VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND/, N-30D, 1998-02-26

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND/
N-30D, 1998-02-26

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<PAGE>

V A N K A M P E N A M E R I C A N C A P I T A L

----------------------
EQUITY INCOME FUND
----------------------

ANNUAL REPORT
DECEMBER 31, 1997

[PHOTO APPEARS HERE]

____ A Wealth of Knowledge * A Knowledge of Wealth() ____
VAN KAMPEN AMERICAN CAPITAL

<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
Letter to Shareholders........................ 1
Performance Results........................... 3
Performance in Perspective.................... 4
Glossary of Terms............................. 5
Portfolio Management Review................... 6
Portfolio Highlights.......................... 9
Portfolio of Investments...................... 10
Statement of Assets and Liabilities........... 17
Statement of Operations....................... 18
Statement of Changes in Net Assets............ 19
Financial Highlights.......................... 20
Notes to Financial Statements................. 23
Report of Independent Accountants............. 29
</TABLE>

EQI ANR 2/98
<PAGE>

LETTER TO SHAREHOLDERS

February 1, 1998

Dear Shareholder,

The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.

Most Americans will benefit from the bill's $95 billion in tax cuts over
five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.

This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.

ECONOMIC OVERVIEW

These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is headed for
surplus, and our nation's currency is rising around the world.

Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar and significant
productivity gains helped offset inflationary pressures caused by rising wages.

After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.

MARKET OVERVIEW

Bolstered by solid economic growth and low inflation, stock prices
continued their advance during the reporting period. Over the 12 months through
December, the Wilshire 5000 Index, which measures the performance of all
publicly

1 continued on page two
<PAGE>

traded U.S. companies, gained 29.17 percent. And with its 22.64 percent advance
in 1997, the Dow Jones Industrial Average completed its third consecutive year
of 20 percent-plus gains for the first time in the history of the index.

But while U.S. stocks kept rising, volatility also picked up. During the
spring, stronger-than-expected economic growth and a subsequent hike in short-
term interest rates caused stock prices to fall by 10 percent. Later in the
year, investors were unnerved by the spreading economic crisis in Asia. Between
early August and late October, the DJIA fell by 16 percent before rebounding
sharply to close the reporting period near record-high territory.

Within the equity market, large stocks continued to outperform their small-
cap cousins. For the year, the Russell 1000 Index of large-cap companies
returned 30.49 percent, compared to 20.52 percent for the Russell 2000 Index of
small stocks. A wave of consolidations helped make Financial Services the top-
performing industry group. The Dow Jones Financial Index soared 48.44 percent
during 1997.

OUTLOOK

We expect that the recent upheavals in Southeast Asia will have a mixed
impact on the U.S. economy and financial markets. Sales of American goods
overseas are likely to decline in coming months, and competition from relatively
inexpensive imports could pinch profit margins. However, lower currency values
in Asia will likely result in less inflation in the U.S. and a greater
likelihood of stable or falling interest rates. Such a scenario usually benefits
stock prices, and we believe that a portfolio of high-quality domestic stocks
should continue to perform well. We also anticipate that stock selection will
play a larger role in generating investment performance due to the uneven impact
of the Asian crisis on individual companies.

As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.

Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you and your family through our
diverse menu of quality investments.

Sincerely,

/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.

2
<PAGE>

PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV/1/......... 24.13% 23.23% 23.23%
One-year total return/2/...................... 17.01% 18.23% 22.23%
Five-year average annual total return/2/...... 15.32% 15.57% N/A
Ten-year average annual total return/2/....... 14.08% N/A N/A
Life-of-Fund average annual total return/2/... 11.32% 15.53% 16.11%
Commencement Date............................. 08/03/60 05/01/92 07/06/93
</TABLE>

N/A = Not Applicable

/1/ Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (5.75% for A shares) or
contingent deferred sales charge for early withdrawal (5% 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).

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

The medium-grade debt securities in which the Fund may invest are subject to
greater market risks and less assurance as to the ability of the issuer to meet
principal and interest obligations than higher-rated securities. Debt securities
rated in lower categories are considered high-risk securities; the rating
agencies consider them speculative, and payment of interest and principal is not
considered well-assured.

Market forecasts provided in this report may not necessarily come to pass.

3
<PAGE>

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 Standard & Poor's 500-Stock
Index and the Lipper Equity Income Fund Index over time. These indices are
unmanaged statistical composites and do not reflect any commissions or fees
which would be incurred by an investor purchasing the securities they
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 Equity Income Fund vs. Standard & Poor's 500-
Stock Index and the Lipper Equity Income Fund Index (December 31, 1987
through December 31, 1997)

[GRAPH APPEARS HERE]

<TABLE>
VKAC Equity Income Fund Lipper Equity Income Fund Index Standard & Poor's 500-Stock Index
<S> <C> <C> <C>
Dec 1987 9,423 10,000 10,000
9,615 10,529 10,404
10,144 10,924 10,839
9,789 10,763 10,569
9,912 10,864 10,669
10,034 10,952 10,703
10,463 11,382 11,269
10,338 11,369 11,208
10,089 11,196 10,776
10,329 11,512 11,305
10,566 11,711 11,599
10,408 11,595 11,379
- -----------------------------------------------------------------------------------------------------------------
Dec 1988 10,609 11,706 11,650
11,147 12,273 12,478
10,878 12,150 12,117
11,136 12,408 12,474
11,492 12,869 13,099
11,794 13,320 13,559
11,836 13,357 13,573
12,562 14,155 14,772
12,701 14,346 15,001
12,999 14,357 15,024
12,658 14,013 14,646
12,772 14,197 14,888
- -----------------------------------------------------------------------------------------------------------------
Dec 1989 12,915 14,357 15,330
12,309 13,676 14,275
12,454 13,805 14,397
12,699 13,938 14,866
12,377 13,551 14,466
13,255 14,354 15,797
13,296 14,306 15,797
13,116 14,223 15,715
12,188 13,296 14,232
11,673 12,772 13,636
11,582 12,648 13,545
12,068 13,329 14,357
- -----------------------------------------------------------------------------------------------------------------
Dec 1990 12,312 13,622 14,852
12,682 14,085 15,469
13,297 14,909 16,510
13,575 15,178 17,002
13,606 15,270 17,008
14,042 15,813 17,664
13,603 15,280 16,965
14,170 15,859 17,726
14,548 16,214 18,074
14,549 16,229 17,871
14,804 16,481 18,083
14,454 15,988 17,289
- -----------------------------------------------------------------------------------------------------------------
Dec 1991 15,596 17,257 19,358
15,499 17,202 18,973
15,758 17,424 19,154
15,499 17,192 18,871
15,793 17,641 19,397
16,021 17,821 19,416
15,857 17,670 19,230
16,385 18,266 19,988
16,253 18,037 19,508
16,450 18,180 19,836
16,517 18,140 19,878
16,950 18,580 20,480
- -----------------------------------------------------------------------------------------------------------------
Dec 1992 17,268 18,938 20,831
17,671 19,244 20,977
17,940 19,634 21,197
18,395 20,237 21,738
18,088 20,073 21,185
18,327 20,380 21,666
18,609 20,599 21,841
18,780 20,766 21,724
19,398 21,467 22,472
19,578 21,484 22,403
19,820 21,748 22,837
19,509 21,364 22,542
- -----------------------------------------------------------------------------------------------------------------
Dec 1993 20,032 21,749 22,921
20,646 22,428 23,666
20,104 21,872 22,955
19,333 20,998 22,059
19,516 21,273 22,313
19,626 21,515 22,590
19,263 21,199 22,153
19,779 21,798 22,851
20,370 22,523 23,710
20,006 22,097 23,236
20,154 22,217 23,721
19,485 21,385 22,784
- -----------------------------------------------------------------------------------------------------------------
Dec 1994 19,635 21,550 23,232
20,205 21,935 23,796
20,852 22,641 24,654
21,290 23,175 25,487
21,789 23,730 26,200
22,594 24,458 27,151
23,025 24,782 27,912
23,759 25,462 28,799
23,875 25,775 28,790
24,540 26,577 30,123
23,345 26,201 29,973
25,434 27,305 31,204
- -----------------------------------------------------------------------------------------------------------------
Dec 1995 26,030 27,979 31,931
26,525 28,618 32,973
26,566 28,827 33,201
26,938 29,189 33,643
26,938 29,455 34,095
27,399 29,892 34,874
27,420 29,937 35,149
26,367 28,958 33,541
27,083 29,611 34,172
28,030 30,682 36,228
28,623 31,406 37,174
30,401 33,201 39,902
- -----------------------------------------------------------------------------------------------------------------
Dec 1996 30,078 32,987 39,243
31,149 34,192 41,650
31,461 34,808 41,896
30,541 33,682 40,302
31,544 34,682 42,656
33,368 36,680 45,155
34,485 38,063 47,323
36,958 40,357 51,020
35,401 39,054 48,089
37,026 41,023 50,862
36,106 39,777 49,109
36,796 41,095 51,298
- -----------------------------------------------------------------------------------------------------------------
Dec 1997 37,336 42,058 52,317
- -----------------------------------------------------------------------------------------------------------------
</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 (5.75% 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.

4
<PAGE>

GLOSSARY OF TERMS

BLUE-CHIP STOCKS:
Stocks of large, well-known companies that have a long record of growth and
a reputation for quality management. Examples of blue-chip stocks include
General Motors, International Business Machines (IBM), Coca-Cola, and
General Electric.

CAPITALIZATION:
The size of a company, as measured by the value of its stock. Morningstar,
Inc., an independent mutual fund rating service, defines "small-cap" as
less than $1 billion, "mid-cap" as between $1 billion and $5 billion, and
"large-cap" as more than $5 billion.

DOW JONES INDUSTRIAL AVERAGE (DJIA):
The oldest and most widely recognized stock market average, which reflects
the performance of 30 actively traded stocks of well-established, blue-chip
companies.

FEDERAL RESERVE BOARD (FED):
A seven-member group that oversees the operations of the Federal Reserve
System, the central bank system of the United States. Currently led by
Chairman Alan Greenspan, the Fed meets eight times a year to establish
monetary policy and monitor the country's economic pulse.

GROWTH INVESTING:
An investment strategy that seeks to identify stocks that tend to offer
greater-than-average earnings growth. Growth stocks typically trade at
higher prices than value stocks, due to their higher expected earnings
growth.

NET ASSET VALUE (NAV):
The value of a mutual fund share, calculated by deducting a fund's
liabilities from its total assets and dividing this amount by the number of
shares outstanding. The NAV does not include any initial or contingent
deferred sales charge.

P/E RATIO:
The price-to-earnings ratio shows the "multiple" of earnings at which a
stock is selling. It is calculated by dividing a stock's current price by
its current earnings per share. A high multiple means that investors are
optimistic about future growth and have bid up the stock's price.

STANDARD AND POORS 500-STOCK INDEX:
An index of the 500 largest, most actively traded stocks on the New York
Stock Exchange. It provides a guide to the overall health of the U.S. stock
market. The S&P 500 is a much broader index than the Dow Jones Industrial
Average and reflects the stock market more accurately.

VALUATION:
The estimated or determined worth of a stock, based on its current price
relative to its earnings.

VALUE INVESTING:
A strategy that seeks to identify stocks that are sound investments but are
temporarily out of favor in the marketplace, due to concerns about short-
term performance. As a result, they trade at prices below the value that
investors believe they are actually worth.

5
<PAGE>

PORTFOLIO MANAGEMENT REVIEW

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

We recently spoke with the management team of the Van Kampen American Capital
Equity Income Fund about the key events and economic forces that shaped the
markets during the 12 months ended December 31, 1997. The team is led by James
A. Gilligan, portfolio manager, Scott Carroll and Bret Stanley, assistant
portfolio managers, and Alan T. Sachtleben, chief investment officer for equity
investments. The following excerpts reflect their views on the Fund's
performance during this time.

Q WHAT WERE THE KEY MARKET CONDITIONS IN WHICH THE FUND OPERATED DURING ITS
FISCAL YEAR?

A During the past 12 months, moderate economic growth and historically low
inflation provided a very favorable environment for equity investments and drove
the U.S. stock market to new heights. After a strong finish in 1996, the market
resumed its climb through the first half of 1997. As the economy continued to
flourish, investors worriedly scanned the horizon for signs of inflation. This
concern increased volatility in stock prices and sparked a month-long market
correction in March that eroded most year-to-date gains. Stocks rebounded
quickly, however, and the Dow Jones Industrial Average (DJIA) rallied through
May and June.

After peaking at 8259 in early August, heightened volatility in the DJIA in
the last few months of the Fund's fiscal year overshadowed what was a very
positive period for the U.S. stock market. October was marked by turbulence, as
economic weakness in Asia created a worldwide ripple effect. The widespread
collapse of currencies and stock prices in the Far East led to weakening
economies and widening trade deficits in many Southeast Asian nations. In
response, U.S. markets initially suffered significant drops, but had largely
recovered by the end of the reporting period.

Market leadership took several twists and turns as well. Although investors
favored blue-chip stocks early in the period, small-capitalization stocks had
captured momentum by mid-year, outperforming large caps in almost every major
economic sector in the third quarter. In October, uncertainty surrounding the
Asian currency crisis prompted investors to seek out large, well-established
companies. As a result, small stocks began to struggle again and large stocks
regained their dominant position.

Q WHAT EFFECTS DID MARKET CONDITIONS HAVE ON THE FUND?

A In the shadow of steep valuations and a continued narrow universe of
attractive stocks, our focus on the Equity Income Fund's value-oriented strategy
has proven to be increasingly important. In managing the Fund's portfolio, we
seek securities with fair valuations relative to the market and their peers, as
well as strong fundamentals and positive earnings growth. Consequently, we have
shifted assets among different market sectors when we have seen opportunities to
benefit the Fund.

In response to the volatility in the stock market over the last six months
of the Fund's fiscal year, we increased the Fund's investments in fixed-income
securities. Since June 30, 1997, the portfolio's weighting in bonds has grown
from 10 percent to over 16 percent. This move not only reinforced our defensive
posturing, but also allowed us to take advantage of the strong bond rally that
dominated the second half of the year.

6
<PAGE>

Q WHAT WERE THE LARGEST SECTORS REPRESENTED IN THE FUND'S PORTFOLIO
OVER THE REPORTING PERIOD?

A The Fund's largest sector position was the financial sector. This industry
boasted strong performance during the period, with broad-based growth of more
than 40 percent. Banks in particular were star performers, but the effects of
merger and acquisition activity forced prices higher. Valuations have been much
more compelling in the insurance industry, and we continue to search for those
companies that we believe are operating efficiently. Stand-out stocks with
attractive valuations in the Fund's portfolio include Allstate Corp., Chase
Manhattan Corp., and BankAmerica Corp.

In sharp contrast to the first six months of 1997, the Fund's recent
performance has been supported by its holdings in the utility sector, as utility
stocks have bounced back with 20 percent-plus returns. Lingering questions about
the effects of deregulation on the electric utility industry have been partially
answered, with more states ushering in allowances for competition. We also have
taken advantage of buying opportunities in the telecommunications industry,
favoring regional telephone companies such as Bell South.

During the period, we eliminated some of the portfolio's higher-priced
stocks in the pharmaceutical sector, while adding new names with strong
fundamentals and attractive valuations. As a group, pharmaceutical stocks have
been fairly overpriced in the past year, but the sector enjoys continued high-
volume growth and support from the managed-care industry. As a result, we added
growth companies with attractive prices, such as American Home Products and
Rhone-Poulenc, and reinforced our positions in Pharmacia & Upjohn and SmithKline
Beecham. We plan to remain slightly overweighted in this sector, because it
continues to show the potential for appreciation.

The technology sector struggled in the second half of 1997, as technology
stocks were roiled by the Asian currency crisis that dominated the last several
months of the year. We searched for companies with growth opportunities, which
included Nokia, a mobile telecommunications company. Although cellular phone
usage is strong in the United States, penetration in overseas markets is still
shallow, revealing a high potential for growth. Within the technology industry,
we also reinforced our holding in IBM. As one of the largest holdings in the
Fund's portfolio, IBM is an example of the type of company we seek. In addition
to acceleration in both top-line and earnings growth, this stock has an
attractive price-to-earnings ratio and the financial strength to buy back more
than $15 billion in stock over the last two years.

Finally, we scaled back the portfolio's percentage in energy in response to
overvaluations in this sector. However, we did strengthen our positions in
Coastal Corp. and El Paso Natural Gas, which demonstrated favorable earnings
growth and reasonable price-to-earnings ratios. For additional Fund portfolio
highlights, please refer to page nine.

Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?

A The Fund achieved a total return of 24.13 percent/1/ (Class A shares at net
asset value) for the 12-month period ended December 31, 1997. By comparison, the
Standard & Poor's 500-Stock Index returned 33.31 percent, and the Lipper Equity
Income Fund Index produced a total return of 27.50 percent for the same period.
The S&P 500-Stock Index is a broad-based, unmanaged index that reflects the
general performance of the stock market, and the Lipper Equity Income Fund Index
reflects the average performance of the largest equity income funds. Keep in
mind that these indices are unmanaged statistical composites that do not reflect
any commissions, fees, or sales charges that would be incurred by an investor
purchasing the securities they represent. Please refer to the chart on page
three for additional Fund performance results.

7
<PAGE>

Q WHAT IS YOUR ECONOMIC OUTLOOK FOR THE MONTHS AHEAD?

A We believe that the economic uncertainty in Southeast Asia will be a
double-edged sword for the domestic economy and stock market. On the downside,
we anticipate that U.S. corporate profits could be negatively impacted by lower
foreign sales and increased competition from imports. On the upside, a slowdown
in corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia will result in low
price inflation in the U.S. and stable or declining interest rates--a favorable
scenario for stocks.

Although U.S. investors have enjoyed a low level of market volatility
during the past few years, market movements in both directions are normal.
Investors who have long-term goals such as retirement or college tuition must
realize that short-term market fluctuations have historically posed little
threat to those goals. We encourage you to focus on your long-term goals instead
of short-term distractions that ultimately may have little impact on your plans.

Remember that the U.S. stock market is still enjoying the best of all
possible environments: low inflation, moderate economic growth, and solid
corporate earnings. The economy continues to grow fast enough to produce further
earnings growth, and the absence of inflation suggests stable interest rates,
which in turn would provide support for high stock valuations.

/s/ Alan T. Sachtleben /s/ James A Gilligan

Alan T. Sachtleben James A. Gilligan
Chief Investment Officer Portfolio Manager
Equity Investments

8 Please see footnotes on page three
<PAGE>

PORTFOLIO HIGHLIGHTS

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

TOP TEN HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
As of December 31, 1997 As of June 30, 1997
<S> <C> <C>
United States Treasury Notes..................................................... 7.2% ............ 2.1%
BankAmerica Corp................................................................. 1.9% ............ 2.4%
Philip Morris Companies, Inc..................................................... 1.8% ............ 1.7%
International Business Machines Corp............................................. 1.7% ............ 0.6%
Chase Manhattan Corp............................................................. 1.7% ............ 0.6%
Texaco, Inc...................................................................... 1.6% ............ 2.0%
Roche Holdings, Inc.............................................................. 1.6% ............ 1.7%
Allstate Corp.................................................................... 1.6% ............ 1.5%
ADT Operations, Inc.............................................................. 1.3% ............ 1.2%
U.S. West Communications Group................................................... 1.3% ............ N/A

N/A = Not Applicable
</TABLE>

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

<TABLE>
<CAPTION>
As of December 31, 1997 As of June 30, 1997
<S> <C> <C> <C>
Finance................................. 18% Finance........................... 18%
Utilities............................... 12% Health Care....................... 15%
Technology.............................. 10% Energy............................ 12%
Health Care............................. 10% Technology........................ 11%
Energy.................................. 10% Utilities......................... 11%
</TABLE>

ASSET ALLOCATION AS A PERCENTAGE OF TOTAL INVESTMENTS

[PIE CHART APPEARS HERE]

<TABLE>
<CAPTION>
As of December 31, 1997
<S> <C> <C>
[_] Stocks................................... 68%
[_] Bonds.................................... 9%
[_] Convertibles............................. 8%
[_] United States Agencies & Obligations..... 7%
[_] Cash Equivalents......................... 8%
</TABLE>

[PIE CHART APPEARS HERE]

<TABLE>
<CAPTION>
As of June 30, 1997
<S> <C> <C>
[_] Stocks................................... 75%
[_] Bonds.................................... 7%
[_] Convertibles............................. 8%
[_] United States Agencies & Obligations..... 2%
[_] Cash Equivalents......................... 8%
</TABLE>

9
<PAGE>

PORTFOLIO OF INVESTMENTS

December 31, 1997

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 68.0%
CONSUMER DISTRIBUTION 1.8%
Federated Department Stores, Inc. (b)..................... 235,200 $ 10,128,300
Gap, Inc.................................................. 271,050 9,605,334
Gymboree Corp. (b)........................................ 376,300 10,301,213
----------
30,034,847
----------
CONSUMER DURABLES 1.1%
Black & Decker Corp....................................... 196,000 7,656,250
Newell Financial Trust 144A--Convertible Preferred (c).... 185,000 9,712,500
----------
17,368,750
----------
CONSUMER NON-DURABLES 5.4%
Adidas--ADR (Germany)..................................... 119,000 7,705,250
Avon Products, Inc........................................ 45,300 2,780,288
Benckiser NV, Class B--ADR (Netherlands).................. 163,600 6,728,050
Colgate-Palmolive Co...................................... 151,200 11,113,200
Nabisco Holdings Corp., Class A........................... 271,300 13,141,094
Philip Morris Cos., Inc................................... 587,000 26,598,437
Ralston Purina Group...................................... 122,600 11,394,137
Tommy Hilfiger Corp. (b).................................. 220,700 7,752,088
----------
87,212,544
----------
CONSUMER SERVICES 3.4%
Bell & Howell Co. (b)..................................... 161,300 3,901,444
Cognizant Corp............................................ 278,300 12,401,744
H & R Block, Inc.......................................... 317,200 14,214,525
Lone Star Steakhouse (b).................................. 217,000 3,797,500
News Corp. Exchange Trust 144A--Convertible Preferred (c). 83,000 7,428,500
Reader's Digest Association, Inc., Class A................ 134,000 3,165,750
Sinclair Broadcast Group--Convertible Preferred........... 82,000 4,704,750
Walt Disney Co............................................ 64,100 6,349,906
----------
55,964,119
----------
</TABLE>

10 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS

December 31, 1997

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 6.9%
Coastal Corp........................................... 242,100 $ 14,995,069
El Paso Natural Gas Co................................. 146,000 9,709,000
Exxon Corp............................................. 223,200 13,657,050
McDermott International, Inc........................... 175,700 6,435,012
Royal Dutch Petroleum Co.--ADR (Netherlands)........... 269,700 14,614,369
Texaco, Inc............................................ 392,400 21,336,750
USX Marathon Group..................................... 387,500 13,078,125
Valero Energy Corp..................................... 77,000 2,420,688
YPF Sociedad Anonima, Class D--ADR (Argentina)......... 463,000 15,828,812
-----------
112,074,875
-----------
FINANCE 14.4%
Aetna, Inc............................................. 20,350 1,435,947
Allstate Corp.......................................... 259,200 23,554,800
American General Corp.................................. 205,000 11,082,812
BankAmerica Corp....................................... 396,700 28,959,100
BankBoston Corp........................................ 194,000 18,223,875
Bankers Trust New York Corp............................ 17,100 1,922,681
Chase Manhattan Corp................................... 224,900 24,626,550
Conseco, Inc........................................... 215,500 9,791,781
Conseco, Inc.--Convertible Preferred................... 160,000 8,200,000
Equitable Cos., Inc.................................... 315,000 15,671,250
Everest Reinsurance Holdings, Inc...................... 145,300 5,993,625
First Union Corp....................................... 332,000 17,015,000
Golden West Financial Corp............................. 86,200 8,431,438
NationsBank Corp....................................... 175,000 10,642,187
Protective Life Corp.--Convertible Preferred........... 130,000 7,150,000
Provident Cos., Inc.................................... 267,000 10,312,875
Travelers Group, Inc................................... 163,500 8,808,563
Washington Mutual, Inc................................. 147,440 9,408,515
WBK Trust, STRYPES--Convertible Preferred.............. 201,000 6,733,500
Weingarten Reality Investors........................... 50,000 2,240,625
Wells Fargo & Co....................................... 8,200 2,783,388
-----------
232,988,512
-----------
</TABLE>

11 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

PRODUCER MANUFACTURING 6.0%
AGCO Corp.............................................. 390,600 11,425,050
Allied Signal, Inc..................................... 285,600 11,120,550
Canadian Pacific Ltd................................... 496,800 13,537,800
Flowserve Corp......................................... 286,200 7,995,712
Fluor Corp............................................. 149,000 5,568,875
Ingersoll Rand Co...................................... 392,400 15,892,200
ITT Corp. (b).......................................... 115,000 9,530,625
Johnson Controls, Inc.................................. 214,600 10,247,150
Rockwell International Corp............................ 99,000 5,172,750
Waste Management, Inc.................................. 262,700 7,224,250
-----------
97,714,962
-----------

RAW MATERIALS/PROCESSING INDUSTRIES 3.0%
BetzDearborn, Inc...................................... 105,000 6,411,563
Boise Cascade Corp..................................... 245,000 7,411,250
Crown Cork & Seal Co., Inc............................. 245,200 12,290,650
Fort James Corp........................................ 169,400 6,479,550
Fresenius National Med Care, Inc., Class D--Preferred.. 12,000 840
Reynolds Metals Co..................................... 52,700 3,162,000
Union Camp Corp........................................ 133,400 7,161,912
WR Grace & Co.......................................... 75,200 6,048,900
-----------
48,966,665
-----------
</TABLE>

12 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

TRANSPORTATION 0.7%
Canadian National Railway Co........................ 235,100 11,108,475
-------------
UTILITIES 10.2%
AirTouch Communications, Inc. (b)................... 155,000 6,442,188
AT&T Corp........................................... 111,200 6,811,000
BellSouth Corp...................................... 341,300 19,219,456
Boston Edison Co.................................... 304,900 11,548,087
Cincinnati Bell, Inc................................ 248,000 7,688,000
Consolidated Edison Co.............................. 340,000 13,940,000
Edison International................................ 349,400 9,499,313
FPL Group, Inc...................................... 170,000 10,061,875
GPU, Inc............................................ 350,700 14,773,237
GTE Corp............................................ 171,400 8,955,650
Northeast Utilities................................. 1,059,200 12,511,800
PG & E Corp......................................... 469,600 14,293,450
SBC Communications, Inc............................. 133,000 9,742,250
U.S. WEST Communications Group...................... 426,000 19,223,250
-------------
164,709,556
-------------
TOTAL COMMON AND PREFERRED STOCKS 68.0% 1,103,386,692
-------------
</TABLE>

13 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 9.2%
CONSUMER DISTRIBUTION 0.7%
$ 6,000 Gruma SA De Cv (Mexico) 144A (c)............. 7.625% 10/15/07 $ 5,946,000
4,000 May Department Stores Co..................... 8.375 08/01/24 4,411,720
----------
10,357,720
----------
CONSUMER DURABLES 0.6%
3,000 Ford Motor Co................................ 7.250 10/01/08 3,197,430
3,000 Ford Motor Co. Delaware Note................. 9.000 09/15/01 3,275,400
3,000 General Motors Corp.......................... 7.000 06/15/03 3,104,700
----------
9,577,530
----------
CONSUMER NON-DURABLES 0.4%
6,000 Coca Cola Bottling Co........................ 7.200 07/01/09 6,241,260
----------

CONSUMER SERVICES 0.8%
10,000 Cox Communications, Inc...................... 7.250 11/15/15 10,504,000
1,500 Time Warner Entertainment Co. LP............. 9.625 05/01/02 1,678,290
----------
12,182,290
----------
ENERGY 2.0%
5,000 Enron Corp................................... 9.125 04/01/03 5,592,150
5,000 NGC Corp..................................... 6.750 12/15/05 5,092,000
4,000 Occidental Petroleum Corp.................... 10.125 11/15/01 4,532,000
6,000 Sonat, Inc................................... 6.875 06/01/05 6,160,560
2,500 Texaco Capital, Inc.......................... 8.250 10/01/06 2,823,813
5,500 Texas Eastern Transmission Corp.............. 8.250 10/15/04 6,038,010
2,000 Western Atlas, Inc........................... 7.875 06/15/04 2,182,200
----------
32,420,733
----------
FINANCE 0.1%
2,000 General Electric Capital Corp................ 8.900 09/15/04 2,300,660
----------
PRODUCER MANUFACTURING 0.1%
1,500 Reliance Electric Co......................... 6.800 04/15/03 1,537,500
----------
RAW MATERIALS/PROCESSING INDUSTRIES 1.7%
5,000 Crown Cork & Seal Finance PLC................ 7.000 12/15/06 5,159,700
5,000 Crown Cork & Seal, Inc....................... 8.375 01/15/05 5,556,600
5,000 Georgia Pacific Corp......................... 9.500 05/15/22 5,660,400
10,000 ICI North America Inc........................ 8.375 01/15/06 11,599,600
----------
27,976,300
----------
TECHNOLOGY 0.9%
4,000 Philips Electronics N.V.--ADR (Netherlands).. 7.750 04/15/04 4,283,600
10,000 Raytheon Co.................................. 6.750 08/15/07 10,242,700
----------
14,526,300
----------
</TABLE>

14 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRANSPORTATION 0.6%
$ 5,000 Norfolk Southern Corp........................................... 7.350% 05/15/07 $ 5,312,700
5,000 Union Pacific Corp.............................................. 7.000 02/01/16 5,084,050
-------------
10,396,750
-------------

UTILITIES 1.3%
5,000 360 Communications Co........................................... 7.125 03/01/03 5,118,600
4,000 Compania De Telocomunicaciones (Chile).......................... 7.625 07/15/06 4,112,960
1,000 Tennessee Valley Authority, Series G............................ 8.625 11/15/29 1,086,400
10,000 Worldcom, Inc................................................... 7.750 04/01/07 10,775,000
-------------
21,092,960
-------------
TOTAL CORPORATE OBLIGATIONS 9.2%.................................................... 148,610,003
-------------

CONVERTIBLE CORPORATE OBLIGATIONS 7.9%
CONSUMER DURABLES 0.7%
26,000 Deutshce Finance Netherlands 144A (Convertible into
128,778 Daimler Benz common shares) (c)......................... * 02/12/17 11,635,000
-------------

CONSUMER NON-DURABLES 0.6%
7,530 Grand Metropolitan PLC 144A (Convertible into
1,097,671 common shares) (c).................................... 6.500 02/01/98 10,052,550
-------------

CONSUMER SERVICES 1.2%
17,000 ADT Operations, Inc. LYONS (Convertible into 461,992
Tyco International Ltd. common shares).......................... * 07/06/10 19,677,500
-------------

FINANCE 2.0%
5,000 Aegon NV 144A (Convertible into 180,000 common shares) (c)...... 4.750 11/01/04 15,862,500
8,160 Berkshire Hathaway, Inc. (Convertible into 244,121
Travelers Group, Inc. common shares)............................ 1.000 12/02/01 13,198,800
STRYPES Merrill Lynch & Co., Inc., 94,500 shares (Convertible
into 77,452 Cox Communications, Inc. common shares)............. 6.000 06/01/99 3,188,578
-------------
32,249,878
-------------

HEALTHCARE 1.8%
12,000 Alza Corp. LYON (Convertible into 155,844 common shares)........ * 07/14/14 5,550,000
43,500 Roche Holdings, Inc. LYON (Convertible into
206,347 common shares).......................................... * 04/20/10 23,925,000
-------------
29,475,000
-------------

PHARMACEUTICALS 0.2%
2,090 Sandoz, Ltd. 144A (Convertible into 1,958 common shares) (c).... * 10/06/02 3,202,925
-------------

PRODUCER MANUFACTURING 0.4%
6,000 USA Waste Services, Inc. (Convertible into
137,754 common shares).......................................... 4.000 02/01/02 6,660,000
-------------
</TABLE>

15 See Notes to Financial Statements
<PAGE>

PORTFOLIO OF INVESTMENTS (CONTINUED)

December 31, 1997

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 0.2%
$ 7,500 RPM Convertibles, Inc. LYON (Convertible into
228,902 common shares).......................................... * 09/30/12 $ 3,665,625
---------------
TECHNOLOGY 0.8%
24,000 Hewlett Packard Co. 144A LYON (Convertible into
130,320 common shares) (c)...................................... * 10/14/17 12,600,000
---------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS 7.9%........................................ 129,218,478
---------------

UNITED STATES OBLIGATIONS 6.6%
90,000 United States Treasury Notes (a)............................... 6.250% 10/31/01 91,560,600
12,000 United States Treasury Notes (a)............................... 6.375 07/15/99 12,121,920
3,000 United States Treasury Notes................................... 6.875 05/15/06 3,210,480
---------------
TOTAL UNITED STATES OBLIGATIONS.................................................... 106,893,000
---------------
TOTAL LONG-TERM INVESTMENTS 91.7% (Cost $1,242,607,784)................................................ 1,488,108,173
---------------
SHORT-TERM INVESTMENTS 8.1%
COMMERCIAL PAPER 2.9%
General Electric Capital Corp. ($47,505,000 par, yielding 6.702%, 01/02/98 maturity)..................... 47,487,318
---------------

UNITED STATES AGENCIES 5.2%
Federal Home Loan Mortgage Discount Notes ($3,000,000 par, yielding 5.612%, 02/23/98 maturity).......... 2,975,115
Federal National Mortgage Association Discount Notes
($25,000,000 par, yielding 5.546%, 01/27/98 maturity)................................................... 24,898,750
Federal National Mortgage Association Discount Notes
($10,000,000 par, yielding 5.559%, 01/22/98 maturity)................................................... 9,966,511
Federal National Mortgage Association Discount Notes
($24,000,000 par, yielding 5.558%, 01/29/98 maturity)................................................... 23,894,053
Federal National Mortgage Association Discount Notes
($13,000,000 par, yielding 5.650%, 03/03/98 maturity)................................................... 12,876,370
Federal National Mortgage Association Discount Notes
($9,000,000 par, yielding 5.639%, 04/24/98 maturity).................................................... 8,843,220
---------------
TOTAL UNITED STATES AGENCIES........................................................ 83,454,019
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $130,940,006)........................................................ 130,941,337
---------------
TOTAL INVESTMENTS 99.8% (Cost $1,373,547,790)........................................................... 1,619,049,510
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES 0.2%....................................................... 3,605,816
---------------
NET ASSETS 100.0%....................................................................................... $ 1,622,655,326
===============
</TABLE>

*Zero coupon bond
STRYPES--Structured yield product exchangeable for stock, traded in shares
LYON--Liquid yield option note
TAPS--Threshold Appreciation Price Securities
(a) Assets segregated as collateral for open futures transactions
(b) Non-income producing security as this stock currently does not declare
dividends.
(c) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold only in
transactions exempt from registration which are normally those transactions
with qualified institutional buyers.

16 See Notes to Financial Statements
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES

December 31, 1997

<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $1,373,547,790)................................................................. $ 1,619,049,510
Cash.................................................................................................... 2,011
Receivables:
Fund Shares Sold................................................................................... 5,220,912
Interest........................................................................................... 4,259,357
Investments Sold................................................................................... 2,069,772
Dividends.......................................................................................... 1,447,257
Other................................................................................................... 48,510
---------------
Total Assets..................................................................................... 1,632,097,329
---------------
LIABILITIES:
Payables:
Income Distributions............................................................................... 3,778,774
Fund Shares Repurchased............................................................................ 3,095,884
Distributor and Affiliates......................................................................... 1,606,545
Investment Advisory Fee............................................................................ 507,488
Variation Margin on Futures........................................................................ 6,700
Accrued Expenses........................................................................................ 291,769
Trustees' Deferred Compensation and Retirement Plans.................................................... 154,843
---------------
Total Liabilities................................................................................ 9,442,003
---------------
NET ASSETS.............................................................................................. $ 1,622,655,326
===============
NET ASSETS CONSIST OF:
Capital................................................................................................. $ 1,358,964,817
Net Unrealized Appreciation............................................................................. 245,432,645
Accumulated Net Realized Gain........................................................................... 16,191,940
Accumulated Undistributed Net Investment Income......................................................... 2,065,924
---------------
NET ASSETS.............................................................................................. $ 1,622,655,326
===============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:

Net asset value and redemption price per share (Based on net assets of $638,092,113
and 88,104,227 shares of beneficial interest issued and outstanding)............................. $ 7.24
Maximum sales charge (5.75%* of offering price).................................................. .44
---------------
Maximum offering price to public................................................................. $ 7.68
===============
Class B Shares:

Net asset value and offering price per share (Based on net assets of $908,715,054
and 126,154,388 shares of beneficial interest issued and outstanding)............................ $ 7.20
===============
Class C Shares:

Net asset value and offering price per share (Based on net assets of $75,848,159
and 10,528,677 shares of beneficial interest issued and outstanding)............................. $ 7.20
===============
</TABLE>

*On sales of $50,000 or more, the sales charge will be reduced.

17 See Notes to Financial Statements
<PAGE>

STATEMENT OF OPERATIONS

For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 22,021,080
Dividends......................................................... 19,877,040
------------
Total Income................................................. 41,898,120
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,305,402, $7,864,110 and $667,942, respectively). 9,837,454
Investment Advisory Fee........................................... 5,338,993
Shareholder Services.............................................. 2,664,837
Custody........................................................... 88,787
Legal............................................................. 40,198
Trustees' Fees and Expenses....................................... 24,500
Other............................................................. 854,859
------------
Total Expenses............................................... 18,849,628
------------
NET INVESTMENT INCOME............................................. $ 23,048,492
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments.................................................. $170,171,955
Futures...................................................... 14,437,957
------------
Net Realized Gain................................................. 184,609,912
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period...................................... 159,606,826
------------
End of the Period:
Investments.............................................. 245,501,720
Futures.................................................. (69,075)
------------
245,432,645
------------
Net Unrealized Appreciation During the Period..................... 85,825,819
------------
NET REALIZED AND UNREALIZED GAIN.................................. $270,435,731
============
NET INCREASE IN NET ASSETS FROM OPERATIONS........................ $293,484,223
============
</TABLE>

18 See Notes to Financial Statement

<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

For The Years Ended December 31, 1997 And 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................................... $ 23,048,492 $ 19,968,031
Net Realized Gain.............................................. 184,609,912 68,950,601
Net Unrealized Appreciation During the Period.................. 85,825,819 52,838,493
-------------- --------------
Change in Net Assets from Operations...................... 293,484,223 141,757,125
-------------- --------------
Distributions from Net Investment Income*...................... (24,018,109) (19,965,051)
Distributions in Excess of Net Investment Income*.............. (2,400,068) -0-
-------------- --------------
Distributions from and in Excess of Net Investment Income*..... (26,418,177) (19,965,051)
Distributions from Net Realized Gain*.......................... (181,941,214) (58,454,770)
-------------- --------------
Total Distributions....................................... (208,359,391) (78,419,821)
-------------- --------------
NET CHANGE IN NET ASSETS
FROM INVESTMENT ACTIVITIES.................................... 85,124,832 63,337,304
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................................... 436,926,312 398,265,655
Value Received from Shares Issued in Merger.................... 21,732,117 -0-
Net Asset Value of Shares Issued Through
Dividend Reinvestment......................................... 188,548,998 70,824,847
Cost of Shares Repurchased..................................... (269,846,748) (169,322,567)
-------------- --------------
NET CHANGE IN NET ASSETS
FROM CAPITAL TRANSACTIONS..................................... 377,360,679 299,767,935
-------------- --------------
TOTAL INCREASE IN NET ASSETS................................... 462,485,511 363,105,239
NET ASSETS:
Beginning of the Period........................................ 1,160,169,815 797,064,576
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $2,065,924 and $969,617 respectively).... $1,622,655,326 $1,160,169,815
============== ==============
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
*DISTRIBUTIONS BY CLASS DECEMBER 31, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................ $ (12,849,167) $ (9,713,457)
Class B Shares............................................ (12,509,687) (9,411,080)
Class C Shares............................................ (1,059,323) (840,514)
-------------- --------------
$ (26,418,177) $ (19,965,051)
============== ==============
Distributions from Net Realized Gain:
Class A Shares............................................ $ (71,711,304) $ (23,861,990)
Class B Shares............................................ (101,660,017) (31,798,200)
Class C Shares............................................ (8,569,893) (2,794,580)
-------------- --------------
$ (181,941,214) $ (58,454,770)
============== ==============
</TABLE>

19 See Notes to Financial Statements
<PAGE>

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 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $6.740 $ 6.31 $ 5.16 $ 5.55 $ 5.15
------ ------ ------ ------ ------
Net Investment Income................................ .152 .158 .20 .21 .19
Net Realized and Unrealized Gain/Loss................ 1.435 .796 1.458 (.317) .6055
------ ------ ------ ------ ------
Total from Investment Operations.......................... 1.587 .954 1.658 (.107) .7955
------ ------ ------ ------ ------
Less:
Distributions from Net Investment Income............. .168 .156 .188 .1855 .168
Distributions from Net Realized Gain................. .917 .368 .32 .0975 .2275
------ ------ ------ ------ ------
Total Distributions....................................... 1.085 .524 .508 .283 .3955
------ ------ ------ ------ ------
Net Asset Value, End of the Period........................ $7.242 $6.740 $ 6.31 $ 5.16 $ 5.55
====== ====== ====== ====== ======
Total Return (a).......................................... 24.13% 15.55% 32.57% (1.98%) 16.00%
Net Assets at End of the Period (In millions)............. $638.1 $471.8 $349.9 $240.5 $187.6
Ratio of Expenses to Average Net Assets (b)............... .86% .97% .95% 1.02% 1.06%
Ratio of Net Investment Income to Average Net Assets (b).. 2.09% 2.50% 3.43% 3.60% 3.33%
Portfolio Turnover........................................ 86% 99% 92% 92% 101%
Average Commission Paid Per Equity Share Traded (c)....... $.0566 $.0582 -- -- --
</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) For the year ended December 31, 1996, 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%.

(c) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

20 See Notes to Financial Statements
<PAGE>

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
Class B Shares 1997 1996 1995 1994 1993(a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.............................. $6.713 $ 6.30 $ 5.16 $ 5.55 $ 5.15
------ ------ ------ ------ ------
Net Investment Income............................................ .100 .113 .15 .13 .14
Net Realized and Unrealized Gain/Loss............................ 1.423 .784 1.458 (.277) .6155
------ ------ ------ ------ ------
Total from Investment Operations...................................... 1.523 .897 1.608 (.147) .7555
------ ------ ------ ------ ------
Less:
Distributions from and in Excess of Net Investment Income........ .116 .116 .148 .1455 .128
Distributions from Net Realized Gain............................. .917 .368 .32 .0975 .2275
------ ------ ------ ------ ------
Total Distributions................................................... 1.033 .484 .468 .243 .3555
------ ------ ------ ------ ------
Net Asset Value, End of the Period.................................... $7.203 $6.713 $ 6.30 $ 5.16 $ 5.55
====== ====== ====== ====== ======
Total Return (b)...................................................... 23.23% 14.56% 31.51% (2.70%) 14.94%
Net Assets at End of the Period (In millions)......................... $908.7 $633.3 $408.9 $242.0 $115.4
Ratio of Expenses to Average Net Assets (c)........................... 1.64% 1.74% 1.75% 1.82% 1.89%
Ratio of Net Investment Income to
Average Net Assets (c)........................................... 1.32% 1.74% 2.62% 2.82% 2.45%
Portfolio Turnover.................................................... 86% 99% 92% 92% 101%
Average Commission Paid Per
Equity Share Traded (d).......................................... $.0566 $.0582 -- -- --
</TABLE>

(a) Based on average month-end shares outstanding.

(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.

(c) For the year ended December 31, 1996, 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%.

(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.

21 See Notes to Financial Statements

<PAGE>

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
July 6, 1993
Year Ended (Commencement
December 31, of Distribution) to
----------------------------------
Class C Shares 1997 1996 1995 1994(a) December 31, 1993(a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $6.713 $ 6.30 $ 5.16 $ 5.55 $ 5.37
------ ------ ------ ------ -------
Net Investment Income.................................. .100 .113 .15 .14 .06
Net Realized and Unrealized
Gain/Loss.......................................... 1.424 .784 1.458 (.287) .379
------ ------ ------ ------ -------
Total from Investment Operations............................ 1.524 .897 1.608 (.147) .439
------ ------ ------ ------ -------
Less:
Distributions from and in Excess of
Net Investment Income.............................. .116 .116 .148 .1455 .064
Distributions from Net Realized Gain................... .917 .368 .32 .0975 .195
------ ------ ------ ------ -------
Total Distributions......................................... 1.033 .484 .468 .243 .259
------ ------ ------ ------ -------
Net Asset Value, End of the Period.......................... $7.204 $6.713 $ 6.30 $ 5.16 $ 5.55
------ ------ ------ ------ -------
Total Return (b)............................................ 23.23% 14.56% 31.51% (2.70%) 8.27%*
Net Assets at End of the Period (In millions)............... $ 75.8 $ 55.2 $ 38.3 $ 26.9 $ 10.0
Ratio of Expenses to Average Net Assets (c)................. 1.64% 1.74% 1.76% 1.82% 1.98%
Ratio of Net Investment Income to
Average Net Assets (c)................................. 1.32% 1.73% 2.63% 2.83% 2.27%
Portfolio Turnover.......................................... 86% 99% 92% 92% 101%
Average Commission Paid Per
Equity Share Traded (d)................................ $.0566 $.0582 -- -- --
</TABLE>

* Non-Annualized
(a) Based on average month-end shares outstanding.

(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.

(c) For the year ended December 31, 1996, 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%.

22 See Notes to Financial Statements

<PAGE>

NOTES TO FINANCIAL STATEMENTS

December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Equity Income Fund (the "Fund") is organized as 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 the highest possible income consistent
with safety of principal by investing primarily in income-producing equity
instruments and other debt securities issued by a wide group of companies in
many different industries. The Fund commenced investment operations on August 3,
1960. The distribution of the Fund's Class B and Class C shares commenced on May
1, 1992 and July 6, 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 in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Unlisted securities and listed securities for which the last sale price is not
available are valued at the mean of the bid and asked prices. Fixed income
investments are stated at value using market quotations. For those securities
where quotations or prices are not available, valuations are determined in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.

B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1997, there were no
when issued or delayed delivery purchase commitments.

The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Fund will make payment for such security only upon
physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.

C. INCOME AND EXPENSES--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discounts are
amortized over the expected life of each applicable security. Premiums on debt
securities are not amortized. Expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.

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.

23
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $1,375,164,838, the aggregate gross unrealized
appreciation is $276,162,168 and the aggregate gross unrealized depreciation is
$32,277,496, resulting in net unrealized appreciation on investments of
$243,884,672.

Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales and the mark to market of open futures contracts at
December 31, 1997.

E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays dividends
quarterly 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 and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes.

For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $55,148,836 as a 28% rate capital gain
distribution and $43,135,549 as a 20% rate capital gain distribution.
Shareholders were sent a 1997 Form 1099-DIV in January 1998 representing their
proportionate share of the capital gain distribution to be reported on their
income tax returns. For corporate shareholders 17.8% of the distributions
qualify for the dividend received deductions.

Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1997 fiscal year have been identified and appropriately reclassified.
Permanent differences totaling $4,477,825 related to market discount recognized
upon sale were reclassified from Accumulated Net Realized Gain to Accumulated
Undistributed Net Investment Income. Amounts were reclassified from Accumulated
Net Investment Income of $11,833 and Accumulated Net Realized Gain of $2,077 to
Capital due to the merger of the funds.

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 DAILY NET ASSETS % PER ANNUM
- --------------------------------------------------------------------------------
<S> <C>
First $150 million................................................. .50 of 1%
Next $100 million.................................................. .45 of 1%
Next $100 million.................................................. .40 of 1%
Over $350 million.................................................. .35 of 1%
</TABLE>

For the year ended December 31, 1997, the Fund recognized expenses of
approximately $37,100 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, 1997, the Fund recognized expenses of
approximately $180,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting
services to the Fund. These services are provided by VKAC at cost.

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, 1997, the Fund recognized expenses of approximately $1,927,100,
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.

24
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997
- --------------------------------------------------------------------------------
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per Trustee under the plan is equal to $2,500.

For the year ended December 31, 1997, the Fund paid brokerage commissions
to Morgan Stanley Group, Inc. and Dean Witter, both of which are affiliates of
VKAC, totaling $1,875.

At December 31, 1997, VKAC owned 223 shares of Class A and 224 shares each
of Classes 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.

At December 31, 1997, capital aggregated $509,445,943, $784,786,712 and
$64,732,162 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
Sales:
<S> <C> <C>
Class A.................................... 25,583,186 $ 191,217,108
Class B.................................... 29,915,227 221,594,137
Class C.................................... 3,239,213 24,115,067
----------- -------------
Total Sales..................................... 58,737,626 $ 436,926,312
=========== =============

Shares Issued in Merger:
Class A.................................... 1,531,079 $ 10,227,602
Class B.................................... 1,542,761 10,259,360
Class C.................................... 187,242 1,245,155
----------- -------------
Total Shares Issued in Merger................... 3,261,082 $ 21,732,117
=========== =============

Dividend Reinvestment:
Class A.................................... 10,787,829 $ 77,160,579
Class B.................................... 14,561,001 103,558,871
Class C.................................... 1,100,953 7,829,548
----------- -------------
Total Dividend Reinvestment..................... 26,449,783 $ 188,548,998
=========== =============

Repurchases:
Class A.................................... (19,786,873) $(147,745,099)
Class B.................................... (14,197,582) (105,642,498)
Class C.................................... (2,216,230) (16,459,151)
----------- -------------
Total Repurchases............................... (36,200,685) $(269,846,748)
=========== =============
</TABLE>

25
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $378,580,283, $555,009,052 and
$48,000,893 for Classes A, B, and C, respectively. For the year ended December
31, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
Sales:
<S> <C> <C>
Class A.................................... 23,837,337 $ 156,204,412
Class B.................................... 34,033,201 221,511,042
Class C.................................... 3,157,673 20,550,201
----------- -------------
Total Sales..................................... 61,028,211 $ 398,265,655
=========== =============

Dividend Reinvestment:
Class A.................................... 4,571,980 $ 29,903,434
Class B.................................... 5,828,833 37,983,943
Class C.................................... 450,818 2,937,470
----------- -------------
Total Dividend Reinvestment..................... 10,851,631 $ 70,824,847
=========== =============

Repurchases:
Class A.................................... (13,879,242) $ (91,378,219)
Class B.................................... (10,471,038) (68,387,863)
Class C.................................... (1,465,191) (9,556,485)
----------- -------------
Total Repurchases............................... (25,815,471) $(169,322,567)
=========== =============
</TABLE>

Class B and C shares are offered without a front end sales charge, but are
to a contingent deferred sales charge (CDSC). The CDSC will be imposed on most
redemptions made within five years of the purchase for Class B and one year of
the purchase for Class C as detailed in the following schedule.

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-------------------
YEAR OF REDEMPTION CLASS B CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
First..................................................... 5.00% 1.00%
Second.................................................... 4.00% None
Third..................................................... 3.00% None
Fourth.................................................... 2.50% None
Fifth..................................................... 1.50% None
Sixth and Thereafter...................................... None None
</TABLE>

For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$564,800 and CDSC on redeemed shares of approximately $1,308,100. Sales change
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 $1,279,521,013 and $1,106,102,323,
respectively.

26
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997
- --------------------------------------------------------------------------------

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 or generate potential gain. 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. Upon
disposition, a realized gain or loss is recognized accordingly, except when
exercising a call 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 provide the return of an index without purchasing all of the securities
underlying the index or as a substitute for purchasing or selling specific
securities.

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 stock index futures. These contracts are generally
used to provide the return of an index without purchasing all of the securities
underlying the index or to manage the Fund's overall exposure to the equity
markets. 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). The risk of loss associated
with a futures contract is in excess of the variation margin reflected on the
Statement of Assets and Liabilities.

Transactions in futures contracts for the year ended December 31, 1997,
were as follows:

<TABLE>
<CAPTION>
CONTRACTS
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996................................. 152
Futures Opened................................................... 545
Futures Closed................................................... (630)
Futures Split (S&P 500 Futures 2-for-1).......................... 67
-----
Outstanding at December 31, 1997................................. 134
=====
</TABLE>

The futures contracts outstanding at December 31, 1997, and the description
and unrealized depreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- March 1998 S&P 500 Index Futures
(Current Notional Value of $244,775 per contract)..... 134 $(69,075)
======= =========
</TABLE>

27
<PAGE>

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997
- --------------------------------------------------------------------------------

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, 1997, are payments retained by VKAC of
approximately $5,345,000.

7. FUND MERGER

On April 4, 1997, the Fund acquired all of the assets and liabilities of the Van
Kampen American Capital Balanced Fund (the "Balanced Fund"), through a tax free
reorganization approved by the Balanced Fund shareholders on March 27, 1997. The
Fund issued 1,531,079, 1,542,761 and 187,242 shares of Classes A, B and C in
exchange for 685,634, 687,703 and 83,476 shares, representing net assets of
$21,732,117, including $249,434 of accumulated depreciation of investments.
Prior to the acquisition, the Fund's net assets were $1,212,920,035. Combined
net assets on the day of the acquisition were $1,234,652,152.

28
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen American Capital Equity
Income Fund (the "Fund") at December 31, 1997, and the results of its
operations, the changes in its net assets and financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Chicago, Illinois
January 29, 1998

29
<PAGE>

FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL

EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International /Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money

To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.

To view a current Van Kampen American Capital or Morgan Stanley fund prospectus
or to receive additional fund information, choose from one of the following:

. visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus

. call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central
time (Telecommunications Device for the Deaf users, call 1-800-421-2833)

. e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place

30
<PAGE>

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

Board of Trustees
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
PHILLIP B. ROONEY
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
ASSET MANAGEMENT, INC.
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
PRICE WATERHOUSE LLP
200 E. Randolph Drive
Chicago, IL 60601

- -------------------------------------------------
TAX NOTICE TO CORPORATE
SHAREHOLDERS
For 1997, 17.8% of the dividends taxable as
ordinary income qualified for the 70% dividends
received deduction for corporation.
- -------------------------------------------------

* "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. After June 30, 1998, the report if used with prospective
investors, must be accompanied by a quarterly performance update.

31
<PAGE>

VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND

This Page Intentionally Left Blank

32
<PAGE>

Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

- -----------------
Bulk Rate
U.S. Postage
PAID
VAN KAMPEN
AMERICAN CAPITAL
- -----------------

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> EQUITY INCOME CLASS A
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,373,547,790<F1>
<INVESTMENTS-AT-VALUE> 1,619,049,510<F1>
<RECEIVABLES> 12,997,298<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 50,521<F1>
<TOTAL-ASSETS> 1,632,097,329<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 9,442,003<F1>
<TOTAL-LIABILITIES> 9,442,003<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 509,445,943
<SHARES-COMMON-STOCK> 88,104,227
<SHARES-COMMON-PRIOR> 69,989,006
<ACCUMULATED-NII-CURRENT> 2,065,924<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 16,191,940<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 245,432,645<F1>
<NET-ASSETS> 638,092,113
<DIVIDEND-INCOME> 19,877,040<F1>
<INTEREST-INCOME> 22,021,080<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (18,849,628)<F1>
<NET-INVESTMENT-INCOME> 23,048,492<F1>
<REALIZED-GAINS-CURRENT> 184,609,912<F1>
<APPREC-INCREASE-CURRENT> 85,825,819<F1>
<NET-CHANGE-FROM-OPS> 293,484,223<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (12,849,167)
<DISTRIBUTIONS-OF-GAINS> (71,711,304)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27,114,265
<NUMBER-OF-SHARES-REDEEMED> (19,786,873)
<SHARES-REINVESTED> 10,787,829
<NET-CHANGE-IN-ASSETS> 166,336,244
<ACCUMULATED-NII-PRIOR> 969,617<F1>
<ACCUMULATED-GAINS-PRIOR> 18,003,144<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,338,993<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 18,849,628<F1>
<AVERAGE-NET-ASSETS> 565,886,511
<PER-SHARE-NAV-BEGIN> 6.740
<PER-SHARE-NII> 0.152
<PER-SHARE-GAIN-APPREC> 1.435
<PER-SHARE-DIVIDEND> (0.168)
<PER-SHARE-DISTRIBUTIONS> (0.917)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.242
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> EQUITY INCOME CLASS B
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,373,547,790<F1>
<INVESTMENTS-AT-VALUE> 1,619,049,510<F1>
<RECEIVABLES> 12,997,298<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 50,521<F1>
<TOTAL-ASSETS> 1,632,097,329<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 9,442,003<F1>
<TOTAL-LIABILITIES> 9,442,003<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 784,786,712
<SHARES-COMMON-STOCK> 126,154,388
<SHARES-COMMON-PRIOR> 94,332,981
<ACCUMULATED-NII-CURRENT> 2,065,924<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 16,191,940<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 245,432,645<F1>
<NET-ASSETS> 908,715,054
<DIVIDEND-INCOME> 19,877,040<F1>
<INTEREST-INCOME> 22,021,080<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (18,849,628)<F1>
<NET-INVESTMENT-INCOME> 23,048,492<F1>
<REALIZED-GAINS-CURRENT> 184,609,912<F1>
<APPREC-INCREASE-CURRENT> 85,825,819<F1>
<NET-CHANGE-FROM-OPS> 293,484,223<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (12,509,687)
<DISTRIBUTIONS-OF-GAINS> (101,660,017)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 31,457,988
<NUMBER-OF-SHARES-REDEEMED> (14,197,582)
<SHARES-REINVESTED> 14,561,001
<NET-CHANGE-IN-ASSETS> 275,464,597
<ACCUMULATED-NII-PRIOR> 969,617<F1>
<ACCUMULATED-GAINS-PRIOR> 18,003,144<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,338,993<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 18,849,628<F1>
<AVERAGE-NET-ASSETS> 785,928,930
<PER-SHARE-NAV-BEGIN> 6.713
<PER-SHARE-NII> 0.100
<PER-SHARE-GAIN-APPREC> 1.423
<PER-SHARE-DIVIDEND> (0.116)
<PER-SHARE-DISTRIBUTIONS> (0.917)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.203
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> EQUITY INCOME CLASS C
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,373,547,790<F1>
<INVESTMENTS-AT-VALUE> 1,619,049,510<F1>
<RECEIVABLES> 12,997,298<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 50,521<F1>
<TOTAL-ASSETS> 1,632,097,329<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 9,442,003<F1>
<TOTAL-LIABILITIES> 9,442,003<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64,732,162
<SHARES-COMMON-STOCK> 10,528,677
<SHARES-COMMON-PRIOR> 8,217,499
<ACCUMULATED-NII-CURRENT> 2,065,924<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 16,191,940<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 245,432,645<F1>
<NET-ASSETS> 75,848,159
<DIVIDEND-INCOME> 19,877,040<F1>
<INTEREST-INCOME> 22,021,080<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (18,849,628)<F1>
<NET-INVESTMENT-INCOME> 23,048,492<F1>
<REALIZED-GAINS-CURRENT> 184,609,912<F1>
<APPREC-INCREASE-CURRENT> 85,825,819<F1>
<NET-CHANGE-FROM-OPS> 293,484,223<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,059,323)
<DISTRIBUTIONS-OF-GAINS> (8,569,893)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,426,455
<NUMBER-OF-SHARES-REDEEMED> (2,216,230)
<SHARES-REINVESTED> 1,100,953
<NET-CHANGE-IN-ASSETS> 20,684,670
<ACCUMULATED-NII-PRIOR> 969,617<F1>
<ACCUMULATED-GAINS-PRIOR> 18,003,144<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,338,993<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 18,849,628<F1>
<AVERAGE-NET-ASSETS> 66,770,065
<PER-SHARE-NAV-BEGIN> 6.713
<PER-SHARE-NII> 0.100
<PER-SHARE-GAIN-APPREC> 1.424
<PER-SHARE-DIVIDEND> (0.116)
<PER-SHARE-DISTRIBUTIONS> (0.917)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.204
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1> This item relates to the Fund on a composite basis and not on a class basis
</FN>

</TABLE>