VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, N14EL24, 1997-09-23

VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
N14EL24, 1997-09-23

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997

1933 ACT REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM N-14

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ____ [ ]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]

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

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)

TELEPHONE NUMBER: (630) 684-6000

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

<TABLE>
<C> <C>
RONALD A. NYBERG, ESQ. COPIES TO:
EXECUTIVE VICE PRESIDENT, WAYNE W. WHALEN, ESQ.
GENERAL COUNSEL AND SECRETARY THOMAS A. HALE, ESQ.
VAN KAMPEN AMERICAN CAPITAL, INC. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
ONE PARKVIEW PLAZA 333 WEST WACKER
OAKBROOK TERRACE, ILLINOIS 60181 CHICAGO, ILLINOIS 60606
(Name and Address of Agent for Service)
</TABLE>

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

PURSUANT TO THE PROVISIONS OF RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940, REGISTRANT HAS ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES AND
INTENDS TO FILE A FORM 24F-2 WITH THE COMMISSION FOR ITS FISCAL YEAR ENDING
DECEMBER 31, 1997 ON OR BEFORE MARCH 31, 1998. THEREFORE, NO FILING FEE IS DUE
AT THIS TIME.
================================================================================
<PAGE> 2

EXPLANATORY NOTE

This Registration Statement contains one Prospectus/Proxy Statement and one
Statement of Additional Information relating to one of the twelve series of the
Registrant: Van Kampen American Capital Municipal Income Fund. This Registration
Statement is organized as follows:

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

-- Questions and Answers to Shareholders of Van Kampen American Capital New
Jersey Tax Free Income Fund

-- Letter to Shareholders of Van Kampen American Capital New Jersey Tax
Free Income Fund

-- Notice of Special Meeting of Shareholders of Van Kampen American Capital
New Jersey Tax Free Income Fund

-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen American Capital New Jersey Tax Free Income Fund into Van Kampen
American Capital Municipal Income Fund

-- Prospectus of Van Kampen American Capital Municipal Income Fund

-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen American Capital New Jersey Tax Free Income
Fund into Van Kampen American Capital Municipal Income Fund

-- Part C Information

-- Exhibits
<PAGE> 3

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY STATEMENT CAPTION*
- ---------- -------------------------------------
<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus/Proxy Statement........... Outside front cover page of
Prospectus/Proxy Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement......................... Outside back cover page of
Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of
Prospectus/Proxy Statement;
Summary; The Proposed
Reorganization; Other Information;
Exhibit A; Prospectus and Statement
of Additional Information of the
Municipal Fund (incorporated by
reference)
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A; Prospectus and
Statement of Additional Information
of the New Jersey Fund
(incorporated by reference)
Item 7. Voting Information................................... Other Information; Voting Information
and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the
Municipal Fund; Incorporation of
Documents by Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the New
Jersey Fund; Incorporation of
Documents by Reference
Item 14. Financial Statements................................. Financial Statements; Incorporation
of Documents by Reference
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>

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

* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
OCTOBER 1997
IMPORTANT NOTICE
TO VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME
FUND SHAREHOLDERS

QUESTIONS & ANSWERS

ALTHOUGH WE RECOMMEND THAT YOU READ THE COMPLETE PROSPECTUS/PROXY STATEMENT,FOR
YOUR CONVENIENCE, WE HAVE PROVIDED A BRIEF OVERVIEW OF THE ISSUES TO BE VOTED
ON.

Q WHY IS A SHAREHOLDER MEETING BEING HELD?

A You are being asked to vote on a reorganization (the "Reorganization") of
Van Kampen American Capital New Jersey Tax Free Income Fund (the "New Jersey
Fund") into Van Kampen American Capital Municipal Income Fund (the "Municipal
Fund"), a fund that pursues a similar investment objective.

Q WHY IS THE REORGANIZATION BEING RECOMMENDED?

A The purpose of the proposed Reorganization is to permit the shareholders of
the New Jersey Fund to (i) achieve certain economies of scale from the
Municipal Fund's larger net asset size and the potentially lower operating
expenses associated therewith, (ii) eliminate the duplication of services and
expenses that currently exists as a result of the separate operations of the
funds and (iii) obtain potentially greater portfolio diversity and potentially
lower portfolio transaction costs.

Q HOW WILL THE REORGANIZATION AFFECT ME?

A Assuming shareholders of the New Jersey Fund approve the Reorganization, the
assets and liabilities of the New Jersey Fund will be combined with those of
the Municipal Fund, and you will become a shareholder of the Municipal Fund.
You will receive shares of the Municipal Fund equal in value at the time of
issuance to your shares of the New Jersey Fund. Holders of Class A shares of
the New Jersey Fund will receive Class A shares of the Municipal Fund; holders
of Class B shares of the New Jersey Fund will receive Class B shares of the
Municipal Fund; and holders of Class C shares of the New Jersey Fund will
receive Class C shares of the Municipal Fund.

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

A You will pay no sales loads or commissions in connection with the
Reorganization. The costs associated with the proposed Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the Adviser. As more fully discussed in

<PAGE> 5

the combined Prospectus/Proxy Statement, the holding period with respect to the
contingent deferred sales charge applicable to Class B shares or Class C shares
of the Municipal Fund acquired in the Reorganization will be measured from the
earlier of the time (i) the holder purchased such Class B shares or Class C
shares from the New Jersey Fund or (ii) the holder purchased Class B shares or
Class C shares of any other Van Kampen American Capital fund and subsequently
exchanged them for shares of the New Jersey Fund.

Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE MUNICIPAL FUND COMPARE
TO THOSE PAYABLE BY THE NEW JERSEY FUND?

A Management of the funds anticipates that, as a result of the Reorganization,
shareholders of the New Jersey Fund would be subject to lower investment
advisory fees and lower total operating expenses as a percentage of net assets.
The contractual advisory fees payable by the Municipal Fund are less than the
contractual advisory fees applicable to the New Jersey Fund. The advisory fees
and other operating expenses of the New Jersey Fund are currently less than
those of the Municipal Fund but only because of voluntary expense waivers or
reimbursements from the Adviser. There can be no assurance that the such
waivers or reimbursements will continue for the New Jersey Fund if the
Reorganization is not completed.

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

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

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

A The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986. If the
Reorganization so qualifies, in general, a shareholder of the New Jersey Fund
will recognize no gain or loss upon the receipt solely of the shares of the
Municipal Fund in connection with the Reorganization. Additionally, the New
Jersey Fund would not recognize any gain or loss as a result of the transfer of
all of its assets and liabilities solely in exchange for the shares of the
Municipal Fund or as a result of its liquidation.

<PAGE> 6

Q WHO ADVISES THE MUNICIPAL FUND AND PROVIDES OTHER SERVICES?

A Van Kampen American Capital Investment Advisory Corp. (the "Adviser") acts
as investment adviser to both the Municipal Fund and the New Jersey Fund. The
Adviser provides advisory services to the Municipal Fund under an arrangement
that is substantially similar to that currently in effect between the New
Jersey Fund and the Adviser.

The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. ("VKAC"). Van Kampen American Capital Distributors, Inc.
serves as distributor of shares of both the Municipal Fund and the New Jersey
Fund. In addition, State Street Bank & Trust Company serves as the custodian of
both the Municipal Fund and the New Jersey Fund. ACCESS Investor Services, Inc.
serves as the transfer agent for both the Municipal Fund and the New Jersey
Fund.

Q WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE NEW JERSEY FUND BEFORE THE
REORGANIZATION TAKES PLACE?

A If you choose to redeem or exchange your shares of the New Jersey Fund
before the Reorganization takes place, the redemption or exchange will be
treated as a normal redemption or exchange of shares and generally will be a
taxable transaction

Q WHERE DO I CALL FOR FURTHER INFORMATION?

A Please call Investor Services at 1-800-341-2911 (Telecommunications Device
for the Deaf users may call 1-800-772-8889) weekdays from 7:00 a.m. to 7:00
p.m. Central time.

<PAGE> 7
ABOUT THE PROXY CARD

Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.

APPROVAL OF REORGANIZATION - mark "For", "Against" or "Abstain"

OTHER BUSINESS - mark "For", "Against" or "Abstain"

Sign, date and return the proxy card in the enclosed postage-paid envelope.
All registered owners of an account, as shown in the address, must sign the
card. When signing as attorney trustee, executor, administrator, custodian,
guardian or corporate officer, please indicate your full title.

- --------------------------------------------------------------------------------
SAMPLE

PROXY

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

1. FOR [ ] AGAINST [ ] ABSTAIN [ ] THE PROPOSAL APPROVE THE AGREEMENT AND
PLAN OF REORGANIZATION XXXXXXX

2. FOR [ ] AGAINST [ ] ABSTAIN [ ] TO ACT UPON ANY AND ALL OTHER BUSINESS
XXXXXXXXX

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

<PAGE> 8

DEAR VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND SHAREHOLDER:

Enclosed is a proxy asking you to vote on the reorganization of your New
Jersey Fund into the Van Kampen American Capital Municipal Income Fund, a mutual
fund that pursues a similar investment objective. Upon shareholder approval, you
would become a shareholder of the Municipal Fund.

The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the
reorganization, please refer to the Prospectus/Proxy Statement.

The proposal has been approved by the Trustees of the New Jersey Fund, who
recommend you vote "FOR" the proposal. Please give this matter your prompt
attention. We will need to receive your proxy card before the shareholder
meeting scheduled for December 4, 1997. YOUR IMMEDIATE RESPONSE WILL HELP SAVE
ON THE COSTS OF ADDITIONAL SOLICITATIONS. We look forward to your participation,
and we thank you for your continued confidence in Van Kampen American Capital.

PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

Sincerely,

Dennis J. McDonnell
President
<PAGE> 9

VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666

NOTICE OF SPECIAL MEETING
DECEMBER 4, 1997

A Special Meeting of shareholders of Van Kampen American Capital New Jersey
Tax Free Income Fund (the "New Jersey Fund") will be held at the offices of Van
Kampen American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
60181, on December 4, 1997 at 1:30 p.m. (the "Special Meeting"), for the
following purposes:

(1) To approve an Agreement and Plan of Reorganization pursuant to which the
New Jersey Fund would (i) transfer all of its assets to the Van Kampen
American Capital Municipal Income Fund (the "Municipal Fund") in exchange
solely for Class A, B and C shares of beneficial interest of the Municipal
Fund and the Municipal Fund's assumption of the liabilities of the New Jersey
Fund, (ii) distribute such shares of the Municipal Fund to the holders of
shares of the New Jersey Fund and (iii) be dissolved.

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

Shareholders of record as of the close of business on October 21, 1997 are
entitled to vote at the Special Meeting or any adjournment thereof.

For the Board of Trustees,

Ronald A. Nyberg
Secretary

October , 1997

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

PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 10

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

SUBJECT TO COMPLETION -- DATED SEPTEMBER 23, 1997
PROSPECTUS/PROXY STATEMENT

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF

VAN KAMPEN AMERICAN CAPITAL

NEW JERSEY TAX FREE INCOME FUND

This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen American Capital New Jersey Tax Free Income Fund (the "New Jersey Fund")
and relates to the special meeting of shareholders of the New Jersey Fund to be
held at the offices of Van Kampen American Capital, Inc., One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 on December 4, 1997 at 1:30 p.m. and at any and
all adjournments thereof (the "Special Meeting"). Shareholders of record as of
the close of business on October 21, 1997 are entitled to vote at the Special
Meeting or any adjournment thereof. The purpose of the Special Meeting is to
approve or disapprove the proposed reorganization of the New Jersey Fund (the
"Reorganization") into the Van Kampen American Capital Municipal Income Fund
(the "Municipal Fund"). The Reorganization would result in shareholders of the
New Jersey Fund in effect exchanging their Class A, B and C shares of the New
Jersey Fund for corresponding Class A, B and C shares of the Municipal Fund. The
purpose of the Reorganization is to permit the shareholders of the New Jersey
Fund to (i) achieve certain economies of scale from the Municipal Fund's larger
net asset size and the potentially lower operating expenses associated
therewith, (ii) eliminate the duplication of services and expenses that
currently exists as a result of the separate operations of the funds and (iii)
obtain greater portfolio diversity and potentially lower portfolio transaction
costs.

The Municipal Fund is a series of the Van Kampen American Capital Tax Free
Trust, an open-end management investment company organized as a Delaware
business trust (the "Tax Free Trust"). The investment objective of the Municipal
Fund is to provide investors with a high level of current income exempt from
federal income tax consistent with preservation of capital, which is similar to
that of the New Jersey Fund, which is also a series of Tax Free Trust. There can
be no assurance that the Municipal Fund will achieve its investment objective.
The address, principal executive office and telephone number of both the
Municipal Fund and the New Jersey Fund is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, (630) 684-6000 or (800) 421-5666. The enclosed proxy and this
Prospectus/Proxy Statement are first being sent to New Jersey Fund shareholders
on or about October , 1997.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/ PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

---------------------
<PAGE> 11

This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the New Jersey Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the Municipal
Fund) and constitutes an offering of Class A, B and C shares of beneficial
interest, par value $.01 per share, of the Municipal Fund only. Please read it
carefully and retain it for future reference. A Statement of Additional
Information dated October , 1997, relating to this Prospectus/Proxy Statement
(the "Reorganization SAI") has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated herein by reference. A Prospectus
(the "Municipal Fund Prospectus") and Statement of Additional Information
containing additional information about the Municipal Fund, each dated April 30,
1996 (and as currently supplemented), have been filed with the SEC and are
incorporated herein by reference. A copy of the Municipal Fund Prospectus
accompanies this Prospectus/Proxy Statement. A Prospectus (the "New Jersey Fund
Prospectus") and Statement of Additional Information containing additional
information about the New Jersey Fund, each dated April 30, 1996 (and as
currently supplemented), have been filed with the SEC and are incorporated
herein by reference. Copies of the foregoing may be obtained without charge by
calling or writing the Municipal Fund or the New Jersey Fund at the telephone
number or address shown above. If you wish to request the Reorganization SAI,
please ask for the "Reorganization SAI." IN ADDITION, EACH OF THE MUNICIPAL FUND
AND THE NEW JERSEY FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT
ANNUAL REPORT AND SUBSEQUENT SEMI-ANNUAL REPORT TO A SHAREHOLDER UPON REQUEST.
ANY SUCH REQUEST SHOULD BE DIRECTED TO THE VAN KAMPEN AMERICAN CAPITAL FUNDS BY
CALLING (800) 421-5666 OR BY WRITING THE RESPECTIVE FUND AT ONE PARKVIEW PLAZA,
OAKBROOK TERRACE, ILLINOIS 60181.
---------------------

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

The Tax Free Trust on behalf of the Municipal Fund and the New Jersey Fund is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the Investment Company Act of 1940, as amended (the "1940
Act"), and in accordance therewith files reports and other information with the
SEC. Such reports, other information and proxy statements filed by the Tax Free
Trust on behalf of the Municipal Fund and the New Jersey Fund can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 500 West
Madison Street, Chicago, Illinois. Copies of such material can also be obtained
from the SEC's Public Reference Branch, Office of Consumer Affairs and
Information Services, Washington, D.C. 20549, at prescribed rates. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains reports, other
information and proxy statements filed by the Tax Free Trust on behalf of the
Municipal Fund and the New Jersey Fund, such information is filed electronically
with the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval
system (EDGAR).

The date of this Prospectus/Proxy Statement is October , 1997.

2
<PAGE> 12

THE PROPOSED REORGANIZATION

A. SUMMARY

The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Trustees of the Tax Free Trust (the "Board") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the New Jersey Fund. As a result of the Reorganization, shareholders of the New
Jersey Fund would acquire an interest in the Municipal Fund

Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the New Jersey Fund Prospectus incorporated herein by
reference and (ii) the Municipal Fund Prospectus incorporated herein by
reference and accompanying this Prospectus/Proxy Statement. This
Prospectus/Proxy Statement constitutes an offering of Class A, B and C shares of
the Municipal Fund only.

THE REORGANIZATION

This Prospectus/Proxy Statement is being furnished to shareholders of the New
Jersey Fund in connection with the proposed combination of the New Jersey Fund
with and into the Municipal Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization between the New Jersey Fund and the
Municipal Fund (the "Agreement"). The Agreement provides that the New Jersey
Fund would (i) transfer all of its assets to the Municipal Fund in exchange
solely for Class A, B and C shares of the Municipal Fund and the Municipal
Fund's assumption of the liabilities of the New Jersey Fund, (ii) dissolve
pursuant to a plan of liquidation and dissolution to be adopted by the Board
promptly following the Closing (as defined herein) and (iii) as part of such
dissolution, distribute to each shareholder of the New Jersey Fund shares of the
respective class of shares of the Municipal Fund equal in value to their
existing shares of the New Jersey Fund (collectively, the "Reorganization").

The Board has determined that the Reorganization is in the best interests of
shareholders of each class of shares of the New Jersey Fund and that the
interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board has determined that the Reorganization is
in the best interests of the Municipal Fund and that the interests of each class
of shares of existing shareholders of the Municipal Fund will not be diluted as
a result of the Reorganization. The Board unanimously approved the
Reorganization and the Agreement on July 25, 1996.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser"), the
investment adviser of both the Municipal Fund and the New Jersey Fund, will bear

3
<PAGE> 13

all of the costs associated with seeking the proposed Reorganization. See "THE
PROPOSED REORGANIZATION -- Expenses" below.

The Board is asking shareholders of the New Jersey Fund to approve the
Reorganization at the Special Meeting to be held on December 4, 1997. If
shareholders of the New Jersey Fund approve the Reorganization, it is expected
that the Closing will be after the close of business on December 5, 1997, but it
may be at a different time as described herein.

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

REASONS FOR THE PROPOSED REORGANIZATION

The Board believes that the proposed Reorganization would be in the best
interests of the shareholders of the New Jersey Fund because it would permit the
shareholders of the New Jersey Fund to (i) achieve certain economics of scale
from the Municipal Fund's larger net asset size and the potentially lower
operating expenses associated therewith, (ii) eliminate the duplication of
services and expenses that currently exists as a result of the separate
operations of the funds, and (iii) obtain greater portfolio diversity and
potentially lower portfolio transaction costs.

In determining whether to recommend approval of the Reorganization to
shareholders of the New Jersey Fund, the Board considered a number of factors,
including, but not limited to: (i) the capabilities and resources of the Adviser
and other service providers to the Municipal Fund in the areas of marketing,
investment and shareholder services; (ii) the expenses and advisory fees
applicable to the New Jersey Fund and the Municipal Fund before the
Reorganization and the estimated expense ratios of the Municipal Fund after the
Reorganization; (iii) the comparative investment performance of the New Jersey
Fund and the Municipal Fund; (iv) the terms and conditions of the Agreement and
whether the Reorganization would result in dilution of New Jersey Fund
shareholder interests; (v) the advantages of eliminating duplication of effort
in marketing funds having similar investment objectives in addition to the
economies of scale potentially realized through the combination of the two
funds; (vi) the compatibility of the funds' investment objectives; (vii) the
compatibility of the funds' service features available to shareholders,
including the retention of applicable holding periods and exchange privileges;
(viii) the costs estimated to be incurred by the respective funds as a result of
the Reorganization; (ix) the future growth prospects of the New Jersey Fund; and
(x) the anticipated tax consequences of the Reorganization including differences
in state tax treatment of Municipal Fund and New Jersey Fund distributions.

4
<PAGE> 14

In this regard, the Board reviewed information provided by the Adviser and Van
Kampen American Capital, Inc., the parent corporation of the Adviser ("VKAC"),
relating to the anticipated impact to the shareholders of the New Jersey Fund as
a result of the Reorganization. The Board considered the probability that the
elimination of duplicative operations and the increase in asset levels of the
combined fund after the Reorganization would result in the following potential
benefits for shareholders of the New Jersey Fund, although there can, of course,
be no assurances in this regard:

(1) Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the net assets of the New Jersey Fund with the assets of the
Municipal Fund should lead to reduced total operating expenses for
shareholders of the New Jersey Fund, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. The Municipal Fund also
pays lower investment advisory fees than the New Jersey Fund when no
expense waivers or reimbursements are in effect. Any reductions in
expenses on a per share basis should, in turn, have a favorable effect on
the relative total return to shareholders of the New Jersey Fund. The
advisory fees and other operating expenses of the New Jersey Fund are
currently less than those of the Municipal Fund but only because of such
voluntary fee and expense waivers or reimbursements from the Adviser.
There can be no assurance that such waivers or reimbursements will
continue for the New Jersey Fund if the Reorganization is not completed.
Management anticipates that the reorganization would have no or only a de
minimis effect upon current shareholders of the Municipal Fund.

(2) Elimination of Separate Operations. Consolidating the New Jersey Fund and
the Municipal Fund should eliminate the duplication of services and
expenses that currently exists as a result of their separate operations.
Consolidating the separate operations of the New Jersey Fund with those of
the Municipal Fund should promote more efficient operations on a more
cost-effective basis.

(3) Benefits to the Portfolio Management Process. The larger net asset size
of the Municipal Fund generally permits it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing and provide the opportunity for greater portfolio
diversity.

Based upon these and other factors, the Board unanimously determined that the
Reorganization is in the best interests of the shareholders of the New Jersey
Fund.

5
<PAGE> 15

COMPARISON OF THE MUNICIPAL FUND AND THE NEW JERSEY FUND

INVESTMENT OBJECTIVES. The Municipal Fund and the New Jersey Fund have similar
investment objectives. The investment objective of the Municipal Fund is to
provide a high level of current income exempt from federal income tax,
consistent with preservation of capital. The investment objective of the New
Jersey 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 primary difference between the two investment objectives is that
the New Jersey Fund seeks income exempt from New Jersey gross income tax, but
the Municipal Fund does not. The Board, however, believes that the benefits to
the New Jersey Fund shareholders from the Reorganization, including the
potentially lower operating costs and potentially higher distributions from the
Municipal Fund relative to the New Jersey Fund, may over time offset the loss of
the exemption from New Jersey gross income tax. As of June 30, 1997, the yield
was 4.74% for Class A shares of the Municipal Fund and 5.09% for the Class A
shares of the New Jersey Fund, and the tax equivalent distribution rate was
8.20% for Class A shares of the Municipal Fund and 8.25% for Class A shares of
the New Jersey Fund. In the absence of expense reimbursement, the yield would
have been 3.51% for the Class A shares of the New Jersey Fund and its income
available for distribution would have been reduced.

INVESTMENT POLICIES. The Municipal Fund and the New Jersey Fund have similar
investment policies insofar as each fund seeks to achieve its investment
objective under normal market conditions by investing at least 80% of its assets
in a portfolio of tax-exempt municipal securities, all or substantially all of
which are rated, at the time of investment, BBB or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). Each of the Municipal Fund and the New Jersey Fund may invest up to
20% of its total assets in tax-exempt municipal securities rated below
investment grade (but not lower than B- by S&P or B3 by Moody's). A comparison
of the credit quality of the respective portfolios of the Municipal Fund and the
New Jersey Fund, as of June 30, 1997, is set forth in the table below.

6
<PAGE> 16

CREDIT QUALITY
(AS OF JUNE 30, 1997)

<TABLE>
<CAPTION>
MUNICIPAL FUND NEW JERSEY FUND
-------------------------------- --------------------------------
RATED UNRATED AT RATED UNRATED AT
CREDIT RATING SECURITIES COMPARABLE QUALITY SECURITIES COMPARABLE QUALITY
------------- ---------- ------------------ ---------- ------------------
<S> <C> <C> <C> <C>
Aaa/AAA.............. 39.6% 2.0 71.6% 0
Aa/AA................ 10.3% 0.6 7.2% 0
A/A.................. 11.8% 0.7 4.3% 2.4%
Baa/BBB.............. 15.3% 5.6 13.3% 1.2%
Ba/BB................ 1.3% 8.9 0 0
B/B.................. 0 3.3 0 0
Caa/CCC.............. 0 0 0 0
Ca/CC................ 0 0 0 0
C/C.................. 0 0.6 0 0
---- ---- ---- ---
TOTAL........ 78.3% 21.7% 96.4% 3.6%
==== ==== ==== ===
</TABLE>

The New Jersey Fund and the Municipal Fund have different policies with
respect to diversification. The New Jersey Fund is a non-diversified investment
company. The Municipal Fund is a diversified investment company. A non-
diversified investment company such as the New Jersey Fund may invest a higher
percentage of its assets in relatively fewer issuers than a diversified
investment company such as the Municipal Fund.

The New Jersey Fund and the Municipal Fund also have different policies with
respect to concentration. The New Jersey Fund generally invests at least 80% of
its total assets in New Jersey municipal securities. The Municipal Fund
generally does not invest more than 25% of its total assets in securities of
issuers located in any one state.

The Municipal Fund may invest a substantial portion of its assets in
securities that are subject to the alternative minimum tax, while the New Jersey
Fund may only invest up to 20% of its assets in such securities. The Municipal
Fund may not be a suitable investment for shareholders of the New Jersey Fund
subject to the alternative minimum tax.

Each of the New Jersey Fund and the Municipal Fund has the ability to purchase
and sell securities on a "when issued" and "delayed delivery" basis and to
borrow amounts up to 5% of its net assets in order to pay for redemptions and
pledge up to 10% of its net assets to process such borrowings. Each of the New
Jersey Fund and the Municipal Fund may utilize options and futures and engage in
interest rate transactions such as swaps, caps, floors or collars. However,
current New Jersey tax

7
<PAGE> 17

law imposes certain limits on the New Jersey Fund's ability to enter into swaps,
caps, floors or collars.

Each of the Municipal Fund and the New Jersey Fund may invest up to 15% and up
to 20%, respectively, of its total assets in derivative variable rate municipal
securities such as inverse floaters, whose rates vary inversely with market
rates of interest, or range or capped floaters, whose rates are subject to
periodic lifetime caps. Such municipal securities may, by their terms, have
economic characteristics comparable to, among other things, a swap, cap, floor
or collar transaction for a period of time prior to the municipal security's
stated maturity.

INVESTMENT ADVISER. The Municipal Fund and the New Jersey Fund are both
managed by the Adviser, which is a wholly-owned subsidiary of VKAC. VKAC is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $57 billion under management or supervision. Van Kampen American Capital's
more than 40 open-end and 38 closed-end funds and more than 2,500 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. Van Kampen American Capital Distributors, Inc. (the "Distributor"),
the distributor of both the Municipal Fund and the New Jersey Fund and the
sponsor of the funds mentioned above, is also a wholly-owned subsidiary of VKAC.
VKAC is an indirect wholly-owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including Morgan Stanley & Co. Incorporated, a
registered broker-dealer and investment adviser, and Morgan Stanley
International are engaged in a wide range of financial services. Their principal
businesses include securities underwriting, distribution and trading; merger,
acquisition, restructuring and other corporate finance advisory activities;
merchant banking; stock brokerage and research services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.

ADVISORY AND OTHER FEES. The contractual advisory fees and total operating
expenses of the Municipal Fund are lower than those of the New Jersey Fund. The
Municipal Fund pays the Adviser a monthly fee based on its average daily net
asset value at the annual rates of: 0.50% of the first $500 million of average
net assets and 0.45% of average net assets in excess of $500 million. As of June
30, 1997, the Municipal Fund's net assets were approximately $967.2 million and
the effective advisory fee on such assets was .47%. No expense reimbursements
were in effect with respect to the Municipal Fund at such time. For a complete
description of the Municipal Fund's advisory services, see the sections of the
Municipal Fund

8
<PAGE> 18

Prospectus and Statement of Additional Information entitled "Investment Advisory
Services" and "Investment Advisory and Other Services -- Investment Advisory
Agreement", respectively.

The New Jersey Fund pays the Adviser a monthly fee based on its average daily
net asset value at the annual rate of: 0.60% of the first $500 million of
average net assets and 0.50% of the average net assets in excess of $500
million. As of June 30, 1997, the New Jersey Fund's net assets were
approximately $18.3 million and the effective advisory fee on such assets was
0.00% (after expense reimbursement) and 0.60% (assuming no expense
reimbursement). For a complete description of the New Jersey Fund's advisory
services, see the sections of the New Jersey Fund Prospectus and Statement of
Additional Information entitled "Investment Advisory Services" and "Investment
Advisory and Other Services -- Investment Advisory Agreement", respectively.

The total operating expenses of the Municipal Fund for the six month period
ended June 30, 1997 (on an annualized basis) were .90%, 1.65% and 1.67% of the
average daily net assets attributable to Class A, B and C shares, respectively.
No expense reimbursements were in effect with respect to the Municipal Fund
during such period.

The total operating expenses (after expense reimbursement) of the New Jersey
Fund for the six month period ended June 30, 1997 (on an annualized basis) were
.15%, .91% and .91% of average daily net assets attributable to Class A, B and C
shares, respectively. In the absence of expense reimbursement, total operating
expenses of the New Jersey Fund would have been 1.72%, 2.47% and 2.47% with
respect to Class A, B and C shares, respectively, for that same period.

The advisory fees and other operating expenses of the New Jersey Fund are
currently less than that of the Municipal Fund but only because of voluntary
expense waivers or reimbursements from the Adviser. There can be no assurance
that such waivers or reimbursements will continue for the New Jersey Fund if the
Reorganization is not completed.

Both the Municipal Fund and the New Jersey Fund have adopted substantially
identical distribution plans (the "Distribution Plans") pursuant to Rule 12b-1
under the 1940 Act and have adopted substantially identical service agreements
or plans (the "Service Plans"). Both the Municipal Fund and the New Jersey Fund
can pay up to 0.75% of their respective average daily net assets attributable to
Class B and C shares for reimbursement of certain distribution-related expenses.
In addition, both the Municipal Fund and the New Jersey Fund can pay up to 0.25%
of the respective average daily net assets attributable to Class A, B and C
shares for the provision of ongoing services to shareholders. The distributor of
both the New Jersey Fund's shares and the Municipal Fund's shares is Van Kampen
American Capital Distributors, Inc. ("VKAC Distributors"). For a complete
description of

9
<PAGE> 19

these arrangements with respect to the Municipal Fund, see the section of the
Municipal Fund Prospectus entitled "The Distribution and Service Plans." For a
complete description of these arrangements with respect to the New Jersey Fund,
see the section of the New Jersey Fund Prospectus entitled "The Distribution and
Service Plans."

The table below sets forth (i) the fees and expenses paid by the Municipal
Fund and the New Jersey Fund during the six month period ended June 30, 1997 (on
an annualized basis) and (ii) pro forma expenses for the combined fund.

10
<PAGE> 20

EXPENSE COMPARISON TABLE

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------------------ ------------------------------ ------------------------------
NEW NEW NEW
MUNICIPAL JERSEY MUNICIPAL JERSEY MUNICIPAL JERSEY
FUND FUND PRO FORMA FUND FUND PRO FORMA FUND FUND PRO FORMA
--------- ------ --------- --------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchase of a Share (as a
percentage of Offering
Price)......................... 4.75%(1) 4.75% 4.75%(1) None None None None None None
Maximum Deferred Sales Charge
(as a percentage of the lower
of the original purchase price
or redemption proceeds)........ None None None 4.00%(3) 4.00%(3) 4.00%(3) 1.00%(4) 1.00%(4) 1.00%(4)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees................. 0.47% 0.00%(2) 0.47% 0.47% 0.00%(2) 0.47% 0.47% 0.00%(2) 0.47%
Rule 12b-1 Fees................. 0.25% 0.15%(2) 0.25% 1.00% 0.91%(2) 1.00% 1.00% 0.91%(2) 1.00%
Other Expenses.................. 0.18% 0.00%(2) 0.18% 0.18% 0.00%(2) 0.18% 0.20% 0.00%(2) 0.20%
Total Fund Operating Expenses... 0.90% 0.15%(2) 0.90% 1.65% 0.91%(2) 1.65% 1.67% 0.91%(2) 1.67%
Expense Example of Total
Operating Expenses Assuming
Redemption at the End of the
Period(5)
One Year....................... $ 56 $ 49 $ 56 $ 57 $ 49 $ 57 $ 27 $ 19 $ 27
Three Years.................... $ 75 $ 52 $ 75 $ 87 $ 64 $ 87 $ 53 $ 29 $ 53
Five Years..................... $ 95 $ 56 $ 95 $ 105 $ 65 $ 105 $ 91 $ 50 $ 91
Ten Years...................... $ 153 $ 66 $ 153 $ 175 $ 90 $ 175 $ 198 $ 112 $ 198
Expense Example of Total
Operating Expenses Assuming No
Redemption at the End of the
Period(5)
One Year....................... $ 56 $ 49 $ 56 $ 17 $ 9 $ 17 $ 17 $ 9 $ 17
Three Years.................... $ 75 $ 52 $ 75 $ 52 $ 29 $ 52 $ 53 $ 29 $ 53
Five Years..................... $ 95 $ 56 $ 95 $ 90 $ 50 $ 90 $ 91 $ 50 $ 91
Ten Years...................... $ 153 $ 66 $ 153 $ 175 $ 90 $ 175 $ 198 $ 112 $ 198
</TABLE>

(See notes on the following page)

11
<PAGE> 21

Notes to Expense Comparison Table
(1) Class A shares of the Municipal Fund received pursuant to the
Reorganization will not be subject to a sales charge upon purchase.

(2) After expense reimbursement. In the absence of expense reimbursement,
"Management Fees" for the New Jersey Fund would have been 0.60% with
respect to Class A, B and C shares, "Rule 12b-1 Fees" for the New Jersey
Fund would have been 0.25%, 1.00% and 1.00% with respect to Class A, B and
C shares, respectively, "Other Expenses" for the New Jersey Fund would have
been 0.87%, 0.87% and 0.87% with respect to Class A, B and C shares,
respectively, and "Total Fund Operating Expenses" for the New Jersey Fund
would have been 1.72%, 2.47% and 2.47% with respect to Class A, B and C
shares, respectively.

(3) Class B Shares of the Municipal Fund and New Jersey Fund are subject to a
contingent deferred sales charge equal to 4.00% of the lesser of the then
current net asset value or the original purchase price on Class B Shares
redeemed during the first year after purchase, which charge is reduced to
zero after a six year period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%;
Year 3 -- 3.50%; Year 4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%; and
Year 7 -- 0.00%.

(4) Class C shares of the Municipal Fund and New Jersey Fund are subject to a
contingent deferred sales charge equal to 1.00% of the lesser of the then
current net asset value or the original purchase price on Class C shares
redeemed during the first year after purchase, which charge is reduced to
zero thereafter.

(5) Expenses examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization.

12
<PAGE> 22

DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
Municipal Fund and the New Jersey Fund offer three classes of shares. The Class
A shares of both the Municipal Fund and the New Jersey Fund are subject to an
initial sales charge of up to 4.75%. The initial sales charge applicable to
Class A shares of the Municipal Fund will be waived for Class A shares acquired
in the Reorganization. Any subsequent purchases of Class A shares of the
Municipal Fund after the Reorganization will be subject to an initial sales
charge of up to 4.75%, excluding Class A shares purchased through the dividend
reinvestment plan. Purchases of Class A shares of the Municipal Fund or the New
Jersey Fund in amounts of $1,000,000 or more are not subject to an initial sales
charge, but a contingent deferred sales charge of 1.00% may be imposed on
certain redemptions made within the first year after purchase.

The Class B shares of both the Municipal Fund and the New Jersey Fund do not
incur a sales charge when they are purchased, but generally are subject to a
contingent deferred sales charge of 4.00% if redeemed within the first year
after purchase, which charge is reduced to zero after a six year period. Class B
shares of both the Municipal Fund and the New Jersey Fund purchased on or after
June 1, 1996 automatically convert to Class A shares after eight years. Class B
shares of the Municipal Fund purchased before June 1, 1996 automatically convert
to Class A shares after six years. Class B shares of the New Jersey Fund
purchased before June 1, 1996 automatically convert to Class A shares after
seven years.

The Class C shares of both the Municipal Fund and the New Jersey Fund do not
incur a sales charge when purchased, but are subject to a contingent deferred
sales charge of 1.00% if redeemed within the first year after purchase. Class C
shares of both the Municipal Fund and the New Jersey Fund purchased before
January 1, 1997 automatically convert to Class A shares after one year.

No contingent deferred sales charge will be imposed on Class B shares or Class
C shares of the New Jersey Fund in connection with the Reorganization. The
holding period and conversion period for Class B shares or Class C shares of the
Municipal Fund received in connection with the Reorganization will be measured
from the earlier time (i) the holder purchased such shares from the New Jersey
Fund or (ii) the holder purchased such shares from any other Van Kampen American
Capital Fund and subsequently exchanged them for shares of the New Jersey Fund.

Shares of the Municipal Fund or the New Jersey Fund may be purchased by check,
by electronic transfer, by bank wire and by exchange from certain other Van
Kampen American Capital open-end mutual funds distributed by VKAC Distributors.
For a complete description regarding purchase of shares and exchange of shares
of the Municipal Fund, see the sections of the Municipal Fund Prospectus
entitled "Purchase of Shares" and "Shareholder Services--Exchange Privilege."
For a complete description regarding purchase of shares and exchange of shares
of

13
<PAGE> 23

the New Jersey Fund, see the sections of the New Jersey Fund Prospectus entitled
"Purchase of Shares" and "Shareholder Services--Exchange Privilege".

Shares of the Municipal Fund and the New Jersey Fund properly presented for
redemption may be redeemed or exchanged at the next determined net asset value
per share (subject to any applicable deferred sales charge). Shares of either
the Municipal Fund or the New Jersey Fund may be redeemed or exchanged by mail
or by special redemption privileges (telephone exchange, telephone redemption,
by check or electronic transfer). If a shareholder of either fund attempts to
redeem shares within a short time after they have been purchased by check, the
respective fund may delay payment of the redemption proceeds until such fund can
verify that payment for the purchase of the shares has been (or will be)
received.

No further purchases of the shares of the New Jersey Fund may be made after
the date on which the shareholders of the New Jersey Fund approve the
Reorganization, and the stock transfer books of the New Jersey Fund will be
permanently closed as of the date of Closing. Only redemption requests and
transfer instructions received in proper form by the close of business on the
day prior to the date of Closing will be fulfilled by the New Jersey Fund.
Redemption requests or transfer instructions received by the New Jersey Fund
after that date will be treated by the New Jersey Fund as requests for the
redemption or instructions for transfer of the shares of the Municipal Fund
credited to the accounts of the shareholders of the New Jersey Fund. Redemption
requests or transfer instructions received by the New Jersey Fund after the
close of business on the day prior to the date of Closing will be forwarded to
the Municipal Fund. For a complete description of the redemption arrangements
for the Municipal Fund, see the section of the Municipal Fund Prospectus
entitled "Redemption of Shares," and, for the New Jersey Fund, see the section
of the New Jersey Fund Prospectus entitled "Redemption of Shares."

14
<PAGE> 24

CAPITALIZATION. The following table sets forth the capitalization of the
Municipal Fund and the New Jersey Fund as of June 30, 1997, and the pro forma
capitalization of the combined fund as if the Reorganization had occurred on
that date. These numbers may differ at the time of Closing.

CAPITALIZATION TABLE AS OF JUNE 30, 1997

<TABLE>
<CAPTION>
NEW JERSEY
MUNICIPAL FUND FUND PRO FORMA
-------------- ---------- ---------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS)
Class A shares................. $751,355.8 $ 7,744.7 $759,100.5
Class B shares................. 203,968.8 9,584.3 213,553.1
Class C shares................. 11,851.0 947.3 12,798.3
---------- --------- ----------
Total................... $967,175.6 $18,276.3 $985,451.9
========== ========= ==========
NET ASSET VALUE PER SHARE
Class A shares................. $ 15.34 $ 14.92 $ 15.34
Class B shares................. 15.34 14.91 15.34
Class C shares................. 15.32 14.92 15.32
SHARES OUTSTANDING (IN THOUSANDS)
Class A shares................. 48,991.7 518.9 49,496.5
Class B shares................. 13,299.9 642.7 13,924.7
Class C shares................. 773.5 63.5 835.3
---------- --------- ----------
Total................... 63,065.1 1,225.1 64,256.5
========== ========= ==========
SHARES AUTHORIZED
Class A shares................. Unlimited Unlimited Unlimited
Class B shares................. Unlimited Unlimited Unlimited
Class C shares................. Unlimited Unlimited Unlimited
</TABLE>

PERFORMANCE INFORMATION. The average annual total returns for Municipal Fund
for the one-year, three-year and five-year periods ended June 30, 1997 and for
the period beginning August 1, 1990 (the date Class A shares of the Municipal
Fund were first offered for sale to the public) through June 30, 1997 were
3.19%, 5.53%, 5.24% and 6.98% with respect to its Class A shares; for the
one-year and three-year periods ended June 30, 1997 and for the period beginning
August 24, 1992 (the date Class B shares of the Municipal Fund were first
offered for sale to the public) through June 30, 1997 were 3.55%, 5.46%, and
5.10% with respect to its Class B shares; and for the one-year and three-year
periods ended June 30, 1997 and for the period beginning August 13, 1993 (the
date Class C shares of the Municipal Fund were first offered to the public)
through June 30, 1997 were 6.48%, 6.40% and 4.07% with respect to its Class C
shares.

The yield for the Municipal Fund as of June 30, 1997, was 4.74% with respect
to its Class A shares, 4.22% with respect to its Class B shares and 4.24% with
respect to its Class C shares. The distribution rate for the Municipal Fund as
of June 30, 1997, was 5.25% with respect to its Class A shares, 4.77% with
respect to its Class B shares and 4.78% with respect to its Class C shares. The
tax-equivalent distribution

15
<PAGE> 25

rate for the Municipal Fund as of June 30, 1997, was 8.20% with respect to its
Class A shares, 7.45% with respect to its Class B shares and 7.47% with respect
to its Class C shares. In addition, that portion of the Municipal Fund's income
attributable to New Jersey municipal bonds may be exempt from New Jersey state
income tax for New Jersey residents.

The average annual total returns for the New Jersey Fund for the one-year
period ended June 30, 1997, and for the period beginning July 29, 1994 (the date
Class A shares of the New Jersey Fund were first offered for sale to the public)
through June 30, 1997 were 3.37% and 5.22% with respect to its Class A shares;
for the one-year period ended June 30, 1997 and for the period beginning July
29, 1994 (the date Class B shares of the New Jersey Fund were first offered for
sale to the public) through June 30, 1997 were 3.72% and 5.12% with respect to
its Class B shares; and for the one-year period ended June 30, 1997 and for the
period beginning July 29, 1994 (the date Class C shares of the New Jersey Fund
were first offered for sale to the public) through June 30, 1997 were 6.72% and
6.21% with respect to its Class C shares.

The yield for the New Jersey Fund as of June 30, 1997, was 5.09% with respect
to its Class A shares, 4.58% with respect to its Class B shares and 4.58% with
respect to its Class C shares. The distribution rate for the New Jersey Fund as
of June 30, 1997, was 4.94% with respect to its Class A shares, 4.47% with
respect to its Class B shares and 4.46% with respect to its Class C shares. The
tax-equivalent distribution rate for New Jersey residents for the New Jersey as
of June 30, 1997, was 8.25% with respect to its Class A shares, 7.46% with
respect to its Class B shares and 7.45% with respect to its Class C shares.

The foregoing total returns include the effect of the maximum sales charge
applicable to sales of shares of both the Municipal Fund and the New Jersey
Fund. The foregoing total returns also assume reinvestment of all dividends and
distributions. The yields, distribution rates and total returns are not
necessarily indicative of future results. The performance of an investment
company is the result of conditions in the securities markets, portfolio
management and operating expenses. Although information such as that shown above
is useful in reviewing a fund's performance and in providing some basis for
comparison with other investment alternatives, it should not be used for
comparison with other investments using different reinvestment assumptions or
time periods.

Management's discussion of the Municipal Fund's and New Jersey Fund's
performance as of December 31, 1996 are attached hereto as Exhibit A.

B. RISK FACTORS

SIMILARITY OF RISKS

The investment objectives of the Municipal Fund and the New Jersey Fund are
similar. The investment policies of the Municipal Fund and the New Jersey Fund
are similar insofar as they each invest at least 80% of their assets in
tax-exempt

16
<PAGE> 26

municipal securities rated at the time of investment BBB or higher by S&P or Baa
or higher by Moody's, and they each permit investment up to 20% of their total
assets in lower grade tax-exempt municipal securities (but not lower than B- by
S&P or B3 by Moody's). Each of the Municipal Fund and the New Jersey Fund also
engages in certain common investment practices such as the purchase and sale of
securities on a "when issued" and "delayed delivery" basis, the ability to
borrow up to 5% of its net assets in order to pay for redemptions and to utilize
futures and options and engage in interest rate transactions such as swaps,
caps, floors and collars. To the extent that the investment objectives and
investment policies and practices of the Municipal Fund and the New Jersey Fund
are similar, the risks associated with an investment in the funds are similar.

Investment in either of the Municipal Fund or the New Jersey Fund may not be
appropriate for all investors. Neither fund is intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
funds. An investment in either fund is intended to be a long-term investment and
should not be used as a trading vehicle.

DIFFERENCES IN RISKS

The Municipal Fund and the New Jersey Fund engage in some dissimilar
investment practices. To the extent that the investment practices of the funds
differ, the risks associated with an investment in the Municipal Fund are
different from the risks associated with an investment in the New Jersey Fund.
For a complete description of the risks of an investment in the Municipal Fund
or the New Jersey Fund, see the sections in the Municipal Fund Prospectus or New
Jersey Fund Prospectus entitled "Investment Objective and Policies," "Municipal
Securities," "Investment Practices" and "Special Considerations Regarding the
Fund".

DIVERSIFICATION. The New Jersey Fund is a non-diversified investment company.
The Municipal Fund is a diversified investment company. A non-diversified
investment company, such as the New Jersey Fund, generally is more susceptible
to economic, political or regulatory events that adversely affect an issuer in
which such fund invests than a diversified investment company such as the
Municipal Fund. A diversified investment company such as the Municipal Fund,
however, is less likely to benefit from economic, political or regulatory events
that beneficially affect issuers in which it invests because it generally
invests a smaller percentage of its assets in each issuer in which it invests.

CONCENTRATION. The New Jersey Fund invests at least 80% of its total assets in
New Jersey municipal securities. The Municipal Fund does not concentrate its
investments in the securities of issuers located in New Jersey or in any one
other state. An investment company, such as the New Jersey Fund, that
concentrates its investments in issuers located in any one state generally is
more susceptible to economic, political or regulatory events that adversely
affect the state in which such

17
<PAGE> 27

company has concentrated its investments than an investment company that does
not concentrate its investments in any one state. The Municipal Fund, however,
is less likely to benefit from economic, political or regulatory events that
beneficially affect issuers located in New Jersey because it does not
concentrate its investments in issuers of New Jersey municipal securities or
issuers located in any one other state.

DERIVATIVE VARIABLE RATE SECURITIES. Each of the Municipal Fund and the New
Jersey Fund may invest up to 15% and 20%, respectively, of its total assets in
derivative variable rate securities such as inverse floaters, whose rates vary
inversely with market rates of interest, or range or capped floaters, whose
rates are subject to periodic or lifetime caps. The value of securities whose
rates vary inversely with market rates of interest generally will fluctuate in
response to changes in market rates of interest to a greater extent than the
value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity.

OTHER. The Municipal Fund may invest a substantial portion of its assets in
securities that are subject to the alternative minimum tax, while the New Jersey
Fund may invest only up to 20% of its assets in such securities. The Municipal
Fund may not be a suitable investment for shareholders of the New Jersey Fund
subject to the alternative minimum tax. Each of the Municipal Fund and the New
Jersey Fund may invest, pursuant to its respective investment policies, in
interest rate transactions such as swaps, caps, floors or collars, however, the
New Jersey Fund is limited in its use of such securities by current New Jersey
tax laws.

C. THE PROPOSED REORGANIZATION

The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Municipal Fund or the New Jersey Fund at (800) 421-5666
and asking for the "Reorganization SAI".

TERMS OF THE AGREEMENT

Pursuant to the Agreement, the Municipal Fund series of the Tax Free Trust
would acquire all of the assets and the liabilities of the New Jersey Fund
series of the Tax Free Trust on the date of the Closing in consideration for
Class A, B and C shares of the Municipal Fund.

Subject to the New Jersey Fund's shareholders approving of the Reorganization,
the closing (the "Closing") will occur within 15 business days after the later
of the receipt of all necessary regulatory approvals and the final adjournment
of the Special Meeting or such later date as soon as practicable thereafter as
the Municipal Fund and the New Jersey Fund may mutually agree.

18
<PAGE> 28

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

The New Jersey Fund expects to distribute the Class A, B and C shares of the
Municipal Fund to the shareholders of the New Jersey Fund promptly after the
Closing and then dissolve pursuant to a plan of dissolution adopted by the
Board.

The Municipal Fund and the New Jersey Fund have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.

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

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

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

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

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

5. the effectiveness under applicable law of the registration statement of
the Municipal Fund of which this Prospectus/Proxy Statement forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; and

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

The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the New
Jersey

19
<PAGE> 29

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

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

DESCRIPTION OF SECURITIES TO BE ISSUED

SHARES OF BENEFICIAL INTEREST. Beneficial interests in the Municipal Fund
being offered hereby are represented by transferable Class A, B and C shares,
par value $0.01 per share. The Declaration of Trust of the Tax Free Trust
permits the trustees, as they deem necessary or desirable, to create one or more
separate investment portfolios and to issue a separate series of shares for each
portfolio and, subject to compliance with the 1940 Act, to further sub-divide
the shares of a series into one or more classes of shares for such portfolio.

VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the Municipal Fund are
entitled to one vote per share on matters as to which they are entitled to vote;
however, separate votes generally are taken by each series on matters affecting
an individual series.

Each of the Municipal Fund and the New Jersey Fund operates as a series of the
Tax Free Trust, an open-end management investment company registered with the
SEC under the 1940 Act. Therefore, in addition to the specific voting rights
described above, shareholders of the Municipal Fund, as well as shareholders of
the New Jersey Fund, are entitled, under current law, to vote with respect to
certain other matters, including changes in fundamental investment policies and
restrictions and the ratification of the selection of independent auditors.
Moreover, under the 1940 Act, shareholders owning not less than 10% of the
outstanding shares of the New Jersey Fund or Municipal Fund may request that the
respective board of trustees call a shareholders' meeting for the purpose of
voting upon the removal of trustee(s).

CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES

If the Reorganization is approved, the Municipal Fund will establish an
account for each New Jersey Fund shareholder containing the appropriate number
of shares of the Municipal Fund. The shareholder services and shareholder
programs of the Municipal Fund and the New Jersey Fund are substantially
identical. Shareholders of the New Jersey Fund who are accumulating New Jersey
Fund shares under the

20
<PAGE> 30

dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to New Jersey Fund shares, will retain the same
rights and privileges after the Reorganization in connection with the Municipal
Fund Class A, B or C shares received in the Reorganization through substantially
identical plans maintained by the Municipal Fund. Van Kampen American Capital
Trust Company will continue to serve as custodian for the assets of New Jersey
Fund shareholders held in IRA accounts after the Reorganization. Such IRA
investors will be sent appropriate documentation to confirm Van Kampen American
Capital Trust Company's custodianship.

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

FEDERAL INCOME TAX CONSEQUENCES

The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the New Jersey Fund and
shareholders of the Municipal Fund. The discussion set forth below is for
general information only and may not apply to a holder subject to special
treatment under the Internal Revenue Code of 1986, as amended (the "Code"), such
as a holder that is a bank, an insurance company, a dealer in securities, a
tax-exempt organization or that acquired its Class A, B and C shares of the New
Jersey Fund pursuant to the exercise of employee stock options or otherwise as
compensation. It is based upon the Code, legislative history, Treasury
regulations, judicial authorities, published positions of the Internal Revenue
Service (the "Service") and other relevant authorities, all as in effect on the
date hereof and all of which are subject to change or different interpretations
(possibly on a retroactive basis). This summary is limited to shareholders who
hold their New Jersey Fund shares as capital assets. No advance rulings have
been or will be sought from the Service regarding any matter discussed in this
Prospectus/Proxy Statement. Accordingly, no assurances can be given that the
Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisers to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws and possible changes to the tax laws.

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
Tax Free Trust receive an opinion from Skadden, Arps, Slate, Meagher & Flom

21
<PAGE> 31

(Illinois) ("Skadden Arps") substantially to the effect that for federal income
tax purposes:

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

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

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

4. No gain or loss will be recognized by the shareholders of the New Jersey
Fund upon the exchange of their shares of the New Jersey Fund for the
Class A, B or C shares of the Municipal Fund.

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

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

In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the Municipal Fund and the New Jersey Fund and assume that
the Reorganization will be consummated as described in the Agreement and that
redemptions of shares of the New Jersey Fund occurring prior to the Closing will
consist solely of redemptions in the ordinary course of business.

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

22
<PAGE> 32

EXPENSES

VKAC will pay all of the costs associated with the Reorganization. Management
of the New Jersey Fund estimates that Reorganization expenses will equal
approximately $125,000. As part of the Reorganization, the New Jersey Fund will
write-off the remaining unamortized organizational expenses of approximately
$28,000 which will be reimbursed by the Adviser.

The Board has determined that the foregoing arrangement with respect to
expenses is fair and reasonable.

As noted above, shareholders of the New Jersey Fund may redeem their shares or
exchange their shares for shares of other Van Kampen American Capital mutual
funds at any time prior to the closing of the Reorganization. See "Distribution,
Purchase, Valuation, Redemption and Exchange of Shares" above. Redemptions and
exchanges of shares generally are taxable transactions, unless your account is
not subject to taxation, such as an individual retirement account or other tax-
qualified retirement plan. Shareholders should consult with their own tax
advisers regarding potential transactions.

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

Approval of the Reorganization will constitute the ratification by New Jersey
Fund shareholders of the investment objective, investment policies and
restrictions, distribution plan and advisory agreement of the Municipal Fund.
Approval of the Reorganization will constitute approval of amendments to any of
the fundamental investment restrictions of the New Jersey Fund that might
otherwise be interpreted as impeding the Reorganization, but solely for the
purpose of and to the extent necessary for, consummation of the Reorganization.

LEGAL MATTERS

Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the Municipal Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the Municipal Fund. Wayne W. Whalen, a partner
of Skadden Arps, is a Trustee of the Tax Free Trust.

D. RECOMMENDATION OF THE BOARD

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

23
<PAGE> 33

OTHER INFORMATION

A. SHAREHOLDERS OF THE MUNICIPAL FUND AND
THE NEW JERSEY FUND

At the close of business on October , 1997, there were Class A
shares, Class B shares and Class C shares, respectively, of the
Municipal Fund. As of such date, the trustees and officers of the Municipal Fund
as a group own less than 1% of the shares of the Municipal Fund. As of such
date, no person was known by the Municipal Fund to own beneficially or of record
as much as 5% of the Class A shares or Class B shares of the Municipal Fund. As
of such date, no person was known by the Municipal Fund to own beneficially or
of record as much as 5% of the Class C shares of the Municipal Fund except as
follows: [TO COME]

At the close of business on October , 1997, the record date with respect to
the Special Meeting, there were Class A shares, Class B shares and
Class C shares, respectively, of the New Jersey Fund. As of such date, the
trustees and officers of the New Jersey Fund as a group own less than [1%] of
the outstanding shares of the New Jersey Fund. [As of such date, no person was
known by the New Jersey Fund to own beneficially or of record as much as 5% of
the Class A shares of the New Jersey Fund except for: [To come]. [As of such
date, no person was known by the New Jersey Fund to own beneficially or of
record as much as 5% of the Class B shares or Class C shares of the New Jersey
Fund.]

B. SHAREHOLDER PROPOSALS

As a general matter, the Municipal Fund does not intend to hold future regular
annual or special meetings of its shareholders unless required by the 1940 Act.
In the event the Reorganization is not consummated, the New Jersey Fund does not
intend to hold future regular annual or special meetings of its shareholders
unless required by the 1940 Act. Any shareholder who wishes to submit proposals
for consideration at a meeting of shareholders of the Municipal Fund or the New
Jersey Fund should send such proposal to the respective fund at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.

VOTING INFORMATION AND REQUIREMENTS

Holders of shares of the New Jersey Fund are entitled to one vote per share on
matters as to which they are entitled to vote. The New Jersey Fund does not
utilize cumulative voting.

24
<PAGE> 34

Each valid proxy given by a shareholder of the New Jersey Fund will be voted
by the persons named in the proxy in accordance with the instructions marked
thereon and as the persons named in the proxy may determine on such other
business as may come before the Special Meeting on which shareholders are
entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the Board "FOR" approval of the
Reorganization. Abstentions and broker non-votes do not count as votes "FOR" a
proposal and are treated as votes "AGAINST". A majority of the outstanding
shares entitled to vote on a proposal must be present in person or by proxy to
have a quorum to conduct business at the Special Meeting. Abstentions and broker
non-votes will be deemed present for quorum purposes.

Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the New Jersey Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.

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

APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE NEW JERSEY FUND ENTITLED TO VOTE.

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

Proxies of shareholders of the New Jersey Fund are solicited by the Board. In
order to obtain the necessary quorum at the Special Meeting, additional
solicitation may be made by mail, telephone, telegraph or personal interview by
representatives of the Adviser or VKAC, or by dealers or their representatives.
In addition, such solicitation servicing may also be provided by Applied Mailing
Systems, a

25
<PAGE> 35

solicitation firm located in Boston, Massachusetts, at a cost estimated to be
approximately $ , plus reasonable expenses.

October , 1997

PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.

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

26
<PAGE> 36

EXHIBIT A

MANAGEMENT'S DISCUSSION OF
MUNICIPAL FUND AND NEW JERSEY FUND PERFORMANCE

Management's Discussion of the Municipal Fund's Performance as of the Annual
Report dated December 31, 1996.

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,

We are pleased to report that the Van Kampen American Capital Municipal Income
Fund has continued to generate positive investment performance. As noted in
earlier reports, VK/AC Holding Inc., the parent company of Van Kampen American
Capital, Inc., was acquired by Morgan Stanley Group Inc., a world leader in
asset management and investment banking. The transaction was completed in
October, and we are excited about the opportunities it creates for investors. As
part of the acquisition, Van Kampen American Capital became the distributor of
Morgan Stanley retail funds on January 2, 1997.

ECONOMIC REVIEW

The U.S. economy experienced moderate growth and low inflation during the
reporting period. At the beginning of 1996, economists were concerned that the
slower economic pace of late 1995 might continue, possibly leading to a
recession by year end. That assumption soon came into question, however, when
non-farm payrolls increased by a stunning 705,000 in February, the biggest
one-month jump in 13 years. Then, a larger-than-expected 4.7 percent rate in
real GDP (the nation's gross domestic product, adjusted for inflation) during
the second quarter confirmed that the economy was back in a strong-growth mode.
By summer, the earlier talk of recession and rate cuts had changed to concerns
about economic overheating and the possibility of interest rate hikes.

Despite mounting evidence of inflation, the Federal Reserve held to a stable
monetary policy, believing the supply-and-demand imbalances in the commodity
markets were temporary and that burdensome consumer debt load would eventually
slow the economy without the need for higher interest rates. Events during the
second half of 1996 proved the wisdom of Federal Reserve policy; real GDP growth
moderated to 2.0 percent in the third quarter while commodity prices receded.
For the year, core producer prices rose by 0.6 percent, the second-lowest annual

A-1
<PAGE> 37

increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

MARKET REVIEW

Shifting expectations and modest returns characterized the fixed-income
markets in 1996. The year began with long-term interest rates near their lowest
level since the 1960s, reflecting the view that the American economy was
weakening and that a series of rate cuts by the Fed would be forthcoming. But
the Fed's quarter-percentage point reduction in the federal funds rate on
January 31 would be the only monetary easing during 1996, and long-term rates
soon began rising amid signs of a tightening labor market and
stronger-than-expected economic growth. Fears that the Fed would reverse course
and raise short-term rates became widespread after the economy experienced
strong growth in the second quarter. By July, the yield on the Treasury's
benchmark 30-year bond had reached 7.2 percent, up from 5.95 percent at the
beginning of the year.

The last half of 1996 was spent recovering about half of the ground lost over
the first six months. Economic growth moderated, commodity prices declined, and
inflation remained tame. As the Fed held short-term rates steady, long-term
Treasury yields gradually fell back to 6.64 percent by year end.

Compared to 1995, when most sectors of the fixed-income market generated
double-digit gains, 1996 was a year of generally lackluster performance. Tax-
exempt bonds outperformed most sectors of the taxable market, with the Lehman
Brothers Municipal Bond Index returning 4.43 percent for the 12-month period
ended December 31, 1996, versus 1.56 percent for long-term AA-rated corporate
bonds and a 0.81 percent loss for long-term Treasuries. Within the various
industry sectors, hospitals and transportation were the top performers for the
year, returning 5.56 percent and 5.05 percent, respectively. The tax-exempt
market was aided by the economic recovery in California (California is the
largest issuer of tax-exempt securities, accounting for approximately 14 percent
of national volume), and the failure of major tax reform to gain widespread
political support.

MARKET OUTLOOK

We expect interest rates during 1997 to repeat last years moderate up and down
pattern. Stronger-than-expected U.S. economic growth and faint rumblings of
inflationary pressures over the first half of the year could prompt a series of
modest credit tightenings by the Fed. We anticipate that by the fourth quarter
the economy will moderate enough to discourage any lingering concerns about
inflation and allow interest rates to decline across the maturity spectrum.

One of the political issues that worried tax-exempt investors in recent years
has been put to rest. Proposals for a flat tax or the removal of the federal tax
exemption

A-2
<PAGE> 38

from municipal-bond interest is postponed for the foreseeable future. We also
anticipate that the trend toward increased use of insurance in the municipal
market should continue. The possibility that revenue districts plagued by
disastrous weather, or cities, such as Miami, Florida, which are experiencing
financial difficulties, could default, underscores the importance of
professional portfolio management and diversification in the tax-exempt market.

Additional details about your Fund, including a question and answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.

Sincerely,

<TABLE>
<S> <C>
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)...................... 4.07% 3.29% 3.16%
One-year total return(2)...... (.91%) (.64%) 2.18%
Five-year average annual total
return(2)................... 5.72% N/A N/A
Life-of-Fund average annual
total return(2)............. 7.00% 4.98% 3.78%
Commencement date............. 08/01/90 08/24/92 08/13/93
Distribution Rates and Yield
Distribution rate(3).......... 5.50% 5.03% 5.04%
Taxable-equivalent
distribution rate(4)........ 8.59% 7.86% 7.88%
SEC Yield(5).................. 4.86% 4.34% 4.34%
</TABLE>

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

A-3
<PAGE> 39

(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).

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

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

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

(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending December 30,
1996.

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

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

A-4
<PAGE> 40

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

TOP TEN STATES AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
New York............. 14.9%
Illinois............. 9.5%
California........... 6.8%
Florida.............. 6.5%
Texas................ 6.0%
Colorado............. 5.5%
Alabama.............. 3.4%
Pennsylvania......... 3.1%
Michigan............. 2.9%
Utah................. 2.8%
</TABLE>

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

[PIE CHART]
[PIE CHART]

Based on credit quality ratings issued by Standard & Poor's. For securities not
rated by Standard & Poor's, the Moody's rating is used.

TOP FIVE PORTFOLIO HOLDINGS BY SECTOR AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
Health Care................ 17.9%
Industrial Revenue......... 12.5%
General Purpose............ 10.7%
Single Family Housing...... 9.9%
Tax District............... 5.9%
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
Health Care................ 21.3%
Industrial Revenue......... 14.8%
General Purpose............ 7.7%
Single Family Housing...... 7.2%
Tax District............... 6.1%
</TABLE>

DURATION

<TABLE>
<CAPTION>
As of December 31, 1996(1) As of June 30, 1996(1)
<S> <C> <C>
Duration.................. 7.80 years 8.01 years
</TABLE>

(1) Unaudited.

A-5
<PAGE> 41

PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE

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

- Illustrate the general market environment in which your investments
are being managed

- Reflect the impact of favorable market trends or difficult market
conditions

- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured

For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.

A-6
<PAGE> 42

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

Van Kampen American Capital Municipal Income Fund vs. Lehman Brothers Municipal
Bond Index (August 1, 1990 through December 31, 1996)

investment performance chart

The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).

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

A-7
<PAGE> 43

PORTFOLIO MANAGEMENT REVIEW

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
Municipal Income Fund about the key events and economic forces that shaped the
markets during the Fund's fiscal year. The team includes David C. Johnson,
portfolio manager, and Peter W. Hegel, chief investment officer for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the 12-month period ended December 31, 1996.

<TABLE>
<S> <C>
Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN
1996?
1996 ushered in a favorable environment for the bond market.
A However, bond prices fell early in the year due to fears
that strong economic growth
would trigger higher inflation and cause the Federal Reserve Board to
raise interest rates. Bond prices fell even further when inflationary
fears were reignited after second-quarter GDP growth (real gross
domestic product, adjusted for inflation) increased to 4.7 percent.
When the Fed ultimately decided to take no action, bond prices began
to rally in May and continued through the end of the year.
</TABLE>

During 1996, municipal bonds outperformed the U.S. Treasury market. While
prices in both markets ended 1996 slightly lower than year-end 1995, municipal
securities dropped less in price than comparable U.S. Treasury securities. For
example, at the end of the year, 30-year tax-exempt yields averaged slightly
less than 90 percent of taxable yields. Municipal bonds continue to represent
good value in this range on an after-tax basis.

<TABLE>
<S> <C>
Q WHAT OTHER FACTORS AFFECTED THE FUND?
Election-year politics played a major role. In the first
A quarter, the biggest issue facing the municipal bond market
was Steve Forbes' presidential
campaign and his platform of a flat federal income tax, which would
have eliminated the tax-preferred advantage of municipal bonds. By
late spring, the flat tax proposal was losing steam, and tax-exempt
prices joined the early stages of a fairly strong rally.
</TABLE>

The results of the presidential election were positive for the municipal
market. Major tax reform seems unlikely under the Clinton administration, and
any negative changes in federal legislation for infrastructure programs are
expected be minor at best.
The 1996 trend that probably had the most impact on the Fund was the rising
number of insured issues that came to the market. AAA-rated insured issuance has
grown steadily from 1989's level of 25 percent to nearly 50 percent in 1996. In
large part, this is due to an increasing appetite for safety from investors
concerned about

Please see footnotes on page A-4

A-8
<PAGE> 44

municipalities with financial difficulties, such as Los Angeles County,
California and Miami, Florida. Also, drastic cuts in insurance costs over the
past three years have made yields on insured offerings much more attractive when
compared to those on lower-rated securities.

<TABLE>
<S> <C>
Q WHAT ACTIONS DID YOU TAKE IN RESPONSE TO THESE EVENTS?
The Fund's investment objective is to provide investors with
A a high level of current income exempt from federal income
taxes, consistent with the
preservation of capital. We continued to seek to accomplish this
objective by employing the following strategies.
</TABLE>

In terms of credit quality, approximately 39 percent of assets were AAA-rated,
the highest credit rating assigned to bonds by the Standard & Poor's Ratings
Group. These bonds tend to involve little credit risk, are highly liquid, and
typically respond quickly to interest rate changes. Approximately 41 percent of
assets are rated BBB or below or non-rated. While the high-quality holdings
provide safety of principal and total return opportunities, the lower-rated and
non-rated bonds provide income potential and tend to exhibit lower price
volatility as interest rates change. The combination of high-quality and
lower-rated holdings helps balance the portfolio's volatility to interest rate
movements. To establish and monitor the lower-rated exposure, we rely heavily on
our credit research staff to identify relative value and specific securities
which meet our internal credit standards.
We had plenty of investment options in 1996. The supply of new bonds issued
during the year totaled $183.5 billion, which was slightly higher than expected.
We focused much of our attention on health-care, industrial revenue, and general
purpose bonds as core holdings during the year, as these sectors tend to provide
some of the most attractive yields in the tax-exempt markets. Health care, which
is beginning to reap the rewards of managed care and consolidations, was the
best-performing sector last year.
We seek to manage the volatility of the Fund by adjusting the duration of the
portfolio when necessary. Duration, which is expressed in years, is a
measurement of the bond's price sensitivity to interest rates. The shorter the
duration of a portfolio, the less sensitive it is to interest rate changes. At
year end, the duration of the Fund stood at 7.80 years, a relatively neutral
level when compared to the Lehman Brothers Municipal Bond Index duration of 7.64
years.
We also found value in the intermediate range of the yield curve. Because we
did not feel that long-term securities offered enough yield advantage to justify
the higher levels of volatility, we concentrated on municipal bonds that matured
in 10 to 20 years, with a special emphasis on the 15- to 18-year range. The
yield on securities in this maturity range was almost 90 percent of long term
yields, with

Please see footnotes on page A-4

A-9
<PAGE> 45

about two-thirds of the volatility. For additional Fund portfolio highlights,
please refer to page four.

Q HOW DID THE FUND PERFORM IN 1996?

A For the 12-month period ended December 31, 1996, the Fund
generated a total return of 4.07 percent(1) (Class A shares
at net asset value), placing it in
the top half of the General Municipal Debt category as tracked by
Lipper Analytical Services. By comparison, the market in general, as
represented by the Lehman Brothers Municipal Bond Index, returned
4.43 percent for the same period. Please keep in mind that this index
is a broad-based, unmanaged index of municipal bonds and does not
reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents.
The Fund also continued to meet its goal of providing a competitive level of
tax-exempt current income in 1996. The Fund's distribution rate was 5.50
percent(3) as of December 31, 1996 based upon a monthly dividend of $.0735 per
Class A share and a maximum public offering price of $16.03. For investors in
the 36 percent federal income tax bracket, the Fund's distribution rate was
equivalent to a taxable investment earning 8.59 percent(4). Please refer to the
chart on page three for additional Fund performance results.

Q WHAT IS YOUR OUTLOOK FOR THE FUND IN THE UPCOMING MONTHS?

A The economy continued its moderate growth in late 1996, and
most forecasters expect this trend to continue through the
first several months of
1997. As a result, we believe it is more likely that interest rates
will rise rather than decline, although we do not expect to see a
drastic move in either direction. We are, however, taking a slightly
defensive posture with the Fund as we enter the new year by
shortening its duration to brace for any increases in interest rates.
We may also begin to look for bonds with shorter maturities if
economic growth is especially strong and inflation becomes a factor.
The bond market should find continued support from the results of the November
national elections. The combination of a Democratic president and a Republican
Congress should help restrain potential spending increases and tax cuts, thereby
keeping the budget deficit under control. This split government should also help
minimize changes of major tax reform, which would likely affect investment
markets, including municipal bonds. The stock market could also influence the
performance of bonds this year. If stocks suffer a protracted setback, the
demand for bonds, including municipal securities, could increase, having a
positive effect on the fixed-income market.

Please see footnotes on page A-4

A-10
<PAGE> 46

We will closely monitor any new developments in the financial markets and in
Washington in order to evaluate their potential impact on the Fund. Thank you
for your continued confidence in your investment with Van Kampen American
Capital.

<TABLE>
<S> <C>
Peter W. Hegel David C. Johnson
Executive Vice President Portfolio Manager
Fixed Income Investments
</TABLE>

Please see footnotes on page A-4

A-11
<PAGE> 47

Management's Discussion of the New Jersey Fund's Performance as of the Annual
Report dated December 31, 1996.

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,

We are pleased to report that the Van Kampen American Capital New Jersey Tax
Free Income Fund has continued to generate positive investment performance. As
noted in earlier reports, VK/AC Holding Inc., the parent company of Van Kampen
American Capital, Inc., was acquired by Morgan Stanley Group Inc., a world
leader in asset management and investment banking. The transaction was completed
in October, and we are excited about the opportunities it creates for investors.
As part of the acquisition, Van Kampen American Capital became the distributor
of Morgan Stanley retail funds on January 2, 1997.

ECONOMIC REVIEW

MARKET REVIEW

Shifting expectations and modest returns characterized the fixed-income
markets in 1996. The year began with long-term interest rates near their lowest
level since

A-12
<PAGE> 48

the 1960s, reflecting the view that the American economy was weakening and that
a series of rate cuts by the Fed would be forthcoming. But the Fed's quarter-
percentage point reduction in the federal funds rate on January 31 would be the
only monetary easing during 1996, and long-term rates soon began rising amid
signs of a tightening labor market and stronger-than-expected economic growth.
Fears that the Fed would reverse course and raise short-term rates became
widespread after the economy experienced strong growth in the second quarter. By
July, the yield on the Treasury's benchmark 30-year bond had reached 7.2
percent, up from 5.95 percent at the beginning of the year.

MARKET OUTLOOK

One of the political issues that worried tax-exempt investors in recent years
has been put to rest. Proposals for a flat tax or the removal of the federal tax
exemption from municipal-bond interest is postponed for the foreseeable future.
We also anticipate that the trend toward increased use of insurance in the
municipal market should continue. The possibility that revenue districts plagued
by disastrous weather, or cities such as Miami, Florida, which are experiencing
financial difficulties, could default, underscores the importance of
professional portfolio management and diversification in the tax-exempt market.

A-13
<PAGE> 49

While domestic economic fundamentals may keep fixed-income prices relatively
stable, the risks of external shocks to the market is growing. We cannot look at
the U.S. economy in isolation. If global economies catch fire in 1997 and impact
the U.S. government market, this impact could very well have an effect on
tax-exempt rates.
Additional details about your Fund, including a question and answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.

Sincerely,

<TABLE>
<S> <C>
Don G. Powell Dennis J. McDonnell
Chief Executive Officer President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>

A-14
<PAGE> 50

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)...................... 4.28% 3.52% 3.45%
One-year total return(2)...... (0.69%) (0.44%) 2.46%
Life-of-Fund average annual
total return(2)............. 4.94% 4.93% 6.26%
Commencement date............. 07/29/94 07/29/94 07/29/94
Distribution Rates and Yield
Distribution rate(3).......... 4.97% 4.49% 4.49%
Taxable equivalent
distribution rate(4)........ 8.30% 7.50% 7.50%
SEC Yield(5).................. 5.04% 4.53% 4.53%
</TABLE>

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

(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (4.75% for A shares)
or contingent deferred sales charge for early withdrawal (4% for B shares
and 1% for C shares).

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

A-15
<PAGE> 51

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

PIE CHART

AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S> <C>
AAA....................... 71.0%
AA........................ 6.1%
A......................... 5.7%
BBB....................... 13.5%
Non-Rated................. 3.7%
</TABLE>

PIE CHART

AS OF JUNE 30, 1996(1)

<TABLE>
<CAPTION>
<S> <C>
AAA...................... 74.8%
AA....................... 2.0%
A........................ 9.6%
BBB...................... 9.6%
Non-Rated................ 4.0%
</TABLE>

Based upon credit quality ratings issued by Standard & Poor's. For securities
not rated by Standard & Poor's, the Moody's rating is used.

TOP FIVE PORTFOLIO HOLDINGS BY SECTOR AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
Health Care................ 23.1%
Public Building............ 18.2%
Single Family Housing...... 10.5%
General Purpose............ 10.4%
Retail Elec/Gas/Telephone.. 8.6%
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
Health Care................ 26.9%
General Purpose............ 11.1%
Public Building............ 10.4%
Retail
Elec/Gas/Telephone....... 9.2%
Single Family Housing...... 8.1%
</TABLE>

DURATION

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1) AS OF JUNE 30, 1996(1)
<S> <C> <C>
Duration 7.72 years 8.25 years
</TABLE>

(1)Unaudited

A-16
<PAGE> 52

PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE

- Illustrate the general market environment in which your investments
are being managed

- Reflect the impact of favorable market trends or difficult market
conditions

- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured

A-17
<PAGE> 53

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

Van Kampen American Capital New Jersey Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index (July 29, 1994 through December 31, 1996)

INVESTMENT PERFORMANCE CHART

<TABLE>
<CAPTION>
VKAC NEW JERSEY LEHMAN BROTHERS
TAX FREE INCOME MUNICIPAL BOND
FUND INDEX

<S> <C> <C>
Jul 1994 $ 9,525 $ 10,000
Dec 1994 9,354 9,745.5
Jun 1995 10,025 10,686.5
Dec 1995 10,782 11,447.3
Jun 1996 10,694 11,395.9
Dec 1996 11,243 11,955

</TABLE>

Fund's Total Return
1 Year Avg. Annual = -0.69%
Inception Avg. Annual = 4.94%

A-18
<PAGE> 54

PORTFOLIO MANAGEMENT REVIEW

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
New Jersey Tax Free Income Fund about the key events and economic forces which
shaped the markets during the past fiscal year. The team includes Timothy D.
Haney, portfolio manager, and Peter W. Hegel, chief investment officer for fixed
income. The following excerpts reflect their views on the Fund's performance
during the twelve-month period ended December 31, 1996.

During 1996, municipal bonds outperformed the U.S. Treasury market. While
prices in both markets ended 1996 slightly lower than year end 1995, municipal
securities dropped less in price than comparable U.S. Treasury securities. At
year end, insured municipal bond yields averaged 90 percent of Treasuries.
Municipal bonds continue to represent good value in this range on an after-tax
basis.

<TABLE>
<S> <C>
WERE THERE ANY OTHER KEY FACTORS BESIDES THE ECONOMY THAT
Q HAD SOME EFFECT ON THIS FUND OVER THE REPORTING PERIOD?
Election-year politics played a major role. In the first
A quarter, the biggest issue facing the municipal bond market
was Steve Forbes' presidential
campaign and his platform of a flat federal income tax, which would
have eliminated the tax-preferred advantage of municipal bonds. By
late spring, the flat tax proposal was losing steam, and tax-exempt
prices rose in the early stages of a fairly strong rally.
</TABLE>

The results of the presidential election were positive for the municipal
market. Major tax reform seems unlikely under the Clinton administration.
Additionally, any negative changes in federal legislation for infrastructure
programs are expected to be minor.
Another 1996 trend that had an impact on the Fund was the rising number of
issues that came to the market insured. Insured issuance has steadily grown from
1989's level of 25 percent to nearly 50 percent of total volume in 1996. This
was due, in part, to an increasing appetite for safety from investors concerned
about municipalities having current financial difficulties. Also, drastic cuts
in insurance costs over recent years have made yields on insured offerings much
more attractive when compared to lower-rated securities.

Please see footnotes on page A-15

A-19
<PAGE> 55

<TABLE>
<S> <C>
Q HOW DID YOU POSITION THE FUND IN LIGHT OF THESE CONDITIONS?

A The Fund's objective is to seek to provide a high level of
current income exempt from federal and state income taxes,
consistent with the
preservation of capital. To achieve this goal, we used the following
strategies.
</TABLE>

Approximately 71 percent of long-term investments were AAA-rated, the highest
credit rating assigned to bonds by Standard & Poor's Ratings Group. These bonds
typically involve little credit risk, are highly liquid, and typically respond
quickly to interest rate changes. Approximately 17 percent of long-term
investments are BBB-rated or non-rated. A combination of high quality and
lower-rated holdings helps balance the portfolio's volatility to interest rate
movements. While high quality holdings may add a stabilizing component and total
return opportunities, lower-rated and non-rated bonds provide income potential
and tend to exhibit lower price volatility as interest rates change. We rely on
our credit research staff to identify relative value and specific securities
that meet our internal credit standards.
The above-average percentage of insured holdings was a result of supply-and-
demand fundamentals. While New Jersey was the eighth largest issuer of municipal
securities in 1996, strong demand and scarce supply helped to drive up the value
of tax-exempt paper held in the Fund's portfolio. Over half of all New Jersey
issuance comes to market insured. The relatively low level of issuance (3
percent of total national volume), and high level of quality issuance, made it
challenging to find high-yield securities.
We focused our attention on health-care related securities, public building
and single family housing bonds, as these sectors offer some of the most
attractive yields in the tax-exempt markets. Health care, which is beginning to
reap the rewards of managed care and consolidations, was the best performing
sector last year.
We seek to manage the volatility of the Fund by adjusting the duration of the
portfolio when necessary. Duration, which is expressed in years, is a
measurement of the portfolio's price sensitivity to interest rate fluctuations.
The shorter the duration of a portfolio, the less sensitive it is to interest
rate changes. At year end, the duration of the Fund stood at 7.72 years, as
compared to the Lehman Brothers New Jersey Municipal Bond Index duration of 8.28
years.
We also found value in the intermediate range of the yield curve in 1996.
Because we did not feel that long-term securities offered enough yield advantage
to justify the higher levels of volatility, we concentrated on municipal bonds
that matured in 10 to 20 years, with a special emphasis on the 15- to 18-year
range. The yield on securities in this maturity range was almost 90 percent of
long term yields, with about two-thirds of the volatility.

<TABLE>
<S> <C>
Q HOW DID THE FUND PERFORM IN 1996?

A For the 12-month period ended December 31, 1996, the Fund
achieved a total return of 4.28 percent(1) (Class A shares
at net asset value), which
put it in the top half of the New Jersey Municipal Debt category as
tracked by Lipper Analytical Services.
</TABLE>

Please see footnotes on page A-15

A-20
<PAGE> 56

The Fund also continued to meet its goal of providing a competitive level of
tax-exempt current income in 1996. Its Class A share distribution rate was 4.97
percent(3) as of December 31, 1996, based on a monthly dividend of $.0645 per
share and a maximum public offering price of $15.58. For investors in the 40.1
percent combined state and federal income tax bracket, the Fund's distribution
rate was equivalent to a taxable investment earning 8.30 percent(4).

<TABLE>
<S> <C>
Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE NEW JERSEY
MUNICIPAL BOND MARKET IN THE UPCOMING MONTHS?

A New Jersey's strong credit profile reflects solid fiscal
management, a diversified economy, and consistent, albeit
modest, growth. As such, we
expect the value of bonds held in the Fund, as well as offerings in
the market, to remain at prices which are higher than comparable
national offerings.
</TABLE>

The national economy continued its moderate growth in late 1996, and most
forecasters expect this trend to continue through the first several months of
1997. As a result, we believe it is more likely that interest rates will rise
rather than decline, although we do not expect to see a drastic move in either
direction. We are, however, taking a slightly defensive posture with the Fund as
we enter the new year by keeping its duration at a neutral or slightly short
level to brace for any increases in interest rates. We may also begin to look
for bonds with shorter maturities if economic growth is especially strong and
inflation becomes a factor.
The bond market should find continued support from the results of the November
national elections. The combination of a Democratic president and a Republican
Congress should help restrain potential spending increases and tax cuts, and
therefore keep the budget deficit under control. This split government should
also help minimize changes of major tax reform, which would likely affect
investment markets, including municipal bonds. The stock market could also
influence the performance of bonds this year. If stocks suffer a protracted
setback, the demand for bonds, including municipal securities, could increase,
having a positive effect on the fixed-income market.

Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

Timothy D. Haney
Portfolio Manager

Please see footnotes on page A-15

A-21
<PAGE> 57

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

DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION 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) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser of the Municipal Fund
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

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

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

Legal Counsel of the Municipal Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors of the Municipal Fund
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 58

PROSPECTUS/PROXY STATEMENT

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF

VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND

OCTOBER , 1997
------------------------------------------------------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PROPOSAL 1: THE PROPOSED REORGANIZATION............................. 3
A. SUMMARY..................................................... 3
The Reorganization........................................ 3
Reasons for the Proposed Reorganization................... 4
Comparison of the Municipal Fund and the New Jersey
Fund...................................................... 6
B. RISK FACTORS................................................ 16
Similarity of Risks....................................... 16
Differences in Risks...................................... 17
C. THE PROPOSED REORGANIZATION................................. 18
Terms of the Agreement.................................... 18
Description of Securities to be Issued.................... 19
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 20
Federal Income Tax Consequences........................... 20
Expenses.................................................. 22
Ratification of Investment Objective, Investment Policies
and Restrictions of the Municipal Fund.................. 22
Legal Matters............................................. 23
D. RECOMMENDATION OF THE BOARD................................. 23
OTHER INFORMATION................................................... 23
A. SHAREHOLDERS OF THE MUNICIPAL FUND AND THE NEW JERSEY
FUND...................................................... 23
B. SHAREHOLDER PROPOSALS....................................... 24
VOTING INFORMATION AND REQUIREMENTS................................. 24
EXHIBIT A: MANAGEMENT'S DISCUSSION OF MUNICIPAL FUND AND NEW JERSEY
FUND PERFORMANCE.................................................. A-1
</TABLE>

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

-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --

VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 59

VAN KAMPEN AMERICAN CAPITAL

SUPPLEMENT TO PROSPECTUS DATED AUGUST 4, 1997

Prospectus dated September 28, 1996, as previously supplemented on
September 28, 1996, November 1, 1996, January 2, 1997,
February 11, 1997 and April 1, 1997
VKAC Global Equity Fund
VKAC Global Government Securities Fund

Prospectus dated October 28, 1996, as previously supplemented on
November 1, 1996, January 2, 1997, January 21, 1997 and
February 11, 1997
VKAC Pace Fund

Prospectus dated October 28, 1996, as previously supplemented on November 1,
1996, January 2, 1997 and February 11, 1997
VKAC Aggressive Growth Fund
VKAC High Yield Fund
VKAC Great American Companies Fund
VKAC Prospector Fund
VKAC Short-Term Global Income Fund
VKAC Strategic Income Fund
VKAC Utility Fund
VKAC Value Fund

Prospectus dated October 28, 1996, as previously supplemented on January 15,
1997 and February 11, 1997
VKAC Growth Fund

Prospectus dated December 29, 1996, as previously supplemented on February 11,
1997
VKAC Corporate Bond Fund
VKAC Emerging Growth Fund
VKAC High Income Corporate Bond Fund
<PAGE> 60

Prospectus dated January 28, 1997, as previously supplemented on
February 11, 1997
VKAC U.S. Government Trust for Income Fund

Prospectus dated March 28, 1997
VKAC Growth and Income Fund
VKAC High Yield Municipal Fund

Prospectus dated April 30, 1997
VKAC California Insured Tax Free Fund
VKAC Comstock Fund
VKAC Enterprise Fund
VKAC Equity Income Fund
VKAC Florida Insured Tax Free Income Fund
VKAC Government Securities Fund
VKAC Harbor Fund
VKAC Insured Tax Free Income Fund
VKAC Intermediate Term Municipal Income Fund
VKAC Limited Maturity Government Fund
VKAC Municipal Income Fund
VKAC New Jersey Tax Free Income Fund
VKAC New York Tax Free Income Fund
VKAC Pennsylvania Tax Free Income Fund
VKAC Real Estate Securities Fund
VKAC Tax Free High Income Fund

Prospectus dated April 30, 1997, as previously supplemented on
April 30, 1997
VKAC Global Managed Assets Fund

Pursuant to the Fund's Prospectus, the Fund's Class A shares may be purchased at
net asset value under certain defined circumstances by certain classes or groups
of investors. In order to qualify, such investors must provide assurance that
the purchase is made only for investment purposes and that the shares will not
be resold except through redemption by the Fund. As of August 4, 1997, item
number seven, under the Section "Purchase of Shares -- Class A Shares -- Other
Purchase Programs" shall be omitted from the list of NAV Purchase Options and
the remaining items shall be renumbered accordingly. As stated in the Fund's
Prospectus, the Fund reserves the right to amend or terminate the terms of
offering shares of the Fund at net asset value at any time.
<PAGE> 61

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

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

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

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

A Statement of Additional Information, dated April 30, 1997, 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 Telecommunications
Device for the Deaf at (800) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http.//www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1997.
<PAGE> 62

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 6
Annual Fund Operating Expenses and Example.................. 7
Financial Highlights........................................ 9
The Fund.................................................... 11
Investment Objective and Policies........................... 11
Municipal Securities........................................ 12
Investment Practices........................................ 15
Special Considerations Regarding the Fund................... 19
Investment Advisory Services................................ 20
Alternative Sales Arrangements.............................. 22
Purchase of Shares.......................................... 24
Shareholder Services........................................ 34
Redemption of Shares........................................ 38
Distribution and Service Plans.............................. 41
Distributions from the Fund................................. 43
Tax Status.................................................. 44
Fund Performance............................................ 49
Description of Shares of the Fund........................... 50
Additional Information...................................... 51
</TABLE>

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

2
<PAGE> 63

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

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

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

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

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

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

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

3
<PAGE> 64

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

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

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

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

4
<PAGE> 65

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

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

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the Fund's investment adviser.

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
distributes the Fund's shares.

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

5
<PAGE> 66

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

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

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

(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of the purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class A Share Purchases of $1 Million or More."

(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 "Distribution and Service Plans."

6
<PAGE> 67

- ------------------------------------------------------------------------------
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).............. 0.47% 0.47% 0.47%
12b-1 Fees (as a percentage of average
daily net assets)(1)................... 0.25% 1.00% 1.00%
Other Expenses (as a percentage of
average daily net assets).............. 0.22% 0.23% 0.23%
Total Expenses (as a percentage of
average daily net assets).............. 0.94% 1.70% 1.70%
</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.

7
<PAGE> 68

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 0.94% for Class
A Shares, 1.70% for Class B Shares and
1.70% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $57 $89 $107 $181*
Class C Shares............................ $27 $54 $ 92 $201
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $17 $54 $ 92 $181*
Class C Shares............................ $17 $54 $ 92 $201
</TABLE>

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

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

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

8
<PAGE> 69

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 each of
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
---------------------------------------------------------------------------------------

YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.549 $14.261 $16.164 $15.310 $15.071 $14.250
Net Investment Income............ .898 .874 .886 .964 1.041 1.066
Net Realized and Unrealized
Gain/Loss on Investments........ (.298) 1.296 (1.907) .862 .374 .853
------- ------- ------- ------- ------- -------
Total from Investment
Operations....................... .600 2.170 (1.021) 1.826 1.415 1.919
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income(2)..... .882 .882 .882 .972 1.044 1.098
Distributions from and in Excess
of Net Realized Gains(2)........ 0 0 .000 .000 .132 .000
------- ------- ------- ------- ------- -------
Total Distributions............... .882 .882 .882 .972 1.176 1.098
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $15.267 $15.549 $14.261 $16.164 $15.310 $15.071
======= ======= ======= ======= ======= =======
Total Return(1)................... 4.07% 15.61% (6.37%) 12.20% 9.69% 13.98%
Net Assets at End of Period (in
millions)........................ $ 792.3 $ 839.7 $ 495.8 $ 597.6 $ 463.6 $ 293.7

<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------- ----------------------------------------------------------------------------
AUGUST 1, 1990
(COMMENCEMENT OF AUGUST 24, 1992
INVESTMENT (COMMENCEMENT OF
OPERATIONS) TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1996 1995 1994 1993 1992
---------------- ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $14.263 $15.549 $14.261 $16.139 $15.308 $15.481
Net Investment Income............ .406 .783 .762 .780 .852 .320
Net Realized and Unrealized
Gain/Loss on Investments........ (.049) (.297) 1.294 (1.890) .845 (.033)
----- ------- ------- ------- ------- -----
Total from Investment
Operations....................... .357 .486 2.056 (1.110) 1.697 .287
----- ------- ------- ------- ------- -----
Less:
Distributions from and in Excess
of Net Investment Income(2)..... .370 .768 .768 .768 .866 .328
Distributions from and in Excess
of Net Realized Gains(2)........ .000 0 .000 0 .000 .132
----- ------- ------- ------- ------- -----
Total Distributions............... .370 .768 .768 .768 .866 .460
----- ------- ------- ------- ------- -----
Net Asset Value, End of the
Period........................... $14.250 $15.267 $15.549 $14.261 $16.139 $15.308
===== ======= ======= ======= ======= =====
Total Return(1)................... 2.57%* 3.29% 14.74% (6.96%) 11.33% 1.90%*
Net Assets at End of Period (in
millions)........................ $ 146.6 $ 211.0 $ 216.6 $ 158.7 $ 168.2 $ 48.4

<CAPTION>
CLASS C SHARES
-------------------------------------------------------------

AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.545 $14.262 $16.141 $15.990
Net Investment Income............ .782 .771 .783 .300
Net Realized and Unrealized
Gain/Loss on Investments........ (.305) 1.280 (1.894) .171
------- ------- ------- -----
Total from Investment
Operations....................... .477 2.051 (1.111) .471
------- ------- ------- -----
Less:
Distributions from and in Excess
of Net Investment Income(2)..... .768 .768 .768 .320
Distributions from and in Excess
of Net Realized Gains(2)........ 0 0 .000 .000
------- ------- ------- -----
Total Distributions............... .768 .768 .768 .320
------- ------- ------- -----
Net Asset Value, End of the
Period........................... $15.254 $15.545 $14.262 $16.141
======= ======= ======= =====
Total Return(1)................... 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of Period (in
millions)........................ $ 12.9 $ 11.2 $ 3.9 $ 4.1
</TABLE>

(Continued on following page)

See Financial Statements and Notes Thereto

9
<PAGE> 70
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized)(1)........................ .94% .99% .99% .87% .86% .59%
Ratio of Net Investment Income to
Average Net Assets(1) (annualized)..... 5.93% 5.86% 5.93% 6.08% 6.76% 7.29%
Portfolio Turnover...................... 73% 61% 75% 82% 92% 106%

<CAPTION>
CLASS A SHARES
--------------
AUGUST 1, 1990
(COMMENCEMENT
OF INVESTMENT
OPERATIONS) TO
DECEMBER 31,
1990
--------------
<S> <C>
Ratio of Expenses to Average Net Assets
(annualized)(1)........................ .89%
Ratio of Net Investment Income to
Average Net Assets(1) (annualized)..... 7.11%
Portfolio Turnover...................... 109%

<CAPTION>
CLASS B SHARES
----------------------------------------------------------------------------

AUGUST 24, 1992
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized)(1)........................ 1.70% 1.73% 1.70% 1.65% 1.66%
Ratio of Net Investment Income to
Average Net Assets(1) (annualized)..... 5.17% 5.09% 5.22% 5.19% 5.23%
Portfolio Turnover...................... 73% 61% 75% 82% 92%

<CAPTION>
CLASS C SHARES
-------------------------------------------------------------

AUGUST 13, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized)(1)........................ 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment Income to
Average Net Assets(1) (annualized)..... 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover...................... 73% 61% 75% 82%

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

(1) Total Return does not reflect the effect of sales charges. During the time
period noted for Class C Shares, no expenses were assumed by the Adviser. If
certain expenses had not been waived or assumed by the Adviser for Class A
Shares and Class B Shares, total return would have been lower and the ratios
would have been as follows:

<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized).......................... .94% .99% .99% .98% 1.00% 1.07%
Ratio of Net Investment Income to
Average Net Assets (annualized)....... 5.93% 5.86% 5.93% 5.97% 6.62% 6.81%

<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------- ----------------------------------------------------------------------------
AUGUST 1, 1990
(COMMENCEMENT AUGUST 24, 1992
OF INVESTMENT (COMMENCEMENT
OPERATIONS) TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1990 1996 1995 1994 1993 1992
-------------- ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)................ 1.19% 1.70% 1.73% 1.20% 1.73% 2.42%
Ratio of Net Investment Income to
Average Net Assets (annualized).... 6.81% 5.17% 5.09% 5.22% 5.11% 4.48%

<CAPTION>
CLASS C SHARES
-------------------------------------------------------------

AUGUST 13, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized).......................... -- -- -- --
Ratio of Net Investment Income to
Average Net Assets (annualized)....... -- -- -- --

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

* Non-Annualized.

See Financial Statements and Notes Thereto

10
<PAGE> 71

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

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

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

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

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

11
<PAGE> 72

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

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

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

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

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

12
<PAGE> 73

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

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

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

13
<PAGE> 74

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

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

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

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

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

14
<PAGE> 75

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

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

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

15
<PAGE> 76

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

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

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

16
<PAGE> 77

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 liquid securities having an aggregate value equal to
the amount of such purchase commitments until payment is made. The Fund will
make commitments to purchase municipal securities on such basis only with the
intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objective and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when issued" or "delayed delivery" basis.

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

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

17
<PAGE> 78

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

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

18
<PAGE> 79

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

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

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

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

19
<PAGE> 80

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

The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1996 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all municipal securities held by the Fund during the 1996
fiscal year, computed on a monthly basis.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
--------------------------------------------------
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............................ 38.20% 3.01%
AA/Aa.............................. 7.83 0.00
A/A................................ 12.40 0.92
BBB/Baa............................ 18.18 5.41
BB/Ba.............................. 1.69 7.27
B/B................................ 0.37 3.98
CCC/Caa............................ 0.05 0.67
CC/Ca.............................. 0.00 0.00
C/C................................ 0.00 0.00
D.................................. 0.00 0.02
------ ------
Percentage of Rated and Unrated
Securities....................... 78.72% 21.28%
====== ======
</TABLE>

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

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

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $57 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and

20
<PAGE> 81

38 closed-end funds and more than 2,500 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
American Capital Distributors, Inc. (the "Distributor"), the distributor of the
Fund and sponsor of the funds mentioned above, is a wholly-owned subsidiary of
Van Kampen American Capital.

Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings II, Inc.
which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered broker-
dealer and investment adviser, and Morgan Stanley International, are engaged in
a wide range of financial services. Their principal businesses include
securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financial and
investing; and global custody, securities clearance services and securities
lending.

On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Subject to certain conditions being
met, it is currently anticipated that the transaction will close in mid-1997.
Thereafter, Van Kampen American Capital Investment Advisory Corp. will be an
indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

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...................................... 0.50 of 1.00%
Over $500 million....................................... 0.45 of 1.00%
</TABLE>

21
<PAGE> 82

"1940 Act"), of the Adviser, the Distributor or Van Kampen American Capital),
the charges and expenses of independent accountants, legal counsel, transfer
agent (ACCESS Investor Services, Inc. ("ACCESS"), a wholly-owned subsidiary of
Van Kampen American Capital), 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 or to reimburse the Fund for all or a portion of its other
expenses.

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 directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.

PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser has been primarily responsible for the day-to-day management of the
Fund's portfolio since August, 1990. Mr. Johnson has been employed by the
Adviser since April 1989.
- ------------------------------------------------------------------------------
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 and service 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."

22
<PAGE> 83

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 in an amount of $500,000 or more and not to accept any order for 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 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).

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. Generally, a class of shares subject
to a higher ongoing distribution and service fee or subject to the conversion
feature will have a higher expense ratio and pay lower dividends than a class of
shares subject to a lower ongoing distribution 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) ACCESS' expenses attributable to a specific class of
shares,

23
<PAGE> 84

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

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

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

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

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal

24
<PAGE> 85

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 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. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. 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. 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. 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 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 90% or more of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933, as amended.

25
<PAGE> 86

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 CDSC
of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to brokers, dealers or financial intermediaries
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 $1 million
and 0.50% on the excess over $3 million. See "Purchase of Shares --
Deferred Sales Charge Alternatives" for additional information with
respect to CDSCs.

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.

A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age 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 of a single trust estate or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. and distributed by the Distributor. Additional funds may be
added from time to time as determined by the Fund's Board of Trustees as
Participating Funds.

VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person at any one
time

26
<PAGE> 87

in Class A Shares of the Fund, or in any combination of 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
sales charge 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.

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 sales
charge 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 sales charge applicable to the purchases made and the sales 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 investment 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.

27
<PAGE> 88

Distributor. The total sales charge for all other 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, 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 ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.

As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.

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 or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.

(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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 children under 21 years of age 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

28
<PAGE> 89

aggregate amount invested in Class A Shares of the Fund alone, or 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 12-month
period following such transaction.

(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $3 million or more and which
invest in multiple fund families through national wirehouse alliance
programs.

(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) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. Prior to February 1, 1997, a commission will be paid to
authorized dealers who initiate and are responsible for such purchases
within a rolling twelve-month period as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million and 0.25% on the excess over
$10 million. For purchases on February 1, 1997

29
<PAGE> 90

and thereafter, a commission will be paid as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million and 0.25% on the excess over $50 million.

(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.

The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS 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

30
<PAGE> 91

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 $1 million and 0.50% on the excess over $3 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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC 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 CDSC 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 CDSC and the distribution 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 CDSC 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 CDSC 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 or Class C Shares, if any, and
fourth of CDSC Shares held longest during the period of time that a CDSC is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase.

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

31
<PAGE> 92

increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds will be charged at a rate of 3.75% (the applicable rate in
the second year after purchase).

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a CDSC of 1.00% on redemptions
made within one year of the purchase. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows: 1%
on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million.

CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a CDSC 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 CDSC generally is waived on redemptions of Class B Shares made pursuant to
the Systematic Withdrawal Plan. See "Shareholder Services -- Systematic
Withdrawal Plan."

CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.

CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares six years after the end of the calendar month in which the shares
were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge.

32
<PAGE> 93

The conversion of such 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 ACCESS' costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Code, and (ii) that the conversion of such
shares does not constitute a taxable event under federal income tax law. The
conversion may be suspended if such an opinion is no longer available and such
shares might continue to be subject to the higher aggregate fees applicable to
such class of shares for an indefinite period.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
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 CDSC
also is 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.

33
<PAGE> 94

direction of the Board of Trustees of the Trust to be representative of the fair
value at which it is expected such securities may be resold. Any securities or
other assets for which current market quotations are not readily available are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Trustees of the
Trust.

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

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

INVESTMENT ACCOUNT. 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 in this Prospectus, 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 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.

34
<PAGE> 95

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) 421-2833 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 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 subject to certain limitations. 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.

To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.

Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.

No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The CDSC schedule and conversion schedule applicable to a Class B Share
and Class C Share acquired through the exchange privilege is determined by
reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a Class B Share and Class C
Share

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<PAGE> 96

acquired through the exchange privilege is determined by reference to the date
such share originally was purchased from a Van Kampen American Capital fund.

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.

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) 421-2833 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. Exchanges are effected at the net asset value per share next
calculated after the request is received in good order with adjustment for any
additional sales charge. 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 reinvest dividends from the new account
into another fund, an exchanging shareholder must file a specific written
request. The Fund reserves the right to reject any order to acquire shares
through exchange. In addition, the Fund may modify, restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.

A prospectus of any of these mutual funds may be obtained from any broker,
dealer, financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.

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

36
<PAGE> 97

instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 at the time the election to
participate in the plan is made.

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.

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

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

37
<PAGE> 98

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. See the Statement of Additional Information for
further information regarding the establishment of the privilege.

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.

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,

38
<PAGE> 99

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.

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 accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 421-2833 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

39
<PAGE> 100

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

In cases of disability, the CDSCs 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 CDSC 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.

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<PAGE> 101

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 CDSC 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 CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 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.

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

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

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<PAGE> 102

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.

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 CDSC. 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

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<PAGE> 103

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, 1996, there
were $4,213,746 and $51,726 of unreimbursed distribution expenses with respect
to Class B Shares and Class C Shares, respectively, representing 2.00% and 0.40%
of the Fund's net assets attributable to Class B Shares and Class C Shares,
respectively. 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 CDSCs.

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 CDSC applicable 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 and dividends, less all expenses of the Fund
attributable to the class of shares in question. Net short-term capital gains,
if any, may be distributed throughout the year. Expenses of the Fund are accrued
each day. Net realized long-term capital gains, if any, are expected to be
distributed, to the extent permitted by applicable law, to shareholders at least
annually. Distributions cannot be assured, and the amount of each monthly
distribution may vary.

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

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<PAGE> 104

Investors will be entitled to begin receiving dividends on their shares on the
business day after ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."

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

FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue 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 gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund 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

44
<PAGE> 105

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 sold for fair market value at the end of the
tax-year), 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.

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 annual gross income be derived from the disposition of
securities held for less than three months.

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 to avoid income and excise taxes, the Fund may have
to dispose of securities that it would

45
<PAGE> 106

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. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.

The Tax Reform Act of 1986 (the "Tax Reform Act") may have an adverse impact
upon the Fund and its shareholders. The Tax Reform Act imposed new limitations
on the use and investment of the proceeds of state and local government bonds
and other funds, which limitations must be satisfied in order to maintain the
exclusion from gross income for interest on such bonds. The provisions of the
Tax Reform Act generally apply to bonds issued after August 15, 1986. In light
of these requirements, bond counsel qualify their opinions as to the federal tax
status of bonds issued after August 15, 1986 by making them contingent on the
issuer's future compliance with these limitations. Any failure on the part of an
issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued.

Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.

The Tax Reform Act also makes interest on certain "private-activity bonds" an
item of tax preference subject to the alternative minimum tax on individuals and
corporations. The Fund invests a portion of its assets in municipal securities
subject to this provision so that a portion of its exempt-interest dividends is
an item of tax preference to the extent such dividends represent interest
received from these private-activity bonds. Accordingly, investment in the Fund
could cause shareholders to be subject to (or result in an increased liability
under) the alternative minimum tax. The Tax Reform Act also imposed per capita
volume limitations on certain private-activity bonds which could limit the
amount of such bonds available for investment by the Fund.

Exempt-interest dividends 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.

46
<PAGE> 107

"related person" of a substantial user) of the facilities financed with respect
to any of the tax-exempt obligations held by the Fund, or by the Trust if it is
required to qualify as a regulated investment company as described below.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses in his trade or business a part of any
facilities financed with the tax-exempt obligations and whose gross revenues
derived from such facilities exceed five percent of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.

The Omnibus Budget Reconciliation Act of 1993 included certain provisions that
requires gains on dispositions of tax-exempt securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year. If
a shareholder receives an exempt-interest dividend with respect to any shares
and such shares are held for six months or less, any short-term capital loss on
the sale or exchange of the shares will be disallowed to the extent of the
amount of such exempt-interest dividend.

While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, 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 as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Interest on indebtedness which is incurred to purchase or carry
shares of a mutual fund which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. 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). Tax-exempt shareholders not subject to federal income tax on
their income generally will not be taxed on distributions from the Fund.

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.

47
<PAGE> 108

The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends so designated cannot exceed, however, the amount of interest
exempt from tax under Section 103 of the Code received by the Fund during the
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. Since the percentage of dividends which are "exempt-interest"
dividends is determined on an average annual method for the fiscal year, the
percentage of income designated as tax-exempt for any particular dividend may be
substantially different from the percentage of the Fund's income that was tax
exempt during the period covered by the dividend, Fund distributions generally
will not qualify for the dividends received deduction for corporations.

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 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.

The Fund is required, in certain circumstances, to withhold 31% of 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 treated as a long-term
capital loss to the extent of any capital gains 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.

STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if

48
<PAGE> 109

realized directly, would be exempt from such income taxes. It is recommended
that investors consult their tax advisers for information in this regard. The
Fund will report annually to its shareholders the percentage and source, on a
state-by-state basis, of interest income earned on municipal securities received
by the Fund during the preceding calendar year. Dividends and distributions paid
by the Fund from sources other than tax-exempt interest are generally subject to
taxation at the state and local levels.

GENERAL. The federal, state and local 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 law
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. or nationally recognized financial publications.

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

49
<PAGE> 110

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) 421-2833 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 as a sub-trust of a Massachusetts business trust by a
Declaration of Trust dated August 15, 1985, under the name Van Kampen Merritt
Municipal Income Fund and was reorganized as a series of the Trust on July 31,
1995. Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $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
"Distribution and Service Plans."

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

The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of 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.

50
<PAGE> 111

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

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

The fiscal year end of the Fund is 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
Municipal Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 847-2424. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
421-2833.

51
<PAGE> 112

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

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) 421-2833.

FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

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

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

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

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

Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 113

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

MUNICIPAL INCOME
FUND

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

P R O S P E C T U S

APRIL 30, 1997

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 114

SUBJECT TO COMPLETION--DATED SEPTEMBER 23, 1997

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(630) 684-6000

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

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

DATED OCTOBER , 1997

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

This Statement of Additional Information provides information about the Van
Kampen American Capital Municipal Income Fund (the "Municipal Fund"), a series
of the Van Kampen American Capital Tax Free Trust, an open-end diversified
management investment company organized as a Delaware business trust ("Tax Free
Trust"), in addition to information contained in the Prospectus/Proxy Statement
of the Municipal Fund, dated October , 1997, which also serves as the proxy
statement of the Van Kampen American Capital New Jersey Tax Free Income Fund
(the "New Jersey Fund"), a series of the Tax Free Trust, in connection with the
issuance of Class A, B and C shares of the Municipal Fund to shareholders of the
New Jersey Fund. This Statement of Additional Information is not a prospectus.
It should be read in conjunction with the Prospectus/Proxy Statement, into which
it has been incorporated by reference and which may be obtained by contacting
the Municipal Fund or New Jersey Fund located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 (telephone No. (630) 684-6000 or (800) 421-5666).

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the New Jersey Fund.............. 2
Additional Information About the Municipal Fund............. 2
Additional Information About the New Jersey Fund............ 2
Financial Statements........................................ 2
</TABLE>

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

1
<PAGE> 115

PROPOSED REORGANIZATION OF THE NEW JERSEY FUND

The shareholders of the New Jersey Fund are being asked to approve an
acquisition of all the assets of the New Jersey Fund solely in exchange for
Class A, B and C shares of the Municipal Fund and the Municipal Fund's
assumption of the liabilities of the New Jersey Fund (the "Reorganization")
pursuant to an Agreement and Plan of Reorganization by and between the Municipal
Fund and the New Jersey Fund (the "Agreement"). A copy of the form of the
Agreement is attached hereto as Appendix A.

ADDITIONAL INFORMATION ABOUT THE MUNICIPAL FUND

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Municipal Fund, dated April 30, 1997, attached as
Appendix B to this Statement of Additional Information.

ADDITIONAL INFORMATION ABOUT THE NEW JERSEY FUND

Incorporated herein by reference in its entirety is the Statement of
Additional Information of the New Jersey Fund, dated April 30, 1997, attached as
Appendix C to this Statement of Additional Information.

FINANCIAL STATEMENTS

Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Municipal Fund for the fiscal year ended
December 31, 1996, as included in Appendix B hereto, (ii) the audited financial
statements of the New Jersey Fund for fiscal year ended December 31, 1996, as
included in Appendix C hereto, (iii) the unaudited financial statements of the
Municipal Fund for the six months ended June 30, 1997, as included in Appendix D
hereto, and (iv) the unaudited financial statements of the New Jersey Fund for
the six months ended June 30, 1997, as included in Appendix E hereto.

2
<PAGE> 116

APPENDIX A

FORM OF
AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1997, by and between the Van Kampen American Capital Municipal Income
Fund (the "Municipal Fund") series of the Van Kampen American Capital Tax Free
Trust, a Delaware business trust formed under the laws of the State of Delaware
(the "Trust"), and the Van Kampen American Capital New Jersey Tax Free Income
Fund (the "New Jersey Fund") series of the Trust.

WITNESSETH:

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

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

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

1. PLAN OF TRANSACTLON.

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

B. CONSIDERATION. In consideration thereof, the Municipal Fund agrees that on
the Closing Date the Municipal Fund will (i) deliver to the New Jersey Fund,
full and fractional Class A, Class B and Class C shares of beneficial interest
of the Municipal Fund having net asset values per share in an amount equal to
the aggregate dollar value of the Assets net of any liabilities of the New
Jersey Fund

A-1
<PAGE> 117

described in Section 3E hereof (the "Liabilities") determined pursuant to
Section 3A of this Agreement (collectively, the "Municipal Fund Shares") and
(ii) assume all of the New Jersey Fund's Liabilities. The calculation of full
and fractional Class A, Class B and Class C shares of beneficial interest of the
Municipal Fund to be exchanged shall be carried out to no less than two (2)
decimal places. All Municipal Fund Shares delivered to the New Jersey Fund in
exchange for such Assets shall be delivered at net asset value without sales
load, commission or other transactional fee being imposed.

2. CLOSING OF THE TRANSACTION.

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

3. PROCEDURE FOR REORGANIZATION.

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

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

A-2
<PAGE> 118

and shall be accompanied by all necessary state stock transfer stamps, the cost
of which shall be borne by Van Kampen American Capital Investment Advisory
Corp., the investment adviser of the New Jersey Fund (the "Adviser").

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

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

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

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

A-3
<PAGE> 119

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

4. NEW JERSEY FUND'S REPRESENTATIONS AND WARRANTIES.

The New Jersey Fund hereby represents and warrants to the Municipal Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Municipal Fund that:

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

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

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the New Jersey Fund audited as of and for the year
ended December 31, 1996, true and complete copies of which have been heretofore
furnished to the Municipal Fund, fairly represent the financial condition and
the results of operations of the New Jersey Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.

A-4
<PAGE> 120

D. FINANCIAL STATEMENTS. The New Jersey Fund shall furnish to the Municipal
Fund (i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the New Jersey Fund for the period ended June 30, 1997; and (ii) within five
(5) business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the New Jersey Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved and the results of its operations and changes
in financial position for the periods then ended; and such financial statements
shall be certified by the Treasurer of the New Jersey Fund as complying with the
requirements hereof.

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

F. MATERIAL AGREEMENTS. The New Jersey Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the New
Jersey Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding relating to the New Jersey Fund to which the New
Jersey Fund is a party.

G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no later
than 30 calendar days after the Closing Date, KPMG Peat Marwick LLP, auditors
for the New Jersey Fund, shall furnish the Municipal Fund with a statement of
the earnings and profits of the New Jersey Fund within the meaning of the Code
as of the Closing Date.

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

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

J. CORPORATE AUTHORITY. The New Jersey Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the New Jersey
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the New Jersey Fund, no other corporate acts or proceedings by the
New Jersey Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
New Jersey Fund and constitutes the legal, valid and binding obligation of New
Jersey Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).

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

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

(1) any change in the business, results of operations, assets, or financial
condition or the manner of conducting the business of the New Jersey Fund, other

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than changes in the ordinary course of its business, or any pending or
threatened litigation, which has had or may have a material adverse effect on
such business, results of operations, assets or financial condition;

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

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

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

(5) any amendment of the Trust's Declaration of Trust or Designation of Series
of the New Jersey Fund; or

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

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

N. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conforms and will conform as it relates to the New Jersey Fund, in
all material respects, to the applicable requirements of the applicable Federal
and state securities laws and the rules and regulations of the SEC thereunder,
and do not and will not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representations or warranties in this
Section 4N apply to statements or omissions made in reliance upon and in
conformity with written information concerning the Municipal Fund furnished to
the New Jersey Fund by the Municipal Fund.

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

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

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

5. THE MUNICIPAL FUND'S REPRESENTATIONS AND WARRANTIES.

The Municipal Fund hereby represents and warrants to the New Jersey Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the New Jersey Fund that:

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

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

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December 31, 1996, true and complete copies of which have been heretofore
furnished to the New Jersey Fund fairly represent the financial condition and
the results of operations of the Municipal Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The Municipal Fund shall furnish to the New Jersey
Fund (i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the Municipal Fund for the period ended June 30, 1997, and (ii) within five
(5) business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending
on the Closing Date; such financial statements will represent fairly the
financial position and portfolio of investments and the results of its
operations as of, and for the period ending on, the dates of such statements
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such
financial statements shall be certified by the Treasurer of the Municipal Fund
as complying with the requirements hereof.

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

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

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

H. CORPORATE AUTHORITY. The Municipal Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated

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herein. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been duly authorized
by the Municipal Fund's Board of Trustees, no other corporate acts or
proceedings by the Municipal Fund are necessary to authorize this Agreement
and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the Municipal Fund and constitutes a valid and
binding obligation of the Municipal Fund enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar law affecting
creditors' rights generally, or by general principals of equity (regardless of
whether enforcement is sought in a proceeding at equity or law).

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

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

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

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

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thereof contained in the Municipal Fund's Prospectus furnished to the New
Jersey Fund.

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

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

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

6. COVENANTS.

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

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

B. GOVERNMENT FILINGS; CONSENTS. The New Jersey Fund and Municipal Fund
shall file all reports required to be filed by the New Jersey Fund and
Municipal Fund with the SEC between the date of this Agreement and the Closing
Date and shall deliver to the other party copies of all such reports

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promptly after the same are filed. Except where prohibited by applicable
statutes and regulations, each party shall promptly provide the other (or its
counsel) with copies of all other filings made by such party with any state,
local or federal government agency or entity in connection with this Agreement
or the transactions contemplated hereby. Each of the New Jersey Fund and the
Municipal Fund shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.

C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other
and furnish to the other the information relating to the New Jersey Fund or
Municipal Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to
be set forth in the Registration Statement or the Prospectus/Proxy Statement,
as the case may be. The New Jersey Fund shall promptly prepare and provide the
Prospectus/Proxy Statement to the Municipal Fund and the Municipal Fund shall
promptly prepare and file with the SEC the Registration Statement, in which
the Prospectus/Proxy Statement will be included as a prospectus. In connection
with the Registration Statement, insofar as it relates to the New Jersey Fund
and its affiliated persons, the Municipal Fund shall only include such
information as is approved by the New Jersey Fund for use in the Registration
Statement. The Municipal Fund shall not amend or supplement any such
information regarding the New Jersey Fund and such affiliates without the
prior written consent of the New Jersey Fund which consent shall not be
unreasonably withheld or delayed. The Municipal Fund shall promptly notify and
provide the New Jersey Fund with copies of all amendments or supplements filed
with respect to the Registration Statement. The Municipal Fund shall use all
reasonable efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing. The Municipal
Fund shall also take any action (other than qualifying to do business in any
jurisdiction in which it is now not so qualified) required to be taken under
any applicable state securities laws in connection with the issuance of the
Municipal Fund's shares of beneficial interest in the transactions
contemplated by this Agreement, and the New Jersey Fund shall furnish all
information concerning the New Jersey Fund and the holders of the New Jersey
Fund's shares of beneficial interest as may be reasonably requested in
connection with any such action.

D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
New Jersey Fund shall make available to the Municipal Fund a copy of each
report, schedule, registration statement and other document (the "Documents")
filed or received by it during such period pursuant to the requirements of
Federal

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or state securities laws or Federal or state banking laws (other than
Documents which such party is not permitted to disclose under applicable law).
During the period prior to the Closing Date, the Municipal Fund shall make
available to the New Jersey Fund each Document pertaining to the transactions
contemplated hereby filed or received by it during such period pursuant to
Federal or state securities laws or Federal or state banking laws (other than
Documents which such party is not permitted to disclose under applicable law).

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

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

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

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

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connection with any of the transactions contemplated by this Agreement on the
basis of any act or statement alleged to have been made by such first party or
its affiliate.

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

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

K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Trust, the Municipal Fund nor the New Jersey
Fund shall take any action, or cause any action to be taken (including,
without limitation, the filing of any tax return) that is inconsistent with
such treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the Trust, the Municipal Fund and the New Jersey Fund will
take such action, or cause such action to be taken, as is reasonably necessary
to enable Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the New
Jersey Fund, to render the tax opinion required herein.

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

7. CONDITIONS TO OBLIGATIONS OF THE NEW JERSEY FUND.

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

A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest the New Jersey Fund.

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

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

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

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

F. TAX OPINION. The New Jersey Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the New Jersey
Fund, dated as of the Closing Date, addressed to the Trust, New Jersey Fund
and Municipal Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described
in Section 368(a) of the Code, substantially in the form attached as Annex A.

G. OPINION OF COUNSEL. The New Jersey Fund shall have received the opinion
of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Trust and
Municipal Fund, dated as of the Closing Date, addressed to the New Jersey Fund
substantially in the form and to the effect that: (i) the Trust is duly formed
and in good standing as a business trust under the laws of the State of
Delaware; (ii) the Board of Trustees of the Trust has duly designated the
Municipal Fund as a series of the Trust pursuant to the terms of the
Declaration of Trust of the Trust; (iii) the Municipal Fund is registered as
an open-end, diversified

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management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized and approved by all requisite action of Trust and this
Agreement has been duly executed and delivered by the Trust on behalf of the
Municipal Fund and (assuming the Agreement is a valid and binding obligation
of the other parties thereto) is a valid and binding obligation of the
Municipal Fund; (v) neither the execution or delivery by the Trust on behalf
of the Municipal Fund of this Agreement nor the consummation by the Trust or
Municipal Fund of the transactions contemplated thereby contravene the Trust's
Declaration of Trust, or, to the best of their knowledge, violate any
provision of any statute or any published regulation or any judgment or order
disclosed to it by the Trust as being applicable to the Trust or the Municipal
Fund; (vi) to the best of their knowledge based solely on the certificate of
an appropriate officer of the Municipal Fund attached hereto, there is no
pending or threatened litigation which would have the effect of prohibiting
any material business practice or the acquisition of any material property or
the conduct of any material business of the Municipal Fund or might have a
material adverse effect on the value of any assets of the Municipal Fund;
(vii) the Municipal Fund's Shares have been duly authorized and upon issuance
thereof in accordance with this Agreement will, subject to certain matters
regarding the liability of a shareholder of a Delaware trust, be validly
issued, fully paid and nonassessable; (viii) except as to financial statements
and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to the Municipal Fund comply as to form in all
material respects with the requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
thereunder and no facts have come to counsel's attention which would cause
them to believe that as of the effectiveness of the portions of the
Registration Statement applicable to the Municipal Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ix) to the best of their knowledge and
information and subject to the qualifications set forth below, the execution
and delivery by the Trust on behalf of the Municipal Fund of the Agreement and
the consummation of the transactions therein contemplated do not require,
under the laws of the States of Delaware or Illinois or the federal laws of
the United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained). Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of

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their legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the New Jersey
Fund of any material benefit under the Agreement; or (c) which can be readily
obtained without significant delay or expense to the New Jersey Fund, without
loss to the New Jersey Fund of any material benefit under the Agreement and
without any material adverse effect on the New Jersey Fund during the period
such consent, approval, authorization, registration, qualification or order
was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a)
laws which are specifically referred to in this opinion, (b) laws of the
States of Delaware and Illinois and the federal laws of the United States
which, in counsel's experience, are normally applicable to transactions of the
type provided for in the Agreement and (c) court orders and judgments
disclosed to counsel by the Trust on behalf of the Municipal Fund in
connection with the opinion. In addition, although counsel need not
specifically have considered the possible applicability to the Trust or the
Municipal Fund of any other laws, orders or judgments, nothing has come to
their attention in connection with their representation of the Trust and the
Municipal Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order or
filing is required.

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

8. CONDITIONS TO OBLIGATIONS OF MUNICIPAL FUND.

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

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the New Jersey Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business, properties or assets of the New Jersey Fund, and the
Municipal Fund shall have received a certificate of an authorized officer of
the New Jersey Fund satisfactory in form and substance to the Municipal Fund
so stating. The New Jersey Fund shall have performed and complied in all
material respects with all agreements, obligations and covenants required by
this

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Agreement to be so performed or complied with by them on or prior to the
Closing Date.

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

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

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

F. TAX OPINION. The Municipal Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the New Jersey
Fund, dated as of the Closing Date, addressed to the Trust, New Jersey Fund
and Municipal Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described
in Section 368(a) of the Code substantially in the form attached as Annex A.

G. OPINION OF COUNSEL. The Municipal Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Trust and the
New Jersey Fund, dated as of the Closing Date, addressed to the Municipal
Fund, substantially in the form and to the effect that: (i) the Trust is duly
formed and existing as a trust under the laws of the State of Delaware; (ii)
the Board of Trustees of the Trust has duly designated the New Jersey Fund as
a series of the Trust pursuant to the terms of the Declaration of Trust of the
Trust; (iii) the New Jersey Fund is registered as an open-end, non-diversified
management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized by all requisite action of the Trust and this Agreement
has been duly executed and delivered by the Trust on behalf of the New Jersey
Fund and (assuming the Agreement is a valid and binding obligation of the
other parties thereto) is a valid and binding obligation of the New Jersey
Fund (v) neither the execution or delivery by the Trust on behalf of the New
Jersey Fund of this Agreement nor the consummation by the Trust or New Jersey
Fund of the transactions contemplated thereby contravene the Trust's
Declaration of Trust or, to their knowledge, violate any provision of any
statute, or any published regulation or any judgment or order disclosed to
them by the Trust as being applicable to the Trust or New Jersey Fund; (vi) to
their knowledge based solely

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on the certificate of an appropriate officer of the New Jersey Fund attached
thereto, there is no pending, or threatened litigation involving the New
Jersey Fund except as disclosed therein; (vii) except as to financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to the New Jersey Fund comply as to form in all
material respects with their requirements of the Securities Act, the
Securities Exchange Act and the 1940 Act and the rules and regulations of the
SEC thereunder and no facts have come to counsel's attention which cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to the New Jersey Fund, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and (viii) to their knowledge and subject
to the qualifications set forth below, the execution and delivery by the Trust
on behalf of the New Jersey Fund of the Agreement and the consummation of the
transactions therein contemplated do not require, under the laws of the States
of Delaware or Illinois, or the federal laws of the United States, the
consent, approval, authorization, registration, qualification or order of, or
filing with, any court or governmental agency or body (except such as have
been obtained under the Securities Act, the 1940 Act or the rules and
regulations thereunder.) Counsel need express no opinion, however, as to any
such consent, approval, authorization, registration, qualification, order or
filing (a) which may be required as a result of the involvement of other
parties to the Agreement in the transactions contemplated by the Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them; (b) the absence of which does not deprive the
Municipal Fund of any material benefit under such agreements; or (c) which can
be readily obtained without significant delay or expense to the Municipal
Fund, without loss to the Municipal Fund of any material benefit under the
Agreement and without any material adverse effect on them during the period
such consent, approval authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a)
laws which are specifically referred to in the opinion, (b) laws of the States
of Delaware and Illinois and the federal laws of the United States which, in
our experience, are normally applicable to transactions of the type provided
for in the Agreement and (c) court orders and judgments disclosed to counsel
by the New Jersey Fund in connection with the opinion. In addition, although
counsel need not specifically considered the possible applicability to the New
Jersey Fund of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the New Jersey Fund in
this transaction

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that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.

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

I. SHAREHOLDER LIST. The New Jersey Fund shall have delivered to the
Municipal Fund an updated list of all shareholders of the New Jersey Fund, as
reported by the New Jersey Fund's transfer agent, as of one (1) business day
prior to the Closing Date with each shareholder's respective holdings in the
New Jersey Fund, taxpayer identification numbers, Form W9 and last known
address.

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

9. AMENDMENT, WAIVER AND TERMINATION.

(A) The parties hereto may, by agreement in writing authorized by the Board,
amend this Agreement at any time before or after approval thereof by the
shareholders of the New Jersey Fund; provided, however, that after receipt of
New Jersey Fund shareholder approval, no amendment shall be made by the parties
hereto which substantially changes the terms of Sections 1, 2 and 3 hereof
without obtaining New Jersey Fund's shareholder approval thereof.

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

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

(i) by the mutual consents of the Board on behalf of the New Jersey Fund and
Municipal Fund;

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(ii) by the New Jersey Fund, if the Municipal Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;

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

(iv) by either the New Jersey Fund or Municipal Fund, if the Closing has not
occurred on or prior to December 31, 1997 (provided that the rights to
terminate this Agreement pursuant to this subsection (C)(iv) shall not be
available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such date);

(v) by the Municipal Fund in the event that: (a) all the conditions
precedent to the New Jersey Fund's obligation to close, as set forth in
Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the Municipal Fund gives the New Jersey Fund
written assurance of its intent to close irrespective of the satisfaction or
nonsatisfaction of all conditions precedent to the Municipal Fund's obligation
to close, as set forth in Section 8 of this Agreement; and (c) the New Jersey
Fund then fails or refuses to close within the earlier of five (5) business
days or December 31, 1997; or

(vi) by the New Jersey Fund in the event that: (a) all the conditions
precedent to the Municipal Fund obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at the
Closing); (b) the New Jersey Fund gives the Municipal Fund written assurance
of its intent to close irrespective of the satisfaction or nonsatisfaction of
all the conditions precedent to the New Jersey Fund's obligation to close, as
set forth in Section 7 of this Agreement; and (c) the Municipal Fund then
fails or refuses to close within the earlier of five (5) business days or
December 31, 1997.

10. REMEDIES.

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

11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.

A. SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant

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

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

C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best efforts
to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such

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notice, Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost and expense, to
assume the defense of any such matter, in which case Indemnified Party shall
have the right, at no cost or expense to Indemnitor, to participate in such
defense. If Indemnitor does not assume the defense of such matter, and in any
event until Indemnitor states in writing that it will assume the defense,
Indemnitor shall pay all costs of Indemnified Party arising out of the defense
until the defense is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain Indemnitor's prior written consent to any
payment or settlement of any such claim. Indemnitor shall keep Indemnified Party
fully apprised at all times as to the status of the defense. If Indemnitor does
not assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided for
hereunder, Indemnitor shall be subrogated to all rights of Indemnified Party
with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made.

12. SURVIVAL.

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

13. NOTICES.

All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the New Jersey Fund shall be addressed to the
New Jersey Fund c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel, or
at such other address as the New Jersey Fund may designate by written notice to
the Municipal Fund. Notice to the Municipal Fund shall be addressed to the
Municipal Fund c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel, or
at such other address and to the attention of such other person as the Municipal
Fund may designate by written notice to the New Jersey Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.

14. SUCCESSORS AND ASSIGNS.

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

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15. BOOKS AND RECORDS.

The New Jersey Fund and the Municipal Fund agree that copies of the books and
records of the New Jersey Fund relating to the Assets including, but not limited
to all files, records, written materials; e.g., closing transcripts,
surveillance files and credit reports shall be delivered by the New Jersey Fund
to the Municipal Fund at the Closing Date. In addition to, and without limiting
the foregoing, the New Jersey Fund and the Municipal Fund agree to take such
action as may be necessary in order that the Municipal Fund shall have
reasonable access to such other books and records as may be reasonably
requested, all for three years after the Closing Date and for the three tax
years ending December 31, 1994, December 31, 1995 and December 31, 1996; namely,
general ledger, journal entries, voucher registers; distribution journal;
payroll register, monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.

16. GENERAL.

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

17. LIMITATION OF LIABILITY.

Consistent with the Trust's Declarations of Trust, notice is hereby given and
the parties hereto acknowledge and agree that this instrument is executed on
behalf of the Trustees of the Trust on behalf of the Municipal Fund and the New
Jersey Fund, respectively, as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders of the Trust, Municipal Fund or New Jersey Fund individually but
binding only upon the assets and property of the Municipal Fund or the New
Jersey Fund the case may be.

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

VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST,
a Delaware business trust on behalf of VAN
KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME
FUND

By:

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

Title:

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

Attest:

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

Title:

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

VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST,
a Delaware business trust on behalf of VAN
KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE
INCOME FUND

By:

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

Title:

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

Attest:

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

Title:

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

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<PAGE> 141

APPENDIX B

STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND

Dated April 30, 1997,
as supplemented July 21, 1997
<PAGE> 142

VAN KAMPEN AMERICAN CAPITAL

JULY 21, 1997 SUPPLEMENT TO STATEMENTS OF ADDITIONAL INFORMATION

Statement of Additional Information dated April 30, 1997
VKAC U.S. Government Fund
VKAC Insured Tax Free Income Fund
VKAC California Insured Tax Free Fund
VKAC Tax Free High Income Fund
VKAC Municipal Income Fund
VKAC Intermediate Term Municipal Income Fund
VKAC Florida Insured Tax Free Income Fund
VKAC New Jersey Tax Free Income Fund
VKAC New York Tax Free Income Fund
VKAC Pennsylvania Tax Free Income Fund

Statement of Additional Information dated April 25, 1997
VKAC Foreign Securities Fund

The section of the Statement of Additional Information entitled the
Trustees and Officers is hereby supplemented by adding Richard M. DeMartini and
Don G. Powell, effective May 31, 1997, as Trustees of the Fund.

Mr. DeMartini is President and Chief Operating Officer, Dean Witter
Capital, a division of Dean Witter Reynolds Inc. Mr. DeMartini is a Director of
InterCapital Funds, Dean Witter Distributors, Inc. and Dean Witter Trust
Company. Trustee of the TCW/DW Funds. Director of the National Healthcare
Resources, Inc. Formerly Vice Chairman of the Board of the National Association
of Securities Dealers, Inc. and Chairman of the Board of The Nasdaq Stock
Market, Inc. Trustee of each of the funds in the Fund Complex. Mr. DeMartini's
principal business address is Two World Trade Center, 66th Floor, New York, NY
10048, and his date of birth is 10/12/52.

Mr. Don G. Powell is currently Chairman and a Director of Van Kampen
American Capital, Inc., VK/AC Holding, Inc., Van Kampen American Capital
Distributors, Inc., Van Kampen American Capital Investment Advisory Corp., Van
Kampen American Capital Asset Management, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American Capital Advisors, Inc., ACCESS Investor
Services, Inc., Van Kampen American Capital Recordkeeping Services, Inc., Van
Kampen American Capital Trust Company and Van Kampen American Capital Exchange
Corporation. Prior to April 15, 1997, Chairman and a Director of Van Kampen
American Capital Services, Inc. Prior to November 1996, President, Chief
Executive Officer and a Director of VK/AC Holding, Inc. Chairman of the Board of
Governors and the Executive Committee of the Investment Company Institute. Prior
to July of 1996, President, Chief Executive Officer and a Trustee/Director of
the funds in the Fund Complex, open-end investment companies advised by Van
Kampen American Capital Management, Inc. and closed-end investment companies
advised by Van Kampen American Capital Investment Advisory Corp. Mr. Powell's
principal business address is 2800 Post Oak Blvd., 45th Floor, Houston, TX
77056, and his date of birth is 10/19/39.

Dennis J. McDonnell resigned as a Trustee of the Fund, effective May 31,
1997.
<PAGE> 143

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

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

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1997 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). This Statement of Additional Information incorporates
by reference the entire Prospectus.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund and the Trust...................................... B-2
Investment Policies and Restrictions........................ B-2
Additional Investment Considerations........................ B-4
Description of Municipal Securities Ratings................. B-13
Trustees and Officers....................................... B-19
Investment Advisory and Other Services...................... B-27
Custodian and Independent Accountants....................... B-29
Portfolio Transactions and Brokerage Allocation............. B-29
Tax Status of the Fund...................................... B-30
The Distributor............................................. B-30
Distribution and Service Plans.............................. B-31
Legal Counsel............................................... B-32
Performance Information..................................... B-32
Report of Independent Accountants........................... B-35
Financial Statements........................................ B-36
Notes to Financial Statements............................... B-54
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1997.

B-1
<PAGE> 144

THE FUND AND THE TRUST

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

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

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

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

INVESTMENT POLICIES AND RESTRICTIONS

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

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

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

B-2
<PAGE> 145

issuer or, if, as a result, the Fund would hold more than 10% of the
outstanding voting securities of an issuer, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.

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), except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.

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

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

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

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

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

8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.

9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.

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

11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or

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

The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.

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

ADDITIONAL INVESTMENT CONSIDERATIONS

MUNICIPAL SECURITIES

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

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

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ability of the lease obligee to direct the sale of the underlying assets, (c)
the general creditworthiness of the lease obligor, (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property in
the event such property is no longer considered essential by the municipality,
(e) the legal recourse of the lease obligee in the event of such a failure to
appropriate funding and (f) any limitations which are imposed on the lease
obligor's ability to utilize substitute property or services than those covered
by the lease obligation.

Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
leases and participation certificates may not be readily marketable.

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

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

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

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

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taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income.

The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. The Fund may, from time to time,
adopt a more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.

HIGH YIELD MUNICIPAL SECURITIES

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

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

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

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resale, the Fund may incur additional risks and costs. Illiquid and restricted
securities are particularly difficult to dispose of.

Lower grade tax-exempt municipal securities generally involve greater credit
risk than higher grade municipal securities. A general economic downturn or a
significant increase in interest rates could severely disrupt the market for
lower grade tax-exempt municipal securities and adversely affect the market
value of such securities. In addition, in such circumstances, the ability of
issuers of lower grade tax-exempt municipal securities to repay principal and to
pay interest, to meet projected financial goals and to obtain additional
financing may be adversely affected. Such consequences could lead to an
increased incidence of default for such securities and adversely affect the
value of the lower grade tax-exempt municipal securities in the Fund's portfolio
and thus the Fund's net asset value. The secondary market prices of lower grade
tax-exempt municipal securities are less sensitive to changes in interest rates
than are those for higher rated tax-exempt municipal securities, but are more
sensitive to adverse economic changes or individual issuer developments. Adverse
publicity and investor perceptions, whether or not based on rational analysis,
may also affect the value and liquidity of lower grade tax-exempt municipal
securities.

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

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

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

STRATEGIC TRANSACTIONS

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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.

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.

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

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

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underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller the
obligation to sell, the underlying instrument at the exercise price. The Fund's
purchase of a call option on a security, financial future, index, or other
instrument might be intended to protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase such instrument. An American style put
or call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Fund is authorized to purchase and sell
exchange listed options and over-the-counter options ("OTC options"). Exchange
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
a paradigm, but is also applicable to other financial intermediaries.

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

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

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.

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"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.

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

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

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

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

B-10
<PAGE> 153

entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price nor that
delivery will occur.

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

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

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

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.

B-11
<PAGE> 154

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 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
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
securities 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 securities equal to the exercise price.

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

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

With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid 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.

B-12
<PAGE> 155

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.

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

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

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

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

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

2. Nature of and provisions of the obligation;

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

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

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

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

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

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

B-13
<PAGE> 156
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.

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

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

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

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

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

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.

<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.
</TABLE>

B-14
<PAGE> 157
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.

BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.

2. MUNICIPAL NOTES

A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating.

The following criteria will be used in making that assessment:

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

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

The note rating symbols and definitions are as follows:

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

SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.

SP-3 Speculative capacity to pay principal and interest.
</TABLE>

3. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.

Ratings are graded into several categories, ranging from 'A-1' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:

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

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

B-15
<PAGE> 158
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 by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.

4. TAX-EXEMPT DUAL RATINGS

S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.

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

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

1. LONG-TERM MUNICIPAL BONDS

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

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

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

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

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

B-16
<PAGE> 159
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.

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

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

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

CON (..) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally and designated with the prefix "Con" followed
by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of
projects unseasoned in 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.

(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.

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.

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.

B-17
<PAGE> 160

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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.

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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:

- Leading market positions in well established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.

- Broad margins in earning coverage of fixed financial charges
and high internal cash generation.

- Well established access to a range of financial markets and
assured sources of alternate liquidity.

Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.

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

B-18
<PAGE> 161

TRUSTEES AND OFFICERS

The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and other executive officers of the Fund's investment
adviser and their principal occupations for the last five years and their
affiliations, if any, with VK/AC Holding, Inc. ("VKAC Holding"), Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), Van Kampen
American Capital Investment Advisory Corp. ("Advisory Corp."), Van Kampen
American Capital Asset Management, Inc. ("Asset Management"), Van Kampen
American Capital Distributors, Inc., the distributor of the Fund's shares (the
"Distributor") and ACCESS Investors Services Inc., the Fund's transfer agent
("ACCESS"). Advisory Corp. and Asset Management sometimes are referred to herein
collectively as the "Advisers". For purposes hereof, the term "Fund Complex"
includes each of the open-end investment companies advised by the Advisory Corp.
and each of the open-end investment companies advised by the Asset Management
(excluding the American Capital Exchange Fund and the Common Sense Trust).

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>

J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Partner, Ray & Berndtson, Inc. An executive recruiting
Sears Tower and management consulting firm. Formerly, Executive Vice
233 South Wacker Drive President of ABN AMRO, N.A., a Dutch bank holding
Suite 4020 company. Prior to 1992, Executive Vice President of La
Chicago, IL 60606 Salle National Bank. Trustee of each of the funds in the
Date of Birth: 06/03/48 Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the funds in the Fund Complex.
Dennis J. McDonnell*...................... President and a Director of VKAC. President, Chief
One Parkview Plaza Operating Officer and a Director of the Advisers.
Oakbrook Terrace, IL 60181 Director or officer of certain other subsidiaries of
Date of Birth: 05/20/42 VKAC. Prior to November 1996, Executive Vice President
and a Director of VKAC Holding. President and Trustee of
each of the funds in the Fund Complex. President,
Chairman of the Board and Trustee of other investment
companies advised by the Advisers or their affiliates.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee of each of the funds
in the Fund Complex.
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Trustee of each of
the funds in the Fund Complex.

</TABLE>

B-19
<PAGE> 162
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------

<S> <C>
Phillip B. Rooney......................... Private investor. Director, Illinois Tool Works, Inc., a manufacturing
348 East Third Street company; Director, The Servicemaster Company, a business and consumer
Hinsdale, IL 60521 services company; Director, Urban Shopping Centers Inc., a retail mall
Date of Birth: 07/08/44 management company; Director, Stone Container Corp., a paper
manufacturing company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, WMX Technologies Inc., an
environmental services company, and prior to that President and Chief
Operating Officer, WMX Technologies Inc. Trustee of each of the funds
in the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the Graduate School,
155 Hickory Lane Stevens Institute of Technology. Director, Dynalysis of Princeton, a
Closter, NJ 07624 firm engaged in engineering research. Trustee of each of the funds in
Date of Birth: 08/02/24 the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive (Illinois), legal counsel to the funds in the Fund Complex, open-end
Chicago, IL 60606 funds advised by Van Kampen American Capital Management, Inc. and
Date of Birth: 08/22/39 closed-end funds advised by Advisory Corp. Trustee of each of the funds
in the Fund Complex, open-end funds advised by Van Kampen Capital
Management, Inc. and closed-end funds advised by Advisory Corp.
</TABLE>

- ---------------
* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the Advisers and
the Fund by reason of his positions with VKAC and its affiliates. Mr. Whalen
is an interested person of the Fund by reason of his firm currently acting as
legal counsel to the Fund and is an interested person of Asset Management with
respect to certain funds advised by Asset Management by reason of his firm in
the past acting as legal counsel to Asset Management.

OFFICERS

Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and Hill are
located at One Parkview Plaza, Oakbrook Terrace, IL 60181. The Fund's other
officers are located at 2800 Post Oak Blvd., Houston, TX 77056.

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>

Peter W. Hegel.............. Vice President Executive Vice President of the Advisers.
Date of Birth: 06/25/56 Director of Asset Management. Officer of
certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.

Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.

</TABLE>
B-20
<PAGE> 163
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell Chairman, President, Chief Executive
2800 Post Oak Blvd. Officer and a Director of VKAC. Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of
Date of Birth: 10/19/39 the Advisers and the Distributor. Chairman
and a Director of ACCESS. Director or
officer of certain other subsidiaries of
VKAC. Chairman of the Board of Governors
and the Executive Committee of the
Investment Company Institute. Prior to
November, 1996, President, Chief Executive
Officer and a Director of VKAC Holding.
President, Chief Executive Officer and a
Trustee/Director of certain investment
companies advised by Asset Management and
prior to July 1996, President, Chief
Executive Officer and a Trustee of the
funds in the Fund Complex and closed-end
investment companies advised by Advisory
Corp.

Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers.
Date of Birth: 04/20/42 Director of Asset Management. Director or
officer of certain other subsidiaries of
VKAC. Vice President of each of the funds
in the Fund Complex and certain other
investment companies advised by the
Advisers or their affiliates.

Paul R. Wolkenberg.......... Vice President Executive Vice President of the VKAC, the
Date of Birth: 11/10/44 Advisers and the Distributor. President,
Chief Executive Officer and a Director of
ACCESS. Director or officer of certain
other subsidiaries of VKAC. Vice President
of each of the funds in the Fund Complex
and certain other investment companies
advised by the Advisers or their
affiliates.

Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers. Vice
Date of Birth: 01/11/56 Financial Officer President and Chief Financial Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>

B-21
<PAGE> 164
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.

Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.

Nicholas Dalmaso............ Assistant Secretary Assistant Vice President and Senior
Date of Birth: 03/01/65 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Advisers and
the Distributor. Officer of certain other
subsidiaries of VKAC. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.

Huey P. Falgout, Jr......... Assistant Secretary Assistant Vice President and Senior
Date of Birth: 11/15/63 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Advisers,
the Distributor and ACCESS. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.

Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Advisers, the
Distributor and ACCESS. Officer of certain
other subsidiaries of VKAC. Prior to
November 1996, Senior Vice President,
Deputy General Counsel and Assistant
Secretary of VKAC Holding. Assistant
Secretary of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or the affiliates.

Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers and the Distributor. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.

Steven M. Hill.............. Assistant Treasurer Assistant Vice President of the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.

M. Robert Sullivan.......... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
</TABLE>

B-22
<PAGE> 165

Each of the trustees holds the same position with each of the funds in the
Fund Complex. As of December 31, 1996, there were 51 funds in the Fund Complex.
Each trustee who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley (each a "Non-Affiliated Trustee") is
compensated by an annual retainer and meeting fees for services to the funds in
the Fund Complex. Each fund in the Fund Complex provides a deferred compensation
plan to its Non-Affiliated Trustees that allows trustees to defer receipt of
their compensation and earn a return on such deferred amounts based upon the
return of the common shares of the funds in the Fund Complex as more fully
described below. Each fund in the Fund Complex also provides a retirement plan
to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.

The compensation of each Non-Affiliated Trustee from each fund in the Fund
Complex advised by Advisory Corp. (each a "VK Fund" and collectively the "VK
Funds") includes an annual retainer in an amount equal to $2,500 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. Each Non-Affiliated Trustee receives a per meeting fee from
each VK Fund in the amount of $125 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Each Non-Affiliated Trustee receives a per meeting fee
from each VK Fund in the amount of $125 per special meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee, provided that no compensation will be paid in connection
with certain telephonic special meetings.

The compensation of each Non-Affiliated Trustee from the funds in the Fund
Complex advised by Asset Management (each an "AC Fund" or collectively the "AC
Funds") includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee in the amount of $125 per special meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a trustee,
provided that no compensation will be paid in connection with certain telephonic
special meetings.

The trustees approved an aggregate compensation cap with respect to funds in
the Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding any
retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of funds in the Fund Complex as of July
21, 1995 and certain other exceptions. For the calendar year ended December 31,
1996, certain trustees received aggregate compensation from the funds in the
Fund Complex over $84,000 due to compensation received but not subject to the
cap, including compensation from new funds added to the Fund Complex after July
22, 1995 and certain special meetings in 1996. In addition, each of Advisory
Corp. or Asset Management, as the case may be, agreed to reimburse each fund in
the Fund Complex through December 31, 1996 for any increase in the aggregate
trustee's compensation over the aggregate compensation paid by such fund in its
1994 fiscal year, provided that if a fund did not exist for the entire 1994
fiscal year appropriate adjustments will be made.

Each Non-Affiliated Trustee generally can elect to defer receipt of all or a
portion of the compensation earned by such Non-Affiliated Trustee until
retirement. Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to the return on the common shares of such Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee,
with the same economic effect as if such Non-Affiliated Trustee had invested in
one or more funds in the Fund Complex. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those funds selected by the Non-Affiliated
Trustees in

B-23
<PAGE> 166

order to match the deferred compensation obligation. The deferred compensation
plan is not funded and obligations thereunder represent general unsecured claims
against the general assets of the Fund.

Each fund in the Fund Complex has adopted a retirement plan. Under the Fund's
retirement plan, a Non-Affiliated Trustee who is receiving trustee's
compensation from the Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such trustee's retirement from the Fund. Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from the Fund. Each
trustee has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth below. The retirement plan
contains a Fund Complex retirement benefit cap of $60,000 per year. Asset
Management has reimbursed each AC Fund for the expenses related to the
retirement plan through December 31, 1996.

Additional information regarding compensation and benefits for trustees is set
forth below. As indicated in the notes accompanying the table, the amounts
relate to either the Trust's most recently completed fiscal year or the Fund
Complex' most recently completed calendar year ended December 31, 1996.

1996 COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR ESTIMATED MAXIMUM BEFORE DEFERRAL
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE TRUST UPON COMPLEX PAID
NAME(1) TRUST(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- ------------------------ ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan* $20,000 $ 4,229 $20,000 $104,875
Philip P. Gaughan 3,750 7,529 6,750 16,875
Linda Hutton Heagy* 20,000 490 20,000 104,875
Dr. Roger Hilsman 20,000 0 0 103,750
R. Craig Kennedy* 20,000 380 20,000 104,875
Donald C. Miller 20,000 13,241 9,250 104,875
Jack E. Nelson* 20,000 2,636 20,000 97,875
David Rees 4,750 0 0 22,000
Jerome L. Robinson* 20,000 11,665 7,250 101,625
Lawrence J. Sheehan 4,750 0 0 22,000
Dr. Fernando Sisto* 20,000 7,056 12,000 104,875
Wayne W. Whalen* 20,000 1,834 20,000 104,875
William S. Woodside 20,000 0 0 104,875
</TABLE>

- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney also is a
current member of the Board of Trustees but is not included in the
compensation table because he did not serve on the Board of Trustees or
receive any compensation from the Trust prior to April 14, 1997. Messrs.
McDonnell and Powell, also trustees of the Trust during all or a portion of
the Trust's last fiscal year, are not included in the compensation table
because they are affiliated persons of the Advisers and are not eligible for
compensation or retirement benefits from the Trust.

(1) Persons not designated by an asterisk are not currently members of the Board
of Trustees, but were members of the Board of Trustees during the Trust's
most recently completed fiscal year. Messrs. Gaughan and Rees retired from
the Board of Trustees on January 26, 1996 and January 29, 1996,
respectively. Mr. Sheehan was removed from the Board of Trustees effective
January 29, 1996. Messrs. Hilsman, Miller and Woodside retired from the
Board of Trustees on December 31, 1996.

B-24
<PAGE> 167

The detail of aggregate compensation before deferral for each series,
including the Fund, are shown in Table A below. Certain trustees deferred
compensation from the Trust during the fiscal year ended December 31, 1996;
the aggregate compensation deferred from all eight series of the Trust,
including the Fund, is as follows: Mr. Branagan, $5,750; Mr. Gaughan,
$3,750; Ms. Heagy, $15,000; Mr. Kennedy, $9,500; Mr. Miller, $20,000; Mr.
Nelson, $20,000; Mr. Robinson, $18,000; and Mr. Whalen, $19,625. The details
of amounts deferred for each series, including the Fund, are shown in Table
B below. Amounts deferred are retained by the respective fund and earn a
rate of return determined by reference to either the return on the common
shares of such fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
all eight series of the Trust, including the Fund, as of the Trust's fiscal
year ended December 31, 1996 is as follows: Mr. Branagan, $5,678; Mr.
Gaughan, $20,094; Ms. Heagy, $20,472; Mr. Kennedy, $47,294; Mr. Miller,
$55,827; Mr. Nelson, $57,771; Mr. Robinson, $54,847; and Mr. Whalen,
$49,269. The details of cumulative deferred compensation (including
interest) for each series, including the Fund, are shown in Table C below.
The deferred compensation plan is described above the Compensation Table.

(3) The amounts shown in this column represent the retirement benefits accrued
by all eight series of the Trust, including the Fund, with respect to the
Trust's fiscal year ended December 31, 1996. The details of retirement
benefits accrued for each series, including the Fund, are shown in Table D
below. The retirement plan is described above the Compensation Table.

(4) This is the estimated maximum annual benefits payable by the Trust in each
year of the 10-year period commencing in the year of such trustee's
retirement from the Trust. The estimated maximum annual benefit, except for
trustees who have retired or are near retirement, is based upon $2,500 per
series assuming: the trustee has 10 or more years of service on the Board of
Trustees (including years of service prior to the adoption of the retirement
plan) 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 a series
of the Trust may receive reduced retirement benefits from such series. The
actual annual benefit may be less if the trustee is subject to the Fund
Complex retirement benefit cap or if the trustee is not fully vested at the
time of retirement. Each Non-Affiliated Trustee of the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table E below.

(5) The amounts shown in this column represent the aggregate compensation paid
by all 51 of the investment companies in the Fund Complex as of December 31,
1996 before deferral by the trustees under the deferred compensation plan.
Certain trustees deferred all or a portion of their aggregate compensation
from the Fund Complex during the calendar year ended December 31, 1996. The
deferred compensation earns a rate of return determined by reference to the
return on the shares of the funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap covered the period July 22, 1995
through December 31, 1996. For the calendar year ended December 31, 1996,
certain trustees received compensation over $84,000 in the aggregate due to
compensation received but not subject to the cap, including compensation
from new funds added to the Fund Complex after July 22, 1995 and certain
special meetings in 1996. The Advisers and their affiliates also serve as
investment adviser for other investment companies; however, with the
exception of Messrs. McDonnell, Powell and Whalen, the trustees were not
trustees of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $243,375 during the calendar year
ended December 31, 1996.

As of April 4, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.

B-25
<PAGE> 168

TABLE A
1996 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES
--------- -------- -------- ------- ----- ------- ------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.... 12/31 $ 3,125 $ 625 $3,125 $3,125 $3,125 $ 3,125 $ 3,125 $ 750
Tax Free High Income Fund....... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
California Insured Tax Free
Income Fund................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Municipal Income Fund........... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Intermediate Term Municipal
Income Fund................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Florida Insured Tax Free Income
Fund.......................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
New Jersey Tax Free Income
Fund.......................... 12/31 625 0 625 625 625 625 625 125
New York Tax Free Income Fund... 12/31 625 0 625 625 625 625 625 125
Trust Total................... 20,000 3,750 20,000 20,000 20,000 20,000 20,000 4,750

<CAPTION>
TRUSTEE
------------------------------------------------
FUND NAME ROBINSON SHEEHAN SISTO WHALEN WOODSIDE
--------- -------- ------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.... $3,125 $ 750 $3,125 $ 3,125 $3,125
Tax Free High Income Fund....... 3,125 750 3,125 3,125 3,125
California Insured Tax Free
Income Fund................... 3,125 750 3,125 3,125 3,125
Municipal Income Fund........... 3,125 750 3,125 3,125 3,125
Intermediate Term Municipal
Income Fund................... 3,125 750 3,125 3,125 3,125
Florida Insured Tax Free Income
Fund.......................... 3,125 750 3,125 3,125 3,125
New Jersey Tax Free Income
Fund.......................... 625 125 625 625 625
New York Tax Free Income Fund... 625 125 625 625 625
Trust Total................... 20,000 4,750 20,000 20,000 20,000

</TABLE>
TABLE B

1996 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON
--------- -------- -------- ------- ----- ------- ------- ------ ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund..... 12/31 $ 875 $ 625 $2,500 $0 $1,500 $3,125 $3,125 $0 $3,125
Tax Free High Income Fund........ 12/31 875 625 2,500 0 1,500 3,125 3,125 0 3,125
California Insured Tax Free
Income Fund.................... 12/31 875 625 2,500 0 1,500 3,125 3,125 0 1,500
Municipal Income Fund............ 12/31 875 625 2,500 0 1,500 3,125 3,125 0 3,125
Intermediate Term Municipal
Income Fund.................... 12/31 875 625 2,500 0 1,500 3,125 3,125 0 3,125
Florida Insured Tax Free Income
Fund........................... 12/31 875 625 2,500 0 1,500 3,125 3,125 0 3,125
New Jersey Tax Free Income
Fund........................... 12/31 250 0 0 0 250 625 625 0 625
New York Tax Free Income Fund.... 12/31 250 0 0 0 250 625 625 0 250
Trust Total.................... 5,750 3,750 15,000 0 9,500 20,000 20,000 0 18,000

<CAPTION>
TRUSTEE
-----------------------------------
FUND NAME SHEEHAN SISTO WHALEN WOODSIDE
--------- ------- ----- ------ --------
<S> <C> <C> <C> <C>
Insured Tax Free Income Fund..... $0 $0 $3,125 $0
Tax Free High Income Fund........ 0 0 3,125 0
California Insured Tax Free
Income Fund.................... 0 0 3,125 0
Municipal Income Fund............ 0 0 3,125 0
Intermediate Term Municipal
Income Fund.................... 0 0 3,125 0
Florida Insured Tax Free Income
Fund........................... 0 0 3,125 0
New Jersey Tax Free Income
Fund........................... 0 0 625 0
New York Tax Free Income Fund.... 0 0 250 0
Trust Total.................... 0 0 19,625 0
</TABLE>

TABLE C

CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON
--------- -------- -------- ------- ----- ------- ------- ------ ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund..... 12/31 $ 864 $3,486 $3,412 $0 $7,792 $9,083 $9,476 $0 $8,925
Tax Free High Income Fund........ 12/31 864 3,486 3,412 0 7,792 9,083 9,476 0 8,925
California Insured Tax Free
Income Fund.................... 12/31 864 3,486 3,412 0 7,792 9,083 9,476 0 8,925
Municipal Income Fund............ 12/31 864 3,486 3,412 0 7,792 9,083 9,083 0 8,925
Intermediate Term Municipal
Income Fund.................... 12/31 864 3,486 3,412 0 7,792 9,083 9,476 0 8,925
Florida Insured Tax Free Income
Fund........................... 12/31 864 1,628 3,412 0 4,228 5,766 5,912 0 5,648
New Jersey Tax Free Income
Fund........................... 12/31 247 518 0 0 2,053 2,323 2,436 0 2,287
New York Tax Free Income Fund.... 12/31 247 518 0 0 2,053 2,323 2,436 0 2,287
Trust Total.................... 5,678 20,094 20,472 0 47,294 55,827 57,771 0 54,847

<CAPTION>
TRUSTEE
-----------------------------------
FUND NAME SHEEHAN SISTO WHALEN WOODSIDE
--------- ------- ----- ------ --------
<S> <C> <C> <C> <C>
Insured Tax Free Income Fund..... $0 $0 $7,967 $0
Tax Free High Income Fund........ 0 0 7,967 0
California Insured Tax Free
Income Fund.................... 0 0 7,967 0
Municipal Income Fund............ 0 0 7,967 0
Intermediate Term Municipal
Income Fund.................... 0 0 7,967 0
Florida Insured Tax Free Income
Fund........................... 0 0 5,486 0
New Jersey Tax Free Income
Fund........................... 0 0 1,974 0
New York Tax Free Income Fund.... 0 0 1,974 0
Trust Total.................... 0 0 49,269 0
</TABLE>

TABLE D

1996 RETIREMENT BENEFITS ACCRUED AS PART OF EXPENSES FOR THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES
--------- -------- -------- ------- ----- ------- ------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund..... 12/31 499 2,086 56 0 48 3,503 394 0
Tax Free High Income Fund........ 12/31 499 2,039 56 0 48 3,532 383 0
California Insured Tax Free
Income Fund.................... 12/31 499 1,950 56 0 47 3,440 373 0
Municipal Income Fund............ 12/31 499 1,454 56 0 46 2,766 315 0
Intermediate Term Municipal
Income Fund.................... 12/31 499 0 56 0 41 0 259 0
Florida Insured Tax Free Income
Fund........................... 12/31 578 0 70 0 50 0 304 0
New Jersey Tax Free Income
Fund........................... 12/31 578 0 70 0 50 0 304 0
New York Tax Free Income Fund.... 12/31 578 0 70 0 50 0 304 0
Trust Total.................... 4,229 7,529 490 0 380 13,241 2,636 0

<CAPTION>
TRUSTEE
-----------------------------------------------
FUND NAME ROBINSON SHEEHAN SISTO WHALEN WOODSIDE
--------- -------- ------- ----- ------ --------
<S> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund..... 2,490 0 861 283 0
Tax Free High Income Fund........ 2,472 0 861 272 0
California Insured Tax Free
Income Fund.................... 2,439 0 861 265 0
Municipal Income Fund............ 2,346 0 861 219 0
Intermediate Term Municipal
Income Fund.................... 1,918 0 861 177 0
Florida Insured Tax Free Income
Fund........................... 0 0 917 206 0
New Jersey Tax Free Income
Fund........................... 0 0 917 206 0
New York Tax Free Income Fund.... 0 0 917 206 0
Trust Total.................... 11,665 0 7,056 1,834 0
</TABLE>

B-26
<PAGE> 169

TABLE E

YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST

<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY ROBINSON SISTO WHALEN
- --------- -------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1992 1995 1984
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1992 1995 1985
California Insured Tax Free Income Fund.............. 1995 1995 1993 1985 1997 1992 1995 1985
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1992 1995 1990
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1993 1995 1993
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1994 1995 1994
New Jersey Tax Free Income Fund...................... 1995 1995 1994 1994 1997 1994 1995 1994
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1994 1995 1994
</TABLE>

As of April 4, 1997, no person was known by the Fund to own beneficially or to
hold of record as much as 5% of the Outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP
OF CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 4, 1997 SHARES OF OWNERSHIP
-------------------------- ------------- -------- ------------
<S> <C> <C> <C>
MLPF&S for the Sole Benefit of its Customers................ 52,185 C 6.36%
ATTN Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Hill & Wilkinson Inc........................................ 42,353 C 5.16%
11969 Plano Rd Ste 190
Dallas, TX 75243-5486
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

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 is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
("VKAC"), which is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC
Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings II, Inc. which, in
turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc. The principal
office of the Fund, the Adviser, the Distributor and VKAC is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Subject to certain conditions being
met, it is currently anticipated that the transaction will close in mid-1997.
Thereafter, Van Kampen American Capital Asset Management, Inc. will be an
indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

B-27
<PAGE> 170

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

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

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

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

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

The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.

For the years ended December 31, 1996, 1995 and 1994, the Fund paid advisory
expenses of $4,825,272, $3,765,225 and $3,475,616, respectively.

OTHER AGREEMENTS

ACCOUNTING SERVICES AGREEMENT. The Fund has 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
in the cost of providing such services, with 25% of such costs shared
proportionately based on the number of outstanding classes of securities per
fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.

For the years ended December 31, 1996, 1995 and 1994, the Fund paid expenses
of approximately $80,200, $51,800 and $18,250, 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 Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services

B-28
<PAGE> 171

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, 1996, 1995 and 1994, the Fund paid expenses
of approximately $27,900, $30,700 and $21,950, respectively, representing Van
Kampen American Capital's cost of providing legal services.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants will be subject to
ratification by the shareholders of the Fund at any annual meeting of
shareholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.

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

B-29
<PAGE> 172

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 Trust and any of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund intends to
qualify each year and to elect to be treated as a regulated investment company
under the Code. 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 gain, but not net capital
gains, which are the excess of 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 will not be subject to federal income tax
on any net capital gains distributed to shareholders.

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, July 1995. VKAC manages or supervises more than $57 billion
in mutual funds, closed-end funds and unit investment trusts -- assets which
have been entrusted to VKAC in more than 2 million investor accounts. VKAC has
one of the largest research teams (outside of the rating agencies) in the
country, with more than 80 analysts devoted to various specializations. Each of
our high yield analysts, based either in San Francisco, Chicago, Houston or
Boston, has the responsibility to cover a specific region of the country. This
regional focus enables each high yield analyst to provide more specialized
coverage of the market and alert the portfolio manager to issues of local
importance.

Shares of the Fund are offered on a continuous basis through the Distributor.
The Distributor is a wholly owned subsidiary of Van Kampen American Capital,
Inc., which is a subsidiary of VK/AC Holding, Inc. MSAM Holdings II, Inc. which,
in turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc. The principal
office of the Fund, the Adviser, the Distributor and VKAC is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Subject to certain conditions being
met, it is currently anticipated that the transaction will close in mid-1997.
Thereafter, Van Kampen American Capital Asset Management, Inc. will be an
indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

B-30
<PAGE> 173

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.

DISTRIBUTION AND SERVICE PLANS

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 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 who are acting as
securities dealers and NASD members or eligible non-members who are acting as
brokers or agents and similar agreements between the Fund and financial
intermediaries who are acting as brokers (collectively, "Selling Agreements")
that may provide for their customers or clients certain services or assistance,
which may include, but not be limited to, processing purchase and redemption
transactions, establishing and maintaining shareholder accounts regarding the
Fund, and such other services as may be agreed to from time to time and as may
be permitted by applicable statute, rule or regulation. Brokers, dealers and
financial intermediaries that have entered into sub-agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement or Selling Agreement. To the
extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.

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 fiscal year ended December 31, 1996, the Fund's aggregate expenses
under the Plans for Class A shares were $1,990,737 or 0.25% of the Class A
shares' average net assets. Such expenses were paid to reimburse the Distributor
for payments made to financial intermediaries for servicing Fund shareholders
and for administering the Plans. For the fiscal year ended December 31, 1996,
the Fund's aggregate expenses under the Plans for Class B shares were $2,084,477
or 1.00% of the Class B shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $1,563,358 for commissions
and transaction fees paid to financial intermediaries in respect of sales of
Class B shares of the Fund and $521,119 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal year ended December 31, 1996, the Fund's aggregate expenses under
the Plans for Class C shares were

B-31
<PAGE> 174

$119,847 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $51,203 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $68,644 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Plans.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).

PERFORMANCE INFORMATION

From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how Van Kampen American
Capital believes the Fund compares relative to other Van Kampen American Capital
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which studied investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless of if shareholders purchased their funds
in direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund will also be marketed on the
Internet.

The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 4% and 1%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.

The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends 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.

B-32
<PAGE> 175

fluctuate over time, and accordingly upon redemption a shareholder's shares may
be worth more or less than their original cost.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, including or
excluding any applicable sales charge as indicated, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.

CLASS A SHARES

The average total return, including payment of maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1996 was (.91%); (ii) the 5 year period ended December 31, 1996 was 5.72%; (iii)
the approximately six year, five month period from August 1, 1990 (the
commencement of investment operations of the Fund) through December 31, 1996 was
7.00%.

The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.86%. The tax-equivalent yield with
respect to Class A Shares for the 30 day period ending December 30, 1996
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 7.59%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.50%.

The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 54.39%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 62.08%.

CLASS B SHARES

The average total return, including payment of the CDSC, with respect to the
Class B Shares for (i) the one year period ended December 31, 1996 was (.64%)
and (ii) the approximately four year, five month period of August 24, 1992
(commencement of distribution) through December 31, 1996 was 4.98%.

The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.34%. The tax-equivalent yield with
respect to Class B Shares for the 30 day period ending December 30, 1996
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.78%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.03%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 23.60%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 25.08%.

CLASS C SHARES

The average total return, including payment of the CDSC, with respect to the
Class C Shares for (i) the one year period ended December 31, 1996 was 2.18% and
(ii) the approximately three year, five month period of August 13, 1993
(commencement of distribution) through December 31, 1996 was 3.78%.

B-33
<PAGE> 176

The tax-equivalent yield with respect to Class C Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance" and assuming a 36% tax rate) was 6.78%. The
Fund's current distribution rate with respect to the Class C Shares for the
month ending December 31, 1996 (calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 5.04%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was 13.38%.

The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was 13.38%.

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<PAGE> 177

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital Municipal Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1996, 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, 1996, 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 American Capital Municipal Income Fund as of December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
February 7, 1997

B-35
<PAGE> 178

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 3.4%
$ 2,100 Alabama St Indl Dev Auth Rev UNR-ROHN Inc Expansion Proj.... 7.500% 09/15/11 $ 2,101,617
5,000 Alabama St Indl Dev Auth Solid Waste Disp Rev Pine City
Fiber Co (b)................................................ 6.450 12/01/23 5,016,550
3,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd) (c)................................................... 6.750 08/15/17 3,333,900
5,205 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec Inds Inc
Rfdg........................................................ 6.500 02/15/09 5,205,833
875 Bessemer, AL Indl Dev Brd Rohn Inc Proj..................... 9.000 09/15/01 934,308
1,750 Bessemer, AL Indl Dev Brd Rohn Inc Proj..................... 9.500 09/15/11 2,075,692
13,400 Birmingham, AL Baptist Med Cent Baptist Hlth Sys Inc (MBIA
Insd)....................................................... 5.875 11/15/26 13,721,332
1,250 Fort Payne, AL Wtrwrks Brd Wtr Rev (MBIA Insd).............. 5.300 07/01/11 1,241,887
1,000 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy
Svcs Co Proj Rfdg........................................... 6.950 01/01/20 1,065,640
--------------
34,696,759
--------------
ALASKA 0.4%
2,500 Alaska Energy Auth Pwr Rev Bradley Lake Proj Ser 1 (BIGI
Insd)....................................................... 6.250 07/01/21 2,553,475
1,000 Valdez, AK Marine Term Rev Sohio Pipeline Rfdg.............. 7.125 12/01/25 1,111,610
--------------
3,665,085
--------------
ARIZONA 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc
Proj........................................................ 5.040 10/01/12 999,340
1,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev Rfdg... 6.500 07/01/09 1,040,210
1,000 Pima Cnty, AZ Indl Dev Auth Single Family Mtg Rev (GNMA
Collateralized) (c)......................................... 6.625 11/01/14 1,041,890
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A.................. 9.500 07/01/10 6,365,111
500 Scottsdale, AZ Indl Dev Auth Rev 1st Mtg Westminster Village
Ser A Rfdg.................................................. 8.250 06/01/15 544,205
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd) (b)............................................ 6.000 09/01/12 1,921,050
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd) (b)............................................ 6.125 09/01/17 1,795,675
500 Tempe, AZ Indl Dev Auth Indl Dev Rev Ser A.................. 6.750 12/01/13 505,795
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent
Inc......................................................... 8.700 09/01/19 7,939,540
--------------
22,152,816
--------------
ARKANSAS 0.7%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser A.......................................... 7.500 01/31/06 5,251,200
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser B.......................................... 7.500 01/31/06 1,641,000
--------------
6,892,200
--------------
CALIFORNIA 6.8%
5,385 California Edl Fac Auth Rev College of Osteopathic Med
Pacific (Prerefunded @ 06/01/03)............................ 7.500 06/01/18 6,057,909
2,880 California Edl Fac Auth Rev Univ of La Verne................ 6.300 04/01/09 2,970,173
4,980 California Hlth Fac Fin Auth Rev Kaiser Permanente Med Cent
(c)......................................................... 5.450 10/01/13 4,843,697
4,745 California Hsg Fin Agy Rev Home Mtg Ser N (c)............... 6.375 02/01/27 4,840,090
2,000 California Statewide Cmntys Dev Auth Rev Ctfs Partn Sisters
Charity..................................................... 4.875 12/01/10 1,852,820
2,000 Compton, CA Ctfs Partn Ser B................................ 7.500 08/01/15 2,115,800
4,285 Delano, CA Ctfs Partn Ser A................................. 9.250 01/01/22 4,825,767
1,000 El Centro, CA Ctfs Partn.................................... 7.000 06/01/19 1,018,110
2,660 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/10 1,206,044
5,875 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/11 2,482,129
3,890 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/13 1,425,568
5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/14 1,849,784
3,500 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/19 963,480
5,000 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/20 1,300,200
965 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj
Rfdg........................................................ 7.875 02/01/15 993,960
2,800 Los Angeles Cnty, CA Ctfs Partn............................. 6.100 11/01/01 2,972,144
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth Rev
Grand Cent Sq Ser A......................................... 5.900 12/01/26 975,940
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 179

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

CALIFORNIA (CONTINUED)
$ 3,065 Los Angeles, CA Wastewater Sys Rev Ser A (FGIC Insd)........ 5.000% 02/01/13 $ 2,935,780
1,000 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA
Insd)....................................................... 6.125 03/15/23 1,047,820
2,825 Midpeninsula Regl Dist CA Fin Auth Rev...................... * 09/01/15 991,236
1,155 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/19 320,963
1,265 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/22 296,351
1,380 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/25 272,398
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/10 425,628
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/11 355,296
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/12 291,669
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/13 272,944
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/14 255,556
500 Norco, CA Swr & Wtr Rev Rfdg................................ 7.200 10/01/19 532,530
300 Northern CA Pwr Agy Pub Pwr Rev Geothermal Proj No 3 Ser
A........................................................... 5.000 07/01/09 291,582
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1 Aliso Viejo
Ser A (Prerefunded @ 08/15/02).............................. 7.350 08/15/18 3,728,288
6,450 Orange Cnty, CA Recovery Ctfs Ser A (MBIA Insd) (c)......... 6.000 07/01/07 6,971,934
1,000 Redondo Beach, CA Pub Fin South Bay Cent Redev Proj......... 7.125 07/01/26 1,056,300
4,000 Riverside Cnty, CA Air Force Village West Inc Ser A Rfdg.... 8.125 06/15/20 4,271,320
2,000 Santa Ana, CA Cmnty Redev Agy Tax Ser B Rfdg................ 7.500 09/01/16 2,034,200
--------------
69,045,410
--------------
COLORADO 5.5%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A.................. 8.875 08/01/10 3,819,090
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A (c).............. 8.875 08/01/12 5,459,649
10,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser
C........................................................... * 08/31/26 1,271,025
1,010 Arapahoe Cnty, CO Single Family Mtg Rev Ser A (GNMA
Collateralized)............................................. 8.375 08/01/19 1,050,026
500 Berry Creek Metro Dist CO................................... 8.250 12/01/11 551,550
500 Boulder Cnty, CO Indl Dev Rev Boulder Med Cent Proj......... 8.875 01/01/17 515,875
1,000 Bowles Metro Dist CO........................................ 7.750 12/01/15 1,027,870
1,500 Colorado Hlth Fac Auth Rev PLS Hlth Sys Proj Ser A
(Prerefunded @ 02/15/01) (FSA Insd)......................... 6.250 02/15/21 1,625,310
2,000 Denver, CO City & Cnty Arpt Rev Ser A....................... 7.000 11/15/99 2,124,860
8,550 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.500 11/15/23 9,763,074
5,000 Denver, CO City & Cnty Arpt Rev Ser A (c)................... 8.000 11/15/25 5,586,450
2,750 Denver, CO City & Cnty Spl Fac Arpt Rev United Airls Proj
Ser A....................................................... 6.875 10/01/32 2,878,865
1,000 Edgewater, CO Redev Auth Tax Increment Rev.................. 6.750 12/01/08 1,072,260
950 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/12 383,572
905 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/13 341,439
1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/14 466,026
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/15 472,548
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/16 441,123
1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/18 364,872
3,690 Jefferson Cnty, CO Residential Mtg Rev...................... 11.500 09/01/12 6,051,526
5,000 Meridian Metro Dist CO Peninsular & Oriental Steam Navig Co
Rfdg........................................................ 7.500 12/01/11 5,506,700
5,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd)...... 6.400 11/15/22 5,302,000
--------------
56,075,710
--------------
CONNECTICUT 1.4%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Hartford (c)............................................ 7.125 11/01/14 5,693,638
1,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser A.......... 6.500 09/01/06 1,032,840
5,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser A.......... 6.400 09/01/11 5,117,100

</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 180

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

CONNECTICUT (CONTINUED)
$ 2,735 Waterbury, CT Hsg Auth Multi-Family Mtg 2nd Lien Proj Ser B
(GNMA Collaterized)......................................... 5.850% 02/01/37 $ 2,640,752
--------------
14,484,330
--------------
DISTRICT OF COLUMBIA 0.3%
2,500 District of Columbia Rev Natl Pub Radio Ser A............... 7.700 01/01/23 2,660,675
--------------
FLORIDA 6.4%
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.500 10/01/02 529,980
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.875 10/01/08 556,810
2,000 Brevard Cnty, FL Sch Brd Ctfs Ser B (AMBAC Insd)............ 5.500 07/01/21 1,972,200
1,000 Broward Cnty, FL Edl Fac Auth Rev Rfdg (Prerefunded @
04/01/99)................................................... 8.500 04/01/10 1,110,540
1,635 Broward Cnty, FL Res Recovery Rev Waste Energy North Proj... 7.950 12/01/08 1,797,110
2,140 Broward Cnty, FL Res Recovery Rev Waste Energy South Proj... 7.950 12/01/08 2,352,181
1,000 Charlotte Cnty, FL Hosp Rev Bon Secours Hlth Saint Joseph
Ser A (Prerefunded @ 08/15/98).............................. 8.250 08/15/18 1,086,120
3,000 Collier Cnty, FL Indl Dev Auth Indl Dev Rev Rfdg............ 6.500 10/01/25 2,971,470
14,465 Dade Cnty, FL Spl Oblig Cap Apprec Ser B Rfdg (AMBAC
Insd)....................................................... * 10/01/21 3,319,139
24,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd)................................................. * 02/01/18 6,868,320
2,000 Dade Cnty, FL Prof Sports Franchise Fac Tax Rev (MBIA
Insd)....................................................... * 10/01/24 417,820
560 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg............ 7.250 06/01/23 616,263
590 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg
(Prerefunded @ 06/01/00).................................... 7.250 06/01/23 655,632
10,000 Florida St Muni Pwr Agy Rev (AMBAC Insd).................... 4.500 10/01/27 8,299,200
2,255 Greater Orlando Aviation Auth Orlando FL Arpt Fac Rev....... 8.375 10/01/16 2,430,213
245 Greater Orlando Aviation Auth Orlando FL Arpt Fac Rev
(Prerefunded @ 10/01/98).................................... 8.375 10/01/16 267,476
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown
Cogeneration Proj A Rfdg.................................... 7.875 12/15/25 3,303,174
1,500 Orange Cnty, FL Hlth Fac Auth Rev 1st Mtg Orlando Lutheran
Tower....................................................... 8.750 07/01/26 1,588,125
1,000 Orange Cnty, FL Hlth Fac Auth Rev Hosp Adventist Hlth Sys
(AMBAC Insd)................................................ 5.250 11/15/20 958,600
1,000 Orange Cnty, FL Tourist Dev Tax Rev (AMBAC Insd)............ 6.000 10/01/16 1,020,190
5,300 Palm Bay, FL Util Rev Palm Bay Util Corp Proj Rfdg (MBIA
Insd)....................................................... 5.000 10/01/22 4,858,510
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev Sun
Coast Hosp Ser A (Prerefunded @ 03/01/00)................... 8.500 03/01/20 5,744,542
2,000 Santa Rosa Bay Bridge Auth FL............................... 6.250 07/01/28 1,979,620
4,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Pptys.... 6.700 07/01/25 3,827,560
4,220 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park (Prerefunded @ 07/01/02).............. 10.000 07/01/22 5,290,403
1,000 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 996,070
670 Tampa, FL Cap Impt Pgm Rev Ser A............................ 8.250 10/01/18 712,398
--------------
65,529,666
--------------
GEORGIA 1.7%
3,000 Atlanta, GA Arpt Fac Rev.................................... 6.250 01/01/21 3,088,230
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Trust Ctfs Franklin
Forest Ser A................................................ 8.000 06/01/22 2,854,687
1,250 Georgia Muni Elec Auth Pwr Rev Ser O........................ 8.125 01/01/17 1,324,275
1,750 Georgia Muni Elec Auth Pwr Rev Ser Q........................ 8.375 01/01/16 1,858,238
5,000 Georgia St Hsg & Fin Auth................................... 6.450 12/01/27 5,121,400
1,500 Municipal Elec Auth GA Spl Oblig (MBIA Insd)................ 6.500 01/01/20 1,712,610
1,000 Rockdale Cnty, GA Dev Auth Solid Waste Disposal Rev......... 7.500 01/01/26 1,038,240
--------------
16,997,680
--------------
HAWAII 2.6%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd)................ 6.350 07/01/07 4,472,787
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd)................................................. 6.550 12/01/22 15,172,587
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc....... 9.700 06/01/20 2,499,719
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.350 07/01/07 1,626,969

</TABLE>
See Notes to Financial Statements

B-38
<PAGE> 181

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HAWAII (CONTINUED)
$ 1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.400% 07/01/08 $ 1,717,669
500 Hawaii St Harbor Cap Impt Rev (MBIA Insd)................... 7.000 07/01/17 542,595
--------------
26,032,326
--------------
ILLINOIS 9.5%
4,500 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq
Proj........................................................ 9.250 02/01/12 5,071,770
1,350 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 1,491,574
7,000 Broadview, IL Tax Increment Rev Sr Lien..................... 8.250 07/01/13 7,595,140
1,000 Chicago, IL Gas Supply Rev Ser A............................ 8.100 05/01/20 1,106,300
1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr Chicago.......... 7.000 01/01/11 1,160,600
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc... 8.500 05/01/18 4,411,120
4,955 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B....................................................... 8.950 05/01/18 5,642,952
2,250 Chicago, IL Park Dist (MBIA Insd)........................... 5.600 01/01/21 2,216,430
2,000 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)............................................. 7.000 09/01/27 2,206,200
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 1,277,720
1,000 Crestwood, IL Tax Increment Rev Rfdg........................ 7.250 12/01/08 1,011,890
870 Hanover Park, IL Rev 1st Mtg Winsdor Park Manor Proj........ 9.250 12/01/07 926,889
1,200 Hodgkins, IL Tax Increment.................................. 9.500 12/01/09 1,397,544
3,400 Hodgkins, IL Tax Increment (Prerefunded @ 12/01/01)......... 9.500 12/01/09 4,187,032
1,500 Hodgkins, IL Tax Increment Rev Ser A Rfdg................... 7.625 12/01/13 1,553,925
1,500 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 1,551,225
1,000 Illinois Dev Fin Auth Elderly Hsg Rev Libertyville Towers
Ser A....................................................... 6.500 09/01/09 1,038,780
650 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/06 652,321
5,000 Illinois Edl Fac Auth Rev Advocate Hlth Ser A Rfdg (MBIA
Insd) (b)................................................... 5.875 08/15/22 5,012,850
1,000 Illinois Edl Fac Auth Rev Lake Forest College (FSA Insd).... 6.750 10/01/21 1,104,790
1,000 Illinois Edl Fac Auth Rev Northwestern Univ Ser 1985
(Prerefunded @ 12/01/01).................................... 6.900 12/01/21 1,123,890
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,008,510
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A
(Prerefunded @ 10/01/02).................................... 9.500 10/01/22 5,140,252
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B
(Prerefunded @ 10/01/02).................................... 9.000 10/01/22 2,441,140
2,500 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 2,539,600
525 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D.......... 9.500 11/15/15 598,584
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00).................................... 9.500 11/15/15 507,531
1,000 Illinois Hlth Fac Auth Rev IL Masonic Med Cent Ser B
(Prerefunded @ 10/01/99).................................... 7.700 10/01/19 1,107,610
1,000 Illinois Hlth Fac Auth Rev Mem Hosp......................... 7.250 05/01/22 1,056,010
1,000 Illinois Hlth Fac Auth Rev Northwestern Mem Hosp............ 6.750 08/15/11 1,063,990
2,600 Illinois Hlth Fac Auth Rev United Med Cent (Prerefunded @
07/01/03)................................................... 8.375 07/01/12 3,127,774
6,100 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg).... 9.613 02/13/18 6,557,500
6,000 Metropolitan Pier & Expo IL Cap Apprec Rfdg McCormack Ser A
(MBIA Insd)................................................. * 12/15/24 1,204,200
6,260 Metropolitan Pier & Expo IL Cap Apprec Rfdg McCormack Ser A
(MBIA Insd)................................................. * 06/15/25 1,220,763
1,250 Mill Creek Wtr Reclamation Dist IL Swr Rev.................. 8.000 03/01/10 1,288,313
750 Mill Creek Wtr Reclamation Dist IL Wtrwrks Rev.............. 8.000 03/01/10 772,988
1,755 Northern Cook Cnty, IL Solid Waste Agy Contract Rev Ser A
Rfdg (MBIA Insd)............................................ 5.300 05/01/09 1,708,422
2,800 Regional Tran Auth IL Ser A (AMBAC Insd).................... 8.000 06/01/17 3,654,196
2,000 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 2,071,100
3,000 Robbins, IL Res Recovery Rev Recreation Robbins Res Partn
Ser B....................................................... 8.375 10/15/16 3,106,650
820 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.200 12/01/04 865,239
500 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.500 12/01/13 514,665
1,620 Saint Charles, IL Indl Dev Rev Tri-City Cent Proj........... 7.500 11/01/13 1,656,855

</TABLE>

See Notes to Financial Statements

B-39
<PAGE> 182

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd).... 5.800% 04/01/10 $ 1,533,016
--------------
96,485,850
--------------
INDIANA 0.8%
1,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700 11/01/12 1,005,990
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc........ 7.000 07/01/12 2,994,585
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.750 02/01/14 630,465
450 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.500 02/01/22 456,223
1,000 Marion Cnty, IN Hosp Auth Hosp Fac Rev...................... 6.500 09/01/13 1,070,270
1,500 Wells Cnty, IN Hosp Auth Rev Caylor-Nickel Med Cent Inc
Rfdg........................................................ 8.500 04/15/03 1,687,575
--------------
7,845,108
--------------
IOWA 0.5%
19,390 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser A (AMBAC
Insd)....................................................... * 09/01/16 2,199,020
3,000 Muscatine, IA Elec Rev Rfdg................................. 5.000 01/01/08 2,951,460
--------------
5,150,480
--------------
KANSAS 0.2%
1,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) (c)............................................. 7.000 06/01/31 1,106,800
1,000 Newton, KS Hosp Rev Newton Hlthcare Corp Ser A.............. 7.750 11/15/24 1,083,340
--------------
2,190,140
--------------
KENTUCKY 2.3%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg......... 6.550 03/01/09 1,023,560
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds Inc.............. 9.875 10/01/10 2,829,204
10,950 Jefferson Cnty, KY Cap Projs Corp Rev Muni Multi-Lease Ser
A........................................................... * 08/15/14 3,310,513
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd)........................................... 8.648 10/09/08 4,610,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (FSA Insd)................................ 6.125 02/01/12 1,313,250
1,710 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Gtd)................ 7.450 01/01/23 1,793,089
8,000 Kentucky St Tpk Auth Res Recovery Rd Rev Ser A.............. 5.000 07/01/08 7,812,080
1,000 Kentucky St Tpk Auth Toll Rd Rev Ser A...................... 5.500 07/01/07 1,000,710
--------------
23,692,406
--------------
LOUISIANA 1.2%
1,000 Hodge, LA Util Rev Stone Container Corp Ser 1990............ 9.000 03/01/10 1,082,630
1,990 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985............................................... 10.000 11/15/04 2,585,587
1,000 Lake Charles, LA Harbor & Terminal Dist Port Fac Rev
Trunkline Rfdg.............................................. 7.750 08/15/22 1,139,520
445 Louisiana Pub Fac Auth Rev Beverly Enterprises Inc Rfdg..... 8.250 09/01/08 483,012
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd)................. * 02/01/15 3,600,200
1,000 Port New Orleans, LA Indl Dev Rev Avondale Inds Inc Proj
Rfdg........................................................ 8.250 06/01/04 1,082,620
1,000 Saint Charles Parish, LA Pollutn Ctl Rev LA Pwr & Lt Co..... 8.250 06/01/14 1,093,780
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf States Util
Co Proj Ser A............................................... 7.500 05/01/15 1,502,452
--------------
12,569,801
--------------
MAINE 1.4%
1,500 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 (c)....... 5.450 11/01/99 1,535,010
12,750 Maine St Hsg Auth Mtg Purchase Ser B2 (AMBAC Insd).......... 6.450 11/15/26 13,006,147
--------------
14,541,157
--------------
MARYLAND 0.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg.................................................. 7.550 06/01/17 1,594,530
1,000 Maryland St Energy Fin Admin Ltd Oblig Rev Cogeneration AES
Warrior Run................................................. 7.400 09/01/19 1,056,440
--------------
2,650,970
--------------
MASSACHUSETTS 2.0%
1,000 Boston, MA Rev Boston City Hosp (FHA Gtd)................... 7.625 02/15/21 1,127,320
1,515 Massachusetts Edl Ln Auth Rev Issue E Ser A (AMBAC Insd).... 7.000 01/01/10 1,595,007

</TABLE>

See Notes to Financial Statements

B-40

<PAGE> 183

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
$ 4,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med
Cent Hosp Ser G (Embedded Swap) (MBIA Insd)................. 3.100% 07/01/13 $ 3,642,240
4,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A....................................................... 5.750 10/01/06 3,676,120
1,000 Massachusetts St Hsg Fin Agy Multi-Family Residential Hsg
Ser A....................................................... 8.750 08/01/08 1,046,240
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Cent Inc Proj... 8.450 07/01/18 1,543,590
1,000 Massachusetts St Indl Fin Agy Rev 1st Mtg Reeds Landing
Proj........................................................ 8.625 10/01/23 1,076,270
990 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth Assoc
Proj........................................................ 8.800 06/01/14 1,091,861
1,000 Massachusetts St Indl Fin Agy Rev Wtr Treatment American
Hingham..................................................... 6.600 12/01/15 1,033,880
2,000 Massachusetts St Wtr Res Auth Ser A (Prerefunded @
04/01/00)................................................... 7.500 04/01/16 2,230,080
2,000 Plymouth Cnty, MA Ctfs Partn Ser A.......................... 7.000 04/01/22 2,228,200
--------------
20,290,808
--------------
MICHIGAN 2.9%
1,000 Detroit, MI Area No 1 Ser A (Prerefunded @ 07/01/99)........ 7.600 07/01/10 1,097,300
3,500 Detroit, MI Downtown Dev Auth Tax Increment Rev............. 6.200 07/01/17 3,602,970
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson
Hlthcare Ser A Rfdg (AMBAC Insd)............................ 6.250 07/01/12 2,122,040
1,775 Michigan St Hosp Fin Auth Rev Garden City Hosp.............. 8.300 09/01/02 1,866,022
2,250 Michigan St Hosp Fin Auth Rev Mercy Hlth Svcs Ser R (AMBAC
Insd)....................................................... 5.375 08/15/26 2,156,670
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded
Swap) (AMBAC Insd).......................................... 5.140 04/01/04 5,430,880
11,000 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fibre Proj (e).............................................. 10.250 12/01/16 6,242,390
4,500 Michigan St Strategic Fd Solid Waste Disp Rev Genesee Pwr... 7.500 01/01/21 4,582,035
1,000 Mount Clemens, MI Hsg Corp Multi-Family Rev Hsg Ser A Rfdg
(FHA Gtd)................................................... 6.600 06/01/13 1,047,880
1,000 Royal Oak, MI Hosp Fin Auth Hosp Rev Ser D (Prerefunded @
01/01/01)................................................... 6.750 01/01/20 1,100,400
--------------
29,248,587
--------------
MINNESOTA 0.4%
1,000 North Saint Paul, MN Multi-Family Rev Cottages.............. 9.250 02/01/22 1,069,510
2,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg...... 5.000 01/01/16 1,831,220
1,250 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser C........... 5.000 01/01/17 1,133,225
--------------
4,033,955
--------------
MISSISSIPPI 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev
Weyerhaeuser Co Rfdg (Inverse Fltg)......................... 8.900 04/01/22 5,577,450
1,155 Ridgeland, MS Urban Renewal Rev The Orchard Ltd Proj Ser A
Rfdg........................................................ 7.750 12/01/15 1,205,601
--------------
6,783,051
--------------
MISSOURI 1.6%
2,835 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A.... 5.750 10/01/06 2,911,347
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt............................................ 7.125 08/15/12 2,124,480
1,660 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd)......................................... 7.250 06/01/04 1,886,789
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd)......................................... 7.250 06/01/14 4,519,054
1,000 Missouri St Hlth & Edl Fac Auth............................. 8.125 10/01/10 1,113,690
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev Mary
Queen & Mother Proj Rfdg (GNMA Collateralized).............. 7.125 03/20/23 2,271,605
915 Saint Louis, MO Tax Increment Rev Scullin Redev Area Ser
A........................................................... 10.000 08/01/10 1,094,148
--------------
15,921,113
--------------
NEBRASKA 0.8%
1,400 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.429 09/10/30 1,562,750
850 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.273 09/15/24 898,875
4,800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.913 10/17/23 5,220,000
--------------
7,681,625
--------------
NEVADA 1.2%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC Insd)
(c)......................................................... 6.700 06/01/22 4,307,960

</TABLE>

See Notes to Financial Statements

B-41

<PAGE> 184

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEVADA (CONTINUED)
$ 2,430 Henderson, NV Loc Impt Dist No T-4 Ser A.................... 8.500% 11/01/12 $ 2,552,812
2,065 Nevada Hsg Div Multi-Unit Hsg Arville Et Cetera Proj (FNMA
Collateralized)............................................. 6.500 10/01/16 2,119,434
3,475 Nevada Hsg Div Multi-Unit Hsg Arville Et Cetera Proj (FNMA
Collateralized)............................................. 6.600 10/01/23 3,566,149
--------------
12,546,355
--------------
NEW HAMPSHIRE 1.5%
3,180 New Hampshire Higher Edl & Hlth Crotched Mtn Rehab Cent
(MBIA Insd)................................................. 5.750 01/01/13 3,221,277
3,500 New Hampshire Higher Edl & Hlth Crotched Mtn Rehab Cent
(AMBAC Insd)................................................ 5.875 01/01/20 3,529,995
1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev................ 8.800 06/01/09 1,654,753
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Daniel Webster
College Issue Rfdg.......................................... 7.625 07/01/16 2,117,680
1,000 New Hampshire Higher Edl & Hlth Fac Auth Rev New London Hosp
Assn Proj................................................... 7.500 06/01/05 1,101,180
1,000 New Hampshire St Business Fin Auth Elec Fac Rev Plymouth
Cogeneration................................................ 7.750 06/01/14 1,029,990
1,000 New Hampshire St Indl Dev Auth Rev Pollutn Ctl Ser B........ 10.750 10/01/12 1,065,840
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC Insd)......... 6.750 11/01/11 1,128,060
--------------
14,848,775
--------------
NEW JERSEY 1.6%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (MBIA
Insd)....................................................... 7.530 08/15/10 6,705,730
1,600 New Jersey Econ Dev Auth Holt Hauling & Warehsg Rev Ser G
Rfdg........................................................ 8.400 12/15/15 1,676,464
2,000 New Jersey Econ Dev Auth Indl Dev Rev Newark Airport Marriot
Hotel Rfdg.................................................. 7.000 10/01/14 2,072,520
1,000 New Jersey Econ Dev Auth Rev United Methodist Homes......... 7.500 07/01/20 1,016,320
1,000 New Jersey Econ Dev Auth Rev United Methodist Homes Oblig
Ser A....................................................... 7.500 07/01/25 1,019,260
3,200 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA Insd)....... 6.500 01/01/16 3,621,152
--------------
16,111,446
--------------
NEW MEXICO 0.3%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan Regl
Med Cent Inc Proj........................................... 7.900 06/01/11 2,785,700
--------------
NEW YORK 14.8%
3,100 Clifton Springs, NY Hosp & Clinic Hosp Rev Rfdg............. 8.000 01/01/20 3,195,015
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper
Corp Recycling.............................................. 8.000 01/01/09 2,462,075
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5
Rfdg........................................................ 7.000 07/01/12 5,412,250
3,500 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 7
Rfdg........................................................ 4.750 07/01/19 2,920,190
1,500 Metropolitan Tran Auth NY Tran Fac Rev Ser G (MBIA Insd).... 5.500 07/01/15 1,471,860
41 Municipal Assist Corp Troy NY Cap Apprec Ser C (MBIA
Insd)....................................................... * 07/15/21 10,238
62 Municipal Assist Corp Troy NY Cap Apprec Ser C (MBIA
Insd)....................................................... * 01/15/22 15,071
1,000 New York City Indl Dev Agy Civic Fac Marymount Manhattan
College Proj................................................ 7.000 07/01/23 1,040,530
4,100 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B..... 5.000 06/15/17 3,721,365
5,000 New York City Ser A......................................... 7.000 08/01/07 5,531,900
2,500 New York City Ser B......................................... 7.500 02/01/07 2,780,925
8,000 New York City Ser B (AMBAC Insd)............................ 7.250 08/15/07 9,353,520
5,000 New York City Ser C Rfdg.................................... 6.500 08/01/04 5,305,050
6,680 New York City Unrefunded Bal Ser C Subser C1................ 7.500 08/01/20 7,468,708
820 New York City Ser C Subser C1 (Prerefunded @ 08/01/02)...... 7.500 08/01/20 949,068
2,000 New York City Ser D Rfdg.................................... 8.000 02/01/05 2,326,880
2,200 New York City Ser E......................................... 5.700 08/01/08 2,194,720
2,400 New York St Dorm Auth Rev Mental Hlth Svcs Fac Impt E (AMBAC
Insd) (b)................................................... 5.000 02/15/06 2,406,840
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.500 07/01/12 4,833,100
2,750 New York St Dorm Auth Rev Court Fac Lease Ser A............. 5.500 05/15/10 2,681,250
15,800 New York St Dorm Auth Rev St Univ Edl Fac Ser C............. 5.400 05/15/23 14,560,964
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg)....................................................... 8.721 04/01/20 2,750,000

</TABLE>

See Notes to Financial Statements

B-42
<PAGE> 185

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara
Mohawk Pwr Corp Ser A Rfdg (FGIC Insd)...................... 7.200% 07/01/29 $ 2,302,040
1,000 New York St Environmental Fac Corp Wtr Fac Rev Long Island
Wtr Corp Proj A............................................. 10.000 10/01/17 1,053,600
23,055 New York St Loc Govt Assistance Corp Ser C Rfdg............. 5.000 04/01/21 20,848,175
1,955 New York St Med Care Fac Fin Agy Rev Hosp & Nursing Home Mtg
(FHA Gtd) (Prerefunded @ 02/15/99).......................... 7.250 02/15/09 2,114,860
490 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser A....................................................... 7.750 08/15/11 550,618
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser A (Prerefunded @ 02/15/01).............................. 7.750 08/15/11 1,507,295
495 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C....................................................... 7.300 02/15/21 544,886
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C (Prerefunded @ 08/15/01).............................. 7.300 02/15/21 1,709,244
1,000 New York St Med Care Fac Fin Agy Rev Mtg Hosp Ser A Rfdg
(Prerefunded @ 08/15/97) (FHA Gtd).......................... 8.000 02/15/25 1,047,190
1,000 New York St Med Care Fac Fin Agy Rev North Genl Hosp........ 7.400 02/15/19 1,048,920
5,000 New York St Mtg Agy Rev Homeowner Mtg Ser 52................ 6.100 04/01/26 5,039,850
2,400 New York St Urban Dev Corp Rev Correctional Cap Fac Rfdg.... 5.625 01/01/07 2,413,032
19,500 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A
Rfdg (FSA Insd)............................................. 5.250 01/01/14 19,188,000
1,500 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A
Rfdg (FSA Insd)............................................. 5.250 01/01/21 1,416,990
2,000 New York St Urban Dev Corp Rev Fac (Prerefunded @
04/01/01)................................................... 7.500 04/01/20 2,274,760
1,000 Port Auth NY & NJ Cons 95th Ser............................. 6.125 07/15/22 1,040,680
3,125 Yonkers, NY Ser C (AMBAC Insd).............................. 5.125 08/01/09 3,075,094
--------------
150,566,753
--------------
NORTH CAROLINA 0.9%
3,000 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth Rev Solid
Waste Weyerhaeuser Co....................................... 5.650 12/01/23 2,936,910
7,695 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev (Prerefunded @
01/01/22)................................................... 4.500 01/01/24 6,533,209
--------------
9,470,119
--------------
NORTH DAKOTA 0.3%
1,220 Mercer Cnty, ND Pollutn Ctl Rev Basin Elec Pwr Ser E........ 7.000 01/01/19 1,291,358
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp
Proj........................................................ 8.875 11/15/24 2,226,020
--------------
3,517,378
--------------
OHIO 2.2%
500 Cleveland, OH Pkg Fac Rev Impt (Prerefunded @ 09/15/02)..... 8.000 09/15/12 592,430
750 Coshocton Cnty, OH Solid Waste Disp Rev Stone Container Corp
Proj Rfdg................................................... 7.875 08/01/13 805,050
1,000 Cuyahoga Cnty, OH Hlthcare Fac Rev Jennings Hall............ 7.300 11/15/23 1,028,200
435 Fairfield, OH Econ Dev Rev Beverly Enterprises Inc Proj
Rfdg........................................................ 8.500 01/01/03 468,926
2,045 Montgomery Cnty, OH Hosp Rev Dayton Osteopathic Hosp Proj
Rfdg........................................................ 6.000 12/01/12 2,003,261
7,940 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized)....................................... 9.849 03/31/31 8,704,225
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd Partnership
Proj Rfdg (AMBAC Insd)...................................... 6.375 04/01/29 1,067,190
4,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 8.250 10/01/14 4,113,400
2,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 9.000 06/01/21 2,137,300
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj Rfdg........... 7.750 12/01/09 1,509,690
--------------
22,429,672
--------------
OKLAHOMA 1.7%
7,685 Grand River Dam Auth OK Rev................................. 5.000 06/01/12 7,432,087
1,980 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/22 1,918,600
2,695 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B (GNMA
Collateralized)............................................. 7.997 08/01/18 3,014,923
1,635 Tulsa, OK Indl Auth Hosp Rev Tulsa Regl Med Cent
(Prerefunded @ 06/01/03).................................... 7.200 06/01/17 1,885,024
1,000 Tulsa, OK Muni Arpt Tran Rev American Airls Inc............. 7.600 12/01/30 1,084,310
1,500 Woodward, OK Muni Auth Sales Tax & Util (Prerefunded @
11/01/97)................................................... 8.000 11/01/12 1,566,975
--------------
16,901,919
--------------
</TABLE>

See Notes to Financial Statements

B-43
<PAGE> 186

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OREGON 0.4%
$ 4,000 Oregon St Econ Dev Rev Georgia Pacific Corp................. 6.350% 08/01/25 $ 4,084,040
500 Salem, OR Hosp Fac Auth Rev Cap Manor Inc................... 7.500 12/01/24 522,525
--------------
4,606,565
--------------
PENNSYLVANIA 3.1%
500 Chartiers Vly, PA Indl & Commercial Dev Auth 1st Mtg Rev.... 7.250 12/01/11 511,425
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys Rev (AMBAC
Insd) (c)................................................... 5.650 05/15/20 4,891,800
1,750 Emmaus, PA Genl Auth Rev Ser A (BIGI Insd).................. 8.150 05/15/18 1,862,385
2,500 Emmaus, PA Genl Auth Rev Ser C (BIGI Insd).................. 7.900 05/15/18 2,674,425
500 Erie Cnty, PA Hosp Auth Rev Metro Hlth Cent................. 7.250 07/01/12 457,110
5,000 Hazelton, PA Area Sch Dist Comp Interest Ser B (FGIC
Insd)....................................................... * 03/01/18 1,499,900
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth Cent Rev United Church
of Christ Homes Rfdg........................................ 6.750 10/01/10 1,013,960
955 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg...................... 8.000 08/01/12 997,211
1,315 Luzerne Cnty, PA Indl Dev Auth 1st Mtg Gross Rev Rfdg....... 7.875 12/01/13 1,381,802
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 1,738,605
2,000 McKeesport, PA Hosp Auth Rev McKeesport Hosp Proj Rfdg...... 6.500 07/01/08 2,055,560
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd)................................ 7.490 06/01/12 3,089,700
1,000 Montgomery Cnty, PA Indl Dev Auth Retirement Cmnty Rev...... 6.300 01/01/13 964,420
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recovery.......... 7.500 01/01/12 1,076,740
500 Pennsylvania St Higher Edl Fac Auth College & Univ Rev
Hahnemann Univ Proj (Prerefunded @ 07/01/99) (MBIA Insd).... 7.200 07/01/19 545,075
250 Pennsylvania St Higher Edl Fac Auth Rev Med College PA Ser A
(Prerefunded @ 03/01/99).................................... 7.500 03/01/14 267,435
1,500 Pennsylvania St Higher Edl Fac Auth Univ PA Ser A Rfdg...... 5.750 01/01/22 1,505,220
685 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev........ 7.250 03/01/24 670,745
1,950 Ridley Park, PA Hosp Auth Rev Hosp Auth Rev Ser 1993A....... 6.000 12/01/13 1,904,780
1,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Allied Svcs
Rehab Hosp Ser A............................................ 7.375 07/15/08 1,065,980
500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Moses Taylor
Hosp Proj................................................... 8.250 07/01/09 539,685
1,000 Washington Cnty, PA Hosp Auth Rev Hosp Canonsburg Genl Hosp
Rfdg........................................................ 7.350 06/01/13 974,760
--------------
31,688,723
--------------
RHODE ISLAND 0.6%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,114,740
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B (FHA
Gtd)........................................................ 7.950 10/01/30 2,502,561
1,285 West Warwick, RI Ser A...................................... 6.800 07/15/98 1,312,807
600 West Warwick, RI Ser A...................................... 7.300 07/15/08 647,472
--------------
6,577,580
--------------
SOUTH CAROLINA 0.4%
3,000 Charleston Cnty, SC Arpt Dist Rfdg (MBIA Insd).............. 4.750 07/01/15 2,678,340
1,070 Piedmont Muni Pwr Agy SC Elec Rev........................... 5.000 01/01/25 928,985
--------------
3,607,325
--------------
SOUTH DAKOTA 0.3%
1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron Reg Med
Cent........................................................ 7.250 04/01/20 1,058,300
150 South Dakota St Hlth & Edl Fac Auth Rev Sioux Vly Hosp...... 7.625 11/01/13 162,525
1,850 South Dakota St Hlth & Edl Fac Auth Rev Sioux Vly Hosp
(Prerefunded @ 11/01/98).................................... 7.625 11/01/13 2,003,328
--------------
3,224,153
--------------
TENNESSEE 0.4%
1,750 Knox Cnty, TN Hlth Edl Hosp Fac Baptist Hlth Sys Rfdg & Impt
(Connie Lee Insd)........................................... 5.500 04/15/17 1,690,728
2,000 Springfield, TN Hlth & Edl Jesse Holman Jones Hosp Proj..... 8.500 04/01/24 2,161,980
--------------
3,852,708
--------------

</TABLE>

See Notes to Financial Statements

B-44
<PAGE> 187

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS 6.0%
$ 1,000 Austin, TX Arpt Sys Rev Prior Lien Ser A (MBIA Insd)........ 6.125% 11/15/25 $ 1,036,060
500 Austin, TX Hsg Fin Corp Multi-Family Hsg Rev Stassney Woods
Apartments Proj Rfdg........................................ 6.500 10/01/10 513,920
1,000 Austin, TX Hsg Fin Corp Multi-Family Hsg Rev Stassney Woods
Apartments Proj Rfdg........................................ 6.750 04/01/19 1,034,600
2,500 Austin, TX Util Sys Rev (AMBAC Insd)........................ * 11/15/11 1,104,325
3,000 Austin, TX Util Sys Rev (AMBAC Insd)........................ * 11/15/12 1,244,700
1,000 Austin, TX Util Sys Rev Rfdg (AMBAC Insd) (b)............... 6.500 11/15/05 1,065,410
1,000 Austin, TX Util Sys Rev Ser A (Prerefunded @ 11/15/98)...... 7.800 11/15/12 1,087,970
500 Baytown, TX Pptys Mgmt & Dev Corp Ser A (GNMA
Collateralized)............................................. 6.100 08/15/21 507,565
160 Bell Cnty, TX Hlth Fac Dev Corp Rev Hosp Proj............... 9.250 07/01/08 175,832
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's
Lutheran Hosp............................................... 7.000 05/01/21 582,370
1,500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's
Lutheran Hosp
(Prerefunded @ 05/01/03).................................... 7.900 05/01/18 1,767,525
375 Bexar Cnty, TX Hsg Fin Corp Rev Ser A (GNMA
Collateralized)............................................. 8.200 04/01/22 396,690
600 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA
Collateralized)............................................. 9.250 04/01/16 622,368
1,675 Cedar Hill, TX Indt Sch Dist Cap Apprec Rfdg................ * 08/15/15 557,691
625 Clear Creek, TX Indpt Sch Dist (Prerefunded @ 02/01/01)..... 6.250 02/01/11 668,362
250 Coastal Wtr Auth TX Conveyance Sys Rev (AMBAC Insd)......... 6.250 12/15/17 265,293
940 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp Rev American
Airls Inc................................................... 7.500 11/01/25 1,007,708
250 El Paso, TX Hsg Auth Multi-Family Rev Ser A................. 6.250 12/01/09 257,240
520 Fort Worth, TX Hsg Fin Corp Home Mtg Rev Ser A Rfdg......... 8.500 10/01/11 567,752
3,000 Galena Park, TX Indt Sch Dist Cap Apprec Rfdg............... * 08/15/20 780,660
115 Galveston, TX Ppty Fin Auth Single Family Mtg Rev Ser A..... 8.500 09/01/11 124,789
2,750 Garland, TX Econ Dev Auth Indl Dev Rev Yellow Freight Sys
Inc Proj.................................................... 8.000 12/01/16 2,834,810
250 Guadalupe Blanco River Auth TX Indl Dev Corp Pollutn Ctl
Rev......................................................... 6.350 07/01/22 265,550
1,250 Harris Cnty, TX Hlth Fac Dev Corp Hosp Rev.................. 7.125 06/01/15 1,350,062
100 Harris Cnty, TX Hsg Fin Corp Single Family Hsg Rev Ser 1983
Ser A....................................................... 10.375 07/15/14 100,331
250 Harris Cnty, TX Muni Util Dist No 120 (Prerefunded @
08/01/01)................................................... 8.000 08/01/14 284,917
1,000 Harris Cnty, TX Muni Util Dist Rfdg......................... 6.100 08/01/14 1,004,980
375 Harris Cnty, TX Sch Hlthcare Corp Sys Rev................... 7.100 07/01/21 407,719
1,000 Hidalgo Cnty, TX Hlth Svcs Mission Hosp Inc Proj............ 7.000 08/15/08 1,057,060
705 Houston, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg
(FSA Insd).................................................. 5.950 12/01/10 718,783
250 Lockhart, TX Correctional Fac Fin Corp Rev.................. 6.625 04/01/12 268,073
4,750 Matagorda Cnty, TX Navigation Dist No 1 Pollutn Ctl Rev Cent
Pwr & Light Co Proj Rfdg (MBIA Insd)........................ 6.100 07/01/28 4,882,572
500 Mission Bend Muni Util Dist No 2 TX......................... 10.000 09/01/98 543,960
145 Montgomery Cnty, TX Hlth Fac Dev Corp Hosp Mtg Rev Woodlands
Med Cent Proj Rfdg.......................................... 8.850 08/15/14 156,311
3,500 North Central, TX Hlth Fac Dev Corp Rev Presbyterian
Hlthcare Sys Ser C (Inverse Fltg) (Prerefunded @ 06/19/01)
(MBIA Insd)................................................. 9.485 06/22/21 4,186,875
750 Northwest Harris Cnty, TX Muni Util Dist No 23.............. 8.100 10/01/15 808,642
2,050 Rusk Cnty, TX Hlth Fac Corp Hosp Rev Henderson Mem Hosp
Proj........................................................ 7.750 04/01/13 2,155,534
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev............. 6.750 10/01/14 940,410
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev Ser A
Rfdg........................................................ 6.250 10/01/17 885,120
220 San Antonio, TX Elec & Gas Rev Ser A........................ 6.500 02/01/12 230,729
250 San Antonio, TX Hlth Fac Dev Corp Rev Encore Nursing Cent
Partn....................................................... 8.250 12/01/19 269,453
500 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Fort Worth
Osteopathic Rfdg & Impt..................................... 7.000 05/15/28 522,685
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Aquisition Proj............................................. 7.000 08/01/24 515,105
271 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Aquisition Proj............................................. 7.000 08/01/09 278,834
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 8/01/19 515,045

</TABLE>

See Notes to Financial Statements

B-45
<PAGE> 188

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
$ 950 Texas Genl Svcs Cmnty Partn Lease Purchase Cert............. 7.500% 02/15/13 $ 964,621
115 Texas Hsg Agy Mtg Rev Ser A................................. 7.150 09/01/12 119,589
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll Ser C
Rfdg (Inverse Fltg) (GNMA Collateralized)................... 9.714 07/02/24 6,076,875
325 Texas St Higher Edl Brd College Sr Lien..................... 7.700 10/01/25 342,456
4,025 Texas St Higher Edl Coordinating Brd College Student Ln
(d)......................................................... 0/7.850 10/01/25 3,415,011
250 Texas St Rfdg............................................... 6.500 12/01/21 264,723
1,000 Texas St Superconducting Ser C.............................. 5.500 04/01/20 973,690
250 Texas St Tpk Auth Dallas Thruway Rev........................ 6.000 01/01/20 250,515
1,000 Texas St Veterans Hsg Assist (MBIA Insd).................... 6.800 12/01/10 1,049,170
1,300 Texas St Veterans Hsg Assist (MBIA Insd).................... 6.800 12/01/23 1,363,609
380 Travis Cnty, TX Hsg Fin Corp Single Family Mtg Rev (GNMA
Collateralized)............................................. 8.200 04/01/22 394,459
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics..................................... 8.200 03/15/21 2,518,087
500 Willow Fork Drainage Dist TX................................ 7.000 03/01/11 529,485
500 Willow Fork Drainage Dist TX................................ 7.000 03/01/12 532,935
500 Willow Fork Drainage Dist TX................................ 7.000 03/01/13 531,555
1,000 Winters, TX Wtrwks & Swr Sys Rev (Prerefunded @ 08/01/03)... 8.500 08/01/17 1,225,220
--------------
61,104,390
--------------
UTAH 2.7%
3,140 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj.......... 9.500 12/15/18 3,485,808
1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 1,335,605
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,008,720
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/25 990,230
1,850 Intermountain Pwr Agy UT Pwr Supply Rev Ser 86B............. 5.000 07/01/16 1,679,522
1,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser A (Prerefunded @
07/01/99)................................................... 6.000 07/01/23 1,042,900
3,650 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg.......... 7.750 07/01/20 3,885,498
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Embedded
Swap)....................................................... 7.800 02/15/12 11,706,200
1,115 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1 (FHA Gtd)... 7.100 07/01/14 1,161,975
1,495 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2 (FHA Gtd)... 7.200 01/01/27 1,566,596
--------------
27,863,054
--------------
VIRGINIA 1.5%
2,000 Fairfax Cnty, VA Park Auth Park Fac Rev..................... 6.625 07/15/14 2,106,380
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Inverse Fltg)
(Prerefunded @ 08/15/01) (FGIC Insd)........................ 6.600 08/15/23 3,844,855
2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.800 03/01/14 2,339,584
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.900 03/01/19 1,128,830
5,000 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp Carilion
Hlth Sys Ser B Rfdg (MBIA Insd)............................. 4.700 01/01/00 4,934,000
1,000 Virginia Port Auth Comwlth Port Fund Rev.................... 8.200 07/01/08 1,067,500
--------------
15,421,149
--------------
WASHINGTON 0.8%
1,000 Port Walla Walla, WA Pub Corp Solid Waste Recycling Rev
Ponderosa Fibres Proj....................................... 9.125 01/01/26 915,050
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev (FGIC
Insd)....................................................... 7.125 07/01/16 1,500,387
2,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev
(Prerefunded @ 01/01/01).................................... 7.625 07/01/10 2,259,560
1,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev
(Prerefunded @ 07/01/00).................................... 7.375 07/01/12 1,112,880
2,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Rfdg
(Prerefunded @ 07/01/00).................................... 7.000 07/01/12 2,752,100
--------------
8,539,977
--------------
WEST VIRGINIA 0.7%
6,750 South Charleston, WV Indl Dev Rev Union Carbide Chem &
Plastics Ser A.............................................. 8.000% 08/01/20 7,258,748
--------------

</TABLE>

See Notes to Financial Statements

B-46
<PAGE> 189

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN 1.9%
$ 750 Jefferson, WI Swr Sys Wtrwrks & Elec Sys Mtg Rev
(Prerefunded @ 07/01/01).................................... 7.400% 07/01/16 $ 840,142
2,640 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg
(Inverse Fltg).............................................. 10.057 10/25/22 2,894,100
1,000 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Ser D...... 6.450 09/01/27 1,021,270
5,000 Wisconsin St Hlth & Edl Fac Auth Rev Aurora Med Group Inc
Ser P (FSA Insd)............................................ 5.600 11/15/16 4,926,000
600 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn..... 7.200 11/01/05 599,724
1,800 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn..... 7.875 11/01/22 1,811,412
1,000 Wisconsin St Hlth & Edl Fac Auth Rev United Lutheran Proj
Aging Inc................................................... 8.500 03/01/19 1,050,760
4,500 Wisconsin St Hlth & Edl Fac Auth Waukesha Mem Hosp Ser A
(AMBAC Insd)................................................ 5.250 08/15/19 4,263,210
2,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 2,050,600
--------------
19,457,218
--------------
WYOMING 0.3%
3,030 Wyoming Cmny Dev Auth Hsg Rev Ser 5......................... 6.200 06/01/16 3,039,938
--------------
TOTAL LONG-TERM INVESTMENTS 99.6%
(Cost $951,637,004) (a)................................................................. 1,012,737,353
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.7%............................................ 17,061,604
LIABILITIES IN EXCESS OF OTHER ASSETS (1.3%)............................................. (13,557,005)
--------------
NET ASSETS 100.0%........................................................................ $1,016,241,952
==============
</TABLE>

*Zero coupon bond

(a) At December 31, 1996, for federal income tax purposes, cost is $951,662,670,
the aggregate gross unrealized appreciation is $71,572,022 and the aggregate
gross unrealized depreciation is $10,497,339, resulting in net unrealized
appreciation of $61,074,683.

(b) Securities purchased on a when issued or delayed delivery basis.

(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments, open option and open futures transactions.

(d) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.

(e) Non-Income producing security.

AMBAC--AMBAC Indemnity Corporation

BIGI--Bond Investor Guaranty Inc.

FGIC--Financial Guaranty Insurance Company

FSA--Financial Security Assurance Inc.

MBIA--Municipal Bond Investors Assurance Corp.

See Notes to Financial Statements

B-47
<PAGE> 190

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $951,637,004)
(Note 1).................................................. $1,012,737,353
Short-Term Investments (Note 1)............................. 17,061,604
Cash........................................................ 104,623
Receivables:
Interest.................................................. 18,278,625
Securities Sold........................................... 8,426,181
Fund Shares Sold.......................................... 642,914
Variation Margin on Futures (Note 5)...................... 149,919
Options at Market Value (Net premiums paid of $659,624)
(Note 5).................................................. 386,722
--------------
Total Assets.......................................... 1,057,787,941
--------------
LIABILITIES:
Payables:
Securities Purchased...................................... 24,860,688
Fund Shares Repurchased................................... 12,644,490
Income Distributions...................................... 2,323,471
Distributor and Affiliates (Notes 2 and 6)................ 907,297
Investment Advisory Fee (Note 2).......................... 409,909
Accrued Expenses............................................ 282,865
Deferred Compensation and Retirement Plans (Note 2)......... 117,269
--------------
Total Liabilities..................................... 41,545,989
--------------
NET ASSETS.................................................. $1,016,241,952
==============
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $ 982,656,656
Net Unrealized Appreciation on Securities................... 60,847,273
Accumulated Undistributed Net Investment Income............. 662,245
Accumulated Net Realized Loss on Securities................. (27,924,222)
--------------
NET ASSETS.................................................. $1,016,241,952
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $792,340,929 and 51,899,523 shares of
beneficial interest issued and outstanding)............ $ 15.27
Maximum sales charge (4.75%* of offering price)......... .76
--------------
Maximum offering price to public........................ $ 16.03
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $210,982,818 and 13,819,776 shares of
beneficial interest issued and outstanding)............ $ 15.27
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $12,918,205 and 846,831 shares of
beneficial interest issued and outstanding)............ $ 15.25
==============
*On sales of $100,000 or more, the sales charge will be
reduced.

</TABLE>

See Notes to Financial Statements

B-48
<PAGE> 191

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 69,853,730
------------
EXPENSES:
Investment Advisory Fee (Note 2)............................ 4,825,272
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,990,737, $2,084,477 and $119,847,
respectively) (Note 6).................................... 4,195,061
Shareholder Services (Note 2)............................... 1,131,955
Custody..................................................... 329,016
Legal (Note 2).............................................. 172,500
Trustees Fees and Expenses (Note 2)......................... 35,372
Other....................................................... 575,056
------------
Total Expenses.......................................... 11,264,232
Less Expenses Reimbursed (Note 2)....................... 10,028
------------
Net Expenses............................................ 11,254,204
------------
NET INVESTMENT INCOME....................................... $ 58,599,526
============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments (Including reorganization and restructuring
costs of $345,015)...................................... $ 13,578,699
Options................................................... (914,878)
Futures................................................... 2,865,748
------------
Net Realized Gain on Securities............................. 15,529,569
------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 95,777,573
------------
End of the Period:
Investments............................................. 61,100,349
Options................................................. (272,902)
Futures................................................. 19,826
------------
60,847,273
------------
Net Unrealized Depreciation on Securities During the
Period.................................................... (34,930,300)
------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(19,400,731)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 39,198,795
============
</TABLE>

See Notes to Financial Statements

B-49
<PAGE> 192

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------

Distributions from Net Investment Income.................... (57,534,519) (43,561,521)
Distributions in Excess of Net Investment Income (Note 1)... -0- (826,976)
-------------- --------------

Distributions from and in Excess of Net Investment
Income*................................................... (57,534,519) (44,388,497)
-------------- --------------

NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (18,335,724) 95,305,825
-------------- --------------

FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................................... 448,529,529 406,337,419
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 29,896,737 23,081,168
Cost of Shares Repurchased.................................. (511,329,514) (116,597,602)
-------------- --------------

NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... (32,903,248) 312,820,985
-------------- --------------

TOTAL INCREASE/DECREASE IN NET ASSETS....................... (51,238,972) 408,126,810
NET ASSETS:
Beginning of the Period..................................... 1,067,480,924 659,354,114
-------------- --------------

End of the Period (Including accumulated undistributed net
investment income of $662,245 and $(553,439),
respectively)............................................. $1,016,241,952 $1,067,480,924
============== ==============
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment
Income:
Class A Shares........................................ $ (46,362,424) $ (34,867,726)
Class B Shares........................................ (10,564,184) (9,177,676)
Class C Shares........................................ (607,911) (313,688)
Class D Shares........................................ -- (29,407)
-------------- ---------------

$ (57,534,519) $ (44,388,497)
============== ===============
</TABLE>

See Notes to Financial Statements

B-50
<PAGE> 193

FINANCIAL HIGHLIGHTS

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

Year Ended December 31,
-----------------------------------------------
Class A Shares 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $15.549 $14.261 $16.164 $15.310 $15.071
------- ------- ------- ------- -------
Net Investment Income..................................... .898 .874 .886 .964 1.041
Net Realized and Unrealized Gain/Loss on Securities....... (.298) 1.296 (1.907) .862 .374
------- ------- ------- ------- -------
Total from Investment Operations............................ .600 2.170 (1.021) 1.826 1.415
------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment Income
(Note 1)................................................ .882 .882 .882 .972 1.044
Distributions from and in Excess of Net Realized Gain on
Securities (Note 1)..................................... -0- -0- -0- -0- .132
------- ------- ------- ------- -------
Total Distributions......................................... .882 .882 .882 .972 1.176
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $15.267 $15.549 $14.261 $16.164 $15.310
======= ======= ======= ======= =======
Total Return* (a)........................................... 4.07% 15.61% (6.37%) 12.20% 9.69%
Net Assets at End of the Period (In millions)............... $792.3 $839.7 $495.8 $597.6 $463.6
Ratio of Expenses to Average Net Assets*.................... .94% .99% .99% .87% .86%
Ratio of Net Investment Income to Average Net Assets*....... 5.93% 5.86% 5.93% 6.08% 6.76%
Portfolio Turnover.......................................... 73% 61% 75% 82% 92%
*If certain expenses had not been assumed by VKAC, total
return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... .94% .99% .99% .98% 1.00%
Ratio of Net Investment Income to Average Net Assets........ 5.93% 5.86% 5.93% 5.97% 6.62%
</TABLE>

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

See Notes to Financial Statements

B-51
<PAGE> 194

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
August 24, 1992
Year Ended December 31, (Commencement of
------------------------------------- Distribution) to
Class B Shares 1996 1995 1994 1993 December 31, 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $15.549 $14.261 $16.139 $15.308 $15.481
------- ------- ------- ------- -------
Net Investment Income................................... .783 .762 .780 .852 .320
Net Realized and Unrealized Gain/Loss on Securities..... (.297) 1.294 (1.890) .845 (.033)
------- ------- ------- ------- -------
Total from Investment Operations.......................... .486 2.056 (1.110) 1.697 .287
------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income (Note 1)....................................... .768 .768 .768 .866 .328
Distributions from and in Excess of Net Realized Gain on
Securities (Note 1)................................... -0- -0- -0- -0- .132
------- ------- ------- ------- -------
Total Distributions....................................... .768 .768 .768 .866 .460
------- ------- ------- ------- -------
Net Asset Value, End of the Period........................ $15.267 $15.549 $14.261 $16.139 $15.308
======= ======= ======= ======= =======
Total Return* (a)......................................... 3.29% 14.74% (6.96%) 11.33% 1.90%**
Net Assets at End of the Period (In millions)............. $211.0 $216.6 $158.7 $168.2 $48.4
Ratio of Expenses to Average Net Assets*.................. 1.70% 1.73% 1.70% 1.65% 1.66%
Ratio of Net Investment Income to Average Net Assets*..... 5.17% 5.09% 5.22% 5.19% 5.23%
Portfolio Turnover........................................ 73% 61% 75% 82% 92%
*If certain expenses had not been assumed by VKAC, total
return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets................... 1.70% 1.73% 1.70% 1.73% 2.42%
Ratio of Net Investment Income to Average Net Assets...... 5.17% 5.09% 5.22% 5.11% 4.48%
</TABLE>

**Non-Annualized

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

See Notes to Financial Statements

B-52
<PAGE> 195

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31, (Commencement of
--------------------------- Distribution) to
Class C Shares 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $15.545 $14.262 $16.141 $15.990
------- ------- ------- -------
Net Investment Income..................................... .782 .771 .783 .300
Net Realized and Unrealized Gain/Loss on Securities....... (.305) 1.280 (1.894) .171
------- ------- ------- -------
Total from Investment Operations............................ .477 2.051 (1.111) .471
Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .768 .768 .768 .320
------- ------- ------- -------
Net Asset Value, End of the Period.......................... $15.254 $15.545 $14.262 $16.141
======= ======= ======= =======
Total Return (a)............................................ 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of the Period (In millions)............... $12.9 $11.2 $3.9 $4.1
Ratio of Expenses to Average Net Assets (b)................. 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment Income to Average Net Assets (b).... 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover.......................................... 73% 61% 75% 82%
</TABLE>

*Non-Annualized

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

(b) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC reimbursement of certain expenses was less than
0.01%.

See Notes to Financial Statements

B-53
<PAGE> 196

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

A. SECURITY VALUATION--Investments 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 60 days or less 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" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.

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

The Fund intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1996, the Fund had an accumulated
capital loss carryforward for tax purposes of $28,118,805 which expires between
December 31, 2002 and December 31, 2003. Net realized gains or losses differ for
financial reporting and tax purposes primarily as a result of the deferral of
losses for tax purposes resulting from wash sale transactions, gains or losses
recognized for tax purposes on open option and futures positions and the
capitalization for tax purposes of reorganization and restructuring costs.

B-54
<PAGE> 197

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

For the year ended December 31, 1996, 98.77% of the income distributions
made by the Fund were exempt from federal income taxes.

Due to inherent differences in the recognition of interest income under
generally accepted accounting principles and federal income tax purposes, for
those securities which the Fund has placed on non-accrual status, the amount of
distributable net investment income may differ between book and federal income
tax purposes for a particular period. These differences are temporary in nature,
but may result in book basis distribution in excess of net investment income for
certain periods. Additionally, permanent book and tax basis differences relating
to the recognition of certain expenses which are not deductible for tax purposes
totaling $150,677 were reclassified from accumulated undistributed net
investment income to capital.

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>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated
person.

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $108,100 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1996, the Fund recognized expenses of approximately $892,000,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC. For the year ended December 31, 1996, the Adviser reimbursed the Fund
for certain trustees' compensation in connection with the July, 1995 increase in
the number of trustees of the Fund.

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, 1996, VKAC owned 6,894, 33 and 32 shares of Classes A, B
and C, respectively.

3. CAPITAL TRANSACTIONS

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

B-55
<PAGE> 198

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $760,254,848, $209,639,832 and
$12,761,976 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 27,650,131 $ 418,053,766
Class B................................................... 1,641,964 24,779,007
Class C................................................... 375,923 5,696,756
----------- -------------
Total Sales................................................. 29,668,018 $ 448,529,529
=========== =============
Dividend Reinvestment:
Class A................................................... 1,572,959 $ 23,855,458
Class B................................................... 375,855 5,699,914
Class C................................................... 22,531 341,365
----------- -------------
Total Dividend Reinvestment................................. 1,971,345 $ 29,896,737
=========== =============
Repurchases:
Class A................................................... (31,326,699) $(474,926,518)
Class B................................................... (2,128,006) (32,268,288)
Class C................................................... (272,810) (4,134,708)
----------- -------------
Total Repurchases........................................... (33,727,515) $(511,329,514)
=========== =============
</TABLE>

B-56
<PAGE> 199

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $793,389,808, $211,460,358 and
$10,860,415 for Classes A, B and C, respectively. For the year ended December
31, 1995, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 24,431,223 $ 346,409,490
Class B................................................... 3,801,812 52,179,384
Class C................................................... 533,838 7,748,545
Class D................................................... -0- -0-
---------- -------------
Total Sales................................................. 28,766,873 $ 406,337,419
========== =============
Dividend Reinvestment:
Class A................................................... 1,177,039 $ 17,764,127
Class B................................................... 388,749 5,104,906
Class C................................................... 12,019 181,673
Class D................................................... 2,041 30,462
---------- -------------
Total Dividend Reinvestment................................. 1,579,848 $ 23,081,168
========== =============
Repurchases:
Class A................................................... (6,373,222) $ (93,894,378)
Class B................................................... (1,339,250) (20,151,942)
Class C................................................... (94,687) (1,432,423)
Class D................................................... (70,940) (1,118,859)
---------- -------------
Total Repurchases........................................... (7,878,099) $(116,597,602)
========== =============
</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.

<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...................................... None None
</TABLE>

B-57
<PAGE> 200

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

For the year ended December 31, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$122,900 and CDSC on redeemed shares of approximately $506,000. Sales charges do
not represent expenses of the Fund.

On September 22, 1995, the Fund acquired all of the assets and
liabilities of the Van Kampen American Capital Municipal Bond Fund (the "AC
Fund"), through a tax free reorganization approved by AC Fund shareholders on
September 21, 1995. The Fund issued 20,054,672, 2,774,312 and 471,489 shares of
Classes A, B and C valued at $301,019,346, $41,842,606 and $7,076,761,
respectively, in exchange for AC Fund's net assets. Shares issued in connection
with this reorganization are included in common share sales for the year ended
December 31, 1995. Combined net assets on the date of acquisition were
$1,027,309,801.

On October 25, 1996, the Fund acquired all of the assets and liabilities
of the Van Kampen American Capital Texas Tax Free Income Fund (the "TX Fund"),
through a tax free reorganization approved by TX Fund shareholders on October
15, 1996. The Fund issued 605,902, 421,195 and 53,444 shares of Classes A, B and
C valued at $9,179,415, $6,381,107 and $809,140, respectively, in exchange for
TX Fund's net assets. Shares issued in connection with this reorganization are
included in common share sales for the current period. Combined net assets on
the day of acquisition were $1,003,018,474.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $744,315,333 and $775,600,106,
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 when exercising an
option contract or taking delivery of a security underlying a futures contract.
In these instances the recognition of gain or loss is postponed until the
disposal of the security underlying the option or futures contract.

Summarized below are the specific types of derivative financial
instruments used by the Fund.

A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.

B-58
<PAGE> 201

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

Transactions in options for the year ended December 31, 1996, were as
follows:

<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995............................ -0- $ -0-
Options Written and Purchased (Net)......................... 24,420 (3,345,011)
Options Terminated in Closing Transactions (Net)............ (9,862) 420,072
Options Expired (Net)....................................... (13,171) 2,038,789
Options Exercised (Net)..................................... (637) 226,526
--------- -----------
Outstanding at December 31, 1996............................ 750 $ (659,624)
========= ===========
</TABLE>

The related futures contracts of the outstanding option transactions as
of December 31, 1996, and the description and market value are as follows:

<TABLE>
<CAPTION>
MARKET
EXP. MONTH/ VALUE
CONTRACTS EXERCISE PRICE OF OPTIONS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond Futures
March 1997--Purchased Calls (Current Notional
Value of $112,625 per Contract)................ 750 Feb./116 $ 386,722
=== =========
</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.

Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).

Transactions in futures contracts for the year ended December 31, 1996,
were as follows:

<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995............................ 1,100
Futures Opened.............................................. 39,389
Futures Closed.............................................. (40,238)
--------
Outstanding at December 31, 1996............................ 251
========
</TABLE>

B-59
<PAGE> 202

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

The futures contracts outstanding at December 31, 1996, and the
descriptions and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- -------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
March 1997--Sells to Open (Current Notional Value
$112,625 per contract).................................. 50 $24,598

Municipal Bond Index Futures
March 1997--Sells to Open (Current Notional Value
$116,063 per contract).................................. 201 (4,772)
--- -------

251 $19,826
=== =======
</TABLE>

C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.

An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. 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 pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .25% for Class A net assets and
1.00% each for Class B and Class C net assets are accrued daily. Included in
these fees for the year ended December 31, 1996, are payments to VKAC of
approximately $1,584,600.

B-60
<PAGE> 203

APPENDIX C

STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND

April 30, 1997,
As supplemented July 21, 1997
<PAGE> 204

VAN KAMPEN AMERICAN CAPITAL

JULY 21, 1997 SUPPLEMENT TO STATEMENTS OF ADDITIONAL INFORMATION

Statement of Additional Information dated April 25, 1997
VKAC Foreign Securities Fund

Dennis J. McDonnell resigned as a Trustee of the Fund, effective May 31,
1997.
<PAGE> 205

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
Trustees and Officers....................................... B-19
Investment Advisory and Other Services...................... B-29
Custodian and Independent Accountants....................... B-31
Portfolio Transactions and Brokerage Allocation............. B-31
Tax Status of the Fund...................................... B-32
The Distributor............................................. B-32
Distribution and Service Plans.............................. B-33
Legal Counsel............................................... B-34
Performance Information..................................... B-34
Appendix A -- Special Considerations Relating to New Jersey
Municipal Securities...................................... B-37
Report of Independent Accountants........................... B-58
Financial Statements........................................ B-59
Notes to Financial Statements............................... B-67
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1997.

B-1
<PAGE> 206

THE FUND AND THE TRUST

Van Kampen American Capital New Jersey Tax Free Income Fund (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 Intermediate
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
and adopted its present name as of July 31, 1995.

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

B-2
<PAGE> 207

bond market; however, the Fund will not invest more than 25% of its assets
in industrial development bonds in a single industry, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.

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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.

8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.

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.

B-3
<PAGE> 208

(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.

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

B-4
<PAGE> 209

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.

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> 210

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
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.

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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

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B- by S&P, below B3 by Moody's or an equivalent rating by another NRSRO, or
whose rating has been withdrawn.

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 an average of 6.4% during the first ten months 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.

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<PAGE> 213

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.

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.

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<PAGE> 214

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.

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.

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<PAGE> 215

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. 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 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,

B-11
<PAGE> 216

they settle by cash settlement, i.e., an option on an index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
(except if, in the case of an OTC option, physical delivery is specified). This
amount of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.

COMBINED TRANSACTIONS. 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.

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.

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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 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 securities 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 securities 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.

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.

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DESCRIPTION OF MUNICIPAL SECURITIES RATINGS

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

1. DEBT

A S&P 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.

BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as
B having as predominantly speculative characteristics with
CCC respect to capacity to pay interest and repay principal.
CC 'BB' 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.

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<PAGE> 219
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.

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

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

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

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<PAGE> 220

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:

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.

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> 221

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

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> 222
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.

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 promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law.

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

B-18
<PAGE> 223

- Leading market positions in well established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.

- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.

- Well established access to a range of financial markets and assured
sources of alternate liquidity.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.

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

TRUSTEES AND OFFICERS

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Partner, Ray & Berndtson, Inc. An executive recruiting
Sears Tower and management consulting firm. Formerly, Executive Vice
233 South Wacker Drive President of ABN AMRO, N.A., a Dutch bank holding
Suite 4020 company. Prior to 1992, Executive Vice President of La
Chicago, IL 60606 Salle National Bank. Trustee of each of the funds in the
Date of Birth: 06/03/48 Fund Complex.
</TABLE>

B-19
<PAGE> 224
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the funds in the Fund Complex.
Dennis J. McDonnell*...................... President and a Director of VKAC. President, Chief
One Parkview Plaza Operating Officer and a Director of the Advisers.
Oakbrook Terrace, IL 60181 Director or officer of certain other subsidiaries of
Date of Birth: 05/20/42 VKAC. Prior to November 1996, Executive Vice President
and a Director of VKAC Holding. President and Trustee of
each of the funds in the Fund Complex. President,
Chairman of the Board and Trustee of other investment
companies advised by the Advisers or their affiliates.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee of each of the funds
in the Fund Complex.
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Trustee of each of
the funds in the Fund Complex.
Phillip B. Rooney......................... Private investor. Director, Illinois Tool Works, Inc., a
348 East Third Street manufacturing company; Director, The Servicemaster
Hinsdale, IL 60521 Company, a business and consumer services company;
Date of Birth: 07/08/44 Director, Urban Shopping Centers Inc., a retail mall
management company; Director, Stone Container Corp., a
paper manufacturing company. Trustee, University of Notre
Dame. Formerly, President and Chief Executive Officer,
WMX Technologies Inc., an environmental services company,
and prior to that President and Chief Operating Officer,
WMX Technologies Inc. Trustee of each of the funds in the
Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee of each of the funds in the
Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, open-end funds advised by Van Kampen American
Date of Birth: 08/22/39 Capital Management, Inc. and closed-end funds advised by
Advisory Corp. Trustee of each of the funds in the Fund
Complex, open-end funds advised by Van Kampen Capital
Management, Inc. and closed-end funds advised by Advisory
Corp.
</TABLE>

B-20
<PAGE> 225

OFFICERS

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>

Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell Chairman, President, Chief Executive
2800 Post Oak Blvd. Officer and a Director of VKAC. Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of
Date of Birth: 10/19/39 the Advisers and the Distributor. Chairman
and a Director of ACCESS. Director or
officer of certain other subsidiaries of
VKAC. Chairman of the Board of Governors
and the Executive Committee of the
Investment Company Institute. Prior to
November, 1996, President, Chief Executive
Officer and a Director of VKAC Holding.
President, Chief Executive Officer and a
Trustee/Director of certain investment
companies advised by Asset Management and
prior to July 1996, President, Chief
Executive Officer and a Trustee of the
funds in the Fund Complex and closed-end
investment companies advised by Advisory
Corp.

</TABLE>

B-21
<PAGE> 226
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>

John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.

B-22
<PAGE> 227
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Advisers, the
Distributor and ACCESS. Officer of certain
other subsidiaries of VKAC. Prior to
November 1996, Senior Vice President,
Deputy General Counsel and Assistant
Secretary of VKAC Holding. Assistant
Secretary of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or the affiliates.

B-23
<PAGE> 228

expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee in the amount of $125 per special meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a trustee,
provided that no compensation will be paid in connection with certain telephonic
special meetings.

B-24
<PAGE> 229

1996 COMPENSATION TABLE

(2) The amounts shown in this column represent the aggregate compensation before
deferral from all eight series of the Trust, including the Fund, with
respect to the Trust's fiscal year ended December 31, 1996. The detail of
aggregate compensation before deferral for each series, including the Fund,
are shown in Table A below. Certain trustees deferred compensation from the
Trust during the fiscal year ended December 31, 1996; the aggregate
compensation deferred from all eight series of the Trust, including the
Fund, is as follows: Mr. Branagan, $5,750; Mr. Gaughan, $3,750; Ms. Heagy,
$15,000; Mr. Kennedy, $9,500; Mr. Miller, $20,000; Mr. Nelson, $20,000; Mr.
Robinson, $18,000; and Mr. Whalen, $19,625. The details of amounts deferred
for each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the respective fund and earn a rate of return
determined by reference to either the return on the common shares of such
fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
all eight series of the Trust, including the Fund, as of the Trust's fiscal

B-25
<PAGE> 230

year ended December 31, 1996 is as follows: Mr. Branagan, $5,678; Mr.
Gaughan, $20,094; Ms. Heagy, $20,472; Mr. Kennedy, $47,294; Mr. Miller,
$55,827; Mr. Nelson, $57,771; Mr. Robinson, $54,847; and Mr. Whalen,
$49,269. The details of cumulative deferred compensation (including
interest) for each series, including the Fund, are shown in Table C below.
The deferred compensation plan is described above the Compensation Table.

As of April 4, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.

B-26
<PAGE> 231

Insured Tax Free Income Fund.... 12/31 $ 3,125 $ 625 $3,125 $3,125 $3,125 $ 3,125 $ 3,125 $ 750
Tax Free High Income Fund....... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
California Insured Tax Free
Income Fund................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Municipal Income Fund........... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Intermediate Term Municipal
Income Fund................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
Florida Insured Tax Free Income
Fund.......................... 12/31 3,125 625 3,125 3,125 3,125 3,125 3,125 750
New Jersey Tax Free Income
Fund.......................... 12/31 625 0 625 625 625 625 625 125
New York Tax Free Income Fund... 12/31 625 0 625 625 625 625 625 125
Trust Total................... 20,000 3,750 20,000 20,000 20,000 20,000 20,000 4,750

TABLE B

TABLE C

<CAPTION>
TRUSTEE
-----------------------------------
FUND NAME SHEEHAN SISTO WHALEN WOODSIDE
--------- ------- ----- ------ --------
<S> <C> <C> <C> <C>
Insured Tax Free Income Fund..... $0 $0 $7,967 $0
Tax Free High Income Fund........ 0 0 7,967 0
California Insured Tax Free
Income Fund.................... 0 0 7,967 0
Municipal Income Fund............ 0 0 7,967 0
Intermediate Term Municipal
Income Fund.................... 0 0 7,967 0
Florida Insured Tax Free Income
Fund........................... 0 0 5,486 0
New Jersey Tax Free Income
Fund........................... 0 0 1,974 0
New York Tax Free Income Fund.... 0 0 1,974 0
Trust Total.................... 0 0 49,269 0
</TABLE>

B-27
<PAGE> 232

TABLE D

TABLE E

YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST

As of April 4, 1997, no person was known by the Fund to own beneficially or to
hold of record as much as 5% of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 4, 1997 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>

Wheat First FBO.......................................... 29,904 A 5.78%
A/C 7912-9391
Grace G. Tullio
P.O. Box 672
Ridgewood, NJ 07451-0672
MLPF&S for the Sole Benefit of Its Customers............. 14,151 C 22.83%
Attn: Fund Administration
4800 Deer Lake Dr. E.
3rd FL
Jacksonville, FL 32246-6484
Louise I. Grill.......................................... 11,880 C 19.16%
c/o Alvin H. Frankel
POA 601 Haddonae
Collingswood, NJ 08108-3703
Wexford Clearing Services Corp. FBO...................... 7,035 C 11.35%
Dr. Gary Karakashian
c/o Vincent Karakashian
46 Seaview Ave.
Monmouth Beach, NJ 07750-1224
</TABLE>

B-28
<PAGE> 233
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 4, 1997 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
PaineWebber for the Benefit of Sam Aldenderfer........... 5,319 C 8.58%
3030 Edwin Avenue
Apt. 3B
Fort Lee, NJ 07024-3413
Ellen Carr & Arthur Carr & Ronald Carr JT Ten............ 4,259 C 6.87%
192 Hidden Hollow
Edison, NJ 08820-1066
Edward D. Jones & CO F/A/O............................... 3,952 C 6.37%
John H. Schroeder & Carol A. Schroeder EDJ#
750-03581-19
P.O. Box 2500
Maryland Heights, MO 5043-8500
Garden State Cutting..................................... 3,827 C 6.17%
Attn: Vincent Landi
212 Brook Ave.
Passaic, NJ 07055-3300
Advest, Inc.............................................. 3,257 C 5.25%
309-03495-19
90 State House Square
Hartford, CT 06103-3702
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

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.).

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Subject to certain conditions being
met, it is currently anticipated that the transaction will close in mid-1997.
Thereafter, Van Kampen American Capital Asset Management, Inc. will be an
indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

B-29
<PAGE> 234

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 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 year ended December 31, 1996, 1995, and 1994, the Fund paid advisory
expenses of $0, $0 and $0, respectively.

OTHER AGREEMENTS

ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
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 years ending December 31, 1996, 1995, and 1994, the Adviser waived its
cost of providing accounting services to the Fund.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the 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.

B-30
<PAGE> 235

For the years ending December 31, 1996, 1995 and 1994, Van Kampen American
Capital waived its cost of providing legal services to the Fund.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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 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 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.

B-31
<PAGE> 236

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 1997 federal and New Jersey State gross income tax rates in effect on the
date of this Statement of Additional Information.

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 8.82% taxable yield at
current federal and state income tax rates to receive the same benefit.

1997 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% 7.5% 8.0%
- ---------------- ---------------- --------- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 24,650 $ 0-- 41,200 16.49% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18% 7.78% 8.38% 8.98% 9.58%
24,651-- 59,750 41,201-- 99,600 31.98 4.41 5.15 5.88 6.62 7.35 8.09 8.82 9.56 10.29 11.03 11.76
59,751-- 75,000 99,601--151,750 34.81 4.60 5.37 6.14 6.90 7.67 8.44 9.20 9.97 10.74 11.50 12.27
75,001--124,650 -- 35.40 4.64 5.42 6.19 6.97 7.74 8.51 9.29 10.06 10.84 11.61 12.38
124,651--271,050 151,751--271,050 40.08 5.01 5.84 6.68 7.51 8.34 9.18 10.01 10.85 11.68 12.52 13.35
Over 271,050 Over 271,050 43.45 5.31 6.19 7.07 7.96 8.84 9.73 10.61 11.49 12.38 13.26 14.15
</TABLE>

- ---------------
* Combined state and federal tax top marginal rate. The tax rate brackets listed
are the 1997 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 0.45% in the chart above.

THE DISTRIBUTOR

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region of the country. This regional focus enables each high yield analyst to
provide more specialized coverage of the market and alert the portfolio manager
to issues of local importance.

Shares of the Fund are offered continuously through Van Kampen American
Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
60181. The Distributor is a wholly-owned subsidiary of MSAM Holdings II, Inc.
which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form
Morgan Stanley, Dean Witter, Discover & Co. Subject to certain conditions being
met, it is currently anticipated that the transaction will close in mid-1997.
Thereafter, Van Kampen American Capital Asset Management, Inc. will be an
indirect subsidiary of Morgan Stanley, Dean Witter, Discover & Co.

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

DISTRIBUTION AND SERVICE PLANS

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 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 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."

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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 fiscal year ended December 31, 1996, the Fund's aggregate expenses
under the Plans for Class A shares were $14,325 or 0.21% of the Class A shares'
average net assets. Such expenses were paid to reimburse the Distributor for
payments made to financial intermediaries for servicing Fund shareholders and
for administering the Plans. For the fiscal year ended December 31, 1996, the
Fund's aggregate expenses under the Plans for Class B shares were $82,603 or
0.96% of the Class B shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $64,752 for commissions
and transaction fees paid to financial intermediaries in respect of sales of
Class B shares of the Fund and $17,851 for fees paid to financial intermediaries
for servicing Class B shareholders and administering the Plans. For the fiscal
year ended December 31, 1996, the Fund's aggregate expenses under the Plans for
Class C shares were $6,671 or 0.96% of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$3,148 for commissions and transaction fees paid to financial intermediaries in
respect of sales of Class C shares of the Fund and $3,523 for fees paid to
financial intermediaries for servicing Class C shareholders and administering
the Plans.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois) and
Crummy, Del Deo, Dolan, Griffinger & Vecchione, Newark, New Jersey.

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

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charge, and if any such contingent deferred sales charge imposed at the time of
redemption were reflected, it would reduce the performance quoted.

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 imposed at the time of redemption were reflected, it would reduce the
performance quoted.

CLASS A SHARES

The average annual total return including payment of the sales charge with
respect to the Class A Shares for (i) the one year period ending December 31,
1996 was (0.69%) and (ii) the approximately two year and five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1996 was 4.94%.

The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.04%. The tax-equivalent yield with
respect to the Class A Shares for the 30 day period ending December 30, 1996
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.1% tax rate) was 8.41%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.97%.

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, 1996 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 12.41%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
December 31, 1996 was 18.01%.

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, 1996 was
(.44%) and (ii) the approximately two year and five

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month period of July 29, 1994 (commencement of investment operations of the
Fund) through December 31, 1996 was 4.93%.

The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.53%. The tax-equivalent yield with
respect to the Class B Shares for the 30 day period ending December 30, 1996
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.1% tax rate) was 7.56%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.49%.

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, 1996
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 12.41%.

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, 1996
was 15.91%.

CLASS C SHARES

The average annual total return including payment of the CDSC with respect to
the Class C Shares for (i) the one year period ending December 31, 1996 was
2.46% and (ii) the approximately two year and five month period from July 29,
1994 (the commencement of investment operations of the Fund) through December
31, 1996 was 6.26%.

The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1996 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.53%. The tax-equivalent yield with
respect to the Class C shares for the 30 day period ending December 30, 1996
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.1% tax rate) was 7.56%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.49%.

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, 1996
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 15.89%.

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, 1996
was 15.89%.

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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 $351,595,000
New Jersey Transit Corporation Capital Grant Anticipation Notes, Series 1997 A,
dated April 16, 1997, except for the Municipal Finance section, which is derived
from the official statement utilized in connection with the issuance of the
$714,340,000 New Jersey Transportation Trust Fund Authority Transportation
System Bonds, 1996 Series B, dated October 15, 1996. 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 1,071 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 over
one-fifth 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 1995,
accelerated to .52%. While this rate of growth is less than that for the United
States, it

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compares favorably with other Middle Atlantic States. New York has shown a 0.15
percent annual rate of increase since 1990 and Pennsylvania's population has
increased 0.30 percent per year.

The small increase in the State's total population during the past quarter
century 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 $224.5 billion for 1994 and
$237.2 billion for 1995, an increase of 5.6 percent. Nationally, total personal
income grew by 6.2 percent between 1994 and 1995, while in New York and
Pennsylvania it grew by 5.3 percent and 5.5 percent, respectively. Based on 1973
levels, the personal income index in 1995 stood at 539.2 for New Jersey, 464.0
for New York and 469.4 for Pennsylvania. The United States index stood at 558.3
(1973 = 100).

Historically, New Jersey's average per capita income has been well above the
national average. The differential narrowed during the 1970s, widened in the
1980s, and has narrowed slightly in the 1990s. In 1995, the State ranked second
among all states in per capita personal income ($29,848). It ranked higher than
New York, with per capita income of $27,678 and Pennsylvania with $23,558. Only
Connecticut, with $31,776, exceeded New Jersey's $29,848.

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 of 1990-1991,
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the long-term
downward trend 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, 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 1989 to a low of 3,457,900 in 1992. This loss was
followed by an employment gain of 200,700 from May 1992 to August 1996, a
recovery of 77% of the jobs lost during the recession. More than two-thirds of
this number, nearly 138,000 jobs, were recovered in the 31 month period from
January 1994 to August 1996.

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 8.5%
during 1992. Since then, the unemployment rate fell to an average of 6.4% in
1995 and 6.1% for the four month period from May 1996 through August 1996.

For the recovery period as a whole, May 1992 to August, 1996,
service-producing employment in New Jersey has expanded by 228,500 jobs. Hiring
has been reported by food stores, auto dealers, wholesale distributors, trucking
and warehousing firms, utilities, business and engineering/management service
firms, hotels/hotel-casinos, social service agencies and health care providers
other than hospitals. Employment growth was particularly strong in business
services and its personnel supply component with increases of 17,500 and 8,100,
respectively, in the 12-month period ending August 1996.

In the manufacturing sector, employment losses slowed between 1992 and 1994.
After an average annual job loss of 33,500 from 1989 through 1992, New Jersey's
factory job losses fell to 13,300 during 1993 and 7,300 during 1994. During
1995, however, manufacturing job losses increased slightly to 9,100, reflecting
a slowdown in national manufacturing production activity. While experiencing
growth in the number of production workers in 1994, the number declined in 1995
at the same time that managerial and office staff were also reduced as part of
nationwide downsizing. Through August 1996 layoffs of white collar workers and
corporate downsizing appear to be abating.

Conditions have slowly improved in the construction industry, where employment
has risen by 15,600 since its low in May 1992. Between 1992 and 1995, this
sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996, public works projects and homebuilding
became the growth segments while nonresidential construction lessened.

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Nonresidential construction activity, as measured by contract awards, grew by
9.7% in 1993, 19.6% in 1994 and 3.0% in 1995. More recently, nonresidential
building construction contracts fell by 20.5% in the first eight months of 1996.
This decline is largely attributable to an abundance of large, one-time contract
awards during 1995, including a $202.9 million contract for the construction of
a state prison.

Residential construction contracts through August 1996, despite monthly
fluctuations, increased by 1.4% for the first eight months of 1996 as compared
to the first eight months of 1995 ($1,502 million and $1,481 million,
respectively). Nonbuilding or infrastructure construction rose robustly by 17.8%
during this period. Despite these increases, total construction contracts
declined by 3.9% when comparing the first eight months of 1995 and 1996.

Improvements in overall employment opportunities and the economy in general
have led to increased consumer spending during the recovery. While overall
retail sales in New Jersey grew by only 1.6% during 1993, they performed much
better in 1994, advancing by 7.8% which exceeded the 7.5% growth registered
nationwide. During 1995, especially the winter months, consumer confidence and
actual consumer spending moderated both nationally and in the State. For all of
1995, retail sales in New Jersey grew by 2.3%. Retail sales regained momentum in
1996 and have been on a moderately upward trend, rising to an annual rate of
$76.5 billion through June. The State's pickup in growth after a
blizzard-related January decline resulted in sales growth of 4.2% when comparing
the first six months of 1995 with those of 1996. The rising trend in retail
sales has translated into steady increases in retail trade jobs (both full-time
and part-time) with a rise in retail employment from December 1995 to August
1996 of 6,900 jobs.

Total new vehicle registrations (new passenger cars and light trucks and vans)
rose robustly in 1993 by more than 18%, and in 1994 by 5.8%, but declined by
4.4% in 1995. Through July 1996 however, total new vehicle registrations rose by
3.5% compared to the same time period in 1995.

Unemployment in the State through August 1996 has been receding. According to
the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.5% in 1993
to 6.8% in 1994 and to 6.4% in 1995. Subsequently, it has dropped to 6.1% for
the four-month period from May 1996 through August 1996.

The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, declined from 3.9% during calendar years 1991 and 1992 to 3.3% during
1993 and then averaged 3.2% throughout 1994, 1995 and the first six months of
1996. As of August 1, 1996, the State's unemployment insurance trust fund
balance stood at $2.1 billion.

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. The framers of the legislation
intended legalized gambling to foster the redevelopment of the tourism, resort
and convention industries in Atlantic City, to provide new jobs and to generate
added tax revenues for assistance programs for the elderly and disabled. 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. In May 1996,
Trump Plaza reopened the former Atlantis Casino Hotel Facility as Trump's World
Fair and integrated it into its existing facility.

For the year ended December 31, 1995, nine of the twelve operating casinos
reported a profit. The industry as a whole reported net income of $147.1 million
for the year, reflecting a $115.7 million increase from the net income of $31.4
million reported for the prior comparable period. This industry net income
reflects strong profits at Harrah's Marina ($43.6) million, Bally's Park Place
($40.5 million) and Caesar's ($32.7 million) which combined to account for 79.4%
of industry profits. Meanwhile, Trump Taj Mahal and Trump's Castle reported
losses of $26.6 million and $11.2 million, respectively.

For the year ended December 31, 1995 and the eight months ended August 31,
1996, the casino industry reported "Win" of $3.7 billion and $2.6 billion,
respectively. "Win" represents the amount a casino wins at the slot machines and
table games before operating expenses and taxes are deducted.

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For the year ended December 31, 1995 and the eight months ended August 31,
1996, the State collected revenue taxes for programs to assist the elderly and
disabled of $298.1 million and $205.7 million, respectively. From May 20, 1978,
the date the first casino opened, through August 31, 1996, the industry has paid
a total of $3.4 billion to the State for these programs. As of August 31, 1996,
the Casino Revenue Fund has earned $117.5 million in interest.

In 1995 there were 44,700 jobs in the hotel/casinos; total employment in the
Atlantic County metropolitan statistical area has grown from 89,000 persons in
1975 to 173,600 in 1995. Tourism has also prospered. The number of visitors to
Atlantic City increased from 7.0 million for 1978 to 33.3 million for 1995.

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, 1996, the Lottery has generated
over $19.7 billion in gross revenues, paid $9.7 billion in prizes and
contributed $8.24 billion to the State.

Higher Education programs have received approximately $2.252 billion in
Lottery funds. For elementary and secondary education, the State Department of
Education has received approximately $1.730 billion. State institutions have
received a total of $4.254 billion in Lottery monies.

In Fiscal Year 1996, gross revenues totalled $1.62 billion, of which 50.85%
was returned in prizes, 40.92 percent went to State education and institutions,
6.94% was paid to sales agents and ticket vendors and 1.29% 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 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, Component Units--Authorities Funds, College and 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 appropriations 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 Service Funds are used to account for the
accumulation of resources for, and the payment of, principal and redemption
premium, if any, of and

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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 1998" refers to the State's fiscal year beginning July 1,
1997 and ending June 30, 1998.

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 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.

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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 1997 AND 1998 REVENUE ESTIMATES

Sales and Use Tax. The revised estimate as shown in the Governor's Fiscal Year
1998 Budget Message forecasts Sales and Use tax collections for Fiscal Year 1997
as $4,385.0 million, a 1.5% increase from the Fiscal Year 1996 revenue. The
Fiscal Year 1998 estimate of $4,557.0 million, is a 3.9% increase from the
Fiscal Year 1997 estimate.

Gross Income Tax. The revised estimate as shown in the Governor's Fiscal Year
1998 Budget Message forecasts Gross Income Tax collections for Fiscal Year 1997
of $4,710.0 million, a 0.5% increase from Fiscal Year 1996 revenue. The Fiscal
Year 1998 estimate of $4,830.0 million, is a 2.5% increase from the Fiscal Year
1997 estimate. Included in the Fiscal Year 1998 estimate is the enactment of a
property tax deduction, to be phased in over a three-year period, permitting a
deduction by resident taxpayers against gross income tax of a percentage of
their property taxes.

Corporation Business Tax. The revised estimate as shown in the Governor's
Fiscal Year 1998 Budget Message forecasts Corporation Business Tax collection
for Fiscal Year 1997 as $1,120.8 million, a 4.3% decrease from Fiscal Year 1996
revenue. The Fiscal Year 1998 forecast as shown in the Governor's Fiscal Year
1998 Budget Message of $1,134.6 million, is a 1.2% increase from the Fiscal Year
1997 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.

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 1993 through 1996 in the amounts of
$444.3 million, $119.9 million, $103.6 million and $466.3 million, respectively.
The Fiscal Year 1997 Appropriations Act includes an appropriation in the amount
of $446.9 million for principal and interest payments for general obligation
bonds.

PROGRAMS FUNDED UNDER FISCAL YEAR 1997 ADJUSTED APPROPRIATIONS

Of the $16,217.7 million appropriated in Fiscal Year 1997 from the General
Fund, the Property Tax Relief Fund, the Casino Control Fund, the Casino Revenue
Fund and the Gubernatorial Elections Fund, $6,384.7 million (39.4%) is
appropriated for State Aid to Local Governments, $3,858 million (23.8%) is

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appropriated for Grants-in-Aid, $5,154 million (31.6%) for Direct State
Services, $446.9 million (2.7%) for Debt Service on State general obligation
bonds and $374.1 million (2.3%) for Capital Construction.

STATE AID TO LOCAL GOVERNMENTS

State Aid to Local Governments is the largest portion of Fiscal Year 1997
appropriations. In Fiscal Year 1997, $6,384.7 million of the State's
appropriations consist of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriation, in the
amount of $4,851.4 million, is provided for local elementary and secondary
education programs. Appropriations to the Department of Community Affairs (DCA)
total $840.4 million in State Aid monies for Fiscal Year 1997. Appropriations to
the State Department of the Treasury total $206.1 million in State Aid monies
for Fiscal Year 1997. Other appropriations of State Aid in Fiscal Year 1997
include: welfare programs ($340.6 million); and aid to county mental hospitals
($76.0 million).

DIRECT STATE SERVICES

The second largest portion of appropriations in Fiscal Year 1997 is applied to
Direct State Services: which supports the operation of State government's
sixteen departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In Fiscal Year 1997, appropriations for Direct
State Services aggregate to $5,154 million.

$602.1 million is appropriated for programs administered by the Department of
Human Services. The Department of Labor is appropriated $55.5 million for the
administration of programs for workers compensation, unemployment and disability
insurance, manpower development and health safety inspection. The Department of
Health and Senior Services is appropriated $45.1 million for the prevention and
treatment of diseases, alcohol and drug abuse programs, regulation of health
care facilities and the uncompensated care program. $732.3 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. $889.5 million is appropriated to the Department of Law and Public
Safety (excluding the Division of Juvenile Services) and the State Department of
Corrections. $159.4 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. $179.9 million is appropriated to the 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 1997 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 1997 for grants-in-aid is $3,858 million.

$1,927.4 million is appropriated for programs administered by the Department
of Human Services. Of that amount, $1,304.1 million is for medical services
provided under the Medicaid program, $172.9 million is for community programs
for the developmentally disabled, $159.5 million is for community programs for
the mentally ill, $211.3 million is for grant programs administered by the
Division of Youth and Family Services, and $75.5 million is for welfare reform
and homeless services.

$325 million is appropriated to the Department of the Treasury for the
Homestead Rebate program, which provides property tax relief to homeowners and
renters. $219.6 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

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premium payments, if any, required to fully pay the bonds. The appropriation for
the debt service obligation on outstanding indebtedness is $446.9 million for
Fiscal Year 1997.

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 $526,800 State of New Jersey General Obligation Bonds Refunding Bonds
(Series E) and $270,000,000 State of New Jersey General Obligation Bonds
(Various Purposes) on May 1, 1996 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. In Fiscal
Year 1997, the amount appropriated to this purpose is $374.1 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.

TAX AND REVENUE ANTICIPATION NOTES

In Fiscal Year 1992, the State initiated a program under which it issued tax
and revenue anticipation notes to aid in providing effective cash flow
management to fund balances which occur in the collection and disbursement of
the General Fund and Property Tax Relief Fund revenues. There are presently $600
million of tax and revenue anticipation notes outstanding. These notes shall
mature on June 13, 1997.

Such tax and revenue anticipation notes do not constitute a general obligation
of the State or a debt or liability within the meaning of the State
Constitution. Such notes constitute special obligations of the State payable
solely from moneys on deposit in the General Fund and the Property Tax Relief
Fund and legally available for such payment.

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 MCIA 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
MCIA'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.

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 entered into eleven lease purchase agreements which have resulted
in the issuance of Certificates of Participation totaling

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$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
State intends to continue to use this financing technique for a substantial
portion of its future equipment requirements.

MARKET TRANSITION FACILITY

Legislation enacted in June 1994 authorizes the EDA to issue bonds to pay the
current and anticipated liabilities and expenses of the Market Transition
Facility, which issued private passenger automobile insurance policies for
drivers who could not be insured by private insurance companies on a voluntary
basis. On July 26, 1994 the EDA issued $705,270,000 aggregate principal amount
of Market Transition Facility Senior Lien Revenue Bonds, Series 1994A. The EDA
and State Treasury have entered into an agreement which provides for the payment
to the EDA of amounts on deposit in the DMV Surcharge Fund to pay debt service
on the bonds. Such payments are subject to and dependent upon appropriations
being made by the State Legislature.

EDUCATIONAL FACILITIES AUTHORITY

Legislation enacted in 1993 authorizes the Educational Facilities Authority
(the "EFA") to issue bonds to finance the purchase of equipment to be leased to
institutions of higher learning. On August 17, 1994 the EFA issued $100,000,000
aggregate principal amount of Higher Education Leasing Fund Program bonds. The
EFA and the State Treasurer have entered into an agreement which provides to the
EFA amounts required to pay debt service on the bonds. Such payments are subject
to and dependent upon appropriations being made by the State Legislature.

Other legislation enacted in 1993 created the Higher Education Facilities
Trust Fund and authorized its funding by the issuance of bonds to make grants to
New Jersey's public and private institutions of higher education for the
development, construction and improvement of instructional, laboratory,
communication and research facilities. The legislation limits the total
outstanding amount of bonds to be issued to $220,000,000. On November 29, 1995
the EFA issued $220,000,000 aggregate principal amount of Higher Education
Facilities Trust Fund Bonds, Series 1995A. These bonds are secured by payments
to be made to the EFA by the State, which payments are subject to and dependent
upon appropriations being made by the State Legislature.

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 June 30, 1996, 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
$246,576,172 have been retired and $27,497,831 are still outstanding. As of June
30, 1996, $44,316,818 of county college bonds or notes are outstanding. 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

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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. As of June 30, 1996 there are approximately $463,310,000 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 legal
obligation that the Legislature make such appropriation. On May 30, 1995, the
State Legislature amended the New Jersey Transportation Trust Fund Act of 1984
to provide, among other things, for (i) the issuance of debt in an aggregate
principal amount in excess of the statutory debt limitation in effect prior to
the enactment of the 1995 Amendments, (ii) an increase in the amount of revenues
available to the TTFA and (iii) broadening the scope of transportation projects.

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.

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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 fails to adopt 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 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; appropriations of private and public dedicated funds;
amounts approved by referendum; and, in the case of municipalities only, to fund
the preceding year's cash deficit with the approval of the Local Finance Board
or to reserve for shortfalls in tax collections, and amounts required pursuant
to contractual obligations for specified services. 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

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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.

State law required certain municipalities and permits all other municipalities
to adopt the State fiscal year in place of the existing calendar fiscal year.
The Act provides that municipalities opting to change to a State Fiscal Year
must adopt a six-month transition year budget funded by Fiscal Year Adjustment
Bonds. 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.

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 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. In September, 1996 the Township of Irvington
requested supervision which was approved by the Local Finance Board and is
expected to continue for at least one year.

There are 567 municipalities and 21 counties in New Jersey. During 1993, 1994
and 1995 no county exceeded its statutory debt limitations or incurred a cash
deficit in excess of 4 percent of its tax levy. Only two municipalities had a
cash deficit greater than 4% of their tax levies for 1994 and 1995. The number
of municipalities which exceeded statutory debt limits was six as of December
31, 1995. 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-15 et seq. (the "School Intervention 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 and on July 5, 1995 ordered the creation
of a State-operated school district in the City of Newark.

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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 must determine the amount necessary to be
appropriated for each item appearing in such budget. Should the governing body
fail to certify an amount determined by the Board of Education to be necessary,
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 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 to the Commissioner only if the County Superintendents of
Schools has determined that additional funds are required to provide a thorough
and efficient education.

The County Superintendents of Schools must also review every proposed local
school district budget for the next school year. The County Superintendents of
Schools examine 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 their view they are insufficient, the
County Superintendents of Schools may 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 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

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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.

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, 1996, the book value of the Fund's assets aggregated $88,816,968 and the
reserve, computed as of June 30, 1996, amounted to $40,363,607. 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).

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 $208,642,750 by various school districts as of
June 30, 1996 and $899,586,220 by various municipalities as of June 30, 1996.

LOCAL FINANCING AUTHORITIES

The Local Authorities Fiscal Control Law provides for State oversight 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 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,

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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, 1995 there were 195 locally created authorities with a total
outstanding capital debt of $7,149,326,992 (figures do not include housing
authorities and redevelopment agencies). This amount reflects outstanding bonds,
notes, and loans payable by the authorities as of their respective fiscal years
ended nearest to June 30, 1995.

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.

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 387,554 of the total
428,988 active members covered by all State-administered plans. The other
systems are Police and Firemen's Retirement System ("PFRS") (38,450 members),
Consolidated Police and Firemen's Pension Fund ("CP&FPF") (no active members),
State Police Retirement System ("SPRS") (2,574 active members), Judicial
Retirement System ("JRS") (410 active members) and Prison Officers' Pension Fund
("POPF") (no active members).

The various pension funds were analyzed between July 1, 1995 and March 31,
1996 by independent actuaries who reported that 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 $43 billion at the valuation
dates. The studies indicated that the market value of all assets of the funds
was $47.3 billion which, when compared to the $43 billion Accumulated Benefit
Obligation, represents a funding level of 110.1%. 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 $49.7
billion. The funding level for the projected benefits is 87.4%.

$603.9 million is provided in the Fiscal Year 1997 adjusted 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

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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 1997 budget and the proposed Fiscal Year 1998 budgets. The State filed a
motion to dismiss and a motion for summary judgment.

On October 6, 1995, the Court issued its opinion in which it dismissed the
State as a party to the action. The only defendant is Treasurer Clymer. The
claims surviving the motion are: (1) breach of trust and fiduciary duty (against
the Treasurer in both his individual and official capacities); (2) violation of
Due Process (against the Treasurer in both his individual and official
capacities); and (3) a 42 U.S.C. sec. 1983 claim (against the Treasurer in his
individual capacity).

The forms of relief sought related to these surviving claims are: (1) a
declaration that certain provisions of Chapter 62 violate Due Process of law
under the Fifth and Fourteenth Amendments to the U.S. Constitution; (2) a
declaration that the enactment and implementation of certain provisions of
Chapter 62 constitute a breach of the fiduciary obligations owed to contributing
participants, vested participants and retirees of the TPAF and PERS; (3) a
declaration that Chapter 62 contravenes the statutory and common law duties to
administer and fund the plans in an actuarially sound and fiscally responsible
manner; (4) a permanent injunction against administering, enforcing or otherwise
implementing certain provisions of Chapter 62; (5) directing payment of
plaintiffs' attorneys' fees, disbursements and costs pursuant to 42 U.S.C. sec.
1988.

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The State filed a motion for reconsideration or, in the alternative, for
certification to the Third Circuit Court of Appeals, of the remaining claims. By
order dated December 19, 1995, the District Court denied the motion in all
respects. On January 29, 1996, the State, on behalf of Treasurer Clymer, filed a
Petition for a Writ of Mandamus and a Motion for a Stay of the Proceedings
below, pending consideration and disposition of the petition, with the Third
Circuit Court of Appeals. In the petition, Treasurer Clymer asked the Court of
Appeals to direct the District Court to dismiss the complaint or enter summary
judgment in his favor. Alternatively, the Treasurer asked the Court of Appeals
to order the District Court to vacate its order denying summary judgment and
resolve that motion as a matter of law without discovery or fact finding or to
certify the issues for interlocutory appeal. The Third Circuit Court of Appeals
denied the motion and petition on February 20, 1996. The matter is currently
stayed pending the adoption of the Appropriations Act for Fiscal Year 1998. The
State intends to vigorously defend this action.

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 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.
Because the Commission has been abolished by L. 1995, c. 133, and its
responsibilities assigned to the Department of Health, the Department of Health
held the hearing on August 30, 1995. By letters dated March 26, 1996, the
Department of Health affirmed the prior assessments. The hospitals filed a
notice of appeal challenging that decision on May 10, 1996 and the case has now
been briefed. The State intends to vigorously defend this action.

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 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 $86,795,000 for tort and
medical malpractice claims pending as of June 30, 1996. 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.

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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"), alleged tort and
contractual claims against the State of New Jersey ("State") and the New Jersey
Department of Environmental Protection ("NJDEP") associated with a resource
recovery facility which plaintiffs had once planned to build. The plaintiffs
alleged that the State and the NJDEP violated a 1984 consent order concerning
the construction of a resource recovery facility in Passaic County. Plaintiffs'
complaint alleged approximately $30 million in damages against the State and the
NJDEP. On March 17, 1995, the court granted the State's motion for summary
judgment, dismissing all counts of plaintiffs' complaint against the State and
the NJDEP, with prejudice. The court found that there was no legal obligation or
duty on the part of the State or the NJDEP concerning the project. Plaintiffs
have filed an appeal of the court's decision. The State intends to vigorously
defend this appeal.

Camden Co. v. Waldman, et al. Fifteen 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. The
first Essex case dealt with sharing maintenance costs when there have been
social security payments that the State received as representative payee. The
second Essex case dealt with sharing Medicaid payment recoveries. The State
contended 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 State also contended that the Legislature did not intend to share
the federal funding with the counties as evidenced by appropriations act
language. 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, Warren and Passaic
counties. The Middlesex, Monmouth, Atlantic, Union, Ocean, Mercer, Morris,
Warren and Hudson County cases were transferred to the Appellate Division. The
Atlantic, Camden and Monmouth counties cases were consolidated. Cape May joined
in the existing calendar matters. The other counties, Essex, Warren and Passaic,
have recently had their cases transferred to the Appellate Division, but did not
seek to join in the existing matters. With the exception of Essex, Warren and
Passaic, the remaining matters were to be heard on a back to back basis by the
Appellate Division. A motion to consolidate or calendar these matters back to
back was made by the State. The State and counties filed their briefs. The State
requested oral argument because of the complicated nature of the issues and the
large amount of money involved; the Court granted the request.

The Court heard oral argument on May 30, 1996. On July 15, 1996, three-judge
panel of the Appellate Division ruled unanimously in favor of the State. Finding
no federal requirement compelling the State to share these monies, the Court
agreed with the State's position that the Legislature may determine to
appropriate these funds to the General Fund and therefore the county had no
State law claim to share in them. Of the fourteen appellant counties, eight
filed motions for reconsideration, which were denied by order of the Appellate
Division on September 16, 1996, nine have filed Notices of Petition for
Certification to the New Jersey Supreme Court, three have filed Motions for
Extension in which to file Notices of Petition, ten have filed Motions for
Extension in which to file Petitions and eight have filed Notices of Appeal.
Pursuant to an Order of the Court, petitions were due by November 15, 1996.

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.

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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. The state intends to defend these suits
vigorously.

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 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 compensatory damage claims against defendants Robert C. Shinn,
Jr. and Jeanne M. Fox were dismissed by way of stipulation of the parties filed
on December 15, 1995. Remaining claims in the action are injunctive and require
declaratory relief.

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 N.J.S.A. 13:1E-1 et seq. and codified at N.J.S.A.
13:1E-126 et seq., 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 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.

Abbot v. Burke. On January 6, 1997, the Education Law Center filed a motion in
aid of litigants' rights with the Supreme Court of New Jersey in the Abbot v.
Burke matter. In 1994, the Supreme Court ruled in Abbot v. Burke that the State
had to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by Fiscal Year 1998. On
December 20, 1996, the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. The CEIFA is centered upon the Core Curriculum Content
Standards -- a comprehensive description of what all students should know and be
able to

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accomplish upon completion of a thirteen year public education. The State
projects that special needs districts will be spending between 91% and 96% of
the wealthy suburban districts in the 1997-1998 school year under CEIFA.
Plaintiffs concede that, under CEIFA, special needs districts are projected to
be spending at 91% of the wealthy suburban districts in the 1997-1998 fiscal
year. In its motion, the Education Law Center requests, in part, relief in the
form of 100% spending parity or State aid in the amount of approximately $200
million dollars to be redistributed to the special needs districts. On March 4,
1997 the Supreme Court heard oral argument on the motion. The Supreme Court has
not yet rendered a decision.

Affiliated FM Insurance Company, et al. v. State of New Jersey, et al. The
plaintiffs in this action are insurers licensed or admitted to write property
and casualty insurance in the State of New Jersey pursuant to N.J.S.A. 17:17-1
et seq. and are all members of the New Jersey Property-Liability Insurance
Guaranty Association ("PLIGA"), a private, non-profit organization created to
cover claims against certain insolvent insurers. Plaintiffs have filed suit in
the Superior Court of New Jersey, Chancery Division, Mercer County against the
State of New Jersey, the Commissioner of Banking, the Department of Banking and
Insurance, PLIGA and the State Treasurer. Plaintiff's contend that their
assessments are being used to retire debt of the Market Transition Fund ("MTF").
The plaintiffs argue that they were never members of the MTF, are not
statutorily responsible for its losses, have not agreed to assume its losses and
did not relinquish any right to repayment of loan assessments to PLIGA. Under
the Fair Automobile Insurance Reform Act of 1990 ("FAIRA"), PLIGA is responsible
for assessing and collecting from its member insurers the amounts necessary to
make certain loans to the Auto Guaranty Fund (the "Auto Guaranty Fund"), a
special nonlapsing fund created pursuant to FAIRA. Plaintiffs contend that
assessments dating back to 1990 are in dispute and challenge the
constitutionality of the assessments and legislation which allow the assessments
and request declaratory relief and an order that the monies assessed since 1990
be returned as well as an accounting. The State intends to vigorously defend
this action and has filed a motion to dismiss this case.

C.F., et al. v. Fauver, et al. This case is brought as a purported class
action consisting of prisoners with serious mental disorders who are confined
within the facilities of the Department of Corrections (the "Class") against the
Commissioner of the Department of Corrections and other officers of the
Department of Corrections. The Class alleges cruel and unusual punishment,
violation of the Americans with Disabilities Act of 1990, discrimination against
members of the Class, sex discrimination and violation of due process. The suit
was brought by the Class in the United States District Court of the District of
New Jersey. Through this action, the Class seeks injunctive relief in the form
of changes to the manner in which mental health services are provided to
inmates. The Class also seeks changes in the disciplinary process to the extent
that an inmate's mental health is taken into consideration by a hearing officer
when adjudicating a disciplinary charge. Discovery has commenced and is
continuing. The State intends to vigorously defend this action.

Cleary v. Waldman. This case involves the spousal impoverishment provisions of
the Medicare Catastrophic Coverage Act ("MCCA"). Under this provision, the
spouse of an institutionalized husband or wife, is allowed to have sufficient
funds to live in the community, called the monthly needs allowance.

The State in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet the
monthly needs allowance, then the institutionalized spouse is allowed to shift
resources to the community spouse to generate income to make the difference.

A class action was brought in federal court in which plaintiffs' argue that
the income first rule is disallowed under the MCCA. Rather plaintiff's claim
that the MCCA mandates the use of what is called the "resource-first" rule.
Under this scheme, before income is shifted from the institutionalized spouse to
the community spouse to meet the monthly needs allowance, resources must be
shifted first and income generated from these resources used to meet the monthly
needs allowance.

Estimates of exposure if a court were to find that the MCCA only allows the
"resource-first" rule has been estimated in the area of $50 million per year
from both State and Federal sources combined.

Plaintiff's filed for a preliminary injunction arguing that, under federal
law, only the resource first rule was allowed under the MCCA. The State opposed
the motion and the New Jersey Association of Health Care

B-56
<PAGE> 261

Facilities and the New Jersey Association for Non-Profit Homes for the Aging
moved for intervenor status, opposing the plaintiffs' motion. The court granted
the motion of intervention and denied the motion for preliminary injunction,
finding that plaintiffs were unlikely to prevail on the merits since New
Jersey's methodology was at least a permissible application of the federal law.

Subsequently, plaintiffs filed for class certification which was granted on
March 25, 1996. On March 26, 1997, Plaintiffs have filed a Notice of Appeal to
the Court of Appeals for the Third Circuit. The State intends to vigorously
defend this action.

United Hospitals, et al. v. State of New Jersey and William Waldman. This case
represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February, 1995. The matter was filed in the Appellate
Division of the Superior Court of New Jersey in January, 1997. The hospitals
challenge all of the following: (i) whether the State complied with certain
federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et. seq., are arbitrary, capricious
and unreasonable; (iii) whether the Department of Human Services (DHS)
incorrectly calculated the rates; (iv) whether DHS denied hospitals of a
meaningful appeal process; (v) whether the 1996-1997 State Appropriations Act
violates the New Jersey Constitution with respect to the provision for Medicaid
reimbursement to hospitals; and (vi) whether DIIS violated the Medicaid State
Plan, filed with the U.S. Department of Health and Human Services, in
implementing hospital rates in 1995 and 1996. The State intends to vigorously
defend this action.

Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Incorporated, The State
of New Jersey, et al. An action was filed in Federal District Court to enjoin
and declare unlawful actions of the Mirage Resorts Incorporated ("Mirage"), the
State of New Jersey, the New Jersey Department of Transportation, the South
Jersey Transportation Authority, the Casino Reinvestment Development Authority
("CRDA"), the New Jersey Transportation Trust Fund Authority and certain
officials of the aforesaid agencies and authorities in their efforts to
revitalize Atlantic City through the design and construction of a highway and
tunnel funded by Mirage, the New Jersey Transportation Trust Fund Authority and
$55,000,000 in bonds to be issued by the South Jersey Transportation Authority
and collateralized by future alternative investment obligations of casinos to be
located in the marina district of Atlantic City. Plaintiffs claim that the
highway and tunnel development funding violates a provision of the New Jersey
State Constitution that requires the State to dedicate all State revenues
derived from gambling to programs benefiting the elderly and the disabled
pursuant to the New Jersey State Constitution, Article IV, Section 7, Paragraph
2. The plaintiffs further allege that (i) the failure to disclose the
constitutional infirmities alleged in the financing for the highway and tunnel
project will be material omissions within the meaning of Rule 10b-5 of the
Securities and Exchange Act of 1934; (ii) the defendants have sought to avoid
the federal requirements of the Clean Water Act, the Federal Highway Act, and
the Clean Air Act; and (iii) the defendants have sought to avoid the requirement
of the New Jersey Coastal Area Facility Review Act. The State has filed a motion
to dismiss the federal action and filed a declaratory judgment action in
Superior Court of New Jersey, Law Division -- Atlantic County, seeking a
declaration that the alternative investment program established under N.J.S.A.
5:12-144.1 of the CRDA legislation and the use of parking fees and sales tax
revenues under the CRDA legislation to fund eligible projects do not violate the
New Jersey State Constitution.

Three additional cases have been filed in opposition to the road and tunnel
project which also contain similar challenges. The three matters, Bryant, et al.
v. New Jersey Department of Transportation, et al., Merolla and Brady v. The
Casino Reinvestment Development Authority, et al., and Gallagher, et al. v. The
Casino Reinvestment Development Authority, et al. are also being vigorously
defended by the State.

B-57
<PAGE> 262

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital New Jersey Tax Free Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital New Jersey Tax Free Income Fund (the "Fund"), including
the portfolio of investments, as of December 31, 1996, 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, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital New Jersey Tax Free Income Fund as of December 31, 1996,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1997

B-58
<PAGE> 263

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
NEW JERSEY 85.4%
$ 400 Atlantic City, NJ Brd Edl Sch (AMBAC Insd)........ 6.125% 12/01/11 $ 422,280
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (MBIA
Insd)............................................ 6.150 10/01/14 265,895
150 Delaware River Port Auth PA & NJ (FGIC Insd)...... 5.500 01/01/26 147,968
500 Essex Cnty, NJ Impt Auth Lease Cnty Jail Proj A
(MBIA Insd)...................................... 5.600 12/01/16 500,190
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth House
Proj (Prerefunded @ 12/01/04) (AMBAC Insd)....... 6.600 12/01/07 285,997
375 Essex Cnty, NJ Impt Auth Lease Jail & Youth House
Proj Rfdg (AMBAC Insd)........................... 5.350 12/01/24 366,217
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)........... 5.375 09/01/10 372,061
500 Essex Cnty, NJ Util Auth Solid Waste Rev Ser A
(FSA Insd)....................................... 5.600 04/01/16 499,660
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg
(MBIA Insd)...................................... 6.600 12/01/21 271,200
250 Lacey Muni Util Auth NJ Wtr Rev (MBIA Insd)....... 6.250 12/01/24 268,022
250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec.......... * 04/01/11 115,068
250 Mercer Cnty, NJ Impt Auth Rev Ewing Brd Edl Lease
Proj Rfdg (MBIA Insd)............................ 5.000 11/15/16 236,578
500 Millburn Twp, NJ Brd Edl.......................... 5.350 07/15/12 503,295
1,000 New Jersey Bldg Auth St Bldg Rev.................. 5.000 06/15/18 919,150
500 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Ser A......................... 6.200 12/01/10 509,805
400 New Jersey Econ Dev Auth Holt Hauling & Warehsg
Rev Ser G Rfdg................................... 8.400 12/15/15 419,116
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev Sr
Lien Ser A (MBIA Insd)........................... 5.800 07/01/09 311,400
200 New Jersey Econ Dev Auth Pollutn Ctl Rev (AMBAC
Insd)............................................ 7.100 07/01/15 240,654
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs
Elec & Gas Co Proj A (MBIA Insd)................. 6.400 05/01/32 223,556
350 New Jersey Econ Dev Auth Rev RWJ Hlth Care Corp
(FSA Insd)....................................... 6.250 07/01/14 373,625
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack
Wtr Co Proj B Rfdg (MBIA Insd)................... 5.900 03/01/24 304,530
490 New Jersey Hlthcare Fac Fin Auth Rev Atlantic City
Med Cent Ser C Rfdg.............................. 6.800 07/01/11 527,999
700 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd).................... 7.000 07/01/04 791,336
400 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd).................... 7.000 07/01/06 461,716
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood
Hosp & Med Cent.................................. 6.700 07/01/15 258,040
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)....................... 6.000 07/01/06 271,140
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)....................... 6.750 07/01/19 278,952
400 New Jersey Hlthcare Fac Fin Auth Rev Jersey Shore
Med Cent (AMBAC Insd)............................ 6.250 07/01/21 425,468
</TABLE>

See Notes to Financial Statements

B-59
<PAGE> 264

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

NEW JERSEY (CONTINUED)
$ 500 New Jersey Hlthcare Fac Fin Auth Rev Southern
Ocean Cnty Hosp Ser A............................ 6.125% 07/01/13 $ 504,015
400 New Jersey Sports & Exposition Auth Convention
Cent Luxury Tax Rev Ser A Rfdg (MBIA Insd)....... 6.250 07/01/20 425,172
200 New Jersey St Edl Fac Auth Rev Caldwell College
Ser A............................................ 7.250 07/01/25 209,350
250 New Jersey St Edl Fac Auth Rev Glassboro St
College Ser A (MBIA Insd)........................ 6.700 07/01/21 272,792
300 New Jersey St Edl Fac Auth Rev Montclair St Univ
Ser F (AMBAC Insd)............................... 5.400 07/01/25 293,805
270 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
K (MBIA Insd).................................... 6.375 10/01/26 277,644
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
O (MBIA Insd).................................... 6.300 10/01/23 513,695
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
S................................................ 6.000 10/01/21 501,235
280 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA
Insd)............................................ 6.500 01/01/16 316,851
200 Port Auth NY & NJ Cons 95th Ser................... 6.125 07/15/22 208,136
400 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj C Rfdg (MBIA Insd)........ 6.200 08/01/30 424,444
300 Union City, NJ (FSA Insd)......................... 6.375 11/01/10 334,281
-----------
14,852,338
-----------
GUAM 1.5%
250 Guam Govt Ser A................................... 5.750 09/01/04 251,593
-----------
PUERTO RICO 10.1%
200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg............................................. 6.625 07/01/12 215,794
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T........... 6.375 07/01/24 264,030
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg...... 6.000 07/01/14 252,613
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg...... 5.500 07/01/14 243,565
470 Puerto Rico Hsg Bank & Fin Agy Single Family Mtg
Rev (GNMA Collateralized)........................ 6.250 04/01/29 479,207
300 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd)............................ 5.750 07/01/15 304,935
-----------
1,760,144
-----------
TOTAL LONG-TERM INVESTMENTS 97.0%
(Cost $16,036,955) (a)...................................................... 16,864,075
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.2%................................ 200,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.8%................................... 321,494
-----------
NET ASSETS 100.0%............................................................ $17,385,569
===========
</TABLE>

* Zero coupon bond

(a) At December 31, 1996, for federal income tax purposes cost is $16,036,955;
the aggregate gross unrealized appreciation is $842,289 and the aggregate
gross unrealized depreciation is $15,169, resulting in net unrealized
appreciation of $827,120.

See Notes to Financial Statements

B-60
<PAGE> 265

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $16,036,955)
(Note 1).................................................. $16,864,075
Short-Term Investments (Note 1)............................. 200,000
Cash........................................................ 44,548
Receivables:
Interest.................................................. 329,484
Fund Shares Sold.......................................... 10,056
Unamortized Organizational Expenses (Note 1)................ 61,706
-----------
Total Assets.......................................... 17,509,869
-----------
LIABILITIES:
Payables:
Distributor and Affiliates (Notes 2 and 5)................ 39,963
Income Distributions...................................... 35,264
Accrued Expenses............................................ 38,157
Deferred Compensation and Retirement Plans (Note 2)......... 10,916
-----------
Total Liabilities..................................... 124,300
-----------
NET ASSETS.................................................. $17,385,569
===========
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $16,805,528
Net Unrealized Appreciation on Securities................... 827,120
Accumulated Undistributed Net Investment Income............. 6,730
Accumulated Net Realized Loss on Securities................. (253,809)
-----------
NET ASSETS.................................................. $17,385,569
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $7,641,719 and 514,981 shares of
beneficial interest issued and outstanding)........... $ 14.84
Maximum sales charge (4.75%* of offering price)......... .74
-----------
Maximum offering price to public........................ $ 15.58
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $9,031,918 and 609,192 shares of
beneficial interest issued and outstanding)........... $ 14.83
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $711,932 and 48,008 shares of beneficial
interest issued and outstanding)...................... $ 14.83
===========
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-61
<PAGE> 266

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 934,883
---------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $17,494, $86,336 and $6,949, respectively)
(Note 5).................................................. 110,779
Investment Advisory Fee (Note 2)............................ 97,956
Custody..................................................... 52,117
Printing.................................................... 29,280
Amortization of Organizational Expenses (Note 1)............ 24,054
Audit....................................................... 20,130
Shareholder Services (Note 2)............................... 15,563
Legal (Note 2).............................................. 11,940
Trustees Fees and Expenses (Note 2)......................... 6,416
Other....................................................... 13,557
---------
Total Expenses.......................................... 381,792
Less Fees Waived and Expenses Reimbursed ($97,956 and
$152,228, respectively)............................... 250,184
---------
Net Expenses............................................ 131,608
---------
NET INVESTMENT INCOME....................................... $ 803,275
=========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments............................ $ 5,297
---------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 982,282
End of the Period:
Investments............................................. 827,120
---------
Net Unrealized Depreciation on Securities During the
Period.................................................... (155,162)
---------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(149,865)
=========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 653,410
=========
</TABLE>

See Notes to Financial Statements

B-62
<PAGE> 267

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................. $ 803,275 $ 600,707
Net Realized Gain/Loss on Securities.............. 5,297 (171,585)
Net Unrealized Appreciation/Depreciation on
Securities During the Period.................... (155,162) 1,207,816
----------- -----------
Change in Net Assets from Operations.............. 653,410 1,636,938
----------- -----------
Distributions from Net Investment Income.......... (792,292) (601,952)
Distributions in Excess of Net Investment Income
(Note 1)........................................ -0- (4,253)
----------- -----------
Distributions from and in Excess of Net Investment
Income*......................................... (792,292) (606,205)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES...................................... (138,882) 1,030,733
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold......................... 4,761,510 5,834,549
Net Asset Value of Shares Issued Through Dividend
Reinvestment.................................... 379,068 296,757
Cost of Shares Repurchased........................ (2,142,401) (2,307,583)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................... 2,998,177 3,823,723
----------- -----------
TOTAL INCREASE IN NET ASSETS...................... 2,859,295 4,854,456
NET ASSETS:
Beginning of the Period........................... 14,526,274 9,671,818
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $6,730
and $(4,253), respectively)..................... $17,385,569 $14,526,274
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares................ $(368,826) $(244,934)
Class B Shares................ (392,001) (345,970)
Class C Shares................ (31,465) (15,301)
--------- ---------
$(792,292) $(606,205)
========= =========
</TABLE>

See Notes to Financial Statements

B-63
<PAGE> 268

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended Year Ended Operations) to
Class A Shares December 31, 1996 December 31, 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $15.000 $13.754 $14.300
------ ------ ------
Net Investment Income................ .786 .792 .295
Net Realized and Unrealized Gain/Loss
on Securities...................... (.173) 1.253 (.551)
------ ------ ------
Total from Investment Operations....... .613 2.045 (.256)
Less Distributions from and in Excess
of Net Investment Income (Note 1).... .774 .799 .290
------ ------ ------
Net Asset Value, End of the Period..... $14.839 $15.000 $13.754
------ ------ ------
Total Return* (a)...................... 4.28% 15.26% (1.81%)**
Net Assets at End of the Period (In
millions)............................ $7.6 $5.8 $3.0
Ratio of Expenses to Average Net
Assets*.............................. .38% .27% .17%
Ratio of Net Investment Income to
Average Net Assets*.................. 5.35% 5.43% 5.16%
Portfolio Turnover..................... 11% 31% 11%**
*If certain expenses had not been
assumed by VKAC, Total Return would
have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net
Assets............................... 1.91% 2.53% 3.17%
Ratio of Net Investment Income to
Average Net Assets................... 3.82% 3.17% 2.17%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

B-64
<PAGE> 269

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended Year Ended Operations) to
Class B Shares December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $14.991 $13.738 $14.300
------ ------ ------
Net Investment Income........... .675 .685 .253
Net Realized and Unrealized
Gain/Loss on Securities....... (.174) 1.260 (.563)
------ ------ ------
Total from Investment
Operations...................... .501 1.945 (.310)
Less Distributions from and in
Excess of Net Investment Income
(Note 1)........................ .666 .692 .252
------ ------ ------
Net Asset Value, End of the
Period.......................... $14.826 $14.991 $13.738
====== ====== ======
Total Return* (a)................. 3.52% 14.43% (2.16%)**
Net Assets at End of the Period
(In millions)................... $9.0 $8.2 $6.5
Ratio of Expenses to Average Net
Assets*......................... 1.13% 1.01% .93%
Ratio of Net Investment Income to
Average Net Assets*............. 4.60% 4.73% 4.38%
Portfolio Turnover................ 11% 31% 11%**
*If certain expenses had not been
assumed by VKAC, Total Return
would have been lower and the
ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... 2.66% 3.23% 3.89%
Ratio of Net Investment Income to
Average Net Assets.............. 3.07% 2.51% 1.41%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

B-65
<PAGE> 270

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended Year Ended Operations) to
Class C Shares December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.000 $13.753 $14.300
------ ------ ------
Net Investment Income............. .673 .706 .240
Net Realized and Unrealized
Gain/Loss on Securities......... (.178) 1.233 (.535)
------ ------ ------
Total from Investment Operations.... .495 1.939 (.295)
Less Distributions from and in
Excess of Net Investment Income
(Note 1).......................... .666 .692 .252
------ ------ ------
Net Asset Value, End of the
Period............................ $14.829 $15.000 $13.753
====== ====== ======
Total Return* (a)................... 3.45% 14.42% (2.09%)**
Net Assets at End of the Period (In
millions)......................... $.7 $.5 $.2
Ratio of Expenses to Average Net
Assets*........................... 1.13% 1.00% .91%
Ratio of Net Investment Income to
Average Net Assets*............... 4.58% 4.73% 4.39%
Portfolio Turnover.................. 11% 31% 11%**
*If certain expenses had not been
assumed by VKAC, Total Return would
have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................ 2.66% 3.23% 3.85%
Ratio of Net Investment Income to
Average Net Assets................ 3.05% 2.50% 1.46%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

B-66
<PAGE> 271

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital New Jersey Tax Free Income Fund (the "Fund") is
organized as a series of the Van Kampen American Capital Tax Free Trust, a
Delaware 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's investment objective is to provide investors with a high
level of current income exempt from federal income tax and New Jersey gross
income tax, consistent with preservation of capital. 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. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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.

B-67
<PAGE> 272

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

D. ORGANIZATIONAL EXPENSES--The Fund will reimburse Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Fund's organization in the amount of $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
July 28, 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
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, 1996, the Fund had an accumulated capital loss
carryforward for tax purposes of $245,890 which will expire on December 31,
2003. Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of post October 31 losses which may not be
recognized for tax purposes until the first day of the following 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. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and federal income tax
purposes, the amount of distributable net investment income may differ between
book and federal income tax purposes for a particular period. These differences
are temporary in nature, but may result in book basis distribution in excess of
net investment income for certain periods.

For the year ended December 31, 1996, 100% of the income distributions made
by the Fund were exempt from federal income taxes.

B-68
<PAGE> 273
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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...................................... .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.

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $7,300 representing VKAC's cost of providing cash management and
legal services to the Fund. All of this cost has been assumed by VKAC.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1996, the Fund recognized expenses of approximately $5,800,
representing ACCESS's cost of providing transfer agency and shareholder services
plus a profit. All of this expense has been assumed by VKAC.

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, 1996, VKAC owned 100 shares each of Classes A, B and C.

3. CAPITAL TRANSACTIONS

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

B-69
<PAGE> 274

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $7,411,377, $8,695,663 and $698,488
for Classes A, B and C, respectively. For the year ended December 31, 1996,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 150,230 $ 2,207,610
Class B....................................... 151,165 2,223,721
Class C....................................... 22,132 330,179
--------- ------------
Total Sales..................................... 323,527 $ 4,761,510
========= ============
Dividend Reinvestment:
Class A....................................... 11,166 $ 163,918
Class B....................................... 12,797 187,745
Class C....................................... 1,867 27,405
--------- ------------
Total Dividend Reinvestment..................... 25,830 $ 379,068
========= ============
Repurchases:
Class A....................................... (35,980) $ (526,087)
Class B....................................... (102,981) (1,513,345)
Class C....................................... (6,957) (102,969)
--------- ------------
Total Repurchases............................... (145,918) $(2,142,401)
========= ============
</TABLE>

B-70
<PAGE> 275

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $5,565,936, $7,797,542 and $443,873
for Classes A, B and C, respectively. For the year ended December 31, 1995,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 207,068 $ 2,985,783
Class B.................................... 184,393 2,661,480
Class C.................................... 12,868 187,286
--------- ------------
Total Sales.................................. 404,329 $ 5,834,549
========= ============
Dividend Reinvestment:
Class A.................................... 8,428 $ 122,246
Class B.................................... 11,009 159,264
Class C.................................... 1,049 15,247
--------- ------------
Total Dividend Reinvestment.................. 20,486 $ 296,757
========= ============
Repurchases:
Class A.................................... (41,615) $ (605,336)
Class B.................................... (117,446) (1,691,133)
Class C.................................... (755) (11,114)
--------- ------------
Total Repurchases............................ (159,816) $(2,307,583)
========= ============
</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.

<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........................... None None
</TABLE>

B-71
<PAGE> 276

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

For the year ended December 31, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$6,800 and CDSC on redeemed shares of approximately $26,300. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $4,619,339 and $1,789,041, respectively.

5. DISTRIBUTION AND SERVICE PLANS

Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1996, are payments to VKAC of approximately
$59,400.

B-72
<PAGE> 277

APPENDIX D

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

FINANCIAL STATEMENTS

June 30, 1997 (Unaudited)
<PAGE> 278

PORTFOLIO OF INVESTMENTS

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 97.1%
ALABAMA 1.5%
$ 2,100 Alabama St Indl Dev Auth Rev UNR-ROHN Inc
Expansion Proj................................. 7.500% 09/15/11 $ 2,125,914
3,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln
Ser A (AMBAC Insd) (b)......................... 6.750 08/15/17 3,307,860
875 Bessemer, AL Indl Dev Brd ROHN Inc Proj........ 9.000 09/15/01 933,258
1,750 Bessemer, AL Indl Dev Brd ROHN Inc Proj........ 9.500 09/15/11 2,092,317
1,000 Mobile, AL Indl Dev Brd Solid Waste Disp Rev
Mobile Energy Svcs Co Proj Rfdg................ 6.950 01/01/20 1,071,940
5,150 West Jefferson Cnty, AL Amusement & Pub Pk
Auth........................................... 8.000 12/01/26 5,181,981
--------------
14,713,270
--------------
ALASKA 0.4%
2,500 Alaska Energy Auth Pwr Rev Bradley Lake Proj
Ser 1 (BIGI Insd).............................. 6.250 07/01/21 2,585,075
1,000 Valdez, AK Marine Term Rev Sohio Pipeline
Rfdg........................................... 7.125 12/01/25 1,110,560
--------------
3,695,635
--------------
ARIZONA 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev
Borden Inc Proj................................ 5.040 10/01/12 999,190
1,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family
Hsg Rev Rfdg................................... 6.500 07/01/09 1,041,440
665 Pima Cnty, AZ Indl Dev Auth Single Family Mtg
Rev (GNMA Collateralized)...................... 6.625 11/01/14 694,041
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A..... 9.500 07/01/10 6,229,339
500 Scottsdale, AZ Indl Dev Auth Rev First Mtg
Westminster Vlg Ser A Rfdg..................... 8.250 06/01/15 546,810
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem
Hosp Ser A Rfdg (AMBAC Insd)................... 6.000 09/01/12 1,970,812
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem
Hosp Ser A Rfdg (AMBAC Insd)................... 6.125 09/01/17 1,841,980
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed
Aermod Cent Inc................................ 8.700 09/01/19 7,874,160
--------------
21,197,772
--------------
ARKANSAS 0.7%
5,355 Dogwood Addition PRD Muni Ppty Owners
Multi-Purp Impt Dist No 8 AR Impt Ser A........ 7.500 01/31/06 5,140,800
5,470 Dogwood Addition PRD Muni Ppty Owners
Multi-Purp Impt Dist No 8 AR Impt Ser B........ 7.500 01/31/06 1,641,000
--------------
6,781,800
--------------
CALIFORNIA 5.7%
5,230 California Edl Fac Auth Rev College of
Osteopathic Med Pacific (Prerefunded @
06/01/03)...................................... 7.500 06/01/18 5,864,085
2,880 California Edl Fac Auth Rev Univ of La Verne... 6.300 04/01/09 2,987,683
</TABLE>

See Notes to Financial Statements

D-1
<PAGE> 279

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 2,000 Compton, CA Ctfs Partn Ser B (b)............... 7.500% 08/01/15 $ 2,120,120
4,285 Delano, CA Ctfs Partn Ser A.................... 9.250 01/01/22 4,986,712
2,660 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd).......................................... * 09/01/10 1,270,070
5,875 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd).......................................... * 09/01/11 2,614,551
3,890 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd).......................................... * 09/01/13 1,503,913
5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd).......................................... * 09/01/14 1,953,823
3,500 Escondido, CA Union High Sch Dist Cap Apprec
(MBIA Insd).................................... * 11/01/19 1,001,770
5,000 Escondido, CA Union High Sch Dist Cap Apprec
(MBIA Insd).................................... * 11/01/20 1,328,800
935 Fairfield, CA Hsg Auth Mtg Rev Creekside
Estates Proj Rfdg.............................. 7.875 02/01/15 963,723
2,800 Los Angeles Cnty, CA Ctfs Partn................ 6.100 11/01/01 2,939,664
8,075 Los Angeles, CA Elec Plant Rev Rfdg (MBIA
Insd).......................................... 4.750 11/15/19 7,143,952
3,065 Los Angeles, CA Wastewater Sys Rev Ser A (FGIC
Insd).......................................... 5.000 02/01/13 2,979,211
1,000 Madera Cnty, CA Ctfs Partn Vly Children's Hosp
(MBIA Insd).................................... 6.125 03/15/23 1,043,750
2,825 Midpeninsula Regl Dist CA Fin Auth Rev (AMBAC
Insd).......................................... * 09/01/15 1,033,809
1,155 Midpeninsula Regl Open Space CA (AMBAC Insd)... * 09/01/19 330,099
1,265 Midpeninsula Regl Open Space CA (AMBAC Insd)... * 09/01/22 298,527
1,380 Midpeninsula Regl Open Space CA (AMBAC Insd)... * 09/01/25 272,826
900 Monterey, CA Regl Wastewater Fin Auth
Wastewater Contract Rev (FSA Insd)............. * 06/01/10 448,182
800 Monterey, CA Regl Wastewater Fin Auth
Wastewater Contract Rev (FSA Insd)............. * 06/01/11 374,904
700 Monterey, CA Regl Wastewater Fin Auth
Wastewater Contract Rev (FSA Insd)............. * 06/01/12 308,413
700 Monterey, CA Regl Wastewater Fin Auth
Wastewater Contract Rev (FSA Insd)............. * 06/01/13 289,674
700 Monterey, CA Regl Wastewater Fin Auth
Wastewater Contract Rev (FSA Insd)............. * 06/01/14 272,258
500 Norco, CA Swr & Wtr Rev Rfdg................... 7.200 10/01/19 538,100
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1
Aliso Viejo Ser A (Prerefunded @ 08/15/02)..... 7.350 08/15/18 3,698,304
4,000 Riverside Cnty, CA Air Force Vlg West Inc Ser A
Rfdg........................................... 8.125 06/15/20 4,305,360
2,000 Santa Ana, CA Cmnty Redev Agy Tax Ser B Rfdg... 7.500 09/01/16 2,046,120
--------------
54,918,403
--------------
COLORADO 5.7%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A..... 8.875 08/01/10 3,784,499
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A
(b)............................................ 8.875 08/01/12 5,433,946
10,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser C............................... * 08/31/26 1,378,755

</TABLE>

See Notes to Financial Statements

D-2
<PAGE> 280

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLORADO (CONTINUED)
$ 925 Arapahoe Cnty, CO Single Family Mtg Rev Ser A
(GNMA Collateralized).......................... 8.375% 08/01/19 $ 959,290
500 Berry Creek Metro Dist CO Rfdg & Impt.......... 8.250 12/01/11 550,900
500 Boulder Cnty, CO Indl Dev Rev Boulder Med Cent
Proj........................................... 8.875 01/01/17 513,805
1,000 Bowles Metro Dist CO........................... 7.750 12/01/15 1,033,530
1,500 Colorado Hlth Fac Auth Rev PLS Hlth Sys Proj
Ser A (Prerefunded @ 02/15/01) (FSA Insd)...... 6.250 02/15/21 1,618,890
2,000 Denver, CO City & Cnty Arpt Rev Ser A.......... 7.000 11/15/99 2,104,840
8,550 Denver, CO City & Cnty Arpt Rev Ser A (b)...... 8.500 11/15/23 9,688,518
5,000 Denver, CO City & Cnty Arpt Rev Ser A.......... 8.000 11/15/25 5,550,550
2,200 Denver, CO City & Cnty Spl Fac Arpt Rev United
Airls Proj Ser A............................... 6.875 10/01/32 2,316,600
1,000 Edgewater, CO Redev Auth Tax Increment Rev..... 6.750 12/01/08 1,078,060
1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser
A (MBIA Insd).................................. * 12/15/14 492,571
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser
A (MBIA Insd).................................. * 12/15/15 495,977
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser
A (MBIA Insd).................................. * 12/15/16 466,371
1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser
A (MBIA Insd).................................. * 12/15/18 383,053
3,690 Jefferson Cnty, CO Residential Mtg Rev......... 11.500 09/01/12 6,034,958
5,000 Meridian Metro Dist CO Rfdg.................... 7.500 12/01/11 5,495,250
5,000 University of CO Hosp Auth Hosp Rev Ser A
(AMBAC Insd)................................... 6.400 11/15/22 5,376,950
--------------
54,757,313
--------------
CONNECTICUT 1.2%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing
Home Pgm AHF/Hartford (b)...................... 7.125 11/01/14 5,636,631
1,000 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A.......................................... 6.500 09/01/06 1,076,760
5,000 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A.......................................... 6.400 09/01/11 5,249,900
--------------
11,963,291
--------------
DISTRICT OF COLUMBIA 0.3%
2,500 District of Columbia Rev Natl Pub Radio Ser
A.............................................. 7.700 01/01/23 2,669,825
--------------
FLORIDA 6.1%
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A
Rfdg & Impt.................................... 7.500 10/01/02 525,045
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A
Rfdg & Impt.................................... 7.875 10/01/08 558,700
2,000 Brevard Cnty, FL Sch Brd Ctfs Ser B (AMBAC
Insd).......................................... 5.500 07/01/21 1,972,460

</TABLE>

See Notes to Financial Statements

D-3
<PAGE> 281

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
$ 1,635 Broward Cnty, FL Res Recovery Rev Waste Energy
North Proj..................................... 7.950% 12/01/08 $ 1,782,935
2,140 Broward Cnty, FL Res Recovery Rev Waste Energy
South Proj..................................... 7.950 12/01/08 2,331,573
24,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec
Ser A Rfdg (MBIA Insd)......................... * 02/01/18 7,348,560
14,465 Dade Cnty, FL Spl Oblig Cap Apprec Ser B Rfdg
(AMBAC Insd)................................... * 10/01/21 3,492,863
560 Florida St Brd Edl Cap Outlay Pub Edl Ser A
Rfdg........................................... 7.250 06/01/23 607,880
590 Florida St Brd Edl Cap Outlay Pub Edl Ser A
Rfdg (Prerefunded @ 06/01/00).................. 7.250 06/01/23 648,782
9,500 Florida St Muni Pwr Agy Rev (AMBAC Insd) (a)... 4.500 10/01/27 7,953,970
2,255 Greater Orlando Aviation Auth Orlando FL Arpt
Fac Rev........................................ 8.375 10/01/16 2,398,531
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg............ 7.875 12/15/25 3,285,866
1,500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr........................... 8.750 07/01/26 1,601,430
1,000 Orange Cnty, FL Hlth Fac Auth Rev Hosp
Adventist Hlth Sys (AMBAC Insd)................ 5.250 11/15/20 950,250
1,000 Orange Cnty, FL Tourist Dev Tax Rev (AMBAC
Insd).......................................... 6.000 10/01/16 1,027,930
5,300 Palm Bay, FL Util Rev Palm Bay Util Corp Proj
Rfdg (MBIA Insd)............................... 5.000 10/01/22 4,862,432
5,000 Saint John's River Wtr Mgmt Dist FL Land
Acquisition Rev Rfdg (FSA Insd)................ 5.125 07/01/16 4,794,900
4,185 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Pk (Prerefunded @ 07/01/02)... 10.000 07/01/22 5,181,239
5,000 Sarasota Cnty, FL Public Hosp Brd Miles
Sarasota Mem Hosp Proj Ser A (Var Rate Cpn).... (d) 10/01/21 4,993,750
1,000 Tampa Palms, FL Open Space & Tran Cmnty Dev
Dist Rev Cap Impt Area 7 Proj.................. 7.500 05/01/18 1,003,980
1,000 Tampa Palms, FL Open Space & Tran Cmnty Dev
Dist Rev Cap Impt Area 7 Proj.................. 8.500 05/01/17 1,068,720
670 Tampa, FL Cap Impt Pgm Rev Ser A............... 8.250 10/01/18 702,080
--------------
59,093,876
--------------
GEORGIA 0.8%
3,000 Atlanta, GA Arpt Fac Rev....................... 6.250 01/01/21 3,104,880
1,250 Georgia Muni Elec Auth Pwr Rev Ser
(Crossover Refunding @ 01/01/98)............... 8.125 01/01/17 1,299,438
1,750 Georgia Muni Elec Auth Pwr Rev Ser Q........... 8.375 01/01/16 1,820,560
1,500 Georgia Muni Elec Auth Pwr Rev Ser X (MBIA
Insd).......................................... 6.500 01/01/20 1,703,865
--------------
7,928,743
--------------

</TABLE>

See Notes to Financial Statements

D-4
<PAGE> 282

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HAWAII 2.7%
$ 4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd)... 6.350% 07/01/07 $ 4,457,175
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev
Hawaiian Elec Co (MBIA Insd)................... 6.550 12/01/22 15,142,836
2,350 Hawaii St Dept Tran Spl Fac Rev Continental
Airls Inc...................................... 9.700 06/01/20 2,655,171
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)...... 6.350 07/01/07 1,621,290
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)...... 6.400 07/01/08 1,711,882
500 Hawaii St Harbor Cap Impt Rev (MBIA Insd)...... 7.000 07/01/17 537,420
--------------
26,125,774
--------------
ILLINOIS 10.0%
4,425 Bedford Park, IL Tax Increment Rev Sr Lien
Bedford City Sq Proj........................... 9.250 02/01/12 5,013,392
1,350 Bridgeview, IL Tax Increment Rev Rfdg.......... 9.000 01/01/11 1,513,917
6,790 Broadview, IL Tax Increment Rev Sr Lien........ 8.250 07/01/13 7,451,482
1,000 Chicago, IL Gas Supply Rev Ser A............... 8.100 05/01/20 1,098,870
1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr
Chicago........................................ 7.000 01/01/11 1,169,350
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc...................................... 8.500 05/01/18 4,395,680
4,865 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc Ser B................................ 8.950 05/01/18 5,515,110
2,000 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)................................ 7.000 09/01/27 2,191,020
500 Chicago, IL Tax Increment Alloc San Drain &
Ship Canal Ser A............................... 7.375 01/01/05 505,580
1,000 Chicago, IL Tax Increment Alloc San Drain &
Ship Canal Ser A............................... 7.750 01/01/14 1,015,960
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago
Ctfs Partn (FGIC Insd)......................... 8.750 01/01/07 1,274,800
1,000 Crestwood, IL Tax Increment Rev Rfdg........... 7.250 12/01/08 1,036,330
870 Hanover Park, IL Rev First Mtg Winsdor Park
Manor Proj (Prerefunded @ 12/01/97)............ 9.250 12/01/07 926,280
1,200 Hodgkins, IL Tax Increment..................... 9.500 12/01/09 1,400,268
3,400 Hodgkins, IL Tax Increment (Prerefunded @
12/01/01)...................................... 9.500 12/01/09 4,137,630
1,500 Hodgkins, IL Tax Increment Rev Ser A Rfdg...... 7.625 12/01/13 1,565,250
1,500 Huntley, IL Increment Alloc Rev Huntley Redev
Proj Ser A..................................... 8.500 12/01/15 1,569,885
1,000 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A...................... 6.500 09/01/09 1,039,660
650 Illinois Dev Fin Auth Rev Cmnty Fac Clinic
Altgeld Proj................................... 8.000 11/15/06 657,755
1,000 Illinois Edl Fac Auth Rev Lake Forest College
(FSA Insd)..................................... 6.750 10/01/21 1,088,240
2,575 Illinois Edl Fac Auth Rev Lewis University
Rfdg........................................... 6.000 10/01/24 2,549,147
1,000 Illinois Edl Fac Auth Rev Northwestern Univ Ser
1985 (Prerefunded @ 12/01/01).................. 6.900 12/01/21 1,116,080

</TABLE>

See Notes to Financial Statements

D-5
<PAGE> 283

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries
Proj........................................... 7.500% 08/15/26 $ 1,018,060
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj A (Prerefunded @ 10/01/02)................ 9.500 10/01/22 5,083,385
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj B (Prerefunded @ 10/01/02)................ 9.000 10/01/22 2,434,100
2,500 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Ser A Rfdg..................................... 7.400 08/15/23 2,637,450
525 Illinois Hlth Fac Auth Rev Glenoaks Med Cent
Ser D.......................................... 9.500 11/15/15 618,235
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent
Ser D (Prerefunded @ 11/15/00)................. 9.500 11/15/15 500,255
1,000 Illinois Hlth Fac Auth Rev IL Masonic Med Cent
Ser B (Prerefunded @ 10/01/99)................. 7.700 10/01/19 1,093,400
1,000 Illinois Hlth Fac Auth Rev Mem Hosp............ 7.250 05/01/22 1,060,480
1,000 Illinois Hlth Fac Auth Rev Northwestern Mem
Hosp........................................... 6.750 08/15/11 1,068,560
2,600 Illinois Hlth Fac Auth Rev United Med Cent
(Prerefunded @ 07/01/03)....................... 8.375 07/01/12 3,094,884
5,900 Illinois Hsg Dev Auth Residential Mtg Rev
(Inverse Fltg)................................. 9.595 02/13/18 6,379,375
2,000 Illinois St.................................... 5.375 02/01/22 1,938,900
1,250 Mill Creek Wtr Reclamation Dist IL Swr Rev..... 8.000 03/01/10 1,306,700
750 Mill Creek Wtr Reclamation Dist IL Wtrwrks
Rev............................................ 8.000 03/01/10 784,020
1,000 Palatine, IL Tax Increment Rev Rand Dundee Cent
Proj........................................... 7.750 01/01/17 1,004,520
2,800 Regional Tran Auth IL Ser A (AMBAC Insd)....... 8.000 06/01/17 3,667,132
7,500 Robbins, IL Res Recovery Rev................... 8.375 10/15/16 7,794,450
3,000 Robbins, IL Res Recovery Rev Recreation Robbins
Res Partn Ser B................................ 8.375 10/15/16 3,117,780
820 Round Lake Beach, IL Tax Increment Rev Rfdg.... 7.200 12/01/04 872,824
500 Round Lake Beach, IL Tax Increment Rev Rfdg.... 7.500 12/01/13 528,705
1,620 Saint Charles, IL Indl Dev Rev Tri-City Cent
Proj........................................... 7.500 11/01/13 1,668,843
1,240 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A
(MBIA Insd).................................... 5.800 04/01/10 1,282,780
--------------
97,186,524
--------------
INDIANA 1.3%
1,000 East Chicago, IN Exempt Fac Inland Steel Co
Proj No 14..................................... 6.700 11/01/12 1,018,630
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl
Hosp Inc....................................... 7.000 07/01/12 2,999,865
1,650 Indiana Bond Bank Spl Pgm Hendricks Redev Ser
B.............................................. 6.125 02/01/17 1,695,392
3,125 Indiana Bond Bank Spl Pgm Hendricks Redev Ser
B.............................................. 6.200 02/01/23 3,211,937
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser
D.............................................. 6.750 02/01/14 631,631
450 Indianapolis, IN Loc Pub Impt Bond Bank Ser
D.............................................. 6.500 02/01/22 454,230

</TABLE>

See Notes to Financial Statements

D-6
<PAGE> 284

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDIANA (CONTINUED)
$ 1,000 Marion Cnty, IN Hosp Auth Hosp Fac Rev......... 6.500% 09/01/13 $ 1,080,370
1,500 Wells Cnty, IN Hosp Auth Rev Caylor-Nickel Med
Cent Inc Rfdg.................................. 8.500 04/15/03 1,685,175
--------------
12,777,230
--------------
IOWA 1.0%
2,045 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp
Proj (FSA Insd)................................ 6.000 07/01/07 2,201,095
2,500 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp
Proj (FSA Insd)................................ 5.750 07/01/17 2,511,825
2,000 Iowa Fin Auth Multi-Family Rev Hsg Hamlet Apts
Proj A Rfdg (GNMA Collateralized).............. 6.150 05/01/32 2,035,140
2,855 Muscatine, IA Elec Rev Rfdg.................... 5.000 01/01/08 2,803,581
--------------
9,551,641
--------------
KANSAS 0.1%
1,000 Newton, KS Hosp Rev Newton Hlthcare Corp Ser
A.............................................. 7.750 11/15/24 1,088,130
--------------
KENTUCKY 2.2%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc
Rfdg........................................... 6.550 03/01/09 1,027,210
10,950 Jefferson Cnty, KY Cap Projs Corp Rev Muni
Multi-Lease Ser A.............................. * 08/15/14 3,410,158
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys
Proj (Inverse Fltg) (MBIA Insd)................ 8.496 10/09/08 4,610,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland
Hosp Corp Ser A Rfdg & Impt (FSA Insd)......... 6.125 02/01/12 1,315,650
1,605 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Gtd)... 7.450 01/01/23 1,694,447
8,000 Kentucky St Tpk Auth Res Recovery Rd Rev Ser
A.............................................. 5.000 07/01/08 7,923,280
1,000 Kentucky St Tpk Auth Toll Rd Rev Ser A......... 5.500 07/01/07 1,003,560
--------------
20,984,305
--------------
LOUISIANA 1.1%
500 Hodge, LA Util Rev Stone Container Corp Ser
1990........................................... 9.000 03/01/10 533,590
1,990 Lafayette, LA Econ Dev Auth Indl Dev Rev
Advanced Polymer Proj Ser 1985................. 10.000 11/15/04 2,554,842
1,000 Lake Charles, LA Harbor & Terminal Dist Port
Fac Rev Trunkline Rfdg......................... 7.750 08/15/22 1,138,010
445 Louisiana Pub Fac Auth Rev Indl Dev Beverly
Enterprises Inc Rfdg........................... 8.250 09/01/08 490,078
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd).... * 02/01/15 3,646,200
900 Port New Orleans, LA Indl Dev Rev Avondale Inds
Inc Proj Rfdg.................................. 8.250 06/01/04 977,247
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf
States Util Co Proj Ser A...................... 7.500 05/01/15 1,520,274
--------------
10,860,241
--------------

</TABLE>

See Notes to Financial Statements

D-7
<PAGE> 285

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARYLAND 0.2%
$ 1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem
Steel Corp Proj Ser A Rfdg..................... 7.550% 06/01/17 $ 1,604,595
--------------
MASSACHUSETTS 2.0%
1,000 Boston, MA Rev Boston City Hosp Ser A (FHA Gtd)
(Prerefunded @ 08/15/00)....................... 7.625 02/15/21 1,113,540
1,455 Massachusetts Edl Ln Auth Rev Issue E Ser A
(AMBAC Insd)................................... 7.000 01/01/10 1,513,913
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New
England Med Cent Hosp Ser G (Embedded Swap)
(MBIA Insd).................................... 3.100 07/01/13 3,794,826
1,000 Massachusetts St Hsg Fin Agy Multi-Family
Residential Hsg Ser A.......................... 8.750 08/01/08 1,034,540
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl
Cent Inc Proj.................................. 8.450 07/01/18 1,555,680
5,000 Massachusetts St Indl Fin Agy Rev First Mtg
Reeds Landing Proj............................. 8.625 10/01/23 5,507,250
980 Massachusetts St Indl Fin Agy Rev Gtr Lynn
Mental Hlth Assoc Proj......................... 8.800 06/01/14 1,092,230
1,000 Massachusetts St Indl Fin Agy Rev Wtr Treatment
American Hingham............................... 6.600 12/01/15 1,034,020
2,000 Plymouth Cnty, MA Ctfs Partn Ser A............. 7.000 04/01/22 2,220,800
--------------
18,866,799
--------------
MICHIGAN 2.9%
1,000 Detroit, MI Area No 1 Ser A (Prerefunded @
07/01/99)...................................... 7.600 07/01/10 1,083,970
3,500 Detroit, MI Downtown Dev Auth Tax Increment
Rev............................................ 6.200 07/01/17 3,637,235
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev
Munson Hlthcare Ser A Rfdg (AMBAC Insd)........ 6.250 07/01/12 2,111,740
1,775 Michigan St Hosp Fin Auth Rev Garden City
Hosp........................................... 8.300 09/01/02 1,869,465
1,750 Michigan St Hosp Fin Auth Rev Mercy Hlth Svcs
Ser R (AMBAC Insd)............................. 5.375 08/15/26 1,677,900
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B
(Embedded Swap) (AMBAC Insd)................... 4.250 04/01/04 5,528,992
11,000 Michigan St Strategic Fd Ltd Oblig Rev Great
Lakes Pulp & Fibre Proj (c).................... 10.250 12/01/16 5,269,220
4,500 Michigan St Strategic Fd Solid Waste Disp Rev
Genesee Pwr.................................... 7.500 01/01/21 4,711,230
1,000 Mount Clemens, MI Hsg Corp Multi-Family Rev Hsg
Ser A Rfdg (FHA Gtd)........................... 6.600 06/01/13 1,050,160
1,000 Royal Oak, MI Hosp Fin Auth Hosp Rev Ser D
(Prerefunded @ 01/01/01)....................... 6.750 01/01/20 1,093,890
--------------
28,033,802
--------------

</TABLE>

See Notes to Financial Statements

D-8
<PAGE> 286

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MINNESOTA 0.4%
$ 1,000 North Saint Paul, MN Multi-Family Rev Hsg
Cottages North Saint Paul Rfdg.................. 9.250% 02/01/22 $ 1,069,410
2,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser
A Rfdg.......................................... 5.000 01/01/16 1,868,300
1,250 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser
C............................................... 5.000 01/01/17 1,162,388
--------------
4,100,098
--------------
MISSISSIPPI 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl
Rev Weyerhaeuser Co Rfdg (Inverse Fltg)......... 7.820 04/01/22 5,784,000
1,155 Ridgeland, MS Urban Renewal Rev The Orchard Ltd
Proj Ser A Rfdg................................. 7.750 12/01/15 1,214,240
--------------
6,998,240
--------------
MISSOURI 1.6%
2,835 Kansas City, MO Port Auth Fac Riverfront Park
Proj Ser A...................................... 5.750 10/01/06 2,927,081
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John
Knox Vlg Proj Rfdg & Impt....................... 7.125 08/15/12 2,126,180
1,500 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev (MBIA Insd).................. 7.250 06/01/04 1,696,410
3,920 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev (MBIA Insd).................. 7.250 06/01/14 4,457,628
1,000 Missouri St Hlth & Edl Fac Auth Rfdg & Impt..... 8.125 10/01/10 1,098,210
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home
Rev Mary Queen & Mother Proj Rfdg (GNMA
Collateralized)................................. 7.125 03/20/23.. 2,328,024
915 Saint Louis, MO Tax Increment Rev Scullin Redev
Area Ser A...................................... 10.000 08/01/10 1,102,392
--------------
15,735,925
--------------
NEBRASKA 0.8%
1,300 Nebraska Invt Fin Auth Single Family Mtg Rev
(Inverse Fltg) (GNMA Collateralized)............ 11.278 09/10/30 1,447,875
800 Nebraska Invt Fin Auth Single Family Mtg Rev
(Inverse Fltg) (GNMA Collateralized)............ 9.314 09/15/24 854,000
4,600 Nebraska Invt Fin Auth Single Family Mtg Rev
(Inverse Fltg) (GNMA Collateralized)............ 9.976 10/17/23 5,025,500
--------------
7,327,375
--------------
NEVADA 0.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A
(FGIC Insd) (b)................................. 6.700 06/01/22 4,311,280
2,385 Henderson, NV Loc Impt Dist No T-4 Ser A........ 8.500 11/01/12 2,496,809
--------------
6,808,089
--------------

</TABLE>

See Notes to Financial Statements

D-9
<PAGE> 287

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW HAMPSHIRE 0.7%
$ 1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev... 8.800% 06/01/09 $ 1,680,520
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Daniel Webster College Issue Rfdg.............. 7.625 07/01/16 2,109,060
1,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
New London Hosp Assn Proj...................... 7.500 06/01/05 1,105,060
1,000 New Hampshire St Business Fin Auth Elec Fac Rev
Plymouth Cogeneration.......................... 7.750 06/01/14 1,039,170
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC
Insd).......................................... 6.750 11/01/11 1,131,760
--------------
7,065,570
--------------
NEW JERSEY 3.5%
2,000 Camden Cnty, NJ Impt Auth Lease Rev Dockside
Refrigerated................................... 8.400 04/01/24 2,123,980
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg
(MBIA Insd).................................... 7.450 08/15/97 6,831,823
1,600 New Jersey Econ Dev Auth Holt Hauling & Warehsg
Rev Ser G Rfdg................................. 8.400 12/15/15 1,690,576
1,900 New Jersey Econ Dev Auth Rev First Mtg
Winchester Gardens Ser A....................... 8.500 11/01/16 1,973,625
1,000 New Jersey Econ Dev Auth Rev United Methodist
Homes.......................................... 7.500 07/01/20 1,074,080
1,000 New Jersey Econ Dev Auth Rev United Methodist
Homes Oblig Ser A.............................. 7.500 07/01/25 1,027,870
3,200 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA
Insd).......................................... 6.500 01/01/16 3,622,784
14,935 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pub Svc Elec & Gas Co Proj C Rfdg (MBIA
Insd).......................................... 6.200 08/01/30 15,843,795
--------------
34,188,533
--------------
NEW MEXICO 0.3%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev
San Juan Regl Med Cent Inc Proj................ 7.900 06/01/11 2,774,950
--------------
NEW YORK 15.5%
3,100 Clifton Springs, NY Hosp & Clinic Hosp Rev
Rfdg........................................... 8.000 01/01/20 3,298,183
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev
Burrows Paper Corp Recycling................... 8.000 01/01/09 2,487,225
5,000 Metropolitan Tran Auth NY Svcs Contract Tran
Fac Ser 5 Rfdg................................. 7.000 07/01/12 5,403,850
3,500 Metropolitan Tran Auth NY Svcs Contract Tran
Fac Ser 7 Rfdg................................. 4.750 07/01/19 2,994,145
1,500 Metropolitan Tran Auth NY Tran Fac Rev Ser G
(MBIA Insd).................................... 5.500 07/01/15 1,499,895
1,000 New York City Indl Dev Agy Civic Fac Marymount
Manhattan College Proj......................... 7.000 07/01/23 1,043,790
3,000 New York City Muni Wtr Fin Auth Ser B.......... 5.750 06/15/29 2,983,830
4,100 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser B...................................... 5.000 06/15/17 3,767,244
5,000 New York City Ser A............................ 7.000 08/01/07 5,625,950
2,500 New York City Ser B............................ 7.500 02/01/07 2,787,975
5,000 New York City Ser C Rfdg....................... 6.500 08/01/04 5,377,200
</TABLE>

See Notes to Financial Statements

D-10
<PAGE> 288

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 640 New York City Ser C Subser C1.................. 7.500% 08/01/20 $ 715,290
6,860 New York City Ser C Subser C1 (Prerefunded @
08/01/02)...................................... 7.500 08/01/20 7,903,475
2,000 New York City Ser D Rfdg....................... 8.000 02/01/05 2,336,300
2,200 New York City Ser E............................ 5.700 08/01/08 2,242,042
5,000 New York St Dorm Auth Rev City Univ Ser F...... 5.500 07/01/12 4,944,700
2,750 New York St Dorm Auth Rev Court Fac Lease Ser
A.............................................. 5.500 05/15/10 2,739,770
2,295 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser A.......................................... 5.750 02/15/11 2,327,864
2,285 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser A.......................................... 5.750 02/15/12 2,311,872
4,000 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser B.......................................... 5.500 08/15/17 3,869,800
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev
(Inverse Fltg)................................. 8.579 04/01/20 2,725,000
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev
Brooklyn Union Gas Co Ser B (Inverse Fltg)..... 9.442 07/01/26 3,611,250
2,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev Niagara Mohawk Pwr Corp Ser A Rfdg (FGIC
Insd).......................................... 7.200 07/01/29 2,270,940
1,000 New York St Environmental Fac Corp Wtr Fac Rev
Long Island Wtr Corp Proj A.................... 10.000 10/01/17 1,031,620
1,955 New York St Med Care Fac Fin Agy Rev Hosp &
Nursing Home Mtg (FHA Gtd) (Prerefunded @
02/15/99)...................................... 7.250 02/15/09 2,086,493
185 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Ser A............................ 7.750 08/15/11 206,553
1,625 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Ser A (Prerefunded @ 02/15/01)... 7.750 08/15/11 1,838,184
175 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Ser C............................ 7.300 02/15/21 192,505
1,825 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Ser C (Prerefunded @ 08/15/01)... 7.300 02/15/21 2,057,103
1,000 New York St Med Care Fac Fin Agy Rev North Genl
Hosp........................................... 7.400 02/15/19 1,049,750
9,720 New York St Thruway Auth Genl Rev Ser D........ 5.500 01/01/14 9,790,081
2,400 New York St Urban Dev Corp Rev Correctional Cap
Fac Rfdg....................................... 5.625 01/01/07 2,458,200
20,500 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser A Rfdg (FSA Insd)...................... 5.250 01/01/14 20,444,035
2,000 New York St Urban Dev Corp Rev Fac (Prerefunded
@ 04/01/01).................................... 7.500 04/01/20 2,254,640
1,000 Port Auth NY & NJ Cons 95th Ser................ 6.125 07/15/22 1,035,740
28,500 Port Auth NY & NJ Cons 109th Ser............... 5.375 01/15/32 27,293,595
3,125 Yonkers, NY Ser C (AMBAC Insd)................. 5.125 08/01/09 3,104,031
--------------
150,110,120
--------------

</TABLE>

See Notes to Financial Statements

D-11
<PAGE> 289

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH CAROLINA 0.6%
$ 3,000 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth
Rev Solid Waste Weyerhaeuser Co................ 5.650% 12/01/23 $ 2,924,730
3,000 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev
Ser A Rfdg (MBIA Insd)......................... 5.700 01/01/13 3,050,640
--------------
5,975,370
--------------
OHIO 2.2%
500 Cleveland, OH Pkg Fac Rev Impt (Prerefunded @
09/15/02)...................................... 8.000 09/15/12 586,925
750 Coshocton Cnty, OH Solid Waste Disp Rev Stone
Container Corp Proj Rfdg....................... 7.875 08/01/13 797,055
1,000 Cuyahoga Cnty, OH Hlthcare Fac Rev Jennings
Hall........................................... 7.300 11/15/23 1,036,970
435 Fairfield, OH Econ Dev Rev Beverly Enterprises
Inc Proj Rfdg.................................. 8.500 01/01/03 472,780
2,045 Montgomery Cnty, OH Hosp Rev Dayton Osteopathic
Hosp Proj Rfdg................................. 6.000 12/01/12 2,029,867
7,540 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B
(Inverse Fltg) (GNMA Collateralized)........... 9.669 03/31/31 8,237,450
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding
Ltd Partnership Proj Rfdg (AMBAC Insd)......... 6.375 04/01/29 1,054,160
4,000 Ohio St Solid Waste Rev Republic Engineered
Steels Proj.................................... 8.250 10/01/14 3,940,360
1,500 Ohio St Solid Waste Rev Republic Engineered
Steels Proj.................................... 9.000 06/01/21 1,532,715
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj
Rfdg........................................... 7.750 12/01/09 1,505,115
--------------
21,193,397
--------------
OKLAHOMA 1.4%
7,685 Grand River Dam Auth OK Rev.................... 5.000 06/01/12 7,429,781
1,980 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA
Insd).......................................... 5.250 12/01/22 1,895,593
2,665 Oklahoma Hsg Fin Agy Single Family Rev Mtg
Class B (GNMA Collateralized).................. 7.997 08/01/18 2,987,785
1,000 Tulsa, OK Muni Arpt Tran Rev American Airls
Inc............................................ 7.600 12/01/30 1,091,020
--------------
13,404,179
--------------
OREGON 0.3%
2,000 Oregon St Econ Dev Rev Georgia Pacific Corp.... 6.350 08/01/25 2,059,540
500 Salem, OR Hosp Fac Auth Rev Cap Manor Inc...... 7.500 12/01/24 526,285
--------------
2,585,825
--------------

</TABLE>

See Notes to Financial Statements

D-12
<PAGE> 290

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA 4.5%
$ 500 Chartiers Vly, PA Indl & Commercial Dev Auth
First Mtg Rev.................................. 7.250% 12/01/11 $ 512,900
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd) (b)........................... 5.650 05/15/20 4,880,550
1,750 Emmaus, PA Genl Auth Rev Ser A (BIGI Insd)..... 8.150 05/15/18 1,834,315
2,500 Emmaus, PA Genl Auth Rev Ser C (BIGI Insd)..... 7.900 05/15/18 2,639,900
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth Cent Rev
United Church of Christ Homes Rfdg............. 6.750 10/01/10 1,014,290
955 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg......... 8.000 08/01/12 1,003,094
1,315 Luzerne Cnty, PA Indl Dev Auth First Mtg Gross
Rev Rfdg....................................... 7.875 12/01/13 1,390,060
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford
Hosp Proj (Crossover Rfdg @ 10/01/00).......... 8.875 10/01/20 1,714,920
2,000 McKeesport, PA Hosp Auth Rev McKeesport Hosp
Proj Rfdg...................................... 6.500 07/01/08 2,065,120
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev (Embedded Swap) (AMBAC Insd)............... 7.450 06/01/12 3,153,300
1,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev...................................... 6.300 01/01/13 977,210
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery....................................... 7.500 01/01/12 1,088,080
8,740 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC
Insd).......................................... 5.000 07/01/15 8,254,143
500 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Hahnemann Univ Proj (Prerefunded @
07/01/99) (MBIA Insd).......................... 7.200 07/01/19 538,480
3,150 Philadelphia, PA Auth for Indl Dev Coml Dev
Philadelphia Arpt Rev Rfdg..................... 7.750 12/01/17 3,432,429
685 Philadelphia, PA Hosp & Higher Edl Fac Auth
Hosp Rev....................................... 7.250 03/01/24 680,979
1,450 Ridley Park, PA Hosp Auth Rev Hosp Auth Rev Ser
1993A.......................................... 6.000 12/01/13 1,435,892
1,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev
Allied Svcs Rehab Hosp Ser A................... 7.375 07/15/08 1,077,290
500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev
Moses Taylor Hosp Proj (Prerefunded @
07/01/01)...................................... 8.250 07/01/09 576,355
4,230 Southeastern PA Trans Auth (FGIC Insd)......... 5.450 03/01/11 4,283,256
1,000 Washington Cnty, PA Hosp Auth Rev Hosp
Canonsburg Genl Hosp Rfdg...................... 7.350 06/01/13 993,250
--------------
43,545,813
--------------
RHODE ISLAND 0.5%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A...... 8.000 09/01/24 2,168,980
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm
Ser B (FHA Gtd)................................ 7.950 10/01/30 2,485,325
600 West Warwick, RI Ser A......................... 7.300 07/15/08 648,846
--------------
5,303,151
--------------
</TABLE>

See Notes to Financial Statements

D-13
<PAGE> 291

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTH CAROLINA 0.4%
$ 3,000 Charleston Cnty, SC Arpt Dist Rfdg (MBIA
Insd).......................................... 4.750% 07/01/15 $ 2,703,660
1,070 Piedmont Muni Pwr Agy SC Elec Rev.............. 5.000 01/01/25 944,371
--------------
3,648,031
--------------
SOUTH DAKOTA 0.1%
1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron
Regl Med Cent.................................. 7.250 04/01/20 1,067,610
150 South Dakota St Hlth & Edl Fac Auth Rev Sioux
Vly Hosp....................................... 7.625 11/01/13 164,009
--------------
1,231,619
--------------
TENNESSEE 0.2%
2,000 Springfield, TN Hlth & Edl Jesse Holman Jones
Hosp Proj...................................... 8.500 04/01/24 2,175,040
--------------
TEXAS 5.0%
1,000 Austin, TX Arpt Sys Rev Prior Lien Ser A (MBIA
Insd).......................................... 6.125 11/15/25 1,030,890
1,000 Austin, TX Util Sys Rev Rfdg (AMBAC Insd)
(a)............................................ 6.500 11/15/05 1,087,820
500 Baytown, TX Pptys Mgmt & Dev Corp Ser A (FNMA
Collateralized)................................ 6.100 08/15/21 507,855
150 Bell Cnty, TX Hlth Fac Dev Corp Rev Hosp
Proj........................................... 9.250 07/01/08 163,290
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint
Luke's Lutheran Hosp........................... 7.000 05/01/21 587,540
1,500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint
Luke's Lutheran Hosp (Prerefunded @
05/01/03)...................................... 7.900 05/01/18 1,743,465
355 Bexar Cnty, TX Hsg Fin Corp Rev Ser A (GNMA
Collateralized)................................ 8.200 04/01/22 373,645
520 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA
Collateralized)................................ 9.250 04/01/16 536,801
1,675 Cedar Hill, TX Indpt Sch Dist Cap Apprec
Rfdg........................................... * 08/15/15 585,211
625 Clear Creek, TX Indpt Sch Dist (Prerefunded @
02/01/01)...................................... 6.250 02/01/11 664,544
250 Coastal Wtr Auth TX Conveyance Sys Rev (AMBAC
Insd).......................................... 6.250 12/15/17 267,860
940 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp
Rev American Airls Inc......................... 7.500 11/01/25 1,013,611
250 El Paso, TX Hsg Auth Multi-Family Rev Ser A.... 6.250 12/01/09 257,148
110 Galveston, TX Ppty Fin Auth Single Family Mtg
Rev Ser A...................................... 8.500 09/01/11 119,054
250 Guadalupe Blanco River Auth TX Indl Dev Corp
Pollutn Ctl Rev................................ 6.350 07/01/22 266,023
1,250 Harris Cnty, TX Hlth Fac Dev Corp Mem Hosp Sys
Proj Rfdg...................................... 7.125 06/01/15 1,406,575
100 Harris Cnty, TX Hsg Fin Corp Single Family Hsg
Rev 1983 Ser A................................. 10.375 07/15/14 100,353
250 Harris Cnty, TX Muni Util Dist No 120
(Prerefunded @ 08/01/01)....................... 8.000 08/01/14 282,463
375 Harris Cnty, TX Sch Hlthcare Corp Sys Rev
(Prerefunded @ 07/01/01)....................... 7.100 07/01/21 418,312
680 Houston, TX Hsg Fin Corp Single Family Mtg Rev
Ser A Rfdg (FSA Insd).......................... 5.950 12/01/10 696,327
250 Lockhart, TX Correctional Fac Fin Corp Rev
(MBIA Insd).................................... 6.625 04/01/12 266,138
</TABLE>

See Notes to Financial Statements

D-14
<PAGE> 292

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
$ 5,500 Lower Colorado Rvr Auth TX Polltn Ctrl Rev
Samsung Austin Semiconductor................... 6.375% 04/01/27 $ 5,657,465
500 Mission Bend Muni Util Dist No 2 TX............ 10.000 09/01/98 531,980
145 Montgomery Cnty, TX Hlth Fac Dev Corp Hosp Mtg
Rev Woodlands Med Cent Proj Rfdg (Prerefunded @
08/15/99)...................................... 8.850 08/15/14 158,605
3,500 North Central TX Hlth Fac Dev Corp Rev
Presbyterian Hlthcare Sys Ser C (Inverse Fltg)
(Prerefunded @ 06/19/01) (MBIA Insd)........... 9.345.. 06/22/21 4,169,375
750 Northwest Harris Cnty, TX Muni Util Dist No 23
(Prerefunded @ 04/01/01)....................... 8.100 10/01/15 844,485
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys
Rev............................................ 6.750 10/01/14 965,830
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev
Ser A Rfdg..................................... 6.250 10/01/17 909,780
5,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev
Ser B Rfdg..................................... 5.500 10/01/20 4,058,750
250 San Antonio, TX Hlth Fac Dev Corp Rev Encore
Nursing Cent Partn............................. 8.250 12/01/19 276,295
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev
Rfdg & Impt.................................... 7.000 05/15/28 268,048
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev
Rfdg & Impt (Prerefunded @ 05/15/03)........... 7.000 05/15/28 283,907
271 Texas Genl Svcs Cmnty Partn Interests Office
Bldg & Land Acquisition Proj................... 7.000 08/01/09 278,815
500 Texas Genl Svcs Cmnty Partn Interests Office
Bldg & Land Acquisition Proj................... 7.000 08/01/19 515,025
500 Texas Genl Svcs Cmnty Partn Interests Office
Bldg & Land Acquisition Proj................... 7.000 08/01/24 515,025
935 Texas Genl Svcs Cmnty Partn Lease Purchase
Ctfs........................................... 7.500 02/15/13 950,093
115 Texas Hsg Agy Single Family Mtg Rev Ser A
Rfdg........................................... 7.150 09/01/12 120,636
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev
Coll Ser C Rfdg (Inverse Fltg) (GNMA
Collateralized)................................ 9.612 07/02/24 6,339,375
305 Texas St Higher Edl Brd College Sr Lien........ 7.700 10/01/25 323,959
4,025 Texas St Higher Edl Coordinating Brd College
Student Ln..................................... 7.850 10/01/25 3,597,303
250 Texas St Rfdg.................................. 6.500 12/01/21 266,300
1,000 Texas St Veterans Hsg Assist................... 6.800 12/01/10 1,056,130
1,300 Texas St Veterans Hsg Assist (MBIA Insd)....... 6.800 12/01/23 1,367,873
2,250 West Side Calhoun Cnty, TX Navig Dist Solid
Waste Disp Union Carbide Chem & Plastics....... 8.200 03/15/21 2,505,712
--------------
48,335,691
--------------

</TABLE>

See Notes to Financial Statements

D-15
<PAGE> 293

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTAH 2.8%
$ 3,120 Bountiful, UT Hosp Rev South Davis Cmnty Hosp
Proj........................................... 9.500% 12/15/18 $ 3,505,414
1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj........................................... 7.800 09/01/15 1,349,970
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj........................................... 8.000 09/01/20 1,018,570
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj........................................... 7.800 09/01/25 1,003,400
1,850 Intermountain Pwr Agy UT Pwr Supply Rev Ser
86B............................................ 5.000 07/01/16 1,697,874
3,650 Intermountain Pwr Agy UT Pwr Supply Rev Ser B
Rfdg........................................... 7.750 07/01/20 3,843,194
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg
(Embedded Swap)................................ 6.720 02/15/12 11,866,910
1,065 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1
(FHA Gtd)...................................... 7.100 07/01/14 1,133,053
1,430 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2
(FHA Gtd)...................................... 7.200 01/01/27 1,520,977
--------------
26,939,362
--------------
VIRGINIA 1.9%
2,000 Fairfax Cnty, VA Park Auth Park Fac Rev........ 6.625 07/15/14 2,117,280
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev
(Prerefunded @ 08/15/01) (FGIC Insd)........... 6.600 08/15/23 3,846,745
2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd)......... 6.800 03/01/14 2,289,310
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)......... 6.900 03/01/19 1,106,200
5,000 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem
Hosp Carilion Hlth Sys Ser B Rfdg (MBIA
Insd).......................................... 4.700 07/01/20 5,051,550
1,000 Virginia Port Auth Comwlth Port Fund Rev....... 8.200 07/01/08 1,053,740
2,650 Virginia St Pub Bldg Auth Ser A................ 5.500 08/01/16 2,669,663
--------------
18,134,488
--------------
WASHINGTON 2.9%
10,000 King Cnty, WA Ser B............................ 5.900 12/01/14 10,269,900
2,000 King Cnty, WA Ser D............................ 5.700 12/01/10 2,079,600
1,000 Port Walla Walla, WA Pub Corp Solid Waste
Recycling Rev Ponderosa Fibres Proj............ 9.125 01/01/26 767,600
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj
No 1 Rev (FGIC Insd)........................... 7.125 07/01/16 1,490,088
3,555 Washington St Pub Pwr Supply Sys Nuclear Proj
No 1 Rev Ser C Rfdg (FSA Insd)................. 5.375 07/01/15 3,484,753
2,000 Washington St Pub Pwr Supply Sys Nuclear Proj
No 2 Rev (Prerefunded @ 01/01/01).............. 7.625 07/01/10 2,246,140
1,000 Washington St Pub Pwr Supply Sys Nuclear Proj
No 2 Rev (Prerefunded @ 07/01/00).............. 7.375 07/01/12 1,104,110
2,500 Washington St Pub Pwr Supply Sys Nuclear Proj
No 2 Rev Rfdg (Prerefunded @ 07/01/00)......... 7.000 07/01/12 2,734,100
3,750 Washington St Pub Pwr Supply Sys Nuclear Proj
No 3 Rev Ser C Rfdg (FSA Insd)................. 5.375 07/01/15 3,642,637
--------------
27,818,928
--------------

</TABLE>
See Notes to Financial Statements

D-16
<PAGE> 294

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WEST VIRGINIA 0.8%
$ 6,750 South Charleston, WV Indl Dev Rev Union Carbide
Chem & Plastics Ser A.......................... 8.000% 08/01/20 $ 7,279,335
--------------
WISCONSIN 1.2%
750 Jefferson, WI Swr Sys Wtrwrks & Elec Sys Mtg
Rev (Prerefunded @ 07/01/01)................... 7.400 07/01/16 832,770
1,250 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev (MBIA Insd)...................... * 12/15/21 311,987
1,250 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev (MBIA Insd)...................... * 12/15/22 294,338
1,250 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev.................................. * 12/15/23 277,650
1,000 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev (MBIA Insd)...................... * 12/15/26 189,280
3,500 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev (MBIA Insd)...................... * 12/15/27 616,700
3,500 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev.................................. * 12/15/28 582,365
3,500 Southeast WI Professional Baseball Pk Dist
Sales Tax Rev (MBIA Insd)...................... * 12/15/29 549,920
2,440 Wisconsin Hsg & Econ Dev Auth Home Ownership
Rev Rfdg (Inverse Fltg)........................ 10.006 10/25/22 2,693,150
600 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem
Hosp Assn...................................... 7.200 11/01/05 604,542
1,800 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem
Hosp Assn...................................... 7.875 11/01/22 1,827,504
1,000 Wisconsin St Hlth & Edl Fac Auth Rev United
Lutheran Proj Aging Inc........................ 8.500 03/01/19 1,046,140
2,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home
Proj........................................... 7.500 07/01/26 2,069,100
--------------
11,895,446
--------------
TOTAL LONG-TERM INVESTMENTS 97.1%
(Cost $879,568,701)....................................................... 939,373,544
SHORT-TERM INVESTMENTS 1.7%
(Cost $15,800,000)........................................................ 15,800,000
--------------
TOTAL INVESTMENTS 98.8%
(Cost $895,368,701)....................................................... 955,173,544
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%................................. 12,002,036
--------------
NET ASSETS 100.0%.......................................................... $ 967,175,580
==============

</TABLE>

*Zero coupon bond

(a) Securities purchased on a when issued or delayed delivery basis.

(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments, open option and open futures transactions.

(d) Security purchased on a when issued basis. The security's coupon, which
fluctuates based upon an index, will be determined upon the settlement of
the purchase.
See Notes to Financial Statements

D-17
<PAGE> 295

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $895,368,701)....................... $955,173,544
Cash........................................................ 154,140
Receivables:
Investments Sold.......................................... 21,098,594
Interest.................................................. 11,400,171
Fund Shares Sold.......................................... 524,911
Variation Margin on Futures............................... 13,960
------------
Total Assets.......................................... 988,365,320
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 14,104,745
Income Distributions...................................... 4,429,429
Distributor and Affiliates................................ 981,846
Fund Shares Repurchased................................... 812,858
Investment Advisory Fee................................... 387,078
Options at Market Value (Net premiums received of
$548,636)................................................. 246,094
Deferred Compensation and Retirement Plans.................. 132,611
Accrued Expenses............................................ 95,079
------------
Total Liabilities..................................... 21,189,740
------------
NET ASSETS.................................................. $967,175,580
============
NET ASSETS CONSIST OF:
Capital..................................................... $928,803,291
Net Unrealized Appreciation................................. 59,862,871
Accumulated Undistributed Net Investment Income............. 491,351
Accumulated Net Realized Loss............................... (21,981,933)
------------
NET ASSETS.................................................. $967,175,580
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $751,355,790 and 48,991,662 shares of
beneficial interest issued and outstanding)........... $ 15.34
Maximum sales charge (4.75%* of offering price)......... .76
------------
Maximum offering price to public........................ $ 16.10
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $203,968,786 and 13,299,947 shares of
beneficial interest issued and outstanding)........... $ 15.34
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $11,851,004 and 773,454 shares of
beneficial interest issued and outstanding)........... $ 15.32
============
</TABLE>

* On sales of $100,000 or more, the sales charge will be
reduced.

See Notes to Financial Statements

D-18
<PAGE> 296

STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 32,363,608
------------
EXPENSES:
Investment Advisory Fee..................................... 2,343,649
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $962,384, $1,021,576 and $61,316,
respectively)............................................. 2,045,276
Shareholder Services........................................ 471,055
Legal....................................................... 74,775
Custody..................................................... 68,135
Trustees Fees and Expenses.................................. 25,485
Other....................................................... 213,971
------------
Total Expenses.......................................... 5,242,346
------------
NET INVESTMENT INCOME....................................... $ 27,121,262
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments (Including reorganization and restructuring
costs of $121,054)...................................... $ 6,016,868
Options................................................... (1,030,527)
Futures................................................... 955,948
------------
Net Realized Gain........................................... 5,942,289
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 60,847,273
------------
End of the Period:
Investments............................................. 59,804,843
Options................................................. 302,542
Futures................................................. (244,514)
------------
59,862,871
------------
Net Unrealized Depreciation During the Period............... (984,402)
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 4,957,887
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 32,079,149
============
</TABLE>

See Notes to Financial Statements

D-19
<PAGE> 297

STATEMENT OF CHANGES IN NET ASSETS

For the Six Months Ended June 30, 1997 and
the Year Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................ $ 27,121,262 $ 58,599,526
Net Realized Gain................................ 5,942,289 15,529,569
Net Unrealized Depreciation During the Period.... (984,402) (34,930,300)
------------- --------------
Change in Net Assets from Operations............. 32,079,149 39,198,795
------------- --------------
Distributions from Net Investment Income:
Class A Shares................................. (21,939,224) (46,362,424)
Class B Shares................................. (5,049,307) (10,564,184)
Class C Shares................................. (303,625) (607,911)
------------- --------------
Total Distributions.......................... (27,292,156) (57,534,519)
------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES..................................... 4,786,993 (18,335,724)
------------- --------------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold........................ 287,817,342 448,529,529
Net Asset Value of Shares Issued Through Dividend
Reinvestment................................... 11,623,555 29,896,737
Cost of Shares Repurchased....................... (353,294,262) (511,329,514)
------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS................................... (53,853,365) (32,903,248)
------------- --------------
TOTAL DECREASE IN NET ASSETS..................... (49,066,372) (51,238,972)
NET ASSETS:
Beginning of the Period.......................... 1,016,241,952 1,067,480,924
------------- --------------
End of the Period (Including accumulated
undistributed net investment income of $491,351
and $662,245, respectively).................... $ 967,175,580 $1,016,241,952
============= ==============
</TABLE>

See Notes to Financial Statements

D-20
<PAGE> 298

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------------------------
Class A Shares June 30, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $15.267 $15.549 $14.261 $16.164 $15.310
------- ------- ------- ------- -------
Net Investment Income............... .427 .898 .874 .886 .964
Net Realized and Unrealized
Gain/Loss......................... .071 (.298) 1.296 (1.907) .862
------- ------- ------- ------- -------
Total from Investment Operations...... .498 .600 2.170 (1.021) 1.826
Less Distributions from Net Investment
Income.............................. .429 .882 .882 .882 .972
------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $15.336 $15.267 $15.549 $14.261 $16.164
======= ======= ======= ======= =======
Total Return (a)...................... 3.33%* 4.07% 15.61% (6.37%) 12.20%
Net Assets at End of the Period (In
millions)........................... $751.4 $792.3 $839.7 $495.8 $597.6
Ratio of Expenses to Average Net
Assets.............................. .90% .94% .99% .99% .87%**
Ratio of Net Investment Income to
Average Net Assets.................. 5.66% 5.93% 5.86% 5.93% 6.08%**
Portfolio Turnover.................... 46%* 73% 61% 75% 82%
</TABLE>

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

*Non-Annualized.

**If certain expenses had not been assumed by VKAC, the Ratios of Expenses to
Average Net Assets and Net Investment Income to Average Net Assets would have
been .98% and 5.97%, respectively, for the year ended December 31, 1993.

See Notes to Financial Statements

D-21
<PAGE> 299

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------------------------
Class B Shares June 30, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.267 $15,549 $14.261 $16.139 $15.308
------- ------- ------- ------- -------
Net Investment Income............ .369 .783 .762 .780 .852
Net Realized and Unrealized
Gain/Loss...................... .072 (.297) 1.294 (1.890) .845
------- ------- ------- ------- -------
Total from Investment Operations... .441 .486 2.056 (1.110) 1.697
Less Distributions from Net
Investment Income................ .372 .768 .768 .768 .866
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $15.336 $15.267 $15.549 $14.261 $16.139
======= ======== ======== ======== ========
Total Return (a)................... 2.94%* 3.29% 14.74% (6.96%) 11.33%
Net Assets at End of the Period (In
millions)........................ $204.0 $211.0 $216.6 $158.7 $168.2
Ratio of Expenses to Average Net
Assets........................... 1.65% 1.70% 1.73% 1.70% 1.65%**
Ratio of Net Investment Income to
Average Net Assets............... 4.91% 5.17% 5.09% 5.22% 5.19%**
Portfolio Turnover................. 46%* 73% 61% 75% 82%
</TABLE>

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

*Non-Annualized

**If certain expenses had not been assumed by VKAC, the Ratios of Expenses to
Average Net Assets and Net Investment Income to Average Net Assets would have
been 1.73% and 5.11%, respectively, for the year ended December 31, 1993.

See Notes to Financial Statements

D-22
<PAGE> 300

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31, (Commencement of
Six Months Ended ----------------------------- Distribution) to
Class C Shares June 30, 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............. $ 15.254 $ 15.545 $ 14.262 $16.141 $15.990
-------- -------- -------- ------- -------
Net Investment Income..... .369 .782 .771 .783 .300
Net Realized and
Unrealized Gain/Loss.... .071 (.305) 1.280 (1.894) .171
-------- -------- -------- ------- -------
Total from Investment
Operations................ .440 .477 2.051 (1.111) .471
Less Distributions from Net
Investment Income......... .372 .768 .768 .768 .320
-------- -------- -------- ------- -------
Net Asset Value, End of the
Period.................... $ 15.322 $ 15.254 $ 15.545 $14.262 $16.141
======== ======== ======== ======= =======
Total Return (a)............ 2.94%* 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of the
Period (In millions)...... $11.9 $12.9 $11.2 $3.9 $4.1
Ratio of Expenses to Average
Net Assets (b)............ 1.67% 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment
Income to Average Net
Assets (b)................ 4.89% 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover.......... 46%* 73% 61% 75% 82%
</TABLE>

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

(b) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC reimbursement of certain expenses was less than
0.01%.

*Non-Annualized

See Notes to Financial Statements

D-23
<PAGE> 301

NOTES TO FINANCIAL STATEMENTS

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Municipal Income Fund (the "Fund") is organized as a
series of the Van Kampen American Capital Tax Free Trust, a Delaware business
trust, and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective is to provide a high level of current income exempt from federal
income tax, consistent with preservation of capital. The Fund commenced
investment operations on August 1, 1990. The distribution of the Fund's Class B
and Class C shares commenced on August 24, 1992 and August 13, 1993,
respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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-24
<PAGE> 302

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

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, 1996, the Fund had an accumulated capital loss
carryforward for tax purposes of $28,118,805 which will expire between December
31, 2002 and December 31, 2003. Net realized gains or losses differ for
financial reporting and tax purposes primarily as a result of the deferral of
losses for tax purposes resulting from wash sale transactions and the
capitalization for tax purposes of reorganization and restructuring costs.
At June 30, 1997, for federal income tax purposes, cost of long- and
short-term investments is $895,394,367; the aggregate gross unrealized
appreciation is $71,036,648 and the aggregate gross unrealized depreciation is
$11,199,443, resulting in net unrealized appreciation including open option and
futures transactions of $59,837,205.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ------------------------------------------------------------------------
<S> <C>
First $500 million...................................... .50 of 1%
Over $500 million....................................... .45 of 1%
</TABLE>

For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $35,000 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $84,300 representing Van Kampen American Capital Distributors,
Inc.'s or

D-25
<PAGE> 303

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

its affiliates' (collectively "VKAC") cost of providing accounting, cash
management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the six months ended
June 30, 1997, the Fund recognized expenses of approximately $357,600,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
At June 30, 1997, VKAC owned 6,894 Class A shares of the Fund.

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

D-26
<PAGE> 304

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

At June 30, 1997, capital aggregated $715,399,633, $201,756,136 and
$11,647,522 for Classes A, B and C, respectively. For the six months ended June
30, 1997, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................. 18,404,838 $ 278,717,862
Class B................................. 509,066 7,730,614
Class C................................. 90,201 1,368,866
----------- -------------
Total Sales............................... 19,004,105 $ 287,817,342
=========== =============
Dividend Reinvestment:
Class A................................. 611,112 $ 9,267,531
Class B................................. 146,928 2,228,227
Class C................................. 8,433 127,797
----------- -------------
Total Dividend Reinvestment............... 766,473 $ 11,623,555
=========== =============
Repurchases:
Class A................................. (21,923,811) $(332,840,608)
Class B................................. (1,175,823) (17,842,537)
Class C................................. (172,011) (2,611,117)
----------- -------------
Total Repurchases......................... (23,271,645) $(353,294,262)
=========== =============
</TABLE>

D-27
<PAGE> 305

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $760,254,848, $209,639,832 and
$12,761,976 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 27,650,131 $ 418,053,766
Class B.......................................... 1,641,964 24,779,007
Class C.......................................... 375,923 5,696,756
----------- -------------
Total Sales........................................ 29,668,018 $ 448,529,529
=========== =============
Dividend Reinvestment:
Class A.......................................... 1,572,959 $ 23,855,458
Class B.......................................... 375,855 5,699,914
Class C.......................................... 22,531 341,365
----------- -------------
Total Dividend Reinvestment........................ 1,971,345 $ 29,896,737
=========== =============
Repurchases:
Class A.......................................... (31,326,699) $(474,926,518)
Class B.......................................... (2,128,006) (32,268,288)
Class C.......................................... (272,810) (4,134,708)
----------- -------------
Total Repurchases.................................. (33,727,515) $(511,329,514)
=========== =============
</TABLE>

D-28
<PAGE> 306

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

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.

<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............................. None None
</TABLE>

For the six months ended June 30, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$54,000 and CDSC on redeemed shares of approximately $248,800. Sales charges do
not represent expenses of the Fund.

On October 25, 1996, the Fund acquired all of the assets and liabilities of
the Van Kampen American Capital Texas Tax Free Income Fund (the "TX Fund"),
through a tax free reorganization approved by TX Fund shareholders on October
15, 1996. The Fund issued 605,902, 421,195 and 53,444 shares of Classes A, B and
C valued at $9,179,415, $6,381,107 and $809,140, respectively, in exchange for
TX Fund's net assets. Shares issued in connection with this reorganization are
included in common share sales for the current period. Combined net assets on
the day of acquisition were $1,003,018,474.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $446,079,383 and $525,253,397,
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.

D-29
<PAGE> 307

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

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 unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising an option contract or taking
delivery of a security underlying a futures contract. In these instances the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996................ 750 $ (659,624)
Options Written and Purchased (Net)............. 6,100 (947,274)
Options Terminated in Closing Transactions
(Net)......................................... (3,150) 758,624
Options Expired (Net)........................... (2,950) 1,396,910
------ -----------
Outstanding at June 30, 1997.................... 750 $ 548,636
======= ===========
</TABLE>

The related futures contracts of the outstanding option transactions as of
June 30, 1997, and the description and market value are as follows:

<TABLE>
<CAPTION>
Market
Exp. Month/ Value
Contracts Exercise Price of Options
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond Futures
September 1997 - Written Puts
(Current notional value of
$111,063 per contract)............ 750 Sep./112 $(246,094)
=== =========
</TABLE>

D-30
<PAGE> 308

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

closes the contract prior to the delivery date. These contracts are generally
used to manage the portfolio's effective maturity and duration.

Transactions in futures contracts for the six months ended June 30, 1997,
were as follows:

<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996........................... 251
Futures Opened............................................. 7,609
Futures Closed............................................. (6,410)
-------
Outstanding at June 30, 1997............................... 1,450
========
</TABLE>

The futures contracts outstanding at June 30, 1997, and the descriptions and
unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- -------------------------------------------------------------
<S> <C> <C>
Long Contracts - U.S. Treasury
Bond Futures
September 1997
(Current notional value $111,063
per contract)................... 650 $ 661,942
Short Contracts - Municipal Bond
Index Futures
September 1997
(Current notional value $116,500
per contract)................... 800 (906,456)
----- ---------
1,450 $(244,514)
======= =========
</TABLE>

C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the

D-31
<PAGE> 309

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

coupon is reduced. Conversely, as the floating rate declines, the coupon is
increased. These instruments are typically used by the Fund to enhance the yield
of the portfolio.

6. DISTRIBUTION AND SERVICE PLANS

Annual fees under the Plans of up to .25% for Class A net assets and 1.00%
each for Class B and Class C net assets are accrued daily. Included in these
fees for the six months ended June 30, 1997, are payments to VKAC of
approximately $808,400.

D-32
<PAGE> 310

APPENDIX E

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

FINANCIAL STATEMENTS

June 30, 1997 (Unaudited)
<PAGE> 311

PORTFOLIO OF INVESTMENTS

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
NEW JERSEY 84.1%
$ 400 Atlantic City, NJ Brd Edl Sch (AMBAC Insd)......... 6.125% 12/01/11 $ 422,896
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (MBIA
Insd).............................................. 6.150 10/01/14 263,880
150 Delaware River Port Auth PA & NJ (FGIC Insd)....... 5.500 01/01/26 148,403
500 Essex Cnty, NJ Impt Auth Lease Cnty Jail Proj A
(MBIA Insd)........................................ 5.600 12/01/16 503,540
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth House
Proj (Prerefunded @ 12/01/04) (AMBAC Insd)......... 6.600 12/01/07 284,262
375 Essex Cnty, NJ Impt Auth Lease Jail & Youth House
Proj Rfdg (AMBAC Insd)............................. 5.350 12/01/24 363,709
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)............ 5.375 09/01/10 374,307
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg
(MBIA Insd)........................................ 6.600 12/01/21 269,672
250 Lacey Muni Util Auth NJ Wtr Rev (MBIA Insd)........ 6.250 12/01/24 267,708
250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec........... * 04/01/11 121,273
250 Mercer Cnty, NJ Impt Auth Rev Ewing Brd Edl Lease
Proj Rfdg (MBIA Insd).............................. 5.000 11/15/16 238,495
500 Millburn Twp, NJ Brd Edl........................... 5.350 07/15/12 508,845
500 Monmouth Cnty, NJ Impt Auth Rev Govtl Ln (MBIA
Insd).............................................. 5.125 12/01/16 482,685
1,000 New Jersey Bldg Auth St Bldg Rev................... 5.000 06/15/18 928,250
500 New Jersey Econ Dev Auth Dist Heating & Cooling Rev
Trigen Trenton Ser A............................... 6.200 12/01/10 514,150
400 New Jersey Econ Dev Auth Holt Hauling & Warehsg Rev
Ser G Rfdg......................................... 8.400 12/15/15 422,644
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev Sr
Lien Ser A (MBIA Insd)............................. 5.800 07/01/09 312,942
200 New Jersey Econ Dev Auth Pollutn Ctl Rev (AMBAC
Insd).............................................. 7.100 07/01/15 221,264
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs
Elec & Gas Co Proj A (MBIA Insd)................... 6.400 05/01/32 224,204
350 New Jersey Econ Dev Auth Rev RWJ Hlth Care Corp
(FSA Insd)......................................... 6.250 07/01/14 371,889
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack Wtr
Co Proj B Rfdg (MBIA Insd)......................... 5.900 03/01/24 302,502
490 New Jersey Hlthcare Fac Fin Auth Rev Atlantic City
Med Cent Ser C Rfdg................................ 6.800 07/01/11 526,672
700 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd)...................... 7.000 07/01/04 791,561
400 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd)...................... 7.000 07/01/06 459,932
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood Hosp
& Med Cent......................................... 6.700 07/01/15 266,165
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent
at Passaic (FSA Insd).............................. 6.000 07/01/06 270,862
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent
at Passaic (FSA Insd).............................. 6.750 07/01/19 274,675
400 New Jersey Hlthcare Fac Fin Auth Rev Jersey Shore
Med Cent (AMBAC Insd).............................. 6.250 07/01/21 424,136
500 New Jersey Hlthcare Fac Fin Auth Rev Southern Ocean
Cnty Hosp Ser A.................................... 6.125 07/01/13 508,270
</TABLE>

See Notes to Financial Statements

E-1
<PAGE> 312

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 400 New Jersey Sports & Exposition Auth Convention Cent
Luxury Tax Rev Ser A Rfdg (MBIA Insd).............. 6.250% 07/01/20 $ 425,664
200 New Jersey St Edl Fac Auth Rev Caldwell College Ser
A.................................................. 7.250 07/01/25 212,190
250 New Jersey St Edl Fac Auth Rev Glassboro St College
Ser A (MBIA Insd).................................. 6.700 07/01/21 275,627
300 New Jersey St Edl Fac Auth Rev Montclair St Univ
Ser F (AMBAC Insd)................................. 5.400 07/01/25 293,016
270 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
K (MBIA Insd)...................................... 6.375 10/01/26 278,667
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
O (MBIA Insd)...................................... 6.300 10/01/23 514,780
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
S.................................................. 6.000 10/01/21 508,810
280 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA
Insd).............................................. 6.500 01/01/16 316,994
200 Port Auth NY & NJ Cons 95th Ser.................... 6.125 07/15/22 207,148
500 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK Intl
Arpt Terminal 6 (MBIA Insd)........................ 5.750 12/01/25 500,165
400 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj C Rfdg (MBIA Insd).......... 6.200 08/01/30 424,340
300 Union City, NJ (FSA Insd).......................... 6.375 11/01/10 337,434
-----------
15,364,628
-----------
GUAM 1.4%
250 Guam Govt Ser A.................................... 5.750 09/01/04 251,952
-----------
PUERTO RICO 9.7%
200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg............................................... 6.625 07/01/12 215,238
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T............ 6.375 07/01/24 266,922
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg....... 6.000 07/01/14 258,512
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg....... 5.500 07/01/14 246,878
470 Puerto Rico Hsg Bank & Fin Agy Single Family Mtg
Rev (GNMA Collateralized).......................... 6.250 04/01/29 482,366
300 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd).............................. 5.750 07/01/15 307,239
-----------
1,777,155
-----------
TOTAL LONG-TERM INVESTMENTS 95.2%
(Cost $16,486,185).......................................................... 17,393,735
SHORT-TERM INVESTMENTS 1.6%
(Cost $300,000)............................................................. 300,000
-----------
TOTAL INVESTMENTS 96.8%
(Cost $16,786,185).......................................................... 17,693,735
OTHER ASSETS IN EXCESS OF LIABILITIES 3.2%................................... 582,624
-----------
NET ASSETS 100.0%............................................................ $18,276,359
===========
</TABLE>

* Zero coupon bond

See Notes to Financial Statements

E-2
<PAGE> 313

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $16,786,185)........................ $17,693,735
Cash........................................................ 143,690
Receivables:
Interest.................................................. 331,263
Fund Shares Sold.......................................... 146,111
Unamortized Organizational Costs............................ 36,071
-----------
Total Assets.......................................... 18,350,870
-----------
LIABILITIES:
Payables:
Income Distributions...................................... 36,959
Distributor and Affiliates................................ 22,975
Accrued Expenses............................................ 133
Deferred Compensation and Retirement Plans.................. 14,444
-----------
Total Liabilities..................................... 74,511
-----------
NET ASSETS.................................................. $18,276,359
===========
NET ASSETS CONSIST OF:
Capital..................................................... $17,582,731
Net Unrealized Appreciation................................. 907,550
Accumulated Undistributed Net Investment Income............. 27,352
Accumulated Net Realized Loss............................... (241,274)
-----------
NET ASSETS.................................................. $18,276,359
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $7,744,737 and 518,922 shares of
beneficial interest issued and outstanding)........... $ 14.92
Maximum sales charge (4.75%* of offering price)......... .74
-----------
Maximum offering price to public........................ $ 15.66
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $9,584,302 and 642,718 shares of
beneficial interest issued and outstanding)........... $ 14.91
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $947,320 and 63,513 shares of beneficial
interest issued and outstanding)...................... $ 14.92
===========
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

E-3
<PAGE> 314

STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $498,988
--------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $9,495, $45,445 and $4,255, respectively)... 59,195
Investment Advisory Fee..................................... 52,608
Custody..................................................... 26,304
Printing.................................................... 14,480
Shareholder Services........................................ 12,129
Audit....................................................... 9,955
Legal....................................................... 7,240
Trustees Fees and Expenses.................................. 4,246
Recapture of Excess Organizational Costs.................... (7,467)
Other....................................................... 5,718
--------
Total Expenses.......................................... 184,408
Less Fees Deferred and Expenses Reimbursed ($52,608 and
$80,782, respectively)................................ 133,390
--------
Net Expenses............................................ 51,018
--------
NET INVESTMENT INCOME....................................... $447,970
========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 12,535
--------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 827,120
End of the Period:
Investments............................................. 907,550
--------
Net Unrealized Appreciation During the Period............... 80,430
--------
NET REALIZED AND UNREALIZED GAIN............................ $ 92,965
========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $540,935
========
</TABLE>

See Notes to Financial Statements

E-4
<PAGE> 315

STATEMENT OF CHANGES IN NET ASSETS

For the Six Months Ended June 30, 1997
and the Year Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................. $ 447,970 $ 803,275
Net Realized Gain................................. 12,535 5,297
Net Unrealized Appreciation/Depreciation During
the Period...................................... 80,430 (155,162)
----------- -----------
Change in Net Assets from Operations.............. 540,935 653,410
----------- -----------
Distributions from Net Investment Income:
Class A Shares.................................. (201,164) (368,826)
Class B Shares.................................. (206,909) (392,001)
Class C Shares.................................. (19,275) (31,465)
----------- -----------
Total Distributions........................... (427,348) (792,292)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES...................................... 113,587 (138,882)
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold......................... 1,863,434 4,761,510
Net Asset Value of Shares Issued Through Dividend
Reinvestment.................................... 208,852 379,068
Cost of Shares Repurchased........................ (1,295,083) (2,142,401)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................... 777,203 2,998,177
----------- -----------
TOTAL INCREASE IN NET ASSETS...................... 890,790 2,859,295
NET ASSETS:
Beginning of the Period........................... 17,385,569 14,526,274
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $27,352
and $6,730, respectively)....................... $18,276,359 $17,385,569
=========== ===========
</TABLE>

See Notes to Financial Statements

E-5
<PAGE> 316

FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

July 29, 1994
Six Months (Commencement
Ended Year Ended Year Ended of Investment
June 30, December 31, December 31, Operations) to
Class A Shares 1997 1996 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $14.839 $15.000 $13.754 $14.300
------- ------- ------- -------
Net Investment Income.................. .405 .786 .792 .295
Net Realized and Unrealized
Gain/Loss............................ .067 (.173) 1.253 (.551)
------- ------- ------- -------
Total from Investment Operations......... .472 .613 2.045 (.256)
Less Distributions from and in Excess of
Net Investment Income.................. .387 .774 .799 .290
------- ------- ------- -------
Net Asset Value, End of the Period....... $14.924 $14.839 $15.000 $13.754
======= ======= ======= =======
Total Return* (a)........................ 3.20%** 4.28% 15.26% (1.81%)**
Net Assets at End of the Period (In
millions).............................. $7.7 $7.6 $5.8 $3.0
Ratio of Expenses to Average Net
Assets*................................ .15% .38% .27% .17%
Ratio of Net Investment Income to Average
Net Assets*............................ 5.54% 5.35% 5.43% 5.16%
Portfolio Turnover....................... 10%** 11% 31% 11%**
*If certain expenses had not been assumed
by VKAC, Total Return would have been
lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets................................. 1.72% 1.91% 2.53% 3.17%
Ratio of Net Investment Income to Average
Net Assets............................. 3.98% 3.82% 3.17% 2.17%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

E-6
<PAGE> 317

FINANCIAL HIGHLIGHTS (CONTINUED)

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

July 29, 1994
Six Months (Commencement
Ended Year Ended Year Ended of Investment
June 30, December 31, December 31, Operations) to
Class B Shares 1997 1996 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $14.826 $14.991 $13.738 $14.300
------- ------- ------- -------
Net Investment Income........... .349 .675 .685 .253
Net Realized and Unrealized
Gain/Loss..................... .070 (.174) 1.260 (.563)
------- ------- ------- -------
Total from Investment
Operations...................... .419 .501 1.945 (.310)
Less Distributions from and in
Excess of Net Investment
Income.......................... .333 .666 .692 .252
------- ------- ------- -------
Net Asset Value, End of the
Period.......................... $14.912 $14.826 $14.991 $13.738
======= ======= ======= =======

Total Return* (a)................. 2.83%** 3.52% 14.43% (2.16%)**
Net Assets at End of the Period
(In millions)................... $9.6 $9.0 $8.2 $6.5
Ratio of Expenses to Average Net
Assets*......................... .91% 1.13% 1.01% .93%
Ratio of Net Investment Income to
Average Net Assets*............. 4.78% 4.60% 4.73% 4.38%
Portfolio Turnover................ 10%** 11% 31% 11%**
*If certain expenses had not been
assumed by VKAC, Total Return
would have been lower and the
ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... 2.47% 2.66% 3.23% 3.89%
Ratio of Net Investment Income to
Average Net Assets.............. 3.22% 3.07% 2.51% 1.41%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

E-7
<PAGE> 318

FINANCIAL HIGHLIGHTS (CONTINUED)

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

July 29, 1994
Six Months (Commencement
Ended Year Ended Year Ended of Investment
June 30, December 31, December 31, Operations) to
Class C Shares 1997 1996 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $14.829 $15.000 $13.753 $14.300
------- ------- ------- -------
Net Investment Income............. .345 .673 .706 .240
Net Realized and Unrealized
Gain/Loss....................... .074 (.178) 1.233 (.535)
------- ------- ------- -------
Total from Investment Operations.... .419 .495 1.939 (.295)
Less Distributions from and in
Excess of Net Investment Income... .333 .666 .692 .252
------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.915 $14.829 $15.000 $13.753
======= ======= ======= =======
Total Return* (a)................... 2.90%** 3.45% 14.42% (2.09%)**
Net Assets at End of the Period (In
millions)......................... $.9 $.7 $.5 $.2
Ratio of Expenses to Average Net
Assets*........................... .91% 1.13% 1.00% .91%
Ratio of Net Investment Income to
Average Net Assets*............... 4.75% 4.58% 4.73% 4.39%
Portfolio Turnover.................. 10%** 11% 31% 11%**
*If certain expenses had not been
assumed by VKAC, Total Return would
have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................ 2.47% 2.66% 3.23% 3.85%
Ratio of Net Investment Income to
Average Net Assets................ 3.18% 3.05% 2.50% 1.46%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

E-8
<PAGE> 319

NOTES TO FINANCIAL STATEMENTS

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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.

E-9
<PAGE> 320

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

D. ORGANIZATIONAL COSTS--The Fund will reimburse Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Fund's organization in the amount of $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
July 28, 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 costs in
the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.

At June 30, 1997, for federal income tax purposes, cost of long- and
short-term investments is $16,786,185; the aggregate gross unrealized
appreciation is $931,969 and the aggregate gross unrealized depreciation is
$24,419, resulting in net unrealized appreciation of $907,550.

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, 1996, the Fund had an accumulated capital loss
carryforward for tax purposes of $245,890 which will expire on December 31,
2003. Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of post October 31 losses which may not be
recognized for tax purposes until the first day of the following year.

E-10
<PAGE> 321

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

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...................................... .600 of 1%

Over $500 million....................................... .500 of 1%
</TABLE>

For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $500 represents legal services provided by Skadden, Arps, Slate,
Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund
is an affiliated person. All of this expense has been assumed by VKAC.

For the six months ended June 30, 1997, the Fund incurred expenses of
approximately $5,200 representing VKAC's cost of providing cash management and
legal services to the Fund. All of this cost has been assumed by VKAC.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the six months ended
June 30, 1997, the Fund incurred expenses of approximately $6,900, representing
ACCESS's cost of providing transfer agency and shareholder services plus a
profit. All of this expense has been assumed by VKAC.

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

The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is equal to $2,500.

At June 30, 1997, VKAC owned 100 shares each of Classes A, B and C.

3. CAPITAL TRANSACTIONS

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

E-11
<PAGE> 322
]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

At June 30, 1997, capital aggregated $7,467,104, $9,186,271 and $929,356 for
Classes A, B and C, respectively. For the six months ended June 30, 1997,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 37,321 $ 549,470
Class B....................................... 74,292 1,093,781
Class C....................................... 14,779 220,183
------- -----------
Total Sales..................................... 126,392 $ 1,863,434
======= ===========
Dividend Reinvestment:
Class A....................................... 6,061 $ 89,536
Class B....................................... 7,268 107,255
Class C....................................... 817 12,061
------- -----------
Total Dividend Reinvestment..................... 14,146 $ 208,852
======= ===========
Repurchases:
Class A....................................... (39,441) $ (583,279)
Class B....................................... (48,034) (710,428)
Class C....................................... (91) (1,376)
------- -----------
Total Repurchases............................... (87,566) $(1,295,083)
======= ===========
</TABLE>

E-12
<PAGE> 323

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $7,411,377, $8,695,663 and $698,488
for Classes A, B and C, respectively. For the year ended December 31, 1996,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 150,230 $ 2,207,610
Class B.................................... 151,165 2,223,721
Class C.................................... 22,132 330,179
-------- -----------
Total Sales.................................. 323,527 $ 4,761,510
======== ===========
Dividend Reinvestment:
Class A.................................... 11,166 $ 163,918
Class B.................................... 12,797 187,745
Class C.................................... 1,867 27,405
-------- -----------
Total Dividend Reinvestment.................. 25,830 $ 379,068
======== ===========
Repurchases:
Class A.................................... (35,980) $ (526,087)
Class B.................................... (102,981) (1,513,345)
Class C.................................... (6,957) (102,969)
-------- -----------
Total Repurchases............................ (145,918) $(2,142,401)
======== ===========
</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.

E-13
<PAGE> 324

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------

For the six months ended June 30, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$1,388 and CDSC on redeemed shares of approximately $17,910. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $2,132,348 and $1,690,350, respectively.

5. DISTRIBUTION AND SERVICE PLANS

Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the six months ended June 30, 1997, are payments to VKAC of approximately
$37,700.

E-14
<PAGE> 325

PART C: OTHER INFORMATION

ITEM 15. INDEMNIFICATION

Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.

Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interests of the Trust, (ii) having acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or (iii) for a criminal proceeding
had reasonable cause to believe the conduct was unlawful (collectively,
"Disabling Conduct"). Absent a court determination that an officer or trustee
seeking indemnification was not liable on the merits or guilty of Disabling
Conduct in the conduct of his or her office, the decision by the Registrant to
indemnify such person must be based upon the reasonable determination of
independent counsel or non-party independent trustees, after review of the
facts, that such officer or trustee is not guilty of Disabling Conduct in the
conduct of his or her office.

The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.

Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately that he or
she is entitled to the indemnification and only if the following conditions are
met: (1) the trustee or officer provides security for the undertaking; (2) the
Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

ITEM 16. EXHIBITS

<TABLE>
<S> <C> <S> <C>
(1) -- (a) Agreement and Declaration of Trust(39)
-- (b) Amended and Restated Certificate of Designation for
Van Kampen American Capital Municipal Income Fund+++
(2) -- Bylaws(39)
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen
American Capital Municipal Income Fund and Van Kampen American
Capital New Jersey Tax Free Income Fund+
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares(39)
-- (b) Class B Shares(39)
</TABLE>

C-1
<PAGE> 326

<TABLE>
<S> <C> <S> <C>
-- (c) Class C Shares(39)
(6) -- Investment Advisory Agreement+++
(7) -- (a) Distribution and Service Agreement+++
-- (b) Dealer Agreement 37
-- (c) Broker Fully Disclosed Clearing Agreement 37
-- (d) Bank Fully Disclosed Clearing Agreement 37
(9) -- (a) Custodian Agreement+++
-- (b) Transfer Agency and Service Agreement+++
(10) -- (a) Plan of Distribution Pursuant to Rule 12b-1(39)
-- (b) Service Plan(39)
-- (c) Amended Multi-Class Plan(40)
(11) -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
relating to
Van Kampen American Capital Municipal Income Fund++
(12) -- Form of Tax Opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois) relating to the Reorganization++
(13) -- (a) Fund Accounting Agreement+++
-- (b) Legal Services Agreement(40)
(14) -- (a) Consent of KPMG Peat Marwick LLP relating to
Van Kampen American Capital New Jersey Tax Free Income
Fund+++
-- (b) Consent of KPMG Peat Marwick LLP relating to
Van Kampen American Capital Municipal Income Fund+++
(16) -- Power of Attorney+++
(17) -- (a) Copy of 24f-2 Election of Registrant+++
-- (b) Form of proxy card for Van Kampen American Capital New
Jersey Tax Free Income Fund+++
-- (c) Prospectus of Van Kampen American Capital New Jersey Tax
Free Income Fund dated April 30, 1997, as supplemented on
August 4, 1997+++
</TABLE>

- ---------------
+ Filed herewith as Appendix A to the Reorganization Statement of
Additional Information contained herein.
++ To be filed by amendment.
+++ Filed within.
(37) Incorporated herein by reference to Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N1-A, File Number 2-99715,
filed on August 1, 1995.
(39) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N1-A, File Number 2-99715,
filed on April 29, 1996.
(40) Incorporated herein by reference to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1997.

ITEM 17. UNDERTAKINGS.

(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.

(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.

(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.

C-2
<PAGE> 327

SIGNATURES

AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED ON BEHALF OF THE REGISTRANT IN THE CITY OF OAKBROOK TERRACE AND
STATE OF ILLINOIS, ON THE 22ND DAY OF SEPTEMBER, 1997.

VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST

By /s/ RONALD A. NYBERG

------------------------------------
Ronald A. Nyberg
Vice President and Secretary

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON SEPTEMBER 22, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President
- -----------------------------------------------------
Dennis J. McDonnell

Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- -----------------------------------------------------
Edward C. Wood III

Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DeMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini

/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy

/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy

/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson

/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell

/s/ JEROME L. ROBINSON* Trustee
- -----------------------------------------------------
Jerome L. Robinson

/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney

/s/ FERNANDO SISTO Sc.D.* Trustee
- -----------------------------------------------------
Fernando Sisto

/s/ WAYNE W. WHALEN* Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.

/s/ RONALD A. NYBERG*
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>

C-3
<PAGE> 328

SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST

<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<C> <C> <S> <C> <C>
(1) -- (b) Amended and Restated Certificate of Designation for Van
Kampen American Capital Municipal Income Fund
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen
American Capital Municipal Income Fund and Van Kampen American
Capital New Jersey Tax Free Income Fund (filed herewith as
Appendix A to the Reorganization Statement of Additional
Information contained herein)
(6) -- Investment Advisory Agreement
(7) -- (a) Distribution and Service Agreement
(9) -- (a) Custodian Agreement
-- (b) Transfer Agency and Service Agreement
(13) -- (a) Fund Accounting Agreement
(14) -- (a) Consent of KPMG Peat Marwick LLP relating to Van Kampen
American Capital New Jersey Tax Free Income Fund
-- (b) Consent of KPMG Peat Marwick LLP relating to Van Kampen
American Capital Municipal Income Fund
(16) -- Power of Attorney
(17) -- (a) Copy of 24 F-2 Election of Registrant
-- (b) Form of proxy card for Van Kampen American Capital New
Jersey Tax Free Income Fund
-- (c) Prospectus of Van Kampen American Capital New Jersey Tax
Free Income Fund Dated April 30, 1997, as supplemented on
August 4, 1997
</TABLE>

<PAGE> 1
Exhibit (1)(b)

VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated Certificate of Designation
of
Van Kampen American Capital Municipal Income Fund

The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Municipal Income
Fund Series of the Trust dated May 10, 1995 by redesignating the following
classes of Shares of the Van Kampen American Capital Municipal Income Fund (the
"Fund") with the following rights, preferences and characteristics:

1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.

2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund

3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.

4. Conversion. Each Class B Share and certain Class C Shares of the Fund
shall be converted automatically, and without any action or choice on the part
of the Shareholder thereof, into Class A Shares of the Fund at such times and
pursuant to such terms, conditions and restrictions as may be established by
the Trustees and as set forth in the Fund's Prospectus.

5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.

<PAGE> 2

6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.

7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.

8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
any officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.

9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.

December 12, 1996

/s/ Ronald A. Nyberg
----------------------------
Ronald A. Nyberg, Secretary

<PAGE> 1
EXHIBIT (6)

INVESTMENT ADVISORY AGREEMENT

THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (the "Agreement"),
by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a Delaware business
trust (the "Trust"), on behalf of its series, VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND (the "Fund") and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "ADVISER"), a Delaware corporation.

1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, the Fund hereby employs the Adviser to act as the investment
adviser for and to manage the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objectives and policies and
limitations, and to administer its affairs to the extent requested by, and
subject to the review and supervision of, the Board of Trustees of the Fund for
the period and upon the terms herein set forth. The investment of funds shall
be subject to all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as may from time to time be in force and delivered or made
available to the Adviser.

(b) ADVISER'S ACCEPTANCE OF EMPLOYMENT. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation 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, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.

(c) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.

(d) INDEPENDENT CONTRACTOR. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.

(e) NON-EXCLUSIVE AGREEMENT. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.

<PAGE> 2

2. (a) FEE. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:

FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- -------------
[S] [C]
First $500 0.500 of 1.00%
Over $500 0.450 of 1.00%

(b) EXPENSE LIMITATION. The adviser's compensation for any fiscal year of
the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense limitation
in any jurisdiction in which the Fund's shares are qualified for offer and
sale, as such limitations set forth in the most recent notice thereof furnished
by the Adviser to the Fund. For purposes of this paragraph there shall be
excluded from computation of the Fund's expenses any amount borne directly or
indirectly by the Fund which is permitted to be excluded from the computation
of such limitation by such statue or regulatory authority. If for any month
expenses of the Fund properly included in such calculation exceed 1/12 of the
amount permitted annually by the most restrictive applicable expense
limitation, the payment to the Adviser for that month shall be reduced, and, if
necessary, the Adviser shall make a refund payment to the Fund, so that the
total net expense for the month will not exceed 1/12 of such amount. As of the
end of the Fund's fiscal year, however, the computations and payments shall be
readjusted so that the aggregate compensation payable to the Adviser for the
year is equal to the fee set forth in subsection (a) of this Section 2,
diminished to the extent necessary so that the expenses for the year do not
exceed those permitted by the applicable expense limitation.

(c) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund
shall be calculated as of on each day the Exchange is open for
trading or such other time or times as the trustees may determine in
accordance with the provisions of applicable law and the Declaration of Trust
and By-Laws of the Trust, and resolutions of the Board of Trustees of the Fund
as from time to time in force. For the purpose of the foregoing computations,
on each such day when net asset value is not calculated, the net asset value of
a share of beneficial interest of the Fund shall be deemed to be the net asset
value of such share as of the close of business of the last day on which such
calculation was made.

(d) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.

<PAGE> 3

3. EXPENSES. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other changes of the custodian and for calculating the net asset value
of the Fund as provided above. The adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares on the
New York Stock Exchange or other exchange, interest (if any) on obligations
incurred by the Fund, costs of shares certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, cost 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 on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by the law.

4. INTERESTED PERSONS. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interested in the Fund as trustees, officers,
shareholders, agents or otherwise.

5. LIABILITY. 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 this 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 this Agreement.

6. (a) TERM. This Agreement shall become effective on the date hereof
and shall remain in full force until May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.

(b) TERMINATION. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.

(c) PAYMENT UPON TERMINATION. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.

<PAGE> 4

7. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statue, rule or otherwise, the remainder shall not
thereby be affected.

8. NOTICES. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.

9. DISCLAIMER. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder and that any such resort may
only be had upon the assets and property of the Fund.

10. GOVERNING LAW. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.

11. NAME. In connection with its employment hereunder, the Adviser hereby
agrees and covenants not to change its name without the prior consent of the
Board of Trustees of the Fund.
<PAGE> 5

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.

<TABLE>
<S> <C>
VAN KAMPEN AMERICAN VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
MUNICIPAL INCOME FUND

By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
------------------------ -------------------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
</TABLE>

<PAGE> 1
Exhibit (7) (a)
DISTRIBUTION AND SERVICE AGREEMENT

THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL MUNICIPAL INCOME FUND (the "Fund"), and VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").

1. (a) Appointment of Distributor. The Fund appoints the Distributor
as a principal underwriter and exclusive distributor of each class of its
shares of beneficial interest (the "Shares") offered for sale from time to time
pursuant to the then current prospectus of the Fund, subject to different
combinations of front-end sales charges, distribution fees, service fees and
contingent deferred sales charges. Classes of shares, if any, subject to a
front-end sales charge and a distribution and/or service fee are referred to
herein as "FESC Classes" and the Shares of such classes are referred to herein
as "FESC Shares." Classes of shares, if any, subject to a contingent-deferred
sales charge and a distribution and/or a service fee are referred to herein as
"CDSC Classes" and Shares of such classes are referred to herein as "CDSC
Shares." Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.

(b) Best Efforts. The Distributor shall use its best efforts to
sell, through its organization and through other dealers and agents, the Shares
which the Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares. Without
the prior approval of the Board of Trustees, the Distributor shall not,
directly or indirectly, distribute, sell or market, through its organization or
other brokers, dealers or agents, shares of any investment companies unless the
Board of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.

(c) Positions in the Shares. The Distributor agrees that it will
not take any long or short positions in the Shares, except for long positions
in those Shares purchased by the Distributor in accordance with any systematic
sales plan described in the then current Prospectus of the Fund and except as
permitted by Section 2 hereof, and that so far as it can control the situation,
it will prevent any of its trustees, officers or shareholders from taking any
long or short positions in the Shares, except for legitimate investment
purposes.

(d) Essential Personnel. The Distributor and the Fund agree that
the retention of (i) the chief executive officer, president, treasurer and
secretary of the Distributor, and (ii) each director, officer and employee of
the Distributor or any of its affiliates (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund
(each person referred to in (i) or (ii) hereinafter being referred to as an
"Essential Person "), in his or her current capacities, is in the best interest
of the Fund and the Fund's shareholders. In connection with the Distributor's
acceptance of employment hereunder, the Distributor hereby agrees and covenants
for itself and on behalf of its Affiliates that neither the Distributor nor any
of its Affiliates shall replace or seek to replace any Essential Person or
cause to be replaced any Essential Person, in each case without first
consulting with the Board of Trustees of the Fund in a timely manner. In
addition, neither the Distributor nor any Affiliate of the Distributor shall
change or seek to change or cause to be changed, in any material respect, the
duties and responsibilities of any Essential Person, in each case without first
consulting with the Board of Trustees of the Fund in a timely manner.

<PAGE> 2

2. Sale of Shares to Distributor. The Fund hereby grants to
the Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Shares in the nature of a stock dividend or stock split or in
connection with any other recapitalization approved by the Board of Trustees;
(c) upon the exercise of purchase or subscription rights granted to the holders
of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund, to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund, to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement, to directors, officers and
employees of Van Kampen American Capital, Inc. (the parent company of the
Distributor), VK/AC Holding, Inc. (the parent company of The Van Kampen
American Capital, Inc.), Morgan Stanley, Dean Witter, Discover & Co. (the
parent company of VK/AC Holding, Inc.) and to the subsidiaries of Van Kampen
American Capital, Inc.; (f) to any trust, pension, profit-sharing or other
benefit plan for any of the aforesaid persons; and (g) to any group of persons
as permitted by Rule 22d-1 under the 1940 Act approved from time to time by the
Board of Trustees and set forth in the then current Prospectus of the Fund.

The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.

3. (a) Public Offering Price. The public offering price per Share
shall be determined in accordance with the then current Prospectus of the Fund.
In no event shall the public offering price exceed the net asset value per
Share, plus, with respect to the FESC Shares, a front-end sales charge not in
excess of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. The Fund will cause immediate
notice to be given to the Distributor of each change in net asset value as soon
as it is determined.

(b) Discounts to Dealers. Discounts to dealers purchasing FESC
Shares from the Distributor for resale and to brokers and other eligible agents
making sales of FESC Shares to investors and compensation payable from the
Distributor to dealers, brokers and other eligible agents making sales of CDSC
Shares and Combination Shares shall be set forth in the selling agreements
between the Distributor and such dealers or agents, respectively, as from time
to time amended, and, if such discounts and compensation are described in the
then current Prospectus for the Fund, shall be as so set forth. In connection
with the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.

2
<PAGE> 3

4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund
Shares, the Distributor will in all respects duly comply with all state and
federal laws relating to the sale of such securities and with all applicable
rules and regulations of all regulatory bodies, including without limitation,
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and all applicable rules and regulations of the Securities and Exchange
Commission under the 1940 Act, and will indemnify and save the Fund harmless
from any damage or expense on account of any unlawful act by the Distributor or
its agents or employees. The Distributor is not, however, to be responsible
for the acts of other dealers or agents, except to the extent that they shall
be acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.

In selling Shares to investors, the Distributor will adopt and comply
with certain standards, as set forth in Exhibit III attached hereto as to when
each respective class of Shares may appropriately be sold to particular
investors. The Distributor will require every broker, dealer and other
eligible agent participating in the offering of the Shares to agree to adopt
and comply with such standards as a condition precedent to their participation
in the offering.

5. Expenses.

(a) The Fund will pay or cause to be paid:

(i) all expenses in connection with the registration of
Shares under the federal securities laws, and the
Fund will exercise its best efforts to obtain said
registration and qualification;

(ii) all expenses in connection with the printing of any
notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any
other notice or communication sent to shareholders in
connection with any meeting of the shareholders or
otherwise, any annual, semiannual or other reports or
communications sent to the shareholders, and the
expenses of sending prospectuses relating to the
Shares to existing shareholders;

(iii) all expenses of any federal or state original-issue
tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and

(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.

(b) The Distributor will pay the costs and expenses of
qualifying and maintaining qualification of the Shares for sale under the
securities laws of the various states. The Distributor will also permit its
officers and employees to serve without compensation as trustees and officers
of the Fund if duly elected to such positions.

(c) The Fund shall reimburse the Distributor for
out-of-pocket costs and expenses actually incurred by it in connection with
distribution of each class of Shares respectively in accordance with and
subject to the terms of a plan (the "12b-1 Plan") adopted by the Fund pursuant
to Rule 12b-1 under the 1940 Act as such 12b-1 Plan may be in effect from time
to time; provided, however, that no payments shall be due or paid to the
Distributor hereunder with respect to a class of Shares unless and until this
Agreement shall have been approved for each such class by a majority of the
Board of Trustees

3
<PAGE> 4

of the Fund and by a majority of the "Disinterested Trustees" (as such term is
defined in such 12b-1 Plan) by vote cast in person at a meeting called for the
purpose of voting on this Agreement. A copy of such 12b-1 Plan as in effect on
the date of this Agreement is attached as Exhibit I hereto. The Fund reserves
the right to terminate such 12b-1 Plan with respect to a class of Shares at any
time, as specified in the Plan. The persons authorized to direct the payment
of funds pursuant to this Agreement and the 12b-1 Plan shall provide to the
Fund's Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each class of Shares setting forth the amounts
so paid, the purposes for which such expenditures were made for each such class
of Shares, comparing the amounts paid by such class of Shares with amounts paid
by classes of shares issued by investment companies not governed by the Board
of Trustees and distributed by the Distributor or by direct or indirect
Affiliates of the Distributor and such other information as the Board of
Trustees may from time to time request.

(d) The Fund shall compensate the Distributor for providing
services to, and the maintenance of, shareholder accounts in the Fund
(including prepaying service fees to eligible brokers, dealers and financial
intermediaries and expenses incurred in connection therewith) and the
Distributor may pay as agent for and on behalf of the Fund a service fee with
respect to each class of Shares to brokers, dealers and financial
intermediaries for the provision of shareholder services and the maintenance of
shareholder accounts in the Fund in the amount with respect to each class of
Shares set forth from time to time in the Fund's prospectus. The Fund shall
compensate the Distributor for such expenses in accordance with the terms of a
service plan (the "Service Plan"), as such Service Plan may be in effect from
time to time; provided, however, that no service fee payments shall be due or
paid to the Distributor hereunder with respect to a class of Shares unless and
until this Agreement shall have been approved for each such class by a majority
of the Board of Trustees of the Fund and by a majority of the Disinterested
Trustees by vote cast in person at a meeting called for the purpose of voting
on this Agreement. A copy of such Service Plan as in effect on the date of
this Agreement is attached as Exhibit II hereto. The Fund reserves the right
to terminate such Service Plan with respect to a class of Shares at any time,
as specified in the Plan. The persons authorized to direct the payment of
funds pursuant to this Agreement and the Service Plan shall provide to the
Fund's Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each class of Shares setting forth the amounts
paid as service fees for each such class of Shares comparing the amounts paid
as service fees by such class of Shares with amounts paid by classes of shares
issued by investment companies not governed by the Board of Trustees and
distributed by the Distributor or by direct or indirect Affiliates of the
Distributor and such other information as the Board of Trustees may from time
to time request.

6. Redemption of Shares. In connection with the Fund's redemption of
its Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.

(a) Subject to and in conformity with all applicable federal
and state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.

(b) The Distributor agrees to notify the Fund at such times
as the Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.

(c) The Fund shall have the right to suspend or revoke the
foregoing authorization at any time; unless otherwise stated, any such
suspension or revocation shall be effective forthwith upon receipt of notice
thereof by telegraph or by written instrument from any of the Fund's officers.
In the event that the Distributor's authorization is, by the terms of such
notice, suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.

4
<PAGE> 5

(d) The Distributor agrees that all repurchases of Shares
made by the Distributor shall be made only as agent for the Fund's account and
pursuant to the terms and conditions herein set forth.

(e) The Fund agrees to authorize and direct its Custodian to
pay, for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.

(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under
the foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.

(g) If any FESC Shares sold to the Distributor under the
terms of this Agreement are redeemed or repurchased by the Fund or by the
Distributor as agent or are tendered for redemption within seven business days
after the date of the Distributor's confirmation of the original purchase by
the Distributor, the Distributor shall forfeit the amount above the net asset
value received by it in respect of such Shares, provided that the portion, if
any, of such amount re-allowed by the Distributor to dealers or agents shall be
repayable to the Fund only to the extent recovered by the Distributor from the
dealer or agent concerned. The Distributor shall include in agreements with
such dealers and agents a corresponding provision for the forfeiture by them of
their concession with respect to FESC Shares purchased by them or their
principals and redeemed or repurchased by the Fund or by the Distributor as
agent within seven business days after the date of the Distributor's
confirmation of such initial purchases.

7. Indemnification. The Fund agrees to indemnify and hold harmless
the Distributor and each of its trustees and officers and each person, if any,
who controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen

5
<PAGE> 6

by it and satisfactory to the Distributor or person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume the defense of
any suit and retain counsel, the Distributor, officers or trustees or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them. If the Fund
does not elect to assume the defense of any suit, it will reimburse the
Distributor, officers or trustees or controlling person or persons, defendant
or defendants in the suit for the reasonable fees and expenses of any counsel
retained by them. The Fund agrees to notify the Distributor promptly of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of any of the Shares.

The Distributor also covenants and agrees that it will indemnify and
hold harmless the Fund and each of its trustees and officers and each person,
if any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the Fund or
person (or after the Fund or such person shall have received notice of service
on any designated agent). However, failure to notify the Distributor of any
claim shall not relieve the Distributor from any liability which it may have to
the Fund or any person against whom the action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. In the case of
any notice to the Distributor, it shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense, of any
suit brought to enforce the claim, but if the Distributor elects to assume the
defense, the defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and trustees and to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Distributor elects to assume the defense of any suit and retain counsel, the
Fund or controlling persons, defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them. If the Distributor does
not elect to assume the defense of any suit, it will reimburse the Fund,
officers and trustees or controlling person or persons, defendant or defendants
in the suit, for the reasonable fees and expenses of any counsel retained by
them. The Distributor agrees to notify the Fund promptly of the commencement
of any litigation or proceedings against it in connection with the issue and
sale of any of the Shares.

8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this

6
<PAGE> 7

Agreement may be terminated by the Distributor on ninety (90) days' written
notice to the Fund. Upon termination of this Agreement with respect to either
class of Shares of the Fund, the obligations of the parties hereunder shall
cease and terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.

This Agreement may be amended with respect to either class of Shares
at any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.

For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.

9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.

10. Notice. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at any
office of such party or at such other address as such party shall have
designated in writing.

11. Name. In connection with its employment hereunder, the
Distributor hereby agrees and covenants not to change its name without the
prior consent of the Board of Trustees.

12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.

7
<PAGE> 8

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.

VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL MUNICIPAL INCOME FUND

By: /s/ Dennis J. McDonnell
------------------------------
Name: Dennis J. McDonnell
Title: President

VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.

By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President

<PAGE> 1
EXHIBIT 9(a)

CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES LISTED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held By
It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States . . . . . . 2

2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . 2
2.3 Registration of Securities . . . . . . . . . . . . . . . . 4
2.4 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Availability of Federal Funds . . . . . . . . . . . . . . 5
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . 5
2.7 Payment of Fund Moneys . . . . . . . . . . . . . . . . . . 6
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased . . . . . . . . . . . . . 7
2.9 Appointment of Agents . . . . . . . . . . . . . . . . . . 7
2.10 Deposit of Fund Assets in Securities System . . . . . . . 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System . . . . . . . . . . . . . . . . . . . . . . . 9
2.12 Segregated Account . . . . . . . . . . . . . . . . . . . . 10
2.13 Ownership Certificates for Tax Purposes . . . . . . . . . 10
2.14 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.15 Communications Relating to Fund Securities . . . . . . . . 11

3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States . . . . . . . . . . . . 11

3.1 Appointment of Foreign Sub-Custodians . . . . . . . . . . 11
3.2 Assets to be Held . . . . . . . . . . . . . . . . . . . . 11
3.3 Foreign Securities Systems . . . . . . . . . . . . . . . . 12
3.4 Agreements with Foreign Banking Institutions . . . . . . . 12
3.5 Access of Independent Accountants of the Fund . . . . . . 12
3.6 Reports by Custodian . . . . . . . . . . . . . . . . . . . 12
3.7 Transactions in Foreign Custody Account . . . . . . . . . 13
3.8 Liability of Foreign Sub-Custodians . . . . . . . . . . . 13
3.9 Liability of Custodian . . . . . . . . . . . . . . . . . . 13
3.10 Reimbursement for Advances . . . . . . . . . . . . . . . . 14
3.11 Monitoring Responsibilities . . . . . . . . . . . . . . . 14
3.12 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
3.13 Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . 15

4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund . . . . . . . . . . . . . . . . . . . . . . 15

5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . 16

6. Actions Permitted Without Express Authority . . . . . . . . . . . 16

7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . 17

8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 17

9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

10. Opinion of Fund's Independent Accountants . . . . . . . . . . . . 18

11. Reports to Fund by Independent Public Accountants . . . . . . . . 18

12. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . 18

13. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . 18

14. Effective Period, Termination and Amendment . . . . . . . . . . . 19

15. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . 20

16. Interpretive and Additional Provisions . . . . . . . . . . . . . . 21

17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . 21

18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . 22

19. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 22

20. Shareholder Communications . . . . . . . . . . . . . . . . . . . . 22

21. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT

This Contract between each fund or series of a fund listed on
Appendix A which evidences its agreement to be bound hereby by executing a copy
of this Contract (each such fund is individually hereafter referred to as
the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",

WITNESSETH:

WITNESSETH THAT, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:

1. Employment of Custodian and Property to be Held by It

The Fund hereby employs the Custodian as the custodian of the assets
of the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to
be held outside the United States ("foreign securities") pursuant to the
provisions of the Fund's governing documents. The Fund agrees to deliver to
the Custodian all securities and cash of the Fund, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, beneficial
interest or partnership interest, as applicable, of the Fund, ("Shares") as
may be issued or sold from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by the Fund and not
delivered to the Custodian.

Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Fund(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund, and
provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian. The
Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.

1
<PAGE> 5
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States

2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property to be held by it in
the United States including all domestic securities owned by such Fund
other than (a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury
(and certain federal agencies collectively referred to herein as
"Securities System") and (b) commercial paper of an issuer for
which State Street Bank and Trust Company acts as issuing and paying
agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "Direct Paper System")
pursuant to Section 2.11.

2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Fund held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System Account")
only upon receipt of Proper Instructions from the Fund, which may be
continuing instructions when deemed appropriate by the parties, and
only in the following cases:

1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;

2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;

3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;

4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;

5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;

6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee

2
<PAGE> 6
name of any agent appointed pursuant to Section 2.9 or into
the name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;

7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;

8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;

9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;

10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;

11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;

3
<PAGE> 7
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;

13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;

14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase
or redemption;

15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Trustees,
specifying the securities of the Fund to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such
securities shall be made; and

16) Upon termination of the Contract.

2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of
the Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee
name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to

4
<PAGE> 8
Article 1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Fund directs the Custodian
to maintain securities in "street name", the Custodian shall utilize
its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.

2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Fund ,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds held by the Custodian for a
Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies
as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Fund be
approved by vote of a majority of the Board of Trustees of the Fund.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.

2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund, make federal funds available to such Fund
as of specified times agreed upon from time to time by the Fund and
the Custodian in the amount of checks received in payment for Shares
of such Fund which are deposited into the Fund's account.

2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder
to which each Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall credit such
income, as collected, to such Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when

5
<PAGE> 9
due on securities held hereunder. Income due each Fund on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund
in arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.

2.7 Payment of Fund Moneys. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out moneys of a Fund in the
following cases only:

1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee
of the Custodian referred to in Section 2.3 hereof or in proper
form for transfer; (b) in the case of a purchase effected
through a U.S. Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case of
a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.11; (d) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian along
with written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer to
a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined
in Article 5;

2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;

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<PAGE> 10
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;

4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;

5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;

6) For payment of the amount of dividends received in respect of
securities sold short;

7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified copy
of a resolution of the Board of Trustees, specifying the amount
of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom such payment
is to be made; and

8) Upon termination of this Contract.

2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.

2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.

7
<PAGE> 11
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Fund in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "U.S. Securities System" in accordance with
applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:

1) The Custodian may keep securities of the Fund in a U.S.
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the U.S.
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;

2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;

3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon (i)
receipt of advice from the U.S. Securities System that payment
for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all advices from the U.S. Securities System of
transfers of securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Custodian
and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund.

4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;

8
<PAGE> 12
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;

6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the U.S. Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.

2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Fund in
the Direct Paper System of the Custodian subject to the following
provisions:

1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund ;

2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held
as a fiduciary, custodian or otherwise for customers;

3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;

4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;

9
<PAGE> 13
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the U.S. Securities System for the account of
the Fund;

6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.

2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of each such Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund , the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities
in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by
the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or
any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund , a certified copy of a
resolution of the Board of Trustees setting forth the purpose or
purposes of such segregated account and declaring such purposes
to be proper corporate purposes.

2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Fund held by it
and in connection with transfers of securities.

10
<PAGE> 14
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.

2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased
or sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is
to take such action.

3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States

3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Trustees, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.

3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in

11
<PAGE> 15
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions. The Custodian
shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.

3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Funds shall be
maintained in a clearing agency which acts as a securities depository
or in a book-entry system for the central handling of securities
located outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof
(Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.

3.4 Holding Securities. The Custodian may hold cash, securities and other
non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (1) the records of the Custodian with respect to cash,
securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry the cash,
securities and other non-cash property belonging to the Fund and (ii)
the Custodian shall require that cash, securities and other non-cash
property so held by the foreign sub-custodian be held separately from
any assets of the Custodian, the foreign sub-custodian or of others.

3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the assets of
each Fund will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
each Fund will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to each
applicable Fund; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund(s) held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.

3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.

3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Fund(s) securities and other assets
and advices or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking

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<PAGE> 16
institution for the Custodian on behalf of each applicable Fund
indicating, as to securities acquired for a Fund, the identity of the
entity having physical possession of such securities.

3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of each applicable Fund and delivery of
securities maintained for the account of each applicable Fund may be
effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer. In addition, and
whether or not such practice is a customary established trading
practice in the relevany jurisdictions, the Custodian will, upon
Proper Instructions from the Fund, deliver cash to securities brokers
in foreign jurisdictions who will effect securities trades for the
Fund and cause the securities purchased to be delivered to the
applicable foreign sub-custodian at some later date. (c) Securities
maintained in the custody of a foreign sub-custodian may be maintained
in the name of such entity's nominee to the same extent as set forth
in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.

3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and each Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.

3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this

13
<PAGE> 17
paragraph 3.10, in delegating custody duties to State Street London
Ltd., the Custodian shall not be relieved of any responsibility to the
Fund for any loss due to such delegation, except such loss as may
result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.

3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Fund's assets to the extent necessary to obtain
reimbursement.

3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the
subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted
U.S. accounting principles).

3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund's assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of

14
<PAGE> 18
said Act. The appointment of any such branch as a sub-custodian shall
be governed by paragraph 1 of this Contract. (b) Cash held for each
Fund in the United Kingdom shall be maintained in an interest bearing
account established for the Fund with the Custodian's London branch,
which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.

3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of
America or any state or political subdivision thereof. It shall be
the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.

4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund

The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Fund such payments as are received for Shares of that Fund issued
or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Fund and the Transfer Agent of
any receipt by it of payments for Shares of such Fund.

From such funds as may be available for the purpose but subject to the
limitations of the applicable Fund's governing documents and any applicable
votes of the Board of Trustees of the Fund pursuant thereto, the Custodian
shall, upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares of a Fund, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire funds
to or through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares,
which checks have been furnished by the Fund to the holder of Shares, when
presented to the Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Fund and the Custodian.

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<PAGE> 19
5. Proper Instructions

Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of
Trustees of the Fund accompanied by a detailed description of procedures
approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian are satisfied
that such procedures afford adequate safeguards for the Funds' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires
a segregated asset account in accordance with Section 2.12.

6. Actions Permitted without Express Authority

The Custodian may in its discretion, without express authority from
the Fund:

1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund ;

2) surrender securities in temporary form for securities in
definitive form;

3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and

4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees of the Fund.

16
<PAGE> 20
7. Evidence of Authority

The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Trustees pursuant to the governing documents of
the Fund as described in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.

8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income

The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Fund and/or compute the net asset value per share
of the outstanding shares of each Fund or, if the Custodian and the Fund
execute the applicable Price Source Authorization (the "Authorization"), the
Custodian shall keep such books of account and/or compute such net asset value
per share pursuant to the terms of the Authorization and the attachments
thereto. If so directed, the Custodian shall also calculate daily the net
income of the Fund as described in the Fund's currently effective Prospectus
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value
per share and the daily income of each Fund shall be made at the time or times
described from time to time in the Fund's currently effective Prospectus
related to such Fund.

9. Records

The Custodian shall with respect to each Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder. All such records shall be the property of the Fund and
shall at all times during the regular business hours of the Custodian be open
for inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Fund and held by the Custodian and shall, when requested to

17
<PAGE> 21
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.

10. Opinion of Fund's Independent Accountant

The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.

11. Reports to Fund by Independent Public Accountants

The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would
be disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.

12. Compensation of Custodian

The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.

13. Responsibility of Custodian

So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in

18
<PAGE> 22
good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.

Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by: (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the foregoing, including,
without limitation, nationalization or expropriation, imposition of currency
controls or restrictions, the interruption, suspension or restriction of trading
on or the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, acts of war or terrorism, riots, revolutions, work stoppages,
natural disasters or other similar events or acts; (ii) errors by the Fund or
its investment adviser in their instructions to the Custodian provided such
instructions have been in accordance with this Contract; (iii) the insolvency of
or acts or omissions by a Securities System; (iv) any delay or failure of any
broker, agent or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge of registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.

The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.

If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.

If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of such Fund's assets to the extent necessary to obtain reimbursement.

14. Effective Period, Termination and Amendment

This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30)

19
<PAGE> 23
days after the date of such delivery or mailing; provided, however that the
Custodian shall not with respect to a Fund act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of the Fund has approved the initial use of a
particular Securities System by such Fund and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of the
Fund has reviewed any subsequent change regarding the use by such Fund of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not with respect to
a Fund act under Section 2.11 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board has
approved the initial use of the Direct Paper System by such Fund and the receipt
of an annual certificate of the Secretary or an Assistant Secretary that the
Board of the Fund has reviewed the use by such Fund of the Direct Paper System;
provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or any
provision of the Fund's governing documents, and further provided, that the Fund
on behalf of one or more of the Funds may at any time by action of its Board (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.

Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.

15. Successor Custodian

If a successor custodian for a Fund shall be appointed by the Board
of Trustees of such Fund, the Custodian shall, upon termination, deliver to
such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities, Funds and other properties of each
applicable Fund then held by it hereunder and shall transfer to an account of
the successor custodian all of the securities of each Fund held in a Securities
System.

If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.

In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such

20
<PAGE> 24
termination shall become effective, then the Custodian shall have the right to
deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act of 1940, doing business in Boston, Massachusetts, of its
own selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Fund and all instruments held by the Custodian relative thereto and
all other property held by it under this Contract on behalf of each applicable
Fund and to transfer to an account of such successor custodian all of the
securities of each such Fund held in any Securities System. Thereafter, such
bank or trust company shall be the successor of the Custodian under this
Contract.

In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.

16. Interpretive and Additional Provisions

In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the governing documents of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.

17. Additional Funds

In the event that Van Kampen American Capital Distributors , Inc.
establishes any funds in addition to the Funds listed on Appendix A with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such fund shall become a
Fund hereunder, subject to the delivery by the new Fund of resolutions
authorizing the appointment of the Custodian and such other supporting or
related documentation as the Custodian may request. All references herein to
the "Fund" are to each of the Funds listed on Appendix A individually, as if

21
<PAGE> 25
this Contract were between each such individual Fund and the Custodian. With
respect to any Fund which issues shares in separate classes or series, each
class or series of such Fund shall be treated as a separate Fund hereunder.

18. Massachusetts Law to Apply

This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.

19. Prior Contracts

This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Funds and the Custodian relating to the custody of
the Fund's assets.

20. Reproduction of Documents

This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties
hereto all/each agree that any such reproduction shall be admissible in evidence
as the original itself in any judicial or administrative proceeding, whether or
not the original is in existence and whether or not such reproduction was made
by a party in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.

21. Shareholder Communications

Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Fund as
consenting to disclosure of this information for all securities owned by the
Fund or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's name
and address for any purpose other than corporate communications. Please
indicate below whether the Fund consent or object by checking one of the
alternatives below.

YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions of each Fund listed on
Exhibit A.

NO [X] The Custodian is not authorized to release the Fund's
name, address, and share positions of each Fund listed
on Exhibit A.

22
<PAGE> 26
22. Limitation of Liability.

The execution of this Contract has been authorized by each Fund's
Board of Trustees. This Contract is executed on behalf of each Fund or the
trustees of such Fund as trustees and not individually and the obligations of
the Fund under this Contract are not binding upon any of the Fund's trustees,
officers or shareholders individually but are binding only upon the assets and
property of the Fund.

IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 1st day of August, 1997.

ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A

/s/ Nicholas Dalmaso By: /s/ Ronald A. Nyberg
- ------------------------ -----------------------------------
Ronald A. Nyberg, Vice President
and Secretary

ATTEST STATE STREET BANK AND TRUST COMPANY

/s/ Francine Hayes By: [ILLEGIBLE]
- ------------------------ -----------------------------------
Executive Vice President

23
<PAGE> 27
APPENDIX A
FUND NAMES

Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Government Target Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust
Asset Allocation Portfolio
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Global Equity Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Morgan Stanley Real Estate Securities Portfolio
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Small Capitalization Fund
Van Kampen American Capital Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital Utilities Income Fund
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
Van Kampen American Capital U.S. Government Fund
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
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 Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal
Income Fund
Van Kampen American Capital Florida Insured Tax Free
Income Fund
Van Kampen American Capital New Jersey Tax Free Income Fund
Van Kampen American Capital New York Tax Free Income Fund
VAN KAMPEN AMERICAN CAPITAL TRUST
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
Van Kampen American Capital Utility Fund
Van Kampen American Capital Value Fund
Van Kampen American Capital Great American Companies Fund
Van Kampen American Capital Growth Fund
Van Kampen American Capital Prospector Fund
Van Kampen American Capital Aggressive Growth Fund
Van Kampen American Capital Pennsylvania Tax Free Income Fund
Van Kampen American Capital Tax Free Money Fund
Van Kampen American Capital Foreign Securities Fund

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<PAGE> 28
THE EXPLORER INSTITUTIONAL TRUST
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund
VAN KAMPEN AMERICAN CAPITAL NAVIGATOR FUNDS
Emerging Markets Equity Portfolio
Emerging Markets Fixed Income Portfolio
U.S. Quality Funds
Van Kampen American Capital Exchange Fund
Van Kampen American Capital Municipal Income Trust
Van Kampen American Capital California Municipal Trust
Van Kampen American Capital High Income Trust
Van Kampen American Capital High Income Trust II
Van Kampen American Capital Investment Grade Municipal Trust
Van Kampen American Capital Prime Rate Income Trust
Van Kampen American Capital Municipal Trust
Van Kampen American Capital California Quality Municipal Trust
Van Kampen American Capital Florida Quality Municipal Trust
Van Kampen American Capital New York Quality Municipal Trust
Van Kampen American Capital Ohio Quality Municipal Trust
Van Kampen American Capital Pennsylvania Quality Municipal Trust
Van Kampen American Capital Trust for Insured Municipals
Van Kampen American Capital Trust for Investment Grade Municipals
Van Kampen American Capital Trust for Investment Grade California Municipals
Van Kampen American Capital Trust for Investment Grade Florida Municipals
Van Kampen American Capital Trust for Investment Grade New Jersey Municipals
Van Kampen American Capital Trust for Investment Grade New York Municipals
Van Kampen American Capital Trust for Pennsylvania Municipals
Van Kampen American Capital Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust
Van Kampen American Capital Advantage Pennsylvania Municipal Income Trust
Van Kampen American Capital Strategic Sector Municipal Trust
Van Kampen American Capital Value Municipal Income Trust
Van Kampen American Capital California Value Municipal Income Trust
Van Kampen American Capital Massachusetts Value Municipal Income Trust
Van Kampen American Capital New Jersey Value Municipal Income Trust
Van Kampen American Capital New York Value Municipal Income Trust
Van Kampen American Capital Ohio Value Municipal Income Trust
Van Kampen American Capital Pennsylvania Value Municipal Income Trust
Van Kampen American Capital Municipal Opportunity Trust II
Van Kampen American Capital Florida Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust II
Van Kampen American Capital Select Sector Municipal Trust
Van Kampen American Capital Bond Fund
Van Kampen American Capital Convertible Securities Fund
Van Kampen American Capital Income Trust

<PAGE> 1
EXHIBIT (9)(b)

TRANSFER AGENCY AND SERVICE AGREEMENT

AGREEMENT made as of the 31st day of May, 1997 by and between each of the
VAN KAMPEN AMERICAN CAPITAL OPEN END FUNDS set forth on Schedule "A" hereto,
which are organized under the laws of the state and as the entities set forth
in Schedule "A" hereto (collectively, the "Funds"), and ACCESS INVESTOR
SERVICES, INC., a Delaware corporation ("ACCESS").

R E C I T A L:
-------------

WHEREAS, each of the Funds desires to appoint ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent and ACCESS
desires to accept such appointments;

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

Article 1. Terms of Appointment; Duties of ACCESS.
---------------------------------------

1.01 Subject to the terms and conditions set forth in this Agreement, each
of the Funds hereby employs and appoints ACCESS as its transfer agent, dividend
disbursing agent and shareholder service agent.

1.02 ACCESS hereby accepts such employment and appointments and agrees
that on and after the effective date of this Agreement it will act as the
transfer agent, dividend disbursing agent and shareholder service agent for
each of the Funds on the terms and conditions set forth herein.

1.03 ACCESS agrees that its duties and obligations hereunder will be
performed in a competent, efficient and workmanlike manner with due diligence
in accordance with reasonable industry practice, and that the necessary
facilities, equipment and personnel for such performance will be provided.

1.04 For a period of one year commencing on the effective date of this
Agreement, ACCESS and each of the Funds agree that the retention of (i) the
chief executive officer, president, chief financial officer, chief operating
officer and secretary of ACCESS and (ii) each director, officer and employee of
ACCESS or any of its Affiliates (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) who serves as an officer of the Funds (each
person referred to in (i) or (ii) hereinafter being referred to as an
"Essential Person"), in his or her current capacities, is in the best interest

<PAGE> 2

of the Funds and the Funds' shareholders. In connection with ACCESS's
acceptance of employment hereunder, ACCESS hereby agrees and covenants for
itself and on behalf of its Affiliates that neither ACCESS nor any of its
Affiliates shall make any material or significant personnel changes or replace
or seek to replace any Essential Person or cause to be replaced any Essential
Person, in each case without first informing the Board of Trustees of the Funds
in a timely manner. In addition, neither ACCESS nor any Affiliate of ACCESS
shall change or seek to change or cause to be changed, in any material
respect, the duties and responsibilities of any Essential Person, in each case
without first informing the Board of Trustees of the Funds in a timely
manner.

1.05 In order to assure compliance with section 1.03 and to implement a
cooperative effort to improve and maintain the quality of transfer agency,
dividend disbursing and shareholder services received by each of the Funds and
their shareholders, ACCESS agrees to provide and maintain quantitative
performance objectives, including maximum target turn-around times and maximum
target error rates, for the various services provided hereunder. ACCESS also
agrees to provide a reporting system designed to provide the Board of Trustees
of each of the Funds (the "Board") on a quarterly basis with quantitative data
comparing actual performance for the period with the performance objectives.
The foregoing procedures are designed to provide a basis for continuing
monitoring by the Board of the quality of services rendered hereunder.

Article 2. Fees and Expenses.
------------------

2.01 For the services to be performed by ACCESS pursuant to this
Agreement, each of the Funds agrees to pay ACCESS the fees provided in the fee
schedules agreed upon from time to time by each of the Funds and ACCESS.

2.02 In addition to the amounts paid under section 2.01 above, each of the
Funds agrees to reimburse ACCESS promptly for such Fund's reasonable
out-of-pocket expenses or advances paid on its behalf by ACCESS in connection
with its performance under this Agreement for postage, freight, envelopes,
checks, drafts, continuous forms, reports and statements, telephone, telegraph,
costs of outside mailing firms, necessary outside record storage costs, media
for storage of records (e.g., microfilm, microfiche and computer tapes) and
printing costs incurred due to special requirements of such Fund. In addition,
any other special out-of-pocket expenses paid by ACCESS at the specific request
of any of the Funds will be promptly reimbursed by the requesting Fund.
Postage for mailings of dividends, proxies, Fund reports and other mailings

Page 2

<PAGE> 3

to all shareholder accounts shall be advanced to ACCESS by the concerned Fund
three business days prior to the mailing date of such materials.

Article 3. Representations and Warranties of Access.
-----------------------------------------

ACCESS represents and warrants to each of the Funds that:

3.01 It is a corporation duly organized and existing and in good standing
under the laws of the State of Delaware.

3.02 It is duly qualified to carry on its business in each jurisdiction in
which the nature of its business requires it to be so qualified.

3.03 It is empowered under applicable laws and regulations and by its
charter and bylaws to enter into and perform this Agreement.

3.04 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.

3.05 It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to perform its
duties and obligations hereunder.

3.06 It will maintain a system regarding "as of" transactions as follows:

(a) Each "as of" transaction effected at a price other than that in
effect on the day of processing for which an estimate has not been given
to any of the affected Funds and which is necessitated by ACCESS' error,
or delay for which ACCESS is responsible or which could have been avoided
through the exercise of reasonable care, will be identified, and the net
effect of such transactions determined, on a daily basis for each such
Fund.
(b) The cumulative net effect of the transactions included in
paragraph (a) above will be determined each day throughout each month.
If, on any day during the month, the cumulative net effect upon any Fund
is negative and exceeds an amount equivalent to 1/2 of 1 cent per share
of such Fund, ACCESS shall promptly make a payment to such Fund (in cash
or through use of a credit as described in paragraph (c) below) in such
amount as necessary to reduce the negative cumulative net effect to less
than 1/2 of 1 cent per share of such Fund. If on the last business day
of the month the cumulative net effect (adjusted by the amount of any
payments or credits used pursuant to the preceding sentence) upon any
Fund is negative, such Fund shall be entitled to a reduction in the
monthly transfer agency fee next payable by an equivalent amount, except
as provided in paragraph (c) below. If on the last

Page 3

<PAGE> 4

business day of the month the cumulative net effect (similarly adjusted)
upon any Fund is positive, ACCESS shall be entitled to recover certain
past payments, credits used and reductions in fees, and to a credit
against all future payments and fee reductions made under this paragraph
to such Fund, as described in paragraph (c) below.

(c) At the end of each month, any positive cumulative net effect
upon any Fund shall be deemed to be a credit to ACCESS which shall first
be applied to recover any payments, credits used and fee reductions made
by ACCESS to such Fund under paragraph (b) above during the calendar year
by increasing the amount of the monthly transfer agency fee next payable
in an amount equal to prior payments, credits used and fee reductions
made during such year, but not exceeding the sum of that month's credit
and credits arising in prior months during such year to the extent such
prior credits have not previously been utilized as contemplated by this
paragraph (c). Any portion of a credit to ACCESS not so used shall
remain as a credit to be used as payment against the amount of any future
negative cumulative net effects which would otherwise require a payment,
use of a credit or fee reduction to such Fund pursuant to paragraph (b)
above.

Article 4. Representations and Warranties of the Funds.
--------------------------------------------

Each of the Funds hereby represents and warrants on behalf of itself
only and not on behalf of any other Funds which are a party to this Agreement
that:

4.01 It is duly organized and existing and in good standing under the laws
of the commonwealth or state set forth in Schedule "A" hereto.

4.02 It is empowered under applicable laws and regulations and by its
Declaration of Trust and by-laws to enter into and perform this Agreement.

4.03 All requisite proceedings have been taken by its Board to authorize
it to enter into and perform this Agreement.

4.04 It is an open-end, management investment company registered under the
Investment Company Act of 1940, as amended.

Page 4
<PAGE> 5

4.05 A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.

Article 5. Indemnification.
---------------
5.01 ACCESS shall not be responsible for and each of the Funds shall
indemnify and hold ACCESS harmless from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities (collectively, "Losses") arising out of or attributable to:

(a) All actions of ACCESS required to be taken by ACCESS for the
benefit of such Fund pursuant to this Agreement, provided that ACCESS has
acted in good faith with due diligence and without negligence or willful
misconduct.

(b) The reasonable reliance by ACCESS on, or reasonable use by
ACCESS of, information, records and documents which have been prepared or
maintained by or on behalf of such Fund or have been furnished to ACCESS
by or on behalf of such Fund.

(d) The offer or sale of such Fund's shares in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state or in violation of any stop
order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such shares in such state unless
such violation results from any failure by ACCESS to comply with written
instructions of such Fund that no offers or sales of such Fund's shares
be made in general or to the residents of a particular state.

(e) Such Fund's refusal or failure to comply with the terms of this
Agreement, or such Fund's lack of good faith, negligence or willful
misconduct or the breach of any representation or warranty of such Fund
hereunder. Notwithstanding the foregoing, no Fund shall be required to
indemnify or hold ACCESS harmless from and against any Losses arising out
of or attributable to any action or failure to take action, or any
information, records or

Page 5
<PAGE> 6

documents prepared or maintained, on behalf of
the Fund by the Fund's investment adviser or distributor, or any person
providing fund accounting or legal services to the Fund that is also an
officer or employee of Van Kampen American Capital, Inc. or its
subsidiaries unless such person or entity is otherwise entitled to
indemnification from the Fund.

5.02 ACCESS shall indemnify and hold harmless each of the Funds from and
against any and all Losses arising out of or attributable to ACCESS' refusal or
failure to comply with the terms of this Agreement, or ACCESS' lack of good
faith, or its negligence or willful misconduct, or the breach of any
representation or warranty of ACCESS hereunder.

5.03 At any time ACCESS may apply to any authorized officer of any of the
Funds for instructions, and may consult with any of the Funds' legal counsel,
at the expense of such concerned Fund, with respect to any matter arising in
connection with the services to be performed by ACCESS under this Agreement,
and ACCESS shall not be liable and shall be indemnified by such concerned Fund
for any action taken or omitted by it in good faith in reasonable reliance upon
such instructions or upon the opinion of such counsel. ACCESS shall be
protected and indemnified in acting upon any paper or document reasonably
believed by ACCESS to be genuine and to have been signed by the proper person
or persons and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the concerned Fund.
ACCESS shall also be protected and indemnified in recognizing stock
certificates which ACCESS reasonably believes to bear the proper manual or
facsimile signatures of the officers of the concerned Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.

5.04 In the event that any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise from such causes.

5.05 In no event and under no circumstances shall any party to this
Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.

5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which one party may be
required to indemnify another, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim.

Page 6
<PAGE> 7

The party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.

Article 6. Covenants of Each of the Funds and ACCESS.
------------------------------------------
6.01 Each of the Funds shall promptly furnish to ACCESS the following:

(a) Certified copies of the resolution of its Board authorizing the
appointment of ACCESS and the execution and delivery of this Agreement.
(b) Certified copies of its Declaration of Trust or Articles of
Incorporation and by-laws and all amendments thereto.

6.02 ACCESS hereby agrees to maintain facilities and procedures
reasonably acceptable to each of the Funds for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such
certificates, forms and devices.

6.03 ACCESS shall keep records relating to the services to be
performed hereunder in the form and manner as it may deem advisable; provided,
however, that all accounts, books and other records of each of the Funds
(hereinafter referred to as "Fund Records") prepared or maintained by ACCESS
hereunder shall be maintained and kept current in compliance with Section 31 of
the Investment Company Act of 1940 and the Rules thereunder (such Section and
Rules being hereinafter referred to as the "1940 Act Requirements"). To the
extent required by the 1940 Act Requirements, ACCESS agrees that all Fund
Records prepared or maintained by ACCESS hereunder are the property of the
concerned Fund and shall be preserved and made available in accordance with the
1940 Act Requirements, and shall be surrendered promptly to the concerned Fund
on its request. ACCESS agrees at such reasonable times as may be requested by
the Board and at least quarterly to provide (i) written confirmation to the
Board that all Fund Records are maintained and kept current in accordance with
the 1940 Act Requirements, and (ii) such other reports regarding its
performance hereunder as may be reasonably requested by the Board.

Page 7
<PAGE> 8

6.04 ACCESS and each of the Funds agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.

6.05 In case of any requests or demands for the inspection of any of
the Fund Records, ACCESS will endeavor to notify each of the concerned
Funds and to secure instructions from an authorized officer of each of the
concerned Funds as to such inspection. ACCESS reserves the right, however, to
exhibit such Fund Records to any person whenever it is advised by its counsel
that it may be held liable for the failure to exhibit such Fund records to such
person.

Article 7. Term and Termination Of Agreement.
----------------------------------
7.01 The initial term of this Agreement shall expire May 31, 1999,
and thereafter this Agreement shall automatically be renewed for
successive one year periods to begin on June 1 of each year unless any party
provides notice to the other party at least 120 days in advance of that date
that this Agreement is not to be renewed.

7.02 Notwithstanding the foregoing, any party may terminate this
Agreement for good and reasonable cause at any time by giving written
notice to the other party at least 60 days prior to the date on which such
termination is to be effective or such shorter period as may be required by
law.

7.03 Any unpaid fees or reimbursable expenses payable to ACCESS at
the termination date of this Agreement shall be due on that termination date.
ACCESS agrees to use its best efforts to cooperate with the Funds and the
successor transfer, dividend disbursement, or shareholder servicing agent
or agents in accomplishing an orderly transition.

Article 8. Miscellaneous.
--------------
8.01 Except as provided in section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by any party
without the written consent of ACCESS or the concerned Fund, as the case may
be; provided, however, that no consent shall be required for any merger of any
of the Funds with, or any sale of all or substantially all the assets of
any of the Funds to, another investment company.

8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.

Page 8
<PAGE> 9

8.03 ACCESS may, without further consent on the part of any of the
Funds, subcontract with DST, Inc., a Missouri corporation, or any other
qualified servicer, for the performance of data processing activities;
provided, however, that ACCESS shall be as fully responsible to each of
the Funds for the acts and omissions of DST, Inc. or other qualified
servicer as it is for its own acts and omissions.

8.04 Without the prior approval of the Boards of Trustees of the
Funds, ACCESS shall not, directly or indirectly, provide services,
including services such as transfer agent, dividend disbursing agent or
shareholder service agent, to any investment companies.

8.05 This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and supersedes
any prior agreement with respect thereto, whether oral or written, and
this Agreement may not be modified except by written instrument executed
by the affected parties.

8.06 The execution of this Agreement has been authorized by the
Funds' Trustees. This Plan is executed on behalf of the Funds or the
Trustees of the Funds as Trustees and not individually and the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Funds individually but are binding only
upon the assets and property of the Funds. A Certificate of Trust in
respect of each of the Funds is on file with the appropriate state
agency.

8.07 For each of those Funds which have one or more portfolios as
set forth in Schedule "A" hereto, all obligations of those Funds under
this Agreement shall apply only on a portfolio-by-portfolio basis and the
assets of one portfolio shall not be liable for the obligations of any
other.

8.08 In the event of a change in the business or regulatory
environment affecting all or any portion of this Agreement, the parties
hereto agree to renegotiate such affected portions in good faith.

8.09 All questions concerning the validity, meaning and effect of
this Agreement shall be determined in accordance with the laws (without
giving effect to the conflict-of-law principles thereof) of the State of
Delaware applicable to contracts made and to be performed in that state.

8.10 (a) Any dispute, controversy, or claim arising out of or
relating to this Agreement, or the breach, termination or validity
thereof, shall be finally settled by arbitration in accordance with
the Expedited Procedures

Page 9

<PAGE> 10

of the commercial arbitration Rules of the American Arbitration
Association (the "AAA") then in effect (the "Rules"). The
arbitration shall be held in Chicago, Illinois.

(b) There shall be one arbitrator who shall be selected jointly by
the parties. If the parties are unable to agree on an arbitrator
within 15 days after a demand for arbitration is made by a party,
the arbitrator shall be appointed by the AAA in accordance with the
Rules. The hearing shall be held within 90 days of the appointment
of the arbitrator. Notwithstanding the Expedited Procedures
of the Rules, the arbitrator, at his discretion, may schedule
additional days of hearings.

(c) Either party may, without inconsistency with this Agreement,
seek from a court any interim or provisional relief in aid of
arbitration, pending the establishment of the arbitral tribunal.
The parties hereby submit to the exclusive jurisdiction of the
federal and state courts located in the northern district of the
state of Illinois for any such relief in aid of arbitration, or for
any relief relating to arbitration, except for the enforcement of an
arbitral award which may be enforced in any court having
jurisdiction.

(d) Any arbitration proceedings or award rendered hereunder and the
validity, effect and interpretation of Section 8.10 shall be
governed by the Federal Arbitration Act (9 U.S.C. Sections 1 et
--
seq.) The award shall be final and binding upon the parties.
---
Judgment upon any award may be entered in any court having
jurisdiction.

(e) This Agreement and the rights and obligations of the Parties
shall remain in full force and effect pending the award in any
arbitration proceeding hereunder.

Page 10

<PAGE> 11

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf and through their duly authorized
officers, as of the date first above written.

EACH OF THE VAN KAMPEN AMERICAN CAPITAL
OPEN END FUNDS LISTED ON SCHEDULE
"A" HERETO

BY: Ronald A. Nyberg
----------------------------------
Vice President

ATTEST:

Nicholas Dalmaso
- ----------------------------------
Assistant Secretary

ACCESS INVESTOR SERVICES, INC.

BY: Paul R. Wolkenberg
---------------------------------
President and Chief Executive Officer

ATTEST:
Huey P. Falgout
- ---------------------------------
Assistant Secretary

Page 11
<PAGE> 12

SCHEDULE "A"
------------
VAN KAMPEN AMERICAN CAPITAL OPEN-END FUNDS

<TABLE>
<CAPTION>
Organization Type
Fund Name State of [Business Trust
(including Portfolios) Organization "T"]
=====================================================================================================
<S> <C> <C>
Van Kampen American Capital Aggressive Growth Fund DE T
Van Kampen American Capital California Insured Tax Free Fund DE T
Van Kampen American Capital Comstock Fund DE T
Van Kampen American Capital Corporate Bond Fund DE T
Van Kampen American Capital Emerging Growth Fund DE T
Van Kampen American Capital Enterprise Fund DE T
Van Kampen American Capital Equity Income Fund DE T
Van Kampen American Capital Florida Insured Tax Free Income Fund DE T
Van Kampen American Capital Foreign Securities Fund DE T
Van Kampen American Capital Global Managed Assets Fund DE T
Van Kampen American Capital Government Securities Fund DE T
Van Kampen American Capital Government Target Fund DE T
Van Kampen American Capital Great American Companies Fund DE T
Van Kampen American Capital Growth Fund DE T
Van Kampen American Capital Growth and Income Fund DE T
Van Kampen American Capital Harbor Fund DE T
Van Kampen American Capital High Income Corporate Bond Fund DE T
Van Kampen American Capital High Yield Fund DE T
Van Kampen American Capital Insured Tax Free Income Fund DE T
Van Kampen American Capital Intermediate Term Municipal Income Fund DE T
</TABLE>

Page 12
<PAGE> 13

Van Kampen American Capital Limited Maturity Government Fund DE T
Van Kampen American Capital Municipal Income Fund DE T
Van Kampen American Capital New Jersey Tax Free Income Fund DE T
Van Kampen American Capital New York Tax Free Income Fund DE T
Van Kampen American Capital Pace Fund DE T
Van Kampen American Capital Pennsylvania Tax Free Income Fund PA T
Van Kampen American Capital Prospector Fund DE T
Van Kampen American Capital Real Estate Securities Fund DE T
Van Kampen American Capital Reserve Fund DE T
Van Kampen American Capital Short-Term Global Income Fund DE T
Van Kampen American Capital Small Capitalization Fund DE T
Van Kampen American Capital Strategic Income Fund DE T
Van Kampen American Capital Tax-Exempt Trust DE T
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Tax Free High Income Fund DE T
Van Kampen American Capital Tax Free Money Fund DE T
Van Kampen American Capital U.S. Government Fund DE T
Van Kampen American Capital U.S. Government Trust for Income DE T
Van Kampen American Capital Utility Fund DE T
Van Kampen American Capital Value Fund DE T
</TABLE>

PAGE 13
<PAGE> 14

PAGE 14

<PAGE> 1

Exhibit 13(a)

FUND ACCOUNTING AGREEMENT

THIS AGREEMENT, dated May 31, 1997, by and between the parties
set forth in Schedule A hereto (designated collectively hereafter as the
"Funds") and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware
corporation ("Advisory Corp.").

W I T N E S S E T H:

WHEREAS, each of the Funds is registered as a management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and

WHEREAS, Advisory Corp. has the capability of providing certain
accounting services to the Funds; and

WHEREAS, each desires to utilize Advisory Corp. in the
provision of such accounting services; and

WHEREAS, Advisory Corp. intends to maintain its staff in order
to accommodate the provision of all such services.

NOW THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties hereto as
follows:

1. Appointment of Advisory Corp. As agent, Advisory Corp. shall provide
-----------------------------
each of the Funds the accounting services ("Accounting Services") as set
forth in Paragraph 2 of this Agreement. Advisory Corp. accepts such
appointment and agrees to furnish the Accounting Services in return for the
compensation provided in Paragraph 3 of this Agreement.

2. Accounting Services to be Provided. Advisory Corp. will provide
----------------------------------
to each respective Fund accounting related services in connection with the
maintenance of the financial records of such Fund, including without
limitation: (i) maintenance of the general ledger and other financial books
and records; (ii) processing of portfolio transactions; (iii) coordination
of the valuation of portfolio securities; (iv) calculation of the Fund's
net asset value; (v) coordination of financial and regulatory reporting;
(vi) preparation of financial reports for each Fund's Board of Trustees;
(vii) coordination of tax and financial compliance issues; (viii) the
establishment and maintenance of accounting policies; (ix) recommendations
with respect to dividend policies; (x) preparation of each Fund's financial
reports and other accounting and tax related notice information to
shareholders; and (xi) the assimilation and interpretation of accounting
data for meaningful management review. Advisory Corp. shall provide
accurate maintenance of each Fund's financial books and records as required
by the applicable securities statutes and regulations, and shall hire
persons (collectively the "Accounting Service Group") as needed to provide
such Accounting Services.

<PAGE> 2

3. Expenses and Reimbursements. Advisory Corp. shall be reimbursed by the
Funds for all costs and services incurred in connection with the provision
of the aforementioned Accounting Services ("Accounting Service Expenses"),
including but not limited to all salary and related benefits paid to the
personnel of the Accounting Service Group, overhead and expenses related to
office space and related equipment and out-of-pocket expenses.

The Accounting Services Expenses will be paid by Advisory Corp.
and reimbursed by the Funds. Advisory Corp. will tender to each Fund a monthly
invoice as of the last business day of each month which shall certify the total
support service expenses expended. Except as provided herein, Advisory Corp.
will receive no other compensation in connection with Accounting Services
rendered in accordance with this Agreement.

4. Payment for Accounting Service Expenses Among the Funds. As to one
quarter (25%) of the Accounting Service Expenses incurred under the
Agreement, the expense shall be allocated between all Funds based on the
number of classes of shares of beneficial interest that each respective
Fund has issued. As to the remaining three quarters (75%) of the Accounting
Service Expenses incurred under the Agreement, the expense shall be
allocated between all Funds based on their relative net assets. For
purposes of determining the percentage of expenses to be allocated to any
Fund, the liquidation preference of any preferred shares issued by any such
Fund shall not be considered a liability of such Fund for the purposes of
calculating relative net assets of such Fund.

5. Maintenance of Records. All records maintained by Advisory Corp. in
connection with the performance of its duties under this Agreement will
remain the property of each respective Fund and will be preserved by
Advisory Corp. for the periods prescribed in Section 31 of the 1940 Act and
the rules thereunder or such other applicable rules that may be adopted
from time to time under the act. In the event of termination of the
Agreement, such records will be promptly delivered to the respective Funds.
Such records may be inspected by the respective Funds at reasonable times.

6. Liability of Advisory Corp. Advisory Corp. shall not be liable to any
Fund for any action taken or thing done by it or its agents or contractors
on behalf of the fund in carrying out the terms and provisions of the
Agreement if done in good faith and without gross negligence or misconduct
on the part of Advisory Corp., its agents or contractors.

7. Indemnification By Funds. Each Fund will indemnify and hold Advisory
Corp. harmless from all lost, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Advisory Corp. resulting from: (a) any
claim, demand, action or suit in connection with Advisory Corp.'s acceptance of
this Agreement; (b) any action or omission by Advisory Corp. in the performance
of its duties hereunder; (c) Advisory Corp.'s acting upon instructions believed
by it to have been executed by a duly authorized officer of the Fund; or (d)
Advisory Corp.'s acting upon information provided by the Fund in form and under
policies agreed to by Advisory Corp. and the Fund. Advisory Corp. shall not be
entitled to such indemnification in respect of actions or omissions
constituting gross negligence or willful misconduct of Advisory Corp. or its
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, Advisory Corp. shall give the Fund reasonable
opportunity to defend against said claim in its own name or in the name of
Advisory Corp.

8. Indemnification By Advisory Corp. Advisory Corp. will indemnify and
hold harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Advisory Corp.'s failure to comply
with the terms of this Agreement or which arises out of the gross negligence or
willful misconduct of Advisory Corp. or its agents or contractors; provided
that such negligence or misconduct is not attributable to the Funds, their
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, the Fund shall give Advisory Corp. reasonable
opportunity to defend against said claim in its own name or in the name of such
Fund.

2
<PAGE> 3

9. Further Assurances. Each party agrees to perform such further acts and
-------------------
execute such further documents as are necessary to effectuate the purposes
hereof.

10. Dual Interests. It is understood that some person or persons may be
---------------
directors, trustees, officers or shareholders of both the Funds and Advisory
Corp. (including Advisory Corp.'s affiliates), and that the existence of any
such dual interest shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision of applicable
law.

11. Execution, Amendment and Termination. The term of this Agreement shall
-------------------------------------
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May, 1998, and
thereafter from year to year, if such continuation is specifically approved at
least annually by the Board of Trustees of each Fund, including a majority of
the independent Trustees of each Fund. This Agreement may be modified or
amended from time to time by mutual agreement between the parties hereto and
may be terminated after May, 1998, by at least sixty (60) days' written notice
given by one party to the others. Upon termination hereof, each Fund shall pay
to Advisory Corp. such compensation as may be due as of the date of such
termination and shall likewise reimburse Advisory Corp. for its costs, expenses
and disbursements payable under this Agreement to such date. This Agreement
may be amended in the future to include as additional parties to the Agreement
other investment companies for with Advisory Corp., any subsidiary or affiliate
serves as investment advisor or distributor if such amendment is approved by
the President of each Fund.

12. Assignment. Any interest of Advisory Corp. under this Agreement shall
-----------
not be assigned or transferred, either voluntarily or involuntarily, by
operation of law or otherwise, without the prior written consent of the Funds.
This Agreement shall automatically and immediately terminate in the event of
its assignment without the prior written consent of the Funds.

13. Notice. Any notice under this Agreement shall be in writing, addressed
-------
and delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President and that of Advisory Corp. for
this purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attention: President.

14. Personal Liability. As provided for in the Agreement and Declaration of
------------------
Trust of the various Funds, under which the Funds are organized as
unincorporated trusts, the shareholders, trustees, officers, employees and
other agents of the Fund shall not personally be found by or liable for the
matters set forth hereto, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.

15. Interpretative Provisions. In connection with the operation of this
--------------------------
Agreement, Advisory Corp. and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor of this
Agreement.

16. State Law. This Agreement shall be construed and enforced in accordance
----------
with and governed by the laws of the State of Illinois.

17. Captions. The captions in this Agreement are included for convenience
---------
of reference only and in no way define or limit any of the provisions hereof
or otherwise affect their construction or effect.

3
<PAGE> 4

IN WITNESS WHEREOF, the parties have caused this amended and
restated Agreement to be executed as of the day and year first above written.

ALL OF THE PARTIES SET FORTH IN SCHEDULE A

By: /s/ Ronald A. Nyberg
---------------------------------------
Ronald A. Nyberg, Vice President

VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.

By: /s/ Dennis J. McDonnell
---------------------------------------
Dennis J. McDonnell, President

4
<PAGE> 5
SCHEDULE A

I. Funds advised by Van Kampen American Capital Investment
Advisory Corp. ("Investment Advisory Corp.") (Collectively, the "Former
Van Kampen Funds"):

CLOSED END FUNDS
- ----------------

Van Kampen American Capital Municipal Income Trust
Van Kampen American Capital California Municipal Trust
Van Kampen American Capital High Income Trust
Van Kampen American Capital High Income Trust II
Van Kampen American Capital Investment Grade Municipal Trust
Van Kampen American Capital Municipal Trust
Van Kampen American Capital California Quality Municipal Trust
Van Kampen American Capital Florida Quality Municipal Trust
Van Kampen American Capital New York Quality Municipal Trust
Van Kampen American Capital Ohio Quality Municipal Trust
Van Kampen American Capital Pennsylvania Quality Municipal Trust
Van Kampen American Capital Trust For Insured Municipals
Van Kampen American Capital Trust For Investment Grade Municipals
Van Kampen American Capital Trust For Investment Grade California Municipals
Van Kampen American Capital Trust For Investment Grade Florida Municipals
Van Kampen American Capital Trust For Investment Grade New Jersey Municipals
Van Kampen American Capital Trust For Investment Grade New York Municipals
Van Kampen American Capital Trust For Investment Grade Pennsylvania Municipals
Van Kampen American Capital Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust
Van Kampen American Capital Advantage Pennsylvania Municipal Income Trust
Van Kampen American Capital Strategic Sector Municipal Trust
Van Kampen American Capital Value Municipal Income Trust
Van Kampen American Capital California Value Municipal Income Trust
Van Kampen American Capital Massachusetts Value Municipal Income Trust
Van Kampen American Capital New Jersey Value Municipal Income Trust
Van Kampen American Capital New York Value Municipal Income Trust
Van Kampen American Capital Ohio Value Municipal Income Trust
Van Kampen American Capital Pennsylvania Value Municipal Income Trust
Van Kampen American Capital Municipal Opportunity Trust II
Van Kampen American Capital Florida Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust II
Van Kampen American Capital Select Sector Municipal Trust

INSTITUTIONAL FUNDS
- -------------------

II. Funds Advised by Van Kampen American Capital Management, Inc.
("Management, Inc.") (Collectively, the "Former Van Kampen Funds"):

The Explorer Institutional Trust
on behalf of its series
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund

5
<PAGE> 6

OPEN END FUNDS
- --------------

III. Funds Advised by Van Kampen American Capital Asset Management, Inc.
("Asset Management, Inc.") (Collectively, the "Former American Capital Funds"):

Van Kampen American Capital Comstock Fund ("Comstock Fund")
Van Kampen American Capital Corporate Bond Fund ("Corporate Bond Fund")
Van Kampen American Capital Emerging Growth Fund ("Emerging Growth Fund")
Van Kampen American Capital Enterprise Fund ("Enterprise Fund")
Van Kampen American Capital Equity Income Fund ("Equity Income Fund")
Van Kampen American Capital Global Managed Assets Fund ("Global Managed Assets
Funds")
Van Kampen American Capital Government Securities Fund ("Government Securities
Fund")
Van Kampen American Capital Government Target Fund ("Government Target Fund")
Van Kampen American Capital Growth and Income Fund ("Growth and Income Fund")
Van Kampen American Capital Harbor Fund ("Harbor Fund")
Van Kampen American Capital High Income Corporate Bond Fund ("High Income
Corporate Bond Fund")

Van Kampen American Capital Life Investment Trust ("Life Investment Trust" or
"LIT") on behalf of its Series
Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Real Estate Securities Portfolio ("LIT Real Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Global Equity Portfolio ("LIT Global Equity Portfolio")

Van Kampen American Capital Limited Maturity Government Fund ("Limited
Maturity Government Fund")
Van Kampen American Capital Pace Fund ("Pace Fund")
Van Kampen American Capital Real Estate Securities Fund ("Real Estate
Securities Fund")
Van Kampen American Capital Reserve Fund ("Reserve Fund")
Van Kampen American Capital Small Capitalization Fund ("Small Capitalization
Fund")

Van Kampen American Capital Tax-Exempt Trust ("Tax-Exempt Trust") on behalf of
its Series
Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund")

Van Kampen American Capital U.S. Government Trust for Income ("U.S.
Government Trust for Income")

6
<PAGE> 7

IV. Funds advised by Van Kampen American Capital Investment
Advisory Corp. ("Investment Advisory Corp.") (Collectively, the "Former
Van Kampen Funds"):

Van Kampen American Capital U.S. Government Trust ("U.S. Government Trust")
on behalf of its series
Van Kampen American Capital U.S. Government Fund ("U.S. Government Fund")

Van Kampen American Capital Tax Free Trust ("Tax Free Trust") on behalf of its
series
Van Kampen American Capital Insured Tax Free Income Fund ("Insured Tax Free
Income Fund")
Van Kampen American Capital Tax Free High Income Fund ("Tax Free High Income
Fund")
Van Kampen American Capital California Insured Tax Free Fund ("California
Insured Tax Free Fund")
Van Kampen American Capital Municipal Income Fund ("Municipal Income Fund")
Van Kampen American Capital Intermediate Term Municipal Income Fund
(Intermediate Term Municipal Income Fund")
Van Kampen American Capital Florida Insured Tax Free Income Fund ("Florida
Insured Tax Free Income Fund")
Van Kampen American Capital New Jersey Tax Free Income Fund ("New Jersey
Tax Free Income Fund")
Van Kampen American Capital New York Tax Free Income Fund ("New York
Tax Free Income Fund")
Van Kampen American Capital California Tax Free Income Fund ("California Tax
Free Income Fund")
Van Kampen American Capital Michigan Tax Free Income Fund ("Michigan Tax
Free Income Fund")
Van Kampen American Capital Missouri Tax Free Income Fund ("Missouri Tax
Free Income Fund")
Van Kampen American Capital Ohio Tax Free Income Fund ("Ohio Tax Free
Income Fund")

Van Kampen American Capital Trust ("VKAC Trust")
Van Kampen American Capital High Yield Fund ("High Yield Fund")
Van Kampen American Capital Short-Term Global Income Fund ("Short-Term
Global Income Fund")
Van Kampen American Capital Strategic Income Fund ("Strategic Income Fund")

Van Kampen American Capital Equity Trust ("Equity Trust")
on behalf of its series
Van Kampen American Capital Utility Fund ("Utility Fund")
Van Kampen American Capital Growth Fund ("Growth Fund")
Van Kampen American Capital Value Fund ("Value Fund")
Van Kampen American Capital Great American Companies Fund ("Great American
Companies Fund")
Van Kampen American Capital Prospector Fund ("Prospector Fund")
Van Kampen American Capital Aggressive Growth Fund ("Aggressive Growth Fund")

Van Kampen American Capital Foreign Securities Fund ("Foreign Securities Fund")

Van Kampen American Capital Pennsylvania Tax Free Income Fund ("Pennsylvania
Tax Free Income Fund")

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 1
EXHIBIT (14)(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders
Van Kampen American Capital New Jersey Tax Free Income Fund:

We consent to the use of our report included herein and to the references to
our Firm under the heading financial highlights in the Prospectus of the Van
Kampen American Capital New Jersey Tax Free Income Fund (Fund) and under the
heading "Custodian and Independent Accountants" in the Statement of Additional
Information of the Fund.

/s/ KPMG Peat Marwick LLP
Chicago, Illinois
September 19, 1997

<PAGE> 1
EXHIBIT (14)(b)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders
Van Kampen American Capital Muncipal Income Fund:

We consent to the use of our report included herein and to the references to
our Firm under the heading financial highlights in the Prospectus of the Van
Kampen American Capital Municipal Income Fund (Fund) and under the heading
"Custodian and Independent Accountants" in the Statement of Additional
Information of the Fund.

/s/ KPMG Peat Marwick LLP
Chicago, Illinois
September 19, 1997

<PAGE> 1

EXHIBIT (16)

POWER OF ATTORNEY

The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open End Trusts (with the exception of Don G. Powell), as
indicated on Schedule 1 attached hereto and incorporated by reference, each a
Delaware business trust, except for the Van Kampen American Capital
Pennsylvania Tax Free Income Fund, being a Pennsylvania business trust
(individually, a "Trust"), do hereby, in the capacities shown below,
individually appoint Dennis J. McDonnell and Ronald A. Nyberg, each of
Oakbrook Terrace, Illinois, and each of them, as the agents and
attorneys-in-fact with full power of substitution and resubstitution, for each
of the undersigned, to execute and deliver, for and on behalf of the
undersigned, any and all amendments to the Registration Statement filed by
each Trust with the Securities and Exchange Commission pursuant to the
provisions of the Securities Act of 1933 and the Investment Company Act of
1940.

This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute
one instrument.

Dated: July 24, 1997

Signature Title
--------- -----

/s/ J. Miles Branagan Trustee
- ---------------------------
J. Miles Branagan

/s/ Richard M. DeMartini Trustee
- ---------------------------
Richard M. DeMartini

/s/ Linda Hutton Heagy Trustee
- ---------------------------
Linda Hutton Heagy

/s/ R. Craig Kennedy Trustee
- ---------------------------
R. Craig Kennedy

/s/ Jack E. Nelson Trustee
- ---------------------------
Jack E. Nelson

/s/ Don G. Powell Trustee (For Former Van
- --------------------------- Kampen Funds only)
Don G. Powell

/s/ Jerome L. Robinson Trustee
- ---------------------------
Jerome L. Robinson

/s/ Phillip B. Rooney Trustee
- ---------------------------
Phillip B. Rooney

/s/ Fernando Sisto, Sc.D. Trustee
- ---------------------------
Fernando Sisto, Sc.D.

/s/ Wayne W. Whalen Trustee and Chairman
- ---------------------------
Wayne W. Whalen

/s/ Edward C. Wood III Vice President and
- --------------------------- Chief Financial Officer
Edward C. Wood III

/s/ Dennis J. McDonnell President
- ---------------------------
Dennis J. McDonnell
<PAGE> 2

SCHEDULE 1

I. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):

Van Kampen American Capital U.S. Government Trust ("U.S. Government Trust")
on behalf of its series
Van Kampen American Capital U.S. Government Fund ("U.S. Government Fund")

Van Kampen American Capital Tax Free Trust ("Tax Free Trust")
on behalf of its series
Van Kampen American Capital Insured Tax Free Income Fund ("Insured Tax Free
Income Fund")
Van Kampen American Capital Tax Free High Income Fund ("Tax Free High Income
Fund")
Van Kampen American Capital California Insured Tax Free Fund ("California
Insured Tax Free Fund")
Van Kampen American Capital Municipal Income Fund ("Municipal Income Fund")
Van Kampen American Capital Intermediate Term Municipal Income Fund
("Intermediate Term Municipal Income Fund") (f/k/a Limited Term Municipal
Income Fund)
Van Kampen American Capital Florida Insured Tax Free Income Fund ("Florida
Insured Tax Free Income Fund")
Van Kampen American Capital New Jersey Tax Free Income Fund ("New Jersey Tax
Free Income Fund")
Van Kampen American Capital New York Tax Free Income Fund ("New York Tax Free
Income Fund")
Van Kampen American Capital California Tax Free Income Fund ("California Tax
Free Income Fund")
Van Kampen American Capital Michigan Tax Free Income Fund ("Michigan Tax Free
Income Fund")
Van Kampen American Capital Missouri Tax Free Income Fund ("Missouri Tax Free
Income Fund")
Van Kampen American Capital Ohio Tax Free Income Fund ("Ohio Tax Free Income
Fund")

Van Kampen American Capital Trust ("VKAC Trust")
on behalf of its series
Van Kampen American Capital High Yield Fund ("VKAC High Yield Fund")
Van Kampen American Capital Short-Term Global Income Fund ("Short-Term Global
Income Fund")
Van Kampen American Capital Strategic Income Fund ("Strategic Income Fund")

Van Kampen American Capital Equity Trust ("Equity Trust")
on behalf of its series
Van Kampen American Capital Utility Fund ("Utility Fund")
Van Kampen American Capital Value Fund ("Value Fund")
Van Kampen American Capital Great American Companies Fund ("Great American
Companies Fund")
Van Kampen American Capital Growth Fund ("Growth Fund")
Van Kampen American Capital Prospector Fund ("Prospector Fund")

Van Kampen American Capital Pennsylvania Tax Free Income Fund
("Pennsylvania Tax Free Income Fund")

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 3

II. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER AMERICAN CAPITAL FUNDS"):

Van Kampen American Capital Comstock Fund ("Comstock Fund")
Van Kampen American Capital Corporate Bond Fund ("Corporate Bond Fund")
Van Kampen American Capital Emerging Growth Fund ("Emerging Growth Fund")
Van Kampen American Capital Enterprise Fund ("Enterprise Fund")
Van Kampen American Capital Equity Income Fund ("Equity Income Fund")
Van Kampen American Capital Limited Maturity Government Fund ("Limited
Maturity Government Fund")
Van Kampen American Capital Global Managed Assets Fund ("Global Managed Assets
Fund")
Van Kampen American Capital Government Securities Fund ("Government Securities
Fund")
Van Kampen American Capital Government Target Fund ("Government Target Fund")
Van Kampen American Capital Growth and Income Fund ("Growth and Income Fund")
Van Kampen American Capital Harbor Fund ("Harbor Fund")
Van Kampen American Capital High Income Corporate Bond Fund ("High Income
Corporate Bond Fund")

Van Kampen American Capital Life Investment Trust ("Life Investment Trust" or
"LIT") on behalf of its Series
Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Global Equity Portfolio ("LIT Global Equity Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Morgan Stanley Real Estate Securities Portfolio ("LIT Morgan Stanley Real
Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Strategic Stock Portfolio ("LIT Strategic Stock Portfolio")

Van Kampen American Capital Pace Fund ("Pace Fund")
Van Kampen American Capital Real Estate Securities Fund ("Real Estate
Securities Fund")
Van Kampen American Capital Reserve Fund ("Reserve Fund")
Van Kampen American Capital Small Capitalization Fund ("Small Capitalization
Fund")

Van Kampen American Capital Tax-Exempt Trust ("Tax-Exempt Trust")
on behalf of its Series
Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund")

Van Kampen American Capital U.S. Government Trust for Income ("U.S.
Government Trust for Income")

Van Kampen American Capital World Portfolio Series Trust ("World Portfolio
Series Trust") on behalf of its Series
Van Kampen American Capital Global Equity Fund ("Global Equity Fund")
Van Kampen American Capital Global Government Securities Fund ("Global
Government Securities Fund")

<PAGE> 1

EXHIBIT (17)(A)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997
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. 40 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 41 [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)

(630) 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 (Illinois)
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 APRIL 30, 1997 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 UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940 AND INTENDS TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM
24F-2 FOR ITS FISCAL YEAR ENDING DECEMBER 31, 1997 ON OR ABOUT MARCH 30, 1998
================================================================================

<PAGE> 1

EXHIBIT (17)(B)
PROXY

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

SPECIAL MEETING OF SHAREHOLDERS

PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES

The undersigned holder of shares of beneficial interest, par value $.01 per
share (the "Shares"), of the VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE
INCOME FUND, a series of Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "New Jersey Fund"), hereby appoints Don G. Powell, Dennis J.
McDonnell and Ronald A. Nyberg, and each of them, with full power of
substitution and revocation, as proxies to represent the undersigned at the
Special Meeting of Shareholders to be held at the offices of Van Kampen American
Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on December
4, 1997 at 1:30 p.m., and any and all adjournments thereof (the "Special
Meeting"), and thereat to vote all Shares which the undersigned would be
entitled to vote, with all powers the undersigned would possess if personally
present, in accordance with the following instructions.
If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one is
present and voting then that one) shall have authority and may exercise all
powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS
DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.

Account No. No. of Shares Class of Shares Proxy No.

<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
------ ------- ------- The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the New Jersey Fund
------ ------ ------- would (i) transfer all of its assets to the Van Kampen
American Capital Municipal Income Fund (the "Municipal
Fund") in exchange solely for Class A, B and C shares of
beneficial interest of the Municipal Fund and the
Municipal Fund's assumption of the liabilities of the New
Jersey Fund, (ii) distribute such shares of the Municipal
Fund to the holders of shares of the New Jersey Fund and
(iii) be dissolved, all as more fully described in the
Prospectus/Proxy Statement.
2. FOR AGAINST ABSTAIN
------ ------- ------- To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
------ ------- -------
</TABLE>

The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Special Meeting to be held on
December 4, 1997 at 1:30 p.m.
Please sign this Proxy exactly as your name or names appear on the books of
the New Jersey Fund. When signing as attorney, trustee, executor, administrator,
custodian, guardian or corporate officer, please give full title. If shares are
held jointly, each holder should sign.

<TABLE>
<S> <C>
- ----------------------------------------------------- ------------------------------------------ ,
Shareholder signature 1997
Date
- ----------------------------------------------------- ------------------------------------------ ,
Co-owner signature (if applicable) 1997
Date
</TABLE>

<PAGE> 1

EXHIBIT 17(C)

VAN KAMPEN AMERICAN CAPITAL

SUPPLEMENT TO PROSPECTUS DATED AUGUST 4, 1997

Prospectus dated October 28, 1996, as previously supplemented on
November 1, 1996, January 2, 1997, January 21, 1997 and
February 11, 1997
VKAC Pace Fund

Prospectus dated October 28, 1996, as previously supplemented on January 15,
1997 and February 11, 1997
VKAC Growth Fund

Prospectus dated December 29, 1996, as previously supplemented on February 11,
1997
VKAC Corporate Bond Fund
VKAC Emerging Growth Fund
VKAC High Income Corporate Bond Fund
<PAGE> 2

Prospectus dated January 28, 1997, as previously supplemented on
February 11, 1997
VKAC U.S. Government Trust for Income Fund

Prospectus dated March 28, 1997
VKAC Growth and Income Fund
VKAC High Yield Municipal Fund

Prospectus dated April 30, 1997, as previously supplemented on
April 30, 1997
VKAC Global Managed Assets Fund

- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME 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. 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 April 30, 1997, 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 Telecommunications
Device for the Deaf at (800) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM

------------------
THIS PROSPECTUS IS DATED APRIL 30, 1997.
<PAGE> 4

(Continued from previous page.)

The Fund's investment adviser 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.

- ------------------------------------------------------------------------------
PROPOSED REORGANIZATION
- ------------------------------------------------------------------------------

On July 25, 1996, the Trustees of the Fund approved an Agreement and Plan of
reorganization between the Fund and Van Kampen American Capital Municipal Income
Fund (the "Municipal Fund"), also a series of the Tax Free Trust and advised by
Van Kampen American Capital Investment Advisory Corp., providing for the
transfer of assets and liabilities of the Fund to the Municipal Fund in exchange
for shares of beneficial interest of the Municipal Fund at its net asset value
per share (the "Reorganization").

The Reorganization is subject to approval by the holders of a majority of the
outstanding shares of the Fund. Further details of the proposed Reorganization
will be contained in the proxy statement/prospectus expected to be mailed to
shareholders in 1997.

The Municipal Fund's net assets as of December 31, 1996 were approximately
$1.02 billion. Its objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. 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 primary difference
between the two investment objectives is that the Fund seeks income exempt from
New Jersey state income tax, but the Municipal Fund does not. The Trustees,
however, believe that the benefits to the Fund shareholders from the
Reorganization, including the potentially lower operating costs and potentially
higher yield from the Municipal Fund relative to the Fund, more than offset the
loss of the exemption from New Jersey state income tax.

The Fund will continue its normal operations prior to the Reorganization.

2
<PAGE> 5

- ------------------------------------------------------------------------------
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
Distribution and Service Plans.............................. 42
Distributions from the Fund................................. 44
Tax Status.................................................. 45
Fund Performance............................................ 52
Description of Shares of the Fund........................... 53
Additional Information...................................... 53
</TABLE>

3
<PAGE> 6

- ------------------------------------------------------------------------------
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. See "The Fund."

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 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. (the
"Adviser") is the Fund's investment adviser.

4
<PAGE> 7

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

5
<PAGE> 8

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

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 CDSC of 1.00% may be imposed
on redemptions made within one year of the purchase. See "Purchase of Shares
-- Deferred Sales Charge Alternatives -- Class A Share Purchases of $1
Million or More."

6
<PAGE> 9

<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% 0.75% 0.75%
Other Expenses(1) (as a percentage of average
daily net assets)............................. 0.38% 0.38% 0.38%
Total Expenses (as a percentage of average
daily net assets)(1).......................... 0.38% 1.13% 1.13%
</TABLE>

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

(1) Expenses include a waiver of $97,956 of "Management Fees" and assumption of
$152,228 of "Other Expenses" and "12b-1 Fees" by the Adviser. If the Adviser
did not waive fees for the fiscal year ending December 31, 1996, 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 1.06% for each
class of shares and "Total Expenses" would have been 1.91% for Class A
Shares, 2.66% for Class B Shares and 2.66% 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.

7
<PAGE> 10

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 0.38% for Class
A Shares, 1.13% for Class B Shares and
1.13% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $51 $59 $68 $ 93
Class B Shares............................ $52 $71 $77 $116*
Class C Shares............................ $22 $36 $62 $137
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $51 $59 $68 $ 93
Class B Shares............................ $12 $36 $62 $116*
Class C Shares............................ $12 $36 $62 $137
</TABLE>

- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight 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 "Purchase of Shares,"
"Redemption of Shares," "Investment Advisory Services" and "Distribution and
Service Plans."

8
<PAGE> 11

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
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 each
of 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 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 SHARES CLASS B SHARES
-------------------------------------------- --------------------------------------------
JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996 1995 1994
------------ ------------ -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $15.000 $13.754 $14.300 $14.991 $13.738 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income............ .786 .792 .295 .675 .685 .253
Net Realized and Unrealized
Gain/Loss on Investments....... (.173) 1.253 (.551) (.174) 1.260 (.563)
------- ------- ------- ------- ------- -------
Total from Investment
Operations....................... .613 2.045 (.256) .501 1.945 (.310)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment
Income(1)...................... .774 .799 .290 .666 .692 .252
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $14.839 $15.000 $13.754 $14.826 $14.991 $13.738
======= ======= ======= ======= ======= =======
Total Return(2)(3)................ 4.28% 15.26% (1.81%)* 3.52% 14.43% (2.16%)*
Net Assets at End of the Period
(In millions).................... $ 7.6 $ 5.8 $ 3.0 $ 9.0 $ 8.2 $ 6.5
Ratio of Expenses to Average Net
Assets(2) (annualized)........... .38% .27% .17% 1.13% 1.01% .93%
Ratio of Net Investment Income to
Average Net Assets(2)
(annualized)..................... 5.35% 5.43% 5.16% 4.60% 4.73% 4.38%
Portfolio Turnover................ 11% 31.45% 11.00% 11% 31.45% 11.00%

<CAPTION>
CLASS C SHARES
--------------------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $15.000 $13.753 $14.300
------- ------- -------
Net Investment Income............ .673 .706 .240
Net Realized and Unrealized
Gain/Loss on Investments....... (.178) 1.233 (.535)
------- ------- -------
Total from Investment
Operations....................... .495 1.939 (2.95)
------- ------- -------
Less:
Distributions from and in Excess
of Net Investment
Income(1)...................... .666 .692 .252
------- ------- -------
Net Asset Value, End of the
Period........................... $14.829 $15.000 $13.753
======= ======= =======
Total Return(2)(3)................ 3.45% 14.42% (2.09%)*
Net Assets at End of the Period
(In millions).................... $ .7 $ .5 $ .2
Ratio of Expenses to Average Net
Assets(2) (annualized)........... 1.13% 1.00% .91%
Ratio of Net Investment Income to
Average Net Assets(2)
(annualized)..................... 4.58% 4.73% 4.39%
Portfolio Turnover................ 11% 31.45% 11.00%

- ----------------
(1)See Note 1 to the Financial Statements.
(2)If certain expenses had not been waived by the Adviser, total return would
have been lower and the ratios would have been as follows:

<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------------- --------------------------------------------
JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996 1995 1994
------------ ------------ -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to
Average Net Assets................. 1.91% 2.53% 3.17% 2.66% 3.23% 3.89%
Ratio of Net Investment
Income to Average Net Assets....... 3.82% 3.17% 2.17% 3.07% 2.51% 1.41%

(3)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
* Non-Annualized
</TABLE>

See Financial Statements and Notes Thereto

9
<PAGE> 12

- ------------------------------------------------------------------------------
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> 13

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> 14

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

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 Jersey 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 Jersey gross income tax.
If it is determined that the interest on municipal

12
<PAGE> 15

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.

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 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.

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

13
<PAGE> 16

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.

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> 17

with respect to the Fund's Strategic Transactions, if any, will be taxable. See
"Tax Status."

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.

15
<PAGE> 18

- ------------------------------------------------------------------------------
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> 19

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 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 liquid 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

17
<PAGE> 20

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.

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.

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> 21

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.

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.

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> 22

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> 23

during the first quarter of 1989 to a recessionary peak of 8.5% during 1992.
Since then, the unemployment rate fell to an average of 6.4% in 1995 and 6.1%
for the four month period from May 1996 through August 1996.

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 $526,800,000 State of New Jersey General Obligation
Bonds, Refunding Bonds (Series E) and $270,000,000 State of New Jersey General
Obligation Bonds (Various Purposes), on May 1, 1996, 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> 24

for managing institutional portfolios, and more than $57 billion under
management or supervision. Van Kampen American Capital's more than 40 open-end
and 38 closed-end funds and more than 2,500 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
American Capital Distributors, Inc. (the "Distributor"), the distributor of the
Fund and sponsor of the funds mentioned above, is a wholly-owned subsidiary of
Van Kampen American Capital.

Dean Witter, Discover & Co. is a financial services company with three major
businesses; full service brokerage, credit services and asset management.

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ --------------
<S> <C>
First $500 million..................................... 0.600 of 1.00%
Over $500 million...................................... 0.500 of 1.00%
</TABLE>

22
<PAGE> 25

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 1940 Act, of the Adviser, the Distributor
or Van Kampen American Capital), the charges and expenses of independent
accountants, legal counsel, transfer agent (ACCESS Investor Services, Inc.
("ACCESS"), a wholly owned subsidiary of Van Kampen American Capital), 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 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, 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 since April 1989. Timothy D. Haney,
Assistant Vice President and municipal portfolio manager of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since August 1995. 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> 26

24
<PAGE> 27

fee or subject to the conversion feature have a higher expense ratio and pay
lower dividends than a class of shares subject to a lower ongoing distribution
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) ACCESS' 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. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares will be
limited to the extent necessary to preserve the Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").

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

The Fund offers three classes of shares to the public on a continuous basis
through 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 of its shares at any time
and without prior notice.

25
<PAGE> 28

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

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. 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. 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. 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

26
<PAGE> 29

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, as amended.

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 CDSC of
1.00% on redemptions made within one year of the purchase. A commission
will be paid to brokers, dealers or financial intermediaries 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 $1 million and 0.50% on the
excess over $3 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to CDSC.

QUANTITY DISCOUNTS

27
<PAGE> 30

As used herein, "Participating Funds" refers to all open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. and distributed by the Distributor. Additional funds may be
added from time to time as determined by the Fund's Board of Trustees as
Participating Funds.

VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person at any one
time in Class A Shares of the Fund, or in any combination of 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
sales charge 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.

OTHER PURCHASE PROGRAMS

Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit investment trust reinvestment programs and purchases by

28
<PAGE> 31

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 INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement 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 other 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, financial intermediary or the Distributor.

(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.

29
<PAGE> 32

(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 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 12-month
period following such transaction.

30
<PAGE> 33

May 1, 1997. Section 403(b) and similar accounts for which Van Kampen
American Capital Trust Company served as custodian will not be eligible
for net asset value purchases based on the aggregate investment made by
the plan or the number of eligible employees, except under certain uniform
criteria established by the Distributor from time to time. Prior to
February 1, 1997, a commission will be paid to authorized dealers who
initiate and are responsible for such purchases within a rolling
twelve-month period as follows: 1.00% on sales to $5 million, plus 0.50%
on the next $5 million and 0.25% on the excess over $10 million. For
purchases on February 1, 1997 and thereafter, a commission will be paid as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million and 0.25% on the excess over $50
million.

The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.

31
<PAGE> 34

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 $1 million and 0.50% on the
excess over $3 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.

Proceeds from the CDSC 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 CDSC 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.

32
<PAGE> 35

CDSC Shares held longest during the period of time that a CDSC is applicable to
such CDSC Shares. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase.

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 CDSC 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 $1 million and 0.50% on the
excess over $3 million.

CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a CDSC 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 CDSC generally is waived on redemptions of Class B Shares made pursuant to
the Systematic Withdrawal Plan. See "Shareholder Services -- Systematic
Withdrawal Plan."

33
<PAGE> 36

CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge.

The conversion of such 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 ACCESS costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) that the conversion of such shares does not constitute a
taxable event under federal income tax law. The conversion may be suspended if
such an opinion is no longer available and such shares might continue to be
subject to the higher aggregate fees applicable to such class of shares for an
indefinite period.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
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 CDSC
also is 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

34
<PAGE> 37

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.

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

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

35
<PAGE> 38

64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (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) 421-2833
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."

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) 421-2833 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, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.

36
<PAGE> 39

No sales charge is imposed upon the exchange of a Class B Shares or Class C
Shares. The CDSC schedule and conversion schedule applicable to a Class B Share
or Class C Share acquired through the exchange privilege is determined by
reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a Class B Share or Class C Share
acquired through the exchange privilege is determined by reference to the date
such share originally was purchased from a Van Kampen American Capital fund.

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) 421-2833 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. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charges. 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 reinvest dividends from the
new account into another fund, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire
shares through

37
<PAGE> 40

exchange. In addition, the Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.

A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.

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. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a quarterly, semi-annual or 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.

38
<PAGE> 41

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. See the Statement of Additional Information
for further information regarding the establishment of the privilege.

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

39
<PAGE> 42

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.

40
<PAGE> 43

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> 44

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

42
<PAGE> 45

43
<PAGE> 46

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, 1996, there were $408,097 and $6,707 of unreimbursed distribution
related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 4.52% and 0.94% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. 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 CDSCs.

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

44
<PAGE> 47

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.

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

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."

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<PAGE> 48

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 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.

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<PAGE> 49

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 2.63% of their entire net
income. New Jersey S corporations with entire net income of $100,000 or less for
tax years beginning on or after July 1, 1996 will be subject to tax at a rate of
1.13%. 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 (Illinois), and reflects applicable federal tax
laws.

The Fund has qualified and intends to continue 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.

47
<PAGE> 50

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.

48
<PAGE> 51

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.

49
<PAGE> 52

Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the purchaser would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than 5% of the useable area of the facilities or for whom the
facilities or a part thereof were specifically constructed, reconstructed or
acquired. Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.

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

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<PAGE> 53

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.

51
<PAGE> 54

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

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.

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<PAGE> 55

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

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

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<PAGE> 56

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.

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<PAGE> 57

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

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) 421-2833.

FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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
New Jersey Tax Free Income Fund

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
New Jersey Tax Free Income Fund

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

Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 58

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NEW JERSEY TAX FREE
INCOME FUND

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P R O S P E C T U S

APRIL 30, 1997

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
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