 1992. With the
failure of the Governor and Legislature to adopt a budget for the 1992-93 fiscal
year on time (to allow the State to carry out its usual cash flow borrowing for
the fiscal year), the shortfall of cash forced the State Controller after July
1, 1992 to issue interest-bearing "registered warrants" in lieu of regular
warrants redeemable for cash to many State vendors, suppliers, and employees and
to local government agencies. Until the State budget was adopted on September 2,
1992, the Controller issued registered warrants totaling approximately $3.8
billion to pay valid obligations from the prior fiscal year, and to pay
continuing obligations after July 1 based on special appropriations or court
orders. Certain constitutionally mandated obligations, such as debt service on
bonds and revenue anticipation warrants, were paid with available cash.
Registered warrants had not been issued by the State since the 1930s. State
employees filed suit against the State alleging that payment of their salaries
with registered warrants violated federal labor laws. See "Litigation" below.

As a result of the deterioration in the State's budget and cash situation
since the 1991-92 fiscal year, rating agencies reduced the State's credit
rating. Between October 1991 and October 1992, the rating on the general
obligation bonds was reduced by Standard & Poor's Ratings Group from "AAA" to
"A+", by Moody's Investors Services, Inc. from "Aaa" to "Aa" and by Fitch
Investors Services, Inc. from "AAA" to "AA". On July 15, 1994, all three of the
rating agencies rating the State's long-term debt again lowered their ratings of
the State's general obligation bonds. Moody's Investors Services, Inc. lowered
its rating from "Aa" to "A1", Standard & Poor's Ratings Group lowered its rating
from "A+" to "A" and termed its outlook as "stable", and Fitch Investors Service
lowered its rating from "AA" to "A". There can be no assurance that such ratings
will continue for any given period of time or that they will not in the future
be further revised or withdrawn. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and there is
no obligation on the part of the State to make payment on such obligations in
the event of default.

In November of 1994, Standard & Poor's Rating Group downgraded the credit
rating of several California counties, including San Francisco, San Diego,
Marin, Los Angeles and San Bernadino. In December and January, Standard & Poor's
Rating Group and Moody's Investors Services, Inc., respectively, downgraded
Orange County to below investment grade as a result of its bankruptcy filing
(see discussion below).

The Legislature and the Governor were unable to agree on a budget for the
1992-93 fiscal year until September 2, 1992, 64 days after the fiscal year
began. The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted
a reserve at June 30, 1993 of only $28 million. Shortly after the 1992-93 Budget
Act was enacted, it became evident that economic conditions in the State were
not beginning to improve in the second half of 1992, as assumed by the
Administration's May Revision of economic estimates, which underlay the Budget.
This was exacerbated by enactment of an Initiative measure in November which
reinstated a sales tax exemption for certain candy, snack foods and bottled
water, reducing revenues by about $300 million for a full fiscal year ($200
million in 1992-93). In addition, certain lawsuits were filed concerning
implementation of the K-14 school financing portion of the Budget Act. As part
of this litigation, the State is appealing a Superior Court ruling In California
Teachers Association v. Gould that could cost the State up to $3.0 billion.

The Governor's Budget for 1993-94, confirmed the earlier forecasts about the
State's economy and the 1992-93 Budget. The 1993-94 Budget Act was signed by the
Governor on June 30, 1993, along with implementing legislation. The 1993-94
Budget Act was predicated upon General Fund revenues and transfers estimated at
$40.6 billion and expenditures of $38.5 billion. The 1993-94 Budget Act reflects
several major adjustments. The Budget Act mandates changes in local government
financing to shift about $2.6 billion in property taxes from cities, counties,
special districts and redevelopment agencies to school and community college
districts, thereby reducing the General Fund support by an equal amount. About
$2.5 billion were permanent, reflecting termination of the State's "bail-out" of
local governments following the property tax

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cuts of Proposition 13 in 1978. The property tax revenue losses for cities and
counties were offset in part by additional sales tax revenues and mandated
relief. Lawsuits were filed by Los Angeles, Butte, Contra Costa and San Diego
Counties challenging the shift of property taxes mandated by the 1993-1994
Budget Act. A hearing was held on the Los Angeles County case on July 28, 1993
which upheld the constitutionality of the property tax shift. On June 23, 1994,
the California Supreme Court said it would not review Los Angeles County's
petition for review, thus upholding the lower court's decision in favor of the
State. Several additional lawsuits relating to the 1993-1994 and 1994-1995
Budget legislation are still pending. The 1993-94 Budget Act included about $692
million of aid to the State from the federal government to offset health and
welfare costs associated with foreign immigrants living in the State. The Act
also reduced spending for health and welfare programs by $600 million. Overall,
revenues for the 1993-94 Fiscal Year were about $800 million lower than original
projections, and expenditures were about $780 million higher, primarily because
of higher health and welfare caseloads, lower property taxes which required
greater State support for K-14 education to make up the shortfall, and lower
than anticipated federal government payments for immigration-related costs.

By June 30, 1993, according to the Department of Finance, the State's Special
Fund for Economic Uncertainties had a deficit, on a budget basis, of
approximately $2.8 billion. The 1993-94 Budget Act incorporated a Deficit
Retirement Plan to repay this deficit over two fiscal years. The original budget
for 1993-94 reflected revenues which exceeded expenditures by approximately $2.0
billion. As a result of the recession, the excess of revenues over expenditures
for the fiscal year is now expected to be only about $500 million. Thus the
accumulated budget deficit at June 30, 1994 is now estimated by the Department
of Finance to have been approximately $2.0 billion and the deficit will not be
retired by June 30, 1995 as planned. Consequently, the 1994-95 Budget Act
anticipates deferring retirement of about $1 billion of the carryover-budget
deficit to the 1995-96 Fiscal Year, when it is intended to be fully retired by
June 30, 1996.

The 1994-95 Fiscal Year represents the fourth consecutive year the Governor
and the Legislature were faced with a very difficult budget environment to
produce a balanced budget. The 1994-95 Budget Act signed by the Governor on July
8, 1994, is projected to have $41.9 billion of General Fund revenues and
transfers and $40.9 billion of budgeted expenditures. Included in the $41.9
billion revenues figure is a projected receipt of about $360 million from the
federal government to reimburse the State's cost in connection with undocumented
immigrants, most of which was not received. The principal features of the
1994-95 Budget Act also include: (i) reductions of approximately $1.1 billion in
health and welfare costs, and (ii) increase in proposition 98 funding for K-14
schools by $526 million from 1993-94 Fiscal Year levels. A 2.3 percent reduction
in AFDC payments (equal to $52 million for the entire fiscal year) has been
temporarily suspended by court order. Certain health care funding actions of the
Budget Act also were challenged in a court action.

Because preparation of cash flow estimates for the 1995-96 Fiscal Year is
necessarily more imprecise than for the current fiscal year and entails greater
risks of variance from assumptions, and because the Governor's two-year budget
plan assumes receipt of a large amount of federal aid in the 1995-96 Fiscal Year
for immigration-related costs which is uncertain, the Legislature enacted a
backup budget adjustment mechanism that involves a review of the cash flow
projections for the General Fund and a comparison to the projections for the
1994-95 Fiscal Year. This enactment is intended to mitigate possible deviations
from projected revenues, expenditures or internal borrowable resources which
might reduce available cash resources during the two-year plan, so as to assure
repayment of the warrants. Furthermore for the 1995-96 Fiscal Year, additional
legislation prohibits any external borrowing as of June 30, 1996, thereby
requiring the State to rely solely on internal borrowing resources, expenditure
reductions or revenue increases to eliminate any projected cash flow deficit.

On January 17, 1994 an earthquake of the magnitude of an estimated 6.8 on the
Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Although some individuals and businesses
suffered losses totaling in the billions of dollars, the overall effect of the
earthquake on the regional and State economy is not expected to be serious. The
State in conjunction with the federal government is committed to providing
assistance to local governments, individuals and businesses suffering damage as
a result of the earthquake, as well as to providing for the repair and
replacement of State-owned facilities.

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Revised employment data indicate that California's recession ended in 1993,
and following a period of stability, a solid recovery is now underway. The
State's unemployment rate fell sharply last year, from 10.1 percent in January
to 7.7 percent in October and November. The gap between the national and
California jobless rates narrowed from 3.4 percentage points at the beginning of
1994 to an average or 2 percentage points in October and November. The number of
unemployed Californians fell by nearly 400,000 during the year, while civilian
employment increased more than 300,000.

For the first time in four years, the State enters the upcoming fiscal year
with strengthening revenues based on an improving economy. The Governor's
1995-96 Fiscal Year Budget Proposal (the "Proposed Budget") estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the (i)
Governor's proposed expansion of the realignment program between the State and
counties, so that counties will take on greater responsibility for welfare and
social services, while the State will take on increased funding of trial court
costs and (ii) the first year of a 15% cut on personal income and corporate tax
rates to be phased in over 3 years commencing in 1996. Without these two
proposals, General Fund revenues would be projected at approximately $43.8
billion, or an increase of 3.3 percent over 1994-95. Expenditures are estimated
at $41.7 billion (essentially unchanged from 1994-95).

Budget figures computed by the Controller and the Department of Finance may
differ from each other due to differences in accounting methods and
interpretation. It is not presently possible (1) to know whether, and to what
extent, the State General Fund or any Special Funds will have surplus or deficit
balances in the 1994-1995 fiscal year or in any subsequent fiscal year, or (2)
to determine the overall impact of any deficits on future allocations of the
State revenues to local governments or on the abilities of State or local
governments to pay the interest on, or repay the principal of, any California
municipal securities in which the Fund may invest.

On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Funds") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Funds had suffered
significant market losses in their investments, causing a liquidity crisis for
the Funds and the County. More than 180 other public entities, most of which,
but not all, are located in the County, were also depositors in the Funds. As of
mid-January, 1995, following a restructuring of most of the Funds' assets to
increase their liquidity and reduce their exposure to interest rate increases,
the County estimated the Funds' loss at about $1.69 billion, or 22% of their
initial deposits of approximately $7.5 billion. Many of the entities which
deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations. The County has technically defaulted upon several of
its outstanding debt issues and its ability to meet its outstanding obligations
is unclear.

The Fund is not presently able to predict whether any other municipalities
will face insolvency because of their participation in the Funds, and if so, the
potential impact on such municipalities' ability to meet its outstanding
obligations. The Governor has called a special session of the Legislature which
is expected to consider various responses to the County situation.

The Mexican currency crisis is expected to have some mild dampening effect on
the California economy; however, it should not endanger the recovery. The peso's
devaluation will make California exports much more expensive in Mexican markets.
Although the economic impact of this is unknown, an export reduction of 20
percent would reduce trade by approximately $1.5 billion. This represents less
than two percent of all exports through California ports. San Diego, however, is
likely to be more severely affected due to substantial reductions in
cross-border traffic. Although the long-run impacts of the devaluation are
unclear, the fundamentals of the Mexican economy are much stronger than during
the last crisis twelve years ago.

Heavy rainfall and widespread flooding throughout the State in mid-January
were at least partially responsible for the slight rise in January unemployment.
However, such flooding is not expected to have a significant impact on the
pattern of economic recovery in California that has been evident over the last
year.

As a part of its cash management program, California regularly issues revenue
anticipation notes ("California notes") and revenue anticipation warrants to
meet cash flow needs during the course of a fiscal

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year. On August 21, 1990, California issued $4.1 billion of California notes
which were retired on June 28, 1991. On August 15, 1991, California issued $3.1
billion of fixed rate California notes, which matured and were timely repaid,
and $1.0 billion of variable rate California notes, which matured and were
timely repaid. On October 8, 1992, California issued $5 billion of California
notes, which matured and were paid. The State issued approximately $3.0 billion
of revenue anticipation notes on April 26, 1993, which matured and were repaid
on June 24, 1993, and $2.0 billion of revenue anticipation warrants on June 23,
1993, which matured and were repaid on December 23, 1993. To meet additional
cash flow needs in the 1993-94 Fiscal Year, on July 28, 1993, the State issued
$2.0 billion of revenue anticipation notes maturing on June 28, 1994, and on
February 23, 1994 the State issued $1.2 billion and $2.0 billion of Revenue
Anticipation Warrants maturing on December 21, 1994 and July 26, 1994,
respectively. All such revenue anticipation notes and warrants were timely
repaid. To meet its cash flow needs in the 1994-1995 Fiscal Year, the State has
issued in July and August, 1994, $4.0 billion of revenue anticipation notes
maturing on April 25, 1996 and $3.0 billion of revenue anticipation notes
maturing on June 28, 1995.

On February 10, 1992, a San Diego County Superior Court ruled that the State's
formula for allocating property tax dollars to the State's 58 counties is
unconstitutional and ordered the State Legislature to adopt a more equitable
system by July 1993. This decision has been appealed. In addition, the State is
a party to various litigation which, if one or more cases are decided adversely,
could have a material impact on the State Budget.

Proposition 98. On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"). The Act changes
State funding of public education below the university level and the operation
of the State's Appropriations Limit. The Act, as amended, guarantees State
funding for K-12 school districts and community college districts at a level
equal to the greater of (a) in general, a fixed percentage of General Fund
revenues, (b) the amount actually appropriated to such districts from the
General Fund in the previous fiscal year, adjusted for either changes in the
cost of living, or (c) a third test which would replace the test in (b) if the
percentage growth in per capita of General Fund revenues in the prior year plus
one half of one percent is less than the percentage growth in California per
capita personal income. Under the test in (c), the schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and
General Fund revenues. The Act permits the legislature, by two-thirds vote of
both houses, with the Governor's concurrence, to suspend this formula for a
one-year period. The Act could cause increasing pressure on the State's budget
over future years, potentially reducing resources available for other State
programs, especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes. The
Act also changes how tax revenues in excess of the State's Appropriations Limit
are distributed. Any excess State tax revenues up to a specified amount would,
instead of being returned to taxpayers, be transferred to K-12 school and
community college districts. Such transfer would be excluded from the
Appropriations Limit for K-14 school districts, and the K-14 school
Appropriations Limits for the next year would be automatically increased by the
amount of such transfer. These additional moneys would enter the base funding
calculation for K-14 schools for subsequent years, creating further pressure on
other portions of the state budget, particularly if revenues decline in a year
following such a transfer.

Litigation. At any given time, including the present, there are numerous civil
actions pending against the State (including, but not limited to, those
discussed in the preceding paragraphs and below), which could, if determined
adversely to the State, affect the State's expenditures and, in some cases, its
revenues. The following are certain of the more significant lawsuits pending
against the State.

In the spring of 1991, the Richmond Unified School District ("RUSD") Board of
Directors attempted to end classes six weeks early because of a fiscal crisis.
In response to lawsuits, a lower court judge, in a case called Butt v. State of
California, ordered the State, over objections from the Governor, to provide
funding to allow the school year to be completed, and an emergency loan was
arranged by the State Controller. On appeal, the California Supreme Court in
late December 1992 upheld the lower court's action, ruling that the State
Constitution's guarantee of public education required the State to ensure a full
year's education in all school districts. The Court, however, overturned a
portion of the original order relating to the source of funds

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for RUSD's emergency loan: the decision leaves unclear just where the State must
find funds to make any future loans of this kind.

In the Yuba River flood litigation, the trial court has found liability in
inverse condemnation and awarded of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 30 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. An appeal has been filed.

In Penny Newman v. J.B. Stringfellow, et al., which involves a damage claim of
$850 million arising from contamination at the Stringfellow toxic waste site, a
group of 17 of the 3,800 plaintiffs has received a verdict against the State for
a total of $159,000. The other cases, which have not been litigated, are in the
process of settlement. In a separate suit, United States, People of the State of
California v. J.B. Stringfellow Jr. et al., the State has been found liable by
the District Court on the counterclaim. The amount of liability is still being
litigated.

In Mervin Morris v. Franchise Tax Board, and related issue cases, the State is
a defendant in a lawsuit involving the exclusion of small business stock gains
from preference tax and in some cases, also from taxation. The Franchise Tax
Board now estimates a combined total of approximately $250 million is at issue
in all (court and administrative) cases with the small business stock issue. In
June 1993 the first Court of Appeal decision on this issue was entered (in the
Lennane case) in favor of the Franchise Tax Board. In August 1993 the second
Court of Appeal decision on this issue was entered (in the Morris case) in favor
of the Franchise Tax Board. On December 28, 1994, the California Supreme Court
decided against the State in Lennane; it has taken no action on Morris. The
State will be losing at least $80 million as a result of the decision in
Lennane.

In Parr v. State of California, a complaint was filed in federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The federal court held that the issuance of registered
warrants does violate the FLSA. In February 1994, Justice Sandra Day O'Connor
refused to block a U.S. magistrate from ordering California to pay $300 million
in penalties. The federal district court issued an order on February 3, 1995
prohibiting the State from further supporting its good faith defense to
liquidated damages, and referred the matter to the magistrate to conduct further
proceedings regarding the damage, if any, to be awarded. The maximum amount of
damage could be approximately $500 million.

Certain cases have been filed with respect to the State's reduction in
payments under the Aid to Families with Dependent Children program. In March
1995, the U.S. Supreme Court upheld a State law limiting certain benefits under
the Aid to Families with Dependent Children program ("AFDC"). In a separate case
decided in February 1995, the U.S. Supreme Court vacated a lower court
injunction on a State law which set lower benefit levels under AFDC for persons
residing in the State for less than one year. The Supreme Court concluded that a
failure to obtain a federal waiver already prevented the State from enacting
such legislation. Anticipated savings from such new law had been estimated at
$22 million annually. The outcome of remaining cases and their ultimate impact
on the State's finances cannot be determined at this time.

The State recently lost several tax refund cases concerning the method of
determining gross insurance premiums involving health insurance. The loss to the
State will be approximately $200 million.

Several lawsuits have been filed by Malibu Video Systems in State and Federal
court to challenge the transfer of moneys from special fund accounts within the
State Treasury to the State's General Fund pursuant to the Budget Acts of 1991,
1992 and 1993. Plaintiffs seek to have the transfers reversed and the moneys,
allegedly totaling approximately $800 million, returned to the special funds.
The State disputes both liability and the amount claimed.

The State is a respondent/defendant in two consolidated cases (American Lung
Association of California v. Wilson; Americans for Nonsmokers' Rights v. State
of California) challenging the purposes of specific appropriations of funds
totaling approximately $65 million for Fiscal Year 1994-95 and approximately $68
million for Fiscal Year 1995-96 from the Cigarette and Tobacco Products Surtax
Fund created by Proposition 99. The petitioners/plaintiffs argue that the funds
can only be used for health education and tobacco-related disease research
programs. The appropriations primarily fund health care services for low-income
persons. On January 23, 1995, the Superior Court issued an interim order in the
consolidated cases prohibiting the State from further encumbering the
specifically appropriated funds and from issuing or negotiating warrants from
the appropriated funds. A final order is expected to be issued after a further
hearing

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on the remedy to be granted. The effect on the General Fund is unclear. A third
lawsuit challenging the similar appropriations of Proposition 99 funds for
Fiscal Years 1989-90 through 1995-96 has been filed and is pending.

In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in fiscal year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be constitutional, and to transfer to PERS the 1993-94 and
1994-95 contributions that are unpaid to date. The State defendants have
appealed.

In Jernigan & Burleson v. State, filed in federal district court, the prison
inmate plaintiffs claim they are entitled to minimum wages while working for the
Prison Industry Authority. The inmates claim the State has violated the Fair
Labor Standards Act. Plaintiffs are seeking back pay for the period from August
1990 onward, and liquidated damages, for a total of approximately $350 million.
Both liability and damages are being contested by the State.

Recent Legislation. Recently, legislation has been enacted which (1)
increases, in limited instances, the abilities of both county boards of
supervisors and redevelopment agencies to impose new special taxes; (2) repeals
the existing limitations on the amount of notes of the State of California which
may be sold; (3) eliminates certain restrictions on repayment of general
obligations bonds; (4) allows revenue anticipation notes to be repaid in a
succeeding fiscal year and generally facilitates their issuance; (5) increases
the ability of community redevelopment agencies to issue revenue bonds for the
purpose of refunding bonds of other political subdivisions of the State; and (6)
automatically and proportionately reduces programmed General Fund appropriations
for the next fiscal year (except those mandated by the Constitution) up to 4%,
if the State Director of Finance, with concurrence of the Commission on State
Finance, certifies that revenues for such fiscal year were not expected to meet
programmed budgetary requirements. In November 1992, the State's voters enacted
an Initiative which reinstated a sales tax exemption for certain candy, snack
foods and bottled water. In November 1993, voters enacted an Initiative which
made permanent a half-cent temporary sales tax which had been scheduled to
expire December 31, 1993. After 1995, the maximum personal income tax rate is
scheduled to return to 9.3 percent from 11 percent, and the AMT rate is
scheduled to drop to 7 percent from 8.5 percent. On November 8, 1994, California
voters approved initiatives relating "three strikes" criminal penalties and
illegal immigrations. The State Controller's report indicated that there was no
anticipated cash impact in the 1994-95 Fiscal Year for such initiatives, but
suggested that budgetary pressure may materialize next year. Additional
legislation has been or may be introduced which would create new regional
agencies with the ability to tax and issue debt, alter the definition of
ownership changes that trigger reassessment of business property under Article
XIIIA, modify existing taxes or other revenue-raising measures or which either
would further limit or, alternatively would increase the abilities of State and
local governments to impose new taxes, increase existing taxes (including sales
tax increases to fund earthquake relief), or issue bonds or other debt
instruments. It is not currently possible to predict the extent to which any
such legislation will be enacted. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Nor is it currently possible to determine the
impact of any recently enacted or proposed legislation on California municipal
securities in which the Fund may invest or future allocations of State revenues
to local governments.

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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.

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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.

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underlying financial instruments, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.

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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.

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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.

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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.

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 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
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also 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.

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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 respects to such payment.

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 policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of 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.

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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 as 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 each 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
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.

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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 honour
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 honour 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 Common
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.

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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 any 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.

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>

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<PAGE> 335

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.

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.

* 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>

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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.

2. MUNICIPAL NOTES

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

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it will 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 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:

<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>

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<PAGE> 337

reliable. The ratings may be changed, suspended, or withdrawn as a result
of changes in or unavailability of, such information.