VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, N-30D, 1997-02-28

VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
N-30D, 1997-02-28

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<PAGE> 1

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Highlights............................. 4
Performance in Perspective....................... 5
Portfolio Management Review...................... 6
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 18
Statement of Operations.......................... 19
Statement of Changes in Net Assets............... 20
Financial Highlights............................. 21
Notes to Financial Statements.................... 24
Report of Independent Accountants................ 30
</TABLE>

TFIN ANR 2/97
<PAGE> 2

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,
We are pleased to report that
the Van Kampen American Capital Insured
Tax Free Income Fund has continued to
generate positive investment
performance. As noted in earlier
reports, VK/AC Holding Inc., the parent [PHOTO]
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 DENNIS J. MCDONNELL AND DON G. POWELL
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, 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 Fed 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
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 in 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 some 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.

Continued on page two

1
<PAGE> 3

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 year's 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 from municipal-bond interest are 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.
While domestic economic fundamentals may keep fixed-income prices
relatively stable, the risk 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,

[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.

2
<PAGE> 4

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL INSURED 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)....................... 3.65% 2.83% 2.83%
One-year total return(2).................................... (1.25%) (1.10%) 1.85%
Five-year average annual total return(2).................... 5.98% N/A N/A
Ten-year average annual total return(2)..................... 6.82% N/A N/A
Life-of-Fund average annual total return(2)................. 9.05% 4.04% 4.09%
Commencement Date........................................... 12/14/84 05/01/93 08/13/93

DISTRIBUTION RATES AND YIELD

Distribution Rate(3)........................................ 4.84% 4.30% 4.30%
Taxable Equivalent Distribution Rate(4)..................... 7.56% 6.72% 6.72%
SEC Yield(5)................................................ 4.16% 3.57% 3.57%
</TABLE>

N/A = Not Applicable
(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%.

The terms of the insurance are more fully described in the Fund's prospectus; no
representation is made as to the insurer's ability to meet its commitments. In
addition, the insurance does not remove market risk, as it does not apply to the
value of the securities in the Fund's portfolio, which may increase or decrease
depending on interest rates and other factors affecting the municipal credit
markets.

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.

3
<PAGE> 5

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND

TOP TEN STATES AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
Percentage of Fund's
Long-Term Investments
<S> <C>
California............................ 19.90%
Illinois.............................. 14.25%
Florida............................... 6.19%
New York.............................. 5.57%
Texas................................. 5.15%
Georgia............................... 5.13%
Kansas................................ 4.40%
Washington............................ 3.54%
Colorado.............................. 2.92%
Pennsylvania.......................... 2.81%
</TABLE>

CREDIT QUALITY

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......................... 27.7%
Higher Education.................... 10.1%
Retail Elec. / Gas / Telephone...... 10.0%
Public Building..................... 8.9%
General Purpose..................... 8.5%
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
Health Care......................... 26.3%
Retail Elec. / Gas / Telephone...... 9.6%
Public Building..................... 8.9%
General Purpose..................... 8.7%
Higher Education.................... 7.6%
</TABLE>

DURATION

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1) AS OF JUNE 30, 1996(1)
<S> <C> <C>
Duration 7.70 years 7.85 years
</TABLE>

(1)Unaudited

4
<PAGE> 6

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.

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Insured Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index
(December 31, 1986 through December 31, 1996)

VKAC Lehman Brothers
Value at Insured Tax Free Municipal Bond
December 31, Income Fund Index
<S> <C> <C>
1986 9,523.00 10,000.00
1988 10,644.00 11,180.00
1990 12,465.00 13,289.00
1992 15,100.00 16,217.00
1994 15,891.00 17,266.00
1996 19,351.00 21,573.00

</TABLE>

- --------------------------------------
Fund's Total Return
1 Year Avg. Annual = -1.25%
5 Year Avg. Annual = 5.98%
10 Year Avg. Annual = 6.82%
Inception Avg. Annual = 9.05%
- --------------------------------------

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.

5
<PAGE> 7

PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Insured Tax Free Income Fund about the key events and economic forces that
shaped the markets during the past fiscal year. The team includes Joseph A.
Piraro, 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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A The economy showed signs of surprising strength during the
first half of the year, which triggered concerns that rising inflation
would eventually lead to rising interest rates. With investors
anticipating this upward move by the Federal Reserve Board, municipal
interest rates rose sharply beginning in February and lasting through
May. When the Fed ultimately decided to take no action, bond prices
rallied through the end of the year.

Although this rally in the second half offset most of the drop in prices
experienced during the first six months, both municipal bonds and Treasuries
ended the year slightly lower than in 1995, with municipal bond prices declining
less than Treasuries. At year end, tax-exempt yields remained attractive
relative to taxable securities, with municipal bond yields averaging
approximately 90 percent of Treasuries.

Q WHAT OTHER FACTORS AFFECTED THE FUND?

The results of the presidential election were positive for the municipal
markets. Major tax reform seems unlikely under the Clinton administration, and
any negative changes in federal legislation for infrastructure programs are
expected to be minor.

The 1996 trend that probably had the most impact to the Fund was the rising
number of insured issues that came to the market. 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 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
compared to those on lower-rated securities.

Q WHAT ACTIONS DID YOU TAKE IN RESPONSE TO THESE EVENTS?

A The Fund's objective is to seek to provide investors with a
high level of current income exempt from federal income taxes, while
maintaining liquidity and safety of principal. We continued to seek to
accomplish this primarily by maintaining a diversified portfolio of
insured municipal securities.

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 the health care sector, which proved to be a
strong performer in 1996. Airport and housing bonds were also core holdings
during the year. The composition of the portfolio did not change significantly
over the year. Because the Fund is income-driven, we tend to establish a general
framework for our core holdings, rather than switching in and out of sectors.

6
<PAGE> 8

the duration of a portfolio, the less sensitive it is to interest rate changes.
At year-end, the Fund's duration was 7.70 years, a relatively neutral level
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 only 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
achieved a total return of 3.65 percent(1) (Class A shares at net asset
value), which put it in the top half of the Insured Municipal Debt
category as ranked by Lipper Analytical Services.

Despite one dividend reduction during the year, the Fund continued to meet
its goal of providing a competitive level of tax-exempt current income. Its
distribution rate was 4.84 percent(3) as of December 31, 1996, based on a
monthly dividend of $.0815 per share and a maximum public offering price of
$20.20 per share. For investors in the 36 percent federal income tax bracket,
the Fund's distribution rate was equivalent to a taxable investment earning 7.56
percent(4). Please refer to the chart on page three for additional Fund
performance results.

Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE MUNICIPAL BOND MARKET
IN THE UPCOMING MONTHS?'

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. While we expect some
type of tax reform bill during 1997, it will probably be very subtle. 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.

[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]
Joseph A. Piraro
Portfolio Manager

Please see footnotes on page three

7
<PAGE> 9

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 2.3%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA
Insd)....................................................... 6.000% 10/01/14 $ 2,357
2,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 6.750 08/15/17 2,223
2,900 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee
Insd)....................................................... 5.875 08/15/25 2,948
2,500 Jefferson Cnty, AL Brd Edl Cap Outlay Sch (AMBAC Insd)...... 5.875 02/15/20 2,551
5,500 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd)............. 7.700 12/01/19 5,858
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur Genl
Hosp Rfdg (Connie Lee Insd)................................. 6.250 03/01/13 5,852
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd)......... 6.500 04/01/16 2,643
1,800 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/16 1,803
2,400 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/21 2,404
1,400 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/25 1,402
1,600 West Morgan East Lawrence Wtr Auth AL Wtr Rev (Prerefunded @
08/15/04) (FSA Insd)........................................ 6.800 08/15/14 1,833
----------
31,874
----------
ALASKA 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd)................ 6.600 12/01/07 2,615
----------
ARIZONA 1.5%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd)............... 6.250 09/01/10 11,794
1,880 Maricopa Cnty, AZ Indl Dev Madera Pointe Apts Proj Ser A
Rfdg (FSA Insd)............................................. 5.800 06/01/15 1,888
2,260 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Irvington
Proj Tucson Ser A Rfdg (FSA Insd)........................... 7.250 07/15/10 2,520
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd) (b)............................................ 6.000 09/01/12 1,921
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd) (b)............................................ 6.125 09/01/17 1,796
----------
19,919
----------
CALIFORNIA 19.9%
4,290 Antioch Area, CA Pub Fac Fin Agy Cmnty Fac Dist No 1989
(FGIC Insd)................................................. 5.300 08/01/15 4,164
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev
Ser A (FSA Insd)............................................ 6.000 12/15/14 2,944
2,555 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd)............ 5.875 08/01/12 2,646
1,985 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd)............ 5.875 08/01/14 2,045
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (Inverse
Fltg) (MBIA Insd)........................................... 5.650 06/01/15 4,904
10,000 California Edl Fac Auth Rev Chapman Univ (Connie Lee
Insd)....................................................... 5.125 10/01/26 9,227
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.700 01/01/13 10,501
3,545 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (BIGI
Insd)....................................................... 8.100 03/01/18 3,756
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison D Susanville (MBIA Insd).......................... 5.375 06/01/18 9,678
16,250 California St Pub Wks Brd Lease Rev Var Univ CA Projs Ser A
(AMBAC Insd)................................................ 6.400 12/01/16 17,878
2,440 Chino Hills, CA Ctfs Partn Wtr Sys Refin Proj (FGIC Insd)... 5.600 06/01/18 2,408
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd).................. 6.200 09/01/18 3,184
220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj Ser
3 (BIGI Insd)............................................... 8.000 07/01/18 236
1,000 Corona Norco, CA Unified Sch Dist Lease Rev Partn Insd Land
Acquis Ser A (FSA Insd)..................................... 6.000 04/15/19 1,035
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refin (FGIC
Insd)....................................................... 6.300 09/01/12 1,329
3,000 Culver City, CA Ctfs Partn CA Tran Fin Corp Ser A (AMBAC
Insd)....................................................... 5.750 01/01/16 3,030
425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC Insd).............. 6.700 08/01/21 499
5,675 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts Rfdg (AMBAC Insd)...................................... * 09/01/17 1,577
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd).... * 11/15/21 1,266
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA
Insd)....................................................... 6.500 11/01/12 1,096
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA
Insd)....................................................... 6.625 11/01/22 7,717
3,160 La Quinta, CA Fin Auth Lease Rev La Quinta City Hall Proj
Rfdg (MBIA Insd)............................................ 5.550 10/01/18 3,178
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev Rfdg
(AMBAC Insd)................................................ 6.000 12/01/16 3,623
13,480 Los Angeles Cnty, CA Metro Tran Prop A 2nd Tier Rfdg (MBIA
Insd)....................................................... 6.000 07/01/21 14,043
2,000 Los Angeles Cnty, CA Public Wks Sr Lien Ser A Rfdg (FSA
Insd)....................................................... 5.500 10/01/18 1,996
3,000 Los Angeles, CA Cmnty Redev Agy Tax Alloc Bunker Hill Ser H
Rfdg (FSA Insd)............................................. 6.500 12/01/14 3,321
</TABLE>

See Notes to Financial Statements

8
<PAGE> 10

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

CALIFORNIA (CONTINUED)
$ 7,635 Los Angeles, CA Convention & Exhibition Cent Auth Lease Rev
(MBIA Insd)................................................. 5.125% 08/15/13 $ 7,353
13,770 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev 2nd Issue Rfdg
(AMBAC Insd)................................................ 5.375 11/15/11 13,706
2,475 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev 2nd Issue Rfdg
(AMBAC Insd)................................................ 5.400 11/15/31 2,368
1,830 Los Angeles, CA Ser A (FGIC Insd)........................... 6.125 09/01/13 1,913
2,500 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA
Insd)....................................................... 6.125 03/15/23 2,620
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg
(MBIA Insd)................................................. 6.700 10/01/21 8,288
1,290 Martinez, CA Unified Sch Dist Guar Ctfs Elig Rfdg (FSA
Insd)....................................................... 6.000 08/01/09 1,345
2,000 MSR Pub Pwr Agy CA San Juan Proj Rev Ser F Rfdg (AMBAC
Insd)....................................................... 6.000 07/01/20 2,065
2,755 New Haven, CA Unified Sch Dist Cap Apprec Ser D (FGIC
Insd)....................................................... * 08/01/12 1,129
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area No 1
Rfdg (MBIA Insd)............................................ 6.250 03/01/19 14,359
1,500 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg (FSA
Insd)....................................................... 6.000 09/01/19 1,563
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg
(AMBAC Insd)................................................ 6.000 06/01/17 2,956
5,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA Insd)............. 6.000 07/01/07 5,405
5,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA Insd)............. 6.000 07/01/08 5,379
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A
(MBIA Insd)................................................. 6.000 09/01/15 2,961
2,160 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/11 2,328
2,295 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/12 2,462
2,435 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/13 2,620
2,585 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/14 2,768
2,750 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/15 2,933
2,000 Perris, CA Pub Fin Auth Local Agy Rev Parity Ser F (FSA
Insd)....................................................... 5.850 09/01/24 2,038
2,180 Petaluma, CA City Jt Union High Sch Dist (Prerefunded @
08/01/01) (FGIC Insd)....................................... * 08/01/18 561
1,400 Reedley, CA Pub Fin Auth Lease Rev Wastewtr Treatment Plant
Proj (AMBAC Insd)........................................... 6.050 05/01/15 1,451
4,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA
Insd)....................................................... 5.750 08/15/13 4,056
13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd)................................................. 7.650 07/01/16 13,741
1,250 San Diego, CA Cmnty College (MBIA Insd)..................... 6.125 12/01/16 1,323
1,000 San Jose, CA Fin Auth Rev Convention Cent Proj Ser C Rfdg
(FSA Insd).................................................. 6.300 09/01/09 1,070
2,500 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement
Proj Ser A (AMBAC Insd)..................................... 6.875 11/15/14 2,849
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC
Insd)....................................................... 6.200 07/02/09 1,073
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd)............... 6.200 09/01/09 2,129
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA
Insd)....................................................... 5.750 08/01/14 2,559
12,600 Southern CA Pub Pwr Auth Transmission Proj Rev (FSA Insd)... 6.000 07/01/12 13,053
2,500 Temecula Vly, CA Unified Sch Dist Ctfs Partn Rfdg (FSA
Insd)....................................................... 6.000 09/01/25 2,605
1,000 Temecula Vly, CA Unified Sch Dist Ser B Rfdg (FGIC Insd).... 6.000 09/01/12 1,043
2,460 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd).... 6.750 01/01/12 2,514
11,900 University of CA Ctfs Partn Ser A (MBIA Insd)............... 5.550 06/01/10 12,034
3,845 Vista, CA Unified Sch Dist Ctfs Partn Ser A Rfdg (FSA
Insd)....................................................... * 11/01/17 1,110
2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev Cmnty Fac Rfdg
(FSA Insd).................................................. 6.500 09/01/14 2,198
----------
271,209
----------
COLORADO 2.9%
12,750 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A
(Prerefunded @ 02/15/01) (FSA Insd)......................... 7.250 02/15/16 14,285
2,090 Colorado Hlth Fac Auth Rev Sisters of Charity Hlth Care Ser
A (MBIA Insd)............................................... 6.000 05/15/13 2,137
1,000 Colorado Wtr Res & Pwr Dev Auth Small Wtr Res Rev Ser A
(Prerefunded @ 11/01/00) (FGIC Insd)........................ 7.400 11/01/10 1,108
10 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA
Insd)....................................................... 8.875 10/01/13 11
2,050 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/11 919
1,350 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/15 474
9,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd)...... 6.250 11/15/12 9,571
8,600 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd)...... 6.400 11/15/22 9,119

</TABLE>

See Notes to Financial Statements

9
<PAGE> 11

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COLORADO (CONTINUED)
$ 2,000 Westminster, CO Wtr & Wastewtr Util Enterprise Rev (AMBAC
Insd)....................................................... 6.250% 12/01/14 $ 2,138
----------
39,762
----------
DISTRICT OF COLUMBIA 0.0%
250 District of Columbia Ser B Rfdg (MBIA Insd)................. * 06/01/04 172
----------
FLORIDA 6.2%
2,500 Altamonte Springs, FL Hlth Fac Auth Hosp Rev Adventist Hlth
Sunbelt Ser B (AMBAC Insd).................................. 5.375 11/15/23 2,384
19,000 Broward Cnty, FL Professional Sports Fac Tax Rev (MBIA
Insd)....................................................... 5.750 09/01/21 19,232
3,850 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd)......... 5.500 05/01/25 3,793
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/03 1,212
690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/04 840
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/05 1,454
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/06 1,587
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/07 1,717
5,000 Dade Cnty, FL Solid Waste Spl Oblig Rfdg (AMBAC Insd) (b)... 5.125 10/01/10 4,844
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd)................ 12.000 10/01/04 3,074
260 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.650 09/01/10 276
1,065 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.700 09/01/24 1,130
1,410 Florida St Dept Corrections Ctfs Partn Okeechobee
Correctional (AMBAC Insd)................................... 6.250 03/01/15 1,509
13,000 Hillsborough Cnty, FL Sch Brd Ctfs Partn Master Lease Pgm
(MBIA Insd)................................................. 5.250 07/01/17 12,627
2,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd) (b).......... 6.100 10/01/18 2,064
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd)........... * 10/01/13 400
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA
Insd)....................................................... 9.418 04/01/20 4,565
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA
Insd)....................................................... 9.121 10/29/21 7,177
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd)... 6.375 08/01/15 2,139
1,090 Sarasota Cnty, FL Util Sys Rev (Prerefunded @ 10/01/04)
(FGIC Insd)................................................. 6.500 10/01/14 1,239
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd)............................................ 6.625 12/01/13 11,017
----------
84,280
----------
GEORGIA 5.1%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/08 1,354
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/17 1,858
25,000 Chatham Cnty, GA Hosp Auth Rev Rfdg & Impt Hosp Mem Med Cent
Ser A (AMBAC Insd).......................................... 5.500 01/01/21 24,591
4,000 Clarke Cnty, GA Hosp Auth Rev Hosp Athens Regl Med Cent Proj
(MBIA Insd)................................................. 5.000 01/01/22 3,677
3,500 Clarke Cnty, GA Hosp Auth Rev Hosp Athens Regl Med Cent Proj
(MBIA Insd)................................................. 5.000 01/01/27 3,194
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/07 3,909
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/08 2,686
15,550 Municipal Elec Auth GA Spl Oblig 5th Crossover Ser Proj One
(AMBAC Insd)................................................ 6.400 01/01/13 17,175
10,000 Municipal Elec Auth GA Spl Oblig 5th Crossover Ser Proj One
(MBIA Insd)................................................. 6.500 01/01/17 11,395
----------
69,839
----------
HAWAII 1.0%
12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd)............ 6.400 07/01/08 14,077
----------
ILLINOIS 14.3%
1,000 Berwyn, IL (MBIA Insd)...................................... 7.000 11/15/10 1,100
25,725 Chicago, IL Brd Ed Chicago Sch Reform (MBIA Insd)........... 6.000 12/01/26 26,418
1,250 Chicago, IL O'Hare Intl Arpt Rev Passenger Fac Ser A (AMBAC
Insd)....................................................... 5.625 01/01/14 1,254
2,720 Chicago, IL Pub Bldg Comm Bldg Rev Chicago Transit Auth
(AMBAC Insd)................................................ 6.600 01/01/15 2,968
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/06 2,189
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/07 1,837
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) (c)............................................. 8.400 01/01/01 1,140
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/03 6,701
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/04 10,395

</TABLE>
See Notes to Financial Statements

10
<PAGE> 12

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750% 01/01/05 $ 3,070
3,500 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 4,472
12,400 Cook Cnty, IL Cmnty Cons Sch Dist No 054 Schaumburg Twp Rfdg
(FGIC Insd) (c)............................................. 5.000 01/01/09 12,175
1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor
(AMBAC Insd)................................................ * 12/01/05 816
8,280 Cook Cnty, IL Cnty Juvenile Detention Ser A (AMBAC Insd).... * 11/01/08 4,474
2,500 Des Plaines, IL Hosp Fac Rev Holy Family Hosp Rfdg (AMBAC
Insd)....................................................... 9.250 01/01/14 2,588
1,400 Evanston, IL Residential Mtg Rev (AMBAC Insd)............... 6.375 01/01/09 1,474
10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth Edison Co Proj
Ser D Rfdg (AMBAC Insd)..................................... 6.750 03/01/15 11,042
1,650 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A
1st Mtg Rfdg (MBIA Insd).................................... 5.700 02/01/24 1,635
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A
1st Mtg Rfdg (MBIA Insd).................................... 7.400 12/01/24 40,870
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA
Insd)....................................................... 6.650 02/01/11 2,262
5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 Rfdg
(FSA Insd).................................................. 6.650 02/01/12 5,523
1,261 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B (MBIA
Insd)....................................................... 7.900 08/15/03 1,290
220 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg
(MBIA Insd)................................................. 7.900 08/15/03 250
7,615 Illinois Hlth Fac Auth Rev Decatur Mem Hosp Rfdg (MBIA
Insd)....................................................... 5.375 11/15/16 7,327
7,465 Illinois Hlth Fac Auth Rev Decatur Mem Hosp Rfdg (MBIA
Insd)....................................................... 5.375 11/15/21 7,054
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg)
(MBIA Insd)................................................. 9.487 06/19/15 5,813
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse
Fltg) (AMBAC Insd).......................................... 9.831 05/18/21 5,813
3,400 Illinois Hlth Fac Auth Rev Rush Presbyterian Saint Luke Hosp
(Inverse Fltg) (MBIA Insd).................................. 9.797 10/01/24 3,961
3,000 Illinois Hlth Fac Auth Rev Sarah Bush Lincoln Hlth Rfdg
(AMBAC Insd)................................................ 6.000 01/01/27 3,064
4,000 Illinois Hlth Fac Auth Rev Trinity Med Cent (FSA Insd)...... 5.875 07/01/16 4,060
1,040 Kane, Cook & Du Page Cntys, IL Sch Dist No 46 Elgin Ser B
(FSA Insd).................................................. * 01/01/11 479
1,300 Kane, Cook & Du Page Cntys, IL Sch Dist No 46 Elgin Ser B
(FSA Insd).................................................. * 01/01/12 562
2,095 Kane, Cook & Du Page Cntys, IL Sch Dist No 46 Elgin Ser B
(FSA Insd).................................................. * 01/01/13 848
6,110 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/06 3,665
3,000 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/07 1,691
1,285 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd)................. 8.000 12/01/05 1,569
1,185 Saint Clair Cnty, IL Ctfs Partn Indl Dev Rev (MBIA Insd).... 8.000 12/01/04 1,432
1,500 Will Cnty, IL Cmnty Unit Sch Dist No 201-u Crete Monee (FSA
Insd)....................................................... * 10/01/13 582
1,000 Will Cnty, IL Cmnty Unit Sch Dist No 201-u Crete Monee (FSA
Insd)....................................................... * 10/01/14 364
----------
194,227
----------
INDIANA 1.3%
2,000 Indiana Bond Bank Spl Pgm Ser A (AMBAC Insd)................ 9.750 08/01/09 2,612
3,840 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps of IN
(Prerefunded @ 07/01/01) (MBIA Insd)........................ 7.000 07/01/21 4,296
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj Rfdg &
Impt (MBIA Insd)............................................ 6.400 05/01/12 5,341
1,000 Marion Cnty, IN Convention & Rectl Fac Auth Excise Tax Rev
Lease Rental Ser A (AMBAC Insd)............................. 7.000 06/01/21 1,107
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South
Bend Proj (MBIA Insd)....................................... 6.250 08/15/12 1,061
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South
Bend Ser A Rfdg (MBIA Insd)................................. 7.000 08/15/20 1,112
2,440 Vincennes, IN Cmnty Sch Bldg Corp (FSA Insd)................ 5.000 07/01/15 2,336
----------
17,865
----------
KANSAS 4.4%
38,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) (c)............................................. 7.000 06/01/31 42,888
6,300 Kansas St Dev Fin Auth Hlth Saint Luke's Shawnee Mission Ser
N (MBIA Insd)............................................... 5.375 11/15/16 6,224
5,485 Kansas St Dev Fin Auth Hlth Saint Luke's Shawnee Mission Ser
N (MBIA Insd)............................................... 5.375 11/15/21 5,374
5,670 Kansas St Dev Fin Auth Hlth Saint Luke's Shawnee Mission Ser
P (MBIA Insd)............................................... 5.375 11/15/26 5,530
----------
60,016
----------
KENTUCKY 0.0%
60 Kentucky Cntys Single Family Mtg Presbyterian Homes Ser A
Rfdg (MBIA Insd)............................................ 8.625 09/01/15 62
----------

</TABLE>

See Notes to Financial Statements

11
<PAGE> 13

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LOUISIANA 1.6%
$ 4,065 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake
Charles Mem Hosp Proj Ser A (Connie Lee Insd)............... 6.375% 12/01/12 $ 4,349
5,530 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake
Charles Mem Hosp Proj Ser A (Connie Lee Insd)............... 6.500 12/01/18 6,248
310 Louisiana Pub Fac Auth Rev Med Cent LA at New Orleans Proj
(Connie Lee Insd)........................................... 6.250 10/15/10 327
4,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac Our Lady
Med Cent Ser C (BIGI Insd) (c).............................. 8.200 12/01/15 4,514
5,000 Louisiana Pub Fac Auth Rev Tulane Univ of LA (AMBAC Insd)... 6.050 10/01/25 5,246
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985 Ser
A (MBIA Insd)............................................... * 09/15/16 1,331
----------
22,015
----------
MAINE 0.4%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC
Insd)....................................................... 9.200 08/01/99 2,758
1,750 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd)....... 7.100 07/01/14 2,013
----------
4,771
----------
MASSACHUSETTS 0.3%
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser
B1 (MBIA Insd).............................................. 6.250 08/15/14 1,822
1,000 Massachusetts St Hlth & Edl Fac Auth Rev Univ Hosp Ser C
(MBIA Insd)................................................. 7.250 07/01/19 1,100
1,710 Massachusetts St Indl Fin Agy Rev Assumption College Issue
(Connie Lee Insd)........................................... 5.875 07/01/18 1,736
----------
4,658
----------
MICHIGAN 2.6%
2,325 Bay City, MI (AMBAC Insd)................................... * 06/01/15 829
1,000 Bay City, MI (AMBAC Insd)................................... * 06/01/16 334
2,135 Detroit, MI Ser A Rfdg (FGIC Insd).......................... 5.375 04/01/11 2,109
3,795 Detroit, MI Ser B Rfdg (FGIC Insd).......................... 5.375 04/01/11 3,748
4,000 Detroit, MI Ser B Rfdg (FGIC Insd).......................... 5.375 04/01/12 3,928
2,220 Detroit, MI Ser B Rfdg (FGIC Insd).......................... 5.375 04/01/13 2,167
4,000 Eastern MI University Rev (FGIC Insd) (b)................... 5.500 06/01/27 3,939
14,750 Livonia, MI Pub Sch Dist Ser II (FGIC Insd)................. * 05/01/14 5,416
21,000 Livonia, MI Pub Sch Dist Ser II (FGIC Insd)................. * 05/01/21 4,731
5,000 Michigan St Hosp Fin Auth Rev Hosp Sparrow Oblig Group (MBIA
Insd)....................................................... 6.000 11/15/36 5,173
2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded
Swap) (AMBAC Insd).......................................... 4.290 04/01/04 1,940
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec (Prerefunded @
05/01/07) (MBIA Insd)....................................... * 05/01/17 1,483
----------
35,797
----------
MINNESOTA 0.5%
1,000 Brainerd, MN Rev Evangelical Lutheran Ser B Rfdg (FSA
Insd)....................................................... 6.650 03/01/17 1,081
5,600 Minneapolis-St Paul, MN Hsg & Redev Auth Hlth Care Sys Rev
Hlth One Ser A (MBIA Insd).................................. 7.400 08/15/11 6,199
----------
7,280
----------
MISSISSIPPI 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment
Fac Ser A Rfdg (FGIC Insd).................................. 8.500 02/01/13 1,328
----------
MISSOURI 1.0%
2,700 Central MO St Univ Rev Hsg Sys (Prerefunded @ 07/01/01)
(MBIA Insd)................................................. 7.000 07/01/14 3,024
3,830 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd)........... * 12/01/16 531
545 Jackson Cnty, MO Single Family Mtg Rev Tax Exempt Multiplier
Bond (AMBAC Insd)........................................... * 12/01/16 70
2,250 Kansas City, MO Muni Assistance Corp Rev Leasehold H Roe
Bartle Ser B1 Rfdg (Prerefunded @ 04/15/00) (AMBAC Insd).... 7.125 04/15/16 2,482
5,650 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlth Care
Proj Rfdg (MBIA Insd)....................................... 6.250 06/01/16 5,952
1,000 Missouri St Hlth & Edl Fac Auth Rev Saint Luke's Hosp KC
Proj Rfdg & Impt (Prerefunded @ 11/15/01) (MBIA Insd)....... 7.000 11/15/13 1,125
320 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd)..... 9.250 10/01/16 336
----------
13,520
----------

</TABLE>

See Notes to Financial Statements

12
<PAGE> 14

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEBRASKA 0.2%
$ 1,250 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc
Rfdg (AMBAC Insd)........................................... 6.900% 09/01/11 $ 1,385
1,500 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc
Rfdg (AMBAC Insd)........................................... 7.000 09/01/21 1,669
----------
3,054
----------
NEVADA 1.0%
2,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj C Rfdg (AMBAC
Insd)....................................................... 7.200 10/01/22 2,260
3,125 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser B
(Prerefunded @ 01/01/00) (BIGI Insd)........................ 7.750 07/01/15 3,436
4,695 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser C
(Prerefunded @ 01/01/00) (BIGI Insd)........................ 7.750 07/01/15 5,212
3,720 Washoe Cnty, NV Rfdg & Impt (MBIA Insd)..................... * 07/01/07 2,154
----------
13,062
----------
NEW HAMPSHIRE 0.6%
5,000 New Hampshire Higher Edl & Hlth Fac Auth Rev (AMBAC Insd)... 6.000 10/01/26 5,112
2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC
Insd)....................................................... 9.779 11/01/17 3,087
----------
8,199
----------
NEW JERSEY 1.8%
765 Camden Cnty, NJ Muni Utils Auth Swr Rev (FGIC Insd)......... 8.250 12/01/17 809
3,450 Essex Cnty, NJ Rfdg Ser A 1 (FGIC Insd) (b)................. 5.000 11/15/09 3,390
2,500 Essex Cnty, NJ Rfdg Ser A 1 (FGIC Insd) (b)................. 5.250 11/15/10 2,486
1,000 Essex Cnty, NJ Rfdg Ser A 1 (FGIC Insd) (b)................. 5.000 11/15/11 966
5,500 Howell Twp, NJ Rfdg (FGIC Insd)............................. 6.800 01/01/14 6,049
3,625 Morristown, NJ Rfdg (FSA Insd).............................. 6.400 08/01/14 3,942
3,940 New Jersey St Hsg & Mtg Fin Agy Rev Home Mtg Ser B (MBIA
Insd)....................................................... 8.100 10/01/17 4,137
2,250 Sussex Cnty, NJ Muni Util Auth Solid Waste Rev Ser A
(Prerefunded @ 12/01/98) (BIGI Insd)........................ 7.875 12/01/13 2,454
----------
24,233
----------
NEW MEXICO 1.0%
13,000 Farmington, NM Pollutn Ctl Rev Southern CA Edison Co Ser A
Rfdg (MBIA Insd)............................................ 5.875 06/01/23 13,267
----------
NEW YORK 5.6%
4,350 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd)........................................ 6.375 11/15/14 4,704
2,000 New York City Ser B (MBIA Insd)............................. 6.950 08/15/12 2,260
50 New York City Ser C Subser C1 (FSA Insd).................... 6.250 08/01/09 53
5,000 New York City Ser G (FGIC Insd)............................. 5.750 02/01/14 5,073
3,565 New York St Dorm Auth Rev Dept of Ed (CAPMAC Insd).......... 5.750 07/01/21 3,558
2,200 New York St Dorm Auth Rev Mental Hlth Svcs Fac Impt Ser E
(AMBAC Insd) (b)............................................ 5.250 08/15/11 2,154
5,000 New York St Dorm Auth Rev City Univ Sys 3rd Resolution
(AMBAC Insd)................................................ 6.250 07/01/18 5,330
6,500 New York St Dorm Auth Rev City Univ Sys Cons 2nd Ser A(FGIC
Insd)....................................................... 5.375 07/01/14 6,427
3,950 New York St Dorm Auth Rev City Univ Sys Ser C (FGIC Insd)... 7.000 07/01/14 4,316
675 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (MBIA Insd)........................................... 7.750 08/15/10 747
1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Ser E
(FSA Insd).................................................. 6.500 08/15/15 1,085
28,535 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(AMBAC Insd) (c)............................................ 6.750 08/15/14 31,558
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A
(MBIA Insd)................................................. 6.625 03/15/06 3,694
1,500 New York St Twy Auth Hwy & Brdg Trust Fund Ser B (FGIC
Insd)....................................................... 6.000 04/01/14 1,562
3,500 New York St Urban Dev Corp Rev Correctional Fac Rfdg (AMBAC
Insd)....................................................... 5.250 01/01/18 3,315
----------
75,836
----------
NORTH CAROLINA 0.1%
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd)... 6.625 06/01/14 1,373
500 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev Ser A (AMBAC
Insd)....................................................... 12.900 01/01/97 500
----------
1,873
----------
NORTH DAKOTA 0.4%
5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly Station Rfdg
(AMBAC Insd)................................................ 7.200 06/30/13 5,984
----------

</TABLE>

See Notes to Financial Statements

13
<PAGE> 15

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO 2.0%
$ 3,600 Akron Bath Copley, OH St Twp Hosp Dist Rev Akron Genl Med
Cent Proj (AMBAC Insd)...................................... 6.500% 01/01/19 $ 3,826
1,000 Akron Bath Copley, OH St Twp Hosp Dist Rev Children's Hosp
Med Cent Akron (Prerefunded @ 11/15/00) (AMBAC Insd)........ 7.450 11/15/20 1,128
5,000 Clermont Cnty, OH Hosp Fac Rev (Inverse Fltg) (AMBAC
Insd)....................................................... 9.341 10/05/21 6,087
2,010 Cleveland, OH (MBIA Insd)................................... 6.500 11/15/09 2,240
2,285 Cleveland, OH (MBIA Insd)................................... 6.500 11/15/10 2,539
4,625 Hamilton, OH Elec Sys Mtg Rev Mtg City of Hamilton Ser B
(Prerefunded @ 10/15/98) (FGIC Insd)........................ 8.000 10/15/22 5,036
1,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl Cleveland Co
Proj Rfdg (FGIC Insd)....................................... 8.000 12/01/13 1,755
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison Ser A
Rfdg (FGIC Insd)............................................ 7.450 03/01/16 2,754
2,000 University of Cincinnati OH Ctfs Partn Univ of Cincinnati
Univ Ctr Proj (MBIA Insd)................................... 5.125 06/01/24 1,893
----------
27,258
----------
OKLAHOMA 2.1%
1,385 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/16 1,362
1,760 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/20 1,708
1,865 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/21 1,808
4,510 Norman, OK Regl Hosp Auth Hosp Rev Ser A Rfdg (MBIA Insd)... 5.625 09/01/16 4,446
1,000 Norman, OK Regl Hosp Auth Hosp Rev (Prerefunded @ 09/01/01)
(MBIA Insd)................................................. 6.900 09/01/21 1,118
2,200 Oklahoma City, OK (MBIA Insd)............................... 5.100 03/01/15 2,120
2,200 Oklahoma City, OK (MBIA Insd)............................... 5.100 03/01/16 2,118
3,735 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA
Insd)....................................................... 7.200 03/01/11 3,958
500 Tulsa, OK Arpts Impt Trust Genl Rev (MBIA Insd)............. 7.500 06/01/08 520
9,780 Tulsa, OK Tulsa Indl Auth Rev Univ of Tulsa Ser A Rfdg (MBIA
Insd)....................................................... 5.000 10/01/22 9,142
----------
28,300
----------
OREGON 0.1%
1,000 Wasco Cnty, OR Vets Home (FSA Insd)......................... 6.200 06/01/13 1,059
----------
PENNSYLVANIA 2.8%
3,625 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh Mercy Hlth
Sys Inc (AMBAC Insd)........................................ 5.625 08/15/26 3,573
2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp
Proj Ser B (FGIC Insd)...................................... 6.125 07/01/10 2,107
1,000 Emmaus, PA Genl Auth Rev Var Loc Govt Bond Pool Pgm Ser B
Var Rate Cpn (BIGI Insd).................................... 8.000 05/15/18 1,062
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA Pwr & Lt Co
Proj Ser A Rfdg (MBIA Insd)................................. 6.400 11/01/21 1,067
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg
(MBIA Insd)................................................. 6.700 12/01/21 4,114
2,000 Northeastern PA Hosp & Edl Auth Wyoming Valley Hlth Care Ser
A (AMBAC Insd).............................................. 5.250 01/01/26 1,902
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne Cnty
Cmnty College (AMBAC Insd).................................. 6.625 08/15/15 1,096
3,040 Pennsylvania St Higher Edl Fac Allegheny DE Vly Oblig (MBIA
Insd)....................................................... 5.875 11/15/21 3,118
5,000 Pennsylvania St Higher Edl Fac Allegheny DE Vly Oblig Ser A
(MBIA Insd)................................................. 5.875 11/15/21 5,129
3,000 Philadelphia, PA Auth Indl Dev Lease Rev Ser A (MBIA
Insd)....................................................... 5.375 02/15/27 2,875
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd)..... 6.375 07/01/14 2,424
6,000 Philadelphia, PA Hosps & Higher Edl Fac Auth Hosp Rev
Children's Hosp Ser A Rfdg (MBIA Insd)...................... 5.000 02/15/21 5,449
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Saint Mary Ser A (MBIA Insd)................................ 6.500 07/01/22 1,077
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Sys Ser B (MBIA Insd)....................................... 6.500 07/01/12 1,084
1,000 Sayre, PA Hlth Care Fac Auth Rev VHA Cap Asset Fin Pgm Ser
H2 (AMBAC Insd)............................................. 7.625 12/01/15 1,109
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist Ser
D (MBIA Insd)............................................... 6.500 02/01/14 1,093
----------
38,279
----------
RHODE ISLAND 2.3%
4,175 Rhode Island St Hlth & Edl Bldg Higher Edl Roger Williams
Univ (Connie Lee Insd)...................................... 5.250 11/15/16 3,970
4,225 Rhode Island St Hlth & Edl Bldg Higher Edl Roger Williams
Univ (Connie Lee Insd)...................................... 5.375 11/15/24 4,020
2,000 Rhode Island St Hlth & Edl Bldg Higher Edl Roger Williams
Univ (Connie Lee Insd)...................................... 7.250 11/15/24 2,365
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp (Inverse
Fltg) (FGIC Insd) (c)....................................... 9.822 08/15/21 21,217
----------
31,572
----------
</TABLE>

See Notes to Financial Statements

14
<PAGE> 16

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996

<S> <C> <C> <C> <C>
SOUTH CAROLINA 0.4%
$ 70 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd)............ 6.875% 06/01/14 $ 78
1,430 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd)....................................... 6.875 06/01/14 1,652
3,000 Florence Cnty, SC Pub Fac Corp Ctfs Partn Law Enforcement
Proj Civic Cent (Prerefunded @ 03/01/00) (AMBAC Insd)....... 7.600 03/01/14 3,322
635 Saint Andrews, SC Pub Svcs Dist Swr Sys Rev (FGIC Insd)..... 7.750 01/01/18 669
----------
5,721
----------
SOUTH DAKOTA 0.8%
5,205 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.625 09/01/12 5,894
4,000 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.700 09/01/17 4,656
----------
10,550
----------
TENNESSEE 0.5%
2,000 Chattanooga-Hamilton Cnty, TN Hosp Auth Hosp Rev Erlanger
Med Cent Ser B (Inverse Fltg) (Prerefunded @ 05/01/01) (FSA
Insd)....................................................... 9.875 05/25/21 2,427
3,320 Johnson City, TN Sch Sales Tax (AMBAC Insd)................. 6.700 05/01/18 3,678
----------
6,105
----------
TEXAS 5.2%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd)................................... 9.149 01/01/22 3,454
1,000 Austin, TX Util Sys Rev (Prerefunded @ 05/15/02) (BIGI
Insd)....................................................... 8.625 11/15/12 1,194
2,500 Austin, TX Util Sys Rev Rfdg (AMBAC Insd) (b)............... 6.500 11/15/05 2,663
12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA Insd).............. * 11/15/10 5,873
2,300 Brazoria Cnty, TX Hlth Fac Dev Corp Hosp Rev Brazosport Mem
Hosp Rfdg (FSA Insd)........................................ 5.500 07/01/13 2,290
9,000 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj B
Rfdg (BIGI Insd)............................................ 8.250 05/01/15 9,626
6,515 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj C
Rfdg (BIGI Insd)............................................ 8.100 05/01/19 6,955
3,120 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A
Rfdg (MBIA Insd)............................................ 7.700 07/01/11 3,345
6,525 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/07 3,455
6,780 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/08 3,322
7,705 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/09 3,478
13,525 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC
Insd)....................................................... * 11/01/16 1,708
3,595 Galveston Cnty, TX Hlth Fac Devereux Fndtn (MBIA Insd)...... 5.000 11/01/14 3,406
1,630 Galveston Cnty, TX Hlth Fac Devereux Fndtn (MBIA Insd)...... 5.000 11/01/19 1,516
2,745 Harris Cnty, TX Hlth Fac Dev Corp Spl Fac Rev TX Med Cent
Proj (Prerefunded @ 05/15/00) (MBIA Insd)................... 7.375 05/15/20 3,053
1,250 Harris Cnty, TX Hlth Fac Dev Corp Thermal Util Rev Teco Proj
Ser A (AMBAC Insd).......................................... 7.250 02/15/15 1,365
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC
Insd)....................................................... * 08/15/07 2,656
245 Henderson, TX (AMBAC Insd).................................. 9.125 05/15/04 313
2,500 North Central TX Hlth Fac Dev Hosp Zale Lipshy Univ Proj
(FSA Insd) (b).............................................. 5.450 04/01/19 2,402
2,000 Plano, TX Muni Drainage Util Sys Rev (AMBAC Insd)........... 5.250 05/15/16 1,937
1,000 San Antonio, TX Indt Sch Dist Pub Fac Corp Lease Rev (AMBAC
Insd)....................................................... 5.850 10/15/10 1,047
3,330 Tarrant Cnty, TX Hlth Fac Rfdg & Impt Fort Worth Osteopathic
(MBIA Insd)................................................. 5.500 05/15/16 3,293
1,975 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser A (FGIC
Insd)....................................................... 5.000 09/01/15 1,829
-------
70,180
-------
</TABLE>

See Notes to Financial Statements

15
<PAGE> 17

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

UTAH 2.5%
$ 3,335 Intermountain Pwr Agy UT Pwr Supply Rev (FSA Insd).......... 6.250% 07/01/08 $ 3,704
1,545 Intermountain Pwr Agy UT Pwr Supply Rev (FSA Insd).......... 6.250 07/01/09 1,712
13,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd) (b)................................................... 5.750 07/01/19 12,748
2,720 Payson City, UT Cnty UT Elec Pwr Rev (BIGI Insd)............ 8.000 08/15/03 2,925
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd)............. 10.375 09/15/15 1,038
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd)................................................ 9.515 05/15/20 4,073
7,385 Utah St Muni Fin Co-op Local Govt Rev Pool Cap Salt Lake
(FSA Insd).................................................. * 03/01/09 3,807
3,115 West Jordan, UT Multi-Family Rev Broadmoor Village Apts Proj
Ser A Rfdg (FSA Insd)....................................... 6.800 01/01/15 3,286
----------
33,293
----------
VIRGINIA 1.0%
2,315 Chesapeake Bay Brdg & Tunl Comm VA Dist Rev Genl Resolution
Rfdg (Prerefunded @ 07/01/01) (MBIA Insd)................... 6.375 07/01/22 2,536
2,250 Fredericksburg, VA Indl Dev Medicorp Hlth Sys Oblig Rfdg
(AMBAC Insd)................................................ 5.250 06/15/16 2,174
4,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.800 03/01/14 4,499
750 University of VA Hosp Rev Ser C Rfdg (Prerefunded @
06/01/00) (AMBAC Insd) (d).................................. 0/9.375 06/01/07 842
3,750 Virginia Beach, VA Dev Auth Hosp Fac Rev VA Beach Genl Hosp
Proj (AMBAC Insd)........................................... 5.125 02/15/18 3,569
----------
13,620
----------
WASHINGTON 3.6%
1,250 Franklin Cnty, WA Pub Util Dist No 1 Elec Rev (Prerefunded @
09/01/01) (AMBAC Insd)...................................... 7.100 09/01/08 1,389
350 Pierce Cnty, WA Swr Rev Ser A (MBIA Insd)................... 9.000 02/01/05 432
1,000 Snohomish Cnty, WA Solid Waste Rev (MBIA Insd).............. 7.000 12/01/10 1,116
5,000 Spokane, WA Regl Solid Waste Mgmt Sys Rev (AMBAC Insd)...... 6.250 12/01/11 5,360
160 University of WA Univ Rev (MBIA Insd)....................... 7.000 12/01/21 178
1,000 Washington St Hlth Care Fac Auth Rev VA Mason Med Cent (MBIA
Insd)....................................................... 8.000 07/01/15 1,039
3,090 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser A
Rfdg (AMBAC Insd)........................................... 5.700 07/01/09 3,161
9,435 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C
Rfdg (Prerefunded @ 07/01/00) (FGIC Insd)................... 7.750 07/01/08 10,647
2,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser A
Rfdg (AMBAC Insd)........................................... 5.700 07/01/11 2,515
13,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser A
Rfdg (MBIA Insd)............................................ 5.700 07/01/12 13,087
3,015 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (MBIA Insd)............................................ * 07/01/04 2,067
6,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (Prerefunded @ 01/01/01) (FGIC Insd)................... 7.375 07/01/11 7,285
----------
48,276
----------
WISCONSIN 0.2%
2,300 Wisconsin St Hlth & Edl Fac of the Medical College WI Inc
Proj (MBIA Insd)............................................ 5.500 12/01/26 2,229
----------
WYOMING 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd)........ 6.700 05/01/12 2,200
----------
</TABLE>

See Notes to Financial Statements

16
<PAGE> 18

<TABLE>
<CAPTION>
Par Market
Amount Value
(000) Description Coupon Maturity (000)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 0.2%
$ 3,000 Puerto Rico Indl Tourist Edl Med & Environmental Ctl Fac
Hosp Auxilio (MBIA Insd).................................... 6.250% 07/01/16 $ 3,206
----------
TOTAL LONG-TERM INVESTMENTS 100.2%
(Cost $1,262,735,599) (a)................................................................. 1,362,642
SHORT-TERM INVESTMENTS AT AMORTIZED COST 2.3%............................................ 31,700
LIABILITIES IN EXCESS OF OTHER ASSETS (2.5%)............................................. (34,100)
----------
NET ASSETS 100.0%........................................................................ $1,360,242
---------
</TABLE>

* Zero coupon bond

(a) At December 31, 1996, cost for federal income tax purposes is
$1,262,735,599; the aggregate gross unrealized appreciation is $100,536,631
and the aggregate gross unrealized depreciation is $629,737, resulting in
net unrealized appreciation of $99,906,894.

(b) Securities purchased on a when issued or delayed delivery basis.

(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.

(d) Security is currently a zero coupon bond which will convert to a coupon
paying bond at a predetermined date.

AMBAC--AMBAC Indemnity Corporation

BIGI--Bond Investor Guaranty Inc.

CAPMAC--Capital Markets Assurance Corp.

Connie Lee--Connie Lee Insurance Company

FGIC--Financial Guaranty Insurance Company

FSA--Financial Security Assurance Inc.

MBIA--Municipal Bond Investors Assurance Corp.

See Notes to Financial Statements

17
<PAGE> 19

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
All amounts, except for Maximum Offering Price information, reported in
thousands
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $1,262,736)
(Note 1).................................................. $1,362,642
Short-Term Investments (Note 1)............................. 31,700
Cash........................................................ 855
Receivables:
Interest.................................................. 20,506
Securities Sold........................................... 4,178
Fund Shares Sold.......................................... 728
Variation Margin on Futures (Note 5)...................... 27
Other....................................................... 41
------------
Total Assets.......................................... 1,420,677
------------
LIABILITIES:
Payables:
Securities Purchased...................................... 40,514
Fund Shares Repurchased................................... 16,645
Income Distributions...................................... 1,840
Distributor and Affiliates (Notes 2 and 6)................ 614
Investment Advisory Fee (Note 2).......................... 580
Accrued Expenses............................................ 142
Deferred Compensation and Retirement Plans (Note 2)......... 100
------------
Total Liabilities..................................... 60,435
------------
NET ASSETS.................................................. $1,360,242
============
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $1,255,253
Net Unrealized Appreciation on Securities................... 99,934
Accumulated Net Realized Gain on Securities................. 5,144
Accumulated Distributions in Excess of Net Investment
Income.................................................... (89)
------------
NET ASSETS.................................................. $1,360,242
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,283,668,498 and 66,727,067 shares of
beneficial interest issued and outstanding)............. $ 19.24
Maximum sales charge (4.75%* of offering price)......... .96
------------
Maximum offering price to public........................ $ 20.20
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $71,630,619 and 3,723,056 shares of
beneficial interest issued and outstanding)............. $ 19.24
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $4,943,225 and 256,937 shares of
beneficial interest issued and outstanding)............. $ 19.24
============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>

See Notes to Financial Statements

18
<PAGE> 20

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
All amounts reported in thousands
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 84,388
--------
EXPENSES:
Investment Advisory Fee (Note 2)............................ 6,928
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $2,897, $721 and $47, respectively)
(Note 6).................................................. 3,665
Shareholder Services (Note 2)............................... 1,714
Legal (Note 2).............................................. 156
Insurance (Note 1).......................................... 49
Trustees Fees and Expenses (Note 2)......................... 36
Other....................................................... 1,266
--------
Total Expenses.......................................... 13,814
Less Expenses Reimbursed (Note 2)....................... 10
--------
Net Expenses............................................ 13,804
--------
NET INVESTMENT INCOME....................................... $ 70,584
========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................... $ 11,171
Options................................................... 15
Futures................................................... (540)
--------
Net Realized Gain on Securities............................. 10,646
--------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 132,803
--------
End of the Period:
Investments............................................. 99,907
Futures................................................. 27
--------
99,934
--------
Net Unrealized Depreciation on Securities During the
Period.................................................... (32,869)
--------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(22,223)
========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 48,361
========
</TABLE>

See Notes to Financial Statements

19
<PAGE> 21

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995
All amounts reported in thousands
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 70,584 $ 68,684
Net Realized Gain on Securities............................. 10,646 2,636
Net Unrealized Appreciation/Depreciation on Securities
During the Period......................................... (32,869) 135,893
---------- ----------
Change in Net Assets from Operations........................ 48,361 207,213
---------- ----------
Distributions from Net Investment Income*................... (70,584) (68,723)
Distributions in Excess of Net Investment Income* (Note 1).. (468) (319)
---------- ----------
Distributions from and in Excess of Net Investment
Income*................................................. (71,052) (69,042)
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (22,691) 138,171
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................................... 579,040 373,368
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 48,358 47,663
Cost of Shares Repurchased.................................. (690,250) (257,167)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... (62,852) 163,864
---------- ----------
TOTAL INCREASE/DECREASE IN NET ASSETS....................... (85,543) 302,035
NET ASSETS:
Beginning of the Period..................................... 1,445,785 1,143,750
---------- ----------
End of the Period (Including accumulated distributions in
excess of net investment income of $89 and $51,
respectively)............................................. $1,360,242 $1,445,785
========== ==========
</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........................................ $(67,667) $(66,800)
Class B Shares........................................ (3,179) (2,061)
Class C Shares........................................ (206) (181)
---------- ---------
$(71,052) $(69,042)
========== =========
</TABLE>

See Notes to Financial Statements

20
<PAGE> 22

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.................... $ 19.549 $ 17.572 $ 19.857 $ 18.721 $18.478
--------- --------- --------- --------- --------
Net Investment Income..................................... .980 1.021 1.051 1.107 1.146
Net Realized and Unrealized Gain/Loss on Securities....... (.304) 1.982 (2.280) 1.145 .561
--------- --------- --------- --------- --------
Total from Investment Operations............................ .676 3.003 (1.229) 2.252 1.707
--------- --------- --------- --------- --------
Less:
Distributions from and in Excess of Net Investment Income
(Note 1)................................................ .987 1.026 1.056 1.116 1.140
Distributions from Net Realized Gain on Securities (Note
1)...................................................... -0- -0- -0- -0- .324
--------- --------- --------- --------- --------
Total Distributions......................................... .987 1.026 1.056 1.116 1.464
--------- --------- --------- --------- --------
Net Asset Value, End of the Period.......................... $ 19.238 $ 19.549 $ 17.572 $ 19.857 $18.721
========= ========= ========= ========= ========
Total Return (a)............................................ 3.65% 17.49% (6.31%) 12.32% 9.51%
Net Assets at End of the Period (In millions)............... $1,283.7 $1,365.4 $1,110.2 $1,230.0 $ 999.9
Ratio of Expenses to Average Net Assets (b)................. .95% .88% .88% .84% .83%
Ratio of Net Investment Income to Average Net Assets (b).... 5.11% 5.44% 5.70% 5.69% 6.14%
Portfolio Turnover.......................................... 92% 70% 48% 79% 112%
</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's reimbursement of certain expenses was less than
0.01%.

See Notes to Financial Statements

21
<PAGE> 23

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
May 1, 1993
Year Ended December 31 (Commencement of
----------------------------- Distribution) to
Class B Shares 1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.549 $17.563 $19.824 $19.320
-------- -------- -------- -------

Net Investment Income..................................... .832 .890 .899 .619

Net Realized and Unrealized Gain/Loss on Securities....... (.304) 1.978 (2.276) .513

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

Total from Investment Operations............................ .528 2.868 (1.377) 1.132

Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .837 .882 .884 .628

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

Net Asset Value, End of the Period.......................... $19.240 $19.549 $17.563 $19.824

======== ======== ======== ========

Total Return (a)............................................ 2.83% 16.67% (7.03%) 5.92%*
Net Assets at End of the Period (In millions)............... $ 71.6 $ 75.3 $ 30.0 $ 20.8
Ratio of Expenses to Average Net Assets (b)................. 1.74% 1.67% 1.71% 1.68%
Ratio of Net Investment Income to Average Net Assets (b).... 4.38% 4.69% 4.88% 4.25%
Portfolio Turnover.......................................... 92% 70% 48% 79%
</TABLE>

* Non-Annualized

(a) Total Return is based upon net asset value which does not include payment of
the maximum sale 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's reimbursement of certain expenses was less than
0.01%.

See Notes to Financial Statements

22
<PAGE> 24

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.................... $19.548 $17.568 $19.823 $19.650
------- ------- ------- -------
Net Investment Income..................................... .830 .883 .908 .350
Net Realized and Unrealized Gain/Loss on Securities....... (.302) 1.979 (2.279) .181
------- ------- ------- -------
Total from Investment Operations............................ .528 2.862 (1.371) .531
Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .837 .882 .884 .358
------- ------- ------- -------
Net Asset Value, End of the Period.......................... $19.239 $19.548 $17.568 $19.823
======= ======= ======= =======
Total Return (a)............................................ 2.83% 16.60% (6.98%) 2.70%*
Net Assets at End of the Period (In millions)............... $ 4.9 $ 5.1 $ 3.5 $ 5.0
Ratio of Expenses to Average Net Assets (b)................. 1.74% 1.67% 1.70% 1.68%
Ratio of Net Investment Income to Average Net Assets (b).... 4.37% 4.68% 4.89% 4.21%
Portfolio Turnover.......................................... 92% 70% 48% 79%
</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's reimbursement of certain expenses was less than
0.01%.

See Notes to Financial Statements

23
<PAGE> 25

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Insured Tax Free Income Fund (the "Fund") is
organized as a series of Van Kampen American Capital Tax Free Trust (the
"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 investors with a high
level of current income exempt from federal income taxes, with liquidity and
safety of principal, primarily through an investment in a diversified portfolio
of insured municipal securities. The Fund commenced the distribution of its
Class B and Class C shares on May 1, 1993 and August 13, 1993, respectively. On
May 2, 1995, all Class D shareholders redeemed their shares and the class was
eliminated. The Fund will no longer offer Class D shares.
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.

24
<PAGE> 26

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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.

Net realized losses differ for financial reporting and tax purposes as a
result of losses recognized for tax purposes on open futures positions at
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, 99.8% of the income
distributions made by the Fund were exempt from federal income taxes.

Due to inherent differences in the recognition of certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of distributed net investment income may differ 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.

Permanent book and tax basis differences relating to the recognition of
expenses associated with fund mergers (see Note 3) totaling $430,096 have been
reclassified from accumulated undistributed net investment income to capital.

F. INSURANCE EXPENSES--The Fund typically invests in insured bonds. Any
portfolio securities not specifically covered by a primary insurance policy are
insured secondarily through the Fund's portfolio insurance policy. Insurance
premiums are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------
<S> <C>
First $500 million.......................................... .525 of 1%
Next $500 million........................................... .500 of 1%
Next $500 million........................................... .475 of 1%
Over $1.5 billion........................................... .450 of 1%
</TABLE>

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.

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 $103,800 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.

25
<PAGE> 27

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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 $1,272,800,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

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

The Fund 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.

3. CAPITAL TRANSACTIONS

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

At December 31, 1996, capital aggregated $1,179,723,178, $70,392,984 and
$5,137,291 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.................................................. 29,859,557 $ 567,772,788
Class B.................................................. 504,537 9,594,322
Class C.................................................. 88,189 1,673,061
------------ ------------
Total Sales................................................ 30,452,283 $ 579,040,171
============ ============
Dividend Reinvestment:
Class A.................................................. 2,446,455 $ 46,553,726
Class B.................................................. 86,458 1,644,731
Class C.................................................. 8,358 159,069
------------ ------------
Total Dividend Reinvestment................................ 2,541,271 $ 48,357,526
============ ============
Repurchases:
Class A.................................................. (35,424,716) $(674,636,862)
Class B.................................................. (718,709) (13,659,358)
Class C.................................................. (101,870) (1,953,309)
------------ ------------
Total Repurchases.......................................... (36,245,295) $(690,249,529)
============ ============
</TABLE>

26
<PAGE> 28

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $1,240,439,855, $72,835,537 and
$5,259,989 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.................................................. 17,358,362 $ 324,651,466
Class B.................................................. 2,506,874 46,741,719
Class C.................................................. 105,778 1,974,750
Class D.................................................. -0- -0-
------------ ------------
Total Sales................................................ 19,971,014 $ 373,367,935
============ ============
Dividend Reinvestment:
Class A.................................................. 2,467,735 $ 46,428,605
Class B.................................................. 56,865 1,075,245
Class C.................................................. 8,455 159,166
Class D.................................................. -0- 3
------------ ------------
Total Dividend Reinvestment................................ 2,533,055 $ 47,663,019
============ ============
Repurchases:
Class A.................................................. (13,162,194) $(248,224,027)
Class B.................................................. (422,533) (7,986,889)
Class C.................................................. (51,141) (953,892)
Class D.................................................. (111) (2,099)
------------ ------------
Total Repurchases.......................................... (13,635,979) $(257,166,907)
============ ============
</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>

27
<PAGE> 29

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
$405,200 and CDSC on redeemed shares of approximately $233,200. Sales charges do
not represent expenses of the Fund.

On September 27, 1995, the Fund acquired all of the assets and
liabilities of the Van Kampen American Capital Tax-Exempt Trust-Insured
Municipal Portfolio (the "AC Fund"), through a tax free reorganization approved
by AC Fund shareholders on September 21, 1995. The Fund issued 3,513,425 Class A
shares, 1,958,037 Class B shares and 73,421 Class C shares valued at
$65,701,115, $36,595,879 and $1,372,231, 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 $1,236,253,953.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $1,258,779,404 and $1,320,020,635,
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 securities. 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.

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)........................ 4,650 (2,397,668)
Options Terminated in Closing Transactions (Net)........... (4,650) 2,397,668
------- -----------
Outstanding at December 31, 1996........................... -0- $ -0-
======= ===========
</TABLE>

B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.

28
<PAGE> 30

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------
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............................ -0-
Futures Opened.............................................. 10,990
Futures Closed.............................................. (10,890)
--------
Outstanding at December 31, 1996............................ 100
========
</TABLE>

The futures contracts outstanding as of December 31, 1996, and the
description and unrealized appreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- ------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
March 1997--Sells to Open (Current Notional
Value of $112,655 per contract)......................... 100 $27,321
=== =======
</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% 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
$750,000.

29
<PAGE> 31

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital Insured Tax Free Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Insured 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 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 Insured 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
January 30, 1997

30
<PAGE> 32

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund

EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund

FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income

TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund

MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
Worldwide High Income Fund

Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds, or
1-800-282-4404 for Morgan Stanley retail funds.

31
<PAGE> 33

VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN

LINDA HUTTON HEAGY

R. CRAIG KENNEDY

DENNIS J. MCDONNELL*

JACK E. NELSON

JEROME L. ROBINSON

FERNANDO SISTO

WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD, III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*

ALAN T. SACHTLEBEN*

PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.

(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data.

RESULT OF SHAREHOLDER VOTES

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
46,567,291 shares voted for the proposal, 1,074,872 shares voted against and
3,408,654 shares abstained. With regard to the approval of certain changes to
the Fund's fundamental investment policies with respect to investment in other
investment companies, 40,139,352 shares voted for the proposal, 1,557,838 shares
voted against and 3,651,407 shares abstained. With regard to the ratification of
KPMG Peat Marwick LLP as independent public accountants for the Fund, 47,455,138
shares voted for the proposal, 484,750 shares voted against and 3,110,929 shares
abstained.

32
<PAGE> 34

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Highlights............................. 4
Performance in Perspective....................... 5
Portfolio Management Review...................... 6
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Financial Highlights............................. 17
Notes to Financial Statements.................... 20
Report of Independent Accountants................ 26
</TABLE>

TFHI SAR 8/96
<PAGE> 35

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,
We are pleased to report that
the Van Kampen American Capital Tax
Free High Income Fund has continued to
generate positive investment
performance. As noted in earlier [PHOTO]
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 DENNIS J. MCDONNELL AND DON G. POWELL
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 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.

Continued on page two

1
<PAGE> 36

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, but 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 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.
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,

[sig]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.

[sig]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.

2
<PAGE> 37

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND

<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
TOTAL RETURNS

One-year total return based on NAV(1)....................... 3.21% 2.40% 2.33%
One-year total return(2).................................... (1.72%) (1.47%) 1.36%
Five-year average annual total return(2).................... 4.59% N/A N/A
Ten-year average annual total return(2)..................... 5.76% N/A N/A
Life-of-Fund average annual total return(2)................. 7.53% 5.22% 4.96%
Commencement date........................................... 06/28/85 05/01/93 08/13/93

DISTRIBUTION RATES AND YIELD

Distribution rate(3)........................................ 6.32% 5.85% 5.85%
Taxable equivalent distribution rate(4)..................... 9.88% 9.14% 9.14%
SEC Yield(5)................................................ 5.44% 4.92% 4.92%
</TABLE>

N/A = Not Applicable

(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).

(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%.

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

3
<PAGE> 38

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND

TOP TEN STATES AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
PERCENTAGE OF
FUND'S LONG-TERM
INVESTMENTS
<S> <C>
Illinois ...................... 11.9%
New York ...................... 11.1%
Florida ....................... 9.2%
Colorado ...................... 8.3%
Pennsylvania .................. 7.3%
California .................... 5.6%
Massachusetts ................. 5.4%
Michigan ...................... 4.3%
Tennessee ..................... 3.2%
Texas ......................... 3.2%
</TABLE>

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
AAA.............. 22.1%
AA............... 3.4%
A................ 4.2%
BBB.............. 19.7%
BB............... 7.5%
B................ 1.0%
Non-Rated........ 42.1%
[ Pie Chart]

</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
AAA.............. 21.2%
AA............... 5.7%
A................ 3.6%
BBB.............. 22.1%
BB............... 6.8%
B................ 1.1%
Non-Rated........ 39.5%
[ Pie Chart]

</TABLE>

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 SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1)
<S> <C>
Industrial Revenue ................. 17.1%
Health Care ........................ 16.7%
Other Care ......................... 11.2%
Multi-Family Housing ............... 9.2%
Tax District ....................... 6.8%
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1)
<S> <C>
Health Care ........................ 20.1%
Industrial Revenue ................. 17.7%
Other Care ......................... 10.4%
Multi-Family Housing ............... 9.8%
Tax District ....................... 7.3%
</TABLE>

DURATION

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1) AS OF JUNE 30, 1996(1)
<S> <C> <C>
Duration 7.47 years 8.13 years
</TABLE>

(1)Unaudited

4
<PAGE> 39

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

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Tax Free High Income Fund vs. Lehman Brothers
Municipal Bond Index
(December 31, 1986 through December 31, 1996)

[GRAPH]
<TABLE>
<CAPTION>
DATE VKAC TAX FREE HIGH LEHMAN BROTHERS AGGREGATE
INCOME FUND BOND INDEX
<S> <C> <C>

12/31/86 $ 9,625.00 $10,000.00
12/31/87 $ 9,796.00 $10,150.00
12/31/88 $10,841.00 $11,180.00
12/31/89 $11,893.00 $12,386.00
12/31/90 $12,278.00 $13,288.90
12/31/91 $13,322.00 $14,903.00
12/31/92 $13,333.00 $16,216.60
12/31/93 $15,442.00 $18,207.00
12/31/94 $14,682.00 $17,265.90
12/31/95 $16,960.00 $20,281.00
12/31/96 $17,504.00 $21,181.00

- ---------------------------------------
Fund's Total Return
1 Year Avg. Annual = -1.72%
5 Year Avg. Annual = 4.59%
10 Year Avg. Annual = 5.76%
Inception Avg. Annual = 7.53%
- ---------------------------------------
</TABLE>

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

5
<PAGE> 40

PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
Tax Free High Income Fund about the key events and economic forces that shaped
the markets during the Fund's fiscal year. The team is led by 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.
Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A 1996 ushered in a favorable environment for the bond market. 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.
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.
Q WHAT OTHER FACTORS AFFECTED THE FUND?

A Election-year politics played a major role. In the first 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 status 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.
The results of the presidential election did not have much influence on
municipal bonds. With Clinton's re-election considered a foregone conclusion,
the market had already reacted to this event before November and reflected the
re-election in its pricing. In general, the President's victory was positive for
the market, because major tax reform is unlikely under the Clinton
administration. Additionally, any changes in federal legislation for
infrastructure programs are expected to be minor.
The 1996 trend that probably had the most impact to the Fund was the rising
number of insured issues that came to the market. Insured issuance has grown
steadily from 1989's level of 25 percent to nearly 50 percent of total volume in
1996. In large part, this is due to an increasing appetite for safety from
investors concerned about 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 lower-rated securities.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THESE CONDITIONS?

A The Fund's investment objective is to provide investors with 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.
In terms of credit quality, approximately 22 percent of assets were
AAA-rated, the highest credit rating assigned to bonds by 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 70
percent of assets are non-rated or rated BBB or below. 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.

6
<PAGE> 41

The Fund also benefited from narrowing credit spreads between higher-quality
and lower-quality securities in 1996. This narrowing occurred due to the
scarcity of lower-rated bonds which drove the prices higher. Additionally, the
demand for high yielding tax-exempt income was strong, creating even scarcer
supply.
1996 presented a mixed picture in terms of investment options in the
municipal market. We focused our attention on health-care related securities and
industrial revenue bonds as core holdings during the year. We believe these
sectors provided some of the most attractive yields in the tax-exempt markets.
Health care, which is beginning to reap the reward 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 rates fluctuations.
The shorter the duration of a portfolio, the less sensitive it is to interest
rate changes. At year end, the Fund's duration was 7.47 years, a relatively
neutral level 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 mature
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 only 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's achieved a
total return of 3.21 percent(1) (Class A shares at net asset value).
Despite one dividend cut during the year, the Fund continued to meet its
goal of providing a competitive level of tax-exempt current income. Its
distribution rate was 6.32 percent(3) as of December 31, 1996, based on a
monthly dividend of $.08 per Class A share and a maximum public offering price
of $15.19. For investors in the 36 percent federal income tax bracket, the
Fund's distribution rate was equivalent to a taxable investment earning 9.88
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 will, however, move to a slightly defensive posture
with the Fund as we enter the new year by shortening its duration slightly 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, therefore 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.
We will closely monitor any new developments in the financial markets and in
Washington in order to evaluate their potential impact on the Trust. Thank you
for your continued confidence in your investment with Van Kampen American
Capital.

[SIG]

Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]

David C. Johnson
Portfolio Manager

Please see footnotes on page three

7
<PAGE> 42

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 0.7%
$ 5,000 Alabama St Indl Dev Auth Solid Waste Disp Rev Pine City
Fiber Co (b)................................................ 6.450% 12/01/23 $ 5,016,550
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
------------
6,082,190
------------
ALASKA 0.3%
2,250 Seward, AK Rev AK Sealife Cent Proj......................... 7.650 10/01/16 2,304,968
------------
ARIZONA 1.0%
6,325 Chandler, AZ Indl Dev Auth Rev Chandler Fin Cent Proj Ser
1986 (d).................................................... 9.875 12/01/16 5,376,250
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj
(Var Rate Cpn).............................................. 5.040 10/01/12 999,340
2,700 Maricopa Cnty, AZ Unified Sch Dist No 41 Gilbert Rfdg (FGIC
Insd)....................................................... * 01/01/08 1,515,429
1,045 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A.................. 11.000 07/01/00 1,161,904
------------
9,052,923
------------
ARKANSAS 0.3%
2,085 Arkansas St Dev Fin Auth Single Family Mtg Rev Replacement
Ser C....................................................... 8.600 02/01/17 2,179,388
------------
CALIFORNIA 5.4%
1,310 California Edl Fac Auth Rev Univ of La Verne................ 6.375 04/01/13 1,339,305
1,950 California Hlth Fac Auth Rev Vly Presbytern Hosp Proj Ser A
Rfdg........................................................ 9.000 05/01/12 2,008,500
1,500 California St Pub Wks Lease CA St Univ Proj Ser A Rfdg
(AMBAC Insd)................................................ 5.375 10/01/17 1,470,465
1,500 Colton, CA Pub Fin Auth Rev Elec Sys Impts.................. 7.500 10/01/20 1,573,710
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev (MBIA
Insd)....................................................... * 09/01/17 1,500,400
2,500 Corona, CA Ctfs Partn Vista Hosp Sys Inc Ser C.............. 8.375 07/01/11 2,756,925
3,465 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/15 1,106,201
3,480 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/18 905,705
3,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi-Cap
Fac Proj IV (MBIA Insd)..................................... 5.250 12/01/16 2,879,970
2,850 Riverside Cnty, CA Air Force Village West Inc Ser A Rfdg.... 8.125 06/15/20 3,043,315
2,000 San Diego Cnty, CA Ctfs Partn (AMBAC Insd).................. 5.500 08/15/10 2,045,580
1,900 San Diego Cnty, CA Ctfs Partn (AMBAC Insd).................. 5.500 08/15/11 1,935,017
7,625 San Francisco, CA City & Cnty Redev Agy Lease Rev Gains
(Crossover Rfdg @ 07/01/04) (g)............................. 0/8.500 07/01/14 6,056,614
3,300 San Francisco, CA City & Cnty Redev Fin Auth Tax Alloc
Rev......................................................... 5.250 08/01/21 3,057,549
3,000 Santa Ana, CA Cmnty Redev Agy Tax Ser B Rfdg................ 7.500 09/01/16 3,051,300
9,250 Stanislaus Cnty, CA Ctfs Partn Cap Impt Pgm Ser A Rfdg (MBIA
Insd)....................................................... 5.250 05/01/18 8,821,447
3,000 Westminster, CA Redev Agy Tax Alloc Rev Commercial Redev
Proj No 1................................................... 6.200 08/01/23 3,027,750
------------
46,579,753
------------
COLORADO 8.0%
11,920 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy................... * 08/31/10 5,008,784
19,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser
C........................................................... * 08/31/26 2,299,950
66 Arapahoe Cnty, CO Centennial Downs Metro Dist Cash Payment
Deficiency Bond............................................. 8.090 12/01/34 63,044
356 Arapahoe Cnty, CO Centennial Downs Metro Dist Interest
Certificate (f)............................................. 6.00/8.09 12/01/34 338,531
650 Arapahoe Cnty, CO Centennial Downs Metro Dist Ltd Tax Bond
Ser 1993 Rfdg............................................... 8.090 12/01/34 617,869
1,000 Bowles Metro Dist CO........................................ 7.750 12/01/15 1,027,870
6,395 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 10.500 01/01/19 6,901,804
6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 9.000 01/01/25 6,731,340
2,880 Colorado Hlth Fac Auth Rev Univ Hills Christian Nursing
Rfdg........................................................ 8.750 12/01/11 2,970,633
555 Colorado Hsg Fin Auth Single Family Residential Rev Ser C
Rfdg........................................................ 8.750 09/01/17 578,998
1,000 Denver, CO City & Cnty Arpt Rev Ser A....................... 6.900 11/15/98 1,044,020
1,175 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.400 11/15/98 1,257,344
3,000 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.875 11/15/12 3,563,460
10,000 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.500 11/15/23 11,418,800
2,500 Denver, CO City & Cnty Arpt Rev Ser D....................... 7.750 11/15/13 3,015,375
930 East River Regl Santn Dist CO Var Rfdg (Var Rate Cpn)....... 4.000 12/01/08 665,150
3,016 Gunnison Cnty, CO Indl Rev Bond Crested Butte Mtn Resort
Inc......................................................... 9.250 10/01/07 3,086,152
4,163 Himalaya Wtr & Santn Dist Adams Cnty, CO Genl Oblig Ltd Tax
Bond Ser 1995............................................... 9.500 12/01/24 3,055,521
5,385 Littleton, CO Riverfront Auth Rev Rfdg (e).................. 9.625 12/01/00 1,884,750
4,605 Skyland Metro Dist Gunnison Cnty CO Rfdg (Var Rate Cpn)..... 4.000 12/01/08 3,295,052
13,868 Tower Metro Dist Adams Cnty, CO Genl Oblig Ltd Tax Bond Ser
1995........................................................ 9.500 12/01/24 10,179,153
------------
69,003,600
------------
CONNECTICUT 1.0%
3,740 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Windsor Proj............................................ 7.125 11/01/24 4,223,507
4,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser A.......... 6.400 09/01/11 4,093,680
------------
8,317,187
------------
</TABLE>

See Notes to Financial Statements

8
<PAGE> 43

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DISTRICT OF COLUMBIA 0.5%
$ 1,700 District of Columbia Ser A1 Rfdg (MBIA Insd)................ 6.500% 06/01/10 $ 1,880,200
2,000 District of Columbia Ser E (FSA Insd)....................... 6.000 06/01/11 2,051,640
------------
3,931,840
------------
FLORIDA 8.9%
2,700 Brevard Cnty, FL Sch Brd Ctfs Ser A (AMBAC Insd)............ 5.100 07/01/07 2,740,581
28,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd) (c)............................................. * 02/01/18 8,013,040
5,115 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent........ 10.250 07/01/11 4,859,250
2,155 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent Ser
A........................................................... 10.250 07/01/11 2,047,250
1,135 Fishhawk Cmnty Dev Dist FL Spl.............................. 7.625 05/01/18 1,136,952
1,800 Florida Hsg Fin Agy Crossings Indian Run Apts V (MBIA
Insd)....................................................... 6.200 12/01/36 1,811,934
10,315 Florida St Muni Pwr Agy Rev (AMBAC Insd).................... 4.500 10/01/27 8,560,625
1,000 Lake Saint Charles, FL Cmnty Dev Dist Spl Assmt Rev......... 7.875 05/01/17 997,320
5,500 Miramar, FL Wastewater Impt Assmt Rev (FGIC Insd) (c)....... 6.750 10/01/25 6,154,720
3,860 Monroe Cnty, FL Indl Dev Auth 1st Mtg Med Fac Rev Kennedy Dr
Invt Ltd Proj Rfdg.......................................... 11.000 11/01/12 3,860,000
1,500 Orange Cnty, FL Hlth Fac Auth Rev 1st Mtg Orlando Lutheran
Tower....................................................... 8.750 07/01/26 1,588,125
1,300 Orange Cnty, FL Hlth Fac Auth Rev 1st Mtg Orlando Lutheran
Tower Rfdg.................................................. 8.625 07/01/20 1,363,674
4,030 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 4,593,354
7,500 Santa Rosa Bay Bridge Auth FL............................... 6.250 07/01/28 7,423,575
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Prty..... 6.700 07/01/25 5,741,340
16,065 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A (e)..... 10.000 12/15/11 11,044,687
1,000 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 996,070
2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.500 11/01/16 2,007,160
2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.625 11/01/26 2,007,100
------------
76,946,757
------------
GEORGIA 2.4%
19,000 Class A Ctfs relating to Atlanta, GA Urban Residential Fin
Auth Multi-Family Hsg Rev Renaissance on Peachtree Apts Proj
Ser 85...................................................... 8.500 04/01/26 18,050,000
3,000 Georgia St Hsg & Fin Auth................................... 6.450 12/01/27 3,072,840
------------
21,122,840
------------
IDAHO 1.5%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(c)......................................................... 8.900 02/15/21 8,860,000
4,300 Owyhee Cnty, ID Indl Dev Corp Indl Dev Rev Envirosafe
Services of ID Inc.......................................... 8.250 11/01/02 4,420,701
------------
13,280,701
------------
ILLINOIS 11.5%
1,000 Alton, IL Hosp Fac Rev Saint Anthony's Hlth Cent Proj
(Prerefunded @ 09/01/99).................................... 8.375 09/01/14 1,106,940
1,950 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 2,154,496
4,500 Chicago, IL Emergency Telephone Sys (FGIC Insd)............. 5.800 01/01/13 4,583,205
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev American Airls Inc
Proj Ser A.................................................. 7.875 11/01/25 3,251,190
24,440 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Proj Ser 84A (c)............................................ 8.850 05/01/18 27,491,578
2,730 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B....................................................... 8.950 05/01/18 3,109,033
4,250 Chicago, IL Rev Chatham Ridge Tax Increment................. 10.250 01/01/07 4,632,500
1,000 Chicago, IL Tax Increment................................... 7.250 01/01/14 990,770
2,000 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 2,068,300
1,405 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/16 1,415,425
7,290 Illinois Dev Fin Auth Rev Mercy Hsg Corp Proj Rfdg.......... 7.000 08/01/24 7,708,810
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,008,510
3,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 3,047,520
4,730 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D.......... 9.500 11/15/15 5,392,957
3,825 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00).................................... 9.500 11/15/15 4,567,777
1,000 Illinois Hlth Fac Auth Rev Lifelink Corp Oblig Group Ser
B........................................................... 8.000 02/15/25 1,054,080
5,000 Illinois Hlth Fac Auth Rev Midwest Physician Group Ltd
Proj........................................................ 8.100 11/15/14 5,514,800
3,630 Illinois Hlth Fac Auth Rev Riverside Hlth Sys Series A Rfdg
A........................................................... 6.000 11/15/15 3,613,483
3,000 Illinois Hlth Fac Auth Rev Servantcor Ser A (Var Rate Cpn)
(Prerefunded @ 08/15/01).................................... 8.000 08/15/21 3,466,710
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 Wtrwks Rev............... 8.000 03/01/10 772,988
1,800 Peoria, IL Spl Tax Weaverridge Spl Svc Area................. 8.050 02/01/17 1,803,096
2,095 Regional Tran Auth IL Ser B (AMBAC Insd).................... 8.000 06/01/17 2,734,122
6,000 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 6,213,300
------------
98,989,903
------------
</TABLE>

See Notes to Financial Statements

9
<PAGE> 44

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

INDIANA 0.5%
$ 2,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700% 11/01/12 $ 2,011,980
2,000 Indiana St Dev Fin Auth Envir USX Corp Proj Rfdg & Impt..... 6.250 07/15/30 2,026,780
------------
4,038,760
------------
KANSAS 0.0%
2,500 Kansas City, KS Crawford Cnty Leavenworth Single Family Mtg
Rev (AMBAC Insd)............................................ * 04/01/16 322,300
------------
KENTUCKY 0.4%
2,700 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd)........................................... 8.648 10/09/08 3,111,750
------------
LOUISIANA 1.2%
3,000 Louisiana Pub Fac Auth Rev Student Ln Subser A3............. 7.000 09/01/06 3,162,090
12,500 New Orleans, LA Rfdg (AMBAC Insd)........................... * 09/01/17 3,889,125
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd)................. * 02/01/15 3,600,200
------------
10,651,415
------------
MAINE 0.2%
1,250 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd)....... 7.000 07/01/24 1,418,238
------------
MARYLAND 0.5%
1,440 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Multi-Family Hsg Rev Ser A Rfdg............................. 8.300 05/15/17 1,480,493
1,725 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Rev Single
Family Pgm Seventh Ser...................................... 7.300 04/01/25 1,823,256
1,000 Maryland St Energy Fin Admin Ltd Oblig Rev Cogeneration AES
Warrior Run................................................. 7.400 09/01/19 1,056,440
------------
4,360,189
------------
MASSACHUSETTS 5.3%
13,770 Canton, MA Hsg Auth Multi-Family Hsg Mtg Rev Canton
Arboretum Apts.............................................. 6.500 09/01/19 13,081,500
5,000 Massachusetts St Hlth & Edl Fac Auth Rev New England Med
Cent Hosp Ser G (Embedded Swap) (MBIA Insd)................. 3.100 07/01/13 4,336,000
1,670 Massachusetts St Hlth & Edl Fac Auth Rev Saint Anne's Hosp
Ser A....................................................... 9.375 07/01/14 1,688,153
9,415 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A....................................................... 6.000 10/01/23 8,127,687
2,200 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental Ser A Rfdg
(AMBAC Insd)................................................ 6.650 07/01/19 2,287,890
640 Massachusetts St Hsg Fin Agy Hsg Rev Ser A.................. 9.000 12/01/18 666,374
4,000 Massachusetts St Indl Fin Agy Rev Cent For Autism........... 9.500 11/01/17 4,388,680
575 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.000 12/01/06 609,874
1,085 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.375 12/01/13 1,169,923
675 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.500 12/01/20 730,661
6,900 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl
Composting.................................................. 9.250 06/01/10 7,371,270
1,000 Massachusetts St Indl Fin Agy Solid Waste Disp Rev Res
Recovery Sys................................................ 9.200 12/01/99 1,011,150
------------
45,469,162
------------
MICHIGAN 4.1%
2,000 Battle Creek, MI Downtown Dev Auth Tax Increment Rev........ 7.600 05/01/16 2,266,280
7,000 Detroit, MI Water Supply Sys Rev Rfdg (FGIC Insd)........... 5.000 07/01/23 6,356,350
2,390 Meridian, MI Econ Dev Corp Ltd Oblig Rev 1st Mtg Burcham
Hills Ser A................................................. 7.500 07/01/13 2,451,447
3,430 Meridian, MI Econ Dev Corp Ltd Oblig Rev 1st Mtg Burcham
Hills Ser A................................................. 7.750 07/01/19 3,557,390
8,005 Meridian, MI Econ Dev Corp Ltd Oblig Rev 1st Mtg Burcham
Hills Ser A (Prerefunded @ 07/01/97)........................ 9.625 07/01/19 8,475,454
3,005 Michigan St Hosp Fin Auth Rev Garden City Hosp.............. 8.300 09/01/02 3,159,097
12,500 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fibre Proj (e).............................................. 10.250 12/01/16 7,093,625
1,500 North Branch, MI Area Sch Lapeer Cnty Rfdg (AMBAC Insd)..... 5.250 05/01/13 1,451,175
745 Saint Clair Cnty, MI Econ Dev Corp Kmart Proj............... 9.500 02/01/06 746,296
------------
35,557,114
------------
MINNESOTA 1.2%
5,490 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser A....................................................... 10.000 01/15/20 4,950,333
495 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser B Cap Apprec............................................ * 01/15/20 757,796
2,800 Minneapolis, MN Coml Dev Rev Holiday Inn Metrodome Proj
Rfdg........................................................ 10.000 06/01/98 2,811,928
1,750 Minnesota St Hsg Fin Agy Single Family Mtg Ser D............ 8.800 07/01/16 1,833,352
------------
10,353,409
------------
MISSISSIPPI 0.1%
1,000 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy Res Inc
Rfdg........................................................ 7.300 05/01/25 1,049,540
------------
MISSOURI 0.8%
980 Jefferson Cnty, MO Indl Dev Auth Indl Rev Cedars Hlthcare
Cent Proj Ser A Rfdg........................................ 8.250 12/01/15 985,126
4,815 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Skaggs Cmnty
Hosp Rfdg................................................... 9.500 05/15/13 5,010,585
1,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd)...................... 6.000 06/01/15 1,071,230
------------
7,066,941
------------
</TABLE>

See Notes to Financial Statements

10
<PAGE> 45

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

MONTANA 0.5%
$ 4,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P
Proj........................................................ 7.000% 12/31/19 $ 3,907,200
------------
NEBRASKA 0.7%
2,300 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.913 10/17/23 2,501,250
2,800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.429 09/10/30 3,125,500
------------
5,626,750
------------
NEVADA 0.8%
5,120 Nevada Hsg Division Amt Single Family Mtg Sr D2............. 6.350 04/01/28 5,185,075
1,945 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E
Rfdg........................................................ 5.600 09/01/09 1,863,330
------------
7,048,405
------------
NEW HAMPSHIRE 2.4%
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.350 01/01/18 2,032,400
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.450 01/01/25 2,030,720
4,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp Catholic
Med Cent Rfdg............................................... 8.250 07/01/13 4,291,000
3,480 New Hampshire Higher Edl & Hlth Fac Auth Rev Vly Regl
Hosp........................................................ 7.350 04/01/23 3,341,079
1,440 New Hampshire Higher Edl & Hlth Franklin Pierce College
Issue....................................................... 7.000 10/01/16 1,473,955
2,160 New Hampshire Higher Edl & Hlth Franklin Pierce College
Issue....................................................... 7.125 10/01/26 2,209,723
2,000 New Hampshire St Business Fin Auth Pollutn Ctl & Solid Waste
Disposal Rev................................................ 7.750 01/01/22 2,110,520
3,000 New Hampshire St Indl Dev Auth Rev Pollutn Ctl Pub Svcs Co
of NH Proj Ser C............................................ 7.650 05/01/21 3,088,920
------------
20,578,317
------------
NEW JERSEY 1.4%
6,570 New Jersey Econ Dev Auth Rev 1st Mtg Gross Rev Oakridge
Manor Proj Rfdg............................................. 9.500 11/01/14 6,780,043
1,000 New Jersey Econ Dev Auth Rev 1st Mtg Winchester Gardens Ser
A........................................................... 8.500 11/01/16 1,036,220
1,500 New Jersey Econ Dev Auth Rev 1st Mtg Winchester Gardens Ser
A........................................................... 8.625 11/01/25 1,562,655
3,000 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen Proj Ser A... 8.750 05/15/26 3,150,180
------------
12,529,098
------------
NEW MEXICO 1.3%
2,250 Albuquerque, NM Retirement Fac Rev La Vida Llena Proj Ser A
Rfdg........................................................ 8.850 02/01/23 2,423,002
5,835 Albuquerque, NM Retirement Fac Rev OGL Retirement Fac Rfdg
(d)......................................................... 10.000 10/01/13 4,261,884
4,900 Farmington, NM Pollutn Ctl Rev San Juan Proj Ser A Rfdg..... 6.400 08/15/23 4,932,095
------------
11,616,981
------------
NEW YORK 10.7%
1,315 Clifton Springs, NY Hosp & Clinic Ser B Rfdg & Impt......... 7.000 01/01/05 1,339,617
1,500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY Institute of
Technology Rfdg............................................. 7.500 03/01/26 1,564,320
2,950 New York City Indl Dev Agy Civic Fac Rev Nightingale Bamford
Sch Proj.................................................... 5.850 01/15/20 2,959,646
1,500 New York City Indl Dev Agy Rev Visy Paper Inc Proj.......... 7.950 01/01/28 1,599,885
5,000 New York City Ser A......................................... 7.000 08/01/07 5,531,900
3,000 New York City Ser D Rfdg.................................... 8.000 02/01/05 3,490,320
3,500 New York City Ser E......................................... 6.000 08/01/26 3,412,360
3,750 New York City Tran Auth Tran Fac Livingston Plaza Proj Rfdg
(FSA Insd).................................................. 5.400 01/01/18 3,705,937
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.500 07/01/12 4,833,100
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.000 07/01/20 4,337,650
8,340 New York St Dorm Auth Rev St Univ Edl Fac Ser C............. 5.400 05/15/23 7,685,977
2,500 New York St Dorm Auth Rev Upstate Cmnty Colleges Ser A...... 5.700 07/01/21 2,384,350
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg)....................................................... 8.721 04/01/20 2,750,000
6,000 New York St Energy Resh & Dev Auth Gas Fac Rev Ser D
(Inverse Fltg) (MBIA Insd) (c).............................. 5.635 07/08/26 5,754,780
225 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.500 04/01/00 229,127
1,000 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.500 04/01/01 1,016,930
750 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.250 04/01/02 753,180
1,750 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Rfdg
(MBIA Insd)................................................. 5.250 02/15/19 1,656,830
10,000 New York St Med Care Fac Fin Agy Rev Presbyterian Hosp Ser A
Rfdg (MBIA Insd) (c)........................................ 5.375 02/15/25 9,512,900
1,500 New York St Thruway Auth Hwy & Brdg Tr Fund Ser A........... 6.000 04/01/14 1,561,935
13,000 New York St Urban Dev Corp Rev Correctional Fac Ser A
Rfdg........................................................ 5.500 01/01/16 12,261,990
3,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd)................................. 6.250 11/15/06 3,305,790
1,500 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd)................................. 6.375 11/15/07 1,656,720
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd)................................. 6.500 11/15/09 2,222,300
7,775 Triborough Bridge And Tunnel Auth NY Rev Ser 1994A.......... 4.750 01/01/19 6,851,019
------------
92,378,563
------------
NORTH CAROLINA 0.9%
8,155 Eastern Band Cherokee Indians NC Spl Oblig Rev Carolina
Mirror Co Proj.............................................. 10.250 09/01/09 8,155,000
------------
NORTH DAKOTA 0.3%
$ 2,100 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph Hosp Corp
Proj........................................................ 8.875% 11/15/24 $ 2,337,321
------------

</TABLE>

See Notes to Financial Statements

11
<PAGE> 46

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO 1.9%
$ 2,000 East Liverpool, OH Hosp Rev East Liverpool City Hosp Ser
A........................................................... 8.125% 10/01/11 $ 2,127,700
7,500 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized) (c)................................... 9.849 03/31/31 8,221,875
3,700 Ohio St Solid Waste Rev Rep Engineered Steels Proj.......... 8.250 10/01/14 3,804,895
1,000 Ohio St Solid Waste Rev Rep Engineered Steels Proj.......... 9.000 06/01/21 1,068,650
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj Rfdg........... 7.750 12/01/09 1,509,690
------------
16,732,810
------------
OKLAHOMA 0.5%
4,000 Tulsa, OK Indl Auth Hosp Rev Tulsa Regl Med Cent
(Prerefunded @ 06/01/03).................................... 7.200 06/01/17 4,611,680
------------
PENNSYLVANIA 7.0%
6,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral
Toledo Edison Co Ser A Rfdg................................. 7.750 05/01/20 6,580,320
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Village Inc Proj
Rfdg........................................................ 7.700 05/15/22 1,010,800
4,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem
Steel Corp Proj Rfdg........................................ 7.500 09/01/15 4,242,600
1,775 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp Proj....... 8.500 07/01/13 1,961,411
2,000 Cumberland Cnty, PA Auth Rev 1st Mtg Carlisle Hosp & Hlth... 6.800 11/15/14 2,079,500
1,500 Delaware County, PA Auth 1st Mtg Rev Riddle Vlg Proj........ 7.000 06/01/21 1,506,735
3,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res Recovery Sys
Rev Ser A................................................... 8.500 12/15/10 3,152,640
2,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 2,318,140
3,750 Montgomery Cnty, PA Higher Edl & Hlth Auth Nursing Home Rev
Delco Sys Svcs Proj A....................................... 9.875 11/01/18 3,830,062
8,100 Montgomery Cnty, PA Indl Dev Auth Rev 1st Mtg The Meadowood
Corp Proj Ser A (Prerefunded @ 12/01/00).................... 10.000 12/01/19 9,768,519
500 Montgomery Cnty, PA Indl Dev Auth Rev 1st Mtg The Meadowood
Corp Rfdg................................................... 7.000 12/01/10 508,540
2,500 Montgomery Cnty, PA Indl Dev Auth Rev 1st Mtg The Meadowood
Corp Rfdg................................................... 7.250 12/01/15 2,508,175
6,000 Montgomery Cnty, PA Indl Dev Auth Rev 1st Mtg The Meadowood
Corp Rfdg................................................... 7.400 12/01/20 5,996,100
3,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev MacMillan Ltd
Partnership Proj............................................ 7.600 12/01/20 3,356,760
1,500 Pennsylvania Econ Dev Fin Auth Recycling Rev Ponderosa
Fibres Proj Ser A........................................... 9.250 01/01/22 1,393,455
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev Colver Proj
Ser D....................................................... 7.050 12/01/10 3,207,210
2,300 Pennsylvania Econ Dev Fin Auth Res Recovery Rev Northampton
Generating Ser A............................................ 6.500 01/01/13 2,276,149
5,000 Philadelphia, PA Auth for Indl Dev Rev Long-Term Care
Maplewood................................................... 8.000 01/01/24 5,181,300
------------
60,878,416
------------
RHODE ISLAND 0.2%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,114,740
------------
SOUTH CAROLINA 0.5%
115 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd)............ 7.000 06/01/19 129,663
2,385 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd)....................................... 7.000 06/01/19 2,774,351
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84 (Var
Rate Cpn)................................................... 6.157 06/15/04 1,000,000
------------
3,904,014
------------
TENNESSEE 3.1%
3,000 SCA Tax Exempt Trust Multi-Family Mtg Memphis Hlth Edl Rev
Bond Receipt Ser A6 (FSA Insd).............................. 7.350 01/01/30 3,265,800
4,610 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser A.............................................. 9.750 08/01/19 4,960,498
4,670 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser C.............................................. 9.750 08/01/19 5,025,060
2,000 Springfield, TN Hlth & Edl Fac Brd Hosp Rev Jesse Holman
Jones Hosp Proj............................................. 8.250 04/01/12 2,150,900
6,085 Sullivan Cnty, TN Hlth Edl & Hsg Fac Brd Rev 1st Mtg
RHA/Sullivan Inc Fac Rev.................................... 9.750 09/01/19 6,579,954
4,455 Trenton, TN Hlth & Edl Fac Brd Rev ICF/MR RHA/Trenton Golden
Door........................................................ 10.000 05/01/19 4,798,570
------------
26,780,782
------------
TEXAS 3.1%
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd)................................... 9.149 01/01/22 2,302,500
665 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/00 508,147
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/01 824,016
335 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/02 219,703
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/11 598,764
775 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/11 826,669
2,670 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/12 2,849,985
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84
Rfdg (Var Rate Cpn)......................................... 5.363 04/01/04 2,502,475
3,000 Harris Cnty, TX Hlth Fac Dev Corp Spl Fac Rev TX Med Cent
Proj (MBIA Insd)............................................ 5.900 05/15/20 3,068,400
2,728 Texas Genl Svcs Comm Partn Int Lease Purch Ctfs............. 7.250 08/15/11 2,784,773
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd)..................................... 6.750 01/01/15 2,237,800
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd)..................................... 6.600 01/01/23 2,215,520
5,000 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics..................................... 8.200 03/15/21 5,595,750
------------
26,534,502
------------
UTAH 1.9%
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 996,720
1,165 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,175,158
</TABLE>

See Notes to Financial Statements

12
<PAGE> 47

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

UTAH (CONTINUED)
$ 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800% 09/01/25 $ 990,230
4,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd) (b)................................................... 5.750 07/01/19 3,922,520
5,000 Murray City, UT Hosp Rev Inc Hlth Svc Inc Rfdg (MBIA
Insd)....................................................... 4.750 05/15/20 4,387,450
280 Saint George, UT Indl Dev Rev Kmart Corp Ser 1984A.......... 10.750 10/15/08 285,211
3,270 Salt Lake County, UT Hsg Auth Multi-Family Hsg Rev.......... 6.375 11/01/33 3,288,541
1,600 Utah St Hsg Fin Agy Single Family Mtg Mezz A1 (AMBAC
Insd)....................................................... 6.100 07/01/13 1,632,112
------------
16,677,942
------------
VIRGINIA 0.7%
2,650 Fairfax Cnty, VA Park Auth Park Fac Rev..................... 6.625 07/15/20 2,762,015
3,000 Loudoun Cnty, VA Indl Dev Auth (FSA Insd)................... 5.800 06/01/20 3,014,970
------------
5,776,985
------------
WASHINGTON 0.3%
1,000 Port Walla Walla, WA Pub Corp Solid Waste Recycling Rev
Ponderosa Fibres Proj....................................... 9.125 01/01/26 915,050
5,500 Washington St Pub Pwr Supply Comp Interest Ser C Rfdg (MBIA
Insd)....................................................... * 07/01/17 1,663,255
------------
2,578,305
------------
WISCONSIN 2.3%
6,840 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Ser D...... 6.450 09/01/27 6,985,487
4,225 Wisconsin St Hlth & Edl Fac Auth Rev Chippewa Vly Hosp Ser F
Rfdg........................................................ 9.500 11/15/12 4,856,046
2,185 Wisconsin St Hlth & Edl Fac Auth Rev Eau Claire Manor....... 9.625 06/01/13 2,253,849
1,150 Wisconsin St Hlth & Edl Fac Auth Rev Gundersen Clinic
LaCrosse Inc (FSA Insd)..................................... 5.625 12/01/16 1,149,253
1,975 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn..... 7.875 11/01/22 1,987,521
3,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 3,075,900
------------
20,308,056
------------
PUERTO RICO 0.2%
2,000 Centro De Recaudaciones De Ingresos Municipales Ctfs Partn
Puerto Rico................................................. 6.850 10/17/03 2,048,700
------------
TOTAL LONG-TERM INVESTMENTS 96.5%
(Cost $807,605,260)(a)..................................................................... 834,315,435
SHORT-TERM INVESTMENTS AT AMORTIZED COST 3.0%............................................... 25,978,572
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%.................................................. 4,253,874
------------
NET ASSETS 100.0%........................................................................... $864,547,881
============

*Zero coupon bond

</TABLE>

(a) At December 31, 1996, for federal income tax purposes, cost is $809,858,010;
the aggregate gross unrealized appreciation is $49,569,224 and the aggregate
gross unrealized depreciation is $25,111,799, resulting in net unrealized
appreciation of $24,457,425.

(b) Securities purchased on a when issued and delayed delivery basis.

(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.

(d) Interest is accruing at less than the stated coupon.

(e) Non-income producing security.

(f) Currently is a payment-in-kind security which will convert to a cash paying
security with a higher coupon at a predetermined date.

(g) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.

See Notes to Financial Statements

13
<PAGE> 48

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $807,605,260)
(Note 1).................................................. $834,315,435
Short-Term Investments (Note 1)............................. 25,978,572
Cash........................................................ 42,716
Receivables:
Interest.................................................. 16,720,954
Fund Shares Sold.......................................... 1,631,010
Securities Sold........................................... 145,583
Other....................................................... 69,061
------------
Total Assets.......................................... 878,903,331
------------
LIABILITIES:
Payables:
Securities Purchased...................................... 8,800,000
Income Distributions...................................... 2,653,668
Fund Shares Repurchased................................... 1,379,612
Distributor and Affiliates (Notes 2 and 6)................ 556,193
Investment Advisory Fee (Note 2).......................... 350,047
Variation Margin on Futures (Note 5)...................... 295,000
Accrued Expenses............................................ 238,526
Deferred Compensation and Retirement Plans (Note 2)......... 82,404
------------
Total Liabilities..................................... 14,355,450
------------
NET ASSETS.................................................. $864,547,881
============
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $941,822,660
Net Unrealized Appreciation on Securities................... 26,675,438
Accumulated Distributions in Excess of Net Investment Income
(Note 1).................................................. (8,821,755)
Accumulated Net Realized Loss on Securities................. (95,128,462)
------------
NET ASSETS.................................................. $864,547,881
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $671,856,857 and 46,419,769 shares of
beneficial interest issued and outstanding)............ $ 14.47
Maximum sales charge (4.75%* of offering price)......... .72
------------
Maximum offering price to public........................ $ 15.19
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $173,844,037 and 12,010,543 shares of
beneficial interest issued and outstanding)............ $ 14.47
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $18,846,987 and 1,302,119 shares of
beneficial interest issued and outstanding)............ $ 14.47
============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>

See Notes to Financial Statements

14
<PAGE> 49

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 62,456,702
------------
EXPENSES:
Investment Advisory Fee (Note 2)............................ 3,953,376
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,486,310, $1,517,563 and $131,653,
respectively) (Note 6).................................... 3,135,526
Shareholder Services (Note 2)............................... 868,460
Legal (Note 2).............................................. 817,150
Custody..................................................... 224,323
Trustees Fees and Expenses (Note 2)......................... 34,968
Other....................................................... 396,397
------------
Total Expenses.......................................... 9,430,200
Less Expenses Reimbursed (Note 2)....................... 10,028
------------
Net Expenses............................................ 9,420,172
------------
NET INVESTMENT INCOME....................................... $ 53,036,530
============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments (Including reorganization and restructuring
costs of $705,947)...................................... $(10,287,555)
Options................................................... (463,090)
Futures................................................... (4,459,217)
------------
Net Realized Loss on Securities............................. (15,209,862)
------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 39,038,275
------------
End of the Period:
Investments............................................. 26,710,175
Futures................................................. (34,737)
------------
26,675,438
------------
Net Unrealized Depreciation on Securities During the
Period.................................................... (12,362,837)
------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(27,572,699)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 25,463,831
============
</TABLE>

See Notes to Financial Statements

15
<PAGE> 50

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....................................... $ 53,036,530 $ 52,928,406
Net Realized Loss on Securities............................. (15,209,862) (18,443,786)
Net Unrealized Appreciation/Depreciation on
Securities During the Period.............................. (12,362,837) 75,421,063
-------------- ---------------
Change in Net Assets from Operations........................ 25,463,831 109,905,683
-------------- ---------------
Distributions from Net Investment Income.................... (53,036,530) (49,750,600)
Distributions in Excess of Net Investment Income (Note 1)... (228,957) -0-
-------------- ---------------
Total Distributions from and in Excess of Net Investment
Income*................................................. (53,265,487) (49,750,600)
-------------- ---------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (27,801,656) 60,155,083
-------------- ---------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................................... 164,096,198 98,267,869
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 22,996,285 21,929,512
Cost of Shares Repurchased.................................. (108,010,178) (92,025,233)
-------------- ---------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 79,082,305 28,172,148
-------------- ---------------
TOTAL INCREASE IN NET ASSETS................................ 51,280,649 88,327,231
NET ASSETS:
Beginning of the Period..................................... 813,267,232 724,940,001
------------- ---------------
End of the Period (Including accumulated distributions in
excess of net investment income of $8,821,755 and
$8,760,023, respectively)................................. $ 864,547,881 $813,267,232
============== ===============
</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................................. $(43,633,838) $(42,013,439)
Class B Shares................................. (8,865,546) (7,196,226)
Class C Shares................................. (766,103) (469,250)
Class D Shares................................. -- (71,685)
------------ ------------
$(53,265,487) $(49,750,600)
============ ============
</TABLE>

See Notes to Financial Statements

16
<PAGE> 51

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.................... $14.984 $13.848 $15.629 $14.529 $15.687
-------- -------- -------- -------- --------
Net Investment Income..................................... .963 1.024 .956 1.052 1.064
Net Realized and Unrealized Gain/Loss on Securities....... (.513) 1.072 (1.717) 1.158 (1.047)
-------- -------- -------- -------- --------
Total from Investment Operations............................ .450 2.096 (.761) 2.210 .017
Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .960 .960 1.020 1.110 1.175
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $14.474 $14.984 $13.848 $15.629 $14.529
======== ======== ======== ======== ========
Total Return(a)............................................. 3.21% 15.52% (4.93%) 15.82% .08%
Net Assets at End of the Period (In millions)............... $671.9 $665.8 $603.0 $636.2 $566.1
Ratio of Expenses to Average Net Assets(b).................. .99% .95% .87% 1.03% 1.08%
Ratio of Net Investment Income to Average Net Assets(b)..... 6.60% 7.05% 6.48% 6.95% 7.07%
Portfolio Turnover.......................................... 59% 59% 101% 91% 44%
</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 expenses was less than 0.01%.

See Notes to Financial Statements

17
<PAGE> 52

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
May 1, 1993
Year Ended December 31, (Commencement of
----------------------------- Distributions) to
Class B Shares 1996 1995 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $14.983 $13.850 $15.621 $14.670
-------- -------- -------- ---------
Net Investment Income..................................... .843 .908 .841 .656

Net Realized and Unrealized Gain/Loss on Securities....... (.506) 1.071 (1.718) .945
-------- -------- -------- ---------

Total from Investment Operations............................ .337 1.979 (.877) 1.601

Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .846 .846 .894 .650
-------- -------- -------- ---------

Net Asset Value, End of the Period.......................... $14.474 $14.983 $13.850 $15.621
======== ======== ======== =========
Total Return(a)............................................. 2.40% 14.62% (5.69%) 11.12%*
Net Assets at End of the Period (In millions)............... $ 173.8 $ 137.9 $ 112.4 $ 56.6
Ratio of Expenses to Average Net Assets(b).................. 1.75% 1.70% 1.64% 1.74%
Ratio of Net Investment Income to Average Net Assets(b)..... 5.84% 6.25% 5.70% 5.95%
Portfolio Turnover.......................................... 59% 59% 101% 91%*
</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 expenses was less than 0.01%.

See Notes to Financial Statements

18
<PAGE> 53

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<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.................... $14.987 $13.846 $15.610 $15.030
-------- ------- ------- --------
Net Investment Income..................................... .851 .910 .824 .369
Net Realized and Unrealized Gain/Loss on Securities....... (.518) 1.077 (1.694) .580
-------- ------- -------- --------
Total from Investment Operations............................ .333 1.987 (.870) .949
Less Distributions from and in Excess of Net Investment
Income (Note 1)........................................... .846 .846 .894 .369
------- -------- -------- --------
Net Asset Value, End of the Period.......................... $14.474 $14.987 $13.846 $15.610
======== ======== ======== ========
Total Return(a)............................................. 2.33% 14.70% (5.62%) 6.37%*
Net Assets at End of the Period (In millions)............... $18.8 $9.5 $7.6 $5.2
Ratio of Expenses to Average Net Assets(b).................. 1.75% 1.69% 1.64% 1.82%
Ratio of Net Investment Income to Average Net Assets(b)..... 5.84% 6.19% 5.71% 5.21%
Portfolio Turnover.......................................... 59% 59% 101% 91%*
</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 expenses was less than 0.01%.

See Notes to Financial Statements

19
<PAGE> 54

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Tax Free High 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 investors with a high level of current
income exempt from federal income taxes primarily through investment in a
diversified portfolio of medium and lower grade municipal securities. The Fund
commenced investment operations on June 28, 1985. The distribution of the Fund's
Class B and Class C shares commenced on May 1, 1993 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.

A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Investments
valued using estimates of market value are generally those non-rated securities
in which the Fund owns over 90% of the original bond issue. At December 31,
1996, 18% of the Fund's net assets consisted of such securities. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.

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 $82,799,196 which expires between
December 31, 1999 and December 31, 2004. Net realized gains or losses may differ
for financial reporting and tax purposes primarily as a result of the deferral
of post October 31 losses, gains or losses recognized for tax purposes on open
futures positions and the capitalization of reorganization and restructuring
costs for tax purposes.

20
<PAGE> 55

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.

For the year ended December 31, 1996, 99.1% 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 distributions in excess of net investment income
for certain periods. Permanent book and tax basis differences relating to the
recognition of certain expenses which are not deductible for tax purposes
totaling $167,225 were reclassified from accumulated distributions in excess of
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:

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $54,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $66,300 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 $673,900,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

Additionally, for the year ended December 31, 1996, the Fund reimbursed
VKAC approximately $161,200 related to the cost of consolidating the VKAC
open-end fund complex. Payment was contingent upon the realization by the Fund
of cost efficiencies in certain expense categories resulting from the
consolidation.

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.

21
<PAGE> 56

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

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

At December 31, 1996, capital aggregated $744,740,084, $177,733,309 and
$19,349,267 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................................................... 6,370,895 $ 92,301,711
Class B................................................... 4,180,416 60,439,439
Class C................................................... 787,103 11,355,048
--------- ------------
Total Sales................................................. 11,338,414 $ 164,096,198
========= ============
Dividend Reinvestment:
Class A................................................... 1,326,707 $ 19,189,337
Class B................................................... 229,488 3,317,782
Class C................................................... 33,851 489,166
--------- ------------
Total Dividend Reinvestment................................. 1,590,046 $ 22,996,285
========= ============
Repurchases:
Class A................................................... (5,711,728) $ (82,614,355)
Class B................................................... (1,605,061) (23,186,460)
Class C................................................... (153,484) (2,209,363)
--------- ------------
Total Repurchases........................................... (7,470,273) $(108,010,178)
========= ============
</TABLE>

22
<PAGE> 57

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $715,993,345, $137,196,174 and
$9,718,061 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................................................... 4,222,270 $ 59,289,997
Class B................................................... 2,414,527 35,122,032
Class C................................................... 265,279 3,855,840
Class D................................................... -0- -0-
--------- -----------
Total Sales................................................. 6,902,076 $ 98,267,869
========= ============
Dividend Reinvestment:
Class A................................................... 1,304,961 $ 18,980,521
Class B................................................... 181,510 2,642,279
Class C................................................... 21,072 306,708
Class D................................................... -0- 4
--------- -----------
Total Dividend Reinvestment................................. 1,507,543 $ 21,929,512
========= ============
Repurchases:
Class A................................................... (4,634,819) $(65,107,747)
Class B................................................... (1,504,466) (21,894,277)
Class C................................................... (197,847) (2,860,089)
Class D................................................... (147,327) (2,163,120)
--------- -----------
Total Repurchases........................................... (6,484,459) $(92,025,233)
========== ============
</TABLE>

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
$362,700 and CDSC on redeemed shares of approximately $504,700. Sales charges do
not represent expenses of the Fund.

23
<PAGE> 58

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $518,452,919 and $475,606,658,
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.

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)......................... 7,010 (815,589)
Options Terminated in Closing Transactions (Net)............ (2,240) 421,422
Options Expired (Net)....................................... (4,420) 239,857
Options Exercised (Net)..................................... (350) 154,310
--------- --------
Outstanding at December 31, 1996............................ -0- $ -0-
========= ========
</TABLE>

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).

24
<PAGE> 59

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

Transactions in futures contracts for the year ended December 31, 1996,
were as follows:

<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995............................ 900
Futures Opened.............................................. 12,929
Futures Closed.............................................. (13,403)
---------
Outstanding at December 31, 1996............................ 426
=========
</TABLE>

The futures contracts outstanding as of June 30, 1996, and the
descriptions and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- -----------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bond Index Futures
Mar 1997 - Sells to Open (Current Notional Value
$116,063 per contract)................................ 100 $(44,554)
US Treasury Bond Futures
Mar 1997 - Buys to Open (Current Notional Value
$112,625 per contract)................................ 326 9,817
------ -----------
426 $(34,737)
====== ===========
</TABLE>

C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the security's 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 $1,163,200.

25
<PAGE> 60

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Tax Free High 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 Tax Free High 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

26
<PAGE> 61

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund

27
<PAGE> 62

VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller

PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.

(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

RESULT OF SHAREHOLDER VOTES

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
40,876,271 shares voted for the proposal, 1,113,658 shares voted against and
2,780,761 shares abstained. With regard to the approval of certain changes to
the Fund's fundamental investment policies with respect to investment in other
investment companies, 31,103,417 shares voted for the proposal, 1,290,613 shares
voted against and 2,896,741 shares abstained. With regard to the ratification of
KPMG Peat Marwick LLP as independent public accountants for the Fund, 41,691,705
shares voted for the proposal, 380,219 shares voted against and 2,698,765 shares
abstained.

28
<PAGE> 63

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Performance in Perspective....................... 6
Portfolio Management Review...................... 7
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 15
Statement of Operations.......................... 16
Statement of Changes in Net Assets............... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 21
Report of Independent Accountants................ 28
</TABLE>

CAI ANR 2/97
<PAGE> 64

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,
As noted in earlier reports,
VK/AC Holding Inc., the parent
company of Van Kampen American
Capital, Inc., was acquired by Morgan [PHOTO]
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 DENNIS J. MCDONNELL AND DON G. POWELL
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
increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

Continued on page two

1
<PAGE> 65

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 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.
While domestic economic fundamentals should 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.

Continued on page three

2
<PAGE> 66

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,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

3
<PAGE> 67

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND

<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV(1)... 4.20% 3.35% 3.35%
One-year total return(2)................ 0.79% 0.38% 2.36%
Five-year average annual total
return(2)............................. 6.53% N/A N/A
Ten-year average annual total return(2). 6.65% N/A N/A
Life-of-Fund average annual total
return(2)............................. 7.88% 4.33% 3.78%
Commencement date....................... 12/13/85 05/01/93 08/13/93

DISTRIBUTION RATES AND YIELD

Distribution rate(3).................... 4.58% 3.99% 3.99%
Taxable equivalent distribution rate(4). 8.04% 7.00% 7.00%
SEC Yield(5)............................ 4.18% 3.55% 3.55%
N/A = Not Applicable

</TABLE>

(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (3.25% for A shares) or contingent
deferred sales charge for early withdrawal (3% 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 combined federal and state income
tax rate of 43%, which takes into consideration the deductibility of
individual state taxes paid.

4
<PAGE> 68

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND

TOP TEN HOLDINGS AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
San Jose, CA Finance Authority Revenue Convention
Project ....................................... 3.64%
Corona, CA Redevelopment Agency Tax Allocation
Redevelopment Project, Area A ................. 3.27%
Visalia, CA Certificates of Participation,
Multiple Projects ............................. 3.15%
California State Variable Purpose ............... 2.77%
South Orange County, CA Public Finance Authority
Special Tax Revenue, Senior Lien
(09/01/2008) .................................. 2.61%
Anaheim, CA Public Finance Authority Tax
Allocation Revenue ............................ 2.58%
Los Angeles, CA Unified School District,
Certificates of Participation,
Multiple-Property Projects .................... 2.37%
Grossmont, CA Union High School District,
Certificates of Participation ................ 2.31%
South Orange County, CA Public Finance Authority
Special Tax Revenue, Senior Lien
(09/01/2009) .................................. 2.09%
Palm Desert, CA Finance Authority Tax Allocation
Revenue ....................................... 2.01%
</TABLE>

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

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>
Tax District .......... 21.5%
General Purpose ....... 20.1%
Public Education ...... 19.5%
Public Building ....... 10.3%
Health Care ........... 8.4%
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 (1)
<S> <C>
Tax District ......... 22.0%
Public Education ..... 20.9%
Water & Sewer ........ 12.3%
General Purpose ...... 12.3%
Public Building ...... 12.0%
</TABLE>

DURATION

<TABLE>
<CAPTION>
As of December 31, 1996(1) As of June 30, 1996(1)
<S> <C> <C>
Duration 7.68 years 8.32 years
</TABLE>

(1)Unaudited

5
<PAGE> 69

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

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital California
Insured Tax Free Fund vs. Lehman
Brothers Municipal Bond Index (December 31,
1986 through December 31, 1996)

<TABLE>
<CAPTION>
VKAC California Lehman Brothers
Value at Insured Tax Free Municipal Bond
December 31, Fund Index
<S> <C> <C>
1986 9,675.00 10,000.00
1987 9,410.00 10,149.60
1988 10,398.00 11,180.00
1989 11,357.00 12,385.90
1990 12,202.00 13,288.90
1991 13,420.00 14,902.90
1992 14,773.00 16,216.60
1993 16,929.00 18,207.40
1994 15,449.00 17,265.90
1995 18,273.00 20,281.00
1996 19,040.00 21,181.00

</TABLE>

The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions, and includes payment of the maximum
sales charge (3.25% for A shares).

6
<PAGE> 70

PORTFOLIO MANAGEMENT REVIEW

VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND

We recently spoke with the management team of the Van Kampen American Capital
California Insured Tax Free Fund about the key events and economic forces that
shaped the markets during the past fiscal year. The team includes Joseph A.
Piraro, 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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?
A The economy showed signs of surprising strength during the first half of
the year, which triggered concerns that rising inflation would eventually
lead to rising interest rates. With investors anticipating an upward move
in interest rates by the Federal Reserve Board, municipal interest rates rose
sharply, beginning in February and lasting through May. When the Fed ultimately
decided to take no action, bond prices rallied through the end of the year.
Although this rally in the second half of the year offset most of the drop
in prices experienced during the first six months, both municipal bonds and
Treasuries ended the year slightly lower than in 1995, with municipal bond
prices declining less than Treasuries. At year end, tax-exempt yields remained
attractive relative basis to taxable securities, with municipal bond yields
averaging approximately 90 percent of Treasuries.
California, with the world's seventh-largest economy, exhibited stronger
growth than the U.S. economy as a whole. The state budget was as healthy as it
had been in years, and the population trend, which had recently been declining,
appears to have stabilized. California's employment gains in 1996 were among the
highest in the country.

Q WHAT OTHER FACTORS WERE TAKEN INTO CONSIDERATION IN MANAGING THE FUND OVER
THE PAST YEAR?
A Election-year politics played a major role. In the first 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.
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 grown steadily from
1989's level of 25 percent to nearly 50 percent of total volume in 1996. In
large part, this is due to an increasing appetite for safety from investors
concerned about municipalities with financial difficulties, such as Los Angeles
County, California. Also, drastic cuts in insurance costs over the past three
years have made yields on insured offerings much more attractive when compared
to lower-rated quality securities.

7
<PAGE> 71

Q WHAT STATE-SPECIFIC EVENTS AFFECTED THE FUND?
A State politics had a big impact in 1996, especially the passage of
Proposition 218, which limits the ability of local governments to raise
revenue without the consent of affected taxpayers. The sectors that are
most affected by this new law are economic development issues, public
improvement bonds, and enterprise bonds which together make up about 45 percent
of issuance over the past two years. Proposition 218 has also already begun to
negatively impact the ratings of some municipal issuers.
California continues to be the largest issuer of municipal bonds in the
country, with a total of $24.8 billion in 1996 (13.5 percent of total volume).
The largest portion of the Fund's portfolio is the health care sector, which was
a strong performer in 1996. Since the Fund strives for current income, we tend
to keep our research-based sector allocations fairly consistent, as opposed to
switching in and out of sectors and trading securities in search of capital
gains.

Q WHAT ACTIONS DID YOU TAKE IN RESPONSE TO THESE EVENTS?
A The Fund seeks to provide California investors with a high level of
current income exempt from federal and California state income taxes,
while maintaining liquidity and safety of principal. We continued to seek
to accomplish the Fund's objective primarily by maintaining a diversified
portfolio of municipal securities.
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 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 Fund's duration was 7.68 years, a relatively short
level compared to the Lehman Brothers California Insured Municipal Bond Index
duration of 9.14 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 only two-thirds of the volatility. For additional Fund portfolio
highlights, please refer to page five.

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 4.20 percent(1) (Class A shares at net asset value). In
comparison, the market in general, as represented by the Lehman Brothers
Municipal Bond Index, returned 4.43 percent for the same period.
Despite one dividend reduction during the year, the Fund continued to meet
its goal of providing a competitive level of tax-exempt current income. Its
distribution rate was 4.58 percent(3) as of December 31, 1996, based on a
monthly dividend of $0.0695 per share and a maximum public offering price of
$18.20 per share. For investors in the 43 percent combined federal and state
income tax bracket, the Fund's distribution rate was equivalent to a taxable
investment earning 8.04 percent(4). Please refer to the chart on page four for
additional Fund performance results.

8
<PAGE> 72

Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE CALIFORNIA MUNICIPAL BOND MARKET
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 maintaining a slightly defensive posture with the
Fund as we enter 1997 by keeping its duration at a relatively 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, thereby keeping the budget deficit under control. While we expect some
type of tax reform bill during 1997, it will probably be very subtle. 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.
Economic growth is expected to remain strong in California. Many service
companies and other corporations are relocating to the state, which should keep
employment figures at a high level. The improving economy and state budget may
also result in rating upgrades among some municipal issuers.

[SIG] [SIG]

Peter W. Hegel Joseph A. Piraro
Chief Investment Officer Portfolio Manager
Fixed Income Investments

Please see footnotes on page four

9
<PAGE> 73

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS 97.2%
$4,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (MBIA
Insd)........................................... 6.450% 12/28/18 $ 4,352,680
1,000 Antioch Area Pub Fac Fin Agy CA Spl Tax Cmnty
Fac Dist (FGIC Insd)............................ 5.000 08/01/18 921,220
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy
Pool Ser A2 (FSA Insd).......................... 6.400 12/15/14 3,274,980
750 Berkeley, CA Ctfs Partn Cap Imp Berkeley Civic
Impt (AMBAC Insd)............................... 7.500 06/01/19 796,778
1,000 Brea & Olinda, CA Unified Sch Dist Ctfs Partn Sr
High Sch Pgm Ser A Rfdg (FSA Insd).............. 6.000 08/01/09 1,051,150
1,300 California Edl Fac Auth Rev Univ San Diego Proj
Stanford Univ Ser I (MBIA Insd)................. 6.750 10/01/15 1,415,427
2,000 California Hlth Fac Fin Auth Rev Adventist Hlth
Ser A Rfdg (MBIA Insd).......................... 6.500 03/01/14 2,140,460
1,650 California Hlth Fac Fin Auth Rev Kaiser
Permanente Ser A (AMBAC Insd)................... 5.550 08/15/25 1,623,154
2,000 California Hlth Fac Fin Auth Rev Kaiser
Permanente Ser A (FSA Insd)..................... 5.550 08/15/25 1,967,460
15 California Hsg Fin Agy Rev Hsg Ser B (MBIA
Insd)........................................... 8.625 08/01/15 15,798
1,180 California Pub Cap Impt Fin Auth Rev Pooled Proj
Ser B (BIGI Insd)............................... 8.100 03/01/18 1,250,257
1,250 California St (FGIC Insd)....................... 6.250 09/01/12 1,380,150
1,000 California St Pub Wks Brd Lease Rev Dept of
Corrections Ser B Rfdg (MBIA Insd).............. 5.625 11/01/19 994,820
1,000 California St Pub Wks Brd Lease Rev Ser A (AMBAC
Insd)........................................... 5.750 09/01/21 1,004,170
1,000 California St Univ Fresno Assn Inc Rev Auxiliary
Residence Student Proj (MBIA Insd).............. 6.250 02/01/17 1,068,110
4,500 California St Var Purp (MBIA Insd).............. 6.000 10/01/14 4,675,905
2,460 California Statewide Cmntys Ctfs Devereux Fndtn
(MBIA Insd)..................................... 5.250 11/01/19 2,354,195
1,570 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Children's Hosps Rfdg (MBIA Insd).... 6.000 06/01/10 1,687,797
2,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt
Proj Ser A Rfdg (MBIA Insd)..................... 7.000 08/01/12 2,339,960
1,200 Channel Islands Beach CA Cmnty Svcs Dist Ctfs
Partn (FSA Insd)................................ 5.650 09/01/16 1,194,960
1,205 Channel Islands Beach CA Cmnty Svcs Dist Ctfs
Partn (FSA Insd)................................ 5.700 09/01/21 1,205,434
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA Insd)...... 6.200 09/01/18 1,172,847
2,350 Chino, CA Unified Sch Dist Ctfs Partn Master
Lease Pgm (FSA Insd)............................ 6.250 03/01/09 2,545,308
</TABLE>

See Notes to Financial Statements

10
<PAGE> 74

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,500 Chino, CA Unified Sch Dist Ctfs Partn Master
Lease Pgm (FSA Insd)............................ 6.000% 03/01/14 $ 1,567,020
990 Colton, CA Jt Unified Sch Dist Cmnty Fac Dist
Spl Tax Southridge Village Rfdg (FSA Insd)...... 5.900 09/01/14 990,208
1,500 Compton, CA Cmnty Redev Agy Tax Alloc Walnut
Indl Park Ser A Rfdg (Prerefunded @ 08/01/99)
(AMBAC Insd).................................... 7.500 08/01/13 1,654,965
20 Concord, CA Redev Agy Tax Alloc Cent Concord
Redev Proj Ser 3 (BIGI Insd).................... 8.000 07/01/18 21,441
1,000 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)..................... 7.800 06/01/06 1,091,830
500 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)..................... 7.800 06/01/07 545,915
1,000 Contra Costa Cnty, CA Santn Dist No 7A Ctfs
Partn Sub-Delta Diablo Fin Corp (Prerefunded @
12/01/98) (BIGI Insd)........................... 7.600 12/01/08 1,088,770
1,550 Contra Costa, CA Wtr Auth Wtr Treatment Rev Ser
A Rfdg (FGIC Insd).............................. 5.750 10/01/14 1,575,497
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area A
Ser A Rfdg (FGIC Insd).......................... 6.250 09/01/13 5,509,815
2,250 El Centro, CA Redev Agy Tax El Centro Redev Proj
Rfdg (MBIA Insd)................................ 5.500 11/01/26 2,215,755
2,000 Fairfield Suisun, CA Swr Dist Swr Rev Ser A Rfdg
(MBIA Insd)..................................... 6.250 05/01/16 2,115,200
1,000 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)... 6.000 10/01/12 1,042,950
1,400 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)... 6.000 10/01/19 1,443,106
1,745 Gilroy, CA Unified Sch Dist Ctfs Partn Measure J
Cap Projs Rfdg (FSA Insd)....................... 5.875 09/01/06 1,886,485
1,810 Gilroy, CA Unified Sch Dist Ctfs Partn Measure J
Cap Projs Rfdg (FSA Insd)....................... 6.250 09/01/12 1,944,972
20,000 Grossmont, CA Union High Sch Dist Ctfs Partn
(MBIA Insd)..................................... * 11/15/21 3,895,600
1,000 Hayward, CA Ctfs Partn Civic Cent Proj (MBIA
Insd)........................................... 5.500 08/01/17 993,250
3,500 Hayward, CA Ctfs Partn Civic Cent Proj (MBIA
Insd)........................................... 5.250 08/01/26 3,345,650
1,225 Lincoln, CA Unified Sch Dist (MBIA Insd)........ 5.600 09/01/26 1,211,782
1,835 Local Govt Fin Auth CA Rev Cap Apprec San
Francisco Redev (MBIA Insd)..................... * 08/01/08 961,834
2,000 Local Govt Fin Jt Pwrs Auth CA Rev Anaheim Redev
Agy Ser A (Prerefunded @ 09/01/98) (MBIA
Insd)........................................... 7.950 09/01/09 2,172,380
850 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent
Proj B Rfdg (AMBAC Insd)........................ 7.000 12/01/15 921,026
1,500 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent
Rfdg (MBIA Insd)................................ 5.375 12/01/22 1,423,635

</TABLE>

See Notes to Financial Statements

11
<PAGE> 75

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,000 Long Beach, CA Redev Agy Downtown Redev Proj Ser
A (Prerefunded @ 11/01/98) (AMBAC Insd)......... 7.750% 11/01/10 $ 1,088,610
100 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive
View Med Ser A (Prerefunded @ 04/01/99) (AMBAC
Insd)........................................... 9.100 04/01/01 112,420
85 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive
View Med Ser A (Prerefunded @ 04/01/99) (AMBAC
Insd)........................................... 9.200 04/01/02 95,736
762 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR
Lease Ltd (FSA Insd)............................ 7.375 12/15/06 850,240
4,000 Los Angeles, CA Unified Sch Dist Ctfs Partn
Multi-Ppty Proj Rfdg (FSA Insd)................. 5.625 11/01/13 4,000,360
500 M-S-R Pub Pwr Agy CA San Juan Proj Rev Ser E
(MBIA Insd)..................................... 6.000 07/01/22 509,745
1,300 Martinez, CA Ctfs Partn Martinez Pub Impt Corp
(Prerefunded @ 12/01/98) (AMBAC Insd)........... 7.700 12/01/18 1,429,883
1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)............................... 5.750 09/01/15 1,263,125
1,640 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)............................... 6.000 09/01/19 1,709,060
500 Northern CA Pwr Agy Pub Pwr Rev Combustion
Turbine Proj 1 Ser A Rfdg (MBIA Insd)........... 6.000 08/15/10 509,470
400 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj
1 Ser A Rfdg (Prerefunded @ 07/01/21) (AMBAC
Insd)........................................... 7.500 07/01/23 506,512
2,500 Oakland, CA Jt Pwrs Fin Auth Lease Rev Oakland
Admin Bldgs (AMBAC Insd)........................ 5.750 08/01/26 2,521,950
2,760 Oakland, CA Unified Sch Dist Alameda Cnty Cap
Apprec Ser A (FGIC Insd)........................ * 08/01/13 1,052,360
3,475 Oakland, CA Unified Sch Dist Alameda Cnty Cap
Apprec Ser A (FGIC Insd)........................ * 08/01/14 1,234,702
2,220 Oceanside, CA Cmnty Dev Mtg FHA North River Club
Ser A Rfdg (MBIA Insd).......................... 5.850 07/01/16 2,220,000
750 Oceanside, CA Ctfs Partn Corp Yard Proj Fin
(Prerefunded @ 08/01/02) (AMBAC Insd)........... 7.300 08/01/21 871,320
3,000 Palm Desert, CA Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)............................... 8.705 04/01/22 3,382,500
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg (FSA
Insd)........................................... 6.100 03/01/16 1,046,690
1,945 Pittsburg, CA Unified Sch Dist Ctfs Partn (AMBAC
Insd)........................................... 6.300 09/01/15 2,070,939
1,360 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg
(MBIA Insd)..................................... 6.000 04/01/19 1,462,041
1,000 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd).......................... 7.125 09/01/19 1,087,570
1,235 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd).......................... 6.750 09/01/20 1,328,366
1,265 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (Prerefunded @ 09/01/99) (MBIA
Insd)........................................... 6.750 09/01/20 1,374,865

</TABLE>

See Notes to Financial Statements

12
<PAGE> 76

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac Dist 883
Ser A Rfdg (AMBAC Insd)......................... 6.000% 09/01/17 $ 1,754,542
1,000 Redding, CA Elec Sys Rev Ctfs Partn (Inverse
Fltg) (MBIA Insd)............................... 8.751 07/08/22 1,235,000
2,000 Rialto, CA Spl Tax Cmnty Fac Dist 87-1 Rfdg (FSA
Insd)........................................... 5.625 09/01/18 1,980,060
2,495 Rio Linda, CA Univ Sch Dist Ser A (AMBAC
Insd)........................................... 6.250 08/01/15 2,643,702
2,000 Rohnert Park, CA Hsg Fin Auth Rev Rancho Feliz
Mobile Home Park (FSA Insd)..................... 5.600 12/01/15 1,988,360
1,500 Sacramento Cnty, CA Arpt Sys Rev Ser B
(MBIA Insd)..................................... 5.750 07/01/26 1,513,185
2,000 Sacramento, CA Muni Util Dist Elec Rev Ser A
Rfdg (MBIA Insd)................................ 5.750 08/15/13 2,028,100
2,500 San Bernardino Cnty, CA Ctfs Partn Ser B
(Embedded Swap) (MBIA Insd)..................... 7.650 07/01/16 2,489,375
1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec
Ser A (MBIA Insd)............................... 6.400 09/01/18 1,072,340
1,000 San Gabriel, CA Unified Sch Dist Ctfs Partn (FSA
Insd)........................................... 6.000 09/01/15 1,044,370
5,750 San Jose, CA Fin Auth Rev Convention Proj Ser C
(FSA Insd)...................................... 6.375 09/01/13 6,127,890
2,000 San Mateo Cnty, CA Jt Pwrs Fin Auth Lease Rev
San Mateo Cnty Hlth Care Cent Ser A (FSA
Insd)........................................... 6.000 07/15/09 2,116,000
1,000 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac
Replacement Proj Ser A (AMBAC Insd)............. 6.875 11/15/14 1,139,540
1,000 Shasta Lake, CA Ctfs Partn (FSA Insd)........... 6.000 04/01/16 1,043,060
1,990 South Cnty, CA Regl Wastewtr Auth Rev Regl
Wastewtr Fac Proj Ser A (FGIC Insd)............. 6.000 08/01/14 2,066,515
3,735 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd).................. 7.000 09/01/08 4,390,754
3,000 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd).................. 7.000 09/01/09 3,522,180
2,000 Southern CA Pub Pwr Auth Pwr Proj Rev Ser A Rfdg
(AMBAC Insd).................................... 5.000 07/01/15 1,866,120
1,050 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (FGIC Insd)............... 6.400 09/01/07 1,164,419
1,015 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (FGIC Insd)............... 6.500 09/01/08 1,125,128
1,710 Temecula Vly, CA Unified Sch Dist Ctfs Partn
Rfdg (FSA Insd)................................. 6.000 09/01/18 1,711,094
2,000 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg
(MBIA Insd)..................................... 6.750 01/01/12 2,044,300

</TABLE>

See Notes to Financial Statements

13
<PAGE> 77

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$2,200 University of CA Rev Multi Purp Proj Ser C Rfdg
(AMBAC Insd).................................... 5.250% 09/01/12 $ 2,157,276
3,000 University of CA Rev Multi Purp Proj Ser D (MBIA
Insd)........................................... 6.300 09/01/14 3,197,430
5,525 Visalia, CA Ctfs Partn Multi Projs Ser B Rfdg
(MBIA Insd)..................................... 5.375 12/01/26 5,302,729
------------
TOTAL LONG-TERM INVESTMENTS 97.2%
(Cost $157,870,573) (a).................................................... 168,504,039
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.5%............................... 2,600,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.3%.................................. 2,183,577
------------
NET ASSETS 100.0%........................................................... $173,287,616
============

</TABLE>

*Zero coupon bond

(a) At December 31, 1996, for federal income tax purposes cost is $157,870,573;
the aggregate gross unrealized appreciation is $10,650,744 and the aggregate
gross unrealized depreciation is $17,278, resulting in net unrealized
appreciation of $10,633,466.

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

14
<PAGE> 78

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $157,870,573)
(Note 1).................................................. $168,504,039
Short-Term Investments (Note 1)............................. 2,600,000
Cash........................................................ 152,362
Receivables:
Interest.................................................. 2,655,456
Fund Shares Sold.......................................... 203,931
Other....................................................... 4,765
------------
Total Assets.......................................... 174,120,553
------------
LIABILITIES:
Payables:
Income Distributions...................................... 261,308
Fund Shares Repurchased................................... 162,271
Distributor and Affiliates (Notes 2 and 6)................ 132,756
Investment Advisory Fee (Note 2).......................... 70,414
Accrued Expenses............................................ 118,669
Deferred Compensation and Retirement Plans (Note 2)......... 87,519
------------
Total Liabilities..................................... 832,937
------------
NET ASSETS.................................................. $173,287,616
============
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $167,515,030
Net Unrealized Appreciation on Securities................... 10,633,466
Accumulated Undistributed Net Investment Income............. 209,340
Accumulated Net Realized Loss on Securities................. (5,070,220)
------------
NET ASSETS.................................................. $173,287,616
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $142,457,720 and 8,091,788 shares of
beneficial interest issued and outstanding)............. $ 17.61
Maximum sales charge (3.25%* of offering price)......... .59
------------
Maximum offering price to public........................ $ 18.20
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $28,611,543 and 1,625,341 shares of
beneficial interest issued and outstanding)............. $ 17.60
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $2,218,353 and 126,025 shares of
beneficial interest issued and outstanding)............. $ 17.60
============
*On sales of $25,000 or more, the sales charge will be
reduced.
</TABLE>

See Notes to Financial Statements

15
<PAGE> 79

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $10,309,803
-----------
EXPENSES:
Investment Advisory Fee (Note 2)............................ 827,860
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $345,296,
$267,446 and $19,428, respectively) (Note 6).............. 632,170
Shareholder Services (Note 2)............................... 189,703
Trustees Fees and Expenses (Note 2)......................... 34,968
Legal (Note 2).............................................. 26,352
Insurance (Note 1).......................................... 3,981
Other....................................................... 284,907
-----------
Total Expenses.......................................... 1,999,941
Less Expenses Reimbursed (Note 2)....................... 10,028
-----------
Net Expenses............................................ 1,989,913
-----------
NET INVESTMENT INCOME....................................... $ 8,319,890
===========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................... $ 2,165,958
Options................................................... (183,412)
Futures................................................... 292,737
-----------
Net Realized Gain on Securities............................. 2,275,283
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 14,349,301
End of the Period:
Investments............................................. 10,633,466
-----------
Net Unrealized Depreciation on Securities During the
Period.................................................... (3,715,835)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(1,440,552)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 6,879,338
===========
</TABLE>

See Notes to Financial Statements

16
<PAGE> 80

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........................... $ 8,319,890 $ 8,348,656
Net Realized Gain on Securities................. 2,275,283 20,891
Net Unrealized Appreciation/Depreciation on
Securities During the Period.................. (3,715,835) 18,451,807
------------ ------------
Change in Net Assets from Operations............ 6,879,338 26,821,354
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................ (7,012,876) (7,355,019)
Class B Shares................................ (1,094,958) (897,526)
Class C Shares................................ (79,245) (115,024)
------------ ------------
Total Distributions............................. (8,187,079) (8,367,569)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.................................... (1,307,741) 18,453,785
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold....................... 25,623,230 24,793,274
Net Asset Value of Shares Issued Through
Dividend Reinvestment......................... 4,933,967 4,996,930
Cost of Shares Repurchased...................... (29,969,162) (24,371,464)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................. 588,035 5,418,740
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS........... (719,706) 23,872,525
NET ASSETS:
Beginning of the Period......................... 174,007,322 150,134,797
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$209,340 and $0, respectively)................ $173,287,616 $174,007,322
============ ============
</TABLE>

See Notes to Financial Statements

17
<PAGE> 81

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
Class A Shares 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period... $17.736 $15.802 $18.286 $16.858 $16.259
------ ------ ------ ------ ------
Net Investment Income...................... .857 .884 .912 .967 1.004
Net Realized and Unrealized Gain/Loss on
Securities............................... (.145) 1.938 (2.484) 1.441 .585
------ ------ ------ ------ ------
Total from Investment Operations........... .712 2.822 (1.572) 2.408 1.589
Less Distributions from and in Excess of
Net Investment Income (Note 1)........... .843 .888 .912 .980 .990
------ ------ ------ ------ ------
Net Asset Value, End of the Period......... $17.605 $17.736 $15.802 $18.286 $16.858
====== ====== ====== ====== ======
Total Return* (a).......................... 4.20% 18.28% (8.75%) 14.54% 10.08%
Net Assets at End of the Period (In
millions)................................ $142.5 $147.6 $130.3 $151.1 $74.2
Ratio of Expenses to Average Net Assets*... 1.02% .89% .78% .69% .69%
Ratio of Net Investment Income to Average
Net Assets*.............................. 4.94% 5.23% 5.46% 5.37% 6.07%
Portfolio Turnover......................... 35% 42% 56% 36% 61%
* If certain expenses had not been reimbursed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.... 1.03% 1.05% 1.08% 1.01% 1.08%
Ratio of Net Investment Income to Average
Net Assets............................... 4.94% 5.07% 5.16% 5.05% 5.68%
</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

18
<PAGE> 82

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
From May 1, 1993
Year Ended December 31, (Commencement of
--------------------------- Distribution) to
Class B Shares 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $17.736 $15.805 $18.266 $17.570
------ ------ ------ ------
Net Investment Income..................... .720 .766 .785 .549
Net Realized and Unrealized Gain/Loss on
Securities.............................. (.142) 1.926 (2.482) .705
------ ------ ------ ------
Total from Investment Operations.......... .578 2.692 (1.697) 1.254
Less Distributions from and in Excess of Net
Investment Income (Note 1)................ .711 .761 .764 .558
------ ------ ------ ------
Net Asset Value, End of the Period........ $17.603 $17.736 $15.805 $18.266
====== ====== ====== ======
Total Return* (a)......................... 3.35% 17.33% (9.39%) 7.25%**
Net Assets at End of the Period (In
millions)............................... $28.6 $24.6 $17.1 $15.3
Ratio of Expenses to Average Net
Assets*................................. 1.79% 1.61% 1.52% 1.45%
Ratio of Net Investment Income to Average
Net Assets*............................. 4.17% 4.51% 4.71% 4.06%
Portfolio Turnover........................ 35% 42% 56% 36%
* If certain expenses had not been reimbursed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets... 1.79% 1.77% 1.82% 1.77%
Ratio of Net Investment Income to Average
Net Assets.............................. 4.16% 4.35% 4.41% 3.74%
</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

19
<PAGE> 83

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
From
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.................................. $17.736 $15.798 $18.257 $18.010
------ ------ ------ ------
Net Investment Income..................... .722 .758 .773 .307
Net Realized and Unrealized Gain/Loss on
Securities.............................. (.145) 1.941 (2.468) .258
------ ------ ------ ------
Total from Investment Operations.......... .577 2.699 (1.695) .565
Less Distributions from and in Excess of Net
Investment Income (Note 1)................ .711 .761 .764 .318
------ ------ ------ ------
Net Asset Value, End of the Period........ $17.602 $17.736 $15.798 $18.257
======= ======= ======= =======
Total Return* (a)......................... 3.35% 17.40% (9.40%) 3.17%**
Net Assets at End of the Period
(In millions)........................... $2.2 $1.8 $2.8 $4.0
Ratio of Expenses to Average
Net Assets*............................. 1.79% 1.60% 1.51% 1.45%
Ratio of Net Investment Income
to Average Net Assets*.................. 4.16% 4.50% 4.71% 3.82%
Portfolio Turnover........................ 35% 42% 56% 36%
*If certain expenses had not been reimbursed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets.............................. 1.80% 1.75% 1.82% 1.76%
Ratio of Net Investment Income to Average
Net Assets.............................. 4.16% 4.34% 4.39% 3.52%
</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

20
<PAGE> 84

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital California Insured Tax Free 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 California investors with a high level
of current income exempt from federal and California income taxes, with
liquidity and safety of principal, primarily through investment in a diversified
portfolio of insured California municipal securities. The Fund commenced
investment operations on December 13, 1985. The distribution of the Fund's Class
B shares and Class C shares commenced on May 1, 1993 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.

B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1996, there were no
when issued or delayed delivery purchase commitments.

21
<PAGE> 85

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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

D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, 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 $5,070,220, which will expire between December
31, 2002 and December 31, 2003.

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. For the year ended December 31, 1996, 99.7% of the income
distributions made by the Fund were exempt from federal income taxes.

Due to inherent differences in the recognition of income, expenses and
realized gains/losses 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.

Permanent differences between book and tax basis reporting for the 1996
fiscal year have been identified and appropriately reclassified. Permanent book
and tax basis differences relating to the recognition of certain expenses which
are not deductible for tax purposes totaling $76,529 were reclassified from
accumulated undistributed net investment income to capital.

F. INSURANCE EXPENSE--The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.

22
<PAGE> 86

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
========================================================================
<S> <C>
First $100 million...................................... .500 of 1%
Next $150 million....................................... .450 of 1%
Next $250 million....................................... .425 of 1%
Over $500 million....................................... .400 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $24,600, 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 $142,100,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

Additionally, for the year ended December 31, 1996, the Fund reimbursed VKAC
approximately $63,700 related to the direct cost of consolidating the VKAC
open-end fund complex. Payment was contingent upon the realization by the Fund
of cost efficiencies in certain expense categories resulting from the
consolidation.

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.

23
<PAGE> 87

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

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

At December 31, 1996, capital aggregated $136,025,511, $28,878,801 and
$2,610,718 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.......................................... 986,895 $ 17,165,507
Class B.......................................... 439,621 7,596,970
Class C.......................................... 49,675 860,753
---------- ------------
Total Sales........................................ 1,476,191 $ 25,623,230
========== ============
Dividend Reinvestment:
Class A.......................................... 242,651 $ 4,210,865
Class B.......................................... 38,588 669,630
Class C.......................................... 3,082 53,472
---------- ------------
Total Dividend Reinvestment........................ 284,321 $ 4,933,967
========== ============
Repurchases:
Class A.......................................... (1,457,342) $(25,258,344)
Class B.......................................... (240,656) (4,180,690)
Class C.......................................... (30,329) (530,128)
---------- ------------
Total Repurchases.................................. (1,728,327) $(29,969,162)
========== ============
</TABLE>

24
<PAGE> 88

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $139,971,316, $24,804,730 and
$2,227,478 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.......................................... 986,569 $ 16,771,568
Class B.......................................... 434,181 7,401,889
Class C.......................................... 36,228 619,817
---------- ------------
Total Sales........................................ 1,456,978 $ 24,793,274
========== ============
Dividend Reinvestment:
Class A.......................................... 258,526 $ 4,396,599
Class B.......................................... 31,979 544,950
Class C.......................................... 3,266 55,381
---------- ------------
Total Dividend Reinvestment........................ 293,771 $ 4,996,930
========== ============
Repurchases:
Class A.......................................... (1,170,822) $(19,801,544)
Class B.......................................... (157,415) (2,652,072)
Class C.......................................... (112,218) (1,917,848)
---------- ------------
Total Repurchases.................................. (1,440,455) $(24,371,464)
========== ============
</TABLE>

Classes 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 four years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and 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.............................................. 3.00% 1.00%
Second............................................. 2.50% None
Third.............................................. 2.00% None
Fourth............................................. 1.00% None
Fifth and Thereafter............................... None None
</TABLE>

25
<PAGE> 89

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
$37,800 and CDSC on redeemed shares of approximately $53,600. 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 $60,483,216 and $65,652,566,
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 securities. 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.

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)............. 900 (454,138)
Options Terminated in Closing Transactions
(Net)......................................... (900) 454,138
---- ---------
Outstanding at December 31, 1996................ -0- $ -0-
==== =========
</TABLE>

B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally

26
<PAGE> 90

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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.

Transactions in futures contracts, each with a notional par value of
$100,000, for the year ended December 31, 1996, were as follows:

<TABLE>
<CAPTION>
CONTRACTS
=========================================================================
<S> <C>
Outstanding at December 31, 1995.......................... -0-
Futures Opened............................................ 450
Futures Closed............................................ (450)
----
Outstanding at December 31, 1996.......................... -0-
====
</TABLE>

B. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.

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.

6. DISTRIBUTION AND SERVICE PLANS

27
<PAGE> 91

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital California Insured Tax Free Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital California Insured Tax Free 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 California Insured Tax Free 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 4, 1997

28
<PAGE> 92

VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN

LINDA HUTTON HEAGY

R. CRAIG KENNEDY

DENNIS J. MCDONNELL*

JACK E. NELSON

JEROME L. ROBINSON

FERNANDO SISTO

WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD, III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*

ALAN T. SACHTLEBEN*

PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1997 All rights reserved.

(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

RESULT OF SHAREHOLDER VOTES

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
6,499,824 shares voted for the proposal, 195,936 shares voted against and
625,853 shares abstained. With regard to the approval of certain changes to the
Fund's fundamental investment policies with respect to investment in other
investment companies, 5,092,326 shares voted for the proposal, 287,087 shares
voted against and 693,557 shares abstained. With regard to the ratification of
KPMG Peat Marwick LLP as independent public accountants for the Fund, 6,660,309
shares voted for the proposal, 81,901 shares voted against and 618,775 shares
abstained.

29
<PAGE> 93

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Portfolio Highlights............................. 4
Performance in Perspective....................... 5
Portfolio Management Review...................... 6
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 20
Statement of Operations.......................... 21
Statement of Changes in Net Assets............... 22
Financial Highlights............................. 23
Notes to Financial Statements.................... 26
Report of Independent Accountants................ 33
</TABLE>

MIF ANR 2/97
<PAGE> 94

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 [PHOTO]
management and investment banking. The
transaction was completed in October,
and we are excited about the DENNIS J. MCDONNELL AND DON G. POWELL
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 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.

Continued on page two

1
<PAGE> 95

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 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.
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,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

2
<PAGE> 96

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

(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%.

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

3
<PAGE> 97

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

AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1996 (1)
<S> <C> <S> <C>
AAA.............. 39.4% AAA.............. 34.9%
AA............... 6.7% AA............... 8.1%
A................ 13.0% [PIE CHART] A................ 12.1% [PIE CHART]
BBB.............. 17.5% BBB.............. 19.0%
BB............... 2.6% BB............... 4.1%
B................ 0.4% B................ 0.4%
Non-Rated........ 20.4% Non-Rated........ 21.4%
</TABLE>

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

AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1996 (1)
<S> <C> <C> <C>
Health Care......................... 17.9% Health Care......................... 21.3%
Industrial Revenue.................. 12.5% Industrial Revenue.................. 14.8%
General Purpose..................... 10.7% General Purpose..................... 7.7%
Single Family Housing............... 9.9% Single Family Housing............... 7.2%
Tax District........................ 5.9% 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

4
<PAGE> 98

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

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)

[GRAPH]

VKAC Lehman Brothers
Value at Municipal Municipal Bond
December 31, Income Fund Index
<S> <C> <C>
1990 9771.00 10,286.20
1991 11,137.00 11,535.60
1992 12,215.00 12,552.50
1993 13,706.00 14,093.50
1994 12,833.00 13,364.70
1995 14,836.00 15,698.50
1996 15,439.00 16,395.00

- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 0.91%
5 Year Avg. Annual = 5.72%
Inception Avg. Annual = 7.00%
- --------------------------------

</TABLE>

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

5
<PAGE> 99

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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A 1996 ushered in a favorable environment for the bond market. 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. 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.

Q WHAT OTHER FACTORS AFFECTED THE FUND?

A Election-year politics played a major role. In the first 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.
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 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.

Q WHAT ACTIONS DID YOU TAKE IN RESPONSE TO THESE EVENTS?

A The Fund's investment objective is to provide investors with 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.
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,

6
<PAGE> 100

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 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.
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.

[SIG]
Peter W. Hegel

Chief Investment Officer
Fixed Income Investments

[SIG]
David C. Johnson

Portfolio Manager

Please see footnotes on page three

7
<PAGE> 101

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

8
<PAGE> 102

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

9
<PAGE> 103

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

10
<PAGE> 104

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

11
<PAGE> 105

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

12
<PAGE> 106

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

13
<PAGE> 107

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

14
<PAGE> 108

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

15
<PAGE> 109

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

16
<PAGE> 110

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

17
<PAGE> 111

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

18
<PAGE> 112

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

*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

19
<PAGE> 113

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

20
<PAGE> 114

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

21
<PAGE> 115

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

22
<PAGE> 116

FINANCIAL HIGHLIGHTS

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

23
<PAGE> 117

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

24
<PAGE> 118

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

25
<PAGE> 119

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------
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. On July 6, 1995, all Class D shareholders redeemed their shares
and the class was eliminated. The Fund will no longer offer Class D shares.

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.

26
<PAGE> 120

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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

<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.

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.

27
<PAGE> 121

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>

28
<PAGE> 122

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>

29
<PAGE> 123

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.

30
<PAGE> 124

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>

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>

31
<PAGE> 125

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.

6. DISTRIBUTION AND SERVICE PLANS

32
<PAGE> 126

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.

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

33
<PAGE> 127

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund

34
<PAGE> 128

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD, III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.

(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

RESULTS OF SHAREHOLDER VOTES

A Special Meeting of Shareholders of the Fund was held on October 25, 1996,
where shareholders voted on a new investment advisory agreement, changes to
investment policies and the ratification of KPMG Peat Marwick LLP as independent
public accountants. With regard to the approval of a new investment advisory
agreement between Van Kampen American Capital Investment Advisory Corp. and the
Fund, 47,094,342 shares voted for the proposal, 893,263 shares voted against and
300,796 shares abstained. With regard to the approval of certain changes to the
Fund's fundamental investment policies with respect to investment in other
investment companies, 36,367,087 shares voted for the proposal, 1,458,845 shares
voted against and 3,120,050 shares abstained. With regard to the ratification of
KPMG Peat Marwick LLP as independent public accountants for the Fund, 47,728,518
shares voted for the proposal, 448,392 shares voted against and 2,881,491 shares
abstained.

35
<PAGE> 129

VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND

THIS PAGE INTENTIONALLY LEFT BLANK

36
<PAGE> 130

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Performance in Perspective....................... 6
Portfolio Management Review...................... 7
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Financial Highlights............................. 17
Notes to Financial Statements.................... 20
Report of Independent Accountants................ 26
</TABLE>

INF ANR 2/97
<PAGE> 131
LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,
We are pleased to report that the
Van Kampen American Capital
Intermediate Term Municipal Income [PHOTO]
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 DENNIS J. MCDONNELL AND DON G. POWELL
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
increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

Continued on page two

1
<PAGE> 132

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,
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 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.
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.

Continued on page three

2
<PAGE> 133
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,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

3
<PAGE> 134

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES

TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV(1).... 4.27% 3.54% 3.54%
One-year total return(2)................. 0.93% 0.56% 2.54%
Life-of-Fund average annual total
return(2)............................... 5.47% 5.47% 4.15%
Commencement date........................ 05/28/93 05/28/93 10/19/93

DISTRIBUTION RATES AND YIELD

Distribution rate(3)..................... 4.49% 3.94% 3.94%
Taxable equivalent distribution
rate(4)................................. 7.02% 6.16% 6.16%
SEC Yield(5)............................. 4.04% 3.42% 3.42%
</TABLE>

(1)Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (3.25% for A shares) or contingent deferred
sales charge for early withdrawal (3% 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.

(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. Had
certain expenses of the Fund not been assumed by VKAC, total returns would have
been lower and the SEC Yield would have been 3.88%, 3.26% and 3.26% for Classes
A, B and C, respectively.

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

4
<PAGE> 135

PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
TOP TEN STATES AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
New York............... 14.4%
Illinois............... 12.5%
California............. 11.7%
Colorado............... 6.6%
Florida................ 5.6%
Ohio................... 5.4%
Utah................... 5.4%
New Jersey............. 5.1%
Missouri............... 4.7%
Georgia................ 4.5%
</TABLE>

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
AAA........ 45.1%
AA......... 7.4%
A.......... 7.7%
BBB........ 26.4%
BB......... 2.5%
B.......... 2.7%
Non-Rated.. 8.2%
[Pie Chart]
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
AAA........ 46.4%
AA......... 8.3%
A.......... 8.6%
BBB........ 32.3%
B.......... 3.6%
Non-Rated.. 0.8%
[Pie Chart]
</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............ 20.8%
Multi-Family Housing... 15.3%
General Purpose........ 13.7%
Industrial Revenue..... 9.0%
Other Care............. 8.1%
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
Health Care........... 19.9%
General Purpose....... 18.9%
Multi-Family
Housing............. 14.5%
Industrial Revenue.... 8.6%
Single Family
Housing............. 8.5%
</TABLE>

DURATION

<TABLE>
<CAPTION>
As of December 31, 1996(1) As of June 30, 1996(1)
<S> <C> <C>
Duration 6.51 years 6.49 years
</TABLE>

(1)Unaudited

5
<PAGE> 136

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

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Intermediate Term Municipal Income Fund vs.
Lehman Brothers Municipal Bond Index (May 28, 1993 through December 31, 1996)

<TABLE>
<CAPTION>
VKAC Intermediate Term Lehman Brothers
Value Municipal Income Municipal Bond
at Fund Index
<S> <C> <C>
May, 1993 9,675.00 10,000.00
November, 1993 10,223.00 10,437.70
May, 1994 10,173.00 10,246.90
November, 1994 9,850.00 9,889.29
May, 1995 11,074.00 11,180.10
November, 1995 11,517.00 11,758.90
May, 1996 11,547.00 11,691.00
December, 1996 12,115.00 12,398.00

</TABLE>

The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (3.25% for A shares).

6
<PAGE> 137

PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
Intermediate Term Municipal Income Fund about the key events and economic forces
that shaped the markets during the Fund's fiscal year. The team is led by
Timothy D. Haney, 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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A 1996 ushered in a favorable environment for the bond market. 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.
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.
Ten-year insured municipal bonds yielded approximately 83 percent of a
comparable Treasury bond at the beginning of 1996. This ratio declined to
approximately 74 percent at year end. Municipal bonds continue to represent good
value in this range on an after-tax basis.

Q WHAT OTHER FACTORS AFFECTED THE FUND?

A The most significant change, effective April 29, 1996, was the revision of
the Fund's investment policies. This revision allowed us to shorten the
dollar-weighted average life of the Fund's portfolio and invest up to 35
percent of the Fund's assets in below-investment grade or non-rated securities.
The benefit of these changes is to provide investors with a higher-yielding Fund
that has less volatility.
There were several other factors that had an effect on the Fund.
Election-year politics played a major role. In the first 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.
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 to 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

7
<PAGE> 138

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 municipalities with current 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.

Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THESE CONDITIONS?

A In 1996, the tax-exempt yield curve was flatter than normal, which means
that bonds with longer maturities offered little yield advantage over
intermediate-term issues. The Fund concentrated on the intermediate range,
and we were able to purchase 10-year securities, capturing almost 90 percent of
the yield that a 30-year municipal bond offers, with only half of the
volatility.
In terms of credit quality, approximately 45 percent of the Fund's long-term
investments were invested in AAA-rated securities. These securities involve very
little credit risk, are highly liquid, and typically respond quickly to interest
rate changes. Approximately 26 percent of long-term investments were invested in
BBB-rated securities. Given the change in investment objective, however, our
primary focus was on selectively adding to our non-rated and below investment
grade positions, which together totaled approximately 13 percent of long-term
investments at December 31, 1996. We relied heavily on the expertise of our
credit research staff , which added significant value to security selection.
This combination of high-quality holdings and lower-rated holdings helped
balance the portfolio's volatility to interest rate movements. While
high-quality securities provide safety of principal and total return
opportunities, lower-rated and non-rated bonds provide income potential and tend
to exhibit lower price volatility as interest rates change.
1996 presented a mixed picture in terms of investment options in the
municipal market. The supply of new bonds was higher than expected. However,
there was a limited supply of bonds which provided high yield combined with a
shorter maturity. We focused our attention on the health-care, multi-family
housing, and industrial revenue sectors, and general purpose bonds as core
holdings during the year. We believe these sectors provided some of the most
attractive yields in the tax-exempt markets.
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 6.51 years, relatively long compared
to the Lehman Brothers Intermediate Municipal Bond Index duration of 5.32 years.
Relative to this benchmark, the Fund's duration may shorten as we pursue the new
investment objectives. For additional Fund portfolio highlights, please refer to
page five.

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 4.27 percent(1) (Class A shares at net asset value),
placing it in the top

8
<PAGE> 139

half of the Intermediate 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 Class A distribution rate was 4.49
percent(3) as of December 31, 1996, with a monthly dividend of $.0395 and a
maximum public offering price of $10.55. For investors in the 36 percent federal
income tax bracket, the Fund's distribution rate was equivalent to a taxable
investment earning 7.02 percent(4). Please refer to the chart on page four 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 will, however, move to a slightly defensive posture with
the Fund as we enter the new year by shortening its duration slightly 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, therefore 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.
We will closely monitor any new developments in the financial markets and in
Washington in order to evaluate their potential impact on the Trust. Thank you
for your continued confidence in your investment with Van Kampen American
Capital.

[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]
Timothy D. Haney
Portfolio Manager

Please see footnotes on page four

9
<PAGE> 140

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
ALASKA 0.7%
$ 250 Seward, AK Rev AK Sealife Cent Proj............. 7.100% 10/01/05 $ 255,923
-----------
ARIZONA 4.0%
1,245 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 1,388,324
-----------
CALIFORNIA 12.0%
1,000 California St Var Rate Cpn (AMBAC Insd)......... 6.400 09/01/08 1,126,790
240 Del Mar California Race Track Auth Rev Rfdg..... 6.000 08/15/06 243,041
500 Los Angeles Cnty, CA Ctfs Partn (Embedded
Swap) (d)....................................... 6.100 11/01/01 530,740
540 Montebello, CA Unified Sch Dist Ctfs Partn Cap
Impts Proj...................................... 5.900 06/01/04 549,693
1,050 Orange Cnty, CA Recovery Ctfs Ser A (MBIA
Insd)........................................... 6.000 07/01/08 1,129,569
560 Pleasanton, CA Jt Pwrs Fin Auth Rev Reassessment
Ser A........................................... 6.000 09/02/05 597,945
-----------
4,177,778
-----------
COLORADO 6.8%
280 Colorado Hsg Fin Auth Access Pgm Single Family
Pgm Ser E....................................... 8.125 12/01/24 312,880
1,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.400 11/15/04 1,126,110
500 Montrose Cnty, CO Ctfs Partn.................... 6.000 06/15/01 514,110
400 Montrose Cnty, CO Ctfs Partn.................... 6.100 06/15/02 413,676
-----------
2,366,776
-----------
CONNECTICUT 0.9%
300 Mashantucket Western Pequot Tribe CN Spl Rev Ser
A............................................... 6.500 09/01/06 309,852
-----------
DISTRICT OF COLUMBIA 2.8%
1,000 District of Columbia Redev Land Agy Dist of
Columbia Sports Arena Spl Tax Rev............... 5.625 11/01/10 971,850
-----------
FLORIDA 5.8%
1,150 Florida Hsg Fin Agy Maitland Club Apts Ser B 1
(AMBAC Insd).................................... 6.750 08/01/14 1,229,729
200 Lee Cnty, FL Indl Dev Auth Econ Rev Encore
Nursing Cent Partner Rfdg....................... 8.125 12/01/07 216,704
250 Orange Cnty, FL Hlth Fac Auth Rev 1st Mtg
Orlando Lutheran Twr Rfdg....................... 8.125 07/01/06 255,415
300 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj
Rfdg............................................ 7.125 11/01/06 300,966
-----------
2,002,814
-----------
GEORGIA 4.7%
1,475 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg Rev
North Hill Apts Proj Rfdg (FNMA Collateralized)
(c)............................................. 6.625 01/01/25 1,617,205
-----------
</TABLE>

See Notes to Financial Statements

10
<PAGE> 141

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS 12.8%
$ 200 Danville, IL Single Family Mtg Rev Rfdg......... 7.300% 11/01/10 $ 210,188
250 Hoffman Estates, IL Multi-Family Rev Hsg Pk Pl
Apts Proj Rfdg (FNMA Collateralized)............ 5.750 06/01/21 257,718
1,335 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A....................... 6.500 09/01/09 1,386,771
750 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj
Ser 94-A........................................ 6.250 03/01/04 769,268
400 Illinois Hlth Fac Auth Rev Swedish Covenant Ser
A Rfdg & Impt................................... 5.800 08/01/03 417,928
340 Macon County, IL Rev Cap Apprec Millikin Univ
(AMBAC Insd).................................... * 10/01/06 205,720
370 Macon County, IL Rev Cap Apprec Millikin Univ
(AMBAC Insd).................................... * 10/01/07 210,415
410 Macon County, IL Rev Cap Apprec Millikin Univ
(AMBAC Insd).................................... * 10/01/08 218,719
455 Macon County, IL Rev Cap Apprec Millikin Univ
(AMBAC Insd).................................... * 10/01/09 227,245
500 Macon County, IL Rev Cap Apprec Millikin Univ
(AMBAC Insd).................................... * 10/01/10 234,910
300 Peoria, IL Special Tax Weaverridge Special
Service Area.................................... 7.625 02/01/08 300,525
-----------
4,439,407
-----------
KENTUCKY 1.1%
375 Jefferson Cnty, KY Multi-Family Rev Hsg Whipps
Mill Proj Ser A Rfdg............................ 5.875 06/01/23 380,869
-----------
LOUISIANA 0.7%
250 Iberia Parish, LA Hosp Svc Dist No 1 Hosp Rev... 7.500 05/26/06 253,113
-----------
MASSACHUSETTS 4.0%
470 Boston, MA Wtr & Swr Comm Rev Ser A............. 9.250 01/01/11 626,068
500 Massachusetts St Hlth & Edl North Adams Regl
Hosp Ser C...................................... 6.250 07/01/04 512,005
250 Massachusetts St Indl Fin Agy East Boston
Neighborhood Proj............................... 7.250 07/01/06 251,993
-----------
1,390,066
-----------
MICHIGAN 0.7%
250 Michigan St Hosp Fin Auth Rev Detroit Macomb
Hosp Corp Ser A Rfdg............................ 7.300 06/01/01 252,280
-----------
</TABLE>

See Notes to Financial Statements

11
<PAGE> 142

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

MINNESOTA 1.0%
$ 330 Minneapolis, MN Multi-Family Rev Hsg Belmont
Apts Proj....................................... 7.000% 11/01/06 $ 330,419
-----------
MISSOURI 4.9%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser A (FSA
Insd)........................................... 7.000 09/01/12 1,681,425
-----------
NEW HAMPSHIRE 0.6%
200 New Hampshire Higher Edl & Hlth Fac Auth Rev
Hosp Nashua Mem Hosp............................ 5.500 10/01/02 202,190
-----------
NEW JERSEY 5.2%
250 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen
Proj Ser A...................................... 8.000 05/15/04 256,053
1,000 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd)................... 7.000 07/01/06 1,154,290
375 New Jersey Hlthcare Fac Fin Auth Rev Palisades
Med Cent........................................ 7.500 07/01/06 388,957
-----------
1,799,300
-----------
NEW YORK 14.8%
350 Erie Cnty, NY Indl Dev Agy Civic Fac Rev Mercy
Hosp Buffalo Proj Ser A......................... 5.900 06/01/03 358,697
500 New York City Ser A............................. 7.000 08/01/07 553,190
2,000 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Impt E (AMBAC Insd) (b)......................... 5.000 02/15/06 2,005,700
1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd).............................. 6.200 08/15/05 1,099,690
1,000 Niagara Falls, NY Pub Impt (MBIA Insd).......... 6.900 03/01/20 1,128,180
-----------
5,145,457
-----------
OHIO 5.6%
500 Cuyahoga Cnty, OH Hlthcare Fac Rev Judson
Retirement Cmnty Rfdg........................... 7.000 11/15/10 503,830
250 Marion Cnty OH Hosp Impt Rev Cnty Hosp Rfdg..... 6.375 05/15/11 254,572
145 Miami Cnty, OH Hosp Fac Rev Upper Vly Med Cent
Ser A Rfdg & Impt............................... 6.000 05/15/06 148,611
1,000 Ohio St Air Quality Dev Auth Rev Owens Corning
Fiberglas Proj Rfdg............................. 6.250 06/01/04 1,032,220
-----------
1,939,233
-----------
OKLAHOMA 1.7%
590 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 5.750 10/01/03 598,065
-----------
PENNSYLVANIA 2.1%
225 Erie, PA Higher Edl Bldg Auth College Rev
Mercyhurst College Proj A Rfdg.................. 5.300 03/15/03 228,978
500 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Friends Hosp................................ 5.950 05/01/04 505,750
-----------
734,728
-----------
</TABLE>

See Notes to Financial Statements

12
<PAGE> 143

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS 4.2%
$ 500 Austin, TX Util Sys Rev Rfdg (AMBAC Insd) (b)... 6.500% 11/15/05 $ 532,705
500 Brazos Cnty, TX Hlth Fac Dev Corp Franciscan
Svcs Corp Rev Saint Joseph Rfdg................. 5.600 01/01/03 508,650
405 Mesquite, TX Hlth Fac Dev Retirement Fac
Christian A..................................... 6.100 02/15/08 409,103
-----------
1,450,458
-----------
UTAH 5.6%
1,845 Utah St Hsg Fin Agy Single Family Mtg Mezz Ser
A-1 (FHA Gtd)................................... 7.150 07/01/12 1,926,660
-----------
TOTAL LONG-TERM INVESTMENTS 102.7%
(Cost $33,831,921) (a)..................................................... 35,614,192
LIABILITIES IN EXCESS OF OTHER ASSETS (2.7%)................................ (933,503)
-----------
NET ASSETS 100.0%........................................................... $34,680,689
===========
*Zero coupon bond
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $33,831,921;
the aggregate gross unrealized appreciation is $1,810,859 and the aggregate
gross unrealized depreciation is $28,588, resulting in net unrealized
appreciation of $1,782,271.

(b) Securities purchased on a when issued or delayed delivery basis.

(d) An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference
between the security's fixed swap rate and the floating swap index. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed rate security. These are
typically used by the Fund to enhance the yield of the portfolio. These
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.

See Notes to Financial Statements

13
<PAGE> 144

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $33,831,921)
(Note 1).................................................. $35,614,192
Cash........................................................ 1,057,405
Receivables:
Interest.................................................. 656,653
Investments Sold.......................................... 165,000
Fund Shares Sold.......................................... 10,886
Unamortized Organizational Expenses (Note 1)................ 16,822
Other....................................................... 401
-----------
Total Assets.......................................... 37,521,359
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,514,370
Distributor and Affiliates (Notes 2 and 5)................ 74,869
Income Distributions...................................... 44,302
Fund Shares Repurchased................................... 21,075
Investment Advisory Fee (Note 2).......................... 14,773
Accrued Expenses............................................ 105,340
Deferred Compensation and Retirement Plans (Note 2)......... 65,941
-----------
Total Liabilities..................................... 2,840,670
-----------
NET ASSETS.................................................. $34,680,689
===========
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $33,556,363
Net Unrealized Appreciation on Investments.................. 1,782,271
Accumulated Undistributed Net Investment Income............. 27,942
Accumulated Net Realized Loss on Investments................ (685,887)
-----------
NET ASSETS.................................................. $34,680,689
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $12,466,445 and 1,220,664 shares of
beneficial interest issued and outstanding)............. $ 10.21
Maximum sales charge (3.25%* of offering price)......... .34
-----------
Maximum offering price to public........................ $ 10.55
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $16,384,261 and 1,604,956 shares of
beneficial interest issued and outstanding)............. $ 10.21
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $5,829,983 and 571,218 shares of
beneficial interest issued and outstanding)............. $ 10.21
===========
*On sales of $25,000 or more, the sales charge will be reduced.
</TABLE>

See Notes to Financial Statements

14
<PAGE> 145

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $2,127,939
----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $34,938, $167,722 and $46,319, respectively)
(Note 5).................................................. 248,979
Investment Advisory Fee (Note 2)............................ 176,896
Printing.................................................... 68,040
Registration................................................ 57,595
Custody..................................................... 55,645
Shareholder Services (Note 2)............................... 54,159
Trustees Fees and Expenses (Note 2)......................... 34,309
Amortization of Organizational Expenses (Note 1)............ 12,027
Legal (Note 2).............................................. 11,140
Other....................................................... 60,312
----------
Total Expenses.......................................... 779,102
Less Expenses Reimbursed (Note 2)....................... 64,338
----------
Net Expenses............................................ $ 714,764
----------
NET INVESTMENT INCOME....................................... $1,413,175
==========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments............................ $ 347,243
----------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................. 2,236,676
End of the Period....................................... 1,782,271
----------
Net Unrealized Depreciation on Investments During the
Period.................................................... (454,405)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............. $ (107,162)
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $1,306,013
==========
</TABLE>

See Notes to Financial Statements

15
<PAGE> 146

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................................ $ 1,413,175 $ 1,759,783
Net Realized Gain on Investments..................... 347,243 585,792
Net Unrealized Appreciation/Depreciation on
Investments During the Period...................... (454,405) 2,966,825
----------- -----------
Change in Net Assets from Operations................. 1,306,013 5,312,400
----------- -----------
Distributions from Net Investment Income:
Class A Shares..................................... (656,307) (757,945)
Class B Shares..................................... (666,673) (704,432)
Class C Shares..................................... (184,281) (185,738)
----------- -----------
Total Distributions.............................. (1,507,261) (1,648,115)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... (201,248) 3,664,285
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................ 4,946,191 4,993,059
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 972,957 1,091,043
Cost of Shares Repurchased........................... (9,123,506) (9,751,835)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... (3,204,358) (3,667,733)
----------- -----------
TOTAL DECREASE IN NET ASSETS......................... (3,405,606) (3,448)
NET ASSETS:
Beginning of the Period.............................. 38,086,295 38,089,743
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $27,942 and
$122,028, respectively)............................ $34,680,689 $38,086,295
=========== ===========
</TABLE>

See Notes to Financial Statements

16
<PAGE> 147

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
May 28, 1993
(Commencement
Year Ended December 31, of Investment
----------------------------- Operations) to
Class A Shares 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $10.264 $ 9.330 $10.145 $ 9.700
------- ------- ------- -------
Net Investment Income.................. .455 .508 .489 .278

Net Realized and Unrealized Gain/Loss
on Investments....................... (.032) .900 (.815) .462
------- ------- ------- -------
Total from Investment Operations......... .423 1.408 (.326) .740
------- ------- ------- -------

Less:
Distributions from Net Investment
Income............................... .474 .474 .489 .273

Distributions from Net Realized Gain on
Investments (Note 1)................. -0- -0- -0- .022
------- ------- ------- -------
Total Distributions...................... .474 .474 .489 .295
------- ------- ------- -------
Net Asset Value, End of the Period....... $10.213 $10.264 $ 9.330 $10.145
======= ======= ======= =======
Total Return* (a)........................ 4.27% 15.31% (3.32%) 7.75%**
Net Assets at End of the Period (In
millions).............................. $ 12.5 $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average Net
Assets*................................ 1.56% 1.00% .67% .14%
Ratio of Net Investment Income to Average
Net Assets*............................ 4.45% 5.10% 5.07% 4.78%
Portfolio Turnover....................... 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by VKAC, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.74% 1.61% 1.75% 2.21%
Ratio of Net Investment Income to Average
Net Assets............................. 4.27% 4.49% 3.99% 2.70%
</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

17
<PAGE> 148

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
May 28, 1993
(Commencement
Year Ended December 31, of Investment
----------------------------- Operations) to
Class B Shares 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $10.263 $ 9.319 $10.137 $ 9.700
------- ------- ------- -------
Net Investment Income.................... .375 .430 .417 .233
Net Realized and Unrealized Gain/Loss on
Investments............................ (.027) .916 (.818) .460
------- ------- ------- -------
Total from Investment Operations......... .348 1.346 (.401) .693
------- ------- ------- -------

Less:
Distributions from Net Investment
Income............................... .402 .402 .417 .234
Distributions from Net Realized Gain on
Investments (Note 1)................. -0- -0- -0- .022
------- ------- ------- -------
Total Distributions...................... .402 .402 .417 .256
------- ------- ------- -------
Net Asset Value, End of the Period....... $10.209 $10.263 $ 9.319 $10.137
======= ======= ======= =======
Total Return* (a)........................ 3.54% 14.62% (4.04%) 7.23%**
Net Assets at End of the Period (In
millions).............................. $ 16.4 $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to Average Net
Assets*................................ 2.32% 1.75% 1.43% .92%
Ratio of Net Investment Income to Average
Net Assets*............................ 3.69% 4.33% 4.30% 3.95%
Portfolio Turnover....................... 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by VKAC, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 2.50% 2.36% 2.50% 2.98%
Ratio of Net Investment Income to Average
Net Assets............................. 3.51% 3.72% 3.24% 1.89%
</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

18
<PAGE> 149

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
October 19, 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................................. $10.260 $ 9.314 $10.134 $10.250
------- ------- ------- -------
Net Investment Income.................... .374 .430 .419 .091
Net Realized and Unrealized Gain/Loss on
Investments............................ (.026) .918 (.822) (.098)
------- ------- ------- -------
Total from Investment Operations......... .348 1.348 (.403) (.007)
------- ------- ------- -------

Less:
Distributions from Net Investment
Income............................... .402 .402 .417 .087
Distributions from Net Realized Gain on
Investments (Note 1)................. -0- -0- -0- .022
------- ------- ------- -------
Total Distributions...................... .402 .402 .417 .109
------- ------- ------- -------
Net Asset Value, End of the Period....... $10.206 $10.260 $ 9.314 $10.134
======= ======= ======= =======
Total Return* (a)........................ 3.54% 14.74% (4.04%) (.10%)**
Net Assets at End of the Period (In
millions).............................. $ 5.8 $ 4.9 $ 4.7 $ .3
Ratio of Expenses to Average Net
Assets*................................ 2.32% 1.74% 1.43% .97%
Ratio of Net Investment Income to Average
Net Assets*............................ 3.70% 4.36% 4.34% 4.05%
Portfolio Turnover....................... 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by VKAC, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 2.50% 2.34% 2.46% 2.97%
Ratio of Net Investment Income to Average
Net Assets............................. 3.52% 3.75% 3.31% 2.06%
</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

19
<PAGE> 150

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Intermediate Term Municipal Income Fund (the "Fund")
is organized as a series of Van Kampen American Capital Tax Free Trust (the
"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 seek a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Fund commenced investment operations on May 28, 1993 with two classes of
common shares, Class A and Class B shares. The distribution of the Fund's Class
C shares commenced on October 19, 1993.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount 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.

20
<PAGE> 151

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

D. ORGANIZATIONAL EXPENSES--The Fund has reimbursed 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 $60,000. These costs
are being amortized on a straight line basis over the 60 month period ending May
27, 1998. Van Kampen American Capital Investment Advisory Corp. (the "Adviser")
has agreed that in the event any of the initial shares of the Fund originally
purchased by VKAC are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses in the same proportion as
the number of shares redeemed bears to the number of initial shares held at the
time of redemption.

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

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At December 31, 1996, the Fund had an accumulated capital loss carryforward for
tax purposes of $685,887 which will expire between December 31, 2002 and
December 31, 2003.

F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

For the year ended December 31, 1996, 100% of the income distributions made
by the Fund were exempt from federal income taxes.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

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

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -----------------------------------------------------------------------
<S> <C>
First $500 million...................................... .500 of 1%
Over $500 million....................................... .450 of 1%
</TABLE>

For the year ended December 31, 1996, VKAC has agreed to assume the Fund's
registration and filing fees. This waiver is voluntary and may be discontinued
at any time.

21
<PAGE> 152

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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 $16,700 representing VKAC's 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 for the Fund. For the year ended
December 31, 1996, the Fund recognized expenses of approximately $35,600,
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. 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 1,000, 100 and 100 shares of beneficial
interest of Classes A, B and C, respectively.

3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of 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.

22
<PAGE> 153

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $12,027,013, $15,986,638 and
$5,542,712 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....................................... 103,746 $ 1,052,973
Class B....................................... 139,700 1,404,638
Class C....................................... 245,967 2,488,580
-------- -----------
Total Sales..................................... 489,413 $ 4,946,191
======== ===========
Dividend Reinvestment:
Class A....................................... 40,990 $ 414,943
Class B....................................... 38,800 392,637
Class C....................................... 16,324 165,377
-------- -----------
Total Dividend Reinvestment..................... 96,114 $ 972,957
======== ===========
Repurchases:
Class A....................................... (445,139) $(4,514,663)
Class B....................................... (281,671) (2,845,685)
Class C....................................... (172,868) (1,763,158)
-------- -----------
Total Repurchases............................... (899,678) $(9,123,506)
======== ===========
</TABLE>

23
<PAGE> 154

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $15,073,760, $17,035,048 and
$4,651,913 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....................................... 132,361 $ 1,315,355
Class B....................................... 172,036 1,724,905
Class C....................................... 197,244 1,952,799
-------- -----------
Total Sales..................................... 501,641 $ 4,993,059
======== ===========
Dividend Reinvestment:
Class A....................................... 51,462 $ 512,479
Class B....................................... 41,187 409,706
Class C....................................... 16,979 168,858
-------- -----------
Total Dividend Reinvestment..................... 109,628 $ 1,091,043
======== ===========
Repurchases:
Class A....................................... (346,026) $(3,440,596)
Class B....................................... (400,845) (3,959,338)
Class C....................................... (238,970) (2,351,901)
-------- -----------
Total Repurchases............................... (985,841) $(9,751,835)
======== ===========
</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 for Class B and
Class C shares will be imposed on most redemptions made within four years of the
purchase for Class B and one year of the purchase for Class C as detailed in the
following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C>
First............................................ 3.00% 1.00%
Second........................................... 2.50% None
Third............................................ 2.00% None
Fourth........................................... 1.00% None
Fifth and Thereafter............................. None None
</TABLE>

24
<PAGE> 155

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
$1,800 and CDSC on redeemed shares of approximately $27,600. 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 $15,862,246 and $16,266,055,
respectively.

5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1996, are payments to VKAC of approximately
$126,000.

25
<PAGE> 156
REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital Intermediate Term Municipal Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Intermediate Term 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 Intermediate Term 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

26
<PAGE> 157

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund

27
<PAGE> 158

VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD, III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*

ALAN T. SACHTLEBEN*

PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1997 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
2,546,884 shares voted for the proposal, 47,774 shares voted against and 135,127
shares abstained. With regard to the approval of certain changes to the Fund's
fundamental investment policies with respect to investment in other investment
companies, 1,665,695 shares voted for the proposal, 79,607 shares voted against
and 139,178 shares abstained. With regard to the ratification of KPMG Peat
Marwick LLP as independent public accountants for the Fund, 2,587,872 shares
voted for the proposal, 34,231 shares voted against and 107,681 shares
abstained.

28
<PAGE> 159
TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Performance in Perspective....................... 6
Portfolio Management Review...................... 7
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 12
Statement of Operations.......................... 13
Statement of Changes in Net Assets............... 14
Financial Highlights............................. 15
Notes to Financial Statements.................... 18
Report of Independent Accountants................ 26
</TABLE>

FLI ANR 2/97
<PAGE> 160

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,

We are pleased to report that the
Van Kampen American Capital Florida
Insured Tax Free Income Fund has
continued to generate positive
investment performance. As noted in
earlier reports, VK/AC Holding Inc., [PHOTO]
the parent company of Van Kampen
American Capital, Inc., was acquired
by Morgan Stanley Group Inc., a world DENNIS J. MCDONNELL AND DON G. POWELL
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
increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

Continued on page two

1
<PAGE> 161

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,
followed by transportation securities which returned 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 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.
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.

Continued on page three

2
<PAGE> 162

Sincerely,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

3
<PAGE> 163

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED 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)... 4.37% 3.58% 3.65%
One-year total return(2)................ (0.60%) (0.39%) 2.66%
Life-of-Fund average annual total
return(2)............................. 5.52% 5.54% 6.92%
Commencement date....................... 07/29/94 07/29/94 07/29/94

DISTRIBUTION RATES AND YIELD

Distribution rate(3).................... 4.90% 4.38% 4.38%
Taxable equivalent distribution
rate(4)............................... 7.66% 6.84% 6.84%
SEC Yield(5)............................ 4.82% 4.30% 4.30%
</TABLE>

(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. Had
certain expenses of the Fund not been assumed by VKAC, the SEC Yield would have
been 3.76%, 3.24% and 3.24% for Classes A, B and C, respectively, and total
returns would have been lower.

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

4
<PAGE> 164

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
AAA...................................... 81.2%
AA....................................... 7.7% [PIE CHART]
A........................................ 6.4%
BBB...................................... 4.7%

AS OF JUNE 30, 1996(1)

AAA...................................... 87.5% [PIE CHART]
AA....................................... 3.6%
A........................................ 3.0%
BBB...................................... 5.9%

</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 SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
Health Care ............................. 33.3%
Public Education ........................ 11.2%
Water and Sewer ......................... 11.1%
Single-Family
Housing ............................... 9.5%
Retail
Elec/Gas/Telephone ..................... 7.1%

AS OF JUNE 30, 1996(1)

Public Education ........................ 25.1%
Health Care ............................. 19.3%
Water and Sewer ......................... 17.1%
Retail
Elec/Gas/Telephone ...................... 8.8%
Single-Family
Housing ............................... 8.5%
</TABLE>

DURATION

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1) AS OF JUNE 30, 1996(1)
<S> <C> <C>
Duration 9.44 years 9.41 years

</TABLE>

(1)Unaudited

5
<PAGE> 165

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

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT

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

INVESTMENT PERFORMANCE CHART

DATE VKAC FLORIDA INSURED LEHMAN BROTHERS MUNICIPAL
TAX FREE INCOME FUND BOND INDEX
<S> <C> <C>

7/94 9527 10000
12/94 9387 9745.5
6/95 10145 10686.5
12/95 10916 11447.3
6/96 10749 11395.9
12/96 11394 11955

</TABLE>

FUND'S TOTAL RETURN

1 Year Avg. Annual =-0.60%
Inception Avg. Annual = 5.52%

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).

6
<PAGE> 166

PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
Florida Insured Tax Free Income Fund about the key events and economic forces
that shaped the markets during the Fund's fiscal year. The team includes Joseph
A. Piraro, 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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 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 81 percent of Treasuries.
Municipal bonds continue to represent good value in this range on an after-tax
basis.

Q WHAT OTHER FACTORS AFFECTED THE FUND?

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 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 grown steadily 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 with current financial difficulties, such as Miami,
Florida. Also, drastic cuts in insurance costs over recent years have made
yields on insured offerings much more attractive when compared to lower-rated
securities.

7
<PAGE> 167

Q WHAT ACTIONS DID YOU TAKE IN RESPONSE TO THESE EVENTS?

A The Fund's investment objective is to provide Florida investors with a
high level of current income exempt from federal income and Florida
intangible personal property taxes, consistent with the preservation of
capital. To achieve this goal, we employed the following strategies.

Approximately 81 percent of the Fund's assets were AAA-rated by Standard &
Poor's Ratings Group. These bonds have tended to involve very little credit
risk, are highly liquid, and typically respond quickly to interest rate changes.
The remaining 19 percent of assets were also investment-grade securities, making
this Fund an excellent choice for the conservative investor.

Florida is the fourth largest issuer of municipal securities, with total
volume of $9.8 billion in 1996. Approximately two-thirds of this volume came to
market insured, which provided a wide variety of quality securities across many
sectors. We focused on health-care related securities, public education, and
water and sewer revenue bonds, as these sectors provided some of the most
attractive yields in the tax-exempt markets. The health-care sector, 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 9.44 years, longer
than the Lehman Brothers Florida Insured Index duration of 8.93 years.

We also found value in the intermediate range of the yield curve in 1996.
We did not feel that long-term securities offered enough yield advantage to
justify the higher levels of volatility, so 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. For additional Fund
portfolio highlights, please refer to page five.

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 4.37 percent(1) (Class A shares at net asset value), placing it
in the top half of the Florida 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. 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 4.90
percent(3) as of December 31, 1996, based on a monthly dividend of $.0645 per
Class A share and a maximum public offering price of $15.81 per share. For
investors in the 36 percent

8
<PAGE> 168

federal income tax bracket, the Fund's distribution rate was equivalent to a
taxable investment earning 7.66 percent(4). Please refer to the chart on page
four for additional Fund performance results.

Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE MUNICIPAL BOND MARKET IN THE
UPCOMING MONTHS?

A In the state of Florida, above-average population growth and strong
employment growth contributed to a solid economy in 1996. As corporations
continue to relocate to the state, we expect Florida's economy to remain robust
in the future. Rising population and growing infrastructure needs will result
in increased needs for external financing.

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 will, however, move to a slightly defensive posture with the Fund
as we enter the new year by shortening its duration slightly 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, may increase,
causing bond prices to rise.

[SIG]

Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]

Joseph A. Piraro
Portfolio Manager

Please see footnotes on page four

9
<PAGE> 169
PORTFOLIO OF INVESTMENTS
December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
FLORIDA 89.7%
$1,500 Altamonte Springs, FL Hlth Fac Auth Hosp Rev
Adventist Hlth Sunbelt Ser B (AMBAC Insd)........ 5.375% 11/15/23 $ 1,430,280
470 Brevard Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized)........................ 6.650 09/01/21 485,007
650 Brevard Cnty, FL Sales Tax Rev (MBIA Insd)....... 5.750 12/01/13 663,826
1,000 Brevard Cnty, FL Sch Brd Ctfs Ser A (AMBAC
Insd)............................................ 5.400 07/01/12 1,012,280
500 Citrus Cnty, FL Hosp Brd Rev Citrus Mem Hosp Ser
A Rfdg (FSA Insd)................................ 6.500 08/15/12 542,750
1,650 Coral Springs, FL Franchise Rev Rfdg (AMBAC Insd)
(b).............................................. 5.375 09/01/17 1,621,587
980 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd)............................................ 5.750 05/01/08 1,021,905
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd)............................................ 6.000 05/01/14 520,535
900 Daytona Beach, FL Wtr & Swr Rev Rfdg (AMBAC
Insd)............................................ 5.750 11/15/10 926,019
1,000 Florida St Dept of Tran Right of Way Acquisition
& Brdg........................................... 5.500 07/01/21 987,410
500 Hillsborough Cnty, FL Hosp Auth Hosp Rev Tampa
Genl Hosp Proj Rfdg (FSA Insd)................... 6.375 10/01/13 531,625
750 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl
Rev Tampa Elec Co Proj Rfdg (MBIA Insd).......... 6.250 12/01/34 803,468
1,300 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)... 5.700 10/01/15 1,318,902
1,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)
(b).............................................. 6.100 10/01/18 1,031,940
1,000 Jacksonville, FL Elec Auth Rev Saint John's Pwr-2
Ser 7 Rfdg (MBIA Insd)........................... 5.500 10/01/14 1,000,740
700 Jacksonville, FL Hlth Fac Auth Hosp Rev Baptist
Med Cent Proj Ser A Rfdg (MBIA Insd)............. 7.300 06/01/19 756,021
1,000 Jacksonville, FL Wtr & Swr Rev United Wtr Proj
(AMBAC Insd)..................................... 6.350 08/01/25 1,062,090
2,125 Lakeland, FL Hosp Sys Rev Lakeland Regl Med Cent
Proj Rfdg (MBIA Insd)............................ 5.250 11/15/25 2,023,382
1,000 Lee Cnty, FL Hsg Fin Auth Single Family
Multi-Cnty Pgm Ser A............................. 7.450 09/01/27 1,110,120
990 Manatee Cnty, FL Hsg Fin Auth Mtg Rev (GNMA
Collateralized).................................. 6.875 11/01/26 1,057,518
1,000 Manatee Cnty, FL Pub Utils Rev Ser A1 Rfdg (MBIA
Insd)............................................ 5.000 10/01/13 950,370
890 Martin Cnty, FL Cons Util Sys Rev Rfdg & Impt
(FGIC Insd)...................................... 5.750 10/01/08 939,884
750 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg.............. 7.875 12/15/25 861,697
545 Melbourne, FL Arpt Rev Rfdg (MBIA Insd).......... 6.250 10/01/18 580,485
500 Miramar, FL Wastewtr Impt Assmt Rev (FGIC
Insd)............................................ 6.750 10/01/25 559,520
2,680 Naples, FL Hosp Rev Naples Cmny Hosp Inc (MBIA
Insd)............................................ 5.500 10/01/26 2,639,237
250 Orange Cnty, FL Hlth Fac Auth Rev Pooled Hosp Ln
Ser B Rfdg (BIGI Insd)........................... 7.875 12/01/25 258,528
</TABLE>

See Notes to Financial Statements

10
<PAGE> 170

PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
$ 1,000 Orange Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized) (c).................... 6.550% 10/01/21 $ 1,036,110
900 Orange Cnty, FL Tourist Dev Tax Rev Ser B (AMBAC
Insd)............................................ 6.500 10/01/19 985,653
1,000 Osceola Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC
Insd)............................................ 5.500 06/01/19 986,640
1,800 Palm Beach Cnty, FL Hlth Fac Retirement Cmnty
Acts Oblig Group................................. 5.625 11/15/20 1,767,402
750 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A
(AMBAC Insd)..................................... 6.375 08/01/15 802,050
1,000 Polk Cnty, FL Indl Dev Auth Tampa Elec Co Proj... 5.850 12/01/30 997,740
1,000 Santa Rosa Bay Bridge Auth FL Rev................ 6.250 07/01/28 989,810
750 Sarasota Cnty, FL Util Sys Rev (Prerefunded @
10/01/04) (FGIC Insd)............................ 6.500 10/01/14 852,758
1,000 Tampa, FL Rev Allegany Hlth Sys Saint Mary's
(MBIA Insd) (c).................................. 5.125 12/01/23 921,940
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem
Hlth Rfdg & Impt (AMBAC Insd).................... 5.750 11/15/13 511,490
1,000 Volusia Cnty, FL Hlth Fac Auth Rev John Knox
Hlthcare Rfdg (Asset Gty Insd) (c)............... 6.000 06/01/17 1,011,480
-----------
37,560,199
-----------
PUERTO RICO 3.3%
670 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg............................................. 6.625 07/01/12 722,910
650 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd)............................ 5.750 07/01/15 660,692
-----------
1,383,602
-----------
TOTAL LONG-TERM INVESTMENTS 93.0%
(Cost $37,484,793) (a)..................................................... 38,943,801
-----------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 9.4%
Palm Beach Cnty, FL Wtr & Swr Rev ($645,000 par, coupon 5.00%, maturing
01/02/97).................................................................... 645,000
Pinellas Cnty, FL Hlth Fac Dates Pooled Hosp Ln Pgm Rfdg ($3,300,000 par,
coupon 4.80%, maturing 01/02/97)............................................. 3,300,000
-----------
TOTAL SHORT-TERM INVESTMENTS AT AMORTIZED COST............................... 3,945,000
LIABILITIES IN EXCESS OF OTHER ASSETS (2.4%)................................ (1,011,662)
-----------
NET ASSETS 100.0%........................................................... $41,877,139
===========
</TABLE>

(a) At December 31, 1996 for federal income tax purposes, cost is $37,484,793;
the aggregate gross unrealized appreciation is $1,544,304 and the aggregate
gross unrealized depreciation is $85,296, resulting in net unrealized
appreciation of $1,459,008.

(b) Securities purchased on a when issued or delayed delivery basis.

See Notes to Financial Statements

11
<PAGE> 171
STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $37,484,793)
(Note 1).................................................. $38,943,801
Short-Term Investments (Note 1)............................. 3,945,000
Cash........................................................ 3,030,224
Receivables:
Interest.................................................. 477,837
Fund Shares Sold.......................................... 155,424
Unamortized Organizational Expenses (Note 1)................ 61,707
-------------
Total Assets.......................................... 46,613,993
-------------
LIABILITIES:
Payables:
Securities Purchased...................................... 4,474,939
Income Distributions...................................... 83,140
Organizational Expenses (Note 1).......................... 50,430
Distributor and Affiliates (Notes 2 and 6)................ 31,569
Fund Shares Repurchased................................... 26,089
Deferred Compensation and Retirement Plans (Note 2)......... 37,415
Accrued Expenses............................................ 33,272
-------------
Total Liabilities..................................... 4,736,854
-------------
NET ASSETS.................................................. $41,877,139
=============
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $40,369,602
Net Unrealized Appreciation on Securities................... 1,459,008
Accumulated Net Realized Gain on Securities................. 27,558
Accumulated Undistributed Net Investment Income............. 20,971
-------------
NET ASSETS.................................................. $41,877,139
=============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $22,155,203 and 1,471,084 shares of
beneficial interest issued and outstanding)........... $ 15.06
Maximum sales charge (4.75%* of offering price)......... .75
-------------
Maximum offering price to public........................ $ 15.81
=============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $18,872,726 and 1,252,795 shares of
beneficial interest issued and outstanding)........... $ 15.06
=============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $849,210 and
56,311 shares of beneficial interest issued and
outstanding).......................................... $ 15.08
=============
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

12
<PAGE> 172
STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $1,916,154
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $41,541, $173,312 and $3,893, respectively)
(Note 6).................................................. 218,746
Investment Advisory Fee (Note 2)............................ 171,268
Custody..................................................... 60,971
Printing.................................................... 47,031
Trustees Fees and Expenses (Note 2)......................... 32,630
Amortization of Organizational Expenses (Note 1)............ 24,054
Registration and Filing Fees................................ 21,163
Auditing.................................................... 20,130
Shareholder Services (Note 2)............................... 14,195
Legal (Note 2).............................................. 9,150
Other....................................................... 15,943
------------
Total Expenses............................................ 635,281
Less Fees Waived and Expenses Reimbursed ($171,268 and
$235,222, respectively) (Note 2)........................ 406,490
------------
Net Expenses............................................ 228,791
------------
NET INVESTMENT INCOME....................................... $1,687,363
============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................... $ 300,120
Options................................................... (51,007)
Futures................................................... 38,401
------------
Net Realized Gain on Securities............................. 287,514
------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 2,006,673
End of the Period:
Investments............................................. 1,459,008
------------
Net Unrealized Depreciation on Securities During the
Period.................................................... (547,665)
------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $ (260,151)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $1,427,212
============
</TABLE>

See Notes to Financial Statements

13
<PAGE> 173
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................................ $ 1,687,363 $ 1,201,714
Net Realized Gain/Loss on Securities................. 287,514 (144,567)
Net Unrealized Appreciation/Depreciation on
Securities
During the Period.................................. (547,665) 2,450,275
----------- -----------
Change in Net Assets from Operations................. 1,427,212 3,507,422
----------- -----------
Distributions from Net Investment Income............. (1,654,415) (1,204,444)
Distributions in Excess of Net Investment Income
(Note 1)........................................... -0- (11,977)
----------- -----------
Distributions from and in Excess of Net Investment
Income*............................................ (1,654,415) (1,216,421)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... (227,203) 2,291,001
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................ 16,047,069 17,861,887
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 701,942 447,813
Cost of Shares Repurchased........................... (8,255,409) (6,892,964)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... 8,493,602 11,416,736
----------- -----------
TOTAL INCREASE IN NET ASSETS......................... 8,266,399 13,707,737
NET ASSETS:
Beginning of the Period.............................. 33,610,740 19,903,003
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $20,971 and
$(11,977), respectively)........................... $41,877,139 $33,610,740
=========== ===========
</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..................... $ (868,212) $ (578,890)
Class B Shares..................... (768,924) (634,695)
Class C Shares..................... (17,279) (2,836)
----------- -----------
$(1,654,415) $(1,216,421)
=========== ============
</TABLE>

See Notes to Financial Statements

14
<PAGE> 174
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......................... $15.203 $13.796 $14.300
------- ------- -------
Net Investment Income.......... .784 .789 .291
Net Realized and Unrealized
Gain/Loss on Securities...... (.153) 1.416 (.507)
------- ------- -------
Total from Investment
Operations..................... .631 2.205 .216
Less Distributions from and in
Excess of Net Investment Income
(Note 1)....................... .774 .798 .288
------- ------- -------
Net Asset Value, End of the
Period......................... $15.060 $15.203 $13.796
======= ======= =======
Total Return* (a)................ 4.37% 16.29% (1.47%)**
Net Assets at End of the Period
(In millions).................. $22.2 $16.2 $9.0
Ratio of Expenses to Average Net
Assets*........................ .28% .44% .49%
Ratio of Net Investment Income to
Average Net Assets*............ 5.31% 5.33% 5.13%
Portfolio Turnover............... 73% 41% 19%**
* 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......................... 1.47% 1.70% 1.99%
Ratio of Net Investment Income to
Average Net Assets............. 4.13% 4.07% 3.64%
</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

15
<PAGE> 175
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.................... $15.201 $13.792 $14.300
------- ------- -------
Net Investment Income......... .677 .685 .251
Net Realized and Unrealized
Gain/Loss on Securities..... (.154) 1.415 (.509)
------- ------- -------
Total from Investment
Operations.................... .523 2.100 (.258)
Less Distributions from and in
Excess of Net Investment
Income (Note 1)............... .660 .691 .250
------- ------- -------
Net Asset Value, End of the
Period........................ $15.064 $15.201 $13.792
======= ======= =======
Total Return* (a)............... 3.58% 15.53% (1.81%)**
Net Assets at End of the Period
(In millions)................. $18.9 $16.9 $10.9
Ratio of Expenses to Average Net
Assets*....................... 1.03% 1.12% 1.26%
Ratio of Net Investment Income
to Average Net Assets*........ 4.56% 4.66% 4.31%
Portfolio Turnover.............. 73% 41% 19%**
* 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........................ 2.22% 2.38% 2.75%
Ratio of Net Investment Income
to Average Net Assets......... 3.38% 3.40% 2.81%
</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

16
<PAGE> 176
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......................... $15.213 $13.786 $14.300
------- ------- -------
Net Investment Income.......... .668 .690 .249
Net Realized and Unrealized
Gain/Loss on Securities...... (.140) 1.428 (.513)
------- ------- -------
Total from Investment
Operations..................... .528 2.118 .264
Less Distributions from and in
Excess of Net Investment Income
(Note 1)....................... .660 .691 .250
------- ------- -------
Net Asset Value, End of the
Period......................... $15.081 $15.213 $13.786
======= ======= =======
Total Return* (a)................ 3.65% 15.61% (1.81%)**
Net Assets at End of the Period
(In thousands)................. $849.2 $461.8 $11.4
Ratio of Expenses to Average Net Assets*... 1.03% 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............ 4.56% 4.51% 4.28%
Portfolio Turnover............... 73% 41% 19%**
* 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... 2.22% 2.39% 2.74%
Ratio of Net Investment Income to
Average Net Assets............. 3.38% 3.25% 2.87%
</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

17
<PAGE> 177
NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Florida Insured 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 a high level of
current income exempt from federal income and Florida state intangibles taxes,
consistent with preservation of capital. Under normal market conditions, the
Fund will invest at least 80% of its assets in insured Florida municipal
securities. 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 on securities purchased are amortized over
the expected life of each applicable security.

18
<PAGE> 178
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------

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 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.

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. For the year ended December 31, 1996, 99.5% of the income
distributions made by the Fund were exempt from federal income taxes. 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.

19
<PAGE> 179

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 (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:

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 incurred expenses of
approximately $16,500 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund. All of these expenses were assumed by
VKAC.

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 incurred expenses of approximately $8,400,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit. All of this expense was 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. 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 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.

20
<PAGE> 180

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $21,428,427, $18,098,011 and
$843,164 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..................................... 662,550 $ 9,888,850
Class B..................................... 371,733 5,505,878
Class C..................................... 43,663 652,341
---------- ------------
Total Sales................................... 1,077,946 $16,047,069
========== ============
Dividend Reinvestment:
Class A..................................... 24,754 $ 367,510
Class B..................................... 21,677 321,647
Class C..................................... 858 12,785
---------- ------------
Total Dividend Reinvestment................... 47,289 $ 701,942
========== ============
Repurchases:
Class A..................................... (282,145) $(4,206,188)
Class B..................................... (255,198) (3,772,557)
Class C..................................... (18,569) (276,664)
---------- ------------
Total Repurchases............................. (555,912) $(8,255,409)
========== ============
</TABLE>

21
<PAGE> 181

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $15,378,255, $16,043,043 and
$454,702 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............................... 638,004 $ 9,423,423
Class B............................... 543,226 7,996,321
Class C............................... 29,482 442,143
--------- -----------
Total Sales............................. 1,210,712 $17,861,887
========= ===========
Dividend Reinvestment:
Class A............................... 13,418 $ 197,470
Class B............................... 16,884 248,162
Class C............................... 147 2,181
--------- -----------
Total Dividend Reinvestment............. 30,449 $ 447,813
========= ===========
Repurchases:
Class A............................... (240,707) $(3,477,451)
Class B............................... (232,380) (3,414,090)
Class C............................... (96) (1,423)
--------- -----------
Total Repurchases....................... (473,183) $(6,892,964)
========= ===========
</TABLE>

22
<PAGE> 182

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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 years ended December 31, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$19,000 and CDSC on redeemed shares of approximately $91,900. 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, for the year ended December 31, 1996, were
$33,527,727 and $23,944,324, 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 securities. 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.

23
<PAGE> 183

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).............. 450 (207,537)
Options Terminated in Closing Transactions
(Net).......................................... (450) 207,537
---- ---------
Outstanding at December 31, 1996................. -0- $ -0-
==== =========
</TABLE>

Transactions in futures contracts, each with a par value of $100,000, for
the year ended December 31, 1996, were as follows:

<TABLE>
<CAPTION>
CONTRACTS
- ------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995........................... -0-
Futures Opened............................................. 525
Futures Closed............................................. (525)
----
Outstanding at December 31, 1996........................... -0-
====
</TABLE>

24
<PAGE> 184

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

6. DISTRIBUTION AND SERVICE PLANS

25
<PAGE> 185

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of
Van Kampen American Capital Florida Insured Tax Free Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Florida Insured 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.

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 Florida Insured 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 12, 1997

26
<PAGE> 186

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund

27
<PAGE> 187

VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*

ALAN T. SACHTLEBEN*

PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.

(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.

A Special Meeting of Shareholders of the Fund was held on October 25, 1996,
where shareholders voted on a new investment advisory agreement, changes to
investment policies and the ratification of KPMG Peat Marwick LLP as independent
public accountants. With regard to the approval of a new investment advisory
agreement between Van Kampen American Capital Investment Advisory Corp. and the
Fund, 1,717,181 shares voted for the proposal, 34,835 shares voted against and
127,335 shares abstained. With regard to the approval of certain changes to the
Fund's fundamental investment policies with respect to investment in other
investment companies, 1,375,524 shares voted for the proposal, 60,933 shares
voted against and 124,175 shares abstained. With regard to the ratification of
KPMG Peat Marwick LLP as independent public accountants for the Fund, 1,746,421
shares voted for the proposal, 7,186 shares voted against and 125,744 shares
abstained.

28
<PAGE> 188
TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Performance in Perspective....................... 6
Portfolio Management Review...................... 7
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 12
Statement of Operations.......................... 13
Statement of Changes in Net Assets............... 14
Financial Highlights............................. 15
Notes to Financial Statements.................... 18
Report of Independent Accountants................ 24
</TABLE>

NJTF ANR 2/97
<PAGE> 189

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 [PHOTO]
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 DENNIS J. MCDONNELL AND DON G. POWELL
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
increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

Continued on page two

1
<PAGE> 190

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 year's 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 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.
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.

Continued on page three

2
<PAGE> 191
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,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

3
<PAGE> 192

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

TOTAL RETURNS

<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
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
</TABLE>

DISTRIBUTION RATES AND YIELD

<TABLE>
<S> <C> <C> <C>
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>

(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)The taxable-equivalent distribution rate is calculated assuming a 40.1%
combined effective federal and state tax bracket, which takes into consideration
the deductibility of individual state taxes paid.

(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. Had
certain expenses of the Fund not been assumed by VKAC, total return would have
been lower and the SEC Yield would have been 3.23%, 2.72% and 2.72% for Classes
A, B and C, respectively.

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

4
<PAGE> 193

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
AAA.................... 71.0%
AA..................... 6.1%
A...................... 5.7%
BBB.................... 13.5%
Non-Rated.............. 3.7%
[Pie Chart]
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C>
AAA.................... 74.8%
AA..................... 2.0%
A...................... 9.6%
BBB.................... 9.6%
Non-Rated.............. 4.0%
[Pie Chart]
</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
<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

5
<PAGE> 194

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

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 Fund Municipal Bond Index
<S> <C> <C>
Jul 1994 9,525.00 10,000.00

Dec 1994 9,354.00 9,745.50

Jun 1995 10,025.00 10,686.50

Dec 1995 10,782.00 11,447.30

Jun 1996 10,694.00 11,395.90

Dec 1996 11,243.00 11,955.00

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

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

6
<PAGE> 195
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.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A 1996 ushered in a favorable environment for the bond market. 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.
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.

Q WERE THERE ANY OTHER KEY FACTORS BESIDES THE ECONOMY THAT HAD SOME EFFECT
ON THIS FUND OVER THE REPORTING PERIOD?

A Election-year politics played a major role. In the first 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.
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.

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.

7
<PAGE> 196
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.

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.
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).

8
<PAGE> 197

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.
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.

[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]
Timothy D. Haney
Portfolio Manager

Please see footnotes on page four

9
<PAGE> 198

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

10
<PAGE> 199

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

11
<PAGE> 200

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

12
<PAGE> 201

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

13
<PAGE> 202

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

14
<PAGE> 203

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

15
<PAGE> 204

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

16
<PAGE> 205

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

17
<PAGE> 206

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.

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. As of December 31, 1996, there were
no when issued or delayed delivery purchase commitments.

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

18
<PAGE> 207

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.

19
<PAGE> 208
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.

20
<PAGE> 209

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>

21
<PAGE> 210

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>

22
<PAGE> 211

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

23
<PAGE> 212

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

24
<PAGE> 213

VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND

BOARD OF TRUSTEES
J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman

OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller

PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents

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

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

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

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

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

INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

SM denotes a service mark of Van Kampen American Capital Distributors, Inc.

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
732,926 shares voted for the proposal, 44,999 shares voted against and 36,437
shares abstained. With regard to the approval of certain changes to the Fund's
fundamental investment policies with respect to investment in other investment
companies, 555,801 shares voted for the proposal, 48,782 shares voted against
and 47,905 shares abstained. With regard to the ratification of KPMG Peat
Marwick LLP as independent public accountants for the Fund, 758,225 shares voted
for the proposal, 14,759 shares voted against and 41,378 shares abstained.

25
<PAGE> 214

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Performance in Perspective....................... 6
Portfolio Management Review...................... 7
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 12
Statement of Operations.......................... 13
Statement of Changes in Net Assets............... 14
Financial Highlights............................. 15
Notes to Financial Statements.................... 18
Report of Independent Accountants................ 24
</TABLE>

NYTF ANR 2/97
<PAGE> 215

LETTER TO SHAREHOLDERS

January 31, 1997

Dear Shareholder,
We are pleased to report that the
Van Kampen American Capital New York
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 [PHOTO]
Capital, Inc., was acquired by Morgan
Stanley Group Inc., a world leader in
asset management and investment DENNIS J. MCDONNELL AND DON G. POWELL
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
increase on record. Including the volatile food and energy sectors, however,
prices at the retail level rose by 3.3 percent.

Continued on page two

1
<PAGE> 216

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,
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, but 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 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.
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.

Continued on page three

2
<PAGE> 217

Sincerely,

[SIG]
Don G. Powell

Chairman
Van Kampen American Capital
Investment Advisory Corp.

[SIG]
Dennis J. McDonnell

President
Van Kampen American Capital
Investment Advisory Corp.

3
<PAGE> 218

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996

VAN KAMPEN AMERICAN CAPITAL NEW YORK 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).... 5.14% 4.37% 4.44%
One-year total return(2)................. .14% .39% 3.44%
Life-of-Fund average annual total
return(2)................................ 5.57% 5.60% 6.92%
Commencement date........................ 07/29/94 07/29/94 07/29/94

DISTRIBUTION RATES AND YIELD

Distribution rate(3)..................... 5.07% 4.60% 4.60%
Taxable equivalent distribution
rate(4).................................. 8.54% 7.74% 7.74%
SEC Yield(5)............................. 5.18% 4.67% 4.67%
</TABLE>

(2)Standardized total return. Assumes reinvestment of all distributions for the
period ended 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 combined federal and state income
tax rate of 40.6% which takes into consideration the deductibility of individual
state taxes paid.

(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. Had
certain expenses of the Fund not been assumed by VKAC, the SEC Yield would have
been 3.63%, 3.12%, and 3.12% for Classes A, B and C, respectively, and total
returns would have been lower.

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

4
<PAGE> 219

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C> <C>
AAA................... 43.8%
AA.................... 9.3%
A..................... 7.0% [Pie Chart]
BBB................... 25.1%
Non-Rated............. 14.8%

<CAPTION>
AS OF JUNE 30, 1996(1)
<S> <C> <C>
AAA................... 47.1%
AA.................... 5.2%
A..................... 7.0% [Pie Chart]
BBB................... 24.2%
Non-Rated............. 16.5%
</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 AS OF DECEMBER 31, 1996
<S> <C> <C> <C>
General Purpose ....... 15.3% Health Care .......... 22.8%
Health Care ........... 15.2% General Purpose ...... 21.6%
Industrial Revenue .... 13.8% Industrial Revenue ... 14.1%
Public Education ...... 12.5% Public Building ...... 10.5%
Housing ............... 10.1% Higher Education ..... 8.3%
</TABLE>

DURATION

<TABLE>
<CAPTION>
As of December 31, 1996(1) As of June 30, 1996(1)
<S> <C> <C>
Duration 8.30 years 8.43 years
</TABLE>

(1)Unaudited

5
<PAGE> 220

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

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital New York Tax Free Income Fund vs.
Lehman Brothers Municipal Bond Index (July 29, 1994 through
December 31, 1996)

<TABLE>
<CAPTION>
DATE VKAC Lehman Brothers
<S> <C> <C>
Jul 1994 9575 10000
Dec 1994 9248 9745.5
Jun 1995 10046 10686.5
Dec 1995 10850 11447.3
Jun 1996 10735 11395.9
Dec 1996 11408 11955

</TABLE>

- -------------------------------------
Fund's Total Return
1 Year Avg. Annual = 0.14%
Inception Avg. Annual = 5.57%
- -------------------------------------

[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).

6
<PAGE> 221

PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
New York Tax Free Income Fund about the key events and economic forces which
shaped the markets during the past fiscal year. The team includes Dennis S.
Pietrzak, 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 12-month period ended December 31, 1996.

Q WHAT ECONOMIC FACTORS INFLUENCED THE FUND'S PERFORMANCE IN 1996?

A 1996 ushered in a favorable environment for the bond market. 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.
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.

Q WERE THERE ANY OTHER KEY FACTORS BESIDES THE ECONOMY THAT HAD SOME EFFECT
ON THIS FUND OVER THE REPORTING PERIOD?

A Election-year politics played a major role. In the first 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.
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.

7
<PAGE> 222

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 New York State and New York City income taxes,
consistent with the preservation of capital. To achieve this goal, we used
the following strategies.
Approximately 44 percent of assets were AAA-rated, the highest credit rating
assigned to bonds by Standard & Poor's Ratings Group. These bonds have typically
involved little credit risk, are highly liquid, and typically respond quickly to
interest rate changes. Approximately 40 percent of assets are BBB-rated or
non-rated. A combination of high quality and lower-rated holdings has helped
balance the portfolio's relative 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 have
tended 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.
New York is the second largest issuer of municipal securities, providing the
Fund with a broad range of investment opportunities. Given the diverse economy
of the state, we focused on the general purpose, health care, industrial revenue
and higher education sectors, as these sectors offer some of the more 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 relative 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 8.30
years, as compared to the Lehman Brothers New York Municipal Bond Index duration
of 8.62 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 mature 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.

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 5.14 percent(1) (Class A shares at net asset value), which put
it in the top half of the New York Municipal Debt category as tracked by
Lipper Analytical Services.
The Fund also continued to meet its goal of providing a competitive level of
tax-exempt current income in 1996. Its distribution rate, based on Class A
shares, was 5.07 percent(3) as of December 31, 1996, based on a monthly dividend
of $.0665 per

8
<PAGE> 223

Class A share and a maximum public offering price of $15.74 per share. For
investors in the 40.6 percent combined state and federal income tax bracket, the
Fund's distribution rate was equivalent to a taxable investment earning 8.54
percent(4).

Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE NEW YORK MUNICIPAL BOND MARKET
IN THE UPCOMING MONTHS?

A New York's improved economic picture is largely tied to the continued
strong securities market, and is somewhat susceptible to rising interest
rates or changing prospects for equities. Municipal bond supply-and-demand
within the state should be consistent with 1996 levels.
Nationwide, 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 keeping its duration at a neutral or slightly shorter
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 major tax reform changes, 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.

[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments

[SIG]
Dennis Pietrzak
Portfolio Manager

Please see footnotes on page four

9
<PAGE> 224

PORTFOLIO OF INVESTMENTS

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK MUNICIPAL BONDS 98.9%
$815 Battery Park City Auth NY Rev (MBIA Insd)....... 5.250% 11/01/17 $ 777,706
400 Battery Park City Auth NY Rev Sr Ser A Rfdg..... 5.000 11/01/13 372,580
200 Broome Cnty, NY Ctfs Partn Pub Safety Fac (MBIA
Insd)........................................... 5.250 04/01/15 192,154
500 Buffalo, NY Swr Auth Rev Swr Sys Ser G Rfdg
(FGIC Insd)..................................... 5.000 07/01/12 475,900
750 Clifton Springs, NY Hosp & Clinic Ser A Rfdg &
Impt............................................ 7.650 01/01/12 767,437
500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY
Institute of Technology Rfdg.................... 7.500 03/01/26 521,440
500 New York City Indl Dev Agy Civic Fac Rev........ 7.500 08/01/26 508,305
500 New York City Indl Dev Agy Rev Visy Paper Inc
Proj............................................ 7.950 01/01/28 533,295
375 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj............................. 5.700 01/01/04 383,239
500 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser A Rfdg.................................. 5.625 06/15/19 491,230
500 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser B (AMBAC Insd).......................... 5.375 06/15/19 478,630
490 New York City Ser C............................. 7.250 08/15/24 527,534
10 New York City Ser C (Prerefunded @ 08/15/01).... 7.250 08/15/24 11,160
500 New York City Ser H (Cap Guar Insd)............. 7.000 02/01/21 552,935
300 New York St Dorm Auth Rev City Univ Ser F....... 5.000 07/01/14 267,024
600 New York St Dorm Auth Rev City Univ Sys 3rd Genl
Res 2 Rfdg...................................... 6.000 07/01/05 625,530
350 New York St Dorm Auth Rev Cons City Univ Sys
Ser A .......................................... 5.625 07/01/16 343,102
500 New York St Dorm Auth Rev Court Fac Lease
Ser A .......................................... 5.700 05/15/22 477,100
500 New York St Dorm Auth Rev St Univ Edl Fac....... 5.750 05/15/10 499,960
500 New York St Energy Resh & Dev Auth Elec Fac Rev
Cons Edison Co NY Inc Proj Ser A (MBIA Insd).... 7.500 01/01/26 543,175
300 New York St Energy Resh & Dev Auth St Svc
Contract Rev Western NY Nuclear Svc Cent Proj... 6.000 04/01/00 310,140
500 New York St Environmental Fac Corp Pollutn Ctl
Rev St Wtr Revolving Fund Ser D................. 6.850 11/15/11 567,205
500 New York St Hsg Fin Agy Rev Insd Multi-Family
Mtg Ser B (AMBAC Insd).......................... 6.250 08/15/14 518,985
595 New York St Med Care Fac Fin Agy Rev North Shore
Univ Glen Cove Ser A (MBIA Insd)................ 5.125 11/01/12 573,639
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd).............................. 6.200 08/15/05 549,845
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd).............................. 6.600 02/15/11 550,520
300 New York St Med Care Fac Fin Agy Rev
Presbyterian Hosp Mtg Ser A Rfdg (FHA Gtd)...... 5.250 08/15/14 289,779
</TABLE>

See Notes to Financial Statements

10
<PAGE> 225
PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
NEW YORK MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C> <C>
$500 New York St Mtg Agy Rev Homeowner Mtg Ser 30B... 6.650% 10/01/25 $ 522,330
750 New York St Mtg Agy Rev Homeowner Mtg Ser 58.... 6.400 04/01/27 773,542
290 New York St Thruway Auth Svc Contract Rev Loc
Hwy & Brdg...................................... 5.750 04/01/09 290,925
370 New York St Urban Dev Corp Rev Correctional Cap
Fac Rfdg........................................ 5.625 01/01/07 372,009
300 New York St Urban Dev Corp Rev Correctional Fac
Rfdg............................................ 5.750 01/01/13 292,806
500 Niagara Falls, NY Brdg Comm Toll Rev Ser B Rfdg
(FGIC Insd)..................................... 5.250 10/01/21 471,250
420 Niagara Falls, NY Pub Impt (MBIA Insd).......... 6.900 03/01/20 473,836
500 Oneida Cnty, NY Pub Impt........................ 5.850 03/15/12 502,270
300 Port Auth NY & NJ Spl Oblig..................... 7.000 10/01/07 321,978
625 Rockland Cnty, NY Solid Waste Mgmt Auth Ser B
(AMBAC Insd).................................... 5.550 12/15/16 623,112
400 Triborough Brdg & Tunl Auth NY Rev Genl Purp Ser
A Rfdg.......................................... 5.000 01/01/12 379,948
250 Upper Mohawk Vly Reg Wtr Fin NY Ser A (FSA
Insd)........................................... 5.125 10/01/16 239,205
-----------
TOTAL LONG-TERM INVESTMENTS 98.9%
(Cost $17,005,002) (a)..................................................... 17,972,760
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1%.................................. 208,846
-----------
NET ASSETS 100.0%........................................................... $18,181,606
===========
</TABLE>

(a) At December 31, 1996, for federal income tax purposes cost is $17,005,002;
the aggregate gross unrealized appreciation is $967,758 and the aggregate
gross unrealized depreciation is $-0-, resulting in net unrealized
appreciation of $967,758.

See Notes to Financial Statements

11
<PAGE> 226

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $17,005,002)
(Note 1).................................................. $17,972,760
Receivables:
Investments Sold.......................................... 4,263,471
Interest.................................................. 348,719
Fund Shares Sold.......................................... 58,768
Unamortized Organizational Expenses (Note 1)................ 61,706
-----------
Total Assets.......................................... 22,705,424
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,219,933
Custodian Bank............................................ 138,625
Distributor and Affiliates (Notes 2 and 5)................ 37,503
Income Distributions...................................... 36,211
Fund Shares Repurchased................................... 34,927
Accrued Expenses............................................ 45,703
Deferred Compensation and Retirement Plans (Note 2)......... 10,916
-----------
Total Liabilities..................................... 4,523,818
-----------
NET ASSETS.................................................. $18,181,606
===========
NET ASSETS CONSIST OF:
Capital (Note 3)............................................ $17,333,745
Net Unrealized Appreciation on Investments.................. 967,758
Accumulated Undistributed Net Investment Income............. 10,427
Accumulated Net Realized Loss on Investments................ (130,324)
-----------
NET ASSETS.................................................. $18,181,606
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $7,700,094 and 513,625 shares of
beneficial interest issued and outstanding)........... $ 14.99
Maximum sales charge (4.75%* of offering price)......... .75
-----------
Maximum offering price to public........................ $ 15.74
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $10,128,587 and 675,612 shares of
beneficial interest issued and outstanding)........... $ 14.99
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $352,925 and 23,541 shares of beneficial
interest issued and outstanding)...................... $ 14.99
===========
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

12
<PAGE> 227

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 993,413
----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $16,329, $100,433 and $3,736, respectively)
(Note 5).................................................. 120,498
Investment Advisory Fee (Note 2)............................ 101,692
Custodian................................................... 48,690
Printing.................................................... 33,340
Amortization of Organizational Expenses (Note 1)............ 24,054
Audit....................................................... 20,130
Shareholder Services (Note 2)............................... 14,636
Legal (Note 2).............................................. 6,935
Trustees Fees and Expenses (Note 2)......................... 6,416
Other....................................................... 13,432
----------
Total Expenses.......................................... 389,823
Less Fees Waived and Expenses Reimbursed ($101,692 and
$156,322, respectively)............................... 258,014
----------
Net Expenses............................................ 131,809
----------
NET INVESTMENT INCOME....................................... $ 861,604
==========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments............................ $ 178,372
----------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................... 1,152,943
End of the Period......................................... 967,758
----------
Net Unrealized Depreciation on Investments During the
Period.................................................... (185,185)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............. $ (6,813)
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 854,791
==========
</TABLE>

See Notes to Financial Statements

13
<PAGE> 228

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................................ $ 861,604 $ 691,227
Net Realized Gain/Loss on Investments................ 178,372 (150,409)
Net Unrealized Appreciation/Depreciation on
Investments During the Period...................... (185,185) 1,493,429
---------- ----------
Change in Net Assets from Operations................. 854,791 2,034,247
---------- ----------
Distributions from Net Investment Income............. (843,389) (691,442)
Distributions in Excess of Net Investment Income
(Note 1)........................................... -0- (7,788)
---------- ----------
Distributions from and in Excess of Net Investment
Income*............................................ (843,389) (699,230)
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... 11,402 1,335,017
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................ 5,845,364 4,830,393
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 429,768 353,229
Cost of Shares Repurchased........................... (3,618,542) (2,209,451)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... 2,656,590 2,974,171
---------- ----------
TOTAL INCREASE IN NET ASSETS......................... 2,667,992 4,309,188
NET ASSETS:
Beginning of the Period.............................. 15,513,614 11,204,426
---------- ----------
End of the Period (Including accumulated
undistributed net investment income of $10,427 and
$(7,788), respectively)............................ $18,181,606 $15,513,614
=========== ===========
</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.................... $(354,322) $(226,467)
Class B Shares.................... (471,468) (459,895)
Class C Shares.................... (17,599) (12,868)
--------- ---------
$(843,389) $(699,230)
========= =========
</TABLE>

See Notes to Financial Statements

14
<PAGE> 229

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............................ $15.048 $13.579 $14.300
------- ------- -------
Net Investment Income............. .816 .821 .302
Net Realized and Unrealized
Gain/Loss on Investments........ (.074) 1.476 (.722)
------- ------- -------
Total from Investment Operations.... .742 2.297 (.420)
Less Distributions from and in
Excess of Net Investment Income
(Note 1).......................... .798 .828 .301
------- ------- -------
Net Asset Value, End of the
Period............................ $14.992 $15.048 $13.579
======= ======= =======
Total Return*(a).................... 5.14% 17.33% (2.93%)**
Net Assets at End of the Period (In
millions)......................... $ 7.7 $ 5.4 $ 2.9
Ratio of Expenses to Average Net
Assets*........................... .31% .21% .26%
Ratio of Net Investment Income to
Average Net Assets*............... 5.56% 5.63% 5.27%
Portfolio Turnover.................. 126% 51% 68%**
*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............................ 1.82% 2.10% 2.73%
Ratio of Net Investment Income to
Average Net Assets................ 4.04% 3.74% 2.81%
**Non-Annualized
</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

15
<PAGE> 230

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............................ $15.046 $13.578 $14.300
------- ------- -------
Net Investment Income............. .704 .713 .263
Net Realized and Unrealized
Gain/Loss on Investments........ (.068) 1.476 (.722)
------- ------- -------
Total from Investment Operations.... .636 2.189 (.459)
Less Distributions from and in
Excess of Net Investment Income
(Note 1).......................... .690 .721 .263
------- ------- -------
Net Asset Value, End of the
Period............................ $14.992 $15.046 $13.578
======= ======= =======
Total Return*(a).................... 4.37% 16.47% (3.20%)**
Net Assets at End of the Period (In
millions)......................... $ 10.1 $ 9.7 $ 8.1
Ratio of Expenses to Average Net
Assets*........................... 1.07% .93% .96%
Ratio of Net Investment Income to
Average Net Assets*............... 4.79% 4.93% 4.58%
Portfolio Turnover.................. 126% 51% 68%**
*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............................ 2.60% 2.82% 3.42%
Ratio of Net Investment Income to
Average Net Assets................ 3.26% 3.04% 2.12%
**Non-Annualized
</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

16
<PAGE> 231

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............................ $15.041 $13.579 $14.300
------- ------- -------
Net Investment Income............. .701 .711 .267
Net Realized and Unrealized
Gain/Loss on Investments........ (.060) 1.472 (.725)
------- ------- -------
Total from Investment Operations.... .641 2.183 (.458)
Less Distributions from and in
Excess of Net Investment Income
(Note 1).......................... .690 .721 .263
------- ------- -------
Net Asset Value, End of the
Period............................ $14.992 $15.041 $13.579
======= ======= =======
Total Return*(a).................... 4.44% 16.39% (3.20%)**
Net Assets at End of the Period (In
millions)......................... $ .4 $ .4 $ .2
Ratio of Expenses to Average Net
Assets*........................... 1.08% .98% .96%
Ratio of Net Investment Income to
Average Net Assets*............... 4.78% 4.81% 4.58%
Portfolio Turnover.................. 126% 51% 68%**
*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............................ 2.61% 2.86% 3.42%
Ratio of Net Investment Income to
Average Net Assets................ 3.25% 2.93% 2.12%
**Non-Annualized
</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

17
<PAGE> 232

NOTES TO FINANCIAL STATEMENTS

December 31, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital New York 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, New York State and New York City
income taxes, consistent with preservation of capital. The Fund seeks to achieve
its investment objective by investing at least 80% of its assets in a portfolio
of New York municipal securities rated investment grade at the time of
investment. 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.

18
<PAGE> 233

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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.

For the year ended December 31, 1996, 100.0% of the income distributions
made by the Fund were exempt from federal income taxes.

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>

19
<PAGE> 234

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

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 $10,000 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 of the Fund. For the year ended
December 31, 1996, the Fund recognized expenses of approximately $7,500,
representing ACCESS' 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.

20
<PAGE> 235

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1996, capital aggregated $7,390,967, $9,602,474 and $340,304
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...................................... 221,959 $ 3,267,016
Class B...................................... 167,902 2,467,305
Class C...................................... 7,482 111,043
-------- -----------
Total Sales.................................... 397,343 $ 5,845,364
======== ===========
Dividend Reinvestment:
Class A...................................... 14,548 $ 214,270
Class B...................................... 13,908 204,781
Class C...................................... 727 10,717
-------- -----------
Total Dividend Reinvestment.................... 29,183 $ 429,768
======== ===========
Repurchases:
Class A...................................... (78,724) $(1,167,300)
Class B...................................... (154,018) (2,273,282)
Class C...................................... (12,034) (177,960)
-------- -----------
Total Repurchases.............................. (244,776) $(3,618,542)
======== ===========
</TABLE>

21
<PAGE> 236

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

At December 31, 1995, capital aggregated $5,076,981, $9,203,670, and
$396,504 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...................................... 178,498 $ 2,590,867
Class B...................................... 139,452 2,015,988
Class C...................................... 15,339 223,538
-------- -----------
Total Sales.................................... 333,289 $ 4,830,393
======== ===========
Dividend Reinvestment:
Class A...................................... 9,002 $ 130,867
Class B...................................... 14,956 216,684
Class C...................................... 389 5,678
-------- -----------
Total Dividend Reinvestment.................... 24,347 $ 353,229
======== ===========
Repurchases:
Class A...................................... (46,443) $ (668,258)
Class B...................................... (104,963) (1,535,985)
Class C...................................... (352) (5,208)
-------- -----------
Total Repurchases.............................. (151,758) $(2,209,451)
======== ===========
</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.

22
<PAGE> 237

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ----------------------------------------------------------------------------
<S> <C> <C>
First............................................. 4.00% 1.00%
Second............................................ 3.75% None
Third............................................. 3.50% None
Fourth............................................ 2.50% None
Fifth............................................. 1.50% None
Sixth............................................. 1.00% None
Seventh and Thereafter............................ .00% None
</TABLE>

For the year ended December 31, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$10,800 and CDSC on redeemed shares of approximately $40,100. 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 $23,582,103 and $20,783,427.

5. DISTRIBUTION AND SERVICE PLANS

23
<PAGE> 238

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of

Van Kampen American Capital New York Tax Free Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital New York 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 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 New York 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

24
<PAGE> 239

VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND

BOARD OF TRUSTEES

J. MILES BRANAGAN

LINDA HUTTON HEAGY

R. CRAIG KENNEDY

DENNIS J. MCDONNELL*

JACK E. NELSON

JEROME L. ROBINSON

FERNANDO SISTO

WAYNE W. WHALEN* - Chairman

OFFICERS

DENNIS J. MCDONNELL*
President

RONALD A. NYBERG*
Vice President and Secretary

EDWARD C. WOOD, III*
Vice President and Chief Financial Officer

CURTIS W. MORELL*
Vice President and Chief Accounting Officer

JOHN L. SULLIVAN*
Treasurer

TANYA M. LODEN*
Controller

PETER W. HEGEL*

ALAN T. SACHTLEBEN*

PAUL R. WOLKENBERG*
Vice Presidents

INVESTMENT ADVISER

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

DISTRIBUTOR

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

SHAREHOLDER SERVICING AGENT

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

CUSTODIAN

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

LEGAL COUNSEL

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

INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601

* "Interested" persons of the Fund, as defined in the
Investment Company Act of 1940.

A Special Meeting of Shareholders of the Fund was held on October 25, 1996 where
shareholders voted on a new investment advisory agreement, changes to investment
policies and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
774,415 shares voted for the proposal, 7,919 shares voted against and 84,928
shares abstained. With regard to the approval of certain changes to the Fund's
fundamental investment policies with respect to investment in other investment
companies, 586,378 shares voted for the proposal, 15,595 shares voted against
and 84,378 shares abstained. With regard to the ratification of KPMG Peat
Marwick LLP as independent public accountants for the Fund, 787,081 shares voted
for the proposal, 2,089 shares voted against and 78,091 shares abstained.