VAN KAMPEN MERRITT TAX FREE FUND /IL/, 485BPOS, 1995-08-18

VAN KAMPEN MERRITT TAX FREE FUND /IL/
485BPOS, 1995-08-18

Previous: UNION TEXAS PETROLEUM HOLDINGS INC, 8-K, 1995-08-18

Next: VAN KAMPEN MERRITT TAX FREE FUND /IL/, DEFA14A, 1995-08-18

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1995

REGISTRATION NOS. 2-99715
811-4386
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 38 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 39 /X/

VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
(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)

Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Secretary,
Van Kampen American Capital, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
(Name and Address of Agent for Service)

Copies to:

Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700
------------------------

Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
------------------------

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

/ / IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)

/X/ ON SEPTEMBER 1, 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

IF APPROPRIATE CHECK THE FOLLOWING:
/ / THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.

DECLARATION PURSUANT TO RULE 24F-2

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND WILL FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1995 ON OR ABOUT FEBRUARY 28, 1996.

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

<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains five Prospectuses and five Statements
of Additional Information describing five of the twelve series of the
Registrant. The Registration Statement is organized as follows:

Facing Page

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

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

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

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

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

Prospectus relating to Van Kampen American Capital Tax Free High Income
Fund

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

Prospectus relating to Van Kampen American Capital Limited Term Municipal
Income Fund

Statement of Additional Information relating to Van Kampen American Capital
Limited Term Municipal Income Fund.

Prospectus relating to Van Kampen American Capital Florida Insured Tax Free
Income Fund

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

Prospectus relating to Van Kampen American Capital New Jersey Tax Free
Income Fund

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

Prospectus relating to Van Kampen American Capital New York Tax Free Income
Fund

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

Part C Information

Exhibits
-------------------------
<PAGE> 3

The Prospectus and Statement of Additional Information with respect to each
of Van Kampen American Capital California Tax Free Income Fund, Van Kampen
American Capital Michigan Tax Free Income Fund, Van Kampen American Capital
Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax Free
Income Fund, four other series of the Registrant, 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.

The Prospectus and Statement of Additional Information with respect to each
of Van Kampen American Capital Insured Tax Free Income Fund, Van Kampen American
Capital California Insured Tax Free Fund and Van Kampen American Capital
Municipal Income Fund, included in Post-Effective Amendment No. 37 to the
Registration Statement of the Registrant are included herein by reference and no
changes thereto are affected hereby.

<PAGE> 4

VAN KAMPEN AMERICAN CAPITAL 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; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
PRACTICES; INVESTMENT ADVISORY SERVICES; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or Repurchase.... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>

i
<PAGE> 5

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR 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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; 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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
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 PERFORM-
ANCE; 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 AMERICAN CAPITAL LIMITED TERM MUNICIPAL INCOME FUND

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

iii
<PAGE> 7

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR 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................ Shares of the Fund; Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; 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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
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 PERFORM-
ANCE; 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 AMERICAN CAPITAL 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; ADDITIONAL
INFORMATION
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; DESCRIPTION OF SHARES
OF THE FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
PRACTICES; INVESTMENT ADVISORY SERVICES; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>

v
<PAGE> 9

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR 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............... 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;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Officers and
Trustees; The Distributor; Notes to Financial
Statements
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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
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.......... 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.

vi
<PAGE> 10

VAN KAMPEN AMERICAN CAPITAL 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; ADDITIONAL
INFORMATION
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; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT PRACTICES; INVESTMENT ADVISORY
SERVICES; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>

vii
<PAGE> 11

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR 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............... 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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Officers and
Trustees; The Distributor; Notes to Financial
Statements
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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
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.......... 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.

viii
<PAGE> 12

VAN KAMPEN AMERICAN CAPITAL 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; ADDITIONAL
INFORMATION
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; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Funds..................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT PRACTICES; INVESTMENT ADVISORY
SERVICES; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
PART B
Item 10. Cover Page.................. Cover Page
</TABLE>

ix
<PAGE> 13

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Officers and
Trustees; The Distributor; Notes to Financial
Statements
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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
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.......... 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.

x
<PAGE> 14

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

VAN KAMPEN AMERICAN CAPITAL

TAX FREE HIGH INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital Tax Free High Income Fund, formerly known as Van
Kampen Merritt Tax Free High Income Fund (the "Fund"), is a separate diversified
mutual fund organized as a series of Van Kampen American Capital Tax Free Trust.
The Fund's investment objective is to provide 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.

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. See
"Municipal Securities -- Special Considerations and Risk Factors Regarding
Medium and Lower Grade Municipal Securities." Investment in the Fund may not be
appropriate for all investors.
------------------ (Continued on next page.)

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 September 1, 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 (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.

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

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

THIS PROSPECTUS IS DATED SEPTEMBER 1, 1995.

<PAGE> 15

(Continued from previous page.)

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)
421-5666.

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

2
<PAGE> 16

------------------------------------------------------------------------------
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........................................... 21
Investment Advisory Services................................... 23
Alternative Sales Arrangements................................. 25
Purchase of Shares............................................. 27
Shareholder Services........................................... 36
Redemption of Shares........................................... 40
The Distribution and Service Plans............................. 43
Distributions from the Fund.................................... 45
Tax Status..................................................... 46
Fund Performance............................................... 49
Description of Shares of the Fund.............................. 51
Additional Information......................................... 52
Appendix A: Description of Municipal Securities Ratings........ 53
</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> 17

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

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

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

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income taxes primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities.

INVESTMENT POLICIES. 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

4
<PAGE> 18

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 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 Objective 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."

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

5
<PAGE> 19

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 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."

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

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares 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 CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares.

6
<PAGE> 20

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 CDS Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for the Fund. The Adviser utilizes at its own expense
certain research services of its affiliate, McCarthy, Crisanti & Maffei, Inc.
See "Investment Advisory Services."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

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

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

7
<PAGE> 21

------------------------------------------------------------------------------
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 the lesser of the
original purchase price or
redemption proceeds)........... None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a percentage
of amount redeemed)............ None None None
Exchange fees.................... None None None
</TABLE>

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

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

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

8
<PAGE> 22

------------------------------------------------------------------------------
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).......................... 0.48% 0.48% 0.48%
12b-1 Fees(1) (as a percentage of average
daily net assets).......................... 0.23% 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets).......................... 0.19% 0.19% 0.25%
Total Expenses (as a percentage of average
daily net assets).......................... 0.90% 1.67% 1.73%
</TABLE>

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

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

9
<PAGE> 23

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 0.90% for Class A Shares,
1.67% for Class B Shares, and 1.73% for Class
C Shares, (ii) 5% annual return and (iii)
redemption at the end of each time period:
Class A Shares............................... $56 $75 $ 95 $ 153
Class B Shares............................... $57 $88 $ 106 $ 167*
Class C Shares............................... $28 $54 $ 94 $ 204
You would pay the following expenses on the
same $1,000 investment assuming no redemption
at the end of each period:
Class A Shares............................... $56 $75 $ 95 $ 153
Class B Shares............................... $17 $53 $ 91 $ 167*
Class C Shares............................... $18 $54 $ 94 $ 204
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

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 "Example" reflect expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion 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> 24

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

The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.

<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------------------------------------------
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>

(Continued on following page)

(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> 25

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

<TABLE>
<CAPTION>
CLASS C SHARES
CLASS B 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> 26

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

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

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

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

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

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

13
<PAGE> 27

in which the Fund may invest. Such instruments will be treated as municipal
securities for purposes of the 80% test.

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

14
<PAGE> 28

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
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

15
<PAGE> 29

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 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.

16
<PAGE> 30

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 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

17
<PAGE> 31

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 AND RISK FACTORS 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 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

18
<PAGE> 32

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.

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 &

19
<PAGE> 33

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 (the "Code"), 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 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

20
<PAGE> 34

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.

21
<PAGE> 35

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 so for the

22
<PAGE> 36

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.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. 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.

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

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38 closed-end funds and
more than 2,700 unit investment trusts are professionally distributed by leading
financial advisers nationwide.

23
<PAGE> 37

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

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

PERSONAL INVESTING POLICIES. The 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.

24
<PAGE> 38

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

------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
------------------------------------------------------------------------------

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

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

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

25
<PAGE> 39

sales charge and have all his or her funds initially invested in Class B Shares
or Class C Shares. If such an investor anticipates that he or she will redeem
such shares prior to the expiration of the CDSC period applicable to Class B
Shares, the investor may wish to acquire Class C Shares. Investors must weigh
the benefits of deferring the sales charge and having all of their funds
invested against the higher aggregate distribution and service fee applicable to
Class B Shares and Class C Shares (discussed below). Investors who intend to
hold their shares for a significantly long time may not wish to continue to bear
the ongoing distribution and service expenses of Class C Shares which, in the
aggregate, eventually would exceed the aggregate amount of initial sales charge
and distribution and service expenses applicable to Class A Shares, irrespective
of the fact that a CDSC would eventually not apply to a redemption of such Class
C Shares.

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

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

26
<PAGE> 40

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

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") acting as
securities dealers ("dealers") and through NASD members acting as brokers for
investors ("brokers") or eligible non-NASD members acting as agents for
investors ("financial intermediaries"). The Fund reserves the right to suspend
or terminate the continuous public offering at any time and without prior
notice.

The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or 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.

27
<PAGE> 41

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 to brokers, dealers and financial intermediaries
for sales contests, other sales programs and seminars are made by the
Distributor out of its own assets and not out of the assets of the Fund. These
programs will not change the price an investor will pay for shares or the amount
that the Fund will receive from such sale.

CLASS A SHARES

The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between 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.

SALES CHARGE TABLE

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

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

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

28
<PAGE> 42

QUANTITY DISCOUNTS

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

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

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

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

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

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

29
<PAGE> 43

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

OTHER PURCHASE PROGRAMS

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

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

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

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

30
<PAGE> 44

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

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

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

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

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

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

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

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

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

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

31
<PAGE> 45

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

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

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

DEFERRED SALES CHARGE ALTERNATIVES

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

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

32
<PAGE> 46

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

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
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).

33
<PAGE> 47

on redemptions made within one year of the purchase. A commission will be paid
to dealers who initiate and are responsible for purchases of $1 million or more
as follows: 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million.

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

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

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

Conversion Feature. 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

34
<PAGE> 48

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 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 Code, and (ii)
that the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.

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

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

NET ASSET VALUE

The net asset value per share of the Fund 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.

35
<PAGE> 49

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 series. 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.

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

SHAREHOLDER SERVICES

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

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

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

SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a

36
<PAGE> 50

fee for replacing the lost certificate equal to no more than 2.00% of the net
asset value of the issued shares and bill the party to whom the replacement
certificate was mailed.

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

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

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

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

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

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

37
<PAGE> 51

the Fund will increase the number of days shares must be registered in a
shareholder's name prior to an exchange to 30 days.

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

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

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

38
<PAGE> 52

being acquired, a new account will be established with the same registration,
dividend and capital gains options (except dividend diversification options) and
broker, dealer or financial intermediary of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or dividend
diversification options for the new account, an exchanging shareholder must file
a specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.

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

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

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

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company

39
<PAGE> 53

("State Street Bank") will be sent to such shareholder. These checks may be made
payable by the holder of Class A Shares to the order of any person in any amount
of $100 or more.

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

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

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

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

REDEMPTION OF SHARES

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

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

40
<PAGE> 54

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

DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.

41
<PAGE> 55

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

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

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

42
<PAGE> 56

satisfactory proof of disability before it determines to waive the contingent
deferred sales charge on Class B Shares and Class C Shares.

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

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

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

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

43
<PAGE> 57

dealers or financial intermediaries (collectively, "Selling Agreements") that
may provide for their customers or clients certain services or assistance.

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

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

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

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

44
<PAGE> 58

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 less than
0.01% of the Fund's total net assets. If the Distribution Plan was terminated or
not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.

Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of CDSC Shares to defray distribution related expenses
attributable to any other class of CDSC Shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.

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

DISTRIBUTIONS FROM THE FUND

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

The Fund's 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

45
<PAGE> 59

any, are expected to be distributed, to the extent permitted by applicable law,
to shareholders at least annually. Distributions cannot be assured, and the
amount of each monthly distribution may vary.

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

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

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

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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

TAX STATUS

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

FEDERAL TAXES. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets. If the Fund so qualifies and if it distributes 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

46
<PAGE> 60

losses), it will not be required to pay federal income taxes on any income
distributed to shareholders. The Fund intends to distribute at least the minimum
amount of net investment income to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gain
distributed to its shareholders.

In order to avoid a 4% excise tax, the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, the Fund will be treated
as having been distributed.

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

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.

47
<PAGE> 61

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.

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 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.

48
<PAGE> 62

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

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

49
<PAGE> 63

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 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

50
<PAGE> 64

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.

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

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

DESCRIPTION OF SHARES OF THE FUND

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

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

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 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 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 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

51
<PAGE> 65

Class A Shares as described above. In the event of liquidation, each of the
shares of the Fund is entitled to its portion of all of the Fund's net assets
after all debt and expenses of the Fund have been paid. Since Class B Shares and
Class C Shares pay higher distribution expenses, the liquidation proceeds to
holders of Class B Shares and Class C Shares are likely to be lower than to
other shareholders.

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

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

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

The 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 the
Fund's independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.

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

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

52
<PAGE> 66

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>

53
<PAGE> 67

<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,
B on balance, as predominantly speculative with respect to
CCC capacity to pay interest and repay principal. 'BB'
CC indicates the least degree of speculation and 'C' the
C highest. While such debt 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.
</TABLE>

54
<PAGE> 68

<TABLE>
<S> <C>
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.
</TABLE>

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

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

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>

55
<PAGE> 69

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 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.
</TABLE>

56
<PAGE> 70

<TABLE>
<S> <C>
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 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+').

57
<PAGE> 71

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.
</TABLE>

58
<PAGE> 72

<TABLE>
<S> <C>
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.

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.

59
<PAGE> 73

2. SHORT-TERM EXEMPT NOTES

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

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

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

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

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

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

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

3. TAX-EXEMPT COMMERCIAL PAPER

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

60
<PAGE> 74

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.

61
<PAGE> 75

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL

YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL

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

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

Custodian

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

Attn: Van Kampen American Capital Funds

Legal Counsel

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

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 76

TAX FREE HIGH
INCOME FUND

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

P R O S P E C T U S

SEPTEMBER 1, 1995

------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 77
STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND

Van Kampen American Capital Tax Free High Income Fund, formerly known as Van
Kampen Merritt Tax Free High Income Fund (the "Fund") is a separate diversified
series of Van Kampen American Capital Tax Free Trust, a Delaware 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 September 1, 1995
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
shares of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling (800) 421-5666.

The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. (the "SEC"). This omitted information
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>
<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-16
Custodian and Independent Auditors................................................... B-18
Portfolio Transactions and Brokerage Allocation...................................... B-18
Tax Status of the Fund............................................................... B-19
The Distributor...................................................................... B-19
Legal Counsel........................................................................ B-20
Performance Information.............................................................. B-21
Independent Auditors' Report......................................................... B-22
Financial Statements................................................................. B-23
Notes to Financial Statements........................................................ B-34
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 1, 1995.

B-1
<PAGE> 78

THE FUND AND THE TRUST

The Fund is a separate diversified series of the Trust. The Trust is an
unincorporated business trust established under the laws of the State of
Delaware by an Agreement and Declaration of Trust dated as of May 10, 1995
("Declaration of Trust"). At present, the Fund, Van Kampen American Capital
Insured Tax Free Income Fund, Van Kampen American Capital California Insured Tax
Free Fund, Van Kampen American Capital Municipal Income Fund, Van Kampen
American Capital Limited Term Municipal Income Fund, Van Kampen American Capital
Florida Insured Tax Free Income Fund, Van Kampen American Capital New Jersey Tax
Free Income Fund and Van Kampen American Capital New York Tax Free Income Fund
have been organized as series of the Trust and have commenced investment
operations. Van Kampen American Capital California Tax Free Income Fund, Van
Kampen Merritt American Capital Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax
Free Income Fund have been organized as series of the Trust but have not
commenced investment operations. Other series may be organized and offered in
the future. The Fund originally was organized as a Maryland corporation under
the name Van Kampen Merritt Tax Free High Income Fund Inc. and was reorganized
under the name Van Kampen Merritt Tax Free High Income Fund as a sub-trust of
the Van Kampen Merritt Tax Free Fund, a Massachusetts business trust. The Fund
was reorganized as a series of the Trust as of July 31, 1995.

The Declaration of Trust permits the Trustees to create one or more separate
investment portfolios and issue a series of shares for each portfolio. The
Trustees can further sub-divide each series of shares into one or more classes
of shares for each portfolio. The Trust can issue an unlimited number of shares,
$0.01 par value (prior to July 31, 1995, the shares had no par value). Each
share of the Trust represents an equal proportionate interest in the assets of
its respective series with each other share in such series and no interest in
any other series. No series is subject to the liabilities of any other series.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.

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

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

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

INVESTMENT POLICIES AND RESTRICTIONS

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

B-2
<PAGE> 79

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.

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

B-3
<PAGE> 80

(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,
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

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 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 and Risk Factors
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.

B-5
<PAGE> 82

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
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, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. The Fund may, from time to time,
adopt a more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.

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

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

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

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

B-7
<PAGE> 84

imposed with respect to particular classes or series of options or underlying
securities including reaching daily price limits; (iv) interruption of the
normal operations of the OCC or an exchange; (v) inadequacy of the facilities of
an exchange or OCC to handle current trading volume; or (vi) a decision by one
or more exchanges to discontinue the trading of options (or a particular class
or series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.

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

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

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

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.

B-8
<PAGE> 85

those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.

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

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

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

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.

B-9
<PAGE> 86

Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.

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

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

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

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

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

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

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

OFFICERS AND TRUSTEES

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

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
</TABLE>

B-11
<PAGE> 88

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

B-12
<PAGE> 89

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
</TABLE>

B-13
<PAGE> 90

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.

Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.

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

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

B-14
<PAGE> 91

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>

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

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

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

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

B-15
<PAGE> 92
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 $ 45 $2,500 $ 62,362
Philip G. Gaughan.............. 21,928 994 2,500 63,250
Donald C. Miller............... 23,768 1,881 2,500 62,178
Jack A. Nelson................. 23,858 484 2,500 62,362
Jerome L. Robinson............. 23,801 831 2,500 58,475
Wayne W. Whalen................ 17,553 330 2,500 49,875
</TABLE>

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

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

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

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The
amounts in this column are the retirement benefits accrued during the
Fund's fiscal year ended December 31, 1994.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.

(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board
of Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual
funds in the Fund Complex during the calendar year ended December 31,
1994. The VK Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. Powell,
McDonnell and Whalen, such investment companies do not have the same
trustees as the Fund Complex. Combining the Fund Complex with other
investment companies advised by the VK Adviser, Mr. Whalen received Total
Compensation of $161,850.

As of August 11, 1995, the trustees and officers as a group own less than 1%
of the Shares of the Fund.

To the knowledge of the Fund, as of August 11, 1995, no person owned of record
or beneficially 5% or more of such Fund's Class A Shares or Class B Shares.

As of August 11, 1995, the following person owned of record or beneficially 5%
or more of the Fund's Class C Shares: Bernard Segall, 3501 Westlake Drive,
Austin, TX 78746-1610, 5%.

INVESTMENT ADVISORY AND OTHER SERVICES

Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through

B-16
<PAGE> 93

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, 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 own, in the
aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
11% of the common stock of VK/AC Holding, Inc. Presently, and after giving
effect to the exercise of such options, no officer or trustee of the Fund owns
or would own 5% or more of the common stock of VK/AC Holding, Inc.

The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative services, and permits its officers and employees to
serve without compensation as officers of the Fund and trustees of the Trust if
duly elected to such positions.

The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.

The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.

The investment advisory agreement 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

ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares with the other Van Kampen American Capital mutual funds
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost 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 VK Adviser's cost of providing accounting services.

B-17
<PAGE> 94

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, 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 and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the 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 funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.

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

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.

B-18
<PAGE> 95

If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.

The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC 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 series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight. Van Kampen American Capital's roots in
money management extend back to 1926. Today, Van Kampen American Capital manages
or supervises more than $50 billion in mutual funds, closed-end funds and unit
investment trusts -- assets which have been entrusted to Van Kampen American
Capital in more than 2 million investor accounts. Van Kampen American Capital
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.

Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, 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 and its subsidiaries own, in the aggregate not more than
7% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 11% of the common
stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton, Dubilier & Rice,
Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D Associates
L.P.") is the general partner of C & D L.P. Pursuant to a distribution
agreement, the Distributor will purchase shares of the Fund for resale to the
public, either directly or through securities dealers, and is obligated to

B-19
<PAGE> 96

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 financial
intermediaries who are acting as brokers (collectively, "Selling Agreements")
that may provide for their customers or clients certain services or assistance,
which may include, but not be limited to, processing purchase and redemption
transactions, establishing and maintaining shareholder accounts regarding the
Fund, and such other services as may be agreed to from time to time and as may
be permitted by applicable statute, rule or regulation. Brokers, dealers and
financial intermediaries that have entered into sub-agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

Under the Distribution 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 series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.

For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $1,678,218, $906,729 and $77,984 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $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.

B-20
<PAGE> 97

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 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-21
<PAGE> 98
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-22
<PAGE> 99

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-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>
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-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>
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-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>
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-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>
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-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>
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-28

<PAGE> 105

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-29

<PAGE> 106

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-30
<PAGE> 107

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-31

<PAGE> 108

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-32

<PAGE> 109

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>

<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 ........................................... $ (43,955,918) $ (43,112,469)
Class B Shares ........................................... (5,542,863) (857,755)
Class C Shares ........................................... (476,352) (34,623)
Class D Shares ........................................... (107,905) -0-
----------------- ---------------
$ (50,083,038) $ (44,004,847)
----------------- ---------------
</TABLE>

See Notes to Financial Statements

B-33

<PAGE> 110

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-34
<PAGE> 111

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-35
<PAGE> 112

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-36

<PAGE> 113

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-37
<PAGE> 114

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

VAN KAMPEN AMERICAN CAPITAL

LIMITED TERM MUNICIPAL INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital Limited Term Municipal Income Fund, formerly
known as Van Kampen Merritt Limited Term Municipal Income Fund (the "Fund"), is
a separate diversified series of Van Kampen American Capital Tax Free Trust, an
open-end management investment company, commonly known as a mutual fund. The
Fund's investment objective is to seek a high level of current income exempt
from federal income tax, consistent with preservation of capital. The Fund will
seek to achieve its investment objective by investing substantially all of its
assets in a diversified portfolio of 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 or Baa or higher by Moody's
Investors Service, Inc. (or comparably rated by any other nationally recognized
statistical ratings organization). The Fund does not intend to invest in unrated
municipal securities. Under current market conditions, the Fund anticipates that
it will limit the dollar-weighted average life of its portfolio to between 10
and 15 years. Municipal securities in which the Fund may invest include
conventional fixed-rate municipal securities, variable rate municipal securities
and other types of municipal securities described herein. See "Municipal
Securities." The Fund may invest a substantial portion of its assets in
municipal securities that pay interest that is subject to the alternative
minimum tax. There is no assurance that the Fund will achieve its investment
objective.

(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 September 1, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device For the Deaf at (800) 772-8889.

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

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

THIS PROSPECTUS IS DATED SEPTEMBER 1, 1995.

<PAGE> 115

(Continued from previous page.)

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 in the Fund. Please
read it carefully and retain it for future reference. The address of the Fund is
One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number
is (800) 421-5666.

The Fund is offering 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 a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase ("Class A Shares") or (ii) on a contingent
deferred basis (Class A Share accounts over $1 million, "Class B Shares" and
"Class C Shares"). The Alternative Sales Arrangements permit an investor to
choose the method of purchasing shares that is more beneficial to the investor,
taking into account the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% of 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 Shares
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 will automatically
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. The purpose of the
conversion feature is to relieve the holders of Class B Shares after such six
year period from the higher aggregate distribution and service fees applicable
to Class B Shares. See "Alternative Sales Arrangements" and "Purchase of
Shares."

2
<PAGE> 116

------------------------------------------------------------------------------
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........................................... 14
Investment Practices........................................... 17
Investment Advisory Services................................... 21
Alternative Sales Arrangements................................. 22
Purchase of Shares............................................. 24
Shareholder Services........................................... 34
Redemption of Shares........................................... 38
The Distribution and Service Plans............................. 41
Distributions from the Fund.................................... 43
Tax Status..................................................... 44
Fund Performance............................................... 48
Description of Shares of the Fund.............................. 49
Additional Information......................................... 50
</TABLE>

3
<PAGE> 117

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

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

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

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

INVESTMENT POLICIES. The Fund will seek to achieve its investment objective by
investing substantially all of its assets in a diversified portfolio of
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") (or comparably rated by any other nationally recognized statistical
ratings organization). The Fund does not intend to invest in unrated municipal
securities. Under current market conditions, the Fund anticipates that it will
limit the dollar-weighted average life of its portfolio to between 10 and 15
years. There is no assurance that the Fund will achieve its investment
objective. See "Investment Objective and Policies."

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 net asset value per share of the Fund may
increase or decrease depending on changes in interest rates and other factors
affecting the municipal securities markets. See "Municipal Securities."

INVESTMENT PRACTICES. The Fund also may use various investment techniques
including engaging in Strategic Transactions and entering into when-issued or
delayed delivery transactions. Such transactions entail certain risks. See
"Municipal Securities" and "Investment Practices." The Fund may invest an
unlimited 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

4
<PAGE> 118

become subject to the federal alternative minimum tax as a result of an
investment in the Fund. See "Tax Status."

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

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

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

Class A Shares. Class A Shares are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but generally are subject to a sales charge if redeemed within four
years of purchase. Class B Shares are subject to a CDSC equal to 3.00% 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.

5
<PAGE> 119

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 Fund's average daily net assets attributable to the Class C Shares.

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

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

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

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

6
<PAGE> 120

------------------------------------------------------------------------------
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)..................... 3.25%(1) None None
Maximum sales charge imposed
on reinvested dividends (as
a percentage of the
offering price)............ None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of
the original purchase price
or redemption proceeds).... None(2) Year Year
1--3.00% 1--1.00%
Year After--None
2--2.50%
Year
3--2.00%
Year
4--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed).................. None None None
Exchange fees................ None None None
</TABLE>

----------------
(1) Reduced on investments of $25,000 or more. See "Purchase of Shares -- Class
A Shares."

7
<PAGE> 121

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

ANNUAL FUND OPERATING EXPENSES AND EXAMPLE

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

<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)................. 0.00% 0.00% 0.00%
12b-1 fees (as a percentage of average daily
net assets)(2)............................ 0.25% 1.00% 1.00%
Other expenses(1) (as a percentage of
average daily net assets)................. 0.67% 0.71% 0.72%
Total expenses(1) (as a percentage of
average daily net assets)................. 0.92% 1.71% 1.72%
</TABLE>

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

(1) Expenses include a waiver of $179,781 of "Management fees" and assumption of
"Other expenses" of $202,666 by the Adviser. If the Adviser did not waive
fees for the fiscal year ending December 31, 1994, the "Management fees"
would have been 0.50% for each class of shares, "Other expenses" would have
been 0.82% for Class A Shares, 0.82% for Class B Shares and 0.83% for Class C
Shares and "Total expenses" would have been 1.57% for Class A Shares, 2.32%
for Class B Shares and 2.33% for Class C Shares.

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

8
<PAGE> 122

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 0.92% for Class A Shares,
1.71% for Class B Shares and 1.72% for Class
C Shares (ii) 5% annual return and (iii)
redemption at the end of each time period:
Class A Shares............................. $42 $61 $82 $ 142
Class B Shares............................. $47 $74 $93 $ 162*
Class C Shares............................. $27 $54 $93 $ 203
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................. $42 $61 $82 $ 142
Class B Shares............................. $17 $54 $93 $ 162*
Class C Shares............................. $17 $54 $93 $ 203
</TABLE>

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

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

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. 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. 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
THAN OR LESS THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."

9
<PAGE> 123

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 reports thereon appear in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------- ---------------------------- CLASS C SHARES
MAY 28, 1993 MAY 28, 1993 -------------------------------
(COMMENCEMENT (COMMENCEMENT OCTOBER 19, 1993
OF INVESTMENT OF INVESTMENT (COMMENCEMENT
OPERATIONS) OPERATIONS) OF DISTRIBUTION)
YEAR ENDED TO YEAR ENDED TO YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1994 1993 1994 1993
------------ ------------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 10.145 $ 9.700 $ 10.137 $ 9.700 $ 10.134 $ 10.250
------------ ------------- ------------ ------------- ------------ --------
Net Investment Income........... .489 .278 .417 .233 .419 .091
Net Realized and Unrealized
Gain/Loss on Investments...... (.815) .462 (.818) .460 (.822) (.098)
------------ ------------- ------------ ------------- ------------ --------
Total from Investment
Operations...................... (.326) .740 (.401) .693 (.403) (.007)
------------ ------------- ------------ ------------- ------------ --------
Less:
Distributions from Net
Investment Income............. .489 .273 .417 .234 .417 .087
Distributions from Net Realized
Gain on Investments........... -- .022 -- .022 -- .022
------------ ------------- ------------ ------------- ------------ --------
Total Distributions............... .489 .295 .417 .256 .417 .109
------------ ------------- ------------ ------------- ------------ --------
Net Asset Value, End of Period.... $ 9.330 $10.145 $ 9.319 $10.137 $ 9.314 $ 10.134
========== ============= ========== ============= ========== =============
Total Return
(Non-annualized)(1)............. (3.32%) 7.75% (4.04%) 7.23% (4.04%) (.10%)
Net Assets at End of Period
(in millions)................... $ 15.7 $ 14.0 $ 17.7 $ 13.9 $ 4.7 $ 0.3
</TABLE>

(Continued on following page)
See Financial Statements and Notes Thereto

10
<PAGE> 124

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

(1) If certain expenses had not been assumed or waived by the investment
adviser, total return would have been lower and the ratios would have been
as follows:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (annualized)....... 1.75% 2.21% 2.50% 2.98% 2.46% 2.97%
Ratio of Net Investment Income
to Average Net Assets
(annualized).................. 3.99% 2.70% 3.24% 1.89% 3.31% 2.06%
</TABLE>

See Financial Statements and Notes Thereto

11
<PAGE> 125

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

Van Kampen American Capital Limited Term Municipal Income Fund (the "Fund") is
a separate diversified series of Van Kampen American Capital Tax Free Trust (the
"Trust"), which is an open-end management investment company, commonly known as
a "mutual fund," organized as a Delaware business trust. Mutual funds sell their
shares to investors and invest the proceeds in a portfolio of securities. A
mutual fund allows investors to pool their money with that of other investors in
order to obtain professional investment management. Mutual funds generally make
it possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping. Investment in the Fund involves special
considerations as the Fund is a newly organized investment company with no
history of investment operations.

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

The investment objective of the Fund is to seek a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
Fund's investment objective may not be changed without shareholder approval. The
Fund will seek to achieve its investment objective by investing substantially
all of its assets in a diversified portfolio of municipal securities rated
investment grade at the time of investment. The Fund does not intend to invest
in unrated municipal securities. Under current market conditions, the Fund
anticipates that it will limit the dollar-weighted average life of its portfolio
to between 10 and 15 years. There is no limit with respect to the expected life
or stated maturity of individual municipal securities in which the Fund may
invest. The Fund's policies with respect to ratings and portfolio life are not
fundamental policies, and thus may be changed by the Trustees without
shareholder approval. See "Municipal Securities."

Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") (or comparably rated by any other nationally recognized statistical
rating organization ("NRSRO")) in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. 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

12
<PAGE> 126

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. For a
description of S&P's and Moody's ratings see the Statement of Additional
Information. From time to time, the Fund also may invest up to 10% of its assets
in tax exempt money market funds for cash management purposes. Such instruments
will be treated as investments in municipal securities.

The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
NRSRO) downgrades its assessment of the credit characteristics of a particular
issuer. In determining whether the Fund will retain or sell such a security, the
Adviser may consider such factors as the Adviser's assessment of the credit
quality of the issuer of such security, the price at which such security could
be sold and the rating, if any, assigned to such security by other NRSRO.
Securities rated below investment grade commonly are referred to as "junk bonds"
and are regarded by S&P and Moody's as predominantly speculative with respect to
the capacity to pay interest and/or repay principal in accordance with their
terms.

Under current market conditions, the Fund anticipates that it will limit the
dollar-weighted average life of its portfolio to between 10 and 15 years.
Generally, a portfolio of municipal securities having a longer dollar-weighted
average life tends to produce a higher level of income than a portfolio of
municipal securities having a shorter dollar-weighted average life, although
such differences cannot be assured. Under current market conditions, however,
the incremental yield-to-maturity difference between municipal securities with
longer maturities and municipal securities with shorter maturities tends to be
less than historic norms. In addition, market prices of municipal securities
with longer maturities generally fluctuate more in response to changes in
interest rates than do market prices of municipal securities with shorter
maturities. Based on the foregoing, the Adviser believes that under current
market conditions the yield and price characteristics of a municipal securities
portfolio with a dollar-weighted average life of 10 to 15 years generally offer
an attractive balance between income and interest rate risk. In certain market
conditions, however, such a portfolio may be less attractive because of
differences in yield between municipal securities of different maturities due to
supply and demand forces, monetary and tax policies and investor expectations.
In the event of sustained market conditions that make it less desirable to
maintain a dollar-weighted average portfolio life of 10 to 15 years, the Board
of Trustees of the Trust, after consultation with the Adviser, may change the
investment policy of the Fund with respect to the dollar-weighted average life
of the portfolio. The Fund's

13
<PAGE> 127

investment policy with respect to the dollar-weighted average life of its
portfolio is not a fundamental policy, and may be changed by the Trustees
without obtaining shareholder approval. There is no limitation with respect to
the expected life or stated maturity of individual municipal securities in the
Fund's portfolio.

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

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

GENERAL. 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
net 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.

Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, 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

14
<PAGE> 128

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. 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. 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, and the markets for such securities may be less
developed than the market for conventional fixed rate 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.

Although the municipal securities in which the Fund may invest will be 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.

The Fund has not established any limit on the percentage of its portfolio that
may be invested in municipal securities subject to the alternative minimum tax
provisions of federal tax law, and a substantial portion of the income produced
by the Fund may be taxable under the alternative minimum tax. The Fund may not
be a

15
<PAGE> 129

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. In addition, income earned
or deemed to be earned with respect to the Fund's Strategic Transactions, if
any, will be taxable. See "Tax Status."

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.

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. Other than for tax purposes, frequency
of portfolio turnover generally will not be a limiting factor if the Fund
considers it advantageous to purchase or sell securities. The Fund may have
annual portfolio turnover rates in excess of 100%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
Fund and its shareholders. High portfolio turnover may also result in the
realization of substantial net short-term capital gains and any distributions
resulting from such gains will be taxable. See "Tax Status" in this Prospectus
and "Investment Policies and Restrictions" in the Statement of Additional
Information.

TEMPORARY 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 (or comparably rated by any other NRSRO); commercial paper rated in the
highest grade by either rating service (or comparably rated by any other NRSRO);
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

16
<PAGE> 130

with such strategy. To the extent that the Fund invests a substantial portion of
its assets in taxable securities for temporary defensive purposes, the Fund will
not be invested in a manner primarily designed to achieve a high level of
current income exempt from federal income tax.

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

17
<PAGE> 131

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."

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
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.

18
<PAGE> 132

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.

OTHER PRACTICES. 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.

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.

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

19
<PAGE> 133

alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Fund.

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). See "Investment Policies and Restrictions" in the
Statement of Additional Information.

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 generally are traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.

The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.

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

20
<PAGE> 134

------------------------------------------------------------------------------
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 Van Kampen
American Capital and its subsidiaries (some of whom are officers or trustees of
the Fund) own, in the aggregate, not more than 7% of the common stock of VK/AC
Holding Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc. The address of the Adviser is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

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

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

Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operations, including
the compensation of the Trustees of the Trust (other than those who are
affiliated

21
<PAGE> 135

persons, as defined in the 1940 Act, of the Adviser, the Distributor or Van
Kampen American Capital), the charges and expenses of independent accountants,
legal counsel, any transfer or dividend disbursing agent and the custodian
(including fees for safekeeping of securities), costs of calculating net asset
value, costs of acquiring and disposing of portfolio securities, interest (if
any) on obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any similar organization,
reports and notices to shareholders, costs of registering shares of the Fund
under the federal securities laws, miscellaneous expenses and all taxes and fees
to federal, state or other governmental agencies. The Adviser reserves the right
in its sole discretion from time-to-time to waive all or a portion of its
management fee and/or to reimburse the Fund for all or a portion of its other
expenses.

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

------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
------------------------------------------------------------------------------

The 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."

22
<PAGE> 136

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

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of 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 benefit 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> 137

time, however, the per share net asset values of the classes may differ. The net
asset value per share of each class of shares of the Fund will be determined as
described in this Prospectus under "Purchase of Shares -- Net Asset Value."

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

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

24
<PAGE> 138

to such time in order for the investor's order to be fulfilled on the basis of
the net asset value to be determined that day. Any change in the purchase price
due to the failure of the Distributor to receive a purchase order prior to such
time must be settled between the investor and the broker, dealer or financial
intermediary submitting the order.

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

CLASS A SHARES

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

25
<PAGE> 139

SALES CHARGE TABLE

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
--------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
------------------------------------ ----------- ----------- ----------
<S> <C> <C> <C>
Less than $25,000................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000...... 2.75 2.83 2.50
$250,000 but less than $500,000..... 1.75 1.78 1.50
$500,000 but less than $1,000,000... 1.50 1.52 1.25
$1,000,000 or more*................. * * *
</TABLE>

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

QUANTITY DISCOUNTS

26
<PAGE> 140

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.

OTHER PURCHASE PROGRAMS

27
<PAGE> 141

program meets certain uniform criteria relating to cost savings by the Fund and
the Distributor. The total sales charge for all investments made from unit trust
distributions will be 1.00% of the offering price (1.01% of net asset value). Of
this amount, the Distributor will pay to the broker, dealer or financial
intermediary, if any, through which such participation in the qualifying program
was initiated 0.50% of the offering price as a dealer concession or agency
commission. Persons desiring more information with respect to this program,
including the applicable terms and conditions thereof, should contact their
broker, dealer or financial intermediary or the Distributor.

28
<PAGE> 142

combination of shares of the Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.

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

29
<PAGE> 143

terminate, or amend the terms of, offering shares of the Fund at net asset value
to such groups at any time.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are being sold without an initial sales charge so that the Fund will receive 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) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 3.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.

CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. 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 contingent deferred sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no such charge
will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchase of CDSC Shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
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 service fees facilitates the ability of the Fund to sell such
CDSC Shares without a sales charge being deducted at the time of purchase.

30
<PAGE> 144

In determining whether a contingent deferred sales change 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 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 2.5% (the
applicable rate in the second year after purchase).

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

CLASS B SHARES. Class B Shares redeemed within four 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............................................... 3.0%
Second.............................................. 2.5%
Third............................................... 2.0%
Fourth.............................................. 1.0%
Fifth and after..................................... 0.0%
</TABLE>

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

31
<PAGE> 145

Conversion Feature. Six years after the end of the month in which a
shareholder's order to purchase a Class B Share was accepted, such Class B Share
automatically will convert to Class A Shares and will no longer be subject to
the higher distribution fee applicable to Class B Shares. The purpose of the
conversion feature is to relieve the holders of Class B Shares after such six
year period from the higher aggregate distribution and service fees applicable
to Class B Shares. Proceeds received by the Distributor from the distribution
fee and the CDSC, if any, with respect to a particular Class B Share may be more
or less than the Distributor's actual distribution related expense with respect
to such Class B Share. The Fund does not expect to issue any stock certificates
upon conversion.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to the Class B Shares 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 Shares 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 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 Code and (ii) 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, which period may extend beyond the period ending six years
after the end of the month in which the shares were issued.

32
<PAGE> 146

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

NET ASSET VALUE

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

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

33
<PAGE> 147

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

34
<PAGE> 148

reinvested at net asset value, or that both dividends and capital gains
distributions be paid in cash. For further information, see "Distributions from
the Fund."

35
<PAGE> 149

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.

36
<PAGE> 150

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any

37
<PAGE> 151

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

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

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

38
<PAGE> 152

individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. The redemption price is the net asset value
per share next determined after the request is received by ACCESS in proper
form. Payment for shares redeemed (less any sales charge, if applicable) will
ordinarily be made by check mailed within three business days after acceptance
by ACCESS of the request and any other necessary documents in proper order. Such
payments may be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, ACCESS may delay mailing a redemption check until it confirms that the
purchase check has cleared, usually a period of up to 15 days. Any gain or loss
realized on the redemption of shares is a taxable event.

39
<PAGE> 153

shareholder cannot reach ACCESS by telephone, whether because all telephone
lines are busy or for any other reason; in such case, a shareholder would have
to use the Fund's other redemption procedures previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for all accounts other than retirement accounts. The
telephone redemption privilege is not available for shares represented by
certificates. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check or wiring redemption proceeds
until it confirms that the purchase check has cleared, usually a period of up to
15 days. If an account has multiple owners, ACCESS may rely on the instructions
of any one owner.

40
<PAGE> 154

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

CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of its average daily net assets attributable
to the Class A Shares pursuant to the Service Plan in connection with the
ongoing provision of services to holders of such shares by the Distributor and
by brokers, dealers or financial intermediaries and in connection with the
maintenance of shareholders' accounts. The Fund pays the Distributor the lesser
of the balance of

41
<PAGE> 155

the 0.25% not paid to such brokers, dealers or financial intermediaries or the
amount of the Distributor's actual distribution related expenses.

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

The Distributor's actual expenses with respect to the 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 the 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 the 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 distribution
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

42
<PAGE> 156

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 unreimbursed expenses with respect to the 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 $13,847 and $5,957 of unreimbursed expenses with respect to
Class B Shares and Class C Shares, respectively, representing 0.04% and 0.02% of
the Fund's total net assets. If the Distribution Plan was terminated or not
continued, the Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.

Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge with respect
to a particular class of shares to defray distribution related expenses
attributable to any other class of 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.

------------------------------------------------------------------------------
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, dividends and other ordinary income earned by
the Fund, 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.

43
<PAGE> 157

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.

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

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.

TAXATION. The Fund intends to qualify each year and to elect to be treated as
a regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.

If the Fund so qualifies and 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) in each year, 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 necessary to satisfy the
90% distribution requirement. The Fund

44
<PAGE> 158

will not be subject to federal income tax on any net capital gains distributed
to Shareholders.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any 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 subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to Shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.

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 the 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
requirements for avoiding income and excise 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.

45
<PAGE> 159

investment company and to avoid income and excise taxes. In order to generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise 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 when distributed to Shareholders.

DISTRIBUTIONS. 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 value of the Fund's total
assets consist 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 (including
exempt interest dividends attributable to investments of the Fund in tax-exempt
money market funds) less expenses applicable thereto. Exempt-interest dividends
are treated by Shareholders as interest excludable from their gross income for
federal income tax purposes but are included 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. Such dividends may be
taxable for state and local purposes. Interest 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 paid in cash or reinvested in additional Shares. Distributions of
the Fund's net capital gains ("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 will first reduce the
adjusted tax basis of a holder's Shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming such
Shares are held as a capital asset). It is not expected that any portion of the
distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform Shareholders of the source and
tax status of all distributions promptly after the close of each calendar year.

Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date. Shareholders receiving distributions
in the form of additional

46
<PAGE> 160

Shares purchased by the Plan Agent under the Fund's Dividend Reinvestment Plan
will be treated for federal income tax purposes as receiving the amount of cash
received by the Plan Agent on their behalf. In general, the basis of such Shares
will equal the price paid by the Plan Agent for such Shares.

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 during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. 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 was actually made.

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. 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 all 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.

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.

SALE OF SHARES. The sale of Shares (including transfers in connection with a
redemption or repurchase of Shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
Shares 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 be long-term if such Shares
have been held for more than one year. Any loss realized upon a taxable
disposition of 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

47
<PAGE> 161

treated as a long-term capital loss to the extent of any capital gains dividends
received with respect to such Shares.

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

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

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 the Fund's
investments 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.

Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which

48
<PAGE> 162

can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).

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

DESCRIPTION OF SHARES OF THE FUND

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

The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1993 under the name Van Kampen Merritt Limited Term
Municipal Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
as of July 31, 1995. Shares of the Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
individual series.

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

49
<PAGE> 163

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

The fiscal year of the Fund 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
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.

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

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

50
<PAGE> 164

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

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

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

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

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

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

Investment Adviser

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

Distributor

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

Transfer Agent

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

Custodian

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

Legal Counsel

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

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 165

LIMITED TERM
MUNICIPAL INCOME
FUND

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

P R O S P E C T U S

SEPTEMBER 1, 1995

------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 166

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL LIMITED TERM MUNICIPAL INCOME FUND

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

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated September 1, 1995
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
shares of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Description of Municipal Securities Ratings.......................................... B-12
Officers and Trustees................................................................ B-17
Investment Advisory and Other Services............................................... B-22
Custodian and Independent Auditors................................................... B-24
Portfolio Transactions and Brokerage Allocation...................................... B-24
Tax Status of the Fund............................................................... B-25
The Distributor...................................................................... B-25
Legal Counsel........................................................................ B-26
Performance Information.............................................................. B-26
Independent Auditors' Report......................................................... B-29
Financial Statements................................................................. B-30
Notes to Financial Statements........................................................ B-36
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 1, 1995.

B-1
<PAGE> 167

THE FUND AND THE TRUST

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

The Trust is an unincorporated business trust established under the laws of
the state of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995 (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. The Trust can
issue an unlimited number of shares, $0.01 per share (prior to July 31, 1995,
the shares had no par value). Each share represents an equal proportionate
interest in the assets of the series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability. The Fund was
originally organized under the name Van Kampen Merritt Limited Term Municipal
Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust. The Fund was reorganized as a series of the Trust on July 31,
1995.

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

B-2
<PAGE> 168

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

2. Invest more than 25% of its assets in a single industry; however, 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 securities
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, except to the extent the obligations the
Fund may invest in are considered to be loans and except to the extent
that the Fund may lend money or property in connection with maintenance of
the value of or the Fund's interest with respect to the securities owned
by the Fund.

5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.

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

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

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

10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.

11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent that the securities that the Fund may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under agreements
relating to such municipal securities (in which case the Fund may
liquidate real estate acquired as a result of a default on a mortgage),
and except to the extent that Strategic Transactions the Fund may engage
in are considered to be commodities or commodities contracts.

B-3
<PAGE> 169

the investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund may have annual portfolio
turnover rates in excess of 100%. Portfolio turnover will be 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 will be excluded from such calculation.

Under current market conditions, the Fund anticipates that it will limit the
dollar-weighted average life of its portfolio to between 10 and 15 years. There
is no limitation with respect to the anticipated life or stated maturity of
individual municipal securities in the Fund's portfolio. The weighted average
life of a security is generally a measure of the anticipated period until the
principal amount of the obligation is repaid, taking into account such factors
as scheduled amortization, anticipated prepayments, put, call or redemption
features and market conditions.

The Fund does not intend to lend its portfolio securities.

ADDITIONAL INVESTMENT CONSIDERATIONS

MUNICIPAL SECURITIES

B-4
<PAGE> 170

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. The Fund will invest in lease obligations which contain
non-appropriation clauses only if such obligations are rated investment grade,
at the time of investment.

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.

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.

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-5
<PAGE> 171

securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest and/or repay principal in accordance with their terms.

STRATEGIC TRANSACTIONS

B-6
<PAGE> 172

tions successfully will depend on the Adviser's ability to predict pertinent
market movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.

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

B-7
<PAGE> 173

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.

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 Standard &
Poors Ratings Group ("S&P") or "P-1" from Moody's Investors Service, Inc.
("Moody's") or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.

B-8
<PAGE> 174

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. In the
event of exercise of a call option sold by the Fund with respect to securities
not owned by the Fund, the Fund may be required to acquire the underlying
security at a disadvantageous price in order to satisfy its obligation with
respect to the call option.

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.

The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes 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 net 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.

B-9
<PAGE> 175

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-10
<PAGE> 176

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.

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.

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

B-11
<PAGE> 177

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 highest rated issues only in small degree.

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

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 of 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-12
<PAGE> 178

<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
rating categories.

C The letter 'c' indicates that the holders 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 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.
</TABLE>

B-13
<PAGE> 179

<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 obliger 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," and "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.
</TABLE>

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.

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

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

Note rating symbols are as follows:

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>

B-14
<PAGE> 180

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 or based on other information.

VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.

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 are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned.

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
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

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

A Bonds which are rated A possess many favorable investment attributes and are to
be considered 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 sometime in the future.

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

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

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

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.
</TABLE>

B-15
<PAGE> 181

<TABLE>
<S> <C>
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 operating 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.

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 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.

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

3. TAX-EXEMPT COMMERCIAL PAPER

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

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

B-16
<PAGE> 182

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

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

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

OFFICERS AND TRUSTEES

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>

B-17
<PAGE> 183

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

B-18
<PAGE> 184

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
</TABLE>

B-19
<PAGE> 185

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

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

B-20
<PAGE> 186

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 $ 44 $2,500 $62,362
Philip G. Gaughan.............. 21,928 559 2,500 63,250
Donald C. Miller............... 23,768 0 2,500 62,178
Jack A. Nelson................. 23,858 371 2,500 62,362
Jerome L. Robinson............. 23,801 710 2,500 58,475
Wayne W. Whalen................ 17,553 230 2,500 49,875
</TABLE>

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

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

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

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended December 31, 1994.

(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual funds
in the Fund Complex during the calendar year ended December 31, 1994. The VK
Adviser also serves as investment adviser for other investment companies;
however, with the exception of Messrs. Powell, McDonnell and Whalen, such
investment companies do not have the same trustees as the Fund Complex.

B-21
<PAGE> 187

Combining the Fund Complex with other investment companies advised by the VK
Adviser, Mr. Whalen received Total Compensation of $161,850.

As of August 11, 1995, the trustees and officers as a group own less than 1%
of the shares of the Fund.

To the knowledge of the Fund, as of August 11, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of August 11, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class C Shares: Helen Friedman, 74 Hillside Avenue,
Short Hills, NJ 07078-2054, 12%; Edward D. Jones and Co. F/A/O, William J. Cole
TTEE, U/A DTD 12/30/86, EDJ #398-03812-1-8, P.O. Box 2500, Maryland Heights, MO
63043-8500, 6%; Stanley and Robert Joseph Holuba, Co. TR, U/A 11/09/87, ART 9TH,
Stanley Joseph Holuba Trust, 2 Hackensack Avenue, Kearny, NJ 07032-4611, 12%;
Swanson Corporation, 2 Hackensack Avenue, Kearny, NJ 07032-4611, 10%; Edward D.
Jones and Co. F/A/O, William J. Cole TTEE, U/A DTD 12/30/86, EDJ #398-03811-1-9,
P.O. Box 2500, Maryland Heights, MO 63043-8500, 6%; R.J. Holuba Co. Tr U/A
10/31/86, Stanson Chemicals Trust, Ulwat Stanley Joseph Holuba DECD, 2
Hackensack Avenue, Kearny, NJ 07032-4611, 5%; Stanley J. & Robert J. Holuba Co.
Tr, U/A 10/31/86, Article 6, Stanley Joseph Holuba Trust, 2 Hackensack Avenue,
Kearny, NJ 07032-4611, 10%; and Robert Joseph Holuba, 2 Hackensack Avenue,
Kearny, NJ 07032-4611, 7%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

The Fund's portfolio is managed by Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") which is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. (the "Van Kampen American Capital"), a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. 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. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York-based private investment firm. Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P.") is the general partner of C&D 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. Certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc. The
address of Clayton, Dubilier & Rice, Inc. is 126 East 56th Street, New York, New
York 10022 and the address of each of C&D Associates L.P., C&D L.P. and CDV
Holding, Inc. is 270 Greenwich Avenue, Greenwich, Connecticut 06830. Presently,
and after giving effect to the exercise of stock options, no officer or trustee
of the Fund owns or would own 5% or more of the common stock of VK/AC Holding,
Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.

The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.

The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.

B-22
<PAGE> 188

The investment advisory agreement for the Fund will be submitted for approval
by the shareholders of the Fund at the first meeting of shareholders held after
commencement of operations. The investment advisory agreement for the Fund will
continue in effect from year to year if specifically approved by the trustees of
the Trust, of which the Fund is a separate series (or by the Fund's
shareholders), and by the disinterested trustees in compliance with the
requirements of the 1940 Act. The agreement may be terminated without penalty
upon 60 days' written notice by either party thereto and will automatically
terminate in the event of assignment.

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 year ending December 31, 1994 and the period ended December 31, 1993,
the Fund recognized advisory expenses of $0 and $0, respectively.

OTHER AGREEMENTS

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, shared such costs proportionately among
themselves based upon their respective net asset values.

For the year ending December 31, 1994 and the period ended December 31, 1993,
the Fund recognized expenses of approximately $16,475 and $3,270, 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 equally with the other Van Kampen American Capital mutual funds
advised by the Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.

For the year ending December 31, 1994 and the period ended December 31, 1993,
the Fund recognized expenses of approximately $4,055 and $1,526, respectively,
representing the Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: maintenance of
the funds' minute books and records, preparation and oversight of the funds'
regulatory reports, and other information provided to shareholders, as well as
responding to day-to-day legal issues on behalf of the funds. Payment by the
Fund for such services is made on a cost basis for the salary and salary related
benefits, including but not limited to bonuses, group insurances and other
regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the

B-23
<PAGE> 189

Distributor, one half of such costs are allocated equally to each fund and the
remaining one half of such costs are allocated to specific funds based on
monthly time records.

For the year ending December 31, 1994 and the period ended December 31, 1993,
the Fund recognized expenses of approximately $8,086 and $4,800, respectively,
representing Van Kampen American Capital'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 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 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 the
services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Fund's Adviser may take into consideration that
certain firms (i) provide market, statistical or other research information to
the Fund and the Adviser, (ii) have sold or are selling shares of the Fund and
that certain firms and (iii) may select firms that are affiliated with the Fund,
the Adviser, or its distributor and other principal underwriters. If purchases
or sales of securities of the Fund and of one or more other investment companies
or clients supervised by the Adviser are considered at or about the same time,
transactions in such securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser, taking
into account the respective sizes of the Fund and other investment companies and
clients and the amount of securities to be purchased or sold. Although it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned, it is also
possible that the ability to participate in volume transactions and to negotiate
lower brokerage commissions will be beneficial to the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.

B-24
<PAGE> 190

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 Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund will be subject to tax
if, among other things, it fails to distribute net capital gains, or if its
annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

Shares of the Fund are offered through the Distributor, One Parkview Plaza,
Oakbrook Terrace, IL 60181. The Distributor is a wholly owned subsidiary of Van
Kampen American Capital, Inc., which is a subsidiary of VK/AC Holding, Inc., a
Delaware corporation that is controlled through an ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C & D L.P."), a Connecticut limited partnership. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc., and its subsidiaries own, in the aggregate not more than 7% of
the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. C & D L.P. is managed by Clayton, Dubilier & Rice, Inc.
Clayton & Dubilier Associates IV Limited Partnership ("C & D Associates L.P.")
is the general partner of C & D L.P. Pursuant to a distribution agreement, the
Distributor will purchase shares of the Fund for resale to the public, either
directly or through securities dealers, and is obligated to purchase only those
shares for which it has received purchase orders. Shares of the Fund may not be
purchased from the Distributor for consideration other than cash. 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 sometimes
are referred to herein 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 Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD acting as securities dealers and NASD
members or eligible non-members acting as brokers or agents and similar
agreements between the Fund and financial intermediaries 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-25
<PAGE> 191

and financial intermediaries that have entered into sub-agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement 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.

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan 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 $46,785, $174,932 and $28,679 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $38,320, $35,205 and $2,052
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares, Class B Shares and Class C Shares, respectively. For the year
ended December 31, 1994, the Fund has reimbursed the Distributor $4,083 and
$3,862 for advertising expenses, and $1,630 and $4,652 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. CDSC Shares may be subject to a contingent
deferred sales charge. 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-26
<PAGE> 192

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 non-standardized 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,
deducting the maximum initial sales charge, if any, 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 Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.

CLASS A SHARES

The average total return including payment of the sales charge with respect to
the Class A Shares for (i) the one year period ending December 31, 1994 was
(6.22%) and (ii) the approximately one year seven month period from May 28, 1993
(the commencement of investment operations of the Fund) through December 31,
1994 was 0.67%.

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 4.68%. The tax-equivalent 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" and assuming a 36% tax rate) was 7.31%. 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 4.93%.

The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to December 31, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 1.06%.

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
December 31, 1994 was 4.18%.

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 (6.80%) and (ii)
the approximately one year seven month period of May 28, 1993 (commencement of
distribution) through December 31, 1994 was 0.32%.

B-27
<PAGE> 193

36% tax rate) was 6.36%. 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
4.31%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1994
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 0.50%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1994
was 2.90%.

CLASS C SHARES

The average total return including payment of sales charge with respect to the
Class C Shares for (i) the one year period ended December 31, 1994 was (4.96%)
and (ii) the approximately one year period of August 13, 1993 (commencement of
distribution) through December 31, 1994 was (3.32%).

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 4.07%. The tax-equivalent 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" and assuming a 36% tax rate) was 6.36%. 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 4.32%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1994
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was (4.13%).

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1994
was (4.13%).

B-28
<PAGE> 194

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

The Board of Trustees and Shareholders of
Van Kampen Merritt Limited Term Municipal Income Fund:

We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Limited Term 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, and the statement
of changes in net assets and the financial highlights for the year then
ended and for the period from October 19, 1993 (commencement of
investment operations) through December 31, 1993. 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 Limited Term Municipal Income Fund
as of December 31, 1994, the results of its operations for the year then ended,
and the changes in its net assets and financial highlights for the year then
ended and for the period from October 19, 1993 (commencement of investment
operations) through December 31, 1993, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 7, 1995

B-29

<PAGE> 195

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------

</TABLE>

See Notes to Financial Statements

B-30

<PAGE> 196

Van Kampen Merritt Limited Term Municipal Income Fund

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

Massachusetts (Continued)

</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 197

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

Total Long-Term Investments 93.5%
(Cost $36,339,798) <F1>...................................................................................... 35,609,649
-------------
Short-Term Investments at Amortized Cost 6.0%
New York, NY Ser B ($800,000 par, yielding 4.60%, maturing 01/03/95) ........................................ 800,000
Uinta Cnty, WY Pollutn Ctl Rev Rfdg (Gtd: Chevron USA, Inc.) ($1,500,000 par,
yielding 6.15%, maturing 01/03/95) .......................................................................... 1,500,000
-------------
Total Short-Term Investments at Amortized Cost............................................................... 2,300,000
Other Assets in Excess of Liabilities 0.5%................................................................... 180,094
-------------
Net Assets 100%.............................................................................................. $ 38,089,743
-------------

</TABLE>

[FN]

<F1>At December 31, 1994, cost for federal income tax purposes is
$36,339,798; the aggregate gross unrealized appreciation is $278,202 and the
aggregate gross unrealized depreciation is $1,008,351, resulting in net
unrealized depreciation of $730,149.
<F2>Securities purchased on a when issued or delayed delivery basis.
<F3>Assets segregated as collateral for when issued or delayed delivery
purchase commitments.

See Notes to Financial Statements

B-32

<PAGE> 198

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $36,339,798) <F1>.................................. $ 35,609,649
Short-Term Investments <F1>........................................................... 2,300,000
Receivables:
Investments Sold...................................................................... 2,766,400
Interest.............................................................................. 574,792
Fund Shares Sold...................................................................... 1,758
Unamortized Organizational Expenses and Initial Registration Costs <F1>............... 40,843
Other................................................................................. 104
--------------
Total Assets.......................................................................... 41,293,546
--------------
Liabilities:
Payables:
Custodian Bank........................................................................ 1,750,963
Investments Purchased................................................................. 1,003,151
Fund Shares Repurchased............................................................... 308,181
Income Distributions.................................................................. 48,870
Accrued Expenses...................................................................... 92,638
--------------
Total Liabilities..................................................................... 3,203,803
--------------
Net Assets............................................................................ $ 38,089,743
--------------
Net Assets Consist of:
Paid in Surplus <F3>.................................................................. $ 40,428,454
Accumulated Undistributed Net Investment Income....................................... 10,360
Net Unrealized Depreciation on Investments............................................ (730,149)
Accumulated Net Realized Loss on Investments.......................................... (1,618,922)
--------------
Net Assets............................................................................ $ 38,089,743
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $15,705,505 and
1,683,270 shares of beneficial interest issued and outstanding) <F3>.................. $ 9.33
Maximum sales charge (3.00%* of offering price)....................................... .29
--------------
Maximum offering price to public...................................................... $ 9.62
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $17,666,148 and
1,895,749 shares of beneficial interest issued and outstanding) <F3>.................. $ 9.32
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $4,718,090 and
506,542 shares of beneficial interest issued and outstanding) <F3>.................... $ 9.31
--------------
*On sales of $100,000 or more, the sales charge will be reduced.

</TABLE>

See Notes to Financial Statements

B-33

<PAGE> 199

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest.......................................................................................... $ 2,134,882
Amortization of Premium........................................................................... (76,936)
-------------
Total Income...................................................................................... 2,057,946
-------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $46,785, $174,932 and
$28,679, respectively) <F5>.................................................................... 250,396
Investment Advisory Fee <F2>...................................................................... 179,781
Custody........................................................................................... 80,776
Shareholder Services ............................................................................. 79,546
Printing.......................................................................................... 63,675
Audit............................................................................................. 34,295
Trustees Fees and Expenses <F2>................................................................... 25,250
Amortization of Organizational Expenses and Initial Registration Costs <F1>....................... 11,994
Legal <F2>........................................................................................ 11,790
Other............................................................................................. 40,190
-------------
Total Expenses.................................................................................... 777,693
Less Fees Waived and Expenses Reimbursed ($179,781 and $202,666, respectively).................... 382,447
-------------
Net Expenses...................................................................................... 395,246
-------------
Net Investment Income............................................................................. $ 1,662,700
-------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................... $ 93,070,536
Cost of Securities Sold........................................................................... (94,689,458)
-------------
Net Realized Loss on Investments.................................................................. (1,618,922)
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period........................................................................... 627,995
End of the Period................................................................................. (730,149)
-------------
Net Unrealized Depreciation on Investments During the Period...................................... (1,358,144)
-------------
Net Realized and Unrealized Loss on Investments................................................... $ (2,977,066)
-------------
Net Decrease in Net Assets from Operations........................................................ $ (1,314,366)
-------------

</TABLE>

See Notes to Financial Statements

B-34

<PAGE> 200

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

Statement of Changes in Net Assets
For the Year Ended December 31, 1994 and the Period May 28, 1993
(Commencement of Investment Operations) through December 31, 1993
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1994 December 31, 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 1,662,700 $ 482,164
Net Realized Gain/Loss on Investments....................................... (1,618,922) 61,398
Net Unrealized Appreciation/Depreciation on Investments During the Period... (1,358,144) 627,995
---------------------------------------------------------------------------- ---------------- -----------------
Change in Net Assets from Operations ....................................... (1,314,366) 1,171,557
---------------- -----------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (787,021) (269,260)
Class B Shares.............................................................. (749,473) (205,350)
Class C Shares.............................................................. (121,533) (1,867)
---------------- -----------------
(1,658,027) (476,477)
---------------- -----------------
Distributions from Net Realized Gain on Investments:
Class A Shares.............................................................. -0- (30,417)
Class B Shares.............................................................. -0- (30,243)
Class C Shares.............................................................. -0- (738)
---------------- -----------------
-0- (61,398)
---------------- -----------------
Total Distributions......................................................... (1,658,027) (537,875)
---------------- -----------------
Net Change in Net Assets from Investment Activities......................... (2,972,393) 633,682
---------------- -----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 19,067,615 28,097,885
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 1,096,122 334,183
Cost of Shares Repurchased.................................................. (7,289,151) (888,870)
---------------- -----------------
Net Change in Net Assets from Capital Transactions.......................... 12,874,586 27,543,198
---------------- -----------------
Total Increase in Net Assets................................................ 9,902,193 28,176,880
Net Assets:
Beginning of the Period..................................................... 28,187,550 10,670
---------------- -----------------
End of the Period (Including undistributed net investment income of
$10,360 and $5,687, respectively) .......................................... $ 38,089,743 $ 28,187,550
---------------- ----------------

</TABLE>

See Notes to Financial Statements

B-35

<PAGE> 201

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

1. Significant Accounting Policies
Van Kampen Merritt Limited Term Municipal Income Fund (the "Fund")
was organized as a sub-trust of Van Kampen Merritt Tax Free Fund (the
"Trust"), a Massachusetts business trust, as of February 12, 1993, 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 May 28, 1993 with two classes of
common shares, Class A and 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
October 19,1993.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

B. Security Transactions-Security transactions are recorded on a
trade date basis. Realized gains and losses are determined on an identified
cost basis. The Fund may purchase and sell securities on a "when
issued" and "delayed delivery" basis, with settlement to occur at a later
date. The value of the security so purchased is subject to market fluctuations
during this period. The Fund will maintain, in a segregated account
with its custodian, assets having an aggregate value at least equal to the
amount of the when issued or delayed delivery purchase commitments
until payment is made.

C. Investment Income-Interest income is recorded on an accrual
basis. Bond premium and original issue discount are amortized over the
expected life of each applicable security.

D. 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 $60,000. These costs are being amortized
on a straight line basis over the 60 month period ending May 27, 1998. 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 loss and offset such losses against any future realized capital gains.
At December 31, 1994, the Fund had an accumulated capital loss carryforward of
$849,643 which will expire on December 31, 2002. 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.

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 in ordinary income for
tax purposes.

B-36

<PAGE> 202

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

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

Average Net Assets % Per Annum
----------------------------------
<S> <C>
First $500 million... .500 of 1%
Over $500 million.... .450 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 $28,600, 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 1,000, 100 and 100 shares of beneficial
interest of Classes A, B and C, respectively.

3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $16,686,522, $18,859,775 and
$4,882,157 for Classes A, B and C, respectively. For the year ended December 31,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
-----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 611,527 $ 5,970,329
Class B....................... 794,014 7,783,860
Class C....................... 555,340 5,313,426
------------------------------ --------- --------------
Total Sales................... 1,960,881 $ 19,067,615
--------- --------------
Dividend Reinvestment:
Class A....................... 54,779 $ 528,311
Class B....................... 48,361 465,700
Class C....................... 10,697 102,111
--------- --------------
Total Dividend Reinvestment... 113,837 $ 1,096,122
--------- --------------
Repurchases:
Class A....................... (359,335) $ (3,439,466)
Class B....................... (316,420) (2,980,786)
Class C....................... (92,860) (868,899)
------------------------------ --------- --------------
Total Repurchases............. (768,615) $ (7,289,151)
--------- --------------

</TABLE>

At December 31, 1993, paid in surplus aggregated $13,627,348, $13,591,001 and
$335,519 for Classes A, B and C, respectively. For the period ended December 31,
1993, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,426,570 $ 14,125,320
Class B....................... 1,374,412 13,638,505
Class C....................... 33,221 334,060
------------------------------ --------- -------------
Total Sales................... 2,834,203 $ 28,097,885
--------- -------------
Dividend Reinvestment:
Class A....................... 19,813 $ 198,221
Class B....................... 13,549 134,503
Class C....................... 144 1,459
--------- -------------
Total Dividend Reinvestment... 33,506 $ 334,183
--------- -------------
Repurchases:
Class A....................... (70,084) $ (705,893)
Class B....................... (18,167) (182,977)
Class C....................... -0- -0-
--------- -------------
Total Repurchases............. (88,251) $ (888,870)
--------- -------------

</TABLE>

B-37

<PAGE> 203

Van Kampen Merritt Limited Term Municipal Income Fund
--------------------------------------------------------------------------------

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

Class B and C shares are offered without a front end sales charge,
but are subject to a contingent deferred sales charge (CDSC). The CDSC
for Class B and Class C shares will be imposed on most redemptions
made within four years of the purchase for Class B and one year of the
purchase for Class C as detailed in the following schedule. The Class B
and Class C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incre
mental transfer agency costs.

Contingent Deferred
Sales Charge

<TABLE>
<CAPTION>
Year of Redemption Class B Class C
-----------------------------------------
<S> <C> <C>
First ................. 3.00% 1.00%
Second ................ 2.50% None
Third ................. 2.00% None
Fourth ................ 1.00% None
Fifth and Thereafter .. None None

</TABLE>

For the year ended December 31, 1994, VKAC, as Distributor for the
Fund, paid net commissions on sales of the Fund's Class A shares of
$21 and received CDSC on the redeemed shares of Classes B and C of
approximately $74,900. 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 $104,359,780 and
$94,689,458, respectively.

5. 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% of Class A 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 $165,600.

B-38
<PAGE> 204

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

VAN KAMPEN AMERICAN CAPITAL

FLORIDA INSURED TAX FREE INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital Florida Insured Tax Free Income Fund, formerly
known as Van Kampen Merritt Florida Insured Tax Free Income Fund (the "Fund"),
is a non-diversified mutual fund, organized as a separate series of Van Kampen
American Capital Tax Free Trust. The Fund's investment objective is to provide
investors a high level of current income exempt from federal income tax and
Florida intangible personal property taxes, consistent with preservation of
capital. The Fund is designed for investors who are residents of Florida for tax
purposes. Under normal market conditions, the Fund seeks to achieve its
investment objective by investing at least 80% of its assets in a portfolio of
Florida municipal securities that are insured as to timely payment of both
principal and interest by an entity whose claims-paying ability is rated AAA by
Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or an equivalent rating from another nationally recognized
statistical rating organization. Insured 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.
Up to 20% of the Fund's total assets may consist of uninsured Florida municipal
securities rated investment grade at the time of investment. See "Municipal
Securities." There is no assurance that the Fund will achieve its investment
objective.

(Continued on next page.)
------------------

A Statement of Additional Information, dated September 1, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.

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

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

THIS PROSPECTUS IS DATED SEPTEMBER 1, 1995.

<PAGE> 205

(Continued from previous page.)

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

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 a sales charge 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. See
"Alternative Sales Arrangements" and "Purchase of Shares."

2
<PAGE> 206

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 10
Investment Objective and Policies.............................. 10
Municipal Securities........................................... 12
Investment Practices........................................... 15
Special Considerations Regarding the Fund...................... 18
Investment Advisory Services................................... 20
Alternative Sales Arrangements................................. 22
Purchase of Shares............................................. 24
Shareholder Services........................................... 33
Redemption of Shares........................................... 38
The Distribution and Service Plans............................. 41
Distributions from the Fund.................................... 43
Tax Status..................................................... 44
Fund Performance............................................... 48
Description of Shares of the Fund.............................. 49
Additional Information......................................... 50
</TABLE>

3
<PAGE> 207

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

THE FUND. Van Kampen American Capital Florida Insured Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund, organized as a separate series of Van
Kampen American Capital Tax Free Trust. See "The Fund."

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income tax and Florida
intangible personal property taxes, consistent with preservation of capital. The
Fund is designed for investors who are residents of Florida for tax purposes.

INVESTMENT POLICIES. Under normal market conditions, the Fund seeks to achieve
its investment objective by investing at least 80% of its assets in a portfolio
of Florida municipal securities that are insured as to timely payment of both
principal and interest by an entity whose claims-paying ability is rated AAA by
Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or an equivalent rating from another nationally recognized
statistical rating organization ("NRSRO"). Up to 20% of the Fund's total assets
may consist of uninsured Florida municipal securities rated investment grade at
the time of investment. Investment grade securities are securities rated BBB or
higher by S&P or Baa or higher by Moody's or an equivalent rating from another
NRSRO. Up to 20% of the Fund's assets may be invested in municipal securities
that are subject to federal alternative minimum tax. See "Investment Objectives
and Policies," "Municipal Securities" and "Special Considerations Regarding the
Fund."

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

PURCHASE OF SHARES. Shares of the Fund are offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, and
through selected brokers and dealers. The offering price is the net asset value
per share next determined following receipt of an order plus a sales charge
which, at the option of the investor, may be imposed at the time of purchase or
on a contingent deferred basis. Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The minimum initial investment is $500 for each class of shares and
the minimum subsequent investment is $25 for each class of shares (or less as
described under "Purchase of Shares"). The different classes of shares 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. See "Purchase
of Shares."

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

4
<PAGE> 208

SPECIAL RISK FACTORS. The Fund may invest up to 20% of its assets in certain
derivative securities such as inverse floaters. Investment in such derivative
securities involves significant risks. Under normal market conditions, the Fund
will invest substantially all of its assets in insured Florida municipal
securities, and therefore it will be more susceptible to factors adversely
affecting issuers of Florida municipal securities than a municipal securities
fund that does not invest in Florida municipal securities to this degree. There
can be no assurance that the Fund will achieve its objective. See "Special
Considerations Regarding the Fund."

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

5
<PAGE> 209

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

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

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

6
<PAGE> 210

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

ANNUAL FUND OPERATING EXPENSES AND EXAMPLE

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

<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)......................... 0.00% 0.00% 0.00%
12b-1 fees(1)(2) (as a percentage
of average daily net assets).... 0.25% 1.00% 1.00%
Other expenses(1) (as a percentage
of average daily net assets).... 0.25% 0.30% 0.29%
Total expenses(1) (as a percentage
of average daily net assets).... 0.50% 1.30% 1.29%
</TABLE>

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

(1) The Adviser agreed to waive a portion of its "Management fees" during the
Fund's last fiscal year. Absent the Adviser's waiver of its fee and
assumption of a portion of the expenses of the Fund, the "Management fees"
would have been 0.50% for each class of shares, "Other expenses" would have
been 0.90% for Class A Shares, 0.90% for Class B Shares and 0.85% for Class
C Shares and the "Total expenses" would have been 1.65% for Class A Shares,
2.40% for Class B Shares and 2.35% for Class C Shares.

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

7
<PAGE> 211

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 0.50%
for Class A Shares, 1.30% for Class
B Shares and 1.29% for Class C
Shares, (ii) 5% annual return and
(iii) redemption at the end of each
time period:
Class A Shares...................... $52 $63 $74 $ 107
Class B Shares...................... $53 $76 $86 $ 124*
Class C Shares...................... $23 $42 $72 $ 156
You would pay the following expenses
on the same $1,000 investment
assuming no
redemption at the end of each
period:
Class A Shares...................... $52 $63 $74 $ 107
Class B Shares...................... $13 $42 $72 $ 124*
Class C Shares...................... $13 $42 $72 $ 156
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. 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."

8
<PAGE> 212

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

FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)

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

The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout the
period indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for the period indicated
and their report thereon appears in the Statement of Additional Information.
This information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------- ------------- -------------
JULY 29, 1994 JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS) OPERATIONS)
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $14.300 $14.300 $14.300
------------- ------------- -------------
Net Investment Income......... .291 .251 .249
Net Realized and Unrealized
Gain on Investments......... (.507) (.509) (.513)
------------- ------------- -------------
Total from Investment
Operations.................... (.216) (.258) (.264)
------------- ------------- -------------
Less:
Distributions from Net
Investment Income........... .288 .250 .250
------------- ------------- -------------
Net Asset Value, End of
Period........................ $13.796 $13.792 $13.786
============= ============= =============
Total Return
(Non-annualized)(1)........... (1.47%) (1.81%) (1.81%)
Net Assets at End of Period
(in millions)................. $ 9.0 $ 10.9 $ 11.4
Ratio of Expenses to Average Net
Assets (annualized)(1)........ .49% 1.26% 1.26%
Ratio of Net Investment Income
to Average Net Assets
(annualized)(1)............... 5.13% 4.31% 4.28%
Portfolio Turnover.............. 19.30% 19.30% 19.30%
</TABLE>

----------------
(1) If certain expenses had not been waived or assumed by the investment
adviser, total return would have been lower and the ratios would have been
as follows:

<TABLE>
<S> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (annualized)..... 1.99% 2.75% 2.74%
Ratio of Net Investment
Income to Average Net Assets
(annualized)................ 3.64% 2.81% 2.81%
</TABLE>

See Financial Statements and Notes Thereto

9
<PAGE> 213

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

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

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates act as investment adviser to 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 a high level of
current income exempt from federal income tax and Florida intangible personal
property taxes, consistent with preservation of capital. The Fund is designed
for investors who are residents of Florida for tax purposes. The Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Under normal market conditions, the Fund will invest up to 80%
of its assets in Florida municipal securities that are insured as to timely
payment of both principal and interest by an entity whose claims-paying ability
is rated AAA by Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's
Investors Service, Inc. ("Moody's") or an equivalent rating from another
nationally recognized statistical rating organization ("NRSRO"). Up to 20% of
the Fund's total assets may consist of uninsured Florida municipal securities
rated investment grade at the time of investment. Investment grade securities
are securities rated BBB or higher by S&P or Baa or higher by Moody's, or an
equivalent rating by another NRSRO. There are market risks inherent in all
investments in securities; and accordingly there can be no assurance the Fund
will achieve its investment objective. An investment in the Fund may not be
appropriate for all investors. The Fund is not intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
Fund. An investment in the Fund is intended to be a long-term investment and
should not be used as a trading vehicle.

10
<PAGE> 214

For a description of S&P's and Moody's claims-paying ability ratings and
municipal securities ratings see the Statement of Additional Information. From
time to time, the Fund temporarily may invest up to 10% of its assets in tax
exempt money market funds. Such instruments will be treated as investments in
municipal securities.

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 Florida intangible personal property taxes 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 Florida municipal
securities permitted by its investment policies if the Adviser determines that
market risks or credit risks associated with such investments would subject the
Fund's portfolio to undue risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. Other than for tax purposes, frequency of portfolio turnover
generally will not be a limiting factor if the Fund considers it advantageous to
purchase or sell securities. The Fund anticipates that its annual portfolio
turnover rate normally will be less than 200%. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expenses or dealer costs
than a lower rate, which expenses and costs must be borne by the Fund and its
shareholders. High portfolio turnover may also result in the realization of
substantial net short-term capital gains and any distributions resulting from
such gains will be taxable. See "Tax Status" in this Prospectus and "Investment
Policies and Restrictions" in the Statement of Additional Information.

TEMPORARY DEFENSIVE STRATEGIES. At times, conditions in the markets for
Florida insured 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 Florida municipal obligations. If
such 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 high-quality, municipal securities of issuers other than issuers of
Florida municipal securities. Furthermore, if such high-quality securities 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 categories by either S&P or Moody's (or comparably rated by another
NRSRO); commercial paper rated in the highest grade by either rating service (or
comparably rated by another NRSRO); 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. To the extent that the Fund invests a substantial
portion of its assets in

11
<PAGE> 215

municipal securities other than Florida municipal securities or taxable
securities for temporary defensive purposes, the Fund will not be invested in a
manner primarily designed to achieve a high level of current income exempt from
federal income tax and Florida intangible personal property taxes. The Fund may
invest in insured and uninsured securities for temporary defensive purposes.

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

GENERAL. Municipal securities are obligations issued by or on behalf of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel or other counsel to the issuer
of such securities is, at the time of issuance, exempt from federal income tax.
Florida municipal securities are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is at the time of issuance exempt from Florida intangible personal property
taxes. Under normal market conditions, at least 80% of the Fund's assets will be
invested in Florida municipal securities. The policy stated in the foregoing
sentence is a fundamental policy of the Fund and cannot be changed without
approval of the shareholders of the Fund. Up to 20% of the Fund's assets may be
invested in securities that are subject to federal alternative minimum tax.

Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, 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. The Fund may also invest in derivative
variable rate securities such as inverse floaters, whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
generally

12
<PAGE> 216

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. The Fund will not invest more than 20% of its total
assets in securities whose rates vary inversely with changes in market rates of
interest.

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. Municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Other than as set forth above, there is
no limitation with respect to the amount of the Fund's assets that may be
invested in the foregoing types of municipal securities. Certain of the
municipal securities in which the Fund may invest represent relatively recent
innovations in the municipal securities markets and the markets for such
securities may be less developed than the market for conventional fixed rate
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.

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 invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments. 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. The prices of longer term
municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.

13
<PAGE> 217

tax or who would become subject to the federal alternative minimum tax as a
result of an investment in the Fund. In addition, income earned or deemed to be
earned with respect to the Fund's Strategic Transactions, if any, will be
taxable. See "Tax Status."

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.

INSURED MUNICIPAL SECURITIES. Insured Florida municipal securities in which
the Fund may invest will be covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio 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 issue of such municipal
securities. Secondary Market Insurance is purchased by the Fund or a third party
subsequent to the time of original issuance of a municipal security. Both
Original Issue Insurance and Secondary Market Insurance remain 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. Portfolio Insurance may be purchased by the Fund with
respect to municipal securities which the Fund intends to purchase or already
owns and would generally terminate when the municipal security is sold by the
Fund or redeemed. There is no limitation on the percentage of the Fund's assets
that may be invested in Florida municipal securities insured by any given
insurer.

Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do 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 Fund's shares or the market value of the Fund's
portfolio securities. Such 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.

The Fund's policy of investing in Florida municipal securities insured by
insurers whose claims-paying ability is rated Aaa by Moody's, AAA by S&P or the
equivalent by another NRSRO will apply only at the time of the Fund's investment
in a Florida municipal security. A subsequent downgrade by Moody's, S&P or
another NRSRO of an insurer's claims-paying ability would result in a downgrade
of the rating assigned to the Florida municipal securities insured by such
insurer, although the Florida municipal securities may have an independent
rating that is higher than the new rating assigned to the insurer's
claims-paying ability. The securities could experience a decrease in market
price as a result of such a downgrade. In the event the ratings assigned to such
municipal securities decline to below investment grade, such municipal
securities would probably become less

14
<PAGE> 218

liquid or even illiquid. There can be no assurance that an insurer will be able
to honor its obligations with respect to Florida municipal securities in the
Fund's portfolio. For a description of S&P's and Moody's claims-paying ability
ratings of insurers, see the Statement of Additional Information.

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

15
<PAGE> 219

Income earned or deemed to be earned by the Fund from, among other things, its
Strategic Transactions and temporary defensive strategies, if any, generally
will be taxable income of the Fund. See "Tax Status."

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
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.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to

16
<PAGE> 220

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.

Under normal market conditions, the Fund will invest substantially all of its
assets in insured Florida municipal securities. The Fund generally will not
invest more than 25% of its total assets in any industry. 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 therefore 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 justifies 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.

From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of Florida municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.

17
<PAGE> 221

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 income 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.

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

GENERAL. The Fund may invest up to 20% of its total assets in derivative
variable rate securities such as inverse floaters whose rates of interest vary
inversely with changes in market rates of interest. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Investment in such securities involve special
risks as compared to a fixed rate municipal

18
<PAGE> 222

security. The extent of increases and decreases in the value of inverse floaters
and the corresponding change to per share net asset value of the Fund 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. The markets for inverse variable rate securities may be
less developed than the market for conventional fixed rate municipal securities.

SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES. As described in
this Prospectus, under normal market conditions the Fund will invest
substantially all of its assets in Florida municipal securities. The Fund is
therefore susceptible to political, economic, regulatory or other factors
affecting issuers of Florida municipal securities. Investors should be aware of
certain factors that might affect the financial condition of the issuers of
Florida municipal securities.

The following information is a summary of a more detailed description of
certain factors affecting Florida municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of Florida published in connection with the issuance of specific Florida
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.

Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole.

Florida's economic outlook is projected generally to reflect the national
economic outlook; however, unemployment levels during the past several years
have been above the national level and are estimated to continue to be above the
national level for the State's 1994-95 fiscal year which ends June 30, 1995.
Since 1980, Florida's unemployment rate has generally tracked below that of the
nation; however, since 1989 the State's jobless rate has moved ahead of the
national average. The average rate of unemployment for Florida since 1985 is
6.3% while the national average during the same time period is 6.4%. Florida's
unemployment rate is forecasted at 6.1% for fiscal year 1994-95 and fiscal year
1995-96.

For the State fiscal year which ended June 30, 1994, receipts from the sales
and use tax, the greatest single source of tax revenue to the State of Florida,
were $10,012.5 million, an increase of 6.9% from fiscal year 1992-93.

Zero growth in the number of tourists in the State of Florida is expected over
the fiscal year 1994-95 due in part to negative publicity regarding crime
against tourists. A 1.7% growth in the number of tourists is expected in
1995-96.

19
<PAGE> 223

County and municipal governments in Florida depend primarily upon ad valorem
property taxes, sales, motor fuel and other local excise taxes and miscellaneous
revenue sources, including revenues from utilities services. Florida school
districts derive substantially all of their revenues from local property taxes.
The overall level of revenue from these sources is in part dependent upon the
local, state and national economies. Local government obligations held by the
Fund may constitute general obligations or may be special obligations payable
solely from one or more specified revenue sources. The ability of the local
governments to repay their obligations on a timely basis will be dependent upon
the continued strength of the revenues pledged and of the overall fiscal status
of the local government.

Voters at the general election in November 1994 approved an amendment to the
Constitution of the State of Florida limiting future state revenues. It is
unclear at this time what effect, if any, such amendment would have on state or
local government debt obligations.

The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.

There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.

More detailed information concerning Florida municipal securities and the
State of Florida is included in the Statement of Additional Information.

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

INVESTMENT ADVISORY SERVICES

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

20
<PAGE> 224

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

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Adviser may, in its sole discretion, determine to waive temporarily
all or a portion of its fee or it may discontinue this practice without notice
to shareholders. Without such waiver, the Fund would 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, 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 1940 Act, of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.

21
<PAGE> 225

PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Johnson has been employed by the Adviser for the last five years.

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

ALTERNATIVE SALES ARRANGEMENTS

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

The 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 Shares accounts over $1
million or otherwise subject to a contingent deferred sales charge ("CDSC"),
Class B Shares and Class C Shares sometimes are referred to herein collectively
as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."

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

22
<PAGE> 226

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 the initial sales
charge and distribution and service related expenses applicable to Class A
Shares, irrespective of the fact that a CDSC would eventually not apply to a
redemption of such Class C shares.

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

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

23
<PAGE> 227

will be limited to the extent necessary to preserve the Fund's qualification as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").

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

PURCHASE OF SHARES

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

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

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

24
<PAGE> 228

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, from time to time, sponsor sales contests with respect to
sales of the Fund's Class A Shares and Class B Shares pursuant to which brokers,
dealers and financial intermediaries may receive additional compensation of up
to 2% of sales in such shares. In connection therewith, the Distributor may
combine the sales of shares made by brokers, dealers and financial
intermediaries of certain Van Kampen American Capital funds. 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 to brokers, dealers and financial
intermediaries for sales contests, other sales programs and seminars are made by
the Distributor out of its own assets and not out of the assets of the Fund.
These programs will not change the price an investor pays for shares or the
amount that the Fund will receive from such sale.

CLASS A SHARES

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

SALES CHARGE TABLE

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

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

25
<PAGE> 229

commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to contingent deferred
sales charges.

QUANTITY DISCOUNTS

26
<PAGE> 230

intended purchases of Class A Shares of the Fund with other shares of the Fund
and shares of the Participating Funds plus the value of all shares of the Fund
and other Participating Funds previously purchased during such 13-month period
and still owned. An investor may elect to compute the 13-month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.

OTHER PURCHASE PROGRAMS

27
<PAGE> 231

backup data for each participating investor in a computerized format fully
compatible with the transfer agent's processing system.

28
<PAGE> 232

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

DEFERRED SALES CHARGE ALTERNATIVE

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

29
<PAGE> 233

on the next million, plus 0.20% on the next $2 million and 0.08% on the excess
over $5 million; (ii) 4.00% with respect to Class B Shares; and (iii) 1.00% with
respect to Class C Shares. Such compensation will not change the price an
investor will pay for CDSC Shares or the amount that the Fund will receive from
such sale.

CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
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 and the distribution fee
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 fee facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase. Investors
should understand that the purpose of the contingent deferred sales charge and
the distribution fee with respect to a class of CDSC Shares is the same as the
initial sales charge and the distribution fee with respect to Class A Shares.

30
<PAGE> 234

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 B SHARES. Class B Shares redeemed within seven 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 Plan. See "Shareholder
Services--Systematic Withdrawal Plan."

31
<PAGE> 235

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.

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

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

NET ASSET VALUE

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is

32
<PAGE> 236

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 value per share of the different class of shares are
expected to be substantially the same; from time to time, however, the per share
net asset value of the different class of shares may differ.

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

SHAREHOLDER SERVICES

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

33
<PAGE> 237

transaction other than reinvestment of dividends and capital gains distributions
and systematic purchases or redemptions. Additions to an investment account may
be made at any time by purchasing shares through authorized brokers, dealers or
financial intermediaries or by mailing a check directly to ACCESS.

34
<PAGE> 238

35
<PAGE> 239

request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.

36
<PAGE> 240

purchases of additional shares ordinarily will be disadvantageous to the
shareholder because of the duplication of sales charges. The Fund reserves the
right to amend or terminate the systematic withdrawal program on thirty days'
notice to its shareholders.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

37
<PAGE> 241

redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing ACCESS.

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

REDEMPTION OF SHARES

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

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

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

38
<PAGE> 242

transmit redemption requests received by them to the Distributor so they will be
received prior to such time. Any change in the redemption price due to failure
of the Distributor to receive a sell order prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the sell order. Payment for shares redeemed (less any sales charge, if
applicable) will ordinarily be made by check mailed within three business days
to the dealer.

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

39
<PAGE> 243

shareholder's bank account of record. This privilege is not available if the
address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.

40
<PAGE> 244

Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.

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

THE DISTRIBUTION AND SERVICE PLANS

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

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

41
<PAGE> 245

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

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. As of December 31, 1994, there were $16,017
and $75 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 0.08% and less than 0.01%
of the Fund's total net assets. If the Distribution Plan was terminated or not
continued, the Fund would not be contractually obligated to pay the Distributor
for any expenses not previously reimbursed by the Fund or recovered through
contingent deferred sales charges.

42
<PAGE> 246

find that these laws prevent such banks from providing such services described
above, the Fund would seek alternate providers and expects that shareholders
would not experience any disadvantage.

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

DISTRIBUTIONS FROM THE FUND

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

The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income and dividends, other ordinary income earned by
the Fund, 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 will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.

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

43
<PAGE> 247

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

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

TAX STATUS

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

FLORIDA TAXATION

The following Florida tax discussion is based on the advice of Squire, Sanders
& Dempsey, special counsel to the Fund for Florida tax matters, and reflects
applicable Florida tax laws as of the date of this Prospectus.

Under existing Florida law, shares of the Fund will not be subject to the
Florida intangible personal property tax for any year if, on the last business
day of the previous calendar year, the Fund's portfolio consisted solely of (1)
notes, bonds and other obligations issued by the State of Florida or its
municipalities, counties, and other taxing districts, or by the United States
Government and its agencies, or by the governments of Puerto Rico, Guam or the
U.S. Virgin Islands, or (2) other intangible personal property exempt from the
Florida intangible personal property tax. (FOR THIS PURPOSE, OBLIGATIONS ISSUED
BY A NONPROFIT CORPORATION FORMED UNDER THE GENERAL NONPROFIT CORPORATION LAW OF
A STATE ARE NOT EXEMPT FROM THE FLORIDA INTANGIBLE PERSONAL PROPERTY TAX EVEN IF
THEY ARE CONSIDERED FOR FEDERAL INCOME TAX PURPOSES TO BE OBLIGATIONS ISSUED "ON
BEHALF OF" A GOVERNMENTAL UNIT THE INTEREST ON WHICH IS EXEMPT FROM FEDERAL
INCOME TAX.) Shares of the Fund will generally be subject to the Florida
intangible personal property tax for any year if, on the last business day of
the previous calendar year, the Fund's portfolio consists of any asset that is
not exempt from the Florida intangible property tax.

The State of Florida and its political subdivisions do not impose income taxes
on individuals, and therefore individual shareholders of the Fund will not be
subject to a Florida income tax on distributions from the Fund or on gain from
the sale or other disposition of shares of the Fund.

Corporations (and certain other entities treated as corporations under the
Florida Income Tax Code) that are subject to the Florida income tax will be
taxable on distributions from the Fund and on gain from the sale or other
disposition of shares of the Fund to the extent such income or gain is allocated
or apportioned to Florida. Accordingly, investment in shares of the Fund may not
be appropriate for such corporations.

The transfer of shares of the Fund will not be subject to the Florida
documentary stamp tax. Shares of the Fund will be included in assets subject to
Florida estate tax.

Under current Florida tax law, the Florida intangible personal property tax
rate is 0.20%. Shareholders subject to taxation in a state other than Florida
may realize a lower after-tax rate of return than Florida shareholders if the
dividends distributed by the Fund are not exempt from taxation in such other
state.

44
<PAGE> 248

FEDERAL TAXATION

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.

The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.

If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. Similarly, the Fund will not be subject to federal
income tax on any net capital gain distributed to its shareholders.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (which does not
include tax-exempt 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 subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.

45
<PAGE> 249

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
requirements for avoiding income and excise 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 and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid income and excise taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold.

DISTRIBUTIONS. 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 value of the Fund's assets
consists of obligations the interest on which is 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.

The Internal Revenue Service has publicly ruled that payments of insurance
proceeds representing interest on defaulted tax-exempt obligations are
excludable from gross income to the same extent that such payments would have
been excludable if they had been directly made by the issuer of the insured
obligations.

46
<PAGE> 250

Accordingly, insurance proceeds received by the Fund from any insurer with whom
the Fund maintains a policy described in this Prospectus will be tax-exempt
interest income of the Fund to the same extent as if such payments were made by
the issuer of the insured obligations, and will be includable by the Fund in
calculating their exempt-interest dividends. In the case of non-appropriation by
a political subdivision, however, there can be no assurance that payments made
by the insurers representing interest on a "non-appropriation" lease obligation
will be excludable from gross income for federal income tax purposes and,
therefore, includable by the Fund in calculating its tax-exempt dividends.

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
dividend"), 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. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares 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). It is not expected that any portion of the distributions from
the Fund will be eligible for the dividends received deduction for corporations.
The Fund will inform shareholders of the source and tax status of distributions
promptly after the close of each calendar year.

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. 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.

47
<PAGE> 251

the December 31 prior to the date of payment. 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.

SALE OF SHARES. Redemption or sale of shares of the Fund will be a taxable
transaction for federal income tax purposes. Redeeming shareholders will
generally 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 shares have been held for more than
one year. Any loss realized on a taxable disposition of 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 gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

GENERAL. The Florida and federal tax discussions set forth above are for
general information only. Prospective investors should consult their tax
advisers regarding the specific Florida and federal tax consequences of holding
and disposing of shares, as well as the effects of other state, local and
foreign tax laws and any proposed tax law changes.

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

FUND PERFORMANCE

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

48
<PAGE> 252

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 or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.

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

DESCRIPTION OF SHARES OF THE FUND

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

The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt Florida Insured
Tax Free Fund as a sub-trust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
as of July 31, 1995. Shares of the Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
individual series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 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."

49
<PAGE> 253

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

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, as amended. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.

The fiscal year of the Fund ends December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.

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

50
<PAGE> 254

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL

YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL

FLORIDA INSURED TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

Investment Adviser

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

Distributor

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

Transfer Agent

ACCESS INVESTOR SERVICES, INC.

P.O. Box 418256

Kansas City, MO 64141-9256

Attn: Van Kampen American Capital Funds

Custodian

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

Attn: Van Kampen American Capital Funds

Legal Counsel

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

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 255

FLORIDA INSURED

TAX FREE

INCOME FUND

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

P R O S P E C T U S

SEPTEMBER 1, 1995

------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 256

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND

Van Kampen American Capital Florida Insured Tax Free Income Fund, formerly
known as Van Kampen Merritt Florida Insured Tax Free Income Fund (the "Fund"),
seeks to provide investors with high current income exempt from federal income
tax and Florida intangible personal property taxes consistent with preservation
of capital. The Fund is designed for investors who reside in Florida for tax
purposes. The Fund attempts to achieve its investment objective by investing at
least 80% of its assets in a portfolio of Florida insured municipal securities
that are insured as to timely payment of both principal and interest by an
entity whose claims-paying ability is rated AAA by Standard & Poor's Ratings
Group ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating from another nationally recognized statistical rating
organization ("NRSRO"). Insured 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.
Up to 20% of the Fund's total assets may consist of uninsured Florida municipal
securities rated investment grade at the time of investment. There is no
assurance that the Fund will achieve its investment objective. The Fund is a
separate series of Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "Trust").

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-18
Description of Insurance Company Claims Paying Ability Ratings....................... B-23
Officers and Trustees................................................................ B-23
Investment Advisory and Other Services............................................... B-29
Custodian and Independent Auditors................................................... B-30
Portfolio Transactions and Brokerage Allocation...................................... B-30
Tax Status of the Fund............................................................... B-31
The Distributor...................................................................... B-32
Legal Counsel........................................................................ B-33
Performance Information.............................................................. B-33
Independent Auditor's Report......................................................... B-36
Financial Statements................................................................. B-37
Notes to Financial Statements........................................................ B-42
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 1, 1995.

B-1
<PAGE> 257

THE FUND AND THE TRUST

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

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio. The Trust can issue an
unlimited number of shares, par value $0.01 (prior to July 31, 1995, the shares
had no par value). Each share represents an equal proportionate interest in the
assets of the series with each other share in such series and no interest in any
other series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability. The Fund was originally
organized in 1994 under the name Van Kampen Merritt Florida Insured Tax Free
Fund as a sub-trust of the Van Kampen Merritt Tax Free Trust, a Massachusetts
business trust. The Fund was reorganized as a series of the Trust as of July 31,
1995.

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

INVESTMENT POLICIES AND RESTRICTIONS

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

B-2
<PAGE> 258

bond market; however, the Fund will not invest more than 25% of its assets
in industrial development bonds in a single industry.

2. 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.

3. 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.

4. 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.

5. 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.

6. 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.

7. 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.

8. 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.

9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.

10. 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 that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.

The Fund may not change any of these investment restrictions as they apply to
the Fund without the approval of the lesser of (i) more than 50% of the Fund's
outstanding shares or (ii) 67% of the Fund's outstanding Shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
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> 259

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 excise 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. Lease
obligations generally 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. A
risk exists that the municipality will not, or will be unable to, appropriate
money in the future in the event of political changes, changes in the economic
viability of the project, general economic changes or for other reasons. 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 an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. 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. The Fund will invest in lease obligations which contain
non-appropriation clauses only if such obligations are rated investment grade,
at the time of investment.

B-4
<PAGE> 260

The Fund also may invest up to 20% 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. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Inverse floaters 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 inverse floaters 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 municipal security having similar
credit quality, redemption provisions and maturity.

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 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 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

B-5
<PAGE> 261

Code of 1986, as amended (the "Code"), may limit the extent to which the Fund
may exercise its rights by taking possession of such assets, because as a
regulated investment company the Fund is subject to certain limitations on its
investments and on the nature of its income. Further, in connection with the
working out or restructuring of a defaulted security, the Fund may acquire
additional securities of the issuer, the acquisition of which may be deemed to
be a loan of money or property. Such additional securities should be considered
speculative with respect to the capacity to pay interest or repay principal in
accordance with their terms.

INSURANCE

As described in the Prospectus, the Fund generally will invest substantially
all of its asset 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
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.

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 of 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 instrument of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon

B-6
<PAGE> 262

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 security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.

One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.

PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the 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.

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

B-7
<PAGE> 263

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 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.

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,
Aaa by Moody's or an equivalent rating by another NRSRO, 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, Aaa by Moody's or an equivalent rating by another NRSRO, 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

B-8
<PAGE> 264

creditworthiness of the issuer 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, Aaa by Moody's or an equivalent
rating by another NRSRO. 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.

Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Common Shares.

SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES

GENERAL. As described in the Prospectus, except during temporary periods, the
Fund will invest substantially all of its assets in Florida municipal
securities. The Fund is therefore susceptible to political, economic, regulatory
or other factors affecting issuers of Florida municipal securities. In addition,
the specific Florida municipal securities in which the Fund will invest are
expected to change from time to time. The following information constitutes only
a brief summary of some of the complex factors which may have an impact on the
financial situation of issuers of Florida municipal securities and does not
purport to be a complete or exhaustive description of all adverse conditions to
which issuers of Florida municipal securities may be subject and is not
applicable to "conduit" obligations, such as industrial development revenue
bonds, with respect to which the public issuer itself has no financial
responsibility. Such information is derived from certain official statements of
the State of Florida published in connection with the issuance of specific
Florida municipal securities, as well as from other publicly available
documents. Such information has not been independently verified by the Fund and
may not apply to all Florida municipal securities acquired by the Fund. 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 Florida 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 Florida issuers
may be unrelated to the creditworthiness of obligations issued by the State of
Florida, and there is no responsibility on the part of the State of Florida 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 Florida, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information

B-9
<PAGE> 265

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 Florida municipal
securities.

Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole. Florida's economic outlook is generally projected to
reflect the national economic outlook; however, unemployment levels during the
past several years have been above the national level and are estimated to
continue to be above the national level for the State's 1994-95 fiscal year
which ended June 30, 1995. The Florida constitution and statutes require a
balanced budget, which may affect the ability of the State of Florida to issue
and/or repay its obligations. In addition, various limitations on the State of
Florida, its governmental agencies and its local governments, including school
and special districts and authorities, may inhibit the ability of these issuers
to repay existing indebtedness and issue additional indebtedness. The ability of
such issuers to repay revenue bonds will also depend on the success of the
capital projects to which they relate. The ability of such issuers to repay
general obligation bonds will also depend on the success of such issuer
maintaining its ad valorem tax base.

INVESTMENT PRACTICES AND POLICIES OF ISSUERS OF FLORIDA MUNICIPAL
ISSUERS. Florida law does provide certain restrictions on the investment of
funds for the State of Florida and its local governments; however, with respect
to all municipalities and its charter counties, such restrictions may be limited
by the constitutional home rule powers of such entities. Although the Florida
municipal securities which may be purchased by the Fund will be insured, only
those securities which are insured by Original Issuance Insurance will contain
restrictions on investments imposed by the issuer of such insurance. Because
statutory restrictions on investments and investment policies with respect to
the investment of funds is limited by constitutional home rule powers, there can
be no assurance as to whether any issuer will suffer losses as a result of
investments or the magnitude or any such losses.

POPULATION, INCOME AND EMPLOYMENT. Florida has experienced a large population
growth. As of April 1, 1993, Florida ranks fourth with an estimated population
of 13.6 million. Since 1980, the State's population has increased approximately
40%. The personal income of residents of Florida has been growing strongly the
last several years and generally has historically outperformed both the nation
as a whole and the southeast in particular. The State's economy since the early
seventies has diversified in such a way as to provide a greater insulation from
national economic downturns. The structure of income of residents of Florida
differs from that of the nation and the southeast in that, due to a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (Social Security and pension benefits,
among other sources of income) are an important source of income.

Personal income growth in Florida is estimated at 8.3% and 6.7% for 1994-95
and 1995-96 respectively. By the end of the State's fiscal year 1995-96, real
personal income per capita in Florida is projected to average 4.5% higher than
the 1993-94 level.

Florida's economic dependence on the cyclical construction and construction
related manufacturing sectors had declined. The service sector is Florida's
largest employer. Presently, the State's service sector employment constitutes
32.6% of the total non-farm employment. While structurally the southeast and the
nation are endowed with a greater proportion of manufacturing jobs, which tend
to pay higher wages, service jobs are less sensitive to business cycle swings.

Since 1980, Florida's unemployment rate has generally tracked below that of
the nation; however, since 1989 the State's jobless rate has moved ahead of the
national average. The average rate of unemployment for Florida since 1980 is
6.5% while the national average during the same time period is 7.1%. Florida's
unemployment rate is forecasted at 6.1% for both fiscal year 1994-95 and fiscal
year 1995-96.

TOURISM INDUSTRY. Tourism is one of Florida's most important industries.
Approximately 41 million people visited the State in 1993, as reported by the
Florida Department of Commerce. In terms of business activities and Florida tax
revenues, tourism in Florida in 1993 was equivalent to an estimated 4.5 million
additional residents, spending their dollars predominantly at eating and
drinking establishments, hotels and motels, and amusement and recreation parks.
Florida tourism is currently suffering from the effects of negative publicity
regarding crime against tourists in the State. However, unlike in fiscal year
1993-94 which experienced a 4.0% drop in the number of tourists, zero growth in
the number of tourists is expected over the current fiscal year. A 1.7% growth
in the number of tourists is expected in 1995-96.

B-10
<PAGE> 266

STATE FINANCIAL OPERATIONS. Financial operations of the State covering all
receipts and expenditures are maintained through the use of three funds--the
General Revenue Fund, Trust Funds, and the Working Capital Fund. Article III of
the Florida Constitution adds a fourth fund, the Budget Stabilization Fund. In
fiscal year 1993-94, the State derived an estimated 66% of its total direct
revenues to these funds from state taxes. Federal funds and other special
revenues accounted for the remaining revenues. Major sources of tax revenues to
the General Revenue Fund are the sales and use tax, corporate income tax,
intangible personal property tax, and beverage tax, which amounted to 66%, 8%,
4% and 4%, respectively, of the total General Revenue funds available. State
expenditures are categorized for budget and appropriation purposes by type of
fund and spending unit, which are further subdivided by line item. In fiscal
year 1993-94, appropriations from the General Revenue Fund for education, health
and welfare, and public safety amounted to approximately 49%, 32%, and 12%,
respectively, of total General Revenues.

The sales and use tax is the greatest single source of tax receipts in
Florida. The sales tax is 6% of the sales price of tangible personal property
sold at retail in the State. The use tax is at 6% of the cost price of tangible
personal property when the same is not sold but is used, or stored for use, in
the State. Slightly less than 10% of the sales tax is designated for local
governments and is distributed to the respective counties in which collected for
use by the county and the municipalities therein. In addition to this
distribution, local governments may (by referendum) assess certain discretionary
sales surtaxes within their county, for certain purposes, restricted as to
amount. The proceeds of these surtaxes are required to be applied to the
purposes for which such surtax is assessed.

For the State fiscal year which ended June 30, 1994, receipts from the sales
and use tax were $10,012.5 million, an increase of 6.9% from fiscal year
1992-93.

The second largest source of State tax receipts, including those distributed
to local governments, is the tax on motor fuels. Preliminary data show
collections from this source in the State fiscal year ending June 30, 1994 were
$1,733.4 million. However, these revenues are almost entirely trust funds
dedicated for specific purposes and are not included in the State General
Revenue Fund. Alcoholic beverage tax and license revenues totalled $439.8
million in the State fiscal year ended June 30, 1994. The receipts of corporate
income tax for the State fiscal year ended June 30, 1994 were $1,047.4 million,
an increase of 23.7% over the prior fiscal year. In November 1986, the voters of
the State approved a constitutional amendment to allow the State to operate a
lottery, the proceeds of which are required to be applied as follows: 50% to be
returned to the public as prizes, at least 38% to be deposited in the
Educational Enhancement Trust (for public education), and no more than 12% to be
spent on the administrative cost of operating the lottery. State fiscal year
1993-94 produced ticket sales of $2.15 billion of which education received
approximately $816.2 million.

The State Constitution does not permit a personal income tax. An amendment to
the State Constitution would be required to impose a personal income tax in the
State.

Estimated fiscal year 1994-95 General Revenue plus Working Capital and Budget
Stabilization funds available total $14,682.9 million, 6.1% increase over
1993-94. This amount reflects a transfer of $159.0 million in non-recurring
revenue due to Hurricane Andrew, to a hurricane relief trust fund. The $13,702.1
million Estimated Revenues (excluding the Hurricane Andrew impacts) represent an
increase of 6.6% over the analogous figure in 1993-94. With combined General
Revenue, Working Capital Fund and Budget Stabilization Fund appropriations at
$14,309.7 million, unencumbered reserves at the end of the fiscal year are
estimated at $373.2 million.

In fiscal year 1995-96 estimated General Revenue plus Working Capital and
Budget Stabilization funds available total $14,915.4 million, a 1.6% increase
over 1994-95. The $14,465.2 million in Estimated Revenues represent a 5.6%
increase over the analogous figure in 1994-95.

According to the Division of Bond Finance of the Department of General
Services of the State, as of April 4, 1995, the State maintains a high bond
rating from Moody's Investors Service, Inc. (Aa), Standard & Poor's Corporation
(AA) and Fitch Investors Service (AA) on the majority of its full faith and
credit bonds. Outstanding full faith and credit bonds at April 4, 1995 totalled
approximately $6.55 billion, with another $300 million anticipated to be issued
April 25, 1995.

B-11
<PAGE> 267

LOCAL GOVERNMENT REVENUE SOURCES. County and municipal governments in Florida
depend primarily upon ad valorem property taxes, and sales, motor fuels and
other local excise taxes and miscellaneous revenue sources, including revenues
from utilities services. Florida school districts derive substantially all of
their revenues from local property taxes. The overall levels of revenues from
these sources is in part dependent upon the local, state and national economy.
Local government obligations held by the Fund may constitute general obligations
or may be special obligations payable solely from one or more specified revenue
sources. The ability of the local governments to repay their obligations on a
timely basis will be dependent upon the continued strength of the revenues
pledged and of the overall fiscal status of the local government.

STATE CONSTITUTIONAL AMENDMENT LIMITING STATE REVENUES. An amendment to the
Constitution of the State of Florida was approved by the voters of the State of
Florida at the November 1994 general election. This amendment limits the amount
of taxes, fees, licenses and charges imposed by the State Legislature and
collected during any fiscal year to the amount of revenues allowed for the prior
fiscal year, plus an adjustment for growth. Growth is defined as the amount
equal to the average annual rate of growth in Florida personal income over the
most recent twenty quarters times the state revenues allowed for the prior
fiscal year. The revenues allowed for any fiscal year could be increased by a
two-thirds vote of the Legislature. The limit is effective starting with fiscal
year 1995-1996 which commenced July 1, 1995. Excess revenues generated will
initially be deposited in the budget stabilization fund until it is fully
funded; any additional excess revenues will then be refunded to taxpayers. This
amendment could limit the amount of actual revenues from which the State of
Florida could appropriate funds, including funds appropriated to local
governments. It is unclear at this point what effect, if any, this amendment
would have on local government debt obligations payable from state revenues
which may be subject to this amendment, such as state revenue sharing moneys or
other state revenues distributed to local governments. Certain State of Florida
debt obligations, which are not by their terms subject to appropriation, should
not be affected, depending upon the language of the legislation authorizing the
issuance of such obligations.

OTHER FACTORS. Florida will continue to face enormous spending pressures well
into the future. The large number of elderly residents will continue to demand
health services, an area where cost escalation is significant, and the constant
influx of people to Florida will continue to place sizable pressure on the State
for infrastructure needs.

STRATEGIC TRANSACTIONS

B-12
<PAGE> 268

B-13
<PAGE> 269

(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.

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 NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.

B-14
<PAGE> 270

The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.

B-15
<PAGE> 271

B-16
<PAGE> 272

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

B-17
<PAGE> 273

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', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
B speculative with respect to capacity to pay interest and repay principal. 'BB'
CCC indicates the lowest degree of speculation and 'C' the highest. While such debt
CC will likely have some quality and protective characteristics, these are
C 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-18
<PAGE> 274

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.
</TABLE>

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

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

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-19
<PAGE> 275

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 due 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 it will be treated as a note).

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

Note rating symbols are as follows:

<TABLE>
<S> <C>
SP-1 Strong or 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>

B-20
<PAGE> 276

<TABLE>
<S> <C>
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.
</TABLE>

4. TAX-EXEMPT DUAL RATINGS

S&P assigns "dual" ratings to all municipal debt issues that have a
demand or double feature as part of their provisions. 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 are used to denote 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, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("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-21
<PAGE> 277

<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 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.

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.

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-22
<PAGE> 278

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.

DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS

RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY

The claims-paying ability of insurance companies is rated by S&P and Moody's.
Descriptions of these ratings are set forth below:

DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY

AAA. Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.

AA. Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.

A. Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.

BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.

Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.

DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY

AAA. Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.

AA. Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.

A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.

BAA. Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.

Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.

OFFICERS AND TRUSTEES

B-23
<PAGE> 279

Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.

TRUSTEES

<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
</TABLE>

B-24
<PAGE> 280

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
</TABLE>

B-25
<PAGE> 281

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

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

B-26
<PAGE> 282

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

B-27
<PAGE> 283

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

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

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended December 31, 1994.

(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 20 mutual funds in the Fund Complex
during the calendar year ended December 31, 1994. The VK Adviser also serves
as investment adviser for other investment companies; however, with the
exception of Messrs. Powell, McDonnell and Whalen, such investment companies
do not have the same trustees as the Fund Complex. Combining the Fund
Complex with other investment companies advised by the VK Adviser, Mr.
Whalen received Total Compensation of $161,850.

As of August 11, 1995, the trustees and officers as a group own less than 1%
of the shares of the Fund.

To the knowledge of the Fund, as of August 11, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares.

As of August 11, 1995, the following person owned of record or beneficially 5%
or more of the Fund's Class B Shares: Peter C. and Jane H. Manus, JTWROS, 1471
NW Sweet Bay Circle, Palm City, FL 34990-8012, 6%.

As of August 11, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class C Shares: PaineWebber for the Benefit of Eunice
M. Lasche, 7308 Ola Avenue, Tampa, FL 33604-4064, 24%; Edward D. Jones & Co.
F/A/O, Janice R. Carter, EDJ #398-04317-1-6, P.O. Box 2500, Maryland Heights, MO
63043-8500, 24%; NFSC FEBO #A9R-020133, Ada L. Dean, 9433 Fountainbleau Blvd.,
Apt. 207, Miami, FL 33172-5684, 25%; and Wayne R. Darnell, 13840 Wilcox Road,
Largo, FL 34644-2106, 23%.

B-28
<PAGE> 284

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

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, 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 own, in the
aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
11% of the common stock of VK/AC Holding, Inc.

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. 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 agreement will continue in effect from year to year if specifically
approved by the Trustees of the Trust, of which the Fund is a separate series
(or by the Fund's shareholders), and by the disinterested trustees in compliance
with the requirements of the 1940 Act. The agreement may be terminated without
penalty upon 60 days' written notice by either party thereto and will
automatically terminate in the event of assignment.

For the period ended December 31, 1994 the Fund recognized advisory expenses
of $0.

OTHER AGREEMENTS

B-29
<PAGE> 285

for the employment of the personnel and the equipment necessary to render the
support services. At such time, the Fund, and the other Van Kampen American
Capital mutual funds distributed by the Distributor, shared such costs
proportionately among themselves based upon their respective net asset values.

For the period ended December 31, 1994 the Fund recognized expenses of
approximately $4,680, 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 American Capital mutual funds
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.

For the period ended December 31, 1994 the Fund recognized expenses of
approximately $942, representing the Adviser's cost of providing accounting
services.

For the period ended December 31, 1994 the Fund recognized expenses of
approximately $0, representing Van Kampen American Capital's cost of providing
legal services.

CUSTODIAN AND INDEPENDENT AUDITORS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and

B-30
<PAGE> 286

may select firms that are affiliated with the Fund, the Adviser, or its
distributor and other principal underwriters.

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 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 Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.

The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the Trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.

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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1995 federal individual income tax rates in effect on the date of this
Statement of Additional Information, including the 36% and 39.6% rates enacted
in August 1993 as part of the Revenue Reconciliation Act of 1993.

The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.3% taxable yield at
current federal income tax rates to receive the same benefit.

The State of Florida imposes no income tax on individuals; accordingly, the
table reflects only the exemption from Federal income taxes. The table does not
reflect the exemption of shares of the Fund from the State's intangible tax;
accordingly, Florida residents subject to such tax would need a somewhat higher
taxable return than those shown to equal the tax-exempt return of the Florida
Fund.

B-31
<PAGE> 287

1995 FEDERAL TAXABLE VS. TAX-FREE YIELDS

<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX ------------------------------------------------------------------------------
RETURN RETURN BRACKET 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
--------------- --------------- ------- ---- ---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-39,000 15.00% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
23,350-56,550 39,000-94,250 28.00% 4.17 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72
56,550-117,950 94,250-143,600 31.00% 4.35 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14
117,950-256,500 143,600-256,500 36.00% 4.69 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94
Over 256,500 Over 256,500 39.60% 4.97 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59
</TABLE>

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

Shares of the Fund are offered continuously through Van Kampen American
Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Van Kampen American Capital Distributors, Inc. is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of VK/AC
Holding, Inc., a Delaware corporation that is controlled through an ownership of
a substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C & D L.P."), a Connecticut limited
partnership. In addition, certain officers, directors and employees of Van
Kampen American Capital, Inc., and its subsidiaries own, in the aggregate not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of shares. The Distribution Plan and Service Plan sometimes are
referred to herein collectively as the "Plans". The Plans provide that the Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor, and
sub-agreements between the Distributor and members of the NASD acting as
securities dealers and NASD members or eligible non-members acting as brokers or
agents and similar agreements between the Fund and financial intermediaries
acting as brokers (collectively, "Selling Agreements") that may provide for
their customers or clients certain services or assistance, which may include,
but not be limited to, processing purchase and redemption transactions,
establishing and maintaining shareholder accounts regarding the Fund, and such
other services as may be agreed to from time to time and as may be permitted by
applicable statute, rule or regulation. Brokers, dealers and financial
intermediaries that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."

B-32
<PAGE> 288

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 period ended December 31, 1994, the Fund has recognized expenses under
the Plans of $7,646, $40,451, $45 for the Class A Shares, Class B Shares, and
Class C Shares, respectively, of which $4,306 and $6,313 represent payments to
financial intermediaries under the Selling Agreements for Class A Shares and
Class B Shares, respectively. For the period ended December 31, 1994, the Fund
has reimbursed the Distributor $0 and $185 for advertising expenses, and $1,233
and $1,077 for compensation of the Distributor's sales personnel for the Class A
Shares and Class B Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund are Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois and Squire, Sanders & Dempsey of Jacksonville, Florida.

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
seven 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 4.00% and 1.00%, respectively, of the lesser of the
then current net asset value of the shares redeemed or their initial purchase
price from the Fund. Yield quotations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.

B-33
<PAGE> 289

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 non-standardized 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,
deducting the maximum initial sales charge, if any, 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 annualized total return, including payment of the sales charge,
with respect to the Class A Shares for the five month period from July 29, 1994
(the commencement of investment operations of the Fund) through December 31,
1994 was (13.95%).

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 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" and assuming a 36% tax rate) was 8.50%. 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 5.51%.

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
December 31, 1994 was (1.47%).

CLASS B SHARES

The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for the five month period of July 29, 1994
(commencement of investment operations of the Fund) through December 31, 1994
was (13.07%).

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 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" and assuming a 36% tax rate) was 7.72%. 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 5.01%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1994
was (1.81%).

B-34
<PAGE> 290

CLASS C SHARES

The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for the five month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1994 was
(6.53%).

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 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" and assuming a 36% tax rate) was 7.72%. 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 5.01%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1994
was (1.81%).

B-35
<PAGE> 291

Van Kampen Merritt Florida Insured Tax Free Income Fund

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

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

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

We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Florida Insured Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1994, and the
related statement of operations, the statement of changes in net assets
and the financial highlights for the period from July 29, 1994 (com-
mencement of investment operations) through December 31, 1994. 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 audit.

We conducted our audit 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 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Florida Insured Tax Free Income Fund as of December 31, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for the period from July 29, 1994 (commencement of investment
operations) through December 31, 1994, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 14, 1995

B-36

<PAGE> 292

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------

</TABLE>

See Notes to Financial Statements

B-37

<PAGE> 293

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

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

</TABLE>

<TABLE>
<CAPTION>
<S> <C>
Total Long-Term Investments 91.7%
(Cost $18,684,806) <F1> ...................................................................... 18,247,656
Short-Term Investments at Amortized Cost 4.5% ................................................ 900,000
Other Assets in Excess of Liabilities 3.8% ................................................... 755,347
-------------
Net Assets 100% .............................................................................. $ 19,903,003
-------------

</TABLE>

[FN]
<F1> At December 31, 1994, cost for federal income tax purposes is
$18,684,806; the aggregate gross unrealized appreciation is $83,119 and the
aggregate gross unrealized depreciation is $526,721, resulting in net unrealized
depreciation including futures transactions of $443,602.
<F2>Assets segregated as collateral for open futures transactions.

See Notes to Financial Statements

B-38

<PAGE> 294

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $18,684,806) <F1>.......................................... $ 18,247,656
Short-Term Investments <F1> .................................................................. 900,000
Cash.......................................................................................... 311,293
Receivables:
Interest...................................................................................... 249,243
Fund Shares Sold.............................................................................. 243,436
Margin on Futures <F5>........................................................................ 7,812
Unamortized Organizational Expenses and Initial Registration Costs <F1>....................... 109,748
--------------
Total Assets.................................................................................. 20,069,188
--------------
Liabilities:
Payables:
Organizational Expenses and Initial Registration Costs <F1> .................................. 82,026
Income Distributions.......................................................................... 55,083
Accrued Expenses.............................................................................. 29,076
--------------
Total Liabilities............................................................................. 166,185
--------------
Net Assets ................................................................................... $ 19,903,003
--------------
Net Assets Consist of:
Paid in Surplus <F3> ......................................................................... $ 20,459,264
Accumulated Undistributed Net Investment Income............................................... 2,730
Accumulated Net Realized Loss on Investments ................................................. (115,389)
Net Unrealized Depreciation on Investments.................................................... (443,602)
--------------
Net Assets ................................................................................... $ 19,903,003
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $9,039,532 and
655,210 shares of beneficial interest issued and outstanding) <F3>............................ $ 13.80
Maximum sales charge (4.65%* of offering price)............................................... .67
--------------
Maximum offering price to public ............................................................. $ 14.47
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $10,852,084 and
786,853 shares of beneficial interest issued and outstanding) <F3>............................ $ 13.79
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $11,387 and
826 shares of beneficial interest issued and outstanding) <F3> ............................... $ 13.79
--------------
*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-39

<PAGE> 295

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

Statement of Operations
For the Period July 29, 1994 (Commencement of Investment Operations)
through December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest........................................................................................ $ 371,064
Amortization of Premium......................................................................... (3,003)
-----------
Total Income.................................................................................... 368,061
-----------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $7,646, $40,451 and
$45, respectively) <F6> .................................................................... 48,142
Investment Advisory Fee <F2> ................................................................... 32,991
Shareholder Services ........................................................................... 23,200
Audit........................................................................................... 15,601
Printing........................................................................................ 15,600
Amortization of Organizational Expenses and Initial Registration Costs <F1> .................... 10,252
Legal <F2>...................................................................................... 3,900
Trustees Fees and Expenses <F2>................................................................. 2,997
Other .......................................................................................... 9,160
-----------
Total Expenses.................................................................................. 161,843
Less Fees Waived and Expenses Reimbursed ($32,991 and $65,455, respectively).................... 98,446
-----------
Net Expenses.................................................................................... 63,397
-----------
Net Investment Income .......................................................................... $ 304,664
-----------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................. $ 2,420,856
Cost of Securities Sold......................................................................... (2,536,245)
-----------
Net Realized Loss on Investments (Including realized loss on futures transactions of $53,529) .. (115,389)
-----------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................................... -0-
End of the Period (Including unrealized depreciation on open futures transactions of $6,452).... (443,602)
-----------
Net Unrealized Depreciation on Investments During the Period.................................... (443,602)
-----------
Net Realized and Unrealized Loss on Investments................................................. $ (558,991)
-----------
Net Decrease in Net Assets from Operations...................................................... $ (254,327)
-----------

</TABLE>

See Notes to Financial Statements

B-40

<PAGE> 296

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
From Investment Activities:
Operations:
<S> <C>
Net Investment Income........................................................................ $ 304,664
Net Realized Loss on Investments............................................................. (115,389)
Net Unrealized Depreciation on Investments During the Period ................................ (443,602)
--------------
Change in Net Assets from Operations ........................................................ (254,327)
--------------
Distributions from Net Investment Income:
Class A Shares............................................................................... (128,551)
Class B Shares............................................................................... (173,186)
Class C Shares............................................................................... (197)
--------------
Total Distributions.......................................................................... (301,934)
--------------
Net Change in Net Assets from Investment Activities.......................................... (556,261)
--------------
From Capital Transactions <F3>:
Proceeds from Shares Sold ................................................................... 21,222,360
Net Asset Value of Shares Issued Through Dividend Reinvestment............................... 90,281
Cost of Shares Repurchased................................................................... (857,667)
--------------
Net Change in Net Assets from Capital Transactions .......................................... 20,454,974
--------------
Total Increase in Net Assets ................................................................ 19,898,713
Net Assets:
Beginning of the Period ..................................................................... 4,290
--------------
End of the Period (Including undistributed net investment income of $2,730).................. $ 19,903,003
--------------

</TABLE>

See Notes to Financial Statements

B-41

<PAGE> 297

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

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

1. Significant Accounting Policies
Van Kampen Merritt Florida Insured Tax Free Income Fund (the "Fund") was
organized as a subtrust of the Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust, and is registered as a non-diversified open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund commenced investment operations on July 29, 1994.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount on securities purchased are amortized over
the expected life of each applicable security.

D. Organizational Expenses and Initial Registration Costs-The Fund will
reimburse 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 $120,000. These costs are being amortized
on a straight line basis over the 60 month period ending July 29, 1999. 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.

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 $41,580 which will expire on December 31, 2002.
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.

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.

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... .500 of 1%
Over $500 million.... .450 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.

B-42

<PAGE> 298

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

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

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 A, B and C.

3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $9,234,813, $11,212,650 and
$11,801 for Classes A, B and C, respectively. For the period ended December 31,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
-----------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 670,002 $ 9,435,244
Class B........................ 827,493 11,776,916
Class C ....................... 713 10,200
---------- --------------
Total Sales ................... 1,498,208 $ 21,222,360
---------- --------------
Dividend Reinvestment:
Class A........................ 2,618 $ 36,073
Class B........................ 3,917 54,037
Class C ....................... 13 171
---------- --------------
Total Dividend Reinvestment ... 6,548 $ 90,281
---------- --------------
Repurchases:
Class A........................ (17,510) $ (237,934)
Class B........................ (44,657) (619,733)
Class C ....................... -0- -0-
---------- --------------
Total Repurchases.............. 62,167 $ (857,667)
---------- --------------

</TABLE>

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.

Contingent Deferred
Sales Charge

<TABLE>
<CAPTION>
Year of Redemption Class B Class C
-------------------------------------------
<S> <C> <C>
First .................. 4.00% 1.00%
Second .................. 3.75% None
Third ................... 3.50% None
Fourth .................. 2.50% None
Fifth .................. 1.50% None
Sixth ................... 1.00% None
Seventh and Thereafter .. None None

</TABLE>

For the period ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$2,000 and received CDSC on the redeemed shares of Classes B and C of
approximately $20,200. 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 $21,222,228 and
$2,536,245, respectively.

B-43

<PAGE> 299

Van Kampen Merritt Florida Insured Tax Free Income Fund
--------------------------------------------------------------------------------

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

ments. Upon disposition, a realized gain or loss is recognized accordingly.
Summarized below are the specific types of derivative financial instruments used
by the Fund.

A. 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, each with a par value of $100,000, for the
period ended December 31, 1994, were as follows:

--------------------------------------------------------------------------------
Contracts

Outstanding at July 29, 1994....... -0-
Futures Opened..................... 50
Futures Closed..................... (25)
---
Outstanding at December 31, 1994... 25
---

</TABLE>

The futures contracts outstanding as of December 31, 1994, and the description
and unrealized depreciation is as follows:

<TABLE>
<CAPTION> Unrealized
Contracts Depreciation
----------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Mar 1995 - Sells to Open... 25 $ (6,452)
--------- ------------

</TABLE>

B. 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, ongoing
shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .30% each of Class A shares and 1.00% each
of Class B and Class C shares are accrued daily. Included in these fees for the
period ended December 31, 1994, are payments to VKAC of approximately $30,500.

B-44
<PAGE> 300

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

VAN KAMPEN AMERICAN CAPITAL

NEW JERSEY TAX FREE INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital New Jersey Tax Free Income Fund, formerly known
as Van Kampen Merritt New Jersey Tax Free Income Fund (the "Fund"), is a
non-diversified mutual fund, organized as a separate series of Van Kampen
American Capital Tax Free Trust. The Fund's investment objective is to provide
investors a high level of current income exempt from federal income tax and New
Jersey gross income tax, consistent with preservation of capital. The Fund is
designed for investors who are residents of New Jersey for tax purposes. Under
normal market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a portfolio of New Jersey 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"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
Jersey municipal securities rated below investment grade (but not rated lower
than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO) and
unrated New Jersey municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
See "Municipal Securities." There is no assurance that the Fund will achieve its
investment objective.

(Continued on next page.)
------------------

A Statement of Additional Information, dated September 1, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL SM

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

THIS PROSPECTUS IS DATED SEPTEMBER 1, 1995.

<PAGE> 301

(Continued from previous page.)

2
<PAGE> 302

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 10
Investment Objective and Policies.............................. 10
Municipal Securities........................................... 12
Investment Practices........................................... 16
Special Considerations Regarding the Fund...................... 19
Investment Advisory Services................................... 21
Alternative Sales Arrangements................................. 23
Purchase of Shares............................................. 25
Shareholder Services........................................... 35
Redemption of Shares........................................... 39
The Distribution and Service Plans............................. 42
Distributions from the Fund.................................... 44
Tax Status..................................................... 45
Fund Performance............................................... 51
Description of Shares of the Fund.............................. 52
Additional Information......................................... 52
</TABLE>

3
<PAGE> 303

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

THE FUND. Van Kampen American Capital New Jersey Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund, organized as a separate series of Van
Kampen American Capital Tax Free Trust.

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors a
high level of current income exempt from federal income tax and New Jersey gross
income tax, consistent with preservation of capital. The Fund is designed for
investors who are residents of New Jersey for tax purposes.

INVESTMENT POLICIES. Under normal market conditions, the Fund seeks to achieve
its investment objective by investing at least 80% of its assets in a portfolio
of New Jersey 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"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO"). Up to 20% of the Fund's
total assets may consist of New Jersey municipal securities rated below
investment grade (but not rated lower than B- by S&P, B3 by Moody's or an
equivalent rating by another NRSRO) and unrated New Jersey municipal securities
that the Fund's investment adviser believes are of comparable quality, which
involve special risk considerations. Up to 20% of the Fund's assets may be
invested in municipal securities that are subject to federal alternative minimum
tax. See "Investment Objective and Policies," "Municipal Securities" and
"Special Considerations Regarding the Fund."

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

PURCHASE OF SHARES. Shares of the Fund are offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, and
through selected brokers and dealers. The offering price is the net asset value
per share next determined followed receipt of an order plus a sales charge
which, at the option of the investor, may be imposed at the time of purchase or
on a contingent deferred basis. Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The minimum initial investment is $500 for each class of shares and
the minimum subsequent investment is $25 for each class of shares (or less as
described under "Purchase of Shares"). The different classes of shares 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. See "Purchase
of Shares."

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

4
<PAGE> 304

SPECIAL RISK FACTORS. Up to 20% of the Fund's assets may consist of New Jersey
municipal securities rated below investment grade (but not rated lower than B-
by S&P, B3 by Moody's or an equivalent rating by another NRSRO) and in unrated
New Jersey municipal securities considered by the Adviser to be of comparable
quality. In addition, the Fund may invest up to 20% of its assets in certain
derivative securities such as inverse floaters. Investment in such lower grade
municipal securities and derivative securities involves significant risks.
Furthermore, under normal market conditions, the Fund will invest substantially
all of its assets in New Jersey municipal securities, and therefore it will be
more susceptible to factors adversely affecting issuers of New Jersey municipal
securities than a municipal securities fund that does not invest in New Jersey
municipal securities to this degree. There can be no assurance that the Fund
will achieve its objective. See "Special Considerations Regarding the Fund."

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

5
<PAGE> 305

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

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

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

(2) Investments of $1 million or more are subject to a substantially reduced or
no 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.

6
<PAGE> 306

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

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)(1)........................ 0.00% 0.00% 0.00%
12b-1 Fees (as a percentage of average daily
net assets)(1)(2)........................... 0.18% 0.98% 0.98%
Other Expenses(1) (as a percentage of average
daily net assets)........................... 0.00% 0.00% 0.00%
Total Expenses (as a percentage of average
daily net assets)(1)........................ 0.18% 0.98% 0.98%
</TABLE>

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

(1) The Adviser agreed to waive a portion of its "Management Fees" during the
Fund's last fiscal year. Absent the Adviser's waiver of its fee and
assumption of certain expenses of the Fund, the "Management Fees" would have
been 0.60% for each class of shares, "12b-1 Fees" would have been 0.25% for
Class A Shares and 1.00% each for Class B Shares and Class C Shares, "Other
Expenses" would have been 1.54% for Class A Shares, 1.58% for Class B Shares
and 1.56% for Class C Shares and the "Total Expenses" would have been 2.39%
for Class A Shares, 3.18% for Class B Shares and 3.16% for Class C Shares.

7
<PAGE> 307

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 0.18% for Class
A Shares, 0.98% for Class B Shares and
0.98% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $49 $53 $57 $ 69
Class B Shares............................ $50 $66 $69 $ 87*
Class C Shares............................ $20 $31 $54 $ 120
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $49 $53 $57 $ 69
Class B Shares............................ $10 $31 $54 $ 87*
Class C Shares............................ $10 $31 $54 $ 120
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amounts 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."

8
<PAGE> 308

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

FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------- ------------- -------------
JULY 29, 1994 JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS) OPERATIONS)
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $14.300 $14.300 $14.300
------------- ------------- -------------
Net Investment Income......... .295 .253 .240
Net Realized and Unrealized
Loss on Investments......... (.551) (.563) (.535)
------------- ------------- -------------
Total from Investment
Operations.................... (.256) (.310) (2.95)
------------- ------------- -------------
Less:
Distributions from Net
Investment Income........... .290 .252 .252
------------- ------------- -------------
Net Asset Value, End of
Period........................ $13.754 $13.738 $13.753
============= ============= =============
Total Return
(Non-annualized)(1)........... (1.81%) (2.16%) (2.09%)
Net Assets at End of Period
(in millions)................. $ 3.0 $ 6.5 $ 0.2
Ratio of Expenses to Average Net
Assets (annualized)(1)........ .17% .93% .91%
Ratio of Net Investment Income
to Average Net Assets
(annualized)(1)............... 5.16% 4.38% 4.39%
Portfolio Turnover.............. 11.00% 11.00% 11.00%
</TABLE>

----------------
(1) If certain expenses had not been waived or assumed by the investment
adviser, total return would have been lower and the ratios would have been
as follows:

<TABLE>
<S> <C> <C> <C>
Ratio of Expenses to
Average Net Assets
(annualized)............... 3.17% 3.89% 3.85%
Ratio of Net Investment
Income to Average Net
Assets (annualized)........ 2.17% 1.41% 1.46%
</TABLE>

See Financial Statements and Notes Thereto

9
<PAGE> 309

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

THE FUND

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

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

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to 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 a high level of
current income exempt from federal income tax and New Jersey gross income tax,
consistent with preservation of capital. The Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund is
designed for investors who are residents of New Jersey for tax purposes. An
investment in the Fund may not be appropriate for all investors. The Fund is not
intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision with respect to the Fund. An investment in the Fund is intended to be a
long-term investment and should not be used as a trading vehicle.

Under normal market conditions, the Fund will invest at least 80% of its total
assets in New Jersey 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"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO") 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

10
<PAGE> 310

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. The Fund's policy with respect to ratings
is not a fundamental policy, and thus may be changed by the Trustees without
shareholder approval.

Up to 20% of the Fund's total assets may be invested in New Jersey municipal
securities rated below investment grade (but not rated below B- by S&P, B3 by
Moody's or an equivalent rating by another NRSRO) and unrated New Jersey
municipal securities that the Adviser considers to be of comparable quality to
such securities. According to published guidelines, securities rated below
investment grade 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. According to
published guidelines, securities rated below investment grade 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.

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 New
Jersey gross 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 New Jersey municipal securities permitted by its investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to undue risk. The potential for
realization of capital gains resulting from possible changes in interest rates
will not be a major consideration. Other than for tax purposes, frequency of
portfolio turnover generally will not be a limiting factor if the Fund considers
it advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate normally will be less than 200%. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expenses or dealer costs than a lower rate, which expenses and costs must be
borne by the Fund and its shareholders. High portfolio turnover may also result
in

11
<PAGE> 311

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.

At times, conditions in the markets for New Jersey 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 New
Jersey municipal obligations. If these high-quality, short-term New Jersey
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 high-quality municipal securities of issuers other than issuers of New
Jersey municipal securities. Furthermore, if such high-quality municipal
securities 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 categories by either S&P or Moody's (or comparably rated
by another NRSRO); commercial paper rated in the highest grade by either rating
service (or comparably rated by another NRSRO); 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. To the extent that the Fund invests a substantial
portion of its assets in municipal securities other than New Jersey municipal
securities or in taxable securities for temporary defensive purposes, the Fund
will not be invested in a manner primarily designed to achieve a high level of
current income exempt from federal income tax and New Jersey gross income tax.
In addition, under New Jersey tax law, to qualify as a "qualified investment
fund", at the close of each quarter the Fund must have not less than 80% of the
aggregate principal amount of all of its investments, excluding certain
investments, in New Jersey municipal securities, or any other obligations the
interest or gains on which is exempt from New Jersey gross income tax. See "Tax
Status -- New Jersey Taxation."

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

12
<PAGE> 312

securities is includable in gross income for federal income tax purposes or the
interest on New Jersey municipal securities is not exempt from New Jersey gross
income tax, the Fund may not qualify as a "qualified investment fund" under New
Jersey tax law. See "Tax Status -- New Jersey Taxation." Under normal market
conditions, at least 80% of the Fund's assets will be invested in New Jersey
municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and cannot be changed without approval of the
shareholders of the Fund. Up to 20% of the Fund's assets may be invested in
municipal securities that are subject to federal alternative minimum tax.

Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, 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. The Fund may also invest in derivative
variable rate securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
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. The Fund will not invest more than
20% of its total assets in securities whose rates vary inversely with changes in
market rates of interest.

13
<PAGE> 313

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.
Municipal securities may not be backed by the faith, credit and taxing power of
the issuer. Other than as set forth above, there is no limitation with respect
to the amount of the Fund's assets that may be invested in the foregoing types
of municipal securities. Certain of the municipal securities in which the Fund
may invest represent relatively recent innovations in the municipal securities
markets and the markets for such securities may be less developed than the
market for conventional fixed rate 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.

Although at least 80% of the municipal securities in which the Fund may invest
will be 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 securities experiencing non-payment and a potential decrease in the
net asset value of the Fund.

Up to 20% of the Fund's assets may be invested in municipal securities that
are subject to 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. In addition, income earned or deemed
to be earned

14
<PAGE> 314

with respect to the Fund's Strategic Transactions, if any, will be taxable. See
"Tax Status."

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 New Jersey municipal securities rated below investment grade (but not
rated lower than B- by S&P, B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated municipal securities considered by the Adviser to be of
comparable quality to such securities. 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 or
comparable unrated securities.

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

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

15
<PAGE> 315

------------------------------------------------------------------------------
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 New Jersey
municipal securities for purposes of the Fund's 80% investment policy with
respect thereto.

STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Under current New Jersey
tax law, the Fund may purchase and sell exchange listed and over-the-counter put
and call options and purchase and sell financial futures. See "Tax Status -- New
Jersey Taxation." The Fund also reserves the right to engage in swaps, caps,
floors or collars. However, current New Jersey tax law may limit the Fund's
ability to enter into such 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.

16
<PAGE> 316

Income earned or deemed to be earned by the Fund from, among other things, its
Strategic Transactions and temporary defensive strategies, if any, will
generally be taxable income of the Fund. See "Tax Status."

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
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.

17
<PAGE> 317

Under normal market conditions, the fund will invest substantially all of its
assets in New Jersey municipal securities. The Fund generally will not invest
more than 25% of its total assets in any industry. 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 therefore 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 justifies 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.

From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of New Jersey municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.

18
<PAGE> 318

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 income 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.

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

SPECIAL CONSIDERATIONS REGARDING THE FUND

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

GENERAL. In normal circumstances, the Fund may invest up to 20% of its total
assets in New Jersey municipal securities rated below investment grade (but not
lower than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO) or
in unrated New Jersey municipal securities considered by the Adviser to be of
comparable quality to such securities. Investment in such lower grade municipal
securities involves special risks as compared with investment in higher grade
municipal securities. The market for lower grade municipal securities is

19
<PAGE> 319

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, below B3 by Moody's or an equivalent rating by another NRSRO,
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 up to 20% of its total assets in derivative variable rate
securities such as inverse floaters whose rates of interest vary inversely with
changes in market rates of interest. When market rates of interest decrease, the
change in value of such securities will have a positive effect on the net asset
value of the Fund and when market rates of interest increase, the change in
value of such securities will have a negative effect on the net asset value of
the Fund. Investment in such securities involve special risks as compared to a
fixed rate municipal security. The extent of increases and decreases in the
value of inverse floaters and the corresponding change to per share net asset
value of the Fund 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. The markets for inverse
variable rate securities may be less developed than the market for conventional
fixed rate municipal securities.

SPECIAL CONSIDERATIONS REGARDING NEW JERSEY MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of New Jersey municipal securities. New Jersey's economic base is
diversified, consisting of a variety of manufacturing, construction and service
industries, supplemented by rural areas with selective commercial agriculture.
By the beginning of the national recession in 1990, construction activity had
already been declining in New Jersey for nearly two years. The onset of
recession caused an acceleration of New Jersey's job losses in construction and
manufacturing, as well as an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a peacetime low of 3.6%

20
<PAGE> 320

during the first quarter of 1989 to a recessionary peak of 8.4% during 1992.
Since then, the unemployment rate fell to 6.9% during the first quarter of 1995.

New Jersey operates under an annual budget which is formulated and submitted
for legislative approval by the Governor by the third Tuesday following the
first meeting of the State Legislature in each year. After a process of
legislative committee review, the budget, in the form of an appropriations bill,
must be approved by the Senate and Assembly and must be approved and signed by
the Governor before any expenditure may be made in a fiscal year. At the time of
signing the bill, the Governor may revise the estimate of anticipated revenues
and may delete or reduce appropriation items contained in the bill. Like any
gubernatorial veto, that action may be reversed by a two-thirds vote of each
House of the New Jersey Legislature. In addition to anticipated revenues, the
appropriations act also provides for the appropriation of non-budgeted revenue
to the extent such revenue may be received and permits the corresponding
increase of appropriation balances from which expenditures may be made. New
Jersey operates on a fiscal year beginning July 1 and ending June 30.

On July 3, 1991, S&P downgraded New Jersey general obligation bonds to "AA+."
On August 26, 1992, Moody's downgraded New Jersey general obligation bonds to
"Aa1." The issuance of the $59,000,000 State of New Jersey General Obligation
Bonds on November 23, 1994, which was the most recent issuance of this type of
bond, was rated AA+ by S&P and Aa1 by Moody's. Local municipalities issuing New
Jersey municipal securities, although impacted in general by the economic
condition of the State, have credit ratings that are determined with reference
to the economic condition of such local municipalities.

Although revenue obligations of the State of New Jersey 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 New Jersey municipal securities and the
State of New Jersey is included in the Statement of Additional Information.

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

INVESTMENT ADVISORY SERVICES

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

21
<PAGE> 321

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

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Adviser may, in its sole discretion, determine to waive temporarily
all or a portion of its fee or it may discontinue this practice without notice
to shareholders. Without such waiver, the Fund would 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........................................ 0.60 of 1%
Over $500 million......................................... 0.50 of 1%
</TABLE>

22
<PAGE> 322

similar organization, reports and notices to shareholders, costs of registering
shares of the Fund under the federal securities laws, miscellaneous expenses and
all taxes and fees to federal, state or other governmental agencies.

PERSONAL INVESTING POLICIES. The 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
preclearance and other procedures designed to prevent conflicts of interest.

PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson has been employed by the Adviser for the last five years. Timothy D.
Haney, municipal portfolio manager of the Adviser, is primarily responsible for
the day-to-day management of the Fund's portfolio. From 1992 to 1995 Mr. Haney
was employed by the Distributor as a unit trust bond buyer. Prior to 1992, Mr.
Haney was employed by the Adviser as a municipal analyst.

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

ALTERNATIVE SALES ARRANGEMENTS

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

23
<PAGE> 323

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 the initial sales charge and
distribution and service related expenses applicable to Class A Shares,
irrespective of the fact that a CDSC would eventually not apply to a redemption
of such Class C Shares.

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

24
<PAGE> 324

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 "Code").

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

PURCHASE OF SHARES

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

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

25
<PAGE> 325

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to 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, from time to
time, sponsor sales contests with respect to sales of the Fund's Class A Shares
and Class B Shares pursuant to which brokers, dealers and financial
intermediaries may receive additional compensation of up to 2.00% of sales in
such shares. In connection therewith, the Distributor may consider combining the
sales of shares made by such brokers, dealers and financial intermediaries of
certain Van Kampen American Capital funds. 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 to brokers, dealers and financial intermediaries for
sales contests, other sales programs and seminars are made by the Distributor
out of its own assets and not out of the assets of the Fund. These programs will
not change the price an investor pays for shares or the amount that the Fund
will receive from such sale.

CLASS A SHARES

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

26
<PAGE> 326

SALES CHARGE TABLE

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

QUANTITY DISCOUNTS

27
<PAGE> 327

Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.

OTHER PURCHASE PROGRAMS

28
<PAGE> 328

29
<PAGE> 329

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

30
<PAGE> 330

transaction fee for placing an order to purchase shares pursuant to this
provision or for placing a redemption order with respect to such shares. The
Fund may terminate, or amend the terms of, offering shares of the Fund at net
asset value to such groups at any time.

DEFERRED SALES CHARGE ALTERNATIVE

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

31
<PAGE> 331

purpose of the contingent deferred sales charge and the distribution fee with
respect to a class of CDSC Shares is the same as the initial sales charge and
the distribution fee with respect to Class A Shares.

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).

32
<PAGE> 332

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

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

33
<PAGE> 333

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

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

NET ASSET VALUE

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

34
<PAGE> 334

to time, however, the per share net asset value of the different class of shares
may differ.

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

SHAREHOLDER SERVICES

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

35
<PAGE> 335

64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.

36
<PAGE> 336

approval of the Adviser; however, under normal circumstances, it is the policy
of the Adviser not to approve such requests. Upon 60 days after the date of this
prospectus, the Fund will increase the number of days shares must be registered
in a shareholder's name prior to an exchange to 30 days.

37
<PAGE> 337

unauthorized or fraudulent instructions if reasonable procedures are not
followed. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification options) and broker, dealer or financial intermediary of record
as the account from which shares are exchanged, unless otherwise specified by
the shareholder. In order to establish a systematic withdrawal plan for the new
account or dividend diversification options for the new account, an exchanging
shareholder must file a specific written request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
may restrict or terminate the exchange privilege at any time on 60 days' notice
to its shareholders of any termination or material amendment.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

38
<PAGE> 338

application to ACCESS. Once the form is properly completed, signed and returned
to the agent, a supply of checks drawn on State Street Bank and Trust Company
("State Street Bank") will be sent to such shareholder. These checks may be made
payable by the holder of Class A Shares to the order of any person in any amount
of $100 or more.

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

REDEMPTION OF SHARES

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

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

39
<PAGE> 339

40
<PAGE> 340

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

41
<PAGE> 341

long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.

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

THE DISTRIBUTION AND SERVICE PLANS

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

42
<PAGE> 342

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 and sub-agreements between the Distributor and
brokers, dealers or financial intermediaries (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance.

43
<PAGE> 343

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. As of December 31, 1994, there were $9,717 and
$2,159 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 0.10% and 0.02% 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.

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

DISTRIBUTIONS FROM THE FUND

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

44
<PAGE> 344

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 will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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

TAX STATUS

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

NEW JERSEY TAXATION

The following New Jersey income tax discussion is based on the advice of
Crummy, Del Deo, Dolan, Griffinger & Vecchione, special New Jersey tax counsel
to the Fund, and reflects applicable New Jersey tax laws as of the date hereof.

45
<PAGE> 345

Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax will not be required to include in
their New Jersey gross income distributions from the Fund which the Fund clearly
identifies as directly attributable to interest or gains from New Jersey
municipal securities, obligations of the United States or any other obligations,
the interest and gain on which is exempt from New Jersey Gross Income Tax under
New Jersey law or federal law, provided that the Fund qualifies as a "qualified
investment fund."

The Fund will qualify as a "qualified investment fund" if, for any calendar
year in which a distribution is paid: (1) the Fund has no investments, other
than interest-bearing obligations, obligations issued at a discount and cash and
cash items, including receivables and financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto;
(2) at the close of each quarter of the taxable year the Fund has not less than
80% of the aggregate principal amount of all of its investments (excluding
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto to the extent such instruments are
authorized by Section 851(b) of the Internal Revenue Code of 1986, cash and cash
items, which cash items shall include receivables) in New Jersey municipal
securities, or any other obligations, including United States obligations, the
interest or gains on which is exempt from New Jersey Gross Income Tax pursuant
to New Jersey law or federal law; (3) the Fund does not engage in any prohibited
Strategic Transactions (see "Investment Practices"); and (4) the Fund satisfies
the certification and reporting requirements imposed by regulations promulgated
by the New Jersey Division of Taxation. The Fund intends to so qualify. The Fund
must certify annually on or before February 15 to the New Jersey Division of
Taxation that for the preceding calendar year the Fund is a "qualified
investment fund." The Fund must also advise the Division of Taxation as to
amounts distributed for the preceding calendar year to shareholders from income
or gain derived from New Jersey and federal obligations. The Fund must also
advise its shareholders on or before February 15 of each calendar year that its
distributions qualify for exclusion pursuant to New Jersey law regarding
qualified investment funds.

Distributions to individual shareholders, including trusts and estates, who
are subject to the New Jersey Gross Income Tax, attributable to interest or
gains on municipal obligations issued by states other than New Jersey, including
municipalities or authorities in such other states, or any other obligations the
interest on which is not exempt from New Jersey Gross Income Tax pursuant to New
Jersey law or federal law, will be included as New Jersey gross income for
purposes of calculating the New Jersey Gross Income Tax.

Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax, will not be required to include in
gross income net gains attributable to the sale of shares provided that the Fund
qualifies

46
<PAGE> 346

as a "qualified investment fund." Any loss realized on such sale may not be
utilized to offset gains realized by such shareholder on the sale of assets the
gain on which is subject to the New Jersey Gross Income Tax.

If an individual holder of shares dies a domiciliary of New Jersey, New Jersey
Inheritance Tax and New Jersey Estate Tax may be imposed as a result of the
ownership of such shares.

If a shareholder is a corporation subject to the New Jersey Corporation
Business Tax or the New Jersey Corporation Income Tax, distributions of interest
or gains, or both, from the Fund will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax, less any interest expense incurred to carry such investment to the
extent such interest expense has not been deducted in computing federal taxable
income. Net gains derived by such corporation on the sale of its shares will be
included in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax.

New Jersey S corporations that are shareholders of the Fund generally will be
subject to the Corporation Business Tax at a rate of 2.42% of their entire net
income. However, New Jersey S corporations that are taxed under certain
provisions of federal tax law will be subject to the Corporation Business Tax at
a rate of 9.0% of their entire net income. Entire net income will include
distributions of the Fund and gains on the sale of shares of the Fund.

The foregoing is a general, abbreviated summary of certain of the provisions
of New Jersey law presently in effect as they directly govern the taxation of
shareholders of the Fund. The provisions are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions.

FEDERAL TAXATION

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable federal tax laws as of the
date of this Prospectus.

If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain, which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net

47
<PAGE> 347

investment income necessary to satisfy the 90% distribution requirement.
Similarly, the Fund will not be subject to federal income tax on any net capital
gain distributed to its shareholders.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.

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
requirements for avoiding income and excise 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.

48
<PAGE> 348

each year in order to maintain its qualification as a regulated investment
company and to avoid income and excise taxes. In order to generate sufficient
cash to make distributions necessary to satisfy the 90% distribution requirement
and avoid income and excise taxes, the Fund may have to dispose of securities
that it would otherwise have continued to hold.

DISTRIBUTIONS. 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 value of the Fund's assets
consists of obligations the interest on which is 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 gain
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. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares 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). It is not expected that any portion of the distributions from
the Fund will be eligible for the dividends received deduction for corporations.
The Fund will inform shareholders of the source and tax status of distributions
promptly after the close of each calendar year.

49
<PAGE> 349

increase a shareholder's alternative minimum taxable income. 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.

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 prior to the date of payment. 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.

GENERAL. The New Jersey and federal income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisers regarding the specific New Jersey and federal tax consequences of
holding and

50
<PAGE> 350

disposing of shares, as well as the effects of other state, local and foreign
tax laws and any proposed tax law changes.

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

FUND PERFORMANCE

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

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.

51
<PAGE> 351

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

DESCRIPTION OF SHARES OF THE FUND

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

The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt New Jersey Tax
Free Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
as of July 31, 1995. Shares of the Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
individual series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 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."

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

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, as amended. 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.

52
<PAGE> 352

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

53
<PAGE> 353

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL

YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL

NEW JERSEY TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

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

Transfer Agent

ACCESS INVESTOR SERVICES, INC.

P.O. Box 418256

Kansas City, MO 64141-9256

Attn: Van Kampen American Capital Funds

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

Attn: Van Kampen American Capital Funds

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

Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 354

NEW JERSEY TAX FREE
INCOME FUND

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

P R O S P E C T U S

SEPTEMBER 1, 1995

------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 355

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

Van Kampen American Capital New Jersey Tax Free Income Fund, formerly known as
Van Kampen Merritt New Jersey Tax Free Income Fund (the "Fund"), seeks to
provide investors with high current income exempt from federal income tax and
New Jersey gross income tax, consistent with preservation of capital. The Fund
is designed for investors who are residents of New Jersey for tax purposes.
Under normal market conditions, the Fund attempts to achieve its investment
objective by investing at least 80% of its assets in a portfolio of New Jersey
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poors Ratings Group ("S&P"), Baa or higher by Moody's Investors Service, Inc.
("Moody's") or an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO"). Up to 20% of the Fund's total assets may consist
of New Jersey municipal securities rated below investment grade (but not rated
lower than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO)
and unrated New Jersey municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
There is no assurance that the Fund will achieve its investment objective. The
Fund is a separate series of Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "Trust").

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-14
Officers and Trustees................................................................ B-19
Investment Advisory and Other Services............................................... B-24
Custodian and Independent Auditors................................................... B-26
Portfolio Transactions and Brokerage Allocation...................................... B-26
Tax Status of the Fund............................................................... B-27
The Distributor...................................................................... B-27
Legal Counsel........................................................................ B-28
Performance Information.............................................................. B-29
Appendix A -- Special Considerations Relating to New Jersey Municipal Securities..... B-31
Independent Auditor's Report......................................................... B-51
Financial Statements................................................................. B-52
Notes to Financial Statements........................................................ B-57
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 1, 1995.

B-1
<PAGE> 356

THE FUND AND THE TRUST

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

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated as of May 10, 1995. The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. The Trust can
issue an unlimited number of shares, $0.01 par value (prior to July 31, 1995,
the shares had no par value). Each share represents an equal proportionate
interest in the assets of the series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability. The Fund was
originally organized in 1994 under the name Van Kampen Merritt New Jersey Tax
Free Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
as of July 31, 1995.

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

INVESTMENT POLICIES AND RESTRICTIONS

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

B-2
<PAGE> 357

bond market; however, the Fund will not invest more than 25% of its assets
in industrial development bonds in a single industry.

6. 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.

B-3
<PAGE> 358

These investment restrictions are subject to provisions of applicable New
Jersey tax law. Thus, under current New Jersey tax law, the Fund must not hold
any investments in real estate or commodities to qualify as a "qualified
investment fund". See the Prospectus under the caption "Tax Status -- New Jersey
Taxation."

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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. 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 an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment and would
adversely affect the Fund's status as a "qualified investment fund" under New
Jersey tax law. 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. The Fund will invest in lease

B-4
<PAGE> 359

obligations which contain non-appropriation clauses only if such obligations are
rated investment grade, at the time of investment.

The Fund also may invest up to 20% 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. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund, and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Inverse floaters 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 inverse floaters 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 municipal security having similar
credit quality, redemption provisions and maturity.

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 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 and would adversely affect the Fund's status as a
"qualified investment fund" under New Jersey tax law.

B-5
<PAGE> 360

such securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund and would adversely affect the Fund's
status as a "qualified investment fund" under New Jersey tax law. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.

LOWER GRADE MUNICIPAL SECURITIES

In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade municipal securities and up to 20% of the Fund's
total assets may be invested in lower grade 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 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 municipal securities is considered generally to be less
liquid than the market for investment grade 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

B-6
<PAGE> 361

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 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
municipal securities and adversely affect the market value of such securities.
In addition, in such circumstances, the ability of issuers of lower grade
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 municipal
securities in the Fund's portfolio and thus the Fund's net asset value. The
secondary market prices of lower grade municipal securities are less sensitive
to changes in interest rates than are those for higher rated municipal
securities, but are more sensitive to adverse economic changes or individual
issuer developments. Adverse publicity and investor perceptions, whether or not
based on rational analysis, may also affect the value and liquidity of lower
grade 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 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 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 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, Moody's or another NRSRO in evaluating 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 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,
below B3 by Moody's or an equivalent rating by another NRSRO, or whose rating
has been withdrawn.

B-7
<PAGE> 362

Because issuers of lower grade 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.

SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES

Investors should be aware of certain factors that might affect the financial
condition of issuers of New Jersey municipal securities. New Jersey's economic
base is diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. By the beginning of the national recession in 1990, construction
activity had already been declining in New Jersey for nearly two years. The
onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. Reflecting the downturn, the rate of unemployment
in the State rose from a peacetime low of 3.6% during the first quarter of 1989
to a recessionary peak of 8.4% during 1992. Since then, the unemployment rate
fell to 6.9% during the first quarter of 1995.

More detailed information concerning New Jersey municipal securities and the
State of New Jersey is included in Appendix A of the Statement of Additional
Information.

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. Under current New Jersey tax law, the Fund may not
hold any investments other than interest-bearing obligations, obligations issued
at a discount and cash and cash items, including receivables and financial
options, futures, forward contracts or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto. See the Prospectus under the caption "Tax Status
-- New Jersey Taxation."

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"). Under
current New Jersey tax law, the Fund may purchase and sell exchange-listed and
over-the-counter put and call options and purchase and sell financial futures.
See the Prospectus under the caption "Tax Status -- New Jersey Taxation." The
Fund also reserves the right to engage in swaps, caps, floors or collars.
However, current New Jersey tax law may limit the Fund's ability to engage in
such transactions. Strategic Transactions may be used to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Fund's portfolio resulting from securities markets
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.

B-8
<PAGE> 363

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-9
<PAGE> 364

options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.

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 NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.

B-10
<PAGE> 365

Fund, the Fund may be required to acquire the underlying security at a
disadvantageous price in order to satisfy its obligation with respect to the
call option.

The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. 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 financial 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 financial 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

B-11
<PAGE> 366

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

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars, if permitted under applicable New Jersey tax
law. 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.

B-12
<PAGE> 367

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-13
<PAGE> 368

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 as having as predominantly
B speculative characteristics 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.

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.
</TABLE>

B-14
<PAGE> 369

<TABLE>
<S> <C>
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.
</TABLE>

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

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

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.

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>

B-15
<PAGE> 370

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 guide"
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 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 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>

B-16
<PAGE> 371

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, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("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-17
<PAGE> 372

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

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

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

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

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

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

3. TAX-EXEMPT COMMERCIAL PAPER

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

B-18
<PAGE> 373

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

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

OFFICERS AND TRUSTEES

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>

B-19
<PAGE> 374

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

B-20
<PAGE> 375

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
</TABLE>

B-21
<PAGE> 376

B-22
<PAGE> 377

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. McDonnell and Powell, trustees of the Trust, are affiliated
persons of the VK Adviser and are not eligible for compensation or
retirement benefits from the Trust. Messrs. Branagan, Caruso, Hilsman,
Rees, Sheehan, Sisto and Woodside were elected as trustees of the Trust at
a shareholders meeting held July 21, 1995 and thus received no
compensation or retirement benefits from the Trust during its 1994 fiscal
year. The amounts in this column are the retirement benefits accrued
during the Fund's fiscal year ended December 31, 1994.

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

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The
amounts in this column are the retirement benefits accrued during the
Fund's fiscal year ended December 31, 1994.

B-23
<PAGE> 378

investment adviser for other investment companies; however, with the
exception of Messrs. Powell, McDonnell and Whalen, such investment
companies do not have the same trustees as the Fund Complex. Combining the
Fund Complex with other investment companies advised by the VK Adviser,
Mr. Whalen receive Total Compensation of $161,850.

As of August 11, the trustees and officers as a group own less than 1% of the
shares of the Fund.

As of August 11, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class A Shares: Maliad Maher and Mary Maher, 228 Eagle
Rock Avenue, Roseland, NJ 07068-1711, 6%.

As of August 11, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class B Shares: Prudential Securities FBO, Edith PC
Taylor, 25 Hickory Place, APT D-1, Chatham, NJ 07928-1479, 7%.

As of August 11, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class C Shares: John H. and Carol A. Schroeder, JTWROS,
20 Byron Drive, Mount Laurel, NJ 08054-4700, 17%; Edward D. Jones & Co., F/A/O,
Henry J. Glaser Jr., EDJ #769-02443-1-9, P.O. Box 2500, Maryland Heights, MO
63043-8500, 8%; Garden State Cutting, Attn: Vincent Landi, 66 Gray Street,
Paterson, NJ 07501-3502, 16%; and Louise I. Grill, c/o Alvin H. Frankel POA, 601
Haddon Ave., Collingswood, NJ 08108-3703, 50%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.). The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, 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 own, in the
aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
11% of the common stock of VK/AC Holding, Inc. Presently, and after giving
effect to the exercise of such options, no officer or trustee of the Fund owns
or would own 5% or more of the common stock of VK/AC Holding, Inc.

The investment advisory agreement 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.

B-24
<PAGE> 379

For the period ended December 31, 1994, the Fund recognized advisory expenses
of $0.

OTHER AGREEMENTS

ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.

For the period ended December 31, 1994, the Fund recognized expenses of
approximately $0 representing the VK Adviser's cost of providing accounting
services.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, shared such costs proportionately among
themselves based upon their respective net asset values.

For the period ended December 31, 1994, the Fund recognized expenses of
approximately $0 representing the Distributor's cost of providing certain
support services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the 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 funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.

For the period ended December 31, 1994, the Fund recognized expenses of
approximately $0 representing Van Kampen American Capital's cost of providing
legal services.

B-25
<PAGE> 380

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 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 Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as set
forth above to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.

B-26
<PAGE> 381

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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1995 federal and New Jersey State gross income tax rates in effect on the
date of this Statement of Additional Information, including the 36% and 39.6%
rates enacted in August 1993 as part of the Revenue Reconciliation Act of 1993.
Under legislation enacted on July 4, 1995, the New Jersey gross income tax rates
for 1996 are scheduled to be reduced from the rates utilized in this chart.

The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately a 8.9% taxable yield at
current federal and state income tax rates to receive the same benefit.

1995 FEDERAL AND NEW JERSEY STATE TAXABLE VS. TAX-FREE YIELDS

<TABLE>
<CAPTION>
SINGLE JOINT MARGINAL
RETURN RETURN TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
---------------- ---------------- --------- ---- ---- ---- ---- ---- ---- ----- ----- -----
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 23,350 $ 0-- 39,000 16.81% 3.61% 4.21% 4.81% 5.41% 6.01% 6.61% 7.21% 7.81% 8.41%
23,350-- 56,550 39,000-- 94,200 32.33 4.43 5.17 5.91 6.65 7.39 8.13 8.87 9.61 10.34
56,550-- 75,000 94,200--143,600 35.15 4.63 5.40 6.17 6.94 7.71 8.48 9.25 10.02 10.79
75,000--117,950 -- 35.54 4.65 5.43 6.21 6.98 7.76 8.53 9.31 10.08 10.86
117,950--256,500 143,600--256,500 40.21 5.02 5.85 6.69 7.53 8.36 9.20 10.04 10.87 11.71
Over 256,000 Over 256,500 43.57 5.32 6.20 7.09 7.97 8.86 9.75 10.63 11.52 12.40
</TABLE>

---------------
* Combined state and federal tax top marginal rate. The tax rate brackets listed
are the 1995 federal income tax rate brackets. Because New Jersey's gross
income tax utilizes a different set of rate brackets, more than one New Jersey
gross income tax bracket may fall within a particular federal bracket. In
those federal brackets where this is so, the highest marginal New Jersey gross
income tax rate has been used for purposes of the table. This tends to
slightly increase the taxable equivalent estimated current return shown above
for lesser income amounts within certain federal brackets, but not by more
than approximately 0.4% in the chart above.

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

Shares of the Fund are offered continuously through the Distributor Inc., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Distributor Inc. 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

B-27
<PAGE> 382

and employees of Van Kampen American Capital, Inc., and its subsidiaries own, in
the aggregate not more than 7% of the common stock of VK/AC Holding, Inc. and
have the right to acquire, upon the exercise of options, approximately an
additional 11% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed
by Clayton, Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited
Partnership ("C & D Associates L.P.") is the general partner of C & D L.P.
Pursuant to a distribution agreement, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities
dealers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem the Fund's
shares and how the Fund's shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of shares. The Distribution Plan and Service Plan sometimes are
referred to herein collectively as the "Plans". The Plans provide that the Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD 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 acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."

For the period ended December 31, 1994, the Fund has recognized expenses under
the Plans of $2,901, $21,519 and $715 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $0 and $0 represent payments to financial
intermediaries under the Selling Agreements for Class A Shares and Class B
Shares, respectively. For the period ended December 31, 1994, the Fund
reimbursed the Distributor $0 and $0 for advertising expenses and $0 and $0 for
compensation of the Distributor's sales personnel for Class A Shares and Class B
Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois
and Crummy, Del Deo, Dolan, Griffinger & Vecchione, Newark, New Jersey.

B-28
<PAGE> 383

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
seven 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 4.00% and 1.00%, respectively, of the lesser of the
then current net asset value of the shares redeemed or their initial purchase
price from the Fund. Yield quotations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.

The Fund 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 non-standardized 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,
deducting the maximum initial sales charge, if any, 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 annualized total return including payment of the sales charge with
respect to the Class A Shares for the five month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1994 was
(14.67%).

B-29
<PAGE> 384

(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.5% tax rate) was 9.33%. 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 5.58%.

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
December 31, 1994 was (1.81%).

CLASS B SHARES

The average annualized total return including payment of the CDSC with respect
to the Class B Shares for the five month period of July 29, 1994 (commencement
of investment operations of the Fund) through December 31, 1994 was (13.80%).

The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.06%. The tax-equivalent 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" and assuming a 40.5% tax rate) was 8.50%. 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 5.07%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1994
was (2.16%).

CLASS C SHARES

The average annualized total return including payment of the CDSC with respect
to the Class C Shares for the five month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1994 was
(7.16%).

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 5.06%. The tax-equivalent 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" and assuming a 40.5% tax rate) was 8.50%. 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 5.07%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1994
was (2.09%).

B-30
<PAGE> 385

APPENDIX A

SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES

As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New Jersey municipal securities. In
addition, the specific New Jersey 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 New Jersey
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of New Jersey
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of New Jersey municipal
securities may be subject. Such information is derived from the preliminary
official statement utilized in connection with the issuance of the $805,440,000
New Jersey Transportation Trust Fund Authority Transportation System Bonds, 1995
Series B, dated July 28, 1995. 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 New Jersey 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 New Jersey issuers may be unrelated to the creditworthiness of
obligations issued by the State of New Jersey and there is no responsibility on
the part of the State of New Jersey 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 New Jersey, 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 New Jersey municipal
securities.

The portfolio of the Fund may include municipal securities issued by the State
of New Jersey (the "State"), by its various public bodies (the "Agencies")
and/or by other entities located within the State.

The State and Its Economy

New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 persons per square mile, it is the most
densely populated of all the states. New Jersey is located at the center of the
megalopolis which extends from Boston to Washington, and which includes almost
one-fourth of the country's population. The extensive facilities of the Port
Authority of New York and New Jersey, the Delaware River Port Authority and the
South Jersey Port Corporation across the Delaware River from Philadelphia
augment the air, land and water transportation complex which has influenced much
of the State's economy. This central location in the northeastern corridor, the
transportation and port facilities and proximity to New York City make the State
an attractive location for corporate headquarters and international business
offices. A number of Fortune Magazine's top 500 companies maintain headquarters
or major facilities in New Jersey, and many foreign-owned firms have located
facilities in the State.

The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic seashore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. In 1976, voters
approved casino gambling for Atlantic City, which has again become an important
State tourist attraction.

New Jersey's population grew rapidly in the years following World War II,
before slowing to an annual rate of 0.27 percent in the 1970s. Between 1980 and
1990, the annual growth rose to 0.49 percent and between 1990 and 1994,
accelerated to .52%. While this rate of growth is less than that for the United
States, it compares favorably with other Middle Atlantic States. New York has
shown a 0.23 percent annual rate of increase since 1990 and Pennsylvania's
population has increased 0.33 percent per year.

B-31
<PAGE> 386

The small increase in the State's total population during the 1970s and
throughout the 1980s masks the redistribution of population within the State.
There has been a significant shift from the northeastern industrial areas toward
the four coastal counties (Cape May, Atlantic, Ocean and Monmouth) and toward
the central New Jersey counties of Hunterdon, Somerset and Middlesex.

Total personal income in New Jersey stood at $204.1 billion for 1992 and
$210.6 billion for 1993, an increase of 3.2%. Nationally, total personal income
grew by 4.4 percent between 1992 and 1993, while in New York and Pennsylvania it
grew by 3.6 percent and 3.1 percent, respectively. Based on 1973 levels, the
personal income index in 1993 stood at 478.9 for New Jersey, 416.6 for New York
and 422.4 for Pennsylvania. The United States index stood at 490.7 (1973 = 100).

Historically, New Jersey's average per capita income has been well above the
national average. The differential narrowed during the 1970s but widened in the
1980s. In 1993, the State ranked second among all states in per capita personal
income ($26,732). It ranked higher than New York, with per capita income of
$24,771 and Pennsylvania with $21,241. Only Connecticut, with $27,957, exceeded
New Jersey's $26,732.

After enjoying a boom during the mid-1980s, New Jersey as well as the rest of
the Northeast slipped into a slowdown well before the onset of the national
recession which officially began in July 1990 (according to the National Bureau
of Economic Research). By the beginning of the national recession, construction
activity had already been declining in New Jersey for nearly two years. As the
rapid acceleration of real estate prices forced many would-be homeowners out of
the market and high non-residential vacancy rates reduced new commitments for
offices and commercial facilities, construction employment began to decline;
also growth had tapered off markedly in the service sectors and the long-term
downtrend of factory employment had accelerated, partly because of a leveling
off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,689,800 in March 1989 to a low of 3,445,000 in March 1992. This
loss has been followed by an employment gain of 118,700 from March 1992 to
September 1994.

Reflecting the downturn, the rate of unemployment in the State rose from a low
of 3.6 percent during the first quarter of 1989 to a recessionary peak of 8.4%
during 1992. Since then, the unemployment rate fell to 6.9% during the first
quarter of 1995.

In the first nine months of 1994, relative to the same period a year ago, job
growth took place in services (3.5%) and construction (5.7%), more moderate
growth took place in trade (1.9%), transportation and utilities (1.2%) and
finance/ insurance/ real estate (1.4%), while manufacturing and government
declined (by 1.5% and 0.1%, respectively). The net result was a 1.6% increase in
average employment during the first nine months of 1994 compared to the first
nine months of 1993.

The insured unemployment rate, i.e. the number of individuals claiming
benefits as a percentage of the number of workers covered by Unemployment
Insurance, stopped rising during the winter of 1991-1992 and had been stable at
about 4.0 percent through June of 1992 before beginning a gradual decline to its
December, 1994 level of 3.0 percent. It has since stabilized at about that
level. After paying out approximately $125 million, the State's Emergency
Unemployment Benefits Program ended on November 17, 1991 with the enactment of
the Federal Emergency Unemployment Compensation (EUC) Program. Through the
expiration of the EUC program on April 30, 1994, over $2.1 billion had been
disbursed to claimants who exhausted their entitlement under the regular state
program. Benefits under EUC are financed 100 percent by the federal government
and thus do not impact the State's trust fund.

Total construction contracts awarded in New Jersey have turned around, rising
by 11.8% in the first two months of 1995 compared with 1994. By far, the largest
boost came from residential construction awards which increased by 32.8% in 1995
compared with 1994. In addition, nonresidential building construction awards
have turned around, posting a 2.3% gain from 1994. Nonbuilding construction
awards increased approximately 12% in the first two months of 1995 compared with
the same period in 1994.

New passenger car registrations issued during 1994 were virtually unchanged in
New Jersey from a year earlier. However, registrations of new light trucks and
vans (up to 10,000 lbs.) advanced strongly in 1994

B-32
<PAGE> 387

increasing 19% in 1994. Retail sales for 1994 were up 7.5% compared to 1993.
Retailers, such as those selling appliances and home furnishings, should benefit
from increased residential construction. Car, light truck and van dealers should
also benefit from the high (eight years) average age of autos on the road.

ATLANTIC CITY AND LEGALIZED GAMBLING

Legalized casino gambling was introduced into Atlantic City by the enactment
of the Casino Control Act on June 2, 1977 following a public referendum which
passed by a 3-to-2 margin in November 1976. Since passage of that legislation,
thirteen hotel/casinos have opened in Atlantic City. However, on May 22, 1989,
Elsinore's Atlantis Casino Hotel discontinued its casino operations due to its
severe financial difficulties. Consequently, there are twelve casinos currently
operating in Atlantic City.

For the year ended December 31, 1994, eight of the twelve operating casinos
reported a profit. The industry as a whole reported net income of $31.4 million
for the year, reflecting a $32.6 million increase from the net loss of $1.2
million reported for the prior comparable period.

For the years ended December 31, 1993 and 1994, the casino industry reported
"Win" of $3.3 billion and $3.4 billion, respectively. "Win" represents the
amount a casino wins at the slot machines and table games before operating
expenses and taxes are deducted.

For the years ended December 31, 1993 and 1994, the State collected revenue
taxes for programs to assist the elderly and disabled of $262.9 million and
$272.4 million, respectively. From May 20, 1978, the date the first casino
opened, through December 31, 1994, the industry has paid a total of $2.9 billion
to the State for these programs. As of December 31, 1994, the Casino Revenue
Fund has earned $113.8 million in interest.

In 1994 there were 43,400 jobs in the hotel/casinos; total employment in the
Atlantic County metropolitan statistical area has grown from 89,000 persons in
1975 to 165,300 in 1994. The number of visitors to Atlantic City increased 347.1
percent from 7.0 million for 1978 to 31.3 million for 1994.

The gaming industry has also provided substantial revenue for municipal,
county and school governments through real estate taxes and payment of the
luxury tax which the State has authorized and which is applied to hotel tax and
amusement revenues.

NEW JERSEY STATE LOTTERY FINANCIAL DATA

The New Jersey State Lottery was created as a major source of revenue for
State education and institutions. As of June 30, 1994, the Lottery has generated
over $16.5 billion in gross revenues and $8.1 billion in prizes and contributed
$6.93 billion to the State.

The State Department of Higher Education has received approximately $1.912
billion in Lottery funds. For elementary and secondary education, the State
Department of Education has received approximately $1.559 billion. State
institutions have received a total of $3.455 billion in Lottery monies.

In Fiscal Year 1994, gross revenues totalled $1.45 billion, of which 49.94
percent was returned in prizes, 41.65 percent went to State education and
institutions, 7.02 percent was paid to banks and lottery companies and 1.39
percent covered lottery operational and promotional expenses.

STATE FINANCES

The Director of the Division of Budget and Accounting in the Department of
Treasury of the State (the "Budget Director") prescribes and approves the
accounting policies of the State and directs their implementation.

NEW JERSEY'S ACCOUNTING SYSTEM

The State prepares its financial statements on a "modified accrual" basis
utilizing the fund method of accounting. The National Council on Governmental
Accounting in its publication entitled Statement I. -- Governmental Accounting
and Financial Reporting Principles defines a fund as a fiscal and accounting
entity with a self-balancing set of accounts recording cash and other financial
resources together with all related

B-33
<PAGE> 388

liabilities and residual equities or balances, and changes therein, which are
segregated for the purpose of carrying on specific activities or attaining
certain objectives in accordance with special regulations, restrictions or
limitations. The State's financial statements reflect financial reporting
practices in accordance with that definition. Accordingly, the State prepares
separate statements for the General Fund, Special Revenue Funds, Debt Service
Funds, Capital Project Funds, Trust and Agency Funds, Enterprise Funds,
University Funds, General Fixed Asset Account Group and its General Long-Term
Debt Account Group, and its component units.

The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund. The appropriation acts provide the basic framework for the
operation of the General Fund.

Special Revenue Funds are used to account for resources legally restricted to
expenditure for specified purposes. Special Revenue Funds include the Casino
Control Fund, the Casino Revenue Fund, the Gubernatorial Elections Fund and the
Property Tax Relief Fund. Debt Services Funds are used to account for the
accumulation of resources for, and the payment of, principal and redemption
premium, if any, of and interest on general obligation bonds. Capital Project
Funds are used to account for financial resources to be used for the acquisition
or construction of major State capital facilities. Trust and Agency Funds are
used to account for assets held in a trust capacity or as an agent for
individuals, private organizations, other governments and/or other funds. The
General Fixed Asset Account Group accounts for the State's fixed assets acquired
or constructed for general governmental purposes. The General Long-Term Debt
Account Group accounts for the unmatured general long-term liabilities of the
State.

The Property Tax Relief Fund, the largest of the Special Revenue Funds, is
used to account for revenues from the New Jersey Gross Income Tax. Revenues
realized from the Gross Income Tax are dedicated by the State Constitution. All
receipts from taxes levied on personal income of individuals, estates and trusts
must be appropriated exclusively for the purpose of reducing or offsetting
property taxes.

New Jersey's Budget and Appropriation System

The State operates on a fiscal year beginning July 1 and ending June 30. For
example, "Fiscal Year 1996" refers to the State's fiscal year beginning July 1,
1995 and ending June 30, 1996. Pursuant to Article VIII, Section II, par. 2 of
the State Constitution, no money may be drawn from the State Treasury except for
appropriations made by law. In addition, all monies for the support of State
government and all other State purposes, as far as can be ascertained or
reasonably foreseen, must be provided for in one general appropriation law
covering one and the same fiscal year. No general appropriations law or other
law appropriating money for any State purpose shall be enacted if the amount of
money appropriated therein, together with all other prior appropriations made
for the same fiscal year, exceeds the total amount of revenue on hand and
anticipated to be available for such fiscal year, as certified by the Governor.

In addition to the Constitutional provisions, the New Jersey Statutes contain
provisions concerning the budget and appropriation system. On or before October
1 in each year, each Department, Board, Commission, officer, or other Agency of
the State must file with the Budget Director a request for appropriation or
permission to spend specifying all expenditures proposed to be made by such
spending agency during the following fiscal year. The Budget Director then
examines each request and determines the necessity or advisability of the
appropriation request. The Budget Director may hold hearings, open to the
public, during the months of October, November and December and reviews the
budget requests with the agency heads. On or before December 31 of each year or
such other time as the Governor may request, after review and examination, the
Budget Director submits the requests, together with her findings, comments and
recommendations, to the Governor. It is then the responsibility of the Governor
to examine and consider all requests and formulate her budget recommendations.

The Governor's budget message (the "Governor's Budget Message") is then
transmitted on or before the third Tuesday following the first meeting of the
State Legislature, in each year, except in the year when a Governor is
inaugurated, when it must be transmitted on or before February 15. The
Governor's Budget

B-34
<PAGE> 389

Message must embody the proposed complete financial program of the State
government for the next ensuing fiscal year and must set forth in detail each
source of anticipated revenue and the purposes of recommended expenditures for
each spending agency. After a process of legislative committee review, the
budget, in the form of an appropriations bill, must be approved by the Senate
and Assembly and must be submitted to the Governor for review. Upon such
submissions, the Governor may approve the bill, revise the estimate of
anticipated revenues contained therein, delete or reduce appropriation items
contained in the bill through the exercise of her line-item veto power, or veto
the bill in its entirety. Like any gubernatorial veto, such action may be
reversed by a two-thirds vote of each House of the State Legislature. In
addition to anticipated revenues, the appropriations act also provides for the
appropriation of non-budgeted revenue to the extent such revenue may be received
and permits the corresponding increase of appropriation balances from which
expenditures may be made.

FINANCIAL RESULTS AND PROJECTIONS

AUDIT REPORTS

The State Auditor is directed by statute to "examine and post-audit all the
accounts, reports, and statements and make independent verifications of all
assets, liabilities, revenues, and expenditures" of the State and its agencies.
The audit reports containing the opinion of the State Auditor are available for
examination and review upon request to the State Treasurer.

FISCAL YEARS 1995 AND 1996 REVENUE ESTIMATES

Sales and Use Tax. The Fiscal Year 1996 Appropriations Act revised estimate
forecasts Sales and Use Tax collections for Fiscal Year 1995 as $4,130.0
million, a 9.3% increase from the Fiscal Year 1994 revenue. The Fiscal Year 1996
estimate of $4,356.0 million, is a 5.5% increase from the Fiscal Year 1995
estimate.

Gross Income Tax. The revised estimate forecasts Gross Income Tax collections
for Fiscal Year 1995 of $4.580.0 million, a 1.9% increase from Fiscal Year 1994
revenue. Included in the Fiscal Year 1995 forecast is a 5% reduction of personal
income tax rates effective January 1, 1994 and a further 10% reduction of
personal income tax rates effective January 1, 1995 (on joint incomes under $80
thousand). The estimate for Fiscal Year 1996 of $4,580.0 million, is a 0%
increase from the Fiscal Year 1995 estimate. Included in the Fiscal Year 1996
forecast is the 10% reduction of personal income tax rates effective January 1,
1995 and a further 15% reduction of personal income tax rates effective January
1, 1996 (on joint incomes under $80 thousand).

Corporation Business Tax. The revised estimate forecasts Corporation Business
Tax collections for Fiscal Year 1995 as $1,054.0 million, a .9% decrease from
Fiscal Year 1994 revenue. Included in the Corporation Business Tax forecast is a
reduction in the Corporation Business Tax rate from 9.375% to 9.0% of net New
Jersey income. The Fiscal Year 1996 forecast of $1,145.0 million, is a 8.6%
increase from the Fiscal Year 1995 estimate.

General Considerations. Estimated receipts from State taxes and revenues,
including the three principal taxes set forth above, are forecasts based on the
best information available at the time of such forecasts. Changes in economic
activity in the State and the nation, consumption of durable goods, corporate
financial performance and other factors that are difficult to predict may result
in actual collections being more or less than forecasted.

Should revenues be less than the amount anticipated in the budget for a fiscal
year, the Governor may, pursuant to statutory authority, prevent any expenditure
under any appropriation. There are additional means by which the Governor may
ensure that the State is operated efficiently and does not incur a deficit. No
supplemental appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet such appropriation. In the past when actual
revenues have been less than the amount anticipated in the budget, the Governor
has exercised her plenary powers leading to, among other actions, implementation
of a hiring freeze for all State departments and the discontinuation of programs
for which appropriations were budgeted but not yet spent.

B-35
<PAGE> 390

Pending Litigation. In connection with the Fiscal Year 1996 budget, certain
unions and individual plaintiffs have filed a lawsuit concerning the funding of
certain retirement systems. See "LITIGATION -- New Jersey Education Association
et al. v. State of New Jersey et al."

The State has made appropriations for principal and interest payments for
general obligation bonds for Fiscal Years 1992 through 1995 in the amounts of
$410.6 million, $444.3 million, $119.9 million and $103.6 million, respectively.
For Fiscal Year 1996, $466.3 million has been appropriated for principal and
interest payments for general obligation bonds.

PROGRAMS FUNDED UNDER FISCAL YEAR 1996 ADJUSTED APPROPRIATIONS

Of the $15,994.5 million appropriated in Fiscal Year 1996 from the General
Fund, the Property Tax Relief Fund, the Casino Control Fund, the Casino Revenue
Fund and the Gubernatorial Elections Fund, $6,423.5 million (40.2%) is
appropriated for State Aid to Local Governments, $3,708.0 million (23.2%) is
appropriated for Grants-in-Aid, $5,179.6 million (32.4%) for Direct State
Services, $466.3 million (2.9%) for Debt Service on State general obligation
bonds and $217.1 million (1.3%) for Capital Construction.

STATE AID TO LOCAL GOVERNMENTS

State Aid to Local Governments is the largest portion of Fiscal Year 1996
appropriations. In Fiscal Year 1996, $6,423.5 million of the State's
appropriations consist of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriations, in the
amount of $4,750.8 million, is provided for local elementary and secondary
education programs. Appropriations to the Department of Community Affairs total
$837.9 million in State Aid monies for Fiscal Year 1996. Appropriations to the
State Department of the Treasury total $85.1 million in State Aid monies for
Fiscal Year 1996. Other appropriations of State Aid in Fiscal Year 1996 include:
welfare programs ($467.6 million); aid to county colleges ($128.0 million); and
aid to county mental hospitals ($78.3 million).

DIRECT STATE SERVICES

The second largest portion of appropriations in Fiscal Year 1996 is applied to
Direct State Services which supports the operation of State government's
seventeen departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In Fiscal Year 1996, appropriations for Direct
State Services aggregate to $5,179.6 million.

$606.6 million is appropriated for programs administered by the State
Department of Human Services. The Department of Labor is appropriated $57.9
million for the administration of programs for workers compensation,
unemployment and disability insurance, manpower development and health safety
inspection. The Department of Health is appropriated $33.2 million for the
prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities and the uncompensated care program. $761.1
million is appropriated for the support of nine State colleges, Rutgers
University, the New Jersey Institute of Technology and the University of
Medicine and Dentistry of New Jersey. $869.9 million is appropriated to the
Department of Law and Public Safety and the State Department of Corrections.
$184.3 million is appropriated to the Department of Transportation for the
various programs it administers, such as the maintenance and improvement of the
State highway system and the registration and regulation of motor vehicles and
licensed drivers. $182.2 million is appropriated to the State Department of
Environmental Protection for the protection of air, land, water, forest,
wildlife and shellfish resources and for the provision of outdoor recreational
facilities.

GRANTS-IN-AID

The third largest portion of appropriations in Fiscal Year 1996 is for
grants-in-aid. These represent payments to individuals or public or private
agencies for benefits to which a recipient is entitled to by law, or for the
provision of services on behalf of the State. The amount appropriated in Fiscal
Year 1996 for grants-in-aid is $3,708.0 million.

B-36
<PAGE> 391

$2,687.3 million is appropriated for programs administered by the Department
of Human Services. Of that amount, $1,839.0 million is for medical services
provided under the Medicaid program, $169.3 million is for community programs
for the developmentally disabled, $147.1 million is for community programs for
the mentally ill, $167.6 million is for pharmaceutical assistance to the aged
and disabled, $226.8 million is for grant programs administered by the Division
of Youth and Family Services, $81.2 million is for the Lifeline program, and
$48.7 million is for welfare reform and homeless services.

$318.9 million is appropriated to the Department of the Treasury for the
Homestead Rebate program, which provides property tax relief to homeowners and
renters. $234.8 million is appropriated to the Department of Transportation for
bus and railroad subsidies.

Debt Service

The primary method for State financing of capital projects is through the sale
of the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. State tax revenues and certain other fees are
pledged to meet the principal payments, interest payments and if provided,
redemption premium payments, if any, required to fully pay the bonds. The
appropriation for the debt service obligation on outstanding indebtedness is
$466.3 million for Fiscal Year 1996.

For many years prior to 1991, both Moody's and S&P rated New Jersey general
obligation bonds "Aaa" and "AAA", respectively. On July 3, 1991, however, S&P
downgraded New Jersey general obligation bonds to "AA+." On August 26, 1992,
Moody's downgraded New Jersey general obligation bonds to "Aa1". The issuance of
the $59,000,000 State of New Jersey General Obligation Bonds on November 23,
1994, which was the most recent issuance of this type of bond, was rated AA+ by
S&P and Aa1 by Moody's. Although impacted in general by the financial condition
of the State, local municipalities issuing New Jersey Municipal Obligations have
credit ratings that are determined with reference to the financial condition of
such local municipalities.

Capital Construction

In addition to payments from bond proceeds, capital construction can also be
funded by appropriation of current revenues on a pay-as-you-go basis. This
amount represents 1.3% of the total Fiscal Year 1996 Budget. In Fiscal Year
1996, the amount appropriated to this purpose is $217.1 million.

All appropriations for capital projects and all proposals for State bond
authorization are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.

OTHER STATE RELATED OBLIGATIONS

LEASE FINANCING

The State has entered into a number of leases relating to the financing of
certain real property and equipment. The State leases the Richard J. Hughes
Justice Complex in Trenton from the Mercer County Improvement Authority (the
"MCIA"). On August 8, 1991 the Authority defeased outstanding bonds originally
issued to finance construction of the Richard J. Hughes Justice Complex through
the issuance of custody receipts (the "Custody Receipts") in the aggregate
principal amount of $98,760,000. The rental is sufficient to cover the debt
service on the Authority's Custody Receipts. The State's obligation to pay the
rentals is subject to appropriations being made by the State Legislature.

The State has also entered into a lease agreement, as lessee, with the New
Jersey Economic Development Authority, (the "EDA") as lessor to lease (i) office
buildings that house the New Jersey Division of Motor Vehicles, New Jersey
network (the State's public television station) a branch of the United States
Postal Service and a parking facility and (ii) to lease approximately 13 acres
of real property and certain infrastructure improvements thereon located in the
City of Newark. The rental payments required to be made by the State under such
lease agreements are sufficient to cover debt service on the bonds issued by the
EDA

B-37
<PAGE> 392

to finance the acquisition and construction of such projects and other amounts
payable to the EDA, including certain administrative expenses of the EDA, and
such rental payments are subject to annual appropriation by the State
Legislature.

Beginning in April 1984, the State, acting through the Director of the
Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment, services and real
property to be used by various departments and agencies of the State. To date,
the State has completed eleven lease purchase agreements which have resulted in
the issuance of Certificates of Participation totaling $749,350,000. A
Certificate of Participation evidences a proportionate interest of the owner
thereof in the lease payments to be made by the State under the terms of the
agreement. The agreements relating to these transactions provide for semiannual
rental payments. The State's obligation to pay rentals due under these leases is
subject to annual appropriations being made by the State Legislature. The
majority of proceeds from these transactions have been or will be used to
acquire equipment and services for the State and its agencies. The rentals
payable by the State will be made from monies appropriated by the State
Legislature. The State intends to continue to use this financing technique for a
substantial portion of its future equipment requirements.

STATE SUPPORTED SCHOOL AND COUNTY COLLEGE BONDS

Legislation provides for future appropriations for State Aid to local school
districts equal to debt service on a maximum principal amount of $280,000,000 of
bonds issued by such local school districts for construction and renovation of
school facilities and for State Aid to counties equal to debt service on up to
$80,000,000 of bonds issued by counties for construction of county college
facilities. The State Legislature is not legally bound to make such future
appropriations, but has done so to date on all outstanding obligations issued
under these laws. As of December 31, 1993, the maximum amount of $280,000,000
school district bonds has been approved for State support. Bonds or notes in the
amount of $274,074,000 have been issued by local school districts, of which
$211,227,841 have been retired and $62,846,159 are still outstanding. As of June
30, 1993, $81,898,853 of county college bonds or notes have been authorized or
issued of which $42,043,825 have been retired. In addition to these acts, there
is legislation which establishes a school bond reserve within the
constitutionally dedicated fund for the Support of Free Public Schools (see
"MUNICIPAL FINANCE -- New Jersey School Bond Reserve Act").

"MORAL OBLIGATION" FINANCING

The authorizing legislation for certain State entities provides for specific
budgetary procedures with respect to certain obligations issued by such
entities. Pursuant to such legislation, a designated official is required to
certify any deficiency in a debt service reserve fund maintained to meet
payments of principal of and interest on the obligations, and a State
appropriation in the amount of the deficiency is to be made. However, the State
Legislature is not legally bound to make such an appropriation. Bonds issued
pursuant to authorizing legislation of this type are sometimes referred to as
"moral obligation" bonds. There is no statutory limitation on the amount of
"moral obligation" bonds which may be issued by eligible State entities.

NEW JERSEY SPORTS AND EXPOSITION AUTHORITY

On March 2, 1992, the New Jersey Sports and Exposition Authority (the "Sports
Authority") issued $147,490,000 in State guaranteed bonds and defeased all
previously outstanding State guaranteed bonds of the Sports Authority. The State
believes that the revenue of the Sports Authority will be sufficient to provide
for the payment of debt service on these obligations without recourse to the
State's guarantee.

Legislation enacted in 1992 by the State authorizes the Sports Authority to
issue bonds for various purposes payable from State appropriations. Pursuant to
this legislation, the Sports Authority and the State Treasurer have entered into
an agreement (the "State Contract") pursuant to which the Sports Authority will
undertake certain projects, including the refunding of certain outstanding bonds
of the Sports Authority, and the State Treasurer will credit to the Sports
Authority Fund amounts from the General Fund sufficient to pay debt service and
other costs related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being made by the State
Legislature. There are approximately

B-38
<PAGE> 393

$475,373,000 aggregate principal amount of Sports Authority bonds currently
outstanding the debt service on which is payable from amounts credited to the
Sports Authority Fund pursuant to the State Contract.

NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY

In July 1984, the State created the New Jersey Transportation Trust Fund
Authority (the "TTFA"), an instrumentality of the State organized and existing
under the New Jersey Transportation Trust Fund Authority Act of 1984, as amended
(the "TTFA Act") for the purpose of funding a portion of the State's share of
the cost of improvements to the State's transportation system. Pursuant to the
TTFA Act, the TTFA, the State Treasurer and the Commissioner of Transportation
executed a contract (the "Contract") which provides for the payment of certain
amounts to the TTFA. The payment of all such amounts is subject to and dependent
upon appropriations being made by the State Legislature and there is no
requirement that the Legislature make such appropriation.

Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years. These
bonds are special obligations of the TTFA payable from the payments made by the
State pursuant to the Contract.

ECONOMIC RECOVERY FUND BONDS

Legislation enacted during 1992 by the State authorizes the EDA to issue bonds
for various economic development purposes. Pursuant to that legislation, EDA and
the State Treasurer have entered into an agreement (the "ERF Contract") through
which EDA has agreed to undertake the financing of certain projects and the
State Treasurer has agreed to credit to the Economic Recovery Fund from the
General Fund amounts equivalent to payments due to the State under an agreement
with the Port Authority of New York and New Jersey. The payment of all amounts
under the ERF Contract is subject to and dependent upon appropriations being
made by the State Legislature.

MUNICIPAL FINANCE

New Jersey's local finance system is regulated by various statutes. Regulatory
and remedial statutes are enforced by the Division of Local Government Services
(the "Division") in the State Department of Community Affairs.

COUNTIES AND MUNICIPALITIES

The Local Budget Law imposes specific budgetary procedures upon counties and
municipalities ("local units"). Every local unit must adopt an operating budget
which is balanced on a cash basis, and items of revenue and appropriation must
be examined by the Director of the Division (the "Director"). The accounts of
each local unit must be independently audited by a registered municipal
accountant. State law provides that budgets must be submitted in a form
promulgated by the Division and further provides for limitations on estimates of
tax collection and for reserves in the event of any shortfalls in collections by
the local unit. The Division reviews all municipal and county annual budgets
prior to adoption for compliance with the Local Budget Law. The Director is
empowered to require changes for compliance with law as a condition of approval;
to disapprove budgets not in accordance with law; and to prepare the budget of a
local unit, within the limits of the adopted budget of the previous year with
suitable adjustments for legal compliance, if the local unit is unwilling to
prepare a budget in accordance with law.

The Local Government Cap Law (the "Cap Law") generally limits the year-to-year
increase of the total appropriations of any municipality and the tax levy of any
county to either 5 percent or an index rate determined annually by the Director,
whichever is less. However, where the index percentage rate exceeds 5 percent,
the Cap Law permits the governing body of any municipality or county to approve
the use of a higher percentage rate up to the index rate. Further, where the
index percentage rate is less than 5 percent, the Cap Law also permits the
governing body of any municipality or county to approve the use of a higher
percentage rate up to 5 percent. Regardless of the rate utilized, certain
exceptions exist to the Cap Law's limitation on

B-39
<PAGE> 394

increases in appropriations. The principal exceptions to these limitations are
municipal and county appropriations to pay debt service requirements; to comply
with certain other State or federal mandates; amounts approved by referendum;
and, in the case of municipalities only, to fund the preceding year's cash
deficit or to reserve for shortfalls in tax collections. The Cap Law was
re-enacted in 1990 with amendments and made a permanent part of the municipal
finance system.

State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. The Local
Bond Law governs the issuance of bonds and notes by the local units. No local
unit is permitted to issue bonds for the payment of current expenses (other than
Fiscal Year Adjustment Bonds described more fully below). Local units may not
issue bonds to pay outstanding bonds, except for refunding purposes, and then
only with the approval of the Local Finance Board. Local units may issue bond
anticipation notes for temporary periods not exceeding in the aggregate
approximately ten years from the date of first issue. The debt that any local
unit may authorize is limited to a percentage of its equalized valuation basis,
which is the average of the equalized value of all taxable real property and
improvements within the geographic boundaries of the local unit, as annually
determined by the Director of the Division of Taxation, for each of the three
most recent years. In the calculation of debt capacity, the Local Bond Law and
certain other statutes permit the deduction of certain classes of debt
("statutory deductions") from all authorized debt of the local unit ("gross
capital debt") in computing whether a local unit has exceeded its statutory debt
limit. Statutory deductions from gross capital debt consist of bonds or notes
(i) authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than a local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5 percent of the
equalized valuation basis in the case of municipalities and 2 percent of the
equalized valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exceptions, may be exceeded only with the approval of
the Local Finance Board.

Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28, 1991
requires certain municipalities and permits all other municipalities to adopt
the State fiscal year in place of the existing calendar fiscal year.
Municipalities that change fiscal years must adopt a six month transition budget
for January through June. Since expenditures would be expected to exceed
revenues primarily because state aid for the calendar year would not be received
by the municipality until after the end of the transition year budget, the act
authorizes the issuance of Fiscal Year Adjustment Bonds to fund the one time
deficit for the six month transition budget. The act provides that the deficit
in the six month transition budget may be funded initially with bond
anticipation notes based on the estimated deficit in the six month transition
budget. Notes issued in anticipation of Fiscal Year Adjustment Bonds, including
renewals, can only be issued for up to one year unless the Local Finance Board
permits the municipality to renew them for a further period of time. The Local
Finance Board must confirm the actual deficit experienced by the municipality.
The municipality then may issue Fiscal Year Adjustment Bonds to finance the
deficit on a permanent basis. The purpose of the Act is to assist municipalities
that are heavily dependent on state aid and that have had to issue tax
anticipation notes to fund operating cash flow deficits each year. While the act
does not authorize counties to change their fiscal years, it does provide that
counties with cash flow deficits may issue Fiscal Year Adjustment Bonds as well.

State law authorizes State officials to supervise fiscal administration in any
municipality which is in default on its obligations; which experiences severe
tax collection problems for two successive years; which has a deficit greater
than 4 percent of its tax levy for two successive years; which has failed to
make payments due and owing to the State, county, school district or special
district for two consecutive years; which has an appropriation in its annual
budget for the liquidation of debt which exceeds 25 percent of its total
operating appropriations (except dedicated revenue appropriations) for the
previous budget year; or which has been subject to a judicial determination of
gross failure to comply with the Local Bond Law, the Local Budget Law

B-40
<PAGE> 395

or the Local Fiscal Affairs Law which substantially jeopardizes its fiscal
integrity. State officials are authorized to continue such supervision for as
long as any of the conditions exist and until the municipality operates for a
fiscal year without incurring a cash deficit.

There are 567 municipalities and 21 counties in New Jersey. During 1990, 1991,
1992 and 1993 no county exceeded its statutory debt limitations or incurred a
cash deficit in excess of 4 percent of its tax levy. The number of
municipalities which have a cash deficit greater than 4 percent of their tax
levies was zero for 1993. The number of municipalities which exceeded statutory
debt limits was five as of December 31, 1993. No New Jersey municipality or
county has defaulted on the payment of interest or principal on any outstanding
debt obligation since the 1930's.

SCHOOL DISTRICTS

New Jersey's school districts operate under the same comprehensive review and
regulation as do its counties and municipalities. Certain exceptions and
differences are provided, but the State supervision of school finance closely
parallels that of local governments.

Types of School Districts

All New Jersey school districts are coterminous with the boundaries of one or
more municipalities. They are characterized by the manner in which the board of
education, the governing body of the school district, takes office. Type I
school districts, most commonly found in cities, have a board of education
appointed by the mayor or the chief executive officer of the municipality
constituting the school district. In a Type II school district, the board of
education is elected by the voters of the district. Nearly all regional and
consolidated school districts are Type II school districts.

The State Department of Education has been empowered with the necessary and
effective authority to abolish an existing school board and create a
State-operated school district where the existing school board has failed or is
unable to take the corrective actions necessary to provide a thorough and
efficient system of education in that school district pursuant to N.J.S.A.
18A:7A-1 et seq. (the "School Act"). The State operated school district operated
under the direction of a State appointed superintendent has all of the powers
and authority of the local Board of Education and of the local district
superintendent. Pursuant to the authority granted under the School Act, on
October 4, 1989, the State Board of Education ordered the creation of a State
operated school district in the City of Jersey City. Similarly, on August 7,
1991, the State Board of Education ordered the creation of a State operated
school district in the City of Paterson. On July 22, 1994, the Commissioner of
Education issued an order to show cause why the Newark school district should
not become State operated. On April 13, 1995, an Administrative Law Judge issued
an initial decision recommending the creation of a State operated school
district. On May 19, 1995, the Commissioner of Education accepted such
recommendation and made his own recommendation to the State Board of Education
seeking the creation of a State-operated school district in the City of Newark.

On July 5, 1995, the State Board of Education accepted the Commissioner's
recommendation and by administrative order of that date ordered the creation of
a State-operated school district in the City of Newark. The State Board also, on
July 5, 1995, denied the Newark Board's request for a stay of the administrative
order. On July 5, 1995, the Newark Board filed its Notice of Appeal with the
Appellate Division along with its merits brief and an Emergent Motion for a Stay
of the State Board's order pending appeal. On July 6, 1995, the Appellate
Division denied the Newark Board's motion for a stay, but left in place a
temporary stay until July 7, 1995 for the Newark Board to appeal the Appellate
Division's denial of the stay to the State Supreme Court. On July 12, 1995, the
State Supreme Court denied the Newark Board's motion for a stay pending appeal.
No return date has been set by the Appellate Division. On July 12, 1995, the
Newark Board filed an Order to Show Cause and Complaint in the District Court of
New Jersey seeking a restraining order against the State. The complaint alleged
three counts of Section 1983 violations (deprivation of property rights without
due process) and two counts of Voting Rights Act violations. After brief
argument on July 12, 1995, the District Court declined to issue a restraining
order. The District Court set July 20, 1995 as the return date for full argument
on the order to Show Cause. The State-operated school district has been advised
by the Newark Board that it has withdrawn the action in federal district court.

B-41
<PAGE> 396

School Budgets

In every school district having a board of school estimate, the board of
school estimate examines the budget request and fixes the appropriation amounts
for the next year's operating budget after a public hearing at which the
taxpayers and other interested persons shall have an opportunity to raise
objections and to be heard with respect to the budget. This board, whose
composition is fixed by statute, certifies the budget to the municipal governing
bodies and to the local board of education. If the local board of education
disagrees, it must appeal to the State Commissioner of Education (the
"Commissioner") to request changes.

In a Type II school district without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district has approximately 20 days to determine the
amount necessary to be appropriated for each item appearing in such budget.
Should the governing body fail to certify any amount determined by the Board of
Education to be necessary for any item rejected at the election, the Board of
Education may appeal the action to the Commissioner of Education.

The State laws governing the distribution of State aid to local school
districts limit the annual increase of a school district's net current expense
budget. The Commissioner certifies the allowable amount of increase for each
school district but may grant a higher level of increase in certain limited
instances. A school district may also submit a proposal to the voters to raise
amounts above the allowable amount of increase. If defeated, such a proposal is
subject to further review or appeal only if the Commissioner determines that
additional funds are required to provide a thorough and efficient education. The
Supreme Court of New Jersey has ordered that the Legislature adopt a new funding
formula by September 1996 which would provide for substantially equivalent
expenditures in the poor urban districts and wealthy suburban districts.

The Commissioner must also review every proposed local school district budget
for the next school year. The Commissioner examines every item of appropriation
for current expenses and budgeted capital outlay to determine their adequacy in
relation to the identified needs and goals of the school district. If, in his
view they are insufficient, the Commissioner must order remedial action. If
necessary, the Commissioner is authorized to order changes in the school
district's budget.

School District Bonds

School district bonds and temporary notes are issued in conformity with
N.J.S.A. 18A:24-1 et seq. (the "School Bond Law"), which closely parallels the
Local Bond Law (for further information relating to the Local Bond Law, see
"MUNICIPAL FINANCE -- Counties and Municipalities" herein). Although school
districts are exempted from the 5 percent down payment provision generally
applied to bonds issued by municipalities and counties, they are subject to debt
limits (which vary depending on the type of school system provided) and to State
regulation of their borrowing. The debt limitation on school district bonds
depends upon the classification of the school district, but may be as high as 4
percent of the average equalized valuation basis of the constituent
municipality. In certain cases involving school districts in cities with
populations exceeding 100,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities with
populations in excess of 80,000 the debt limit is 6 percent of the aforesaid
average equalized valuation.

School bonds are authorized by (i) an ordinance adopted by the governing body
of a municipality within a Type I school district; (ii) adoption of a proposal
by resolution by the board of education of a Type II school district having a
board of school estimate; (iii) adoption of a proposal by resolution by the
board of education and approval of the proposal by the legal voters of any other
Type II school district; or (iv) adoption of a proposal by resolution by a
capital project control board pursuant to N.J.S.A. 18A:7A-46.1 et seq. for
projects in a state operated school district. If school bonds will exceed the
school district borrowing capacity, a school district (other than a regional
school district) may use the balance of the municipal borrowing capacity. If the
total amount of debt exceeds the school district's borrowing capacity and any
available remaining municipal borrowing capacity, the Commissioner and the Local
Finance Board must approve the proposed authorization before it is submitted to
the voters. All authorizations of debt in a Type II school district without a
board of

B-42
<PAGE> 397

school estimate require an approving referendum, except where, after hearing,
the Commissioner and the State Board of Education determine that the issuance of
such debt is necessary to meet the constitutional obligation to provide a
thorough and efficient system of public schools. When such obligations are
issued, they are issued by, and in the name of, the school district.

School District Lease Purchase Financings

In 1982, school districts were given an alternative to the traditional method
of bond financing capital improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the
"Lease Purchase Law"). The Lease Purchase Law permits school districts to
acquire a site and school building through a lease purchase agreement with a
private lessor corporation. The lease purchase agreement does not require voter
approval. The rent payments attributable to the lease purchase agreement are
subject to annual appropriation by the school district and are required,
pursuant to N.J.A.C. 6:22A-1.2(h), to be included in the annual current expense
budget of the school district. Furthermore, the rent payments attributable to
the lease purchase agreement do not constitute debt of the school district and
therefore do not impact on the school district's debt limitation. Lease purchase
agreements in excess of five years require the approval of the Commissioner and
the Local Finance Board.

Qualified Bonds

In 1976, legislation was enacted which provides for the issuance by
municipalities and school districts of "qualified bonds." Whenever a local board
of education or the governing body of a municipality determines to issue bonds,
it may file an application with the Local Finance Board, and, in the case of a
local board of education, the Commissioner, to qualify bonds pursuant to P.L.
1976, c. 38 or c. 39. Upon approval of such an application and after receipt of
a certificate stating the name and address of the paying agent for such bonds,
the maturity schedule, interest rates and payment dates, the State Treasurer
shall, in the case of qualified bonds for school districts, withhold from the
school aid payable to such municipality or school district and, in the case of
qualified bonds for municipalities, withhold from the amount of business
personal property tax replacement revenues, gross receipts tax revenues,
municipal purposes tax assistance fund distributions, State urban aid, State
revenue sharing, and any other funds appropriated as State aid and not otherwise
dedicated to specific municipal programs, payable to such municipalities, an
amount sufficient to cover debt service on such bonds. These "qualified bonds"
are not direct, guaranteed or moral obligations of the State, and debt service
on such bonds will be provided by the State only if the above mentioned
appropriations are made by the State. Total outstanding indebtedness for
"qualified bonds" consisted of $239,235,650 by various school districts as of
June 30, 1994 and $931,737,570 by various municipalities as of June 30, 1994.

New Jersey School Bond Reserve Act

The New Jersey School Bond Reserve Act establishes a school bond reserve
within the constitutionally dedicated Fund for the Support of Free Public
Schools. Under this law the reserve is maintained at an amount equal to 1.5
percent of the aggregate outstanding bonded indebtedness of counties,
municipalities or school districts for school purposes (exclusive of bonds whose
debt service is provided by State appropriations), but not in excess of monies
available in such Fund. If a municipality, county or school district is unable
to meet payment of the principal of or interest on any of its school bonds, the
trustee of the school bond reserve will purchase such bonds at the face amount
thereof or pay the holders thereof the interest due or to become due. At June
30, 1994, the book value of the Fund's assets aggregated $86,264,837 and the
reserve, computed as of June 30, 1994, amounted to $35,528,287. There has never
been an occasion to call upon this Fund. The State provides support of certain
bonds of counties, municipalities and school districts through various statutes.
(See "OTHER STATE RELATED OBLIGATIONS -- State Supported School and County
College Bonds" herein).

Local Financing Authorities

The Local Authorities Fiscal Control Law provides for State supervision of the
fiscal operations and debt issuance practices of independent local authorities
and special taxing districts by the State Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service

B-43
<PAGE> 398

charges, or to levy taxes in their districts. This encompasses most autonomous
local authorities (sewerage, municipal utilities, parking, pollution control,
improvement, etc.) and special taxing districts (fire, water, etc.). Authorities
which are subject to differing State or federal financial restrictions are
exempted, but only to the extent of that difference.

Financial control responsibilities over local authorities and special
districts are assigned to the Local Finance Board and the Director of the
Division of Local Government Services. The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between a municipality or county and an authority or special district. The Local
Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual audits. The
Director reviews and approves annual budgets of authorities and special
districts.

As of June 30, 1993 there were 200 locally created authorities with a total
outstanding capital debt of $6,963,564,405 (figures do not include housing
authorities and redevelopment agencies). This amount reflects outstanding bonds,
notes, loans and mortgages payable by the authorities as of their respective
fiscal years ended nearest to June 30, 1993.

STATE EMPLOYEES

PUBLIC EMPLOYER-EMPLOYEE RELATIONS ACT

The State of New Jersey, as a public employer, is covered by the New Jersey
Public Employer-Employee Relations Act, as amended which guarantees public
employees the right to negotiate collectively through employee organizations
certified or recognized as the exclusive collective negotiations representatives
for units of public employees found to be appropriate for collective
negotiations purposes. Approximately 64,500 employees are paid through the State
payroll system. Of the 64,500 employees, 56,800 are represented by certified or
recognized exclusive majority representatives and are organized into various
negotiation units.

The Fiscal Year 1996 Budget is expected to reduce the workforce through
attrition, voluntary furlough and layoff of State employees during Fiscal Year
1996.

FINANCING PENSIONS

Virtually all of the public employees of the State and its counties,
municipalities and political subdivisions are members of pension plans
administered by the State. The State operates seven retirement plans. Public
Employees' Retirement System ("PERS") and Teachers Pension and Annuity Fund
("TPAF"), originally created by acts of the State Legislature in 1920 and 1919,
respectively, are the principal plans, together covering 390,651 of the total
431,703 active members covered by all State-administered plans. The other
systems are Police and Firemen's Retirement System ("PFRS") (38,217 members),
Consolidated Police and Firemen's Pension Fund ("CP&FPF") (no active members),
State Police Retirement System ("SPRS") (2,429 members), Judicial Retirement
System ("JRS") (406 members) and Prison Officers' Pension Fund ("POPF") (no
active members).

The various pension funds were analyzed between July 1, 1993 and July 1, 1994
by independent actuaries who reported the present value of accumulated benefits.
The Accumulated Benefit Obligation determined in accordance with Statement No.
87 of the Financial Accounting Standards Board (including the present value of
post-retirement medical benefits for PERS state employees and TPAF), for which
the State is obligated (including both vested and non-vested benefits) for the
seven pension funds approximates $37.4 billion at the valuation dates. The
studies indicated that the market value of all assets of the funds was $37.0
billion which, when compared to the $37.4 billion Accumulated Benefit
Obligation, represents a funding level of 98.9%. The present value of projected
benefits, the Pension Benefit Obligation determined in accordance with Statement
No. 5 of the Governmental Accounting Standards Board, of the funds is $41.3
billion. The funding level for the projected benefits is 83.7%.

B-44
<PAGE> 399

$496.6 million is provided in the Fiscal Year 1996 Appropriations Act as the
State's contributions to public retirement plans.

Chapter 62, Laws of 1994, enacted by the State Legislature and approved by the
Governor on June 30, 1994 made several changes to the funding of the pension
systems, including the Public Employees Retirement System, the Teachers' Pension
and Annuity Fund, the Judicial Retirement System, the State Police Retirement
System, and the Police and Firemen's Retirement System. These reforms include: a
change of the actuarial method used to determine funding requirements for the
systems from the entry age normal to the projected unit credit method; revision
of funding for post-retirement medical benefits under TPAF and PERS; phase in of
revised actuarial assumptions under TPAF; elimination of 2% subsidy in employee
pension contributions rates under TPAF and PERS and implementation of a flat
employee contribution rate of 5%; return to the original phase-in schedule for
recognition of the liability for pension adjustment benefits, Cost of Living
Adjustment ("COLA") for active members; reduction in the salary increase
assumption to an average of 5.95% and a reduction in the inflation assumption
for COLA benefits to 2.4%.

Certain unions and various individuals have instituted litigation in the
United States District Court in Newark challenging the changes to the pension
systems which were made by the State Legislature when it enacted P.L. 1994, c.
62. (See "LITIGATION -- New Jersey Education Association et al. v. State of New
Jersey et al.").

LITIGATION

The following are cases presently pending or threatened in which the State has
the potential for either a significant loss of revenue or a significant
unanticipated expenditure.

New Jersey Education Association et. al v. State of New Jersey et. al. This
case represents a challenge to amendments to the pension laws enacted on June
30, 1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers
Pension and Annuity Fund ("TPAF"), the Public Employee's Retirement System
("PERS"), the Police and Fireman's Retirement System ("PFRS"), the State Police
Retirement System ("SPRS") and the Judicial Retirement System ("JRS"). The
complaint was filed in the United States District Court of New Jersey on October
17, 1994. The statute, P.L. 1994, Chapter 62 ("Chapter 62"), as enacted, made
several changes affecting these retirement systems including changing the
actuarial funding method to projected unit credit; continuing the prefunding of
post-retirement medical benefits but at a reduced level for TPAF and PERS;
revising the employee member contribution rate to a flat 5% for TPAF and PERS;
extending the phase in period for the revised TPAF actuarial assumptions;
changing the phase-in period for funding of cost-of-living adjustments and
reducing the inflation assumption for the Cost of Living Adjustment ("COLA") for
all retirement systems; and decreasing the average salary increase assumption
for all retirement systems. Plaintiffs allege that the changes resulted in lower
employer contributions in order to reduce a general budget deficit. The
complaint further alleges that certain provisions of Chapter 62 violate the
contract, due process, and taking clauses of the United States and New Jersey
Constitutions, and further constitute a breach of the State's fiduciary duty to
participants in TPAF and PERS. Plaintiffs seek to permanently enjoin the State
from administering, enforcing or otherwise implementing Chapter 62. An adverse
determination against the State would have a significant impact upon the Fiscal
Year 1996 budget. The State has filed a motion to dismiss and a motion for
summary judgment. Plaintiffs' response was expected on August 3, 1995 and oral
argument has been scheduled for September 18, 1995. The State intends to
vigorously defend this action.

County/State Disputes Concerning Social Security Recoveries. There are
presently several cases pending in the State courts challenging the methods by
which the State Department of Human Services shares with county governments the
maintenance recoveries and costs for residents in State psychiatric hospitals
and residential facilities for the developmentally disabled. In County of Essex
v. Waldman, et al., Essex County challenged the State's policy of sharing
federal Social Security recoveries on a 50%-50% basis with the County. Essex
County maintains that State law has, since 1980, required that 100% of the
recoveries be paid to the County. On December 6, 1990, the Appellate Division
upheld the trial court's ruling allowing the County to receive 100% of
recoveries, but refused to allow recovery retroactive to 1980, instead fixing
January 25, 1989 as the effective date of the ruling as to Essex County. A
petition for certification by the

B-45
<PAGE> 400

County of Essex, and a cross-petition by the State, were denied by the New
Jersey Supreme Court on May 28, 1991. The Counties of Morris, Passaic,
Middlesex, Hudson, Bergen, Union, Cumberland, Monmouth, Mercer, Hunterdon and
Camden all filed similar actions which were stayed (except in the cases of
Hudson and Camden) pending the outcome in the County of Essex case, and all
actions (except in the case of Mercer) are now on appeal. Retroactive recoveries
in those cases may also be limited, as in the County of Essex matter. By
administrative order dated July 22, 1991, the Commissioner determined that State
liability to all counties (with the exception of Essex County) would run as of
December 6, 1990. The Counties of Bergen, Burlington, Camden, Cumberland,
Hunterdon, Hudson, Mercer, Middlesex, Monmouth, Morris, Somerset and Union
appealed that administrative order to the Superior Court, Appellate
Division.

In County of Essex v. Commissioner, Department of Human Services, et al.,
Essex County has sought the return of moneys it has paid since 1980 for
maintenance of Medicaid or Medicare eligible residents of institutions and
facilities for the developmentally disabled, arguing that State law relieved the
County of maintenance responsibility for those persons. The trial court ruled in
Essex County's favor, but made its ruling effective as of March 30, 1989. The
Appellate Division affirmed that decision on June 14, 1991. Petitions for
certification by both parties were denied by the New Jersey Supreme Court on
November 12, 1991. Hunterdon, Mercer, Passaic, Middlesex, Hudson, Bergen, Union,
Cumberland, Camden and Monmouth Counties filed similar actions, which were
stayed (except in the cases of Hudson and Camden) pending a decision in the
Essex County case, and all actions (except in the case of Mercer) are now on
appeal. By administrative order, dated July 22, 1991, the Commissioner
determined that, subject to action by the New Jersey Supreme Court, the State's
liability to all counties (with the exception of Essex County) will run as of
June 14, 1991. The Counties of Bergen, Burlington, Camden, Cumberland,
Hunterdon, Hudson, Middlesex, Monmouth, Morris, Passaic and Union appealed the
administrative order to the Superior Court, Appellate Division.

In March 1994, the Appellate Division ruled that all counties were entitled to
100% of social security benefits and other maintenance recoveries received by
the State and were entitled to credits for payments made to the State for the
maintenance of Medicare and Medicaid-eligible county residents in State
facilities for the mentally ill and developmentally disabled from the respective
dates in 1989 of the trial court's decisions in County of Essex v. Waldman
(April 14, 1989) and County of Essex v. Commissioner, Department of Human
Services, et al. (September 25, 1989). In May 1994, the Appellate Division
granted the State's Motion for Reconsideration and modified its earlier ruling.
A request by several counties asking the Court to reconsider the modification
was denied. The State and several counties have filed separate notices of
Petition for Certification asking the New Jersey Supreme Court to review
portions of the case. In February 1995, the State and all but one county
resolved the cost-sharing disputes involved in the Appellate Division ruling,
and the Supreme Court dismissed the pending appeals by the State and several
counties. The one county that did not agree to settle its claim has filed for
administrative review to contest the State's specific calculation of the credits
due the county as a result of the Appellate Division's ruling.

New Jersey Hospital Association et. al. v. Waldman, et. al. This case is a
challenge by the New Jersey Hospital Association and certain hospitals of the
adequacy of Medicaid reimbursement for hospital services. Plaintiffs allege that
the Department of Human Services ("DHS") and various State entities and
representatives (collectively referred to as the "State") have violated certain
reimbursement standards established by the Boren Amendment to Title XIX of the
Social Security Act. Plaintiffs seek a preliminary injunction preventing the
recently amended rate regulations from being implemented. If enjoined, the State
will expend an additional $154,000,000 for hospital rates in calendar year 1995,
half of which is paid by federal funds. Plaintiffs are further seeking a
declaration that the State violated federal law and a permanent injunction
against DHS requiring it to comply with federal law concerning the setting of
rates. Plaintiffs also seek costs and attorneys' fees. A Motion for Preliminary
Injunction was filed on March 23, 1995, and was denied on May 25, 1995. The New
Jersey Hospital Association has appealed the denial to the United States Court
of Appeals for the Third Circuit. The action for declaratory relief and a
permanent injunction will be stayed during an appeal.

Beth Israel Hospital et. al. v. Essential Health Services Commission. This
case represents a challenge by eleven New Jersey hospitals to the .53% hospital
assessment authorized by the Health Care Reform Act of 1992, specifically
N.J.S.A. 26:2H-18.62. Amounts collected pursuant to the assessment are paid into
the

B-46
<PAGE> 401

hospital and other health care initiatives account of the Health Care Subsidy
Fund, to be used for various health care programs. Specifically, the funds are
currently used for those programs previously established pursuant to N.J.S.A.
26:2H-18.47. In this appeal of the assessment, filed with the Appellate Division
on December 6, 1993, appellants argue that collection of the assessment is
invalid in the absence of Hospital Rate Setting Commission approval of the
approved revenue base used in the calculation. At the same time, appellants
filed an application for injunctive relief, seeking to stay any collection,
which application was denied. In a decision dated July 10, 1995, the Appellate
Division rejected appellants' contention that the respondents were prohibited
from collecting the assessment. However, the court also found that the hospitals
had not been afforded an opportunity to be heard on the assessment, and thus
remanded the case to the Essential Health Services Commission for a hearing. On
August 15, 1994 a second challenge to the collection of the assessment was filed
with the Appellate Division. This case, New Jersey Hospital Association v.
Fishman, represents a challenge by the Association to any collection of the
assessment post-fiscal year 1994 on the ground that the Legislature intended
only a single year assessment. A request for injunctive relief to prevent
assessments during fiscal year 1995 was denied by the court. The assessment is
intended to produce a total of approximately $3 million dollars per month from
all New Jersey hospitals. In a decision dated January 17, 1995, the Appellate
Division rejected the hospitals' argument. The hospitals filed a petition for
certification which was denied by the Supreme Court in an Order dated April 26,
1995.

New Jersey Hospital Association, et. al. v. Leonard Fishman. This case
represents an appeal, in addition to the cases described above, by the New
Jersey Hospital Association and 67 individual hospitals seeking the refund of
$20,752,918 in amounts previously paid by the hospitals into the Health Care
Cost Reduction Fund, pursuant to the .53% assessment authorized by the Health
Care Cost Reduction Act of 1991. Appellants argue that they are entitled to the
refund as per the Appellate Division's prior opinion in the case of Barnert
Memorial Hospital v. Commissioner of Health. In that case the Appellate Division
determined that the amounts collected by the Department during Fiscal Year 92
and Fiscal Year 93 pursuant to the .53% assessment had effectively constituted a
doubling of the amounts intended by the Legislature. The court thus ordered a
refund to the 16 hospitals who were appellants in that case. The 67 hospitals in
the present case now seek the same relief as afforded the Barnett appellants.
The Appellate Division has heard oral argument but has not yet rendered a
decision.

Fair Automobile Insurance Reform Act Litigation. On March 12, 1990, the Fair
Automobile Insurance Reform Act of 1990 ("FAIR Act") was enacted into law. It
recently was amended by L. 1994, c. 57. The FAIR Act substantially altered New
Jersey's statutory scheme governing private passenger automobile insurance. The
New Jersey Automobile Full Insurance Underwriting Association ("JUA") an
unincorporated non-profit association created in 1983 to provide automobile
insurance to those unable to secure such coverage in the voluntary market, was
precluded from issuing or renewing automobile insurance policies after October
1, 1990. The FAIR Act includes provisions governing the transition of drivers
insured by the JUA first to the Market Transition Facility ("MTF") and then to
the voluntary market and, to the extent such coverage is not available, to an
Assigned Risk Plan. The FAIR Act also provided for the imposition of taxes and
assessments to meet the financial obligations of the JUA, which are not debts,
liabilities or obligations of the State. The FAIR Act's revenue raising measures
were not reflected in the current budget because the anticipated revenues are to
be applied by statute to the JUA financial obligations. L. 1994, c. 57 provides
for the application of these anticipated revenues to the MTF. The FAIR Act also
provides for the making of assessments by the New Jersey Property Liability
Insurance Guaranty Association upon property and casualty liability insurers in
order to raise $160 million dollars per year for the period 1990 to 1997. The
funds will also be used for the JUA and MTF.

Litigation challenging various portions of the FAIR Act still remains pending.
"As applied" challenges to the FAIR Act surtax and assessment provisions have
been brought. Litigation was filed in the Mercer County Superior Court-Chancery
Division, by Allstate and State Farm alleging that their constitutional rights
have been violated and that they are entitled to refunds of FAIR Act surtaxes
and assessments. The Allstate matter is settled. The State Farm matter has been
decided in favor of the State. State Farm is requesting certification to the
Supreme Court of New Jersey.

Tort, Contract and Other Claims. At any given time, there are various numbers
of claims and cases pending against the State, State agencies and employees,
seeking recovery of monetary damages that are primarily paid

B-47
<PAGE> 402

out of the fund created pursuant to the New Jersey Tort Claims Act. The State
does not formally estimate its reserve representing potential exposure for these
claims and cases. The State is unable to estimate its exposure for these claims
and cases.

The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.

In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.

At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act. An independent
study estimated an aggregate potential exposure of $66.5 million for tort and
medical malpractice claims pending as of December 31, 1994. In addition, at any
given time, there are various numbers of contract and other claims against the
University of Medicine and Dentistry, seeking recovery of monetary damages or
other relief which, if granted, would require the expenditure of funds. The
State is unable to estimate its exposure for these claims.

County of Passaic v. State of New Jersey. This action filed by the County of
Passaic, the Passaic County Utilities Authority, and the Passaic County
Pollution Control Financing Authority ("plaintiffs"), alleges tort and
contractual claims against the State and the New Jersey Department of
Environmental Protection ("DEP") associated with a resource recovery facility
which plaintiffs had once planned to build. The plaintiffs allege that the State
and the DEP violated a 1984 consent order concerning the construction of a
resource recovery facility in Passaic County. The State's position is that there
was no obligation or duty on the part of the State or DEP concerning the
project. Plaintiffs' complaint alleges approximately thirty million dollars
($30,000,000) in damages against the State and the DEP. On March 17, 1995, the
court granted the State's motion for summary judgment, dismissing all counts of
plaintiffs' complaint against the State and DEP concerning the project.
Plaintiffs have appealed the court's decision. The State will vigorously defend
the appeal.

Robert E. Brennan v. Richard Barry et. al. On May 19, 1993 plaintiff Robert
Brennan filed suit against two members of the New Jersey Bureau of Securities,
Richard Barry, the Supervisor of Enforcement and Jared Silverman, Bureau Chief.
Brennan's complaint alleges various causes of action for defamation and injury
to reputation under section 1983 and state law. Plaintiff also alleges claims of
abuse of process and improper disclosure of private facts based on the Bureau's
ongoing investigation of certain publicly traded securities. The State's motion
for summary judgment was granted on January 11, 1995. Robert Brennan has filed a
notice of appeal. The State is unable to estimate its exposure for this claim
and intends to defend this suit vigorously.

Camden Co. v. Waldman, et al. Fourteen counties seek a portion of the $412
million in federal funds that the State received for disproportionate share
hospital payments it made to psychiatric hospitals during July 1, 1988 through
July 1, 1991. Camden County filed the first action against the Department of
Human Services, the Attorney General and the State Treasurer. Camden County
contends that the Essex decisions mandate sharing of the federal funding. Those
decisions dealt with sharing maintenance costs when there have been social
security and Medicaid payment recoveries. The State will contend that under a
recently approved Medicaid state plan amendment and federal law, the State does
not have to share the federal funding because it already paid the counties their
portion of disproportionate share hospital payments. The actions against the
attorney General and State Treasurer were dismissed and the matter was
transferred to the Appellate Division.

Similar lawsuits were filed by Middlesex, Monmouth, Atlantic, Union, Hudson,
Ocean, Mercer, Somerset, Morris, Sussex, Cape May, Essex and Passaic counties.
The Middlesex, Monmouth, Atlantic, Union, Ocean, Mercer, Morris and Hudson
County cases were transferred to the Appellate Division. The Atlantic, Camden

B-48
<PAGE> 403

and Monmouth counties' cases have been consolidated. Cape May has joined in the
existing calendar matters. The other counties, Essex and Passaic, have recently
had their cases transferred to the Appellate Division, but have not sought to
join in the existing matters. With the exception of Cape May, Essex and Passaic,
the remaining matters will be heard on a back to back basis by the Appellate
Division. The State and counties have filed their briefs. The State has
requested oral argument because of the complicated nature of the issues and the
large amount of money involved.

Interfaith Community Organization v. Shinn, et al. In late October, 1993, the
Interfaith Community Organization ("ICO") a coalition of churches and church
leaders in Hudson County, filed suit on behalf of the ICO's membership and the
citizens of Hudson County against the Governor, the Commissioner of the New
Jersey Department of Environmental Protection ("DEP"), Commissioner of the
Department of Health ("DOH"), and Lance Miller, Assistant Commissioner of DEP.
The multicount complaint alleged violations of numerous laws, allegedly
resulting from the existence of chromium contamination in the State-owned
Liberty State Park in Jersey City. It also asserted the alleged failure by DEP
and DOH to properly conduct remediation and health screens in Hudson County
concerning chromium contamination. No immediate relief was sought, but
injunctive and monetary relief was asked for.

In June 1994, ICO hired a law firm to represent it in this matter. The firm
filed amended complaints, naming only Commissioner Shinn of DEP and Governor
Whitman as defendants and alleges only Clean Water Act ("CWA") and Resource
Conservation Recovery Act ("RCRA") violations at Liberty State Park. Under the
"citizen suit" provisions of these federal acts, plaintiff is seeking
remediation, health studies and attorneys' fees. The State is unable to estimate
its exposure for this claim. In March, 1995, ICO filed another lawsuit over the
shipments of soil from the I-287 Wetlands Mitigation Project to Liberty State
Park. The defendants in that suit are Commissioner Shinn, Governor Whitman,
Commissioner Wilson of the Department of Transportation ("DOT") and R. W. Vogel,
Inc., the transporter of the soil. The new suit seeks a declaration that the CWA
is being violated and demands cessation of all construction at Liberty State
Park and penalties against Vogel. That suit will be consolidated with the prior
suits. The case has been referred to the federal court's mediation program to
attempt a mutually acceptable resolution.

Waste Management of Pennsylvania et al v. Shinn et al. This action filed in
federal district court by Waste Management of Pennsylvania, Inc. and its
affiliate Geological Reclamation Operations and Waste Systems, Inc.
("plaintiffs") seeks declaratory and injunctive relief and compensatory damages
in excess of $19 million dollars from Department of Environmental Protection
Commissioner Robert C. Shinn, Jr. and former Acting Commissioner Jeanne M. Fox,
("defendants") individually and in their official capacity. These claims are
based on alleged violations of the Commerce Clause and the Contracts Clause of
the United States Constitution as a result of the issuance by defendants of two
emergency redirection orders and a draft permit. The State's position is that
none of the contracts to which the plaintiffs are a party entitle them to any
relief and that therefore none of their constitutional rights have been impaired
by the Commissioners' actions. Moreover, all of the administrative agency
actions which form the gravamen of the federal complaint are currently the
subject of review in either New Jersey appellate courts or within the
Department. The State intends to vigorously defend this action in the proper
forum.

American Trucking Associations, Inc. and Tri-State Motor Transit, Co. v. State
of New Jersey. The American Trucking Associations, Inc. ("ATA") and Tri-State
Motor Transit, Co. filed a complaint in the Tax Court on March 23, 1994 against
the State of New Jersey and certain state officials challenging the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection ("DEP"). A-901
refers to the Assembly bill number which was adopted in 1983 as an amendment to
the Solid Waste Management Act, establishing a requirement that all persons and
entities engaged in solid and hazardous waste activities in the State be
investigated prior to the issuance of a license. Plaintiffs are alleging that
the A-901 renewal fees discriminate against interstate commerce in violation of
the Commerce Clause of the United States Constitution; that the fees are not
used for the purposes for which they are levied; and that the fees do not
reflect the duration or complexity of the services rendered by the government
entities receiving the fees as required under the A-901 statute. Plaintiffs are
seeking a declaration that the fees are unconstitutional; a permanent injunction
enjoining the future collection of the fees; a refund of all annual A-901
renewal fees and all fines and penalties collected pursuant

B-49
<PAGE> 404

to enforcement of these provisions; and attorneys' fees and costs. Plaintiffs
are also seeking class certification of their action.

The DEP currently collects approximately $3.5 to $4 million in A-901 fees
annually. In previous years, the total amount of fees collected was higher
because the number of applicants and licensees subject to the fees was much
larger. It is presently unknown what portion of the A-901 fees are paid by
haulers engaged in interstate commerce, and what percentage of the monies are
renewal fees as opposed to initial application fees. Consequently, the State is
unable to estimate its exposure for this claim and intends to defend this suit
vigorously.

B-50
<PAGE> 405

Van Kampen Merritt New Jersey Tax Free Income Fund

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

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

We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt New Jersey Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1994, and the
related statement of operations, the statement of changes in net assets
and the financial highlights for the period from July 29, 1994
(commencement of investment operations) through December 31, 1994. 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 audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt New Jersey Tax Free Income Fund as of December 31, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for the period from July 29, 1994 (commencement of investment
operations) through December 31, 1994, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 14, 1995

B-51
<PAGE> 406

Van Kampen Merritt New Jersey 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
New Jersey 87.1%
$ 500 Atlantic City, NJ Brd Edl Sch (AMBAC Insd) ........................... AAA Aaa 6.125% 12/01/11 $ 491,960
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (MBIA Insd) .............. AAA Aaa 6.150 10/01/14 241,658
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth
House Proj (AMBAC Insd) ............................................... AAA Aaa 6.600 12/01/07 258,747
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg (MBIA Insd) .......... AAA Aaa 6.600 12/01/21 250,168
250 Lacey Muni Util Auth NJ Wtr Rev (MBIA Insd) ........................... AAA Aaa 6.250 12/01/24 239,880
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev
Sr Lien Ser A (MBIA Insd) ............................................. AAA Aaa 5.800 7/01/09 285,327
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs
Elec & Gas Co Proj A (MBIA Insd) ...................................... AAA Aaa 6.400 5/01/32 201,930
350 New Jersey Econ Dev Auth Rev RWJ Hlth Care Corp (FSA Insd) ............ AAA Aaa 6.250 7/01/14 338,901
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack
Wtr Co Proj B Rfdg (MBIA Insd) ........................................ AAA Aaa 5.900 3/01/24 265,560
840 New Jersey Hlthcare Fac Fin Auth Rev
Atlantic City Med Cent Ser C Rfdg ..................................... A- A 6.800 7/01/11 833,834
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood
Hosp & Med Cent ....................................................... BBB Baa 6.700 7/01/15 228,980
250 New Jersey Hlthcare Fac Fin Auth Rev
Genl Hosp Cent At Passaic (FSA Insd) .................................. AAA Aaa 6.000 7/01/00 246,333
250 New Jersey Hlthcare Fac Fin Auth Rev
Hackensack Med Cent (FGIC Insd) ...................................... AAA Aaa 6.625 7/01/17 250,722
500 New Jersey Hlthcare Fac Fin Auth Rev
Jersey Shore Med Cent (AMBAC Insd) ................................... AAA Aaa 6.250 7/01/21 475,830
250 New Jersey Hlthcare Fac Fin Auth Rev
Robert Wood Johnson Univ Hosp Ser B (MBIA Insd) ....................... AAA Aaa 6.625 7/01/16 249,288
350 New Jersey Hlthcare Fac Fin Auth Rev
Saint Clares Riverside Med Cent (MBIA Insd) .......................... AAA Aaa 5.750 7/01/14 317,271
500 New Jersey Hlthcare Fac Fin Auth Rev
Southern Ocean Cnty Hosp Ser A ....................................... NR Baa 6.125 7/01/13 431,355
500 New Jersey Sports & Exposition Auth Convention Cent
Luxury Tax Rev Ser A Rfdg (MBIA Insd) <F2> ............................ AAA Aaa 6.250 7/01/20 482,720
250 New Jersey St Edl Fac Auth Rev
Glassboro St College Ser A (MBIA Insd) ................................ AAA Aaa 6.700 7/01/21 252,620

</TABLE>

See Notes to Financial Statements
B-52

<PAGE> 407
Van Kampen Merritt New Jersey 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 Jersey (Continued)
$ 270 New Jersey St Hsg & Mtg Fin Agy Rev
Home Buyer Ser K (MBIA Insd) .......................................... AAA Aaa 6.375% 10/01/26 $ 252,623
280 New Jersey St Tpk Auth Rev Ser C Rfdg ................................. A A 6.500 1/01/16 277,152
200 Port Auth NY & NJ Cons Ninety Fifth Ser .............................. AA- A1 6.125 7/15/22 184,214
1,000 Port Auth NY & NJ Cons Nts Ser SS ..................................... AA- A1 4.900 9/01/97 990,090
400 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pub Svc Elec & Gas Co Proj C Rfdg (MBIA Insd) ......................... AAA Aaa 6.200 8/01/30 372,980
-----------
8,420,143
-----------
Puerto Rico 4.5%
200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V Rfdg ................ A Baa1 6.625 7/01/12 198,874
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T .............................. A- Baa1 6.375 7/01/24 236,545
-----------
435,419
-----------
</TABLE>

<TABLE>
<S> <C>
Total Long-Term Investments 91.6%
(Cost $9,077,225) <F1>................................................................................ 8,855,562

Short-Term Investments at Amortized Cost 3.1%............................................................. 300,000

Other Assets in Excess of Liabilities 5.3%................................................................ 516,256
------------
Net Assets 100%........................................................................................... $ 9,671,818
------------
</TABLE>

[FN]
<F1>At December 31, 1994, cost for federal income tax purposes is $9,077,225;
the aggregate gross unrealized appreciation is $35,890 and the aggregate gross
unrealized depreciation is $261,424, resulting in net unrealized depreciation
including open futures transactions of $225,534.
<F2>Assets segregated as collateral for open futures transactions.

See Notes to Financial Statements

B-53

<PAGE> 408
Van Kampen Merritt New Jersey Tax Free Income Fund

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

Statement of Assets and Liabilities
December 31, 1994

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

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $9,077,225) <F1>......................................... $ 8,855,562
Short-Term Investments <F1>................................................................. 300,000
Cash ....................................................................................... 210,930
Receivables:
Interest.................................................................................... 223,075
Fund Shares Sold............................................................................ 52,129
Margin on Futures <F5>...................................................................... 4,687
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 109,748
-------------
Total Assets................................................................................ 9,756,131
-------------
Liabilities:
Accrued Expenses............................................................................ 63,038
Income Distributions Payable................................................................ 21,275
-------------
Total Liabilities........................................................................... 84,313
-------------
Net Assets.................................................................................. $ 9,671,818
-------------
Net Assets Consist of:
Paid in Surplus <F3> ....................................................................... $ 9,983,628
Accumulated Undistributed Net Investment Income............................................. 1,245
Accumulated Net Realized Loss on Investments ............................................... (87,521)
Net Unrealized Depreciation on Investments.................................................. (225,534)
-------------
Net Assets.................................................................................. $ 9,671,818
-------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $2,966,694 and
215,684 shares of beneficial interest issued and outstanding) <F3>.......................... $ 13.75
Maximum sales charge (4.65%* of offering price)............................................. .67
-------------
Maximum offering price to public ........................................................... $ 14.42
-------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $6,460,269 and
470,255 shares of beneficial interest issued and outstanding) <F3>.......................... $ 13.74
-------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $244,855 and
17,804 shares of beneficial interest issued and outstanding) <F3>........................... $ 13.75
-------------
*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-54

<PAGE> 409

Van Kampen Merritt New Jersey Tax Free Income Fund

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

Statement of Operations
For the Period July 29, 1994
(Commencement of Investment Operations) through December 31, 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest........................................................................................ $ 170,831
Amortization of Premium......................................................................... (1,576)
-------------
Total Income.................................................................................... 169,255
-------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $2,901, $21,519 and
$715, respectively) <F6> ....................................................................... 25,135
Investment Advisory Fee <F2> ................................................................... 19,141
Audit........................................................................................... 15,601
Printing ....................................................................................... 15,599
Shareholder Services ........................................................................... 15,363
Amortization of Organizational Expenses and Initial Registration Costs <F1> .................... 10,252
Custody ........................................................................................ 7,322
Legal <F2>...................................................................................... 3,900
Trustees Fees and Expenses <F2>................................................................. 2,997
Other........................................................................................... 1,620
-------------
Total Expenses.................................................................................. 116,930
Less Fees Waived and Expenses Reimbursed ($19,141 and $75,431, respectively).................... 94,572
-------------
Net Expenses.................................................................................... 22,358
-------------
Net Investment Income........................................................................... $ 146,897
-------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................. $ 610,639
Cost of Securities Sold ........................................................................ (698,160)
-------------
Net Realized Loss on Investments (Including realized loss on futures transactions of $51,805)... (87,521)
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................................... -0-
End of the Period (Including unrealized depreciation on open futures transactions of $3,871).... (225,534)
-------------
Net Unrealized Depreciation on Investments During the Period.................................... (225,534)
-------------
Net Realized and Unrealized Loss on Investments................................................. $ (313,055)
-------------
Net Decrease in Net Assets from Operations...................................................... $ (166,158)
-------------
</TABLE>

See Notes to Financial Statements

B-55

<PAGE> 410
Van Kampen Merritt New Jersey Tax Free Income Fund

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

<TABLE>
<CAPTION>
From Investment Activities:
<S> <C>
Operations:
Net Investment Income......................................................... $ 146,897
Net Realized Loss on Investments.............................................. (87,521)
Net Unrealized Depreciation on Investments During the Period.................. (225,534)
-------------
Change in Net Assets from Operations ......................................... (166,158)
-------------
Distributions from Net Investment Income:
Class A Shares................................................................ (48,787)
Class B Shares................................................................ (93,517)
Class C Shares................................................................ (3,348)
-------------
Total Distributions .......................................................... (145,652)
-------------
Net Change in Net Assets from Investment Activities........................... (311,810)
-------------
From Capital Transactions <F3>:
Proceeds from Shares Sold..................................................... 10,259,465
Net Asset Value of Shares Issued Through Dividend Reinvestment ............... 71,306
Cost of Shares Repurchased.................................................... (351,433)
-------------
Net Change in Net Assets from Capital Transactions............................ 9,979,338
-------------
Total Increase in Net Assets.................................................. 9,667,528
Net Assets:
Beginning of the Period....................................................... 4,290
-------------
End of the Period (Including undistributed net investment income of $1,245)... $ 9,671,818
-------------
</TABLE>

See Notes to Financial Statements
B-56

<PAGE> 411
Van Kampen Merritt New Jersey Tax Free Income Fund

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

Notes to Financial Statements
December 31, 1994

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

1. Significant Accounting Policies
Van Kampen Merritt New Jersey Tax Free Income Fund (the "Fund") was
organized as a subtrust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust, and is registered as a non-diversified
open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund commenced investment
operations on July 29, 1994.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation Investments are stated at value using
market quotations or, if such valuations are not available, estimates
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith
by the Board of Trustees. Short-term securities with remaining maturities
of less than 60 days are valued at amortized cost.

B. Security Transactions Security transactions are recorded on a
trade date basis. Realized gains and losses are determined on an
identified cost basis. The Fund may purchase and sell securities on
a "when issued" and "delayed delivery" basis, with settlement to
occur at a later date. The value of the security so purchased is
subject to market fluctuations during this period. The Fund will
maintain in a segregated account with its custodian assets having
an aggregate value at least equal to the amount of the when issued
or delayed delivery purchase commitments until payment is made.
At December 31, 1994, there were no when issued or delayed delivery
purchase commitments.

C. Investment Income Interest income is recorded on an accrual
basis. Bond premium and original issue discount on securities
purchased are amortized over the expected life of each applicable
security.

D. Organizational Expenses and Initial Registration
Costs The Fund will reimburse 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 $120,000. These costs are being amortized on a straight line
basis over the 60 month period ending July 29, 1999. 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 by the Fund 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, if any, 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 $11,885 which will expire on December 31, 2002.
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.

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.

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
----------------------------------
<S> <C>
First $500 million... .600 of 1%
Over $500 million.... .500 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.

B-57

<PAGE> 412

Van Kampen Merritt New Jersey Tax Free Income Fund

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

Notes to Financial Statements (Continued)
December 31, 1994

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

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

The Fund has implemented deferred compensation and retirement
plans for its Trustees. Under the deferred compensation plan, Trustees
may elect to defer all or a portion of their compensation to a later date.
The retirement plan covers those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 100 shares each of Classes A,
B and C.

3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B
and C. There are an unlimited number of shares of each class without par
value authorized.

At December 31, 1994, paid in surplus aggregated $3,063,243,
$6,667,931 and $252,454 for Classes A, B and C, respectively. For the
period ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
----------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 221,890 $ 3,146,645
Class B........................ 484,535 6,865,118
Class C........................ 17,462 247,702
--------- --------------
Total Sales.................... 723,887 $ 10,259,465
--------- --------------
Dividend Reinvestment:
Class A........................ 2,136 $ 29,495
Class B........................ 2,787 38,489
Class C........................ 242 3,322
--------- --------------
Total Dividend Reinvestment ... 5,165 $ 71,306
--------- --------------
Repurchases:
Class A........................ (8,442) $ (114,327)
Class B........................ (17,167) (237,106)
Class C........................ -0- -0-
--------- --------------
Total Repurchases.............. (25,609) $ (351,433)
--------- --------------

</TABLE>

<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge

Year of Redemption Class B Class C
------------------------------------------
<S> <C> <C>
First ................. 4.00% 1.00%
Second ................. 3.75% None
Third .................. 3.50% None
Fourth ................. 2.50% None
Fifth ................. 1.50% None
Sixth .................. 1.00% None
Seventh and Thereafter . .00% None
</TABLE>

For the period ended December 31, 1994, VKAC, as Distributor for the Fund, paid
net commissions on sales of the Fund's Class A shares of approximately $5,900
and received CDSC on the redeemed shares of Classes B and C of approximately
$8,600. 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 period ended December 31, 1994, were $9,776,194 and
$698,160, respectively.

B-58

<PAGE> 413
Van Kampen Merritt New Jersey Tax Free Income Fund

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

Notes to Financial Statements (Continued)
December 31, 1994

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

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 utilizes futures contracts to manage the portfolio's
effective maturity or duration.

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.

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 period ended December 31, 1994, were as follows:

Contracts

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

<TABLE>
<S> <C>
Outstanding at July 29, 1994....... -0-
Futures Opened..................... 30
Futures Closed .................... (15)
-----
Outstanding at December 31, 1994... 15
-----
</TABLE>

The futures contracts outstanding as of December 31, 1994, and the
description and unrealized depreciation is as follows:

<TABLE>
<CAPTION>
Unrealized
Contracts Depreciation
-----------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
Mar 1995 - Sells to Open ... 15 $ (3,871)
--------- ------------
</TABLE>

Annual fees under the Plans of up to .30% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
period ended December 31, 1994, are payments to VKAC of approximately $15,200.

B-59
<PAGE> 414

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

VAN KAMPEN AMERICAN CAPITAL

NEW YORK TAX FREE INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital New York Tax Free Income Fund, formerly known as
Van Kampen Merritt New York Tax Free Income Fund (the "Fund"), is a
non-diversified mutual fund, organized as a separate series of Van Kampen
American Capital Tax Free Trust. The Fund's investment objective is to provide
investors a high level of current income exempt from federal, New York State and
New York City income taxes, consistent with preservation of capital. The Fund is
designed for investors who are residents of New York for tax purposes. Under
normal market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a portfolio of New York 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"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
York municipal securities rated below investment grade (but not rated lower than
B- by S&P, B3 by Moody's or an
(Continued on next page.)

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

A Statement of Additional Information, dated September 1, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.

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

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

THIS PROSPECTUS IS DATED SEPTEMBER 1, 1995.

<PAGE> 415

(Continued from previous page.)

equivalent rating by another NRSRO) and unrated New York 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." There is no assurance that the Fund will achieve its
investment objective.

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 a sales charge 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. See
"Alternative Sales Arrangements" and "Purchase of Shares."

2
<PAGE> 416

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................... 4
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expenses and Example....................... 7
Financial Highlights............................................. 9
The Fund......................................................... 10
Investment Objective and Policies................................ 10
Municipal Securities............................................. 12
Investment Practices............................................. 15
Special Considerations Regarding the Fund........................ 19
Investment Advisory Services..................................... 21
Alternative Sales Arrangements................................... 22
Purchase of Shares............................................... 24
Shareholder Services............................................. 34
Redemption of Shares............................................. 38
The Distribution and Service Plans............................... 41
Distributions from the Fund...................................... 43
Tax Status....................................................... 44
Fund Performance................................................. 48
Description of Shares of the Fund................................ 49
Additional Information........................................... 50
</TABLE>

3
<PAGE> 417

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

PROSPECTUS SUMMARY

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

THE FUND. Van Kampen American Capital New York Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund organized as a separate series of Van
Kampen American Capital Tax Free Trust (the "Trust").

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors a
high level of current income exempt from federal, New York State and New York
City income taxes, consistent with preservation of capital.

INVESTMENT POLICIES. The Fund is designed for investors who are residents of
New York for tax purposes. Under normal market conditions, the Fund seeks to
achieve its investment objective by investing at least 80% of its assets in a
portfolio of New York 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"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO"). Up to 20% of the Fund's
total assets may consist of New York municipal securities rated below investment
grade (but not rated lower than B- by S&P, B3 by Moody's or an equivalent rating
by another NRSRO) and unrated New York municipal securities that the Fund's
investment adviser believes are of comparable quality, which involve special
risk considerations. Up to 20% of the Fund's assets may be invested in municipal
securities that are subject to federal alternative minimum tax. See "Investment
Objective and Policies," "Municipal Securities" and "Special Considerations
Regarding the Fund."

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

PURCHASING SHARES OF THE FUND. Shares of the Fund are offered through Van
Kampen American Capital Distributors, Inc. (the "Distributor"), as principal
underwriter, and through selected brokers and dealers. The offering price is the
net asset value per share next determined following receipt plus a sales charge
which, at the option of the investor, may be imposed at the time of purchase or
on a contingent deferred basis. Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The minimum initial investment is $500 for each class of shares and
the minimum for each subsequent investment is $25 for each class of shares (or
less as described under "Purchase of Shares"). The different classes of shares
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.
See "Purchase of Shares."

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

4
<PAGE> 418

SPECIAL RISK FACTORS. Up to 20% of the Fund's assets may consist of New York
securities rated below investment grade (but not rated lower than B- by S&P, B3
by Moody's or an equivalent rating by another NRSRO) and unrated New York
municipal securities considered by the Adviser to be of comparable quality. In
addition, the Fund may invest up to 20% of its assets in certain derivative
securities such as inverse floaters. Investment in such lower grade New York
municipal securities and derivative securities involves significant risks.
Furthermore, under normal market conditions, the Fund will invest substantially
all of its assets in New York municipal securities, and therefore it will be
more susceptible to factors adversely affecting issuers of New York municipal
securities than a municipal securities fund that does not invest in New York
municipal securities to this degree. There can be no assurance that the Fund
will achieve its objective. See "Special Considerations Regarding the Fund."

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

5
<PAGE> 419

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

SHAREHOLDER TRANSACTION EXPENSES

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

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

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

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

6
<PAGE> 420

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

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)(1).......................... 0.00% 0.00% 0.00%
12b-1 Fees (as a percentage of average daily net
assets)(1)(2)................................. 0.00% 0.70% 0.70%
Other Expenses (as a percentage of average daily
net assets)(1)................................ 0.20% 0.20% 0.24%
Total Expenses (as a percentage of average daily
net assets)(1)................................ 0.20% 0.90% 0.94%
</TABLE>

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

(1) The Adviser agreed to waive a portion of its "Management Fees" during the
Fund's last fiscal year. Absent the Adviser's waiver of its fee and
assumption of certain expenses of the Fund, the "Management Fees" would have
been 0.60% for each class of shares, "12b-1 Fees" would have been 0.25% for
Class A Shares and 1.00% each for Class B Shares and Class C Shares, "Other
Expenses" would have been 1.23% for Class A Shares, 1.25% for Class B Shares
and 1.26% for Class C Shares and the "Total Expenses" would have been 2.08%
for Class A Shares, 2.85% for Class B Shares and 2.86% for Class C Shares.

7
<PAGE> 421

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 0.20% for
Class A Shares, 0.90% for Class B
Shares and 0.94% for Class C Shares,
(ii) 5% annual return and (iii)
redemption at the end of each time
period:
Class A Shares......................... $49 $54 $58 $ 72
Class B Shares......................... $49 $64 $65 $ 81*
Class C Shares......................... $20 $30 $52 $ 115
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares......................... $49 $54 $58 $ 72
Class B Shares......................... $ 9 $29 $50 $ 81*
Class C Shares......................... $10 $30 $52 $ 115
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expense" table. 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."

8
<PAGE> 422

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

FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------- ------------- -------------
JULY 29, 1994 JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS) OPERATIONS)
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $14.300 $14.300 $14.300
------------- ------------- -------------
Net Investment Income......... .302 .263 .267
Net Realized and Unrealized
Gain on Investments......... (.722) (.722) (.725)
------------- ------------- -------------
Total from Investment
Operations.................... (.420) (.459) (.458)
------------- ------------- -------------
Less:
Distributions from Net
Investment Income........... .301 .263 .263
------------- ------------- -------------
Net Asset Value, End of
Period........................ $13.579 $13.578 $13.579
============= ============= =============
Total Return
(Non-annualized)(1)........... (2.93%) (3.20%) (3.20%)
Net Assets at End of Period
(in millions)................. $ 2.9 $ 8.1 $ .2
Ratio of Expenses to Average Net
Assets (annualized)(1)........ .26% .96% .96%
Ratio of Net Investment Income
to Average Net Assets
(annualized)(1)............... 5.27% 4.58% 4.58%
Portfolio Turnover.............. 68.11% 68.11% 68.11%
</TABLE>

----------------
(1) If certain expenses had not been waived or assumed by the investment
adviser, total return would have been lower and the ratios would have been
as follows:

<TABLE>
<S> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (annualized)... 2.73% 3.42% 3.42%
Ratio of Net Investment
Income to Average Net
Assets (annualized)....... 2.81% 2.12% 2.12%
</TABLE>

See Financial Statements and Notes Thereto

9
<PAGE> 423

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

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

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to 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 a high level of
current income exempt from federal, New York State and New York City income
taxes, consistent with preservation of capital. The Fund's investment objective
is a fundamental policy and may not be changed without shareholder approval of
the holders of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"). The
Fund is designed for investors who are residents of New York for tax purposes.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision with respect to the Fund. An investment in the Fund is intended to be a
long-term investment and should not be used as a trading vehicle.

Under normal market conditions, the Fund will invest at least 80% of its total
assets in New York 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"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or have an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO") 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

10
<PAGE> 424

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. The Fund's policy with respect
to ratings is not a fundamental policy, and thus may be changed by the Trustees
without shareholder approval.

Up to 20% of the Fund's total assets may be invested in New York municipal
securities rated below investment grade (but not rated lower than B- by S&P, B3
by Moody's or an equivalent rating by another NRSRO) and unrated New York
municipal securities that the Adviser considers to be of comparable quality to
such securities. According to published guidelines, securities rated below
investment grade 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. According to
published guidelines, securities rated below investment grade 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.

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, New York State
and New York City income taxes 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 New York municipal securities permitted by its investment
policies if the Adviser determines that market risks or credit risks associated
with such investments would subject the Fund's portfolio to undue risk. The
potential for realization of capital gains resulting from possible changes in
interest rates will not be a major consideration. Other than for tax purposes,
frequency of portfolio turnover generally will not be a limiting factor if the
Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that its annual portfolio turnover rate normally will be less than
200%. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses or dealer costs than a lower rate, which expenses
and costs must be borne by the Fund and its shareholders. High portfolio
turnover

11
<PAGE> 425

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.

At times, conditions in the markets for New York 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 New York
municipal obligations. If these high-quality, short-term New York 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
high quality municipal securities of issuers other than issuers of New York
municipal securities. Furthermore, if such high-quality municipal securities 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 categories by either S&P or Moody's (or comparably rated by another
NRSRO); commercial paper rated in the highest grade by either rating service (or
comparably rated by another NRSRO); 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. To the extent that the Fund invests a substantial
portion of its assets in municipal securities other than New York municipal
securities or in taxable securities for temporary defensive purposes, the Fund
will not be invested in a manner primarily designed to achieve a high level of
current income exempt from federal, New York State and New York City income
taxes.

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

GENERAL. Municipal securities are obligations issued by or on behalf of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel or other counsel to the issuer
of such securities is, at the time of issuance, exempt from federal income tax.
New York municipal securities are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is at the time of issuance exempt from New York State and New York City
individual income tax. Under normal market conditions, at least 80% of the
Fund's assets will be invested in New York municipal securities. The policy
stated in the foregoing sentence is a fundamental policy of the Fund and cannot
be changed without approval of the shareholders of

12
<PAGE> 426

the Fund. Up to 20% of the Fund's assets may be invested in municipal securities
that are subject to the federal alternative minimum tax.

Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, 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. The Fund may also invest in derivative
variable rate securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
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. The Fund will not invest more than
20% of its total assets in securities whose rates vary inversely with changes in
market rates of interest.

13
<PAGE> 427

Fund's assets that may be invested in the foregoing types of municipal
securities. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets and
the markets for such securities may be less developed than the market for
conventional fixed rate 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.

Up to 20% of the Fund's assets may be invested in municipal securities that
are 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. In addition, income earned
or deemed to be earned with respect to the Fund's Strategic Transactions, if
any, will be taxable. See "Tax Status."

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.

14
<PAGE> 428

LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in New York municipal securities rated below investment grade (but not
rated lower than B- by S&P or B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated New York municipal securities considered by the Adviser to
be of comparable quality to such securities. 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 or comparable unrated 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 risks. Strategic
transactions generally will not be treated as investments in New York municipal
securities for purposes of the Fund's 80% investment policy with respect
thereto.

STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,

15
<PAGE> 429

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 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.

16
<PAGE> 430

Income earned or deemed to be earned, by the Fund from, among other things,
its Strategic Transactions and temporary defensive strategies, if any, generally
will be taxable income of the Fund. See "Tax Status."

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
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. 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.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including 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.

Under normal market conditions, the Fund will invest substantially all of its
assets in New York municipal securities. The Fund generally will not invest more
than 25% of its total assets in any industry. Governmental issuers of municipal
securities are not considered part of any "industry." However, municipal
securities

17
<PAGE> 431

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 therefore 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 justifies 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.

From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of New York municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.

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 income 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.

18
<PAGE> 432

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.

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

SPECIAL CONSIDERATIONS REGARDING THE FUND

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

GENERAL. In normal circumstances, the Fund may invest up to 20% of its total
assets in New York municipal securities rated below investment grade (but not
rated lower than B- by S&P, B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated New York municipal securities considered by the Adviser to
be of comparable quality to such securities. Investment in such 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 judgement 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, below B3 by Moody's or an equivalent rating by
another

19
<PAGE> 433

NRSRO, 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.

SPECIAL CONSIDERATIONS REGARDING NEW YORK MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of New York municipal securities. The State of New York has
historically been one of the wealthiest states in the nation. For decades,
however, the economy of the State of New York has grown more slowly than that of
the nation as a whole, and the result has been a gradual erosion of the State's
relative economic affluence. New York City, for example, has faced greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in New York City.

The State of New York has for many years had a very high state and local tax
burden. The burden of state and local taxation, in combination with the many
other causes of regional economic dislocations, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State of New York.

There can be no assurance that the State of New York and its political
subdivisions will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain programs at
current levels. To address any potential budgetary imbalance, the State of New
York and such subdivisions may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.

Although revenue obligations of the State of New York 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

20
<PAGE> 434

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 New York municipal securities and the
State of New York is included in the Statement at Additional Information.

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

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 Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Adviser may, in its sole discretion, determine to waive temporarily
all or a portion of its fee or it may discontinue this practice without notice
to shareholders. Without such

21
<PAGE> 435

waiver, the Fund would 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........................................ 0.60 of 1%
Over $500 million......................................... 0.50 of 1%
</TABLE>

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

PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson has been employed by the Adviser for the last five years. Dennis S.
Pietrzak, a Vice President of the Adviser, is primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Pietrzak has been employed by
the Adviser since August, 1995. Prior to joining the Adviser, Mr. Pietrzak was
employed by Merrill Lynch where he was in charge of municipal underwriting and
trading in Merrill Lynch's midwest region.

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

ALTERNATIVE SALES ARRANGEMENTS

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

22
<PAGE> 436

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 the initial sales charge and
distribution and service related expenses applicable to Class A Shares,
irrespective of the fact that a CDSC would eventually not apply to a redemption
of such Class C shares.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those

23
<PAGE> 437

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

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

PURCHASE OF SHARES

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

24
<PAGE> 438

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

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund in its discretion may from time to time, pursuant to objective criteria
established by it, pay fees to 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, from time to time, sponsor
sales contests with respect to sales of the Fund's Class A Shares and Class B
Shares pursuant to which brokers, dealers and financial intermediaries may
receive additional compensation of up to 2% of sales in such shares. In
connection therewith, the Distributor may consider combining the sales of shares
made by such brokers, dealers and financial intermediaries of certain Van Kampen
American Capital funds. 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 to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets

25
<PAGE> 439

of the Fund. These programs will not change the price an investor pays for
shares or the amount that the Fund will receive from such sale.

CLASS A SHARES

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

SALES CHARGE TABLE

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

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

QUANTITY DISCOUNTS

26
<PAGE> 440

27
<PAGE> 441

OTHER PURCHASE PROGRAMS

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

28
<PAGE> 442

investment subadviser to any fund described in (1) above or an affiliate
of such subadviser; and such persons' families and their beneficial
accounts.

29
<PAGE> 443

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

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) with respect to Class
A Shares, 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million; (ii) 4.00%
with respect to Class B Shares; and (iii) 1.00% with respect to Class C Shares.
Such compensation will not change the price an investor will pay for CDSC Shares
or the amount that the Fund will receive from such sale.

30
<PAGE> 444

during a month will be aggregated and deemed to have been made on the last day
of the month.

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

31
<PAGE> 445

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

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

For purposes of conversion of 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.

32
<PAGE> 446

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

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

NET ASSET VALUE

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

33
<PAGE> 447

to time, however, the per share net asset value of the different class of shares
may differ.

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

SHAREHOLDER SERVICES

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

34
<PAGE> 448

acceptable to ACCESS. On the date the letter is received ACCESS will calculate a
fee for replacing the lost certificate equal to no more than 2.00% of the net
asset value of the issued shares and bill the party to whom the replacement
certificate was mailed.

35
<PAGE> 449

the Fund will increase the number of days shares must be registered in a
shareholder's name prior to an exchange to 30 days.

36
<PAGE> 450

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

37
<PAGE> 451

("State Street Bank") will be sent to such shareholder. These checks may be made
payable by the holder of Class A Shares to the order of any person in any amount
of $100 or more.

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

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

38
<PAGE> 452

39
<PAGE> 453

40
<PAGE> 454

satisfactory proof of disability before it determines to waive the contingent
deferred sales charge on Class B Shares and Class C Shares.

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

THE DISTRIBUTION AND SERVICE PLANS

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

41
<PAGE> 455

dealers and financial intermediaries (collectively, "Selling Agreements") that
may provide for their customers or clients certain services or assistance.

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

42
<PAGE> 456

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. As of December 31, 1994, there were $11,901
and $1,901 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 0.11% and 0.02% 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.

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

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, dividends, and other ordinary income earned by
the Fund, 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

43
<PAGE> 457

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 will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the Reinvestment Plan is automatic. Instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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

TAX STATUS

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

The following New York State, New York City and federal income tax discussion
is based on the advice of Skadden, Arps, Slate, Meagher & Flom, and reflects
applicable income tax laws, as of the date of this Prospectus.

NEW YORK TAXATION. Individual shareholders will not be subject to New York
State or New York City income tax on distributions attributable to interest on
New York municipal securities. Individual shareholders will be subject to New
York State or New York City income tax on distributions attributable to other
income of the Fund (including net capital gain), and on gain on the sale of
shares of the Fund. Corporations should note that all or a part of any
distribution from the Fund, and

44
<PAGE> 458

gain on the sale of shares of the Fund, may be subject to the New York State
corporate franchise tax and the New York City general corporation tax.

Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals for taxable years beginning in 1994
is 7.875%, which is currently scheduled to decline to approximately 7.59% for
taxable years beginning in 1995 and to 7.125% for taxable years beginning
thereafter. The highest marginal New York City income tax rate currently imposed
on individuals is 4.57%. In addition, individual taxpayers with New York
adjusted gross income in excess of $100,000 must pay a supplemental tax to
recognize the benefit of graduated tax rates. Due to the ongoing budgetary
problems of both New York State and New York City, these income tax rates are
subject to change at any time. Shareholders subject to taxation in a state other
than New York will realize a lower after-tax rate of return if distributions
from the Fund are not exempt from taxation in such other state.

FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.

If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain, which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. Similarly, the Fund will not be subject to federal
income tax on any net capital gain distributed to its shareholders.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (which does not
include tax-exempt income) for such year and at least 98% of its net capital
gains (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
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.

45
<PAGE> 459

interest charge on 50% of its earnings and profits attributable to non-regulated
investment company years and would be required to distribute such earnings and
profits to shareholders (less any interest charge). In addition, if the Fund
failed to qualify as a regulated investment company for its first taxable year
or, if immediately after qualifying as a regulated investment company for any
taxable year, it failed to qualify for a period greater than one taxable year,
the Fund would be required to recognize any net built-in gains (the excess of
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.

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
requirements for avoiding income and excise 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.

46
<PAGE> 460

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 gain
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. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares 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). It is not expected that any portion of the distributions from
the Fund will be eligible for the dividends received deduction for corporations.
The Fund will inform shareholders of the source and tax status of distributions
promptly after the close of each calendar year.

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. 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.

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 prior to the date of payment. 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

47
<PAGE> 461

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.

GENERAL. The federal and New York income tax discussion set forth above is
for general information only. Prospective investors should consult their tax
advisers regarding the specific federal and New York tax consequences of holding
and disposing of shares, as well as the effects of other state, local and
foreign tax laws and any proposed tax law changes. Also, see "Tax Status of the
Fund" in the Statement of Additional Information for further information.

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

FUND PERFORMANCE

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

48
<PAGE> 462

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.

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

DESCRIPTION OF SHARES OF THE FUND

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

The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt New York Tax Free
Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust. The Fund was reorganized as a series of the Trust as of July 31,
1995. Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 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."

49
<PAGE> 463

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

ADDITIONAL INFORMATION

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

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

50
<PAGE> 464

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--
CALL YOUR BROKER OR

(800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN

AMERICAN CAPITAL

NEW YORK TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

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

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

Transfer Agent

ACCESS INVESTOR

SERVICES, INC.

P.O. Box 418256

Kansas City, MO 64141-9256

Attn: Van Kampen American

Capital Funds

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

Attn: Van Kampen American

Capital Funds

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

Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 465

NEW YORK TAX FREE INCOME FUND

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

P R O S P E C T U S

SEPTEMBER 1, 1995

------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 466

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND

Van Kampen American Capital New York Tax Free Income Fund, formerly known as
Van Kampen Merritt New York Tax Free Income Fund (the "Fund"), seeks to provide
investors with high current income exempt from federal, New York State and New
York City income taxes consistent with preservation of capital. The Fund is
designed for investors who are residents of New York for tax purposes. Under
normal market conditions, the Fund attempts to achieve its investment objective
by investing at least 80% of its assets in a portfolio of New York 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"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
York municipal securities rated below investment grade (but not rated lower than
B- by S&P, B3 by Moody's or an equivalent NRSRO) and unrated New York municipal
securities believed by the Fund's investment adviser to be of comparable
quality, which involve special risk considerations. There is no assurance that
the Fund will achieve its investment objective. The Fund is a separate series of
Van Kampen American Capital Tax Free Trust, a Delaware business trust (the
"Trust").

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-25
Officers and Trustees............................................................ B-30
Investment Advisory and Other Services........................................... B-35
Custodian and Independent Auditors............................................... B-37
Portfolio Transactions and Brokerage Allocation.................................. B-37
Tax Status of the Fund........................................................... B-38
The Distributor.................................................................. B-38
Legal Counsel.................................................................... B-39
Performance Information.......................................................... B-40
Independent Auditor's Report..................................................... B-42
Financial Statements............................................................. B-43
Notes to Financial Statements.................................................... B-48
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 1, 1995.

B-1
<PAGE> 467

THE FUND AND THE TRUST

The Fund is a separate series of the Trust, an open-end non-diversified
management investment company. At present, each of the Fund, Van Kampen American
Capital Insured Tax Free Income Fund, Van Kampen American Capital Tax Free High
Income Fund, Van Kampen American Capital Municipal Income Fund, Van Kampen
American Capital Limited Term Municipal Income Fund, Van Kampen American Capital
California Insured Tax Free Fund, Van Kampen American Capital Florida Insured
Tax Free Income Fund and Van Kampen American Capital New Jersey Tax Free Income
Fund has been organized as a series of the Trust and have commenced investment
operations. Each of Van Kampen American Capital California Tax Free Income Fund,
Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund, and Van Kampen American Capital Ohio Tax
Free Income Fund has been organized as a series of the Trust and have not
commenced investment operations. Other series may be organized and offered in
the future. The Fund was originally organized in 1994 under the name Van Kampen
Merritt New York Tax Free Income Fund, as a sub-trust of Van Kampen Merritt Tax
Free Fund, a Massachusetts business trust. The Fund was reorganized as a series
of the Trust as of July 31, 1995.

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated as of May 10, 1995. The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. The Trust can
issue an unlimited number of shares, par value $0.01 (prior to July 31, 1995,
the shares had no par value). Each share represents an equal proportionate
interest in the assets of the series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.

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

INVESTMENT POLICIES AND RESTRICTIONS

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

1. Invest more than 25% of its assets in a single industry; however, 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.

B-2
<PAGE> 468

6. 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.

B-3
<PAGE> 469

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 200%.

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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. 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 an assignment of the
lessee's interest in the leased property, management or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. 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. The Fund will invest in lease obligations which contain
non-appropriation clauses only if such obligations are rated investment grade,
at the time of investment.

B-4
<PAGE> 470

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

B-5
<PAGE> 471

LOWER GRADE MUNICIPAL SECURITIES

B-6
<PAGE> 472

resale, the Fund may incur additional risks and costs. Illiquid and restricted
securities are particularly difficult to dispose of.

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New York municipal securities. In
addition, the specific New York municipal securities in which the

B-7
<PAGE> 473

Fund will invest will change from time to time. The Fund is therefore
susceptible to political, economic, regulatory or other factors affecting
issuers of New York municipal securities. The following information constitutes
only a brief summary of a number of the complex factors which may impact issuers
of New York municipal securities and does not purport to be a complete or
exhaustive description of all adverse conditions to which issuers of New York
municipal securities may be subject. Such information is derived from official
statements utilized in connection with the issuance of New York 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 New York 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 New York
issuers may be unrelated to the creditworthiness of obligations issued by the
State of New York, and there is no responsibility on the part of the State of
New York 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 New York, 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 New York municipal securities.

The portfolio of the Fund may include municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") or by other
entities located within the State, including the City of New York (the "City")
and political subdivisions thereof or their agencies.

NEW YORK STATE. The State has historically been one of the wealthiest states
in the nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic affluence. Statewide,
urban centers have experienced significant changes involving migration of the
more affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.

The State has for many years had a very high state and local tax burden
relative to other states. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits the burden of state and local taxation, in combination
with the many other causes of regional economic dislocation, may have
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.

The 1993-94 State Financial Plan, adopted on April 16, 1993, is based on an
economic projection that the State will perform more poorly than the nation as a
whole. For calendar year 1993, the economy grew faster than in 1992, but still
at a very moderate rate, as compared to other recoveries. Moderate economic
growth is expected to continue in calendar year 1994 at a slightly faster rate
than in 1993. Economic recovery started considerably later in the State than in
the nation as a whole due in part to the significant retrenchment in the banking
and financial services industries, downsizing by several major corporations,
cutbacks in defense spending and an oversupply of office buildings. The forecast
made by the Division of the Budget for the overall rate of growth of the
national economy during calendar year 1994 is similar to the "consensus" of a
widely followed survey of national economic forecasters.

The New York economy, as measured by employment, shifted from recession to
recovery near the start of calendar year 1993. During the course of calendar
year 1993, employment began to increase, albeit sporadically, and the
unemployment rate declined. However, the State economy turned in a mixed
performance during 1994. The moderate employment growth that characterized 1993
continued into mid-1994, then virtually ceased. Wages grew at around 3.5 percent
and personal income rose 4.0 percent in 1994.

B-8
<PAGE> 474

Employment growth is expected to slow to less than 0.5 percent in 1995. Slow
growth in employment and average wages are expected to restrain wage growth to
3.2 percent. Many uncertainties exist in forecasts of both the national and
State economies, including employment levels and consumer attitudes toward
spending, Federal fiscal and monetary policies and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience worse-than-predicted
results in the 1994-95 and 1995-96 fiscal years, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.

The General Fund is the largest and most significant of the dozens of funds
maintained by the State. The 1991-92 fiscal year was the fourth consecutive year
in which the State incurred a cash-basis operating deficit in the General Fund
and issued deficit notes. During the 1991-92 fiscal year, estimates and
projections of the State's operating results were revised on several occasions
to reflect changing economic and financial conditions, and those revisions were
reflected in quarterly updates to the State's Financial Plan for the 1991-92
fiscal year initially formulated on June 10, 1991. For the 1991-92 fiscal year,
the State incurred a cash-basis operating deficit in the General Fund of $575
million, which, after a $44 million withdrawal from the Tax Stabilization
Reserve Fund, was financed through the public issuance of $531 million of tax
and revenue anticipation notes on March 30, 1992 (the "1992 Deficit Notes").

General Fund receipts, excluding transfers from other funds, totalled $28.818
billion in the State's 1991-92 fiscal year (before repayment of $1.081 billion
of deficit notes issued in its 1990-91 fiscal year and before issuance of $531
million in deficit notes to close the 1991-92 fiscal year General Fund cash
basis operating deficit), $29.950 billion in the State's 1992-93 fiscal year
(before repayment of $531 million in deficit notes issued to close the State's
1991-92 fiscal year General Fund cash basis deficit, and $30.579 billion in the
State's 1993-94 fiscal year). General Fund receipts in the State's 1994-95
fiscal year are estimated in the 1994-95 State Financial Plan at $34.321
billion. Taxes account for 96% of estimated 1994-95 General Fund receipts, with
the balance comprised of miscellaneous receipts. Major components of the tax
receipts in the General Fund and the approximate percentages of actual fiscal
year 1993-94 General Fund receipts and estimated fiscal year 1994-95 General
Fund receipts for which they account, include the personal income tax (50% and
54%, respectively), user taxes and fees (including the State Sales and Use Tax)
(19% and 20%, respectively), business taxes (18% and 16%, respectively), other
taxes (3% and 3%, respectively) and miscellaneous receipts (3.9% and 3.7%,
respectively).

General Fund disbursements, exclusive of transfers to other funds, totalled
$28.058 billion in the State's 1991-92 fiscal year, $29.068 billion in the
State's 1992-93 fiscal year, and $30.152 billion in the State's 1993-94 fiscal
year and are estimated to total $34.248 billion in the State's 1994-95 fiscal
year. Major General Fund disbursements categories and the approximate
percentages of estimated fiscal year 1994-95 General Fund disbursements for
which they account, include grants to local governments (including aid to
education, social services and State revenue sharing) (70%), State operations
spending (18%) (approximately 71% of projected disbursements in this category
are for personal service costs), general State charges (6%) (including
contributions to pension systems and employee fringe benefits), capital
expenditures (2%) and disbursement for interest payments on the State's
short-term tax and revenue anticipation note and bond anticipation note (4%).

For its 1992-93 fiscal year the State had a balanced budget on a cash basis
with a positive margin of $671 million in the General Fund that was deposited in
the refund reserve account. During its 1991-92 and 1990-91 fiscal years, the
State incurred cash basis operating deficits, prior to the issuance of TRANs,
owing to lower-than-projected receipts, which it believes to have been
principally the result of a significant slowdown in the New York and regional
economy.

After reflecting a 1992-93 year-end deposit to the refund reserve account of
$671 million, reported 1992-93 General Fund receipts were $45 million higher
than originally projected in April 1992. If not for that year-end transaction,
which had the effect of reducing 1992-93 receipts by $671 million and making
those receipts available in 1993-94, General Fund receipts would have been $716
million higher than originally projected.

The favorable performance was primarily attributable to personal income tax
collections that were more than $700 million higher than originally projected
(before reflecting the refund reserve transaction). The withholding and
estimated payment components of the personal income tax exceeded original
estimates by

B-9
<PAGE> 475

more than $800 million combined, reflecting both stronger economic activity,
particularly at year's end, and the tax-induced one-time acceleration of income
into 1992. Modest short-falls were experienced in other components of the income
tax.

There were large, but largely offsetting, variances in other categories.
Significantly higher-than-projected business tax collections and the receipt of
unbudgeted payments from the Medical Malpractice Insurance Association and the
New York Racing Association approximately offset the loss of an anticipated $200
million Federal reimbursement, the loss of certain budgeted hospital
differential revenue as a result of unfavorable court decisions, and shortfalls
in certain miscellaneous revenue sources.

Disbursements and transfers to other funds totaled $30.829 billion, an
increase of $45 million above projections in April 1992. After adjusting for the
impact of a $150 million payment from the Medical Malpractice Insurance
Association to health insurers made pursuant to legislation passed in January
1993, actual disbursements were $105 million lower than projected. This
reduction primarily reflected lower costs in virtually all categories of
spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service as partially offset by
higher-than-anticipated costs for educational programs.

The use of New York Local Government Assistance Corporation bond proceeds to
make payments to local governmental units, otherwise made by the State, reduces
the State's future liabilities. Therefore, the projected 1994-95 General Fund
GAAP-basis operating deficit reflected above includes $315 million to reflect
payment by LGAC to local governmental units.

As of March 31, 1994, the State had approximately $5.146 billion in general
obligation bonds, excluding Refunding Bonds, and $224 million in BANs
outstanding. On May 4, 1993 the State issued $850 million in TRANs, all of which
matured on December 31, 1993. Principal and interest due on general obligation
bonds and interest due on BANs and on TRANs were $782.5 million for the State's
1993-94 fiscal year, and are estimated to be $786.3 million for the State's
1994-95 fiscal year, not including interest on the Refunding Bonds to the extent
that such interest is to be paid from escrowed funds.

The State issued $850 million in TRANs on May 4, 1993 to fund its day-to-day
operations and certain local assistance payments to its municipalities and
school districts. These TRANs were fully retired on December 31, 1993. The State
met its cash flow needs in its 1994-95 fiscal year without the issuance of
TRANs.

The State completed its 1993-94 fiscal year with a combined Governmental Funds
operating surplus of $1.051 billion, which included an operating surplus of
$1.051 billion, which included on operating surplus in the General Fund of $914
million, in the Special Revenue Funds of $149 million and in the Debt Service
Funds of $23 million, and an operating deficit in the Capital Projects Funds of
$35 million. The General Fund is projected to be balanced on a cash basis for
the 1994-95 fiscal year. Total receipts are projected to be $34.321 billion, an
increase of $2.092 billion over total receipts in the prior fiscal year. Total
General Fund disbursements are projected to be $34.248 billion, an increase of
$2.351 billion over the total amount disbursed and transferred in the prior
fiscal year.

The Financial Plan for the 1995-96 fiscal year released on February 1, 1995,
projects General Fund receipts, including transfers from other funds, of $32.516
billion, a reduction of $747 million from the revised 1995-95 State Financial
Plan. Tax receipts are projected at $29.391 billion for the 1995-96 fiscal year,
a reduction of $1.071 billion from the prior year. Although growth in the base
of tax receipts is expected to accelerate during the 1995-96 fiscal year, tax
receipts are expected to fall by 3.5 percent, principally due to the combined
effect of implementing during the 1995-96 fiscal year (1) a portion of tax
reductions enacted in 1987 and deferred since 1990, (2) additional tax cuts to
prevent tax increases enacted in 1987 from taking effect and (3) a proposed
employer day care credit, together with the incremental cost of tax reductions
enacted in 1994.

Disbursements in the General Fund are projected to total $32.361 billion in
1995-96, a decrease of $1,144 million or 3.4 percent. Grants to local government
are preserved at 1994-95 levels generally, although costs for social welfare
programs are recommended to be dramatically reduced. Spending for State
operations is projected to decline by $485 million, or 7.7 percent, to the
lowest level since the 1985-86 fiscal year.

There can be no assurance that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary

B-10
<PAGE> 476

imbalance, the State may need to take significant actions to align recurring
receipts and disbursements in future fiscal years.

Projections and estimates of receipts from taxes have been subject to
significant variance in recent fiscal years. The personal income tax, the sales
tax and the corporation franchise tax have been particularly subject to
overestimation as a result of several factors, most recently a significant
slowdown in the national and regional economies and uncertainties in taxpayer
behavior as a result of actual and proposed changes in Federal tax laws.

In June 1990, as part of a state fiscal reform program, legislation was
enacted creating the New York Local Government Assistance Corporation ( "LGAC"),
a public benefit corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded through the State's
annual seasonal borrowing. Over a period of years, the issuance of those
long-term obligations, which will be amortized over no more than 30 years, is
expected to result in eliminating the need for continuing short-term seasonal
borrowing for those purposes. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except in
cases where the Governor and the legislative leaders have certified the need for
additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of December 1, 1994, LGAC had issued its bonds to provide net
proceeds of $3.856 billion and has been authorized to issue its bonds to provide
net proceeds of up to an additional $315 million during the State's 1994-95
fiscal year.

In April 1993, legislation was also enacted providing for significant changes
in the long-term financing practices of the State and the Authorities.

The Legislature passed a proposed constitutional amendment that would permit
the State, without a voter referendum but within a formula-based cap, to issue
revenue bonds, which would be debt of the State secured solely by a pledge of
certain State tax receipts (including those allocated to State funds dedicated
for transportation purposes), and not by the full faith and credit of the State.
In addition, the proposed amendment would require that State debt be incurred
only for capital projects included in a multi-year capital financing plan and
would prohibit lease-purchase and contractual-obligation financing mechanisms
for State facilities. Public hearings have been held on the proposed
constitutional amendment. Following these hearings, in February 1994, the
Governor and the State Comptroller recommended a revised constitutional
amendment which would further tighten the ban on lease-purchase and
contractual-obligation financing, incorporate existing lease-purchase and
contractual-obligation debt under the proposed revenue bond cap while
simultaneously reducing the size of the cap. After considering these
recommendations, the Legislature passed a revised constitutional amendment which
tightens the ban, and provides for a phase-in to a lower cap (4.4 percent of
personal income).

Before the approved constitutional amendment or any revised amendment enacted
in 1994 can be presented to the voters for their consideration, it must be
passed by a separately elected legislature. The amendment must therefore be
passed by the newly elected Legislature in 1995 prior to presentation to the
voters at the earliest in November 1995. The amendment could not become
effective before January 1, 1996.

State legislation has also been enacted to provide for the deposit of
petroleum business tax receipts and certain other transportation-related taxes
and fees into certain funds dedicated to transportation purposes. For the
purpose of financing various State and local highway and bridge projects prior
to the submission of the proposed constitutional amendment to the voters for
their consideration, the New York State Thruway Authority was authorized to
issue up to approximately $4 billion of bonds, the debt service on which,
subject to annual appropriation, is expected to be paid from a portion of the
dedicated funds. In addition, the legislation provides for the payment of a
portion of the dedicated transportation funds to the Metropolitan Transportation
Authority expected to be used in connection with its 1992-96 Capital Program.

Ratings. On January 13, 1992, S&P lowered its rating on the State's general
obligation bonds to A- from A stating that it continues to assess the State's
rating outlook as "negative" and that "[n]ear term prospects for significant
economic recovery appear dismal." S&P cited "[c]continued economic
deterioration, chronic

B-11
<PAGE> 477

operating deficits, mounting GAAP fund balance deficits, and the legislative
statement in seeking permanent and structurally sound fiscal operations" as
factors contributing to the rating reduction. Various agency debt, State moral
obligations, contractual obligations, lease purchase obligations and state
guarantees are also affected by the S&P action. S&P also continued its negative
rating outlook assessment on State general obligation debt. On April 26, 1993,
S&P revised the rating outlook assessment to stable. On February 14, 1994, S&P
raised its outlook to positive and, on December 12, 1994, confirmed its A-
rating. S&P's previous ratings were A from March 1990 to January 1992, AA- from
August 1987 to March 1990 and A+ from November 1982 to August 1987. On January
6, 1992, Moody's lowered its rating on certain appropriations-backed debt of the
State and its agencies from A to Baa1 noting "mounting budget deficits,
inability of the legislature and the administration to reach timely agreement on
deficit reduction plans for the current fiscal year, and protracted weakness in
the economy." Previously, Moody's lowered its rating to A on June 6, 1990, its
rating having been A1 since May 27, 1986. State general obligation,
State-guaranteed and LGAC bonds retained an A rating but were placed under
review for possible downgrade. On February 3, 1992, Moody's confirmed its A
rating of State general obligation bonds, asserting that the State's "general
credit standing reflects its diverse and substantial economic base, but this
strength is offset by structural imbalance of state finances and increasing debt
levels." On December 12, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. There is no assurance that a
particular rating will continue for any given period of time or that any such
rating will not be revised downward or withdrawn entirely if, in the judgment of
the agency originally establishing the rating, circumstances so warrant.

Authorities. Certain authorities and public benefit corporations of the State,
including the State Housing Finance Authority ("HFA"), the Battery Park City
Authority ("BPCA"), the Metropolitan Transportation Authority ("MTA") and the
Urban Development Corporation ("UDC"), have faced and continue to experience
substantial financial difficulties which could adversely affect the ability of
such authorities to make payments of interest on, and principal amounts of,
their respective bonds. The difficulties have in certain instances caused the
State (under so-called "moral obligation") to appropriate funds on behalf of the
authorities. Moreover, it is expected that the problems faced by these
authorities will continue and will require increasing amounts of State
assistance in future years. Failure of the State to appropriate necessary
amounts or to take other action to permit those authorities having financial
difficulties to meet their obligations (including HFA, UDC, MTA and BPCA) could
result in a default by one or more of the authorities. Such default, if it were
to occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the defaulting
authority and of State, City and Municipal Assistance Corporation ("MAC")
obligations. In addition, any default in payment on any general obligation of
any authority whose bonds contain a moral obligation provision could constitute
a failure of certain conditions that must be satisfied in connection with
Federal guarantees of City and MAC obligations and could thus jeopardize the
City's long-term financing plans.

As of September 30, 1993, the latest data available, there were eighteen
authorities that each had outstanding debt of $100 million or more. These
eighteen authorities had an aggregate of $63.5 billion of outstanding debt on
such date, of which approximately $7.3 billion was moral obligation debt and
approximately $21.0 billion was financed under lease-purchase or contractual
obligation financing arrangements.

The State Constitution provides that the State may guarantee the repayment of
certain borrowings to carry out designated projects by the New York State
Thruway Authority, the Job Development Authority and the Port Authority of New
York and New Jersey. As of March 31, 1994, a total of $412 million in such
State-guaranteed debt was outstanding. The State has never been called upon to
make any direct payments pursuant to such guarantees. The constitutional
provisions allowing a State-guarantee of certain Port Authority of New York and
New Jersey debt stipulates that no such guaranteed debt may be outstanding after
December 31, 1996. In addition, the State-guaranteed bonds issued by the Thruway
Authority are scheduled to be fully retired by July 1, 1995.

Litigation. The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and federal laws. Included in
the State's outstanding litigation are a number of cases

B-12
<PAGE> 478

challenging the constitutionality or the adequacy and effectiveness of a variety
of significant social welfare programs primarily involving the State's health
and mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.

On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of the Appellate Division (Third Department) of the
State's Supreme Court in three actions (McDermott, et al. v. Regan, et al.;
Puma, et al. v. Regan, et al.; and Guzdek, et al. v. Regan, et al.) declaring
unconstitutional certain legislation enacted in 1990. That legislation mandated
a change in the actuarial funding method for determining contributions by the
State and its local governments to the State and local retirement systems from
the aggregate cost ("AC") method, previously used by the Comptroller, to the
projected unit credit ("PUC") method, and it required the application of the
surplus reported under the PUC method as a credit to employer contributions. As
a result, contributions to the retirement systems have been significantly
reduced since the State's 1990-91 fiscal year. The Court of Appeals held, among
other things, that the State Constitution, which prohibits the benefits of
membership in the retirements systems from being impaired or diminished, was
violated because the PUC legislation impaired the means designed to assure
benefits to public employees by depriving the Comptroller of his personal
responsibility to maintain 'the security and sources of benefits' of the pension
fund. As a result of this decision, the Comptroller has developed a plan to
return to the AC method and to restore prior funding levels of the retirement
systems. The Comptroller expects to achieve this objective in a manner that,
consistent with his fiduciary responsibilities, will neither require the State
to make additional contributions in its 1993-94 fiscal year nor materially and
adversely affect the financial condition of the State thereafter. The
Comptroller's plan calls for a return to the AC method, using a four-year
phase-in in the New York State and Local Employees' Retirement System ("ERS"),
with State AC contributions to ERS capped at a percentage of payroll that
increases each year during the phase-in. Although State contributions to ERS
under the plan are expected to be lower during the phase-in period than they
would have been if the AC method were reinstated immediately, they are expected
to exceed PUC levels by $30 million in fiscal 1994-95, $63 million in fiscal
1995-96, $116 million in fiscal 1996-97, and $193 million in fiscal 1997-98. The
excess over PUC levels is expected to peak at $241 million in fiscal 1998-99,
when State contributions under the Comptroller's plan are first projected to
exceed levels that would have been required by an immediate return to the AC
method. The excess over PUC levels is projected to decline after fiscal 1998-99,
and, beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than PUC requirements would have
been.

On May 31, 1988 the Supreme Court of the United States took jurisdiction of a
claim of the State of Delaware that certain unclaimed dividends, interest and
other distributions made by issuers of securities and held by New York-based
brokers incorporated in Delaware, for beneficial owners who cannot be identified
or located, had been, and were being, wrongfully taken by the State of New York
pursuant to New York's Abandoned Property Law (State of Delaware v. State of New
York, United States Supreme Court). Texas intervened, claiming a portion of such
distributions and similar property taken by the State of New York from New
York-based banks and depositories incorporated in Delaware. All other states and
the District of Columbia moved to intervene. In a decision dated March 30, 1993,
the United States Supreme Court granted all pending motions of the states and
the District of Columbia to intervene and remanded the case to a Special Master
for further proceedings consistent with the Court's decision. The Court
determined that the abandoned property should be remitted first to the state of
the beneficial owner's last known address, if ascertainable, and, if not, then
to the state of incorporation of the intermediary bank, broker or depository. On
January 21, 1994, the State entered into a settlement agreement with Delaware.
The State made an immediate $35 million payment to Delaware in the 1993-94
fiscal year and agreed to make annual payments of $33 million in each of the
next five fiscal years. The claims of the other states and the District of
Columbia remain. The State anticipates that, as a final resolution of this
proceeding, additional payments, in an amount which may be significant, may be
required during the State's 1993-94 fiscal year or thereafter.

The State is also engaged in a variety of constitutional claims wherein
significant monetary damages are sought. The State is a party to actions
commenced by several Indian nations which claim that significant amounts of land
were unconstitutionally taken from those tribes in violation of various treaties
and agreements during the eighteenth and nineteenth centuries. The claimants
seek recovery of approximately six million acres

B-13
<PAGE> 479

of land as well as compensatory and punitive damages. The amounts of potential
losses, if any, are not presently determinable. Also, the State is a party to
several actions challenging the constitutionality of specified bonding and other
financing programs.

Adverse developments in the foregoing proceedings or new proceedings could
adversely affect the financial condition of the State in its current fiscal year
or thereafter. With respect to pending and threatened litigation, the State has
reported liabilities of $675 million for awarded and anticipated unfavorable
judgments in its audited financial statements for the 1993-94 fiscal year.

Other Localities. In 1992, the total indebtedness of all localities in the
State was approximately $35.2 billion, of which $19.5 billion was debt of the
City (excluding $5.9 billion in MAC debt); a small portion (approximately $71.6
million) of the $35.2 billion of indebtedness represented borrowing to finance
budgetary deficits and was issued pursuant to enabling State legislation. In
1992, an unusually large number of local government units requested
authorization for deficit financings. According to the Comptroller, ten local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds. The
current session of the Legislature may receive as many or more requests for
deficit-financing authorizations as a result of deficits previously incurred by
local governments. Although the Comptroller has indicated that the level of
deficit financing requests in 1992 was unprecedented, in 1993, five localities
were authorized to issue only $5.5 million in deficit financing indebtedness.
Such deficit financing by localities is not expected to have a material adverse
effect on the financial condition of the State.

Fiscal difficulties experienced by the City of Yonkers resulted in the
creation of the Financial Control Board for the City of Yonkers ("Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of the
fiscal affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State resources in
amounts that cannot yet be determined.

NEW YORK CITY. The fiscal health of the State is closely related to the fiscal
health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The City
accounts for approximately 41% of the State's population and personal income.

In February 1975, the UDC, which had approximately $1 billion of outstanding
debt, defaulted on certain of its short-term notes. Shortly after the UDC
default, the City entered a period of financial crisis from which it is only now
emerging. Both the State Legislature and the United States Congress enacted
legislation in response to this crisis. During 1975, the State Legislature (i)
created MAC to assist with long-term financing for the City's short-term debt
and other cash requirements and (ii) created the State Financial Control Board
(the "Control Board") to review and approve the City's budgets and City
four-year financial plans (the financial plans also apply to certain
City-related public agencies (the "Covered Organizations")).

The severe financial difficulties encountered by the City in 1975 caused it to
lose access to the public credit market. At that time, the City was incurring
substantial operating deficits and employing financial and accounting practices
which were widely criticized. Since that time, the City benefited substantially
from financial assistance provided through a combination of Federal, state and
private measures and the City has extensively revised its financial systems and
accounting practices. Since the 1978 fiscal year the City's annual financial
statements, prepared in accordance with generally accepted accounting principles
("GAAP"), have been audited by independent certified accountants and four-year
financial plans have been prepared annually for the City and the Covered
Organizations.

The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1994 through 1997 fiscal
years (the "1994-97 Financial Plan" or "Financial Plan"). The City's projections
set forth in the Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. The City
Comptroller and other agencies and public officials have issued reports which,
among other things, state that projected revenues may be less and future
expenditures may be greater than those forecast in the City's Financial Plan. If
the City were to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the occurrence of
an annual operating deficit of more than $100 million or the loss of access to
the public credit

B-14
<PAGE> 480

markets to satisfy the City's capital and seasonal financing requirements, the
Control Board would be required by State law to exercise certain powers.

The City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the timing of
any regional and local economic recovery, the absence of wage increases in
excess of the increases assumed in the 1994-97 Financial Plan, employment
growth, provision of State and Federal aid and mandate relief, State legislative
approval of future State budgets, adoption of City budgets by the New York City
Council, and approval by the Governor or the State Legislature of various other
actions proposed in the 1994-97 Financial Plan.

The 1993-94 State budget, as enacted, included $400 million less in State
actions than the City had anticipated. As a result of adjustments to education
aid formulas, the City received an additional $145 million in education funds.
However, the State Legislature failed to enact a takeover of local Medicaid
costs, other significant mandate relief items and certain Medicaid cost
containment items proposed by the Governor, which would have provided the City
with savings. The adopted State budget increased sanctions on social service
programs, eliminated the pass-through of a State surcharge on parking tickets,
cut reimbursement for transportation operations under the Consolidated Local
Highway Assistance Program, and required a large contribution in City funds to
hold the Metropolitan Transit Authority ("MTA") fare at the current level. In
the event of any significant reduction in projected State revenues or increases
in projected State expenditures from the amounts currently projected by the
State, there could be an adverse impact on the timing and amounts of State aid
payments to the City in the future.

Implementation of the 1995-98 Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1995 through 1998 contemplates the
issuance of $1.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure and physical assets and to make
capital investments. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The success of
projected public sales of City bonds and notes will be subject to prevailing
market conditions and no assurance can be given that such sales will be
completed. If the City were unable to sell its general obligation bonds and
notes, it would be prevented from meeting its planned operating and capital
expenditures.

The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than those
forecast in the 1995-98 Financial Plan. In addition, the Control Board staff and
other agencies have questioned whether the City has the capacity to generate
sufficient revenues in the future to meet the costs of its expenditure increases
and to provide necessary services. It is reasonable to expect that such reports
and statements will continue to be issued and to engender public comment.

For each of the past twelve fiscal years, the City achieved balanced operating
results as reported in accordance with GAAP and the City's 1994 fiscal year
results are projected to be balanced in accordance with GAAP. The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law, without
additional tax or other revenue increases or reductions in City services, which
could adversely affect the City's economic base.

ACTIONS TO CLOSE THE GAPS

The 1995-1998 Financial Plan reflects a program of proposed actions by the
City, State and Federal governments to close the gaps between projected revenues
and expenditures of $2.7 billion, $3.2 billion and $3.8 billion for the 1996,
1997 and 1998 fiscal years, respectively.

City gap-closing actions, a substantial number of which are unspecified,
include additional spending reductions, the reduction of City personnel through
attrition, government efficiency initiatives, procurement initiatives and labor
productivity initiatives. Certain of these initiatives may be subject to
negotiation with the City's municipal unions.

B-15
<PAGE> 481

State actions proposed in the gap-closing program total $1.3 billion in the
1996 fiscal year. These actions include savings primarily from the proposed
State assumption of certain Medicaid costs.

The Federal actions proposed in the gap-closing program total $145 million in
increased Federal assistance in fiscal year 1996.

Various actions proposed in the Financial Plan, including the proposed
increase in State aid, are subject to approval by the Governor and the State
Legislature, and the proposed increase in Federal aid is subject to approval by
Congress and the President. State and Federal actions are uncertain and no
assurance can be given that such actions will in fact be taken or that the
savings that the City projects will result from these actions will be realized.
The State Legislature failed to approve a substantial portion of the proposed
State assumption of Medicaid costs in the last session. The Financial Plan
assumes that these proposals will be approved by the State Legislature during
the 1996 fiscal year and that the Federal government will increase its share of
funding for the Medicaid program. If these measures cannot be implemented, the
City will be required to take other actions to decrease expenditures or increase
revenues to maintain a balanced financial plan.

The City's projected budget gaps for the 1997 and 1998 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1996 budget are not taken into account in projecting the budget gaps
for the 1997 and 1998 fiscal years.

Although the City has maintained balanced budgets in each of its last fourteen
fiscal years, and is projected to achieve balanced operating results for the
1995 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.

From time to time, the Control Board staff, MAC, OSDC, the City Comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services. It is
reasonable to expect that such reports and statements will continue to be issued
and to engender public comment.

On March 7, 1995, the City Comptroller issued a report which concluded that
the budget gap for the 1996 fiscal year, before implementation of the
gap-closing actions proposed in the Financial Plan, may be between $338 million
and $538 million greater than set forth in the Financial Plan. The increase in
the budget gap identified in the report is primarily due to (i) a $39 million
shortfall in tax revenues beyond that projected in the Financial Plan; (ii)
increased overtime costs of $128 million; (iii) health insurance expenditures
which may exceed those projected in the Financial Plan by $149 million, due to
uncertainties as to projected savings to be negotiated with municipal unions;
and (iv) pension costs which could be $200 million greater than assumed in the
Financial Plan as a result of the implementation of the recommendations of a
recently completed actuarial audit of the City's pension systems.

With respect to the 1996 fiscal year, the City Comptroller identified
uncertainties of between $1.5 billion and $2.1 billion in the gap-closing
program in the 1996 fiscal year. The risks for the 1996 fiscal year included
uncertainties concerning increased Federal aid and proposed reduction in City
expenditures for health care costs, approval by the State Legislature of certain
measures and $600 million in labor initiatives to be negotiated with the City's
labor unions, in addition to a number of the uncertain proposals identified as
substantial risks for the 1995 fiscal year.

B-16
<PAGE> 482

In February 1995, the City Comptroller issued a report on the City's Financial
Plan. The City Comptroller stated that there were substantial risks for the 1995
fiscal year totaling $218 million, including risks with respect to a possible
$67 million in overtime costs in excess of budget; possible increased public
assistance costs of $10 billion; possible additional payments of the City's
share of HHC Medicaid totaling $51 million; and possible additional payments by
the City to the Board of Education, totalling $90 million.

In early December, 1994, the City Comptroller issued a subsequent report which
concluded that the risks for the 1995 fiscal year had increased from $408
million to $453 million, as a result of the termination of negotiations between
the City and the Port Authority regarding renegotiation of the terms of certain
Port Authority leases. In addition, the City Comptroller noted that the City is
currently seeking to develop and implement plans which will satisfy the Federal
Environmental Protection Agency that the water supplied by the City watershed
areas does not need to be filtered. The City Comptroller noted that, if the City
is ordered to build filtration plants, they could cost as much as $4.57 billion
to construct, with annual debt service and operating costs of more than $500
million, leading to a water rate increase of 45%.

On January 17, 1995, the City Comptroller issued a report which concluded that
the risks for the 1995 fiscal year had increased from $453 million to $658
million, primarily as a result of lower than projected tax revenues totaling
$400 million, partially offset by the anticipated receipt of an additional $100
million of revenues from the refund by the Internal Revenue Service of social
security overpayments by the City in the 1995 fiscal year. The report stated
that the shortfall in tax revenue collections is explained largely by weaknesses
in the banking industry and the securities sector, which have been hurt by the
tight monetary policies of the Federal Reserve Board which have resulted in
losses from bond trading operations, layoffs and lower year-end bonuses. The
report stated that this shortfall may increase if total returns in the financial
sector do not improve in the first half of the 1995 calendar year.

On December 16, 1994, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be greatly reduced
in future years due to the decline in value of taxable real property. The report
noted that, under the State constitution, the City is permitted to issue debt in
an amount not greater than 10% of the average full value of taxable real estate
for the current year and previous year, that the latest estimates produced by
the State Board of Equalization and Assessment relating to the full value of
real property, using data from a 1992 survey, indicate a 19% decline in the
market value of taxable real property from the previous survey in 1990, and that
the State Board has decided to use a projected annual growth rate of 8.84%, as
compared to its previous projection of 14% for estimating full value after 1992.
The report concludes that the City will be within the projected legal debt
incurring limit in the 1996 fiscal year. However, the report concluded that
based on the most likely forecast of full value of real property, the debt
incurring power of the City would be curtailed in the 1997 and 1998 fiscal years
substantially. The City Comptroller recommended, among other things
prioritization of capital projects to determine which can be delayed or
cancelled, and better maintenance of the City's physical plant and
infrastructure, which would result in less capital spending for repair and
replacement of capital structures.

On December 27, 1994, the City Comptroller issued a report on the City's
economy which noted that the City's economic recovery had slowed in the third
quarter of the 1994 calendar year and concluded that the City's economy is still
very weak and the local recovery is very fragile. The report noted that the
indications of weakness in the City's economy include slower growth in payroll
employment and retail sales in the third quarter, as well as softness in the
Manhattan commercial real estate market. The report also noted that the tight
monetary policies implemented by the Federal Reserve Bank since February to curb
inflationary pressures were particularly harmful to interest rate sensitive and
cyclical sectors, such as retailing, the securities industry, banking and
manufacturing and that the City's service-driven economy has not benefited from
the national recovery, which was largely driven by interest rate sensitive
sectors of housing, capital goods and consumer durable goods. The report noted
that the slow-down in economic activity is expected to continue in the fourth
quarter of 1994, with more cutbacks in local governments and additional layoffs
in the financial sector, which will offset new hiring in other areas and result
in a slow growth in the 1995 calendar year.

On February 28, 1995, OSDC issued a report reviewing the Financial Plan
relating to the 1995 fiscal year, with additional comments on the 1996 fiscal
year. The report concluded that a budget gap of $41 million exists for the 1995
fiscal year, due primarily to a possible increase in City-funded Medicaid
payments to HHC and

B-17
<PAGE> 483

noted that the $150 million general reserve shown in the Financial Plan is more
than adequate to offset this problem. The report also identified potential risks
for the 1995 fiscal year totaling, net of offsets, $297 million, including
overspending at BOE; uncertainty concerning projected additional State
assistance to BOE and HHC; and the purchase by the State of two City jails,
which requires the approval of the State Legislature. In addition, the report
pointed out the uncertain impact on the City and HHC of the State budget for the
State's 1996 fiscal year to be adopted in April 1995, and expressed concern
about the City's increasing reliance on one-time resources to support recurring
expenses. With respect to the 1996 fiscal year, the report noted that the
City-projected $2.7 billion budget gap for the 1996 fiscal year representing 13%
of City-fund revenues is the largest budget gap, both in absolute terms and on a
percentage basis, which has been projected for the next succeeding fiscal year
at this stage of the budget planning process for the last 15 years. The OSDC
report noted that the most of the resources anticipated in the gap-closing
program require the cooperation of the Federal or State governments, or
municipal unions, and that it is likely that a number of the initiatives,
including those that seek to reduce expenditures for entitlement programs, could
be the subject of litigation which might delay any proposed savings for the
City. For these reasons, the report urged the City to prepare and make public
detailed contingency plans that are within its control to implement. The report
also expressed concern about the impact of the gap-closing program on education
and health care services and the City's economy.

On December 8, 1994, the staff of the Control Board issued a report on the
Financial Plan. In its report the staff concluded that the City faced risks of
more than $513 million in the 1995 fiscal year. The staff noted that tax
receipts are stagnant, primarily because of a further contraction in the
property tax and sluggish growth in the non-property taxes, related to erosion
of profits in the securities industry, and that there are substantial risks for
the 1995 fiscal year with respect to possible increased overtime and City
Medicaid payments to HHC, shortfalls in parking fine collections, the projected
refund of social security payments, a proposed asset sale, the renegotiation of
certain Port Authority leases and possible additional expenditures at BOE. In
addition, the staff indicated that there are risks of $2.0 billion, $2.6 billion
and $3.1 billion for the 1996, 1997 and 1998 fiscal years, respectively. Risks
for the 1996 through 1998 fiscal years include the potential for increased
overtime and lower non-property tax revenues, increased spending for City
Medicaid payments to HHC, additional expenditures at BOE, uncertainties
concerning the proposed reduction in City expenditures for health care costs,
the anticipated revenues from renegotiation of the terms of certain Port
Authority leases, savings resulting from the proposed tort reform program to
limit damage claims against the City, and increased Federal aid for Medicaid.
The report noted that the City faced additional risks with respect to its
assumptions regarding pension costs, a reduced subsidy to the Transit Authority,
social services savings and the cost of wages. The staff noted that it is
imperative that the City Council and the Mayor work together to ensure that the
actions taken for the 1995 fiscal year are recurring and help reduce the $2
billion gap for the 1996 fiscal year, and that a cooperative effort is necessary
if the City is to solve its structural budget problems and bring stability to
the delivery of services to its residents.

On March 23, 1994, the staff of the Control Board issued its report on the
current Financial Plan. The report states that, while the Financial Plan moves
the City in the direction of structural balance, it has more risks and fewer
details than are desirable. With respect to the 1994 fiscal year, the report
concludes that the budget is reliably balanced. However, for the 1995 fiscal
year, the report notes that decisions will have to be made in the next
modification to the Financial Plan in April 1994 whether to include in the
Financial Plan for the 1995 fiscal year certain proposed additional revenues and
savings, which are outside the Mayor's direct control and which require the
support of third parties.

Although the City has maintained balanced budgets in each of its last thirteen
fiscal years, and is projected to achieve balanced operating results for the
1994 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1994-97 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.

Collective Bargaining Agreements. Nearly all of the City's collective
bargaining agreements with the large municipal unions representing civilian and
uniformed employees expired some time during the 1992 fiscal year. On January
11, 1993, the City announced a settlement with a coalition of municipal unions,
including

B-18
<PAGE> 484

Local 237 of the International Brotherhood of Teamsters ("Local 237"), District
Council 37 of the American Federation of State, County and Municipal Employees
("District Council 37") and other unions covering approximately 44% of the
City's workforce. The settlement, which has been ratified by the unions,
includes a total net expenditure increase of 8.25% over a 39-month period,
ending March 31, 1995 for most of these employees. On April 9, 1993 the City
announced an agreement with the Uniformed Fire Officers Association (the "UFOA")
which is consistent with the coalition agreement and which has been ratified. On
August 30, 1993, the BOE and the City announced an agreement with the United
Federation of Teachers ("UFT"). The agreement, which has been ratified by the
UFT members, is generally consistent with the coalition agreement. However,
while the coalition agreement covers a period of 39 months, the UFT agreement is
for 48 1/2 months. The Financial Plan reflects the costs for all City-funded
employees associated with these settlements and provides for similar increases
for all other City-funded employees. Additional expenditures aggregating $42
million for fiscal year 1995 and $79 million for each year thereafter have been
added to the Financial Plan to provide funding for the additional 9 1/2 months
provided for under the UFT agreement. Subsequently, the City has reached
agreement with all except four of its major bargaining units under terms which
are generally consistent with the coalition agreement. The City is presently
bargaining with the Correction Officers' Benevolent Association ("COBA") and the
Sanitation Officers' Association ("SOA"). In addition, the Transit Police
Benevolent Association's ("TPBA") delegate body rejected a tentative settlement
with the City. The contract dispute is currently being arbitrated before the
State's Public Employment Relations Board. Moreover, a contract dispute between
the City and the Licensed Practical Nurses ("LPN's") is currently in arbitration
before the City's Office of Collective Bargaining ("OCB").

The Financial Plan provides no additional wage increases for City employees
after their contracts expire in the 1995 and 1996 fiscal years. Each 1% wage
increase for all employees commencing in the 1995 and 1996 fiscal years would
cost the City an additional $28 million for the 1995 fiscal year, $140 million
for the 1996 fiscal year and $150 million each year thereafter above the amounts
provided for in the Financial Plan.

In the event of a collective bargaining impasse, the terms of wage settlements
could be determined through the impasse procedure in the New York City
Collective Bargaining Law, which can impose a binding settlement.

Litigation. The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the City of the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out the 1994-97 Financial Plan. As of June 30, 1994, the
City estimated its potential future liability on account of all outstanding
claims to be approximately $2.6 billion.

Outstanding Indebtedness. As of September 30, 1994, the City had $21.218
billion of outstanding net long-term indebtedness. As of September 30, 1994, MAC
had $4.146 billion of outstanding net long-term indebtedness.

Ratings. As of June 28, 1993, Moody's rated the City's general obligation
bonds Baa1 and S&P rated such bonds A-. On January 17, 1995, S&P placed the
City's General Obligation Bonds on CreditWatch with negative implications. Such
ratings reflect only the views of Moody's and S&P, from which an explanation of
the significance of such ratings may be obtained. There is no assurance that
such ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of the City's bonds.

STRATEGIC TRANSACTIONS

B-19
<PAGE> 485

B-20
<PAGE> 486

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.

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 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

B-21
<PAGE> 487

OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to the Fund's limitation on investing no
more than 15% of its assets in illiquid securities.

B-22
<PAGE> 488

money amount may be excluded in calculating the 5% limitation. Certain state
securities laws to which the Fund may be subject may further restrict the Fund's
ability to engage in transactions in futures contracts and related options. The
segregation requirements with respect to futures contracts and options thereon
are described below.

B-23
<PAGE> 489

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.

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.

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

B-24
<PAGE> 490

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 as having predominantly
B speculative characteristics 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.

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.
</TABLE>

B-25
<PAGE> 491

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 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.

B-26
<PAGE> 492

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

Satisfactory capacity to pay principal and interest, with some vulnerability to
SP-2 adverse financial and economic changes over the term of the notes.