VAN KAMPEN MERRITT PENNSYLVANIA TAX FREE INCOME FUND, 497, 1995-05-05

VAN KAMPEN MERRITT PENNSYLVANIA TAX FREE INCOME FUND
497, 1995-05-05

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<PAGE> 1

VAN KAMPEN MERRITT
PENNSYLVANIA TAX FREE INCOME FUND

Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund") is a non-
diversified, open-end management investment company, commonly known as a "mutual
fund," and is organized as a Pennsylvania trust. The Fund's investment objective
is to provide only Pennsylvania investors a high level of current income exempt
from federal and Pennsylvania state income taxes and, where possible under local
law, local income and personal property taxes, through investment primarily in a
varied portfolio of medium and lower grade municipal securities. The Fund may
invest in medium and lower grade municipal securities rated between BBB and B-
(inclusive) by Standard & Poor's Ratings Group, Baa and B3 (inclusive) by
Moody's Investors Service, Inc., comparably rated short-term municipal
obligations and municipal securities determined by the Fund's investment adviser
to be of comparable quality. Municipal securities in which the Fund may invest
include conventional fixed-rate municipal securities, variable rate municipal
securities and other types of municipal securities described herein. See
"Municipal Securities." There is no assurance that the Fund will achieve its
investment objective. THE FUND IS AVAILABLE FOR PURCHASE ONLY BY RESIDENTS OF
PENNSYLVANIA.

Investment in medium and lower grade municipal securities involves special
risks as compared with investment in higher grade municipal securities,
including potentially greater sensitivity to a general economic downturn or to a
significant increase in interest rates, greater market price volatility and less
liquid secondary market trading. See "Municipal Securities -- Special
Considerations Regarding Medium and Lower Grade Municipal Securities."
Investment in the Fund may not be appropriate for all investors.

The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth certain information about the Fund
that a prospective investor should know before investing in the Fund. Please
read and retain this Prospectus for future reference. The address of the Fund is
One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number
is (800) 225-2222, ext. 6504.
(Continued on next page.)
------------------

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

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

A Statement of Additional Information, dated April 30, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Statement of Additional Information may be
obtained without charge by calling 1-800-225-2222, ext. 6504 or, for
Telecommunication Device For the Deaf, 1-800-772-8889.
------------------

VAN KAMPEN AMERICAN CAPITAL(SM)

------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 2

(Continued from previous page)

The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") which may be purchased at a price equal to their net asset
value per share, plus sales charges which, at the election of the investor, may
be imposed (i) at the time of purchase ("Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares, and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares seven years after the end of the calendar month in
which the investor's order to purchase was accepted, in the circumstances and
subject to the qualifications described in this Prospectus. See "Purchasing
Shares of the Fund."

2
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................. 4
Shareholder Transaction Expenses.................................... 8
Annual Fund Operating Expenses and Example After
Expense Reimbursement............................................. 9
Financial Highlights................................................ 11
The Fund............................................................ 13
Investment Objective and Policies................................... 13
Municipal Securities................................................ 16
Investment Practices................................................ 21
Purchasing Shares of the Fund....................................... 23
Alternative Sales Arrangements.................................... 24
Initial Sales Charge Alternative.................................. 26
Quantity Discounts................................................ 27
Other Purchase Programs........................................... 29
Deferred Sales Charge Alternatives................................ 30
Distributions From the Fund......................................... 33
Purchase of Additional Shares with Distributions.................. 34
Redemption of Shares................................................ 34
Net Asset Value..................................................... 37
Fund Performance.................................................... 38
Tax Status.......................................................... 39
Investment Advisory Services........................................ 43
The Distribution and Service Plans.................................. 45
Allocation of Brokerage Transactions................................ 46
Shareholder Programs................................................ 47
Shareholder Services and Reports.................................... 50
Additional Information.............................................. 51
Appendix A: Description of Municipal Securities Ratings............. 52
</TABLE>

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

3
<PAGE> 4

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

THE FUND The Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund")
is a non-diversified, open-end management investment company, commonly known as
a "mutual fund," and is organized as a Pennsylvania trust. See "The Fund."

INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to provide
only Pennsylvania investors a high level of current income exempt from federal
and Pennsylvania state income taxes and, where possible under local law, local
income and personal property taxes, through investment primarily in a varied
portfolio of medium and lower grade municipal securities. The Fund invests in
municipal securities issued by or on behalf of the Commonwealth of Pennsylvania
and its political subdivisions, agencies and instrumentalities, certain
interstate agencies and certain territories of the United States. Municipal
securities in which the Fund may invest include fixed and variable rate
securities, municipal notes, municipal leases, tax exempt commercial paper,
custodial receipts, participation certificates, Pennsylvania tax exempt money
market funds and derivative municipal securities the terms of which include
elements of, or are similar in effect to, certain Strategic Transactions (as
defined herein) in which the Fund may engage. The Fund may invest up to 15% of
its total assets in derivative variable rate securities such as inverse
floaters, whose rates vary inversely with changes in market rates of interest or
range or capped floaters, whose rates are subject to periodic or lifetime caps.
The Fund may invest in medium and lower grade municipal securities rated at the
time of investment between BBB and B- (inclusive) by Standard & Poor's Ratings
Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), comparably rated short-term municipal obligations and municipal
securities determined by Van Kampen American Capital Investment Advisory Corp.
(the "Adviser"), the Fund's investment adviser, to be of comparable quality.
There is no assurance that the Fund will achieve its investment objective. THE
FUND IS AVAILABLE FOR PURCHASE ONLY BY RESIDENTS OF PENNSYLVANIA.

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

The Fund may invest in lower grade municipal securities rated at the time of
investment either not lower than B- by S&P or not lower than B3 by Moody's, in
comparably rated

4
<PAGE> 5

short-term municipal obligations and in municipal securities determined by the
Adviser to be of comparable quality. Municipal securities rated B by S&P
generally are regarded by S&P, on balance, as predominantly speculative with
respect to capacity to pay interest or repay principal in accordance with the
terms of the obligation. While such securities will likely have some quality and
protective characteristics, in S&P's view these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Securities rated B
by Moody's are viewed by Moody's as generally lacking characteristics of the
desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.

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

Investment in medium and lower grade municipal securities involves special
risks as compared with investment in higher grade municipal securities,
including potentially greater sensitivity to a general economic downturn,
greater market price volatility and less liquid secondary market trading. The
net asset value per share of the Fund can be expected to increase or decrease
depending on real or perceived changes in the credit risks associated with its
portfolio investments, changes in interest rates and other factors affecting the
municipal credit markets generally. There is no assurance that the Fund will
achieve its investment objective. The Fund may not be an appropriate investment
for all investors. Furthermore, interest on certain "private activity"
obligations in which the Fund may invest up to 20% of its assets is treated as a
preference item for the purpose of calculating the alternative minimum tax and,
accordingly, a portion of the income produced by the Fund may be taxable under
the alternative minimum tax. The Fund may not be a suitable investment for
investors who are already subject to the federal alternative minimum tax or who
would become subject to the federal alternative minimum tax as a result of an
investment in the Fund. See "Investment Objectives and Policies," "Municipal
Securities," "Appendix A" and "Tax Status."

INVESTMENT PRACTICES Subject to certain limitations, the Fund may enter into
strategic transactions, lend its portfolio securities, and enter into
when-issued or delayed delivery transactions. These investments entail certain
risks. See "Municipal Securities" and "Investment Practices."

ALTERNATIVE SALES ARRANGEMENTS The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and services fees

5
<PAGE> 6

with respect to each class of shares that may be incurred over the anticipated
duration of their investment in the Fund. To assist investors in making this
determination, the table under the caption "Annual Fund Operating Expenses and
Example After Expense Reimbursement" sets forth examples of the charges
applicable to each class of shares.

The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1,000,000 or otherwise subject to a contingent deferred sales
charge, Class B Shares and Class C Shares sometimes are referred to herein
collectively as CDSC Shares.

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

Class A Shares. Class A Shares are subject to an initial sales charge equal
to 4.75% of the public offering price (4.99% of the net amount invested),
reduced on investments of $100,000 or more. Class A Shares are subject to
ongoing distribution and service fees at an aggregate annual rate of up to 0.30%
of the Fund's average daily net assets attributable to the Class A Shares.
Certain purchases of Class A Shares qualify for reduced or no initial sales
charges and may be subject to a contingent deferred sales charge.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a contingent deferred sales charge equal
to 4.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after purchase,
which charge is reduced each year thereafter. Class B Shares are subject to
ongoing distribution and service fees at an aggregate annual rate of up to 1.00%
of the Fund's average daily net assets attributable to the Class B Shares. Class
B Shares will automatically convert to Class A Shares seven years after the end
of the calendar month in which the investor's order to purchase was accepted, in
the circumstances and subject to the qualifications described in this
Prospectus.

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

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the Fund's investment adviser. The annual
advisory fee is 0.60% of average daily net assets, reduced on net assets over
$500 million. See "Investment Advisory Services."

6
<PAGE> 7

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

REDEMPTION Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. The Fund may require redemption of shares if the value of an account is
$500 or less. See "Redemption of Shares."

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

7
<PAGE> 8

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

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

- ----------------
(1) Reduced on investments of $100,000 or more.

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

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

8
<PAGE> 9

- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE AFTER EXPENSE REIMBURSEMENT
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees(1) (as a percentage of average daily
net assets)......................................... 0.33% 0.33% 0.33%
12b-1 Fees(2) (as a percentage of average daily net
assets)............................................. 0.30% 1.00% 1.00%
Other Expenses (as a percentage of average daily
net assets)......................................... 0.27% 0.31% 0.30%
Total Expenses(1) (as a percentage of average daily
net assets)......................................... 0.90% 1.64% 1.63%
</TABLE>

- ----------------
(1) Expense projections include a waiver of $682,111 of fees by the Adviser. If
the Adviser did not waive fees of the Fund for the fiscal year ending
December 31, 1994, the "Management Fee" and "Total Expenses" would have
increased by 0.27% for each class of shares.

(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation.

9
<PAGE> 10

EXAMPLE

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (i) an operating expense ratio
of 0.90% for Class A Shares, 1.64% for Class B
Shares and 1.63% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of each time
period
Class A Shares..................................... $56 $75 $ 95 $ 153
Class B Shares..................................... $57 $87 $ 104 $ 165
Class C Shares..................................... $27 $51 $ 89 $ 193
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of each period:
Class A Shares..................................... $56 $75 $ 95 $ 153
Class B Shares..................................... $17 $52 $ 89 $ 165
Class C Shares..................................... $17 $51 $ 89 $ 193
</TABLE>

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

10
<PAGE> 11

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

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

<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------------------------------------------
MAY 1, 1987
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period.......... $ 18.062 $ 16.899 $ 16.373 $ 15.716 $ 15.698 $ 15.204 $ 14.310 $14.265
-------- -------- -------- -------- -------- -------- -------- -------
Net Investment
Income........ .965 1.027 1.074 1.081 1.080 1.073 1.069 .707
Net Realized and
Unrealized
Gain/Loss on
Investments... (1.985) 1.164 .525 .696 .018 .518 .949 .026
----- ----- ----- ----- ----- ----- ----- -----
Total from
Investment
Operations...... (1.020) 2.191 1.599 1.777 1.098 1.591 2.018 .733
----- ----- ----- ----- ----- ----- ----- -----
Less:
Distributions
from Net
Investment
Income........ .961 1.028 1.073 1.080 1.080 1.079 1.082 .688
Distributions
from Net
Realized Gain
on
Investments... -- -- -- .040 -- .018 .042 --
----- ----- ----- ----- ----- ----- ----- -----
Total
Distributions... .961 1.028 1.073 1.120 1.080 1.097 1.124 .688
----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period... $ 16.081 $ 18.062 $ 16.899 $ 16.373 $ 15.716 $ 15.698 $ 15.204 $14.310
======== ======== ======== ======== ======== ======== ======== =======
Total Return
(Non-
annualized)(1)... (5.72%) 13.25% 10.09% 11.64% 7.33% 10.84% 14.54% 5.28%
Net Assets at End
of Period
(in millions)... $ 203.2 $ 221.7 $ 153.8 $ 103.1 $ 69.3 $ 47.1 $ 18.3 $ 10.2
Ratio of Expenses
to Average Net
Assets
(annualized)(1)... .90% .71% .72% .70% .61% .61% .69% .21%
Ratio of Net
Investment
Income to
Average Net
Assets
(annualized)(1)... 5.73% 5.80% 6.41% 6.70% 6.92% 6.81% 7.14% 6.89%
Portfolio
Turnover........ 7.94% 1.35% 9.87% 48.47% 46.74% 16.48% 18.94% 1.62%
- ----------------
(1) If certain expenses had not been waived or assumed by the investment adviser, total return would have been lower and the
ratios would have been as follows:
Ratio of
Expenses to
Average Net
Assets
(annualized)... 1.17% 1.09% 1.17% 1.26% 1.28% 1.45% 1.75% 1.91%
Ratio of Net
Investment
Income to
Average Net
Assets
(annualized)... 5.46% 5.41% 5.95% 6.13% 6.25% 5.97% 6.09% 5.19%
</TABLE>

See Financial Statements and Notes Thereto

11
<PAGE> 12

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------ ------------------------------
MAY 1, 1993 AUGUST 13, 1993
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR ENDED DISTRIBUTION) YEAR ENDED DISTRIBUTION)
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1994 1993 1994 1993
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 18.055 $ 17.460 $ 18.045 $ 17.850
-------- -------- -------- --------
Net Investment Income....................... .841 .586 .850 .325
Net Realized and Unrealized Gain/Loss on
Investments............................... (1.985) .603 (1.985) .208
-------- -------- -------- --------
Total from Investment Operations............. (1.144) 1.189 (1.135) .533
-------- -------- -------- --------
Less:
Distributions from Net Investment Income.... .831 .594 .831 .338
Distributions from Net Realized Gain on
Investments............................... -- -- -- --
-------- -------- -------- --------
Total Distributions.......................... .831 .594 .831 .338
-------- -------- -------- --------
Net Asset Value, End of Period............... $ 16.080 $ 18.055 $ 16.079 $ 18.045
======== ======== ======== ========
Total Return (Non-annualized)(1)............. (6.39) 6.81% 6.34% 2.98%
Net Assets at End of Period (in millions).... $ 37.6 $ 27.7 $ 2.2 $ 2.1
Ratio of Expenses to Average Net Assets
(annualized)(1)............................. 1.64% 1.48% 1.63% 1.54%
Ratio of Net Investment Income to Average Net
Assets (annualized)(1)...................... 4.98% 4.47% 4.97% 4.08%
Portfolio Turnover........................... 7.94% 1.35% 7.94% 1.35%
</TABLE>

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

<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets
(annualized)............................ 1.90% 1.82% 1.90% 1.89%
Ratio of Net Investment Income to Average
Net Assets (annualized)................. 4.71% 4.13% 4.70% 3.73%
</TABLE>

See Financial Statements and Notes Thereto

12
<PAGE> 13

- --------------------------------------------------------------------------------
THE FUND
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Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund") is a mutual
fund which pools shareholders' money to seek to achieve a specific investment
objective. In technical terms the Fund is a non-diversified, open-end management
investment company, organized as a Pennsylvania trust. See "Shareholder Services
and Reports." Mutual funds sell their shares to investors and invest the
proceeds in a portfolio of securities. A mutual fund allows investors to pool
their money with that of other investors in order to obtain professional
investment management. Mutual funds generally make it possible for investors to
obtain greater diversification of their investments and to simplify their
recordkeeping.

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

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INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide only Pennsylvania investors a
high level of current income exempt from federal and Pennsylvania state income
taxes and, where possible under local law, local income and personal property
taxes, through investment primarily in a varied portfolio of medium and lower
grade municipal securities. The Fund may invest in medium and lower grade
municipal securities rated at the time of investment between BBB and B-
(inclusive) by Standard & Poor's Ratings Group ("S&P"), Baa and B3 (inclusive)
by Moody's Investors Service, Inc. ("Moody's"), comparably rated short-term
municipal obligations and municipal securities determined by the Adviser to be
of comparable quality. There is no assurance that the Fund will achieve its
investment objective. THE FUND IS AVAILABLE FOR PURCHASE ONLY BY RESIDENTS OF
PENNSYLVANIA.

Municipal securities are obligations issued by or on behalf of states,
territories or possession of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuer of such
securities, is exempt from federal income taxes. Pennsylvania municipal
securities are municipal securities the interest on which, in the opinion of
bond counsel or other counsel to the issuers of such securities, is at the time
of issuance exempt from Pennsylvania state income taxes. In normal circumstances
up to 100%, but not less than 80%, of the Fund's net assets will be invested in
Pennsylvania municipal securities. The foregoing is a fundamental policy and
cannot be changed without shareholder approval. Any "private activity"
obligations in which the Fund may invest will not be treated as municipal
securities for purposes of such 80% test. The Fund also may invest up to 10% of
its assets in Pennsylvania tax exempt money market funds that invest in
securities rated comparably to those in which the Fund may invest. Such
investments will be treated as municipal securities for purposes of such 80%
test.

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

Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn, greater market price
volatility and less liquid secondary market trading, among others. See
"Municipal Securities--Special Considerations Regarding Medium and Lower Grade
Municipal Securities," below. The net asset value per share of the Fund can be
expected to increase or decrease depending on real or perceived changes in the
credit risks associated with its portfolio investments, changes in interest
rates and other factors affecting the credit markets generally. There can be no
assurance that the Fund will achieve its investment objective. The Fund may not
be an appropriate investment for all investors. Furthermore, interest on certain
"private activity" obligations

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in which the Fund may invest up to 20% of its assets is treated as a preference
item for the purpose of calculating the alternative minimum tax and,
accordingly, a portion of the income produced by the Fund may be taxable under
the alternative minimum tax. The Fund may not be a suitable investment for
investors who are already subject to the federal alternative minimum tax or who
would become subject to the federal alternative minimum tax as a result of an
investment in the Fund. See "Tax Status."

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

The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1994 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all municipal securities held by the Fund during the fiscal
year ended December 31, 1994, computed on a monthly basis.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
- --------- ------------------ ---------------------
<S> <C> <C>
AAA/Aaa................................... 49.8% 0.7%
AA/Aa..................................... 5.7% 0.0%
A/A....................................... 14.1% 0.0%
BBB/Baa................................... 24.7% 0.9%
BB/Ba..................................... 1.9% 1.1%
B/B....................................... 0.0% 1.1%
CCC/Caa................................... 0.0% 0.0%
CC/Ca..................................... 0.0% 0.0%
C/C....................................... 0.0% 0.0%
D......................................... 0.0% 0.0%
---------- --------
Percentage of Rated and Unrated
Securities.............................. 96.2% 3.8%
========== ========
</TABLE>

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Securities rated D are in default, and payment of interest or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest or repayment of principal is in arrears present special risk
considerations. The Fund may incur additional expenses to the extent that it is
required to seek recovery of interest or principal, and the Fund may be unable
to obtain full recovery thereof. See "Municipal Securities--Special
Considerations Regarding Medium and Lower Grade Municipal Securities."

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

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MUNICIPAL SECURITIES
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GENERAL. Municipal securities in which the Fund may invest are debt
obligations issued by or on behalf of the states, territories or possessions of
the United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal income taxes. Pennsylvania municipal securities are municipal
securities, the interest on which, in the opinion of bond counsel or other
counsel to the issuers of such securities, is at the time of issuance exempt
from Pennsylvania state income taxes.

The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.

Within these principal classifications of municipal securities, there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities, the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Fund may engage. Variable
rate securities bear rates of interest that are adjusted periodically according
to formulae intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. The Fund
will not invest more than 15% of its total assets in derivative municipal
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest, or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Such securities may also pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of securities whose rates vary inversely
with market rates of interest generally will be larger than comparable changes
in

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the value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity. Municipal notes
include tax, revenue and bond anticipation notes of short maturity, generally
less than three years, which are issued to obtain temporary funds for various
public purposes. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participation in a lease, an installment purchase contract, or a conditional
sales contract. Some municipal securities may not be backed by the faith, credit
and taxing power of the issuer. Certain of the municipal securities in which the
Fund may invest represent relatively recent innovations in the municipal
securities markets. While markets for such recent innovations progress through
stages of development, such markets may be less developed than more fully
developed markets for municipal securities. A more detailed description of the
types of municipal securities in which the Fund may invest is included in the
Statement of Additional Information.

The net asset value of each of the Funds will change with changes in the value
of their respective portfolio securities. Because the Funds will invest
primarily in fixed income municipal securities, the net asset value of each of
the Funds can be expected to change as general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested in
fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.

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

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

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purposes. Such investments may result in a lower current income than if the Fund
were fully invested in medium and lower grade securities.

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

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

To the extent that there is no established retail market for some of the
medium or lower grade municipal securities in which the Fund may invest, trading
in such securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
municipal securities held in the Fund's portfolio, the ability of the Adviser to
value the Fund's securities becomes more difficult, and the Adviser's use of
judgment may play a greater role in the valuation of the Fund's securities due
to the reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist.

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Further, the Fund may have more difficulty selling such securities in a timely
manner and at their stated value than would be the case for securities for which
an established retail market does exist.

The Adviser seeks to minimize the risks involved in investing in medium and
lower grade municipal securities through investment in a varied portfolio of
municipal securities, careful investment analysis, and attention to current
developments and trends in the economy and financial and credit markets. The
Fund will rely on the Adviser's judgment, analysis and experience in evaluating
the creditworthiness of an issue. In its analysis, the Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. As described under
"Investment Advisory Services," the Adviser will utilize at its own expense
credit analysis and research services provided by its affiliate, McCarthy,
Crisanti & Maffei, Inc. ("MCM"). The Adviser may consider, although it does not
rely primarily on, the credit ratings of Moody's and S&P in evaluating municipal
securities. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, the Adviser continuously monitors the issuers of municipal
securities held in the Fund's portfolio.

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

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

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such distributions. Payment-in-kind securities are securities that pay interest
through the issuance of additional securities. Such securities generally are
more volatile in response to changes in interest rates and are more speculative
investments than are securities that pay interest periodically in cash. As of
December 31, 1994, approximately 9.4% and 0.0% of the Fund's total net assets
were invested in zero coupon securities payment-in-kind municipal securities,
respectively.

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

CERTAIN CONSIDERATIONS REGARDING PENNSYLVANIA MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
issuers of Pennsylvania municipal securities. Pennsylvania historically has been
identified as a heavy industry state although that reputation has changed
recently as the industrial composition of Pennsylvania diversified when the
coal, steel and railroad industries began to decline. The major new sources of
growth in Pennsylvania are in the service sector, including trade, medical and
the health services, education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the Commonwealth's
economic structure, accounting for more than $3.6 billion in crop and livestock
products annually, while agribusiness and food related industries support $39
billion in economic activity annually.

Pennsylvania operates under an annual budget which is formulated and submitted
for legislative approval by the Governor each February. The Pennsylvania
Constitution requires that the Governor's budget proposal consist of three
parts: (i) a balanced operating budget setting forth proposed expenditures and
estimated revenues from all sources and, if estimated revenues and available
surplus are less than proposed expenditures, recommending specific additional
sources of revenue sufficient to pay the deficiency; (ii) a capital budget
setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.

All outstanding general obligation bonds of the Commonwealth of Pennsylvania
are rated AA- by S&P and A1 by Moody's. Local municipalities issuing
Pennsylvania

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municipal securities, although impacted in general by the economic condition of
the Commonwealth, have credit ratings that are determined with reference to the
economic condition of such local municipalities. For example, as of the date
hereof, the ratings on the long-term obligations of the City of Philadelphia
(the "City") supported by payments from the City's General Fund are rated Baa by
Moody's and BB by S&P.

Although revenue obligations of the Commonwealth or its political subdivisions
may be payable from a specific project or source, including lease rentals, there
can be no assurance that future economic difficulties and the resulting impact
on Commonwealth and local government finances will not adversely affect the
market value of the portfolio of the Fund or the ability of the respective
obligors to make timely payments of principal and interest on such obligations.

More detailed information concerning Pennsylvania municipal securities and the
Commonwealth of Pennsylvania is set forth in the Statement of Additional
Information.

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INVESTMENT PRACTICES
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In connection with the investment policies described above, the Fund may also
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risk. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Fund's investment policy with respect
thereto.

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

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

Income earned or deemed to be earned, if any, by the Fund from its strategic
transactions will be distributed to its shareholders in taxable distributions.
See "Tax Status."

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

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Fund's assets which may be used to acquire securities on a "when issued" or
"delayed delivery" basis. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purposes of investment leverage.

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

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

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

The Fund intends to invest its assets in a broadly varied portfolio in order
to reduce the impact on the Fund of any loss on a particular portfolio security.
However, in order to attain economies of scale at relatively low asset size, the
Fund intends to invest more than 5% of its assets in at least five issuers and
may invest as much as 50% of its assets in as few as two issuers. With respect
to the remaining 50% of its assets, it may invest no more than 5% in the
securities of one issuer. Thus, the Fund's investments may be more concentrated
in fewer issuers than if it were a diversified fund and, if so, the Fund's net
asset value may increase or decrease more rapidly than a diversified fund if
these securities change in value.

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PURCHASING SHARES OF THE FUND
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The Fund has designated three classes of shares for sale to the public on a
continuous basis through Van Kampen American Capital Distributors, Inc., (the
"Distributor"), which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares are also offered through members of the National
Association of Securities Dealers, Inc. ("NASD") who are acting as securities
dealers ("dealers") and through NASD members or eligible non-NASD members who
are acting as brokers or agents for investors ("brokers"). The Fund reserves the
right to suspend or terminate the continuous public offering at any time and
without prior notice.

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ALTERNATIVE SALES ARRANGEMENTS

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

The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts over $1
million, "Class B Shares" and "Class C Shares"). Class A Share accounts over
$1,000,000 or otherwise subject to a contingent deferred sales charge ("CDSC"),
Class B Shares and Class C Shares sometimes are referred to herein collectively
as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $1,000.
For purposes of purchasing shares of the Fund, "any person" shall have the
meaning set forth in the section of the Prospectus captioned "Purchasing Shares
of the Fund -- Initial Sales Charge Alternative -- Quantity Discounts." The
minimum subsequent investment with respect to each class of shares is $100. It
is presently the policy of the Distributor, not to accept any order for Class B
Shares or Class C Shares in an amount of $1,000,000 or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares or Class C Shares. If
such an investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares. Investors must weigh the benefits of deferring
the sales charge and having all of their funds invested against the higher
aggregate distribution and service

24
<PAGE> 25

fee applicable to Class B Shares and Class C Shares (discussed below). Investors
who intend to hold their shares for a significantly long time may not wish to
continue to bear the ongoing distribution and service expenses of Class C Shares
which, in the aggregate, eventually would exceed the aggregate amount of the
initial sales charge and distribution and service expenses applicable to Class A
Shares, irrespective of the fact that a CDSC would eventually not apply to a
redemption of such Class C Shares.

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

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be approved by the SEC pursuant to
an amended exemptive order. All such expenses incurred by a class will be borne
on a pro rata basis by the outstanding shares of such class. All allocations of
administrative expenses to a particular class of shares will be limited to the
extent necessary to preserve the Fund's qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended.

The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
securities broker, dealer or financial intermediary or with the Distributor plus
any applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once

25
<PAGE> 26

each business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order. See "Net Asset Value."

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to qualifying brokers, dealers or
financial intermediary for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminar of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. In addition, the Distributor may provide additional
compensation to Edward D. Jones & Co. ("Edward D. Jones") or an affiliate
thereof based on a combination of its sales of shares and increases in assets
under management. In addition, the Distributor is sponsoring a sales contest for
INVEST Financial Corporation ("INVEST") relating to the Fund and other funds
distributed by the Distributor, pursuant to which the Distributor may provide an
INVEST broker an award valued up to $750.00 for sales of such funds during the
period April 1, 1995, through May 31, 1995. Such payments are made by the
Distributor out of its own assets, and not out of the assets of the Fund. These
programs will not change the price an investor will pay for shares or the amount
that the Fund will receive from such sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an initial sales charge which is a variable percentage of
the offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial

26
<PAGE> 27

intermediary. The staff of the SEC has taken the position that brokers, dealers
or financial intermediaries who receive more than 90% or more of the sales
charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of the 1933.

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

- ----------------
* No sales charge is payable at the time of purchase on investments of
$1,000,000 or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one year
of the purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1% on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million. See "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
Investors, or their brokers, dealers or financial intermediaries must notify the
Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.

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

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

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

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

27
<PAGE> 28

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

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

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

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

28
<PAGE> 29

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

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

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

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

2. NAV Purchase Options

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

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

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

29
<PAGE> 30

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

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

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

(e) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1% for such purchases.

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

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

DEFERRED SALES CHARGE ALTERNATIVES

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

30
<PAGE> 31

compensation with respect to Class A Shares subject to a CDSC is set forth under
"Purchasing Shares of the Fund -- Initial Sales Charge Alternative".

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

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of shares of such class of CDSC Shares, such as
the payment of compensation to selected dealers and agents for selling such
shares. The combination of the contingent deferred sales charge and the
distribution and services fees facilitates the ability of the Fund to sell such
CDSC Shares without a sales charge being deducted at the time of purchase.

In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares, if any, and fourth of CDSC Shares held
longest during the period of time that a contingent deferred sales charge is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.

To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) at $10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 3.75% (the applicable rate in the second year after
purchase).

31
<PAGE> 32
The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1,000,000 or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

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

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

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

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

CONVERSION FEATURE. Seven years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher aggregate distribution and service fees. The purpose of
the conversion feature is to relieve the holders of Class B Shares that have
been outstanding for a period of time sufficient for the Distributor to have
been compensated for distribution expenses related to the Class B Shares from
most of the burden of such distribution-related expenses.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a

32
<PAGE> 33

shareholder's account will be considered to be held in a separate sub-account.
Each time any Class B Shares in the shareholder's account (other than those in
the sub-account) convert to Class A Shares, an equal pro rata portion of the
Class B Shares in the sub-account also will convert to Class A Shares. The
holding period applicable to a Class B Share acquired through the use of the
exchange privilege (discussed below) shall be the holding period applicable to a
Class B Share of such Fund acquired other than through use of the exchange
privilege. For purposes of calculating the holding period applicable to a Class
B Share of the Fund prior to conversion, a Class B Share of the Fund issued in
connection with an exercise of the exchange privilege, or a series of exchanges,
shall be deemed to have been issued on the date on which the investor's order to
purchase the exchanged Class B Share was accepted or, in the case of a series of
exchanges, when the investor's order to purchase the original Class B Share was
accepted.

The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution and service fees and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and (ii) that the conversion of Class B
Shares does not constitute a taxable event under federal income tax law. The
conversion of Class B Shares to Class A Shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
Shares would occur, and Class B Shares might continue to be subject to the
higher aggregate distribution and service fees for an indefinite period.
- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------

The Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund, except that net realized
short-term capital gains, if any, are expected to be distributed annually. Net
investment income consists of all interest income, dividends and other ordinary
income earned by the Fund, less all expenses of the Fund. Expenses of the Fund
are accrued each day. Net short-term capital gains, if any, may be distributed
throughout the year. Net realized long-term capital gains, if any, are expected
to be distributed, to the extent permitted by applicable law, to shareholders at
least annually. Distributions cannot be assured, and the amount of each monthly
distribution may vary.

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

Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares

33
<PAGE> 34

become entitled to dividends on the day the Fund's transfer agent receives
payment for the shares either through a fed wire or NSCC settlement. Shares
remain entitled to dividends through the day such shares are processed for
payment on redemption.

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

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge, unless a shareholder elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889,
during the hours of 7:30 a.m. to 4:00 p.m. Central Standard Time. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.

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

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

34
<PAGE> 35

(if any) in proper form. Any applicable contingent deferred sales charge with
respect to CDSC Shares redeemed will be deducted from the redemption proceeds
prior to transmittal of such proceeds to the shareholder.

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

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

35
<PAGE> 36

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

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

In cases of disability, the CDSC on Class B Shares will be waived where the
disabled person is either an individual shareholder or owns the shares as a
joint tenant with right of

36
<PAGE> 37

survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the CDSC on Class B Shares applies to a total or
partial redemption, but only to redemptions of shares held at the time of the
initial determination of disability.

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

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

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

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

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

Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Fund. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost when amortized cost is determined in good faith by or under the
direction of the Board of Trustees of the

37
<PAGE> 38

Trust to be representative of the fair value at which it is expected such
securities may be resold. Other assets are valued at fair value as determined in
good faith by or under the direction of the Trustees. The net asset values per
share of the different classes of shares are expected to be substantially the
same; from time to time, however, the per share net asset value of the different
classes of shares may differ.

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

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.

The Fund's yield quotation is determined for each class of the Fund's shares
on a monthly basis with respect to the immediately preceding 30 day period.
Yield is computed by first dividing the Fund's net investment income per share
earned during such a 30 day period by the Fund's maximum offering price per
share on the last day of such period. Net investment income per share for a
class of shares is determined by taking the interest earned by the Fund during
the period and allocable to the class of shares, subtracting the expenses (net
of any reimbursements) accrued for the period and allocable to the class of
shares, and dividing the result by the product of (a) the average daily number
of such class of the Fund shares outstanding during the period that were
entitled to receive dividends and (b) the Fund's maximum offering price per
share on the last day of the period. The yield calculation formula assumes net
investment income is earned and reinvested at a constant rate annualized at the
end of a six month period.

Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed for each class of the Fund's shares by dividing that portion of the
yield of the Fund (as computed above) which is tax-exempt by a percentage equal
to 100% minus a stated percentage income tax rate and adding the result to that
portion of the Fund's yield, if any, that is not tax-exempt.

The Fund calculates average compounded total return for each class of the
Fund's shares by determining the redemption value at the end of specified
periods (after adding back all dividends and other distributions made during the
period) of a $1,000 investment in a class of shares of the Fund (less the
maximum sales charge) at the beginning of the period, annualizing the increase
or decrease over the specified period with respect to such initial investment
and expressing the result as a percentage.

38
<PAGE> 39

Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
the Fund from a given date to a subsequent given date and including or
excluding, as the case may be, sales charges applicable to the respective class
of shares. Cumulative non-standardized total return is calculated by measuring
the value of an initial investment in the Fund at a given time, including or
excluding, as the case may be, the maximum sales charge applicable to the
respective class of shares, determining the value of all subsequent reinvested
distributions, and dividing the net change in the value of the investment as of
the end of the period by the amount of the initial investment and expressing the
result as a percentage.

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

From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, the Fund may utilize sales literature that
includes hypotheticals.

Please consult the Statement of Additional information for more information
regarding the Fund's performance.
- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------

FEDERAL TAXES. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company, the
Fund must comply with certain requirements of the Code relating to, among other
things, the source of its income and diversification of its assets. If the Fund
so qualifies and if it distributes at least 90% of its net investment income
(including tax-exempt interest and other taxable

39
<PAGE> 40

income including net short-term capital gain, but not net capital gain, which
are the excess of net long-term capital gain over net short-term capital loss),
it will not be required to pay federal income taxes on the income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income to satisfy the 90% distribution requirement. The Fund will not
be subject to federal income tax on any net capital gain distributed to its
shareholders.

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

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

Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. Distributions in excess of the Fund's earnings
and profits, such as distributions of principal, will first reduce the adjusted
tax basis of the shares held by the shareholders and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such shareholders
(assuming such shares are held as a capital asset). The Fund will inform
shareholders of the source and tax status of such distributions promptly after
the close of each calendar year. Distributions from the Fund will not be
eligible for the dividends received deduction for corporations.

Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a

40
<PAGE> 41

shareholder's alternative minimum taxable income. Unless otherwise provided in
regulations, the portion of the Fund's interest on such "private activity"
obligations allocable to shareholders will correspond to the portion of the
Fund's total net tax-exempt income distributed to shareholders. In addition, for
corporations, alternative minimum taxable income will be increased by a
percentage of the amount by which a measure of income that includes interest on
tax-exempt obligations exceeds the amount otherwise determined to be the
alternative minimum taxable income. Accordingly, investment in the Fund may
cause shareholders to be subject to (or result in an increased liability under)
the alternative minimum tax.

Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.

Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held their shares for more than one year. Any loss
realized on shares held for six months or less will be disallowed to the extent
of any exempt-interest dividends received with respect to such shares. If such
loss is not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
shares.

Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving the cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid income taxes, the Fund may have to dispose of
securities that it would otherwise have continued to hold. Discount relating to
certain stripped tax-exempt obligations may constitute taxable income when
distributed to shareholders.

41
<PAGE> 42

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November, or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purpose of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution is actually made.

The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.

PENNSYLVANIA TAX STATUS. Under existing Pennsylvania law, since the Fund
intends to invest primarily in Pennsylvania municipal securities, in the opinion
of special Pennsylvania counsel to the Fund, interest income of the Fund derived
from these investments and distributed to the shareholders will be exempt from
Pennsylvania Personal Income Tax and (for residents of Philadelphia) from
Philadelphia School District Income Tax. To the extent the Fund invests in other
permitted investments, distributions to shareholders of income from these
investments may be subject to Pennsylvania Personal Income Tax and (for
residents of Philadelphia) to Philadelphia School District Income Tax.
Shareholders of the Fund will receive annual notification from the Fund as to
the taxability of such distributions in Pennsylvania.

Income of the Fund derived from Pennsylvania municipal securities and
distributed to corporate shareholders will be exempt from Pennsylvania Corporate
Net Income Tax as well as Pennsylvania Mutual Thrift Institutions Tax. Gains
realized by a corporate shareholder on a sale or disposition of shares will be
subject to Pennsylvania Corporate Net Income Tax or Pennsylvania Mutual Thrift
Institutions Tax, whichever is applicable. To the extent the Fund invests in
other permitted investments, distributions to corporate shareholders of income
from these investments may be subject to Pennsylvania Corporate Net Income Tax
or Pennsylvania Mutual Thrift Institutions Tax, whichever is applicable.
Shareholders of the Fund will receive annual notification from the Fund as to
the taxability of such distributions in Pennsylvania.

Gains realized by a shareholder on a sale or disposition of shares of the Fund
will be subject to Pennsylvania Personal Income Tax as well as Philadelphia
School District Income Tax (but under the Philadelphia School District Tax, only
as to sales occurring within six months of purchase).

42
<PAGE> 43

In the opinion of special Pennsylvania counsel to the Fund, shares of the Fund
will be exempt from Pennsylvania County Personal Property Taxes and (as to
residents of Pittsburgh) from personal property taxes imposed by the City of
Pittsburgh and School District of Pittsburgh. This exemption, however, will not
apply to that portion of the Fund represented by each shareholder's shares that
is not invested in Pennsylvania municipal securities (or other securities exempt
from personal property taxes in Pennsylvania).

Shares of the Fund are subject to Pennsylvania Inheritance and Estate Tax.

Gains derived by the Fund from the sale, exchange or other disposition of
Pennsylvania municipal securities may be subject to Pennsylvania personal or
corporate income taxes. Those gains which are distributed by the Fund to
shareholders who are individuals will be subject to Pennsylvania Personal Income
Tax and, for residents of Philadelphia, to Philadelphia School District
Investment Income Tax. For shareholders which are corporations, the distributed
gains will be subject to Pennsylvania Corporate Net Income Tax or Pennsylvania
Mutual Thrift Institutions Tax, whichever is applicable. Gains which are not
distributed by the Fund will nevertheless be taxable to shareholders if derived
by the Fund from the sale, exchange or other disposition of Pennsylvania
municipal securities issued on or after February 1, 1994. Gains which are not
distributed by the Fund will not be taxable to shareholders if derived by the
Fund from the sale, exchange or other disposition of Pennsylvania municipal
securities issued prior to February 1, 1994.

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

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

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

Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc. a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles

43
<PAGE> 44

Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.

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

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- --------------------------------------------------------------- -----------
<S> <C>
First $500 million............................................. 0.60 of 1%
Over $500 million.............................................. 0.50 of 1%
</TABLE>

Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act, of the Adviser,
Van Kampen American Capital Distributors, Inc. or Van Kampen American Capital,
Inc.), the charges and expenses of independent accountants, legal counsel, any
transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.

The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Codes permit trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.

PORTFOLIO MANAGEMENT. William V. Grady, a Vice-President of the Adviser, is
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grady has been employed by the Adviser since 1992. Prior to 1992, Mr. Grady was
associated with Municipal Bond Investors Assurance Corporation and prior to
1990, Mr. Grady was associated with CIGNA Investments, Inc.

44
<PAGE> 45

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

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the Investment
Company Act. The Fund also has adopted a service plan (the "Service Plan") with
respect to each class of its shares. The Distribution Plan and the Service Plan
provide that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each such class. The Distribution Plan and the
Service Plan are being implemented through an agreement with the Distributor of
each class of the Fund's shares, sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers, NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance. Brokers, dealers and financial
intermediaries that have entered into Selling Agreements with the Distributor
and sell shares of the Fund are referred to herein as "financial
intermediaries."

CLASS A SHARES. The Fund may spend an aggregate amount up to 0.30% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such financial intermediaries or
the amount of the Distributor's actual distribution related expense.

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

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

45
<PAGE> 46

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

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

The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Share that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of a CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1994, there were $42,696
and $0 of unreimbursed distribution expenses with respect to Class B Shares and
Class C Shares, respectively, representing 0.02% and 0.00% of the Fund's total
net assets. If the Distribution Plan was terminated or not continued, the Fund
would not be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.

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

- --------------------------------------------------------------------------------
ALLOCATION OF BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------

In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers

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<PAGE> 47

which may be affiliated with the Fund, the Adviser, the Distributor or dealers
participating in the offering of the Fund's shares. In addition, in selecting
among firms to handle a particular transaction, the Adviser and the Fund may
take into account whether the firm has sold or is selling shares of the Fund.

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

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

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

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

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

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<PAGE> 48

reserves the right to amend or terminate the systematic withdrawal program on
thirty days notice, and a shareholder may withdraw from the program at any time.

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

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

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

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

In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders also may effect an exchange by
telephoning the Fund at 1-800-341-2911 prior to 3:00 p.m. Central Standard Time
and requesting the exchange. For inquiries through Telecommunications Device for
the Deaf (TDD), dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m.
Central Standard Time. The exchange will be processed at the net asset value
next determined after receipt of such request. By utilizing the telephone
exchange service, a shareholder authorizes the Fund or the Transfer Agent to act
upon the instructions of any person by telephone to exchange shares from any
account for which such service has been authorized to any identically registered
account(s) with any Van Kampen Merritt fund distributed by the Distributor which
offers an exchange privilege. In addition, a shareholder also agrees that none
of the

48
<PAGE> 49

Fund, the Distributor, the Transfer Agent nor NFDS will be liable for any loss,
liability, cost or expense arising out of any request, including any fraudulent
request. The staff of the SEC currently is reviewing its position with respect
to such agreements. This service may be amended or terminated at any time by the
Transfer Agent or the Fund. If a shareholder has certificates for any shares
being exchanged, such certificates must be surrendered prior to the exchange in
the same manner as in redemption of such shares (see "Redemption of
Shares--Telephone Redemptions"). Any shares exchanged between the Fund and any
of the other funds will begin earning dividends on the next business day after
the exchange is effected. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY FOR SALE IN THEIR STATE.

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

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

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

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

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

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<PAGE> 50

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

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

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

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

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES AND REPORTS
- --------------------------------------------------------------------------------

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder

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<PAGE> 51

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

Shareholders will receive annual and semiannual reports with financial
statements, as well as proxy statements for shareholders' meetings, if any. The
Fund is an unincorporated trust established under the laws of the Commonwealth
of Pennsylvania by a Declaration of Trust dated January 28, 1987. Shares of the
Fund entitle their holders to one vote per share. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights. The Fund
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of two-thirds of the outstanding shares of beneficial interest. The Fund
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act. More detailed information
concerning the Fund is set forth in the Statement of Additional Information.

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

Shareholder inquiries should be directed to The Van Kampen Merritt Family of
Funds, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence. The telephone number is 1-800-341-2911.

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

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

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

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

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<PAGE> 52

APPENDIX A

DESCRIPTION OF MUNICIPAL SECURITIES RATINGS

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:

1. DEBT

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

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

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

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

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

2. Nature of and provisions of the obligation;

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

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

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

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

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<PAGE> 53

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

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

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

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

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

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

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

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

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<PAGE> 54

<TABLE>
<S> <C>
D Debt rated 'D' is in payment default. The 'D' rating category
is used when interest payments or principal payments are not
made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.

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

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

L The letter 'L' indicates that the rating pertains to the
principal amount of these bonds to the extent that the
underlying deposit collateral is federally insured and
interest is adequately collateralized. In the case of
certificates of deposit, the letter 'L' indicates that the
deposit, combined with other deposits being held in the same
right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within
30 days after closing of the insured institution or, in the
event that the deposit is assumed by a successor insured
institution, upon maturity.

P The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion
of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon
failure of, such completion. The investor should exercise his
own judgment with respect to such likelihood and risk.

*Continuance of the rating is contingent upon S&P's receipt of
an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.

NR Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter
of policy.
</TABLE>

DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.

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<PAGE> 55

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

2. MUNICIPAL NOTES

A S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:

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

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

The note rating symbols and definitions are as follows:

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

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

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

3. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365
days. Ratings are graded into several categories, ranging from 'A-1' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:

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

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

A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
</TABLE>

55
<PAGE> 56

<TABLE>
<S> <C>
B Issues rated 'B' are regarded as having only speculative
capacity for timely payment.

C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

D Debt rated 'D' is in payment default. The 'D' rating category
is used when interest payments or principal payments are not
made on the date due, even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period.
</TABLE>

A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.

4. TAX-EXEMPT DUAL RATINGS

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

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

1. LONG-TERM MUNICIPAL BONDS

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

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

56
<PAGE> 57

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

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

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

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

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

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

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

CON (..) Bonds for which the security depends upon the
completion of some act or the fulfillment of some
condition are rated conditionally and designated with
the prefix "Con" followed by the rating in parentheses.
These are bonds secured by: (a) earnings of projects
under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some
other limiting condition attaches. The parenthetical
rating denotes the probable credit stature upon
completion of construction or elimination of the basis
of the condition.
</TABLE>

57
<PAGE> 58

<TABLE>
<S> <C>
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from AA to B. The
modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3
indicates that the company ranks in the lower end of
its generic rating category.
</TABLE>

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

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

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

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

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

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

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

2. SHORT-TERM EXEMPT NOTES

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

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

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

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

58
<PAGE> 59

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

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

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

3. TAX-EXEMPT COMMERCIAL PAPER

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

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

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

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

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

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

59
<PAGE> 60

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

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

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

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

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

VAN KAMPEN MERRITT
PENNSYLVANIA TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

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

Distributor

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

Transfer Agent

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

Custodian

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

Legal Counsel

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

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 61
STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT PENNSYLVANIA TAX FREE INCOME FUND

Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund") is a
non-diversified, open-end management investment company, commonly known as a
mutual fund, and is organized as a Pennsylvania trust. The Fund's investment
objective is to provide only Pennsylvania investors a high level of current
income exempt from federal and Pennsylvania state income taxes and, where
possible under local law, local income and personal property taxes, through
investment primarily in a varied portfolio of medium and lower grade
Pennsylvania municipal securities. The Fund's portfolio is managed by Van Kampen
American Capital Investment Advisory Corp. (the "Adviser").

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus of the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling the Fund's toll-free number: 1-800-341-2911.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund................................................................................ B-2
Shares of the Fund...................................................................... B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Officers and Trustees................................................................... B-16
Custodian............................................................................... B-20
Legal Counsel and Independent Auditors.................................................. B-20
Investment Advisory and Other Services.................................................. B-20
Portfolio Transactions.................................................................. B-21
Tax Status of the Fund.................................................................. B-22
The Distributor......................................................................... B-23
Performance Information................................................................. B-24
Independent Auditors' Report............................................................ B-26
Financial Statements.................................................................... B-27
Notes to Financial Statements........................................................... B-37
</TABLE>

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

B-1
<PAGE> 62

THE FUND

The Fund is a non-diversified, open-end management investment company,
commonly known as a mutual fund, and is organized as an unincorporated trust
established under the laws of the Commonwealth of Pennsylvania by a Declaration
of Trust dated January 28, 1987. The Declaration of Trust permits the Trustees
to issue an unlimited number of full and fractional shares.

Each share represents an equal proportionate interest in the assets of the
Fund with each other share in the Fund. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Fund and requires
inclusion of a clause to that effect in every agreement entered into by the Fund
and indemnifies shareholders against any such liability. Although shareholders
of an unincorporated trust established under Pennsylvania law may, under certain
limited circumstances, be held personally liable for the obligations of the
trust as though they were general partners in a partnership, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.

Shares of the Fund entitle their holders to one vote per share. Shares do not
have cumulative voting rights, preemptive rights or any conversion or exchange
rights other than those described in the Prospectus. The Fund does not
contemplate holding regular meetings of shareholders to elect Trustees or
otherwise. However, the holders of 10% or more of the outstanding shares may by
written request require a meeting to consider the removal of Trustees by a vote
of a majority of the shares present and voting at such meeting.

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

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

SHARES OF THE FUND

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

INVESTMENT POLICIES AND RESTRICTIONS

The Fund's investment objective is to provide only Pennsylvania investors a
high level of current income exempt from federal and Pennsylvania state income
taxes and, where possible under local law, local income and personal property
taxes, through investment primarily in a varied portfolio of medium and lower
grade Pennsylvania municipal securities. The Fund will generally invest its
assets in obligations issued by or on behalf of the Commonwealth of Pennsylvania
and its political subdivisions, agencies and instrumentalities, certain
interstate agencies and certain territories of the United States, the interest
on which is exempt from federal and Pennsylvania state income taxes in the
opinion of counsel.

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

1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that with respect to 50% of the
Fund's total assets up to 25% may be invested in one issuer.

2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond

B-2
<PAGE> 63

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

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

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

5. Buy any securities "on margin." The deposit of initial or maintenance
margin in connection with municipal bond index and interest rate futures
contracts or related options transactions is not considered the purchase
of a security on margin.

6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as described, from
time to time, under the heading "Investment Practices" in the Prospectus.

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

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

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
temporarily invest up to 10% of the value of its assets in Pennsylvania
tax exempt money market funds.

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

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

The Fund may not change any of these investment restrictions nor any other
fundamental policy without the approval of the lesser of (i) more than 50% of
the Fund's outstanding shares or (ii) 67% of the Fund's shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
present in person or by proxy. As long as the percentage restrictions described
above are satisfied at the time of the investment or borrowing, the Fund will be
considered to have abided by those restrictions even if, at a later time, a
change in values or net assets causes an increase or decrease in percentage
beyond that allowed. Certain of the medium and lower grade municipal securities
in which the Fund may invest may be, subsequent to the Fund's investment in such
securities, downgraded by Moody's or S&P or may be deemed by the Adviser to be
of a lower quality as a result of impairment of the creditworthiness of the
issuer of such securities or of the project the revenues from which are the
source of payment of interest and repayment of principal with respect to such
securities. In such instances, the secondary market for such municipal
securities may become less liquid, with the possibility that more than 10% of
the Fund's assets would be invested in securities which are not readily
marketable. In such event, the Fund will take reasonable and appropriate steps
to reduce the percentage of the Fund's portfolio represented by securities that
are not readily marketable, together with any other securities

B-3
<PAGE> 64

subject to investment restriction eight above, to less than 10% of the Fund's
assets as soon as is reasonably practicable.

Frequent portfolio turnover is not anticipated. The Fund anticipates that the
annual portfolio turnover rate of the Fund will normally be less than 100%.
Portfolio turnover is calculated by dividing the lesser of purchases or sales of
portfolio securities by the monthly average value of the securities in the
portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less are excluded
from such calculation. The Fund will not seek capital gain or appreciation but
may sell securities held in its portfolio and, as a result, realize capital gain
or loss. Sales of portfolio securities will be made for the following purposes:
in order to eliminate unsafe investments and investments not consistent with the
preservation of the capital or tax status of the Fund; honor redemption orders,
meet anticipated redemption requirements and negate gains from discount
purchases; reinvest the earnings from portfolio securities in like securities;
or defray normal administrative expenses.

ADDITIONAL INVESTMENT CONSIDERATIONS

MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities. They may take the form of a lease, an installment purchase contract,
a conditional sales contract, or a participation certificate in any of the
above. Some municipal leases and participation certificates may not be
considered readily marketable. Such non-marketable municipal leases, together
with other restricted or non-marketable securities in the Fund's portfolio will
not at the time of purchase exceed 10% of the total assets of the Fund. The
"issuer" of municipal securities is generally deemed to be the governmental
agency, authority, instrumentality or other political subdivision, or the
non-governmental user of a facility, the assets and revenues of which will be
used to meet the payment obligations, or the guarantee of such payment
obligations, of the municipal securities.

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

The Fund also may invest up to 15% of its total assets in variable rate
derivative municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest. Such variable rate
derivative municipal securities may pay a rate of interest determined by
applying a multiple to the variable rate. The extent of increases and decreases
in the value of derivative municipal securities whose rates vary inversely with
changes in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provision and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain

B-4
<PAGE> 65

Strategic Transactions in which the Fund may engage. Such municipal securities
may be their terms, for example, have economic characteristics comparable to,
among other things, a swap, cap, floor or collar transaction with respect to
such security for a period of time prior to its stated maturity. See "Additional
Investment Considerations--Strategic Transactions" in this Statement of
Additional Information.

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

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

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

Pennsylvania historically has been identified as a heavy industry state
although that reputation has changed recently as the industrial composition of
the Commonwealth diversified when the coal, steel and railroad industries began
to decline. The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for

B-5
<PAGE> 66

more than $3.6 billion in crop and livestock products annually, while
agribusiness and food related industries support $39 billion in economic
activity annually.

The Commonwealth operates under an annual budget which is formulated and
submitted for legislative approval by the Governor each February. The
Pennsylvania Constitution requires that the Governor's budget proposal consist
of three parts; (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting fourth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.

The five year period from fiscal 1989 through fiscal 1993 was marked by public
health and welfare costs growing at a rate double the growth rate for all state
expenditures. Rising caseloads, increased utilization of services and rising
prices joined to produce the rapid rise of public health and welfare costs at a
time when a national recession caused tax revenues to stagnate and even decline.
During the period from fiscal 1989 through fiscal 1993, public health and
welfare costs rose by an average annual rate of 10.9 percent while tax revenues
were growing at an average annual rate of 5.5 percent. Consequently, spending on
other budget programs was restrained to a growth rate below 5.0 percent and
sources of revenues other than taxes became larger components of fund revenues.
Among those sources were transfers from other funds and hospital and nursing
home pooling of contributions to use as federal matching funds. Tax revenues
declined in fiscal 1991 as a result of the recession in the economy. A $2.7
billion tax increase enacted for fiscal 1992 brought financial stability to the
General Fund. That tax increase included several taxes with retroactive
effective dates which generated some one-time revenues during fiscal 1992. The
absence of those revenues in fiscal 1993 contributed to the decline in tax
revenues shown for fiscal 1993.

Eliminating the budget deficit carried into fiscal 1992 from fiscal 1991 and
providing revenues for fiscal 1992 budgeted expenditures required tax revisions
that are estimated to have increased receipts for the 1992 fiscal year by over
$2.7 billion. Total revenues for the fiscal year were $14,516.8 million, a
$2,654.5 million increase over cash revenues during fiscal 1991. Originally
based on forecasts for an economic recovery, the budget revenue estimates were
revised downward during the fiscal year to reflect continued recessionary
economic activity. Largely due to the tax revisions enacted for the budget,
corporate tax receipts totaled $3,761.2 million, up from $2,656.3 million in
fiscal 1991, sales tax receipts increased by $302.0 million to $4,499.7 million,
and personal income tax receipts totaled $4,807.4 million, an increase of
$1,443.8 million over receipts in fiscal 1991. As a result of the lowered
revenue estimate during the fiscal year, increased emphasis was placed on
restraining expenditure growth and reducing expenditure levels. A number of cost
reductions were implemented during the fiscal year that contributed to $296.8
million of appropriation lapses. These appropriation lapses were responsible for
the $8.8 million surplus at fiscal year-end, after accounting for the required
10 percent transfer of the surplus to the Tax Stabilization Reserve Fund.
Spending increases in the fiscal 1992 budget were largely accounted for by
increases for education, social services and corrections programs. Commonwealth
funds for the support of public schools were increased by 9.8 percent to provide
a $438.0 million increase to $4.9 billion for fiscal 1992. The fiscal 1992
budget provided additional funds for basic and special education and included
provisions designed to help restrain the annual increase of special education
costs, an area of recent rapid cost increases. Child welfare appropriations
supporting county operated child welfare programs were increased $67.0 million,
more than 31.5 percent over fiscal 1991. Other social service areas such as
medical and cash assistance also received significant funding increases as costs
rose quickly as a result of the economic recession and high inflation rates of
medical care costs. The costs of corrections programs, reflecting the marked
increase in prisoner population, increased by 12.0 percent. Economic development
efforts, largely funded from bond proceeds in fiscal 1991, were continued with
General Fund appropriations for fiscal 1992. The budget included the use of
several Medicaid pooled financing transactions. These pooling transactions
replaced $135.0 million of Commonwealth funds, allowing total spending under the
budget to increase by an equal amount.

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The 1993 fiscal year closed with revenues higher than anticipated and
expenditures about as projected, resulting in an ending unappropriated balance
surplus (prior to the 10 percent transfer to the Tax Stabilization Reserve Fund)
of $242.3 million, slightly higher than estimated in May 1993. Cash revenues
were $41.5 million above the budget estimate and totaled $14.633 billion
representing less than a one percent increase over revenues for the 1992 fiscal
year. A reduction in the personal income tax rate in July 1992 and the one-time
receipt of revenues from retroactive corporate tax increases in fiscal 1992 were
responsible, in part, for the low revenue growth in fiscal 1993. Appropriations
less lapses totaled an estimated $13.870 billion representing a 1.1 percent
increase over those during fiscal 1992. The low growth in spending is a
consequence of a low rate of revenue growth, significant one-time expenses
during fiscal 1992, increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds. By state statute, 10
percent of the budgetary basis unappropriated surplus at the end of a fiscal
year is to be transferred to the Tax Stabilization Reserve Fund. The transfer
for the fiscal 1993 balance is $24.2 million. The remaining unappropriated
surplus of $218.0 million was carried forward into the 1994 fiscal year.

Commonwealth revenues during the 1994 fiscal year totaled $15,210.7 million,
$38.6 million above the fiscal year estimate, and 3.9 percent over commonwealth
revenues during the previous fiscal year. The sales tax was an important
contributor to the higher than estimated revenues. Collections from the sales
tax were $5.124 billion, a 6.1 percent increase from the prior fiscal year and
$81.3 million above estimate. The strength of collections from the sales tax
offset the lower than budgeted performance of the personal income tax which
ended the fiscal year $74.4 million below estimate. The shortfall in the
personal income tax was largely due to shortfalls in income not subject to
withholding such as interest, dividends and other income. Tax refunds in fiscal
1994 were reduced substantially below the $530 million amount provided in fiscal
1993. The higher fiscal 1993 amount and the reduced fiscal 1994 amount occurred
because reserves of approximately $160 million were added to fiscal 1993 tax
refunds to cover potential payments if the Commonwealth lost litigation known as
Philadelphia Suburban Corp. v. Commonwealth. Those reserves were carried into
fiscal 1994 until the litigation was decided in the Commonwealth's favor in
December 1993 and $147.3 million of reserves for tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of all fiscal 1994
appropriation lapses, totaled $14,934.4 million representing a 7.2 percent
increase over fiscal 1993 expenditures. Medical assistance and corrections
spending contributed to the rate of spending growth for the fiscal year. The
Commonwealth maintained an operating balance on a budgetary basis for fiscal
1994 producing a fiscal year ending unappropriated surplus of $335.8 million. By
state statute, ten percent ($33.6 million) of that surplus transferred to the
Tax Stabilization Reserve Fund and the remaining balance will be carried over
into the 1995 fiscal year. The balance in the Tax Stabilization Reserve Fund as
of October 31, 1994 was $63.9 million.

The fiscal 1995 budget was approved by the Governor on June 16, 1994 and
provided for $15,652.9 million of appropriations from commonwealth funds, an
increase of 3.9 percent over appropriations, including supplemental
appropriations, for fiscal 1994. Medical assistance expenditures represent the
largest single increase in the budget ($221 million) representing a nine percent
increase over the prior fiscal year. The budget includes a reform of the
state-funded public assistance program that added certain categories of
eligibility to the program but also limited the availability of such assistance
to other eligible persons. Education subsidies to local school districts were
increased by $132.2 million to continue the increased funding for the poorest
school districts in the state. The budget also includes tax reductions totaling
an estimated $166.4 million. Low income working families will benefit from an
increase to the dependent exemption to $3,000 from $1,500 for the first
dependent and from $1,000 for all additional dependents. A reduction to the
corporate net income tax rate from 12.25 percent to 9.99 percent to be phased in
over a period of four years was enacted. A net operating loss provision has been
added to the corporate net income tax and will be phased in over three years
with an annual cap on losses used to offset profits of $500,000. Several other
tax changes to the sales tax, the inheritance tax and the capital stock and
franchise tax were also enacted. Revenue collections through October 1994 have
been above the budget estimate. Total General Fund commonwealth revenues are
$94.9 million (2.1 percent) above the estimate for that period led by $52.5
million (2.8 percent) of above estimate collections of sales tax receipts and
$34.3 million (5.1 percent) of collections from various corporate taxes. The
fiscal 1995 budget projects a $4 million fiscal year-end

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unappropriated surplus based on estimates for fiscal 1994 and the adopted
budget. No assumption as to appropriation lapses in fiscal 1995 has been made.

All outstanding general obligation bonds of the Commonwealth are rated AA- by
Standard & Poor's Ratings Group ("S&P") and A1 by Moody's Investors Service,
Inc. ("Moody's"). The City of Philadelphia's long-term obligations supported by
payments from the City's General Fund are rated Baa by Moody's and BB by S&P.
Any explanation concerning the significance of such ratings must be obtained
from the rating agencies. There is no assurance that any ratings will continue
for any period of time or that they will not be revised or withdrawn.

According to the Official Statement dated November 24, 1994 describing General
Obligation Bonds, Third Series of 1994 and Refunding Series of 1994 of the
Commonwealth of Pennsylvania, the Office of Attorney General and the Office of
General Counsel have reviewed the status of pending litigation against the
Commonwealth, its officers and employees, and have identified the following
cases as ones where an adverse decision may have a material effect on
governmental operations of the Commonwealth and consequently, the Commonwealth's
ability to pay debt service on its obligations. Under Act No. 1978-152 approved
September 28, 1978, as amended, the General Assembly approved a limited waiver
of sovereign immunity. Damages for any loss are limited to $250,000 for each
person and $1,000,000 for each accident. The Supreme Court of Pennsylvania held
that this limitation is constitutional. Approximately 3,500 suits against the
Commonwealth remain open. Tort claim payments for the departments and agencies,
other than the Department of Transportation, are paid from departmental and
agency operating and program appropriations. Tort claim payments for the
Department of Transportation are paid from an appropriation from the Motor
License Fund. The Motor License Fund tort claim appropriation for fiscal 1995 is
$27 million.

Baby Neal v. Commonwealth, et al.

In April of 1990, the American Civil Liberties Union (the "ACLU") and various
named plaintiffs filed a lawsuit against the Commonwealth in federal court
seeking an order that would require the Commonwealth to provide additional
funding for child welfare services. No figures for the amount of funding sought
are available. A similar lawsuit filed in the Commonwealth Court, captioned as
the City of Philadelphia, Hon. Wilson Goode, et al. v. Commonwealth of
Pennsylvania, Hon. Robert P. Casey, et al., was resolved through a court
approved settlement that provides, inter alia, for more Commonwealth funding for
these services for fiscal year 1991 as well as a commitment to pay to counties
$30 million over five years. The Commonwealth then sought dismissal of the
federal action based on, among other things, the settlement of the Commonwealth
Court case. In January of 1992, the U.S. District Court, per Judge Kelly, denied
the ACLU's motion for class certification and held that the "next friends"
seeking to represent the interests of the 16 minor plaintiffs in the case were
inadequate representatives. The Commonwealth filed a motion for summary judgment
on most of the counts in the ACLU's complaint on the basis of, among other
things, Suter v. Artist M. After the motion for summary judgment was filed, the
ACLU filed a renewed motion to certify sub-classes. The district court has since
denied the ACLU's motion for class certification. The parties have stipulated to
a judgment against the plaintiffs in order for plaintiffs to appeal the denial
of class certification to the Third Circuit.

County of Allegheny v. Commonwealth of Pennsylvania

On December 7, 1987, the Supreme Court of Pennsylvania held in County of
Allegheny v. Commonwealth of Pennsylvania, that the statutory scheme for county
funding of the judicial system is in conflict with the Pennsylvania
Constitution. However, the Supreme Court of Pennsylvania stayed its judgment to
afford the General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the prior system of
county funding shall remain in place until this is done. Allegheny County, on
February 12, 1991, filed a motion in the Supreme Court of Pennsylvania to lift
the stay and enforce the judgment. The Supreme Court subsequently denied the
motion. On February 14, 1991, the Pennsylvania State Association of County
Commissioners and the Counties of Blair, Bucks, Erie, Huntington and Perry filed
an action in the Commonwealth Court of Pennsylvania for declaratory judgment
requesting an order that the Commonwealth be required to provide funds for the
operation of the courts of common pleas in accordance with the County of
Allegheny decision. These parties also requested the Supreme Court of
Pennsylvania to assume plenary jurisdiction over their case. The Supreme Court
of Pennsylvania refused to do so, and these parties have withdrawn the
Commonwealth Court action. On October 5, 1992, the Pennsylvania State

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Association of County Commissioners, along with Allegheny, Beaver, Clarion,
Forest, Tioga and Washington counties, filed in the Supreme Court of
Pennsylvania a motion to enforce judgment seeking an order that would direct the
Commonwealth to restore funding for local courts and district justices to levels
existing in 1987. By order dated May 26, 1993, the motion to enforce judgment
was denied. On December 7, 1992, the State Association of County Commissioners
filed a new action in mandamus seeking to compel the Commonwealth to comply with
the decision in County of Allegheny. The Commonwealth has filed a response in
opposition to the new action. The counties have requested a continuance until
next Spring. The General Assembly has yet to consider legislation implementing
the Supreme Court of Pennsylvania's judgment.

Fidelity Bank v. Commonwealth

In Dale National Bank v. Commonwealth the Pennsylvania Supreme Court held that
it was unconstitutional for the Commonwealth in calculating the bank shares tax,
to include in the taxable base the value represented by federal obligations. In
response, in 1983, the Legislature enacted the single excise tax which was
levied on banking firms to recover refunds owed to each bank as a result of
Dale. First National Bank of Fredericksburg challenged the constitutionality of
the single excise tax. On February 3, 1989, the Supreme Court in First National
Bank of Fredericksburg v. Commonwealth held that the single excise tax, as
applied to the First National Bank of Fredericksburg and its affiliated banks,
violated the banks' due process rights and separation of powers doctrine. On
July 1, 1989, the Governor signed into law Act 1989-21, the Amended Bank Shares
Tax. This law, which revised the bank shares tax by adjusting the tax base and
increasing the tax rate, provided additional revenues to the Commonwealth during
fiscal year 1989-1990 sufficient to meet the Fredericksburg refund liabilities
and to maintain a projected positive budget balance for the General Fund. Single
excise tax refunds were given in the form of credits against the 1989 Amended
Bank Shares Tax. After the first installment of the Amended Bank Shares Tax
became due in October 30, 1989, First National Bank of Fredericksburg, Fidelity
Bank and Equibank filed actions against the Commonwealth contesting the
constitutionality of the tax. First National Bank of Fredericksburg and Equibank
have since withdrawn their cases. On July 7, 1994, the Commonwealth Court en
banc ruled that the 1989 Amended Bank Shares Tax is constitutional. The Court
also ruled that the New Bank Shares Credit Law, passed by the General Assembly
in 1989 to provide a credit against the 1989 Amended Bank Shares Tax for banks
chartered after January 1, 1979, violates the Uniformity Clause of the
Pennsylvania Constitution. The ruling striking down the New Bank Tax Credit Law
results in an expected revenue gain of $11.6 million dollars for the
Commonwealth. Fidelity Bank has appealed to the Pennsylvania Supreme Court, and
the Commonwealth and a group of intervenor new banks have cross-appealed with
respect to the unconstitutionality of the New Bank Tax Credit Law.

Pennsylvania Association of Rural and Small Schools (PARSS) v. Casey

In January of 1991, an association of rural and small schools, several
individual school districts, and a group of parents and students instituted
litigation against Governor Robert P. Casey and Secretary of Education Donald M.
Carroll, Jr. to challenge the constitutionality of the Commonwealth's system for
funding local school districts. The litigation consists of two parallel cases,
one in the Commonwealth Court of Pennsylvania, and one in the United States
District Court for the Middle District of Pennsylvania. The federal court case
has been indefinitely stayed, pending resolution of the state court case. The
state court case is in the pre-trial discovery stage. The trial has not yet been
scheduled.

Austin v. Department of Corrections, et al.

In November 1990, the American Civil Liberties Union ("ACLU") brought a class
action lawsuit on behalf of the inmate populations in thirteen Commonwealth
correctional institutions. The lawsuit challenges the conditions of confinement
at each institution and includes specific allegations of over-crowding,
deficiencies in medical and mental health services, inadequate environmental
conditions, disparate treatment of HIV positive prisoners and other assorted
claims. No damages are sought. The ACLU is seeking injunctive relief which would
modify conditions, change practices and procedures and increase the number of
staff deployment. The Department of Corrections has been ordered to implement a
new policy regarding detection and prevention of tuberculosis. If injunctive
relief is granted, the cost to the Commonwealth may be substantial.

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The Commonwealth may incur significant capital and personnel costs after this
fiscal year ranging in the millions of dollars. The court recessed on January 3,
1994, prompted by settlement negotiations between the parties. On August 1,
1994, the parties submitted a proposed settlement agreement to the court for its
review. On August 10, 1994, copies of this agreement were made available to
members of the class for objection and comment. The court scheduled a conference
on the objections of the class members for November 18, 1994.

Scott v. Snider

In 1991, a consortium of public interest law firms filed a class action suit
in the U.S. District Court for the Eastern District of Pennsylvania, Scott v.
Snider, against various Commonwealth officers, alleging that the Commonwealth of
Pennsylvania had failed to comply with a 1989 federal mandate to provide and pay
for early and periodic screening, diagnostic, and treatment services for all
Medicaid-eligible children under the age of 21. If the federal court were to
grant all of the relief that plaintiffs are seeking, the Commonwealth would be
obligated, among other things, (1) to substantially revise the methods by which
it presently identifies children in need of treatment and (2) to expand the
scope of services and treatment presently provided to such children. In July
1994, the Court denied the plaintiffs' request to proceed as a class action and
dismissed five of the eighteen plaintiff organizations from the case. The
parties have reached a tentative settlement agreement which they have submitted
to the court for approval.

Pennsylvania Medical Society v. Karen F. Snider

The Pennsylvania Medical Society sued the Commonwealth for payment of the full
co-pay and deductible for outpatient services provided to medical assistance
clients who are also eligible for Medicare. The federal Medicare program has an
established fee schedule for services under Part B of which Medicare pays 80
percent and the patient is responsible for the 20 percent co-pay. For medical
assistance eligible clients the medical assistance program pays the 20 percent
patient co-pay amount up to the maximum fee for service set under the
Commonwealth's medical assistance program. Consequently, when the 80 percent
portion paid by Medicare equals or exceeds the state established medical
assistance fee for that service, the Commonwealth has not paid the remaining 20
percent portion of the fee. It is the position of the Commonwealth that the
medical assistance fee has precedence and the service provider should not be
paid more than the Commonwealth's fee schedule. The Commonwealth received a
favorable decision in the United States District Court but the Pennsylvania
Medical Society appealed that decision and won a reversal in the United States
Third Circuit Court. No detailed cost estimates have been completed, but
estimates made earlier have estimated the cost to the Commonwealth of
approximately $50 million per year. An appeal is under consideration.

INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge the
Fund's portfolio against market value changes, the Fund may buy or sell
financial futures contracts and related options, such as municipal bond index
futures contracts and the related put or call options contracts on such index
futures. A tax exempt bond index fluctuates with changes in the market values of
the tax exempt bonds included in the index. An index future is an agreement
pursuant to which two parties agree to receive or deliver at settlement an
amount of cash equal to a specified dollar amount multiplied by the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the future was originally written. A financial
future is an agreement between two parties to buy and sell a security for a set
price on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash rather
than the underlying securities. An example is the Long-Term Municipal Bond
futures contract traded on the Chicago Board of Trade. It is based on the Bond
Buyer's Municipal Bond Index, which represents an adjusted average price of the
forty most recent long-term municipal issues of $50 million or more ($75 million
in the instance of housing issues) rated A or better by either Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Rating Group ("S&P"), maturing in
no less than nineteen years, having a first call in no less than seven nor more
than sixteen years, and callable at par.

The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its

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obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or cover requirements.

The Fund may enter into reverse repurchase agreements with selected commercial
banks or broker-dealers, under which the Fund sells securities and agrees to
repurchase them at an agreed upon time and at an agreed upon price. The
difference between the amount the Fund receives for the securities and the
amount it pays on repurchase is deemed to be a payment of interest by the Fund.
The Fund will maintain, in a segregated account having an aggregate value with
its custodian, cash or other readily marketable portfolio securities having an
aggregate value equal to the amount of such commitment to repurchase, including
accrued interest, until payment is made. Reverse repurchase agreements are
treated as a borrowing by the Fund and will be used by it as a source of funds
on a short-term basis, in an amount not exceeding 5% of the net assets of the
Fund at the time of entering into any such agreement. The Fund will enter into
reverse repurchase agreements only with commercial banks whose deposits are
insured by the Federal Deposit Insurance Corporation and whose assets exceed
$500 million or broker-dealers who are registered with the SEC. In determining
whether to enter into a reverse repurchase agreement with a bank or
broker-dealer, the Fund will take into account the creditworthiness of such
party and will monitor such creditworthiness on an ongoing basis.

STRATEGIC TRANSACTIONS.

The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.

In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.

Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.

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position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.

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

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

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

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

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

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

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

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

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

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

GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a

B-13
<PAGE> 74

specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The sale of a futures contract creates a firm obligation
by the Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.

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

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

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

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

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its

B-14
<PAGE> 75

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

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

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.

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

B-15
<PAGE> 76

to the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.

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

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

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

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

OFFICERS AND TRUSTEES

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

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc. and Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt, Inc.

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

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

B-16
<PAGE> 77

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

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

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

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

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

RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.
Executive Vice President, General Counsel, and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

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

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

B-17
<PAGE> 78

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

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

STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ---------------
* Interested persons of the Fund as defined in the 1940 Act.

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

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

B-18
<PAGE> 79

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
NAME REGISTRANT(2) EXPENSES(3) RETIREMENT(4) PAID TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $3,785 $0 $2,500 $ 62,362
Philip G. Gaughan.............. 3,778 0 2,500 63,250
Donald C. Miller............... 3,774 0 2,500 62,178
Jack A. Nelson................. 3,785 0 2,500 62,362
Jerome L. Robinson............. 3,778 0 2,500 58,475
Wayne W. Whalen................ 2,903 0 2,500 49,875
</TABLE>

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

(2) The Registrant is Van Kampen Merritt Pennsylvania Tax Free Fund (the
"Trust") which currently is comprised of one sub-trust, the Fund. The
amounts shown in this column are accumulated from the Aggregate
Compensation of the Fund during its last completed fiscal year prior to
the date of this Statement of Additional Information. Beginning in October
1994 each Trustee, except Messrs. Gaughan and Whalen, began deferring his
entire aggregate compensation paid by the Fund. The total combined amount
of deferred compensation (including interest) accrued with respect to each
Trustee as of December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr.
Miller $14,553; Mr. Nelson $14,737; and Mr. Robinson $13,725.

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. As of the
end of the Fund's 1994 fiscal year, no amounts had been accrued for
retirement benefits because such amounts were either zero or considered to
be immaterial to the net assets of the Fund at such time. During the
Fund's 1995 fiscal year, the Fund will accrue amounts for retirement
benefits and include an amount, if any, for such Fund's 1994 fiscal year.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund, retires at or after attaining the age of 60 and the annual retainer
in the year prior to the Trustee's retirement if $2,500. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.

(5) The Fund Complex consists of 20 mutual funds advised by the Adviser. The
amounts shown in this column are accumulated from the Aggregate
Compensation of each of these 20 mutual funds in the Fund Complex during
calendar year 1994. The Adviser also serves as investment adviser for
other mutual funds and closed-end investment companies; however, with the
exception of Messrs. Merritt, McDonnell and Whalen, such mutual funds and
closed-end investment companies do not have the same trustees as the Fund
Complex. Combining the Fund Complex with other mutual funds and investment
companies advised by the Adviser, Mr. Whalen received Total Compensation
of $161,850.

As of April 13, 1995, the trustees and officers as a group own less than 1% of
the shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

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

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: PaineWebber For the Benefit of Wise
Business Forms Inc., Bonnie Brook Industrial Park, P.O. Box 1666, Butler, PA
16003-1666, 16%; Donaldson Lufkin Jenrette Securities Corporation Inc.,

B-19
<PAGE> 80

P.O. Box 2052, Jersey City, NJ 07303-2052, 7%; and Donald Lufkin Jenrette
Securities Corporation Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, 5%.

CUSTODIAN

State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.

LEGAL COUNSEL AND INDEPENDENT AUDITORS

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois. Saul, Ewing, Remick & Saul has acted as special counsel to the Fund
for Pennsylvania tax matters and passes on the legality of the Fund's shares.

The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership, C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson,
each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition,
certain officers, directors and employees of Van Kampen American Capital, Inc.
own, in the aggregate, not more than 6% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 10% of the common stock of VK/AC Holding, Inc.

The investment advisory agreement dated February 17, 1993, and approved by
shareholders of the Fund at a meeting held on January 14, 1993, between the
Adviser and the Fund provides that the Adviser will supply investment research
and portfolio management, including the selection of securities for the Fund to
purchase. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as officers of the Fund and trustees of the Trust if duly elected to such
positions.

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

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $832,111, $448,065 and $187,410, respectively.

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<PAGE> 81

OTHER AGREEMENTS

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

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $8,333, $5,580 and $4,525, respectively, representing
the Adviser's cost of providing accounting services.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee paid to the Transfer Agent.
Payment by the Fund for such services is made on cost basis for the employment
of the personnel and the equipment necessary to render the support services. The
Fund, and the other Van Kampen Merritt mutual funds distributed by the
Distributor, share such costs proportionately among themselves based upon their
respective net asset values.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $117,234, $78,180 and $53,023, respectively,
representing the Distributor's cost of providing certain support services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. Payment by the Fund for such services is
made on a cost basis for the salary and salary related benefits, including but
not limited to bonuses, group insurances and other regular wages for the
employment of personnel, as well as overhead and the expenses related to the
office space and the equipment necessary to render the legal services. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor ,
share one half (50%) of such costs equally. The remaining one half (50%) of such
costs are allocated to specific funds based on specific time allocations, or in
the event services are attributable only to types of funds (i.e. closed-end or
open-end), the relative amount of time spent on each type of fund and then
further allocated between funds of that type based upon their respective net
asset values.

For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $14,500, $15,000 and $4,300, respectively,
representing Van Kampen American Capital, Inc.'s cost of providing legal
services.

PORTFOLIO TRANSACTIONS

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the investment
adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser and still must be analyzed and reviewed
by its staff, the receipt of research information is not expected to materially
reduce its expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research

B-21
<PAGE> 82

services. This will be done, however, only if, in the opinion of the Adviser,
the amount of additional commission or increased cost is reasonable in relation
to the value of such services.

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

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

The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commission paid to the Distributor and other affiliates of the
Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.

TAX STATUS OF THE FUND

The Fund will be treated as a separate corporation for income tax purposes.
The Fund may be subject to tax if it fails to distribute net capital gains, or
if its annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.

The table below illustrates approximate equivalent taxable and tax-free yields
at the 1994 federal individual income tax rates in effect on the date of this
Statement of Additional Information, including the 36% and 39.6% rates enacted
in August 1993 as part of the Revenue Reconciliation Act of 1993.

The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.57% taxable yield at
current federal income tax rates to receive the same benefit.

The table does not reflect the effect of the exemption of the Fund from local
personal property taxes and from the Philadelphia School District Investment Net
Income Tax; accordingly, residents of Pennsylvania subject to such taxes would
need a higher taxable equivalent estimated current return than those shown to
equal the tax-exempt estimated current return of the Fund.

1994 FEDERAL AND PENNSYLVANIA STATE TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX ----------------------------------------------------------------------
RETURN RETURN BRACKET 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- ---------------- ---------------- ------- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-22,800 $ 0-38,000 17.40% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47%
22,800-55,100 38,000-91,900 30.00% 4.29 5.00 5.71 6.43 7.14 7.86 8.57 9.29 10.00
55,100-115,000 91,900-140,000 32.90% 4.47 5.22 5.96 6.71 7.45 8.20 8.94 9.69 10.43
115,000-250,000 140,000-250,000 37.80% 4.62 5.63 6.43 7.23 8.04 8.84 9.65 10.45 11.25
Over 250,000 Over 250,000 41.30% 5.11 5.98 6.81 7.67 8.52 9.37 10.22 11.07 11.93

</TABLE>

B-22
<PAGE> 83

THE DISTRIBUTOR

Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.

The Fund has adopted a distribution and services plan (the "Distribution
Plan") with respect to each class of its shares pursuant to Rule 12b-1 under the
1940 Act. The Fund also has adopted a service plan (the "Service Plan") with
respect to each class of its shares. The Distribution Plan and the Service Plan
sometimes are referred to herein collectively as the Plans. The Plans provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of its shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of such class, respectively. The Plans are being
implemented through an agreement (the "Distribution and Service Agreement") with
the Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and banks who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and banks that have entered into
sub-agreements with the Distributor and sell shares of the Fund are referred to
herein as "financial intermediaries."

Under the Distribution and Service Agreement and the sub-agreements with
financial intermediaries, financial intermediaries that sold shares prior to
July 1, 1987, or prior to the beginning of the calendar quarter in which the
sub-agreement between the Fund and such financial intermediary was approved by
the Fund's Board of Trustees (an "Implementation Date") are not eligible to
receive compensation pursuant to such Distribution and Service Agreement and/or
sub-agreements. To the extent that there remain outstanding shares of the Fund
that were purchased prior to all Implementation Dates, the percentage of the
total average daily net asset value of a class of shares that may be utilized
pursuant to the Distribution and Service Agreement will be less than the maximum
percentage amount permissible with respect to such class of shares under the
Distribution and Service Agreement.

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

B-23
<PAGE> 84

For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $645,671, $346,761 and $24,693 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $532,238 and $86,374 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended December 31, 1994,
the Fund has reimbursed the Distributor $53,718 and $5,711 for advertising
expenses, and $26,899 and $13,434 for compensation of the Distributor's sales
personnel for the Class A Shares and Class B Shares, respectively.

PERFORMANCE INFORMATION

CLASS A SHARES

The average total return including payment of maximum sales charge with
respect to the Class A Shares for (i) the one year period ending December 31,
1994 was (10.10%); (ii) the 5 year period ending December 31, 1994 was 6.08%;
and (iii) the approximately 7 year, 8 month period from May 1, 1987 (the
commencement of investment operations of the Fund) through December 31, 1994 was
7.92%.

The Fund's yield for the 30 day period ending December 30, 1994 (calculated in
the manner described in the Prospectus under the heading "Fund Performance") was
5.73%. The Fund's tax-equivalent yield for the 30 day period ending December 30,
1994 (calculated in the manner described in the Prospectus under the heading
"Fund Performance" and assuming a 37.8% tax rate) was 9.21%. The Fund's current
distribution rate for the month ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.64%.

The Class A Share's cumulative non-standardized total return, including
payment of the maximum sales charge, from its inception to December 31, 1994 (as
calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 79.44%.

The Class A Shares cumulative non-standardized total return, excluding payment
of any sales charge, was 88.24%.

CLASS B SHARES

The average annual total return including payment of the CDSC with respect to
the Class B Shares for (i) the one year period ended December 31, 1994 was
(9.95%) and (ii) the approximately 1 year, 8 month period from May 1, 1993 (the
commencement of the sale of Class B Shares) through December 31, 1994 was
(2.09%).

The Class B Share's yield for the 30 day period ending December 30, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.29%. The Class B Share's tax-equivalent yield for the 30 day
period ending December 30, 1994 (calculated in the manner described in the
Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 8.50%. The Class B Share's current distribution rate for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.14%.

The Class B Shares cumulative non-standardized total return including payment
of the CDSC from the commencement of the sale of Class B Shares to December 31,
1994 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was (3.46%).

The Class B Shares cumulative non-standardized total return excluding payment
of the CDSC from the commencement of the sale of Class B Shares to December 31,
1994 was (0.01%).

CLASS C SHARES

The average total annual return including payment of the CDSC with respect to
the Class C Shares for (i) the one year period ended December 31, 1994 was
(7.23%) and (ii) the approximately 1 year, 5 month period from August 13, 1993
(the commencement of the sale of Class C Shares) through December 31, 1994 was
(2.52%).

The Class C Share's yield for the 30 day period ending December 30, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.29%. The Class C Share's tax-equivalent yield for the 30 day
period ending December 30, 1994 (calculated in the manner described in the

B-24
<PAGE> 85

Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 8.50%. The Class C Share's current distribution rate for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.14%.

The Class C Share's cumulative non-standardized total return, including
payment of the CDSC from the commencement of the sale of Class C Shares to
December 31, 1994 (as calculated in the manner described in the Prospectus under
the heading "Fund Performance") was (3.55%).

The Class C Shares cumulative non-standardized total return excluding payment
of the CDSC from the commencement of the sale of Class C Shares to December 31,
1994 was (3.55%).

B-25
<PAGE> 86

Van Kampen Merritt Pennsylvania Tax Free Income Fund

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

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

We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1994, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial state-
ments and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence
with the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Pennsylvania Tax Free Income Fund as of December 31, 1994, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
January 31, 1995

B-26
<PAGE> 87

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------------
Municipal Bonds
Pennsylvania 96.5%
<S> <C> <C> <C> <C> <C> <C>
$ 3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl Arpt Ser B
(FSA Insd) ...................................................... AAA Aaa 6.625% 1/01/22 $ 3,393,215
500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl Arpt
Ser C (MBIA Insd) ............................................... AAA Aaa 8.250 1/01/16 537,865
1,000 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl Arpt
Ser C (FSA Insd) ................................................ AAA Aaa 5.625 1/01/23 834,290
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec <F4> .................... AA A1 0/8.625 2/15/04 1,484,340
265 Allegheny Cnty, PA Hosp Dev Auth Rev ............................ A+ A1 7.375 4/01/15 269,802
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent Presbyterian
Univ Ser A (MBIA Insd) .......................................... AAA Aaa 6.000 11/01/12 2,337,625
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent Presbyterian
Univ Ser A (MBIA Insd) .......................................... AAA Aaa 6.250 11/01/23 2,350,850
1,000 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev Presbyterian
Med Cent Rfdg ................................................... AAA NR 6.750 2/01/26 949,080
2,500 Allegheny Cnty, PA Indl Dev Auth Rev Environmental Impt
Ser A Rfdg ...................................................... BB+ Baa3 6.700 12/01/20 2,267,400
4,240 Allegheny Cnty, PA Residential Fin Auth Mtg Rev 1983 Ser B ...... AA- NR * 10/01/15 475,686
2,000 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
Single Family Ser Z (GNMA Collateralized) ....................... NR Aaa 6.875 5/01/26 1,980,680
2,380 Allegheny Cnty, PA San Auth Swr Rev (FGIC Insd) ................. AAA Aaa * 12/01/10 846,661
1,365 Allegheny Cnty, PA San Auth Swr Rev (FGIC Insd) ................. AAA Aaa * 12/01/11 454,313
2,350 Allegheny Cnty, PA San Auth Swr Rev (FGIC Insd) ................. AAA Aaa * 12/01/13 681,735
2,835 Allegheny Cnty, PA San Auth Swr Rev (FGIC Insd) ................. AAA Aaa * 12/01/14 767,406
2,500 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser A Rfdg ... BBB NR 6.750 11/15/14 2,177,850
2,060 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser B ........ BBB NR 6.750 11/15/15 1,787,400
1,000 Antrim Twp, PA Muni Auth Gtd Swr Rev (AMBAC Insd) ............... AAA Aaa 5.800 5/01/20 885,330
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver, PA Inc
Ser A (AMBAC Insd) .............................................. AAA Aaa 6.250 7/01/22 1,875,700
1,000 Beaver Cnty, PA Indl Dev Auth Environmental Impt Rev PA
Pwr Co Proj A Rfdg (FSA Insd) ................................... AAA Aaa 5.400 10/01/13 867,030
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Ohio Edison
Proj Ser A Rfdg ................................................. BB+ Baa3 7.750 9/01/24 4,531,725
1,940 Bedford, PA Area Sch Dist (MBIA Insd) ........................... AAA Aaa 5.500 4/15/17 1,666,285
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd) ....................... AAA Aaa 8.875 11/10/20 6,390,000
3,300 Berks Cnty, PA Muni Auth College Rev Albright College
(Cap Guar Insd) ................................................. AAA Aaa 5.250 10/01/13 2,796,090
2,000 Berks Cnty, PA Muni Auth Rev Highlands at Wyomissing Proj B ..... A+ A1 6.875 10/01/17 1,980,420

</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 88

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- --------------------------------------------------------------------
Pennsylvania (Continued)
<S> <C> <C> <C> <C> <C> <C>
$ 5,000 Berks Cnty, PA Second Ser (FGIC Insd) ................................ AAA Aaa * % 5/15/18 $ 1,083,750
1,500 Berks Cnty, PA Solid Waste Auth Cnty Gtd Rev (FGIC Insd) ............. AAA Aaa 6.000 4/01/17 1,387,380
2,600 Bristol Twp, PA Sch Dist Ser A (MBIA Insd) ........................... AAA Aaa 5.250 2/15/12 2,242,864
500 Bucks Cnty, PA Wtr & Swr Auth Rev Neshaminy Interceptor
Sys (Prerefunded @ 12/01/98) (FGIC Insd) ............................. AAA Aaa 7.500 12/01/13 535,885
1,650 Butler Cnty, PA Indl Dev Auth First Mtg Rev Sherwood Oaks Proj
Ser A Rfdg (Crossover Rfdg @ 06/01/96) <F3> .......................... A- NR 8.750 6/01/16 1,753,851
3,000 Butler Cnty, PA Indl Dev Auth Pollutn Ctl Rev Witco Corp Proj Rfdg ... A A3 5.850 12/01/23 2,484,990
1,000 Cambria Cnty, PA Hosp Dev Auth Hosp Rev Conemaugh Vly Mem
Hosp Ser B Rfdg (Prerefunded @ 07/01/98) ............................. BBB+ Baa1 8.875 7/01/18 1,124,100
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem
Steel Corp Proj Rfdg ................................................. NR NR 7.500 9/01/15 966,300
1,000 Cambria Cnty, PA Indl Dev Auth Res Recovery Rev Cambria
Cogen Proj Ser F ..................................................... A+ A1 7.750 9/01/19 1,036,470
1,550 Cambria Cnty, PA Ser A (FGIC Insd) ................................... AAA Aaa 6.625 8/15/14 1,554,200
835 Canon McMillan Sch Dist PA (AMBAC Insd) .............................. AAA Aaa * 2/01/13 255,811
575 Canon McMillan Sch Dist PA (AMBAC Insd) .............................. AAA Aaa * 2/01/14 164,393
1,000 Canon McMillan Sch Dist PA (AMBAC Insd) .............................. AAA Aaa * 2/01/15 266,710
1,000 Chartiers Vly, PA Indl & Coml Dev Auth First Mtg Rev United
Methodist Home (Prerefunded @10/01/95) <F3> .......................... NR NR 12.000 10/01/15 1,081,060
90 Chester Cnty, PA Hosp Auth Rev Brandywine Hosp ....................... A- NR 7.000 7/01/10 82,680
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd) .......................... AAA Aaa * 6/01/01 524,309
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd) .......................... AAA Aaa * 6/01/02 556,325
500 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev First Mtg
Kmart Corp Ser A Rfdg ................................................ BBB+ NR 7.200 7/01/07 504,095
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg Carlisle
Hosp & Hlth .......................................................... BBB- Baa 6.800 11/15/23 1,938,851
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp Crozer Chester
Mem Hosp ............................................................. BBB+ Baa1 6.000 12/15/20 1,587,840
3,000 Delaware Cnty, PA Auth Hosp Rev Crozer Chester Med Cent
(MBIA Insd) .......................................................... AAA Aaa 5.300 12/15/20 2,445,420
2,000 Delaware Cnty, PA Auth Hosp Rev Crozer Chester Med Cent
Ser A, B & C (Prerefunded @ 12/15/00) (MBIA Insd) .................... AAA Aaa 7.500 12/15/20 2,215,760
3,000 Delaware Cnty, PA Auth Hosp Rev Riddle Mem Hosp ...................... A- NR 6.500 1/01/22 2,661,030
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj ............................ NR Baa 8.350 6/01/15 2,645,849
2,500 Delaware Cnty, PA Auth Univ Rev Villanova Univ (MBIA Insd) ........... AAA Aaa 5.625 8/01/13 2,234,850
1,900 Delaware Cnty, PA Rfdg ............................................... AA Aa 6.000 11/15/22 1,739,602

</TABLE>

See Notes to Financial Statements

B-28
<PAGE> 89

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------------
Pennsylvania (Continued)
<S> <C> <C> <C> <C> <C> <C>
$ 2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth Cent
Proj Ser A (MBIA Insd) .......................................... AAA Aaa 6.375% 7/01/22 $ 1,906,780
2,745 Erie, PA Higher Edl Bldg Auth Univ Rev Gannon Univ Proj
Ser D Rfdg ...................................................... BBB Baa 5.850 6/01/15 2,396,440
105 Erie, PA Pkg Auth Pkg Fac Rev Bonds Rfdg
(Prerefunded @ 09/01/97) (AMBAC Insd) ........................... AAA Aaa 6.875 9/01/13 109,187
2,130 Erie, PA Sch Dist Ser C (Cap Guar Insd) ......................... AAA Aaa * 9/01/09 829,997
1,000 Fayette Cnty, PA Hosp Auth Hosp Rev Uniontown Hosp Proj
(Crossover Rfdg @ 07/01/95) ..................................... BBB Baa 9.750 7/01/15 1,045,000
2,210 Greene Cnty, PA Unlimited Tax (Prerefunded @ 08/01/00) .......... NR Aaa 8.500 8/01/10 2,482,117
1,045 Harrisburg, PA Wtr & Swr Auth Swr Rev Second Ser
Rfdg (FGIC Insd) ................................................ AAA Aaa * 10/15/08 434,887
1,840 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/11 617,522
1,840 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/12 576,638
1,840 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/13 538,274
1,840 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/14 502,265
1,000 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/15 254,610
1,840 Hollidaysburg, PA Area Sch Dist (MBIA Insd) ..................... AAA Aaa * 10/15/16 436,798
1,880 Johnsonburg, PA Area Sch Dist Elk Cnty (AMBAC Insd) ............. AAA Aaa 5.100 5/15/18 1,513,908
1,260 Lackawanna Cnty, PA Multi-Purp Stadium Auth Stadium Rev Gtd
(Prerefunded @ 08/15/98) ........................................ BBB Baa 8.625 8/15/07 1,420,511
3,000 Lancaster Cnty, PA Hosp Auth Rev Hlth Cent Masonic Homes
Proj Rfdg (AMBAC Insd) .......................................... AAA Aaa 5.000 11/15/20 2,334,330
1,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res Recovery
Sys Rev Ser A ................................................... BBB A1 8.375 12/15/04 1,002,300
2,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res Recovery
Sys Rev Ser A <F3> .............................................. BBB A1 8.500 12/15/10 2,039,880
400 Lehigh Cnty, PA Genl Purp Auth Rev Horizon Hlth Sys Inc
Ser B Rfdg (Prerefunded @ 07/01/97) ............................. NR NR 8.250 7/01/13 429,660
4,100 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg Hosp Ser A Rfdg ... NR Baa1 8.100 7/15/10 4,212,381
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA Pwr & Lt Co
Proj Ser A Rfdg (MBIA Insd) ..................................... AAA Aaa 6.400 11/01/21 967,570
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine Providence
Sisters Ser A ................................................... A- NR 7.750 7/01/16 2,577,175
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine Providence
Sisters Ser A ................................................... A- NR 6.500 7/01/22 1,795,080
400 Lycoming Cnty, PA Auth Hosp Lease Rev Williamsport Hosp
Ser B (AMBAC Insd) .............................................. AAA Aaa 7.000 11/01/15 407,016
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00) ..................................... BBB- NR 8.875 10/01/20 1,156,440

</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 90

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------------
Pennsylvania (Continued)
<S> <C> <C> <C> <C> <C> <C>
$ 750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg .............................................. NR Ba2 8.650% 6/01/11 $ 796,328
400 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev Bryn Mawr
Hosp Proj (Prerefunded @ 12/01/97) ............................... AAA Aaa 9.375 12/01/19 448,536
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev Suburban
Genl Hosp Bonds (AMBAC Insd) ..................................... AAA Aaa 7.250 5/01/16 509,945
420 Montgomery Cnty, PA Higher Edl & Hlth Auth Nursing Home Rev
Delco Sys Svcs Proj A ............................................ NR NR 9.875 11/01/18 427,665
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Philadelphia
Elec Co Ser A Rfdg ............................................... BBB+ Baa2 7.600 4/01/21 2,525,425
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recovery ............... A NR 7.500 1/01/12 3,059,460
1,000 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd) ...................... AAA Aaa 6.875 11/01/19 1,016,470
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd) ...................... AAA Aaa 6.200 11/01/22 1,411,140
1,000 Northampton Cnty, PA Indl Dev Auth Rev Moravian Hall
Square Proj Rfdg ................................................. NR A1 7.450 6/01/14 1,019,760
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn Ctl Bethlehem
Steel Rfdg ....................................................... NR NR 7.550 6/01/17 2,423,750
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne Cnty
Cmnty College (AMBAC Insd) <F2> .................................. AAA Aaa 6.625 8/15/15 992,680
2,399 Oil City, PA Towne Tower Proj .................................... NR NR 6.750 5/01/20 2,204,367
1,465 Penn Hills, PA Ser B Rfdg (AMBAC Insd) ........................... AAA Aaa * 12/01/08 604,737
1,465 Penn Hills, PA Ser B Rfdg (AMBAC Insd) ........................... AAA Aaa * 12/01/09 561,769
1,100 Penn Hills, PA Ser B Rfdg (AMBAC Insd) ........................... AAA Aaa * 12/01/11 366,113
2,000 Pennsylvania Convention Cent Auth Rev Ser A (FGIC Insd) .......... AAA Aaa 6.000 9/01/19 1,848,880
3,800 Pennsylvania Convention Cent Auth Rev Ser A Rfdg ................. BB Ba 6.750 9/01/19 3,457,582
1,000 Pennsylvania Economic Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A ..................................... NR NR 6.600 1/01/19 855,380
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg) .......................... AA Aa 9.315 10/01/23 3,680,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA Collateralized) ... AAA Aaa 6.500 7/01/23 956,390
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser 40 ................ AA Aa 6.900 4/01/25 979,960
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser 42 ................ AA Aa 6.850 4/01/25 2,434,375
850 Pennsylvania Infrastructure Invt Auth Rev Pennvest Subser B ...... AA NR 6.800 9/01/10 865,547
2,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev City Of Philadelphia
Funding Pgm (MBIA Insd) .......................................... AAA Aaa 5.600 6/15/15 1,756,840
1,500 Pennsylvania Intergvtl Coop Auth Spl Tax Rev City of Philadelphia
Funding Pgm (MBIA Insd) .......................................... AAA Aaa 5.625 6/15/23 1,286,055
4,000 Pennsylvania St Ctfs Partn ....................................... AAA Aaa 6.250 5/01/16 3,809,760
1,000 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC Insd) ............... AAA Aaa 5.000 7/01/15 806,260

</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 91

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Pennsylvania (Continued)
<S> <C> <C> <C> <C> <C> <C>
$ 2,000 Pennsylvania St Higher Edl Assistance Agy Student Ln Rev
Rfdg (Inverse Fltg) (AMBAC Insd) ...................................... AAA Aaa 10.534% 9/03/26 $ 1,927,500
2,500 Pennsylvania St Higher Edl Assistance Agy Student Ln Rev Ser B
(Inverse Fltg) (MBIA Insd) ............................................ AAA Aaa 10.341 3/01/20 2,650,000
4,000 Pennsylvania St Higher Edl Assistance Agy Student Ln Rev Ser C
(AMBAC Insd) .......................................................... AAA Aaa 6.400 3/01/22 3,811,960
80 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Drexel
Univ 1st Ser (Prerefunded @ 11/01/95) (MBIA Insd) ..................... AAA Aaa 7.700 5/01/12 83,358
60 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Drexel
Univ 1st Ser (MBIA Insd) .............................................. AAA Aaa 7.700 5/01/12 61,855
105 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Trustees
Univ Ser A ............................................................ AA Aa 6.625 1/01/17 103,034
1,000 Pennsylvania St Higher Edl Fac Auth Rev Med College PA Ser A .......... BBB Baa1 8.375 3/01/11 1,027,060
650 Pennsylvania St Higher Edl Fac Auth Rev Med College PA Ser A .......... BBB Baa1 7.500 3/01/14 629,408
4,000 Pennsylvania St Higher Edl Fac Auth Rev Med College PA Ser A .......... BBB Baa1 7.375 3/01/21 3,785,360
575 Pennsylvania St Tpk Comm Tpk Rev Ser A
(Prerefunded @ 12/01/96) .............................................. AAA Aaa 7.875 12/01/15 613,353
2,500 Pennsylvania St Tpk Comm Tpk Rev Ser P (AMBAC Insd) ................... AAA Aaa 5.750 12/01/12 2,313,000
610 Philadelphia, PA Auth for Indl Dev Rev Baptist Home of Philadelphia ... NR NR 10.000 4/01/02 628,495
250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Albert Einstein Med Cent .............................................. BBB+ A 7.000 10/01/21 238,100
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev Chestnut
Hill Hosp ............................................................. A- A 6.500 11/15/22 2,577,904
4,500 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev Frankford
Hosp Ser A ............................................................ BBB Baa1 6.000 6/01/23 3,639,600
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Friends Hosp .......................................................... BBB Baa 6.200 5/01/11 3,443,720
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev Temple
Univ Hosp Ser A ....................................................... BBB+ Baa1 6.625 11/15/23 3,520,720
1,750 Philadelphia, PA Muni Auth Rev Lease Ser D Rfdg ....................... BB Ba 6.300 7/15/17 1,526,577
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg Lease Cap
Apprec (Cap Guar Insd) ................................................ AAA Aaa * 3/15/08 647,820
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg Lease Cap
Apprec (Cap Guar Insd) ................................................ AAA Aaa * 3/15/11 1,307,175
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg Lease Cap
Apprec (Cap Guar Insd) ................................................ AAA Aaa * 3/15/12 1,228,951
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg Lease Cap
Apprec (Cap Guar Insd) ................................................ AAA Aaa * 3/15/13 1,367,640
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded @ 04/01/00)
(FGIC Insd) ........................................................... AAA Aaa 7.800 4/01/18 2,321,237

</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 92

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------------
Pennsylvania (Continued)
<S> <C> <C> <C> <C> <C> <C>
$ 220 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded @ 04/01/98)
(FGIC Insd) .................................................... AAA Aaa 7.800% 4/01/18 $ 238,473
775 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded @ 07/15/97) ... AAA Aaa 7.875 7/15/17 834,257
1,150 Philadelphia, PA Rfdg (Prerefunded @ 02/15/96) (FGIC Insd) ..... AAA Aaa 8.250 2/15/09 1,211,778
2,210 Philadelphia, PA Wtr & Swr Rev 11th Ser Subser A
(Prerefunded @ 12/01/95) ....................................... AAA Aaa 8.400 12/01/96 2,326,798
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16 .......................... BBB Baa 7.500 8/01/10 1,865,394
5,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (Cap Guar Insd) ....... AAA Aaa 5.500 6/15/14 4,333,150
1,425 Pittsburgh, PA Sch Dist Ser B (AMBAC Insd) ..................... AAA Aaa * 8/01/08 600,823
4,070 Pittsburgh, PA Sch Dist Ser B (AMBAC Insd) ..................... AAA Aaa * 8/01/09 1,594,504
85 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser A .................. A A1 8.750 10/01/19 89,947
1,500 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser C-1 ................ A A1 6.800 10/01/25 1,418,835
960 Pittsburgh, PA Urban Redev Auth Single Family Mtg Rev Ser A .... NR Aaa 8.000 12/01/20 1,003,334
2,000 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev Ser A Rfdg
(FGIC Insd) .................................................... AAA Aaa * 9/01/06 979,860
1,000 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev Ser A Rfdg
(FGIC Insd) .................................................... AAA Aaa * 9/01/07 458,610
1,500 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev Ser A Rfdg
(FGIC Insd) .................................................... AAA Aaa * 9/01/08 643,425
2,645 Ridley Park, PA Hosp Auth Rev Taylor Hosp Ser A ................ BBB Baa 6.125 12/01/20 2,115,656
250 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev Cmnty
Med Cent Proj (MBIA Insd) ...................................... AAA Aaa 7.875 7/01/10 266,308
3,500 Seneca Vly, PA Sch Dist Ser A (FGIC Insd) ...................... AAA Aaa 5.500 7/01/14 3,098,550
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon Regl Hlth Sys
Proj A Rfdg .................................................... BBB+ NR 6.875 12/01/09 2,557,727
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev First Mtg
Kmart Corp Ser A Rfdg .......................................... BBB+ NR 7.200 4/01/07 357,080
1,500 South Fork Muni Auth PA Hosp Rev Lee Hosp Proj Ser A ........... A- NR 5.500 7/01/23 1,160,505
2,180 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist Ser D
(MBIA Insd) <F2> ............................................... AAA Aaa 6.500 2/01/14 2,165,699
2,725 Upper Merion, PA Muni Util Auth Swr Rev Gtd .................... NR Aa 6.000 8/15/16 2,567,686
1,500 Washington Cnty, PA Auth Lease Rev Muni Fac Pool Cap Ser C
Subser C-1D (Prerefunded @ 06/15/00) (AMBAC Insd) .............. AAA Aaa 7.450 12/15/18 1,659,945
190 Washington Cnty, PA Hosp Auth Rev Washington Hosp Proj
(Prerefunded @ 07/01/97) ....................................... NR NR 9.500 7/01/17 209,954
1,000 Wayne Cnty, PA Hosp & Hlth Fac Auth Cnty Gtd Hosp Rev Rfdg
Wayne Mem Hosp (MBIA Insd) ..................................... AAA Aaa 5.375 7/01/12 868,340
1,825 West Middlesex Area Sch Dist PA (MBIA Insd) .................... AAA Aaa 5.400 6/15/23 1,513,126

</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 93

3,465 Westmoreland Cnty, PA Ser G Rfdg (FGIC Insd) ................. AAA Aaa * 12/01/13 1,005,197
-----------
234,480,164
-----------
Puerto Rico 0.1%
45 Puerto Rico Commonwealth (Prerefunded @ 07/01/97) ........... AAA NR 7.125 7/01/02 47,844
205 Puerto Rico Commonwealth Rfdg ............................... A Baa1 7.125 7/01/02 217,031
-----------
264,875
-------

</TABLE>

<TABLE>
<S> <C>
Total Long-Term Investments 96.6%
(Cost $242,135,582) <F1>............................................................................ 234,745,039

Short-Term Investments at Amortized Cost 3.4%...................................................... 8,200,000

Liabilities in Excess of Other Assets 0.0%........................................................ (40,762)
------------
Net Asset 100%..................................................................................... $242,904,277
------------

</TABLE>

*Zero coupon bond

[FN]

<F1> At December 31, 1994, cost for federal income tax purposes is
$242,135,582; the aggregate gross unrealized appreciation is $6,123,831
and the aggregate gross unrealized depreciation is $13,569,923, resulting
in net unrealized depreciation including futures transactions of
$7,446,092.
<F2> Securities purchased on a when issued or delayed delivery basis.
<F3> Assets segregated as collateral for when issued or delayed
delivery purchase commitments and open futures transactions.
<F4> Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.

See Notes to Financial Statements

B-33

<PAGE> 94

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $242,135,582) <F1>....................................... $ 234,745,039
Short-Term Investments <F1>................................................................. 8,200,000
Cash........................................................................................ 31,917
Receivables:
Interest.................................................................................... 3,533,825
Investments Sold............................................................................ 453,731
Fund Shares Sold............................................................................ 278,652
Margin on Futures........................................................................... 93,750
Other....................................................................................... 2,705
---------------
Total Assets................................................................................ 247,339,619
---------------
Liabilities:
Payables:
Investments Purchased....................................................................... 3,128,485
Income Distributions ....................................................................... 460,811
Fund Shares Repurchased..................................................................... 406,433
Investment Advisory Fee <F2>................................................................ 61,720
Accrued Expenses............................................................................ 377,893
---------------
Total Liabilities........................................................................... 4,435,342
---------------
Net Assets.................................................................................. $ 242,904,277
---------------
Net Assets Consist of:
Paid in Surplus <F3>........................................................................ $ 250,292,601
Accumulated Undistributed Net Investment Income............................................. 67,299
Accumulated Net Realized Loss on Investments................................................ (9,531)
Net Unrealized Depreciation on Investments.................................................. (7,446,092)
---------------
Net Assets.................................................................................. $ 242,904,277
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $203,160,479 and
12,633,499 shares of beneficial interest issued and outstanding) <F3>....................... $ 16.08
Maximum sales charge (4.65%* of offering price)............................................. .78
---------------
Maximum offering price to public............................................................ $ 16.86
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $37,570,971 and
2,336,564 shares of beneficial interest issued and outstanding) <F3>........................ $ 16.08
---------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $2,171,025 and
135,023 shares of beneficial interest issued and outstanding) <F3>.......................... $ 16.08
---------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,802 and
112 shares of beneficial interest issued and outstanding) <F3>.............................. $ 16.09
---------------

</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.
Effective January 16, 1995, the maximum sales charge was changed to 4.75%.

See Notes to Financial Statements

B-34
<PAGE> 95

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest........................................................................................................... $ 16,801,029
Amortization of Premium........................................................................................... (92,684)
-----------
Total Income...................................................................................................... 16,708,345
-----------
Expenses:
Investment Advisory Fee <F2>...................................................................................... 1,514,222
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $645,671, $346,761, $24,693 and $4,
respectively)<F6>.............................................................................................. 1,017,129
Shareholder Services ............................................................................................ 312,803
Custody.......................................................................................................... 137,018
Legal <F2>....................................................................................................... 34,448
Trustees Fees and Expenses <F2>.................................................................................. 20,250
Other............................................................................................................ 186,897
-------------
Total Expenses................................................................................................... 3,222,767
Less Fees Waived................................................................................................. 682,111
-------------
Net Expenses..................................................................................................... 2,540,656
-------------
Net Investment Income............................................................................................ $ 14,167,689
-------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................................................. $ 20,562,434
Cost of Securities Sold.......................................................................................... (18,973,309)
-------------
Net Realized Gain on Investments (Including realized gain on futures transactions of $2,649,066)................. 1,589,125
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................................................... 23,742,044
End of the Period (Including unrealized depreciation on open futures transactions of $55,549).................... (7,446,092)
-------------
Net Unrealized Depreciation on Investments During the Period..................................................... (31,188,136)
-------------
Net Realized and Unrealized Loss on Investments.................................................................. $ (29,599,011)
-------------
Net Decrease in Net Assets from Operations....................................................................... $ (15,431,322)
-------------

</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 96

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993

- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 14,167,689 $ 11,574,527
Net Realized Gain/Loss on Investments....................................... 1,589,125 (1,496,437)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (31,188,136) 13,955,476
----------------- -----------------
Change in Net Assets from Operations ....................................... (15,431,322) 24,033,566
----------------- -----------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (12,279,314) (11,117,083)
Class B Shares.............................................................. (1,704,000) (450,424)
Class C Shares.............................................................. (120,704) (22,974)
Class D Shares.............................................................. (86) -0-
----------------- -----------------
Total Distributions......................................................... (14,104,104) (11,590,481)
----------------- -----------------
Net Change in Net Assets from Investment Activities......................... (29,535,426) 12,443,085
----------------- -----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 45,228,180 96,648,072
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 8,518,915 7,020,021
Cost of Shares Repurchased.................................................. (32,797,611) (18,479,645)
----------------- -----------------
Net Change in Net Assets from Capital Transactions.......................... 20,949,484 85,188,448
----------------- -----------------
Total Increase/Decrease in Net Assets....................................... (8,585,942) 97,631,533
Net Assets:
Beginning of the Period..................................................... 251,490,219 153,858,686
----------------- -----------------
End of the Period (Including undistributed net investment income of
$67,299 and $3,714, respectively) .......................................... $ 242,904,277 $ 251,490,219
----------------- -----------------

</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 97

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Pennsylvania Tax Free Income Fund (the "Fund")
was organized as a Pennsylvania trust on January 28, 1987, and is regis-
tered as a non-diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund com-
menced investment operations on May 1, 1987. On May 1, 1993, the
Fund commenced distribution of its Class B shares. The distribution of
the Fund's Class C shares, which were initially introduced as Class D
shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993. The distribution of the Fund's fourth
class of shares, Class D shares, commenced on March 14, 1994.

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

A. Security Valuation-Investments are stated at value using market
quotations or, if such valuations are not available, estimates obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by
the Board of Trustees. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost.

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

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

D. Federal Income Taxes-It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable income,
if any, to its shareholders. Therefore, no provision for federal income taxes is
required.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At December 31, 1994, the Fund had an accumulated capital loss carryforward for
tax purposes of $9,531 which will expire on December 31, 2001. Net realized
gains or losses may differ for financial and tax reporting purposes primarily as
a result of post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.

E. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included in ordinary income for
tax purposes.

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

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------
<S> <C>
First $500 million... .600 of 1%
Over $500 million.... .500 of 1%

</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $140,000 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal and
certain shareholder services to the Fund.

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

B-37
<PAGE> 98

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

The Trust has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.

At December 31, 1994, VKAC owned 100 shares each of Classes B, C and D.

3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $206,707,535,
$41,140,560, $2,442,579 and $1,927 for Classes A, B, C and D, respectively. For
the year ended December 31, 1994, transactions were as follows:

<TABLE>

<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,647,629 $ 28,038,358
Class B....................... 919,103 15,718,097
Class C....................... 85,268 1,469,806
Class D....................... 112 1,919
------------ ----------------
Total Sales................... 2,652,112 $ 45,228,180
------------ ----------------
Dividend Reinvestment:
Class A....................... 444,194 $ 7,432,733
Class B....................... 59,918 998,687
Class C....................... 5,238 87,487
Class D....................... -0- 8
------------ ----------------
Total Dividend Reinvestment... 509,350 $ 8,518,915
------------ ----------------
Repurchases:
Class A....................... (1,733,757) $ (28,705,184)
Class B....................... (177,182) (2,922,282)
Class C....................... (70,025) (1,170,145)
Class D....................... -0- -0-
------------ ----------------
Total Repurchases............. (1,980,964) $ (32,797,611)
------------ ----------------

</TABLE>

At December 31, 1993, paid in surplus aggregated $199,941,628, $27,346,058 and
$2,055,431 for Classes A, B and C, respectively. For the year ended December 31,
1993, transactions were as follows:

Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 3,773,265 $ 66,417,202
Class B....................... 1,541,341 27,465,643
Class C....................... 153,884 2,765,227
------------ ----------------
Total Sales................... 5,468,490 $ 96,648,072
------------ ----------------
Dividend Reinvestment:
Class A....................... 381,133 $ 6,746,665
Class B....................... 14,483 259,718
Class C....................... 760 13,638
------------ ----------------
Total Dividend Reinvestment... 396,376 $ 7,020,021
------------ ----------------
Repurchases:
Class A....................... (983,572) $ (17,376,908)
Class B....................... (21,099) (379,303)
Class C....................... (40,102) (723,434)
------------ ----------------
Total Repurchases............. (1,044,773) $ (18,479,645)
------------ ----------------

</TABLE>

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

Contingent Deferred
Sales Charge

<TABLE>
<CAPTION>
Year of Redemption Class B Class C Class D
- ----------------------------------------------------
<S> <C> <C> <C>
First ................... 4.00% 1.00% 0.75%
Second .................. 3.75% None None
Third ................... 3.50% None None
Fourth .................. 2.50% None None
Fifth ................... 1.50% None None
Sixth ................... 1.00% None None
Seventh and Thereafter .. None None None

</TABLE>

B-38
<PAGE> 99

Van Kampen Merritt Pennsylvania Tax Free Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------

For the year ended December 31, 1994, VKAC, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of
approximately $161,700 and CDSC on the redeemed shares of Classes
B, C and D of approximately $75,800. Sales charges do not represent
expenses of the Fund.

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were
$37,920,892 and $18,973,309, respectively.

5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference
rate or index.

The Fund has a variety of reasons to use derivative instruments,
such as to attempt to protect the Fund against possible changes in the
market value of its portfolio and to manage the portfolio's effective yield,
maturity and duration. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation on invest
ments. Upon disposition, a realized gain or loss is recognized
accordingly.

Summarized below are the specific types of derivative financial
instruments used by the Fund.

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

The fluctuation in market value of the contracts is settled daily
through a cash margin account. Realized gains and losses are recognized
when the contracts are closed or expire.

Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Contracts
- -----------------------------------------------
<S> <C>
Outstanding at December 31, 1993... 0
Futures Opened..................... 1,500
Futures Closed..................... (1,200)
--------
Outstanding at December 31, 1994... 300
--------

</TABLE>

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

<TABLE>
<CAPTION>
Unrealized
Contracts Depreciation
- ----------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Mar 1995 - Sells to Open... 300 $ ($55,549)
--------- -----------

</TABLE>

B. Indexed Securities-These instruments are identified in the port
folio of investments. The price of these securities may be more volatile than
the price of a comparable fixed rate security.

An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.

6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .30% each of Class A and Class D shares and
1.00% each of Class B and Class C shares are accrued daily. Included in these
fees for the year ended December 31, 1994, are payments to VKAC of approximately
$364,500.

B-39