VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUN, 485BPOS, 1997-04-30

VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUN
485BPOS, 1997-04-30

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997

REGISTRATION NOS. 33-11384
811-4983
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 16 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17 [X]
</TABLE>

VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)

One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)

(630) 684-6000

(Registrant's Telephone Number including Area Code)

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

Copies to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.

Skadden, Arps, Slate, Meagher & Flom (Illinois)

333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700

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

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

[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)

[ ] ON (DATE) PURSUANT TO PARAGRAPH (B)

[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)

[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(1)

[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)

[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485

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

DECLARATION PURSUANT TO RULE 24F-2

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940 AND INTENDS TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM
24F-2 FOR ITS FISCAL YEAR ENDING DECEMBER 31, 1997 ON OR ABOUT MARCH 30, 1998.

================================================================================
<PAGE> 2

VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA
TAX FREE INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- -------------------
<S> <C> <C>
PART A

Item 1. Cover Page........................... Cover Page
Item 2. Synopsis............................. PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION
EXPENSES; ANNUAL FUND OPERATING EXPENSES AND
EXAMPLE
Item 3. Condensed Financial
Information........................ SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL
HIGHLIGHTS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 4. General Description of
Registrant......................... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE
AND POLICIES; MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 5. Management of the Fund............... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE;
INVESTMENT ADVISORY SERVICES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and
Other Securities................... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES;
THE DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered...................... SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION
AND SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 8. Redemption or Repurchase............. ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 9. Pending Legal Proceedings............ Not Applicable
</TABLE>

i
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
-------------- -------------------
<S> <C> <C>

PART B

Item 10. Cover Page........................... Cover Page
Item 11. Table of Contents.................... Table of Contents
Item 12. General Information
and History........................ The Fund
Item 13. Investment Objectives
and Policies....................... Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund............... Trustees and Officers
Item 15. Control Persons and Principal Holders
of Securities...................... Shares of the Fund; Trustees and Officers
Item 16. Investment Advisory and
Other Services..................... Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Custodian; Legal Counsel and Independent
Auditors; Investment Advisory and Other Services;
Trustees and Officers; The Distributor; Notes to
Financial Statements
Item 17. Brokerage Allocation................. Portfolio Transactions
Item 18. Capital Stock and
Other Securities................... Shares of the Fund
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered............................ Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status........................... Contained in Prospectus under caption TAX STATUS;
Tax Status of the Fund
Item 21. Underwriters......................... The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance Data..... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements................. Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial
Statements; Trustees and Officers
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

ii
<PAGE> 4

- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND
- ------------------------------------------------------------------------------

Van Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund") is
a non-diversified, open-end management investment company, commonly known as a
"mutual fund." The Fund 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.

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

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

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

A Statement of Additional Information, dated April 30, 1997, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission ("SEC"), a copy of which may be obtained without charge by
calling (800) 421-5666 (or for Telecommunications Device for the Deaf at (800)
421-2833) and is available along with other related Fund materials at the SEC's
internet web site (http://www.sec.gov). This Prospectus, which incorporates by
the entire Statement of Additional Information, concisely sets forth certain
information about the Fund that a prospective shareholder should know before
investing in the Fund. Shareholders should read this Prospectus carefully and
retain it for future reference.

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

VAN KAMPEN AMERICAN CAPITAL SM

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

THIS PROSPECTUS IS DATED APRIL 30, 1997.

<PAGE> 5

(Continued from previous page)

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. The address of the Fund is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, and its telephone number is (800) 421-5666.

2
<PAGE> 6

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Shareholder Transaction Expenses............................ 8
Annual Fund Operating Expenses and Example.................. 9
Financial Highlights........................................ 11
The Fund.................................................... 13
Investment Objective and Policies........................... 13
Municipal Securities........................................ 16
Investment Practices........................................ 22
Investment Advisory Services................................ 24
Alternative Sales Arrangements.............................. 26
Purchase of Shares.......................................... 28
Shareholder Services........................................ 37
Redemption of Shares........................................ 41
Distribution and Service Plans.............................. 44
Distributions from the Fund................................. 46
Tax Status.................................................. 47
Fund Performance............................................ 53
Description of Shares of the Fund........................... 55
Additional Information...................................... 55
Appendix A: Description of Municipal Securities Ratings..... A-1
</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> 7

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

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

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

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide 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.

INVESTMENT POLICIES. 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.

4
<PAGE> 8

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 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

5
<PAGE> 9

of an investment in the Fund. See "Investment Objective 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."

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

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

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

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

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares purchased on
or after June 1, 1996, and any dividend reinvestment plan shares received
thereon automatically

6
<PAGE> 10

convert to Class A Shares eight years after the end of the calendar month in
which the shares were purchased.

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

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

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

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

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

The foregoing is qualified in its entirety by reference to the more detailed

information appearing elsewhere in this Prospectus.

7
<PAGE> 11

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

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

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

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

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

8
<PAGE> 12

- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees (as a percentage of average daily
net assets).................................... 0.60% 0.60% 0.60%
12b-1 fees(1) (as a percentage of average daily
net assets).................................... 0.25% 1.00% 1.00%
Other expenses (as a percentage of average daily
net assets).................................... 0.24% 0.25% 0.25%
Total expenses (as a percentage of average daily
net assets).................................... 1.09% 1.85% 1.85%
</TABLE>

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

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

9
<PAGE> 13

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 1.09% for Class A Shares, 1.85% for
Class B Shares and 1.85% for Class C Shares,
(ii) 5% annual return and (iii) redemption at
the end of each time period
Class A Shares................................ $58 $81 $105 $174
Class B Shares................................ $59 $93 $115 $197*
Class C Shares................................ $29 $58 $100 $217
You would pay the following expenses on the same
$1,000 investment assuming no redemption at
the end of each period:
Class A Shares................................ $58 $81 $105 $174
Class B Shares................................ $19 $58 $100 $197*
Class C Shares................................ $19 $58 $100 $217
</TABLE>

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

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

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years is included
to provide a means for the investor to compare expense levels of funds with
different fee structures over varying investment periods. 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 "Distribution and Service Plans."

10
<PAGE> 14

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

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

<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $17.737 $16.081 $18.062 $16.899 $16.373 $15.716
------- ------- ------- ------- ------- -------
Net Investment Income............. 0.919 0.946 0.965 1.027 1.074 1.081
Net Realized and Unrealized
Gain/Loss on Investments........ (0.263) 1.660 (1.985) 1.164 0.525 0.696
------- ------- ------- ------- ------- -------
Total from Investment Operations... 0.656 2.606 (1.020) 2.191 1.599 1.777
------- ------- ------- ------- ------- -------
Less:
Distributions from and in excess
of Net Investment Income(1)..... 0.903 0.950 0.961 1.028 1.073 1.080
Distributions from Net Realized
Gain on Investments............. -- -- -- -- -- 0.040
------- ------- ------- ------- ------- -------
Total Distributions................ 0.903 0.950 0.961 1.028 1.073 1.120
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $17.490 $17.737 $16.081 $18.062 $16.899 $16.373
======= ======= ======= ======= ======= =======
Total Return(2).................... 3.86% 16.62% (5.72%) 13.25% 10.09% 11.64%
Net Assets at End of Period (in
millions)......................... $ 227.4 $ 226.7 $ 203.2 $ 221.7 $ 153.8 $ 103.1
Ratio of Expenses to Average Net
Assets(2 and 3)................... 1.09% 1.00% 0.90% 0.71% 0.72% 0.70%
Ratio of Net Investment Income to
Average Net Assets(2)............. 5.32% 5.57% 5.73% 5.80% 6.41% 6.70%
Portfolio Turnover................. 57% 28% 8% 1% 10% 48%

<CAPTION>
CLASS A SHARES
------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1990 1989 1988
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.698 $15.204 $14.310
------- ------- -------
Net Investment Income............. 1.080 1.073 1.069
Net Realized and Unrealized
Gain/Loss on Investments........ 0.018 0.518 0.949
------- ------- -------
Total from Investment Operations... 1.098 1.591 2.018
------- ------- -------
Less:
Distributions from and in excess
of Net Investment Income(1)..... 1.080 1.079 1.082
Distributions from Net Realized
Gain on Investments............. -- 0.018 0.042
------- ------- -------
Total Distributions................ 1.080 1.097 1.124
------- ------- -------
Net Asset Value, End of the
Period............................ $15.716 $15.698 $15.204
======= ======= =======
Total Return(2).................... 7.33% 10.84% 14.54%
Net Assets at End of Period (in
millions)......................... $ 69.3 $ 47.1 $ 18.3
Ratio of Expenses to Average Net
Assets(2 and 3)................... 0.61% 0.61% 0.69%
Ratio of Net Investment Income to
Average Net Assets(2)............. 6.92% 6.81% 7.14%
Portfolio Turnover................. 47% 16% 19%
</TABLE>

- ----------------
(1) See Note 1 to the Financial Statements.
(2) Effect of sales charges not reflected on Total Return. If certain expenses
had not been waived or assumed, total return would have been lower and the
ratios would have been as follows:

<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets(3).......... 1.09% 1.14% 1.17% 1.09% 1.17%
Ratio of Net Investment Income to Average Net
Assets............................................ 5.31% 5.42% 5.46% 5.41% 5.95%

<CAPTION>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets(3).......... 1.26% 1.28% 1.45% 1.75%
Ratio of Net Investment Income to Average Net
Assets............................................ 6.13% 6.25% 5.97% 6.09%
</TABLE>

(3) Beginning with the year ended December 31, 1995, the Ratios of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances. See Note 1 to the Financial
Statements.

See Financial Statements and Notes Thereto

11
<PAGE> 15

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------------------------------------- ---------------------------
MAY 1, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION) YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1996 1995
------------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $17.731 $16.080 $18.055 $17.460 $17.729 $16.079
------- ------- ------- ------ ------- -------
Net Investment Income............. 0.788 0.819 0.841 0.586 0.788 0.812
Net Realized and Unrealized
Gain/Loss on Investments........ (0.264) 1.659 (1.985) 0.603 (0.264) 1.665
------- ------- ------- ------ ------- -------
Total from Investment Operations... 0.524 2.478 (1.144) 1.189 0.524 2.477
------- ------- ------- ------ ------- -------
Less Distributions from and in
Excess of Net Investment
Income(1)......................... 0.771 0.827 0.831 0.594 0.771 0.827
------- ------- ------- ------ ------- -------
Net Asset Value, End of the
Period............................ $17.484 $17.731 $16.080 $18.055 $17.482 $17.729
======= ======= ======= ====== ======= =======
Total Return(2).................... 3.07% 15.72% (6.39) 6.81%* 3.08% 15.72%
Net Assets at End of Period (in
millions)......................... $ 48.4 $ 46.8 $ 37.6 $ 27.7 $ 3.4 $ 3.4
Ratio of Expenses to Average Net
Assets(2 and 3)................... 1.85% 1.75% 1.64% 1.48% 1.85% 1.75%
Ratio of Net Investment Income to
Average Net Assets(2)............. 4.56% 4.81% 4.98% 4.47% 4.56% 4.76%
Portfolio Turnover................. 57% 28% 8% 1% 57% 28%

<CAPTION>
CLASS C SHARES
-------------------------------
AUGUST 13, 1993
(COMMENCEMENT
YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, TO DECEMBER 31,
1994 1993
------------ ----------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period............................ $18.045 $17.850
------- ------
Net Investment Income............. 0.850 0.325
Net Realized and Unrealized
Gain/Loss on Investments........ (1.985) 0.208
------- ------
Total from Investment Operations... (1.135) 0.533
------- ------
Less Distributions from and in
Excess of Net Investment
Income(1)......................... 0.831 0.338
------- ------
Net Asset Value, End of the
Period............................ $16.079 $18.045
======= ======
Total Return(2).................... 6.34% 2.98%*
Net Assets at End of Period (in
millions)......................... $ 2.2 $ 2.1
Ratio of Expenses to Average Net
Assets(2 and 3)................... 1.63% 1.54%
Ratio of Net Investment Income to
Average Net Assets(2)............. 4.97% 4.08%
Portfolio Turnover................. 8% 1%
</TABLE>

- ----------------
(1) See Note 1 to the Financial Statements.
(2) Effect of sales charges not reflected on Total Return. If certain expenses
had not been waived or assumed, 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(3)............... 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment Income to Average Net Assets..... 4.55% 4.66% 4.71% 4.13%

<CAPTION>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets(3)............... 1.85% 1.90% 1.90% 1.89%

Ratio of Net Investment Income to Average Net Assets..... 4.55% 4.61% 4.70% 3.73%

</TABLE>

(3) Beginning with the year ended December 31, 1995, the Ratio of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances. See Note 1 to the Financial
Statements.
* Non-Annualized

See Financial Statements and Notes Thereto

12
<PAGE> 16

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

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

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

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

The 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

13
<PAGE> 17

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.

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.

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

14
<PAGE> 18

Considerations Regarding Medium and Lower Grade Municipal Securities." 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. The Fund is not intended to be a complete investment program, and
investors should consider their long-term investment goals and financial needs
when making an investment decision with respect to the Fund. An investment in
the Fund is intended to be a long-term investment and should not be used as a
trading vehicle. 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 "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, 1996 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings

15
<PAGE> 19

of all municipal securities held by the Fund during the fiscal year ended
December 31, 1996, computed on a monthly basis.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
-------- ------------------ ---------------------
<S> <C> <C>
AAA/Aaa............................. 51.1% 1.1%
AA/Aa............................... 9.2% 0.0%
A/A................................. 13.9% 0.9%
BBB/Baa............................. 15.6% 0.0%
BB/Ba............................... 1.5% 2.7%
B/B................................. 0.1% 3.9%
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........................ 91.4% 8.6%
=== ==
</TABLE>

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.

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

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.

16
<PAGE> 20

"Revenue" securities are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source. Industrial development
bonds are usually revenue securities, the credit quality of which is normally
directly related to the credit standing of the industrial user involved.

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

17
<PAGE> 21

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 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

18
<PAGE> 22

volatile in response to changes in interest rates than debt securities which pay
interest periodically in cash. Investment in such securities also involves
certain tax considerations. See "Tax Status."

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

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

The Adviser seeks to minimize the risks involved in investing in medium and
lower grade municipal securities through 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. 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,

19
<PAGE> 23

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 (the "Code"), requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
zero coupon securities that is in excess of 10% of the Fund's net investment
income in that year. The Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. Payment-in-kind securities are securities that pay
interest through the issuance of additional securities. Such securities
generally are more volatile in response to changes in interest rates and are
more speculative investments than are securities that pay interest periodically
in cash. As of December 31, 1996, approximately 8.7% and 0.1% of the Fund's
total net assets were invested in zero coupon securities and 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.

20
<PAGE> 24

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 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 BBB- 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.

21
<PAGE> 25

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

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

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.

22
<PAGE> 26

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 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.

23
<PAGE> 27

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.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. In effecting purchases and
sales of the Fund's portfolio securities, the Adviser and the Fund may place
orders with and pay brokerage commissions to brokers, including brokers which
may be affiliated with the Fund, the Adviser, and the Distributor or dealers
participating in the offering of the Fund's shares. In addition, in selecting
among firms to handle a particular transaction, the Adviser and the Fund may
take into account whether the firm has sold or is selling shares of the Fund.

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

24
<PAGE> 28

for managing institutional portfolios, and more than $57 billion under
management or supervision. Van Kampen American Capital's more than 40 open-end
and 38 closed-end funds and more than 2,500 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
American Capital Distributors, Inc., the distributor of the Fund and the sponsor
of the funds mentioned above, is also a wholly-owned subsidiary of Van Kampen
American Capital. Van Kampen American Capital is an indirect wholly-owned
subsidiary of Morgan Stanley Group Inc. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

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

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

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

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the 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 1.00%
Over $500 million....................................... 0.50 of 1.00%
</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 Fund (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the

25
<PAGE> 29

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

PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.

PORTFOLIO MANAGEMENT. Dennis S. Pietrzak, a Vice President of the Adviser,
has been primarily responsible for the day-to-day management of the Fund since
August 1995. Mr. Pietrzak has been employed by the Adviser since August 1995.
Prior to joining the Adviser, Mr. Pietrzak was employed by Merrill Lynch where
he was in charge of municipal underwriting and trading in Merrill Lynch's
midwest region.

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

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

26
<PAGE> 30

The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.

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

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

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares,

27
<PAGE> 31

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

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

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

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

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

28
<PAGE> 32

broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediary for certain services
or activities which are primarily intended to result in sales of shares of the
Fund. Fees may include payment for travel expenses, including lodging, incurred
in connection with trips taken by invited registered representatives and members
of their families to locations within or outside of the United States for
meetings or seminar of a business nature. In some instances additional
compensation or promotional incentives may be offered to brokers, dealers or
financial intermediaries that have sold or may sell significant amounts of
shares during specified periods of time. The Distributor may provide additional
compensation to Edward D. Jones & Co. or an affiliate thereof based on a
combination of its sales of shares and increases in assets under management.
Such payments to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets of the Fund. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. These programs will not change the price an investor will pay for shares
or the amount that the Fund will receive from such sale.

CLASS A SHARES

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

29
<PAGE> 33

SALES CHARGE TABLE

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

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

* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a CDSC of
1.00% on redemptions made within one year of the purchase. A commission
will be paid to brokers, dealers or financial intermediaries who initiate
and are responsible for purchases of $1 million or more as follows: 1.00%
on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $5 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.

QUANTITY DISCOUNTS

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

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

A person eligible for a reduced sales charge includes an individual, their
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary of a single trust estate or a
single fiduciary account; or a "company" as defined is section 2(a)(8) of the
1940 Act.

As used herein, "Participating Funds" refers to all open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. and distributed by the Distributor. Additional funds may be
added from time to time as determined by the Fund's Board of Trustees as
Participating Funds.

VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person at any one
time in Class A Shares of the Fund, or in any combination of shares of the Fund
and

30
<PAGE> 34

shares of other Participating Funds, although other Participating Funds may have
different sales charges.

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

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

OTHER PURCHASE PROGRAMS

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

UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the

31
<PAGE> 35

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

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

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

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

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

(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.

(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and children under 21 years of age when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees.

(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the

32
<PAGE> 36

aggregate amount invested in Class A Shares of the Fund alone, or any
combination of shares of the Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.

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

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

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

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

The term "families" includes a person's spouse, children under 21 years of age,
grandchildren, parents, and a person's spouse's parents.

Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with ACCESS, the investment adviser, trust company or bank trust
department,

33
<PAGE> 37

provided that ACCESS receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized broker, dealer or financial intermediary may charge a transaction fee
for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.

DEFERRED SALES CHARGE ALTERNATIVES

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

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

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<PAGE> 38

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

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

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

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

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

35
<PAGE> 39

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

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

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

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

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

NET ASSET VALUE

The net asset value per share of the Fund 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

36
<PAGE> 40

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 Fund 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.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------

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

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

SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A

37
<PAGE> 41

shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City,
MO 64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in
a form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 421-2833 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."

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

DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 421-2833 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.

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

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

38
<PAGE> 42

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

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

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

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

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 421-2833 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. If the exchanging shareholder does
not have an account in the fund whose shares are being acquired, a new account
will be established with the same registration,

39
<PAGE> 43

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

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

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a quarterly, semi-annual or annual withdrawal plan. This plan provides
for the orderly use of the entire account, not only the income but also the
capital, if necessary. Each withdrawal constitutes a redemption of shares on
which taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.

Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.

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

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

40
<PAGE> 44

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

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

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

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

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

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

41
<PAGE> 45

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

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

TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such

42
<PAGE> 46

privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 421-2833 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.

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

REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on redemptions
following the disability of holders of Class B Shares and Class C Shares. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite

43
<PAGE> 47

duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of disability before it determines to waive the CDSC on Class B Shares and Class
C Shares.

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

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

REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 days after the date of the redemption. See "Purchase of Shares --
Waiver of Contingent Deferred Sales Charge." Reinstatement at net asset value is
also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plans.

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DISTRIBUTION AND SERVICE PLANS

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

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of 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.

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<PAGE> 48

The Distribution Plan and the Service Plan are being implemented through an
agreement with the Distributor and sub-agreements between the Distributor and
brokers, dealers and financial intermediaries (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance.

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

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

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

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

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

45
<PAGE> 49

CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the CDSC. In such event, with respect to
any such class of CDSC Shares, any unreimbursed expenses will be carried forward
and paid by the Fund (up to the amount of the actual expenses incurred) in
future years so long as such Distribution Plan is in effect. Except as mandated
by applicable law, the Fund does not impose any limit with respect to the number
of years into the future that such unreimbursed expenses may be carried forward
(on a Fund level basis). Because such expenses are accounted on a Fund level
basis, in periods of extreme net asset value fluctuation such amounts with
respect to a particular CDSC Share may be greater or less than the amount of the
initial commission (including 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, 1996, there were $1,448,099 and $7,345 of unreimbursed
distribution expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.99% and 0.22% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through CDSCs.

The Distributor will not use the proceeds from the CDSC 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.

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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

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<PAGE> 50

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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS receives payment for the shares
either through a fed wire or NSCC settlement. Shares remain entitled to
dividends through the day such shares are processed for payment on redemption.

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

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."

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

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

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

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<PAGE> 51

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

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

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

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

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For

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<PAGE> 52

example, with respect to securities issued at a discount, the Fund will be
required to accrue as income each year a portion of the discount and to
distribute such income each year in order to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.

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

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

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

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

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<PAGE> 53

Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.

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

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

While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gains
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Interest on indebtedness which is incurred to purchase or carry
shares of a mutual fund which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares

50
<PAGE> 54

are held as a capital asset). Tax-exempt shareholders not subject to federal
income tax on their income generally will not be taxed on distributions from the
Fund.

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

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

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

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

SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such shares
have been held for more than one year. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such shares. For purposes of determining whether shares have been held for
six months or less, the holding period is

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<PAGE> 55

suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

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).

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

52
<PAGE> 56

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.

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

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

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)

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<PAGE> 57

which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.

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

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

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
the Fund from a given date to a subsequent given date 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. Distribution rate 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,

54
<PAGE> 58

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

Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 421-2833 for the
hearing impaired).

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DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------

The Fund is an unincorporated trust originally established under the laws of
the Commonwealth of Pennsylvania by a Declaration of Trust dated January 28,
1987. The Declaration of Trust was amended and restated as of July 21, 1995.
Shares of the Fund entitle their holders to one vote per share. Except as
described herein, 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
shares then outstanding cast in person or by proxy at such meeting. The Fund
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the 1940 Act. More detailed information concerning the
Fund is set forth in the Statement of Additional Information.

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

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

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

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

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

55
<PAGE> 59

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

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

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

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

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

2. Nature of and provisions of the obligation;

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

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

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

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

A-1
<PAGE> 60

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

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

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.

A-2
<PAGE> 61
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.

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.

A-3
<PAGE> 62

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 three years or less will likely receive a
note rating. Notes maturing beyond three 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'.
</TABLE>

A-4
<PAGE> 63
A-3 Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to
the adverse effects of changes in circumstances than
obligations carrying the higher designations.

B Issues rated 'B' are regarded as having only speculative
capacity for timely payment.

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

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

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

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.
</TABLE>

A-5
<PAGE> 64
AA Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than the
Aaa securities.

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

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

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

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

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

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

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

A-6
<PAGE> 65

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 experi-
ence, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. The parenthetical rating denotes the
probable credit stature upon completion of construction or
elimination of the basis of the condition.

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

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

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

A-7
<PAGE> 66

rate demand obligation. Such ratings will be designated as VMIG, SG or, if the
demand feature is not rated, as NR.

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

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

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

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

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

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

3. TAX-EXEMPT COMMERCIAL PAPER

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

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

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

- Leading market positions in well established industries.

- High rates of return on funds employed.

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

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

A-8
<PAGE> 67

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

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

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

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

A-9
<PAGE> 68

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

NUMBER--(800) 341-2911.

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

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

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

DIAL (800) 421-2833.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 847-2424.

VAN KAMPEN AMERICAN CAPITAL
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

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

Custodian

STATE STREET BANK AND
TRUST COMPANY

225 West Franklin Street, P.O. Box 1713

Boston, MA 02105-1713
Attn: Van Kampen American Capital
Pennsylvania Tax Free Income Fund

Legal Counsel

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM (ILLINOIS)

333 West Wacker Drive
Chicago, IL 60606

Independent Accountants

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 69

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

PENNSYLVANIA TAX FREE INCOME FUND

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

P R O S P E C T U S

APRIL 30, 1997

- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 70

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND

Van Kampen American Capital Pennsylvania Tax Free Income Fund, formerly known
as 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, 1997 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares of the Fund. A copy of the Prospectus may be obtained without
charge by writing or calling Van Kampen American Capital Distributors, Inc. at
One Parkview Plaza, Oakbrook Terrace, IL 60181 at: (800) 421-5666 (or (800)
421-2833 for the hearing impaired).

The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission ("SEC"), Washington, D.C. This omitted information may
be obtained from the SEC 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
Trustees and Officers....................................... B-19
Custodian................................................... B-26
Legal Counsel and Independent Accountants................... B-26
Investment Advisory and Other Services...................... B-26
Portfolio Transactions...................................... B-28
Tax Status of the Fund...................................... B-29
The Distributor............................................. B-29
Distribution and Service Plans.............................. B-30
Performance Information..................................... B-31
Report of Independent Accountants........................... B-33
Financial Statements........................................ B-34
Notes to Financial Statements............................... B-46
</TABLE>

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

B-1
<PAGE> 71

THE FUND

Van Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund") is
a non-diversified, open-end management investment company, commonly known as a
mutual fund, and was originally 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 was amended and restated as of
July 21, 1995. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares, par value $0.01 per share (prior
to July 21, 1995, the shares had no par value).

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 two-thirds of the shares then outstanding cast in person or by proxy 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, par value $0.01 per share.

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

B-2
<PAGE> 72

2. Invest more than 25% of its assets in a single industry, except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act. (As described in the Prospectus, the Fund may
from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry.)

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

9. Invest in securities issued by other investment companies, except as part
of a merger, reorganization or other acquisition, except that the Fund may
temporarily invest up to 10% of the value of its assets in Pennsylvania
tax exempt money market funds to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.

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.

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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 15% of
the Fund's assets would be invested in securities which are not readily
marketable. In such event, the Fund will take reasonable and appropriate steps
to reduce the percentage of the Fund's portfolio represented by securities that
are not readily marketable, together with any other securities subject to
investment restriction eight above, to less than 15% 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 15% 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

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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 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, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. 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

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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
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 1992 through fiscal 1996 recorded a 4.6
percent average annual increase in revenues and other sources, led by an average
annual increase of 13.2 percent for intergovernmental revenues. The increase for
intergovernmental revenues in fiscal 1996 is partly due to an accounting change.
Tax revenues during the five year period increased an average of 2.5 percent as
modest economic growth, low inflation rates and several tax rate reductions and
other tax reduction measures constrained the growth of tax revenues. The tax
reduction measures followed a $2.7 billion tax increase measure adopted for the
1992 fiscal year. Expenditures and other uses during the fiscal 1992 through
fiscal 1996 period rose at an average annual rate of 6.0 percent led by
increases of 14.2 percent for protection of persons and property program costs.
The costs of a prison expansion program and other correctional program expenses
are responsible for the large percentage increase. A reduction in debt service
costs at an average annual rate of 29.1 percent over the five year period is a
result of reduced short-terms borrowing for cash flow purposes. Improved
financial results and structural cash flow modifications contributed to the
lower borrowing. Efforts to control costs for various social welfare programs
and the presence of favorable economic conditions have led to a modest 5.6
percent increase for public health and welfare costs for the five year period.
The fund balance at June 30, 1996 totaled $635.2 million, a $547.7 million
increase from a balance of $87.5 million at June 30, 1992.

Commonwealth revenues for the 1995 fiscal year were above estimate and
exceeded fiscal year expenditures and encumbrances. Fiscal 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-end unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus was
$540.0 million, an increase of $204.2 million over the fiscal 1994 closing
unappropriated surplus prior to transfers. Commonwealth revenues were $459.4
million, 2.9 percent, above the estimate of revenues used at the time the fiscal
1995 budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts largely due to higher receipts from the corporate net income
tax. Fiscal 1995 revenues from the corporate net income tax were 22.6 percent
over collections in fiscal 1994 and include the effects of the reduction of the
tax rate from 12.25 percent to 11.99 percent that became effective with tax
years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9 percent over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to

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the higher collections. Miscellaneous revenue collections for fiscal 1995 were
$183.5 million, $44.9 million above estimate and were largely due to additional
investment earnings, escheat revenues and other miscellaneous revenues. Personal
income tax receipts for fiscal 1995 were slightly above the budgeted estimate.
Receipts totaled $5,083.2 million, $5.1 million above the estimate and 4.3
percent over collections for fiscal 1994. The higher than estimated revenues
from tax sources were due to faster economic growth in the national and state
economy than had been projected when the budget was adopted. The higher rate of
economic growth for the nation and the state gave rise to increases in
employment, income and sales higher than expected which translated into
above-estimate tax revenues. Tax revenue refunds were also higher than estimated
in the budget. The reserve for tax refunds was increased during the fiscal year
from $410 million to $460 million, a 110 percent increase over refunds budgeted
in fiscal 1994 which were unusually low due to a carryover of $160 million of
reserves for tax refunds from fiscal 1993. An acceleration of the tax refund
process for corporation taxes, litigation settlements, and an increase in the
personal income tax poverty exemption contributed to tax refunds being higher
than initially budgeted. Expenditures from Commonwealth revenues, (excluding
pooled financing expenditures) including $65.5 million of supplemental
appropriations enacted at the close of the 1995 fiscal year, totaled $15,674.7
million, representing an increase of 5 percent over spending during fiscal 1994.
Funds held in reserve at the end of fiscal 1995 for transfer to the Tax
Stabilization Reserve Fund totaled $111.0 million. Of this total, $54.0 million
represents the 10 percent transfer of the fiscal year-end balance prescribed in
state law. The remaining $57.0 million represents an additional 5 percent of the
year-end balance and an additional $30 million proposed by the Governor to be
transferred to the Tax Stabilization Reserve Fund. These additional reserves for
transfer were authorized in legislation subsequent to the close of the fiscal
year.

The unappropriated surplus (prior to transfers to Tax Stabilization Reserve
Fund) at the close of the 1996 fiscal year for the General Fund was $183.8
million, $65.5 million above estimate. From fiscal year appropriations, net
expenditures and encumbrances from Commonwealth revenues, including $113.0
million of supplemental appropriations but excluding pooled financing
expenditures, totaled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437.0 million fiscal year adjusted beginning
unappropriated surplus. Commonwealth revenues (prior to tax refunds) for the
1996 fiscal year increased by $113.9 million over the prior fiscal year to
$16,338.5 million representing a growth rate of 0.7 percent. Tax rate reductions
and other tax law changes substantially reduced the amount and rate of revenue
growth for the fiscal year. It is estimated that tax changes enacted for the
fiscal year reduced Commonwealth revenues by $283.4 million representing 1.7
percentage points of fiscal 1996 growth in Commonwealth revenues. The most
significant tax changes enacted for the fiscal year were (i) a reduction of the
corporate net income tax rate to 9.99 percent; (ii) an increase in the maximum
annual allowance for a net operating loss deduction from $0.5 million to $1.0
million; (iv) an increase in the basic exemption amount for the capital stock
and franchise tax; (v) a repeal of the tax on annuities; and (vi) a repeal of
inheritance tax on transfers of certain property to surviving spouses. Among the
major sources of Commonwealth revenues for the fiscal year, corporate tax
receipts declined $338.4 million from receipts in the prior fiscal year, largely
due to the various tax changes enacted for these taxes. Corporate tax changes
were enacted to reduce the cost of doing business in Pennsylvania for the
purpose of encouraging business to remain in Pennsylvania and to expand
employment opportunities within the state. Sales and use tax receipts for the
fiscal year increased $155.5 million, or 2.8 percent, over receipts during
fiscal 1995. All of the increase was produced by the non-motor vehicle portion
of the tax as receipts from the sale of motor vehicles declined slightly for
fiscal 1996. Personal income tax receipts for the fiscal year increased $291.1
million, or 5.7 percent, over receipts during fiscal 1995. Personal income tax
receipts were aided by a 10.2 percent increase in non-withholding tax payments
which generally are comprised of quarterly estimated and annual final return tax
payments. Non- tax receipts for the fiscal year increased $23.7 million for the
fiscal year. Included in that increase was $67 million in net receipts from a
tax amnesty program that was available for a portion of the 1996 fiscal year.
Some portion of the tax amnesty receipts represent normal collection of
delinquent taxes. The tax amnesty program is not expected to be repeated.
Transfers to the Tax Stabilization Reserve Fund from fiscal 1996 operations were
$27.6 million. This amount represents the fifteen percent of the fiscal year
ending unappropriated surplus transfer provided under current law. With the
addition of this transfer, the Tax Stabilization Reserve Fund balance is over
$215 million.

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The enacted fiscal 1997 budget provides for expenditures from Commonwealth
revenues of $16,375.8 million, an increase of 0.6 percent over appropriated
amounts from Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is
based on anticipated Commonwealth revenues before refunds of $16,744.5 million,
an increase over actual fiscal 1996 revenues of 2.5 percent. The revenue
estimate for fiscal 1997 includes provision for a $15 million tax credit program
enacted with the fiscal 1997 budget for businesses creating new jobs. Staggered
corporation tax years cause fiscal 1997 revenues to continue to be affected by
the business tax reductions enacted during the past two completed fiscal years.
These reductions, together with the new job creation tax credit, cause revenue
growth comparisons between fiscal 1996 and fiscal 1997 to be understated. When
taking into account the effect of the recent tax changes, revenues are
anticipated in the fiscal 1997 budget to increase at a rate of 3.0 percent. The
fiscal 1997 revenue estimate is based on a forecast of the national economy for
real gross domestic product to slow to a growth rate of 2.0 percent for 1996 and
below 1.5 percent for 1997. The expectation for slowing economic growth is based
on an assumption that the Federal Reserve Board does not cut interest rates and
an assumption that foreign economic growth is weak. The consequence of this
economic scenario is a U.S. economy with very low growth, slow gains in consumer
spending, declining inflation rates, but increasing unemployment which raises
the unemployment rate to over 6.0 percent by the end of 1996. Increased
authorized spending for fiscal 1997 is driven largely by increased costs of the
corrections and the probation and parole program. Continuation of the trend of a
rapidly rising inmate population increases operating costs for correctional
facilities and requires the opening of new facilities. The fiscal 1997 budget
contains an appropriation increase in excess of $110 million for these programs.
The approved budget also contains some departmental restructurings. The
Department of Community Affairs was eliminated with certain of its programs
transferred to the Department of Commerce that has been re-named the Department
of Community and Economic Development. In addition to assuming some of the
community programs, a significant restructuring of the economic development
programs was completed with the establishment of the new Department of Community
and Economic Development. Although the departmental restructurings are estimated
to save approximately $8 million, a $25 million increase in funds was committed
to economic and community development programs for fiscal 1997. Providing
funding for these program incases in a fiscal year budget where appropriations
increased by only $96.7 million, or 0.6 percent, required reductions and savings
in other programs funded from the General Fund. A major reform of the current
welfare system was enacted in May 1996 to encourage recipients toward
self-sufficiency through work requirements, to provide temporary support for
families showing personal responsibility and to maintain safeguards for those
who cannot help themselves. Net savings to the fiscal 1997 budget of $176.5
million is anticipated. Many of these savings are redirected in the fiscal 1997
budget toward providing additional support services to those working and seeking
work. Of the net savings, $21 million is committed to job training opportunities
and an additional $69 million towards making day care services available to
welfare recipients for work opportunities. The fiscal 1997 budget also provides
additional funding without requiring additional appropriations. An actuarial
reduction of 112 basis points in the employer contribution rate is estimated to
save school districts approximately $21 million for the fiscal year. Additional
savings can be expected to be realized by school districts from legislated
changes to teach sabbatical leaves, worker's compensation insurance and to
revised prevailing wage surveys by the Department of Labor and Industry. These
savings and program funding increases to special education and pupil
transportation programs and an initiative for technology improvements for
schools are estimated to be equal to approximately $138 million of increased
funding to local schools, equivalent to a 4.5% increase in the basic education
funding for fiscal 1997. The fiscal 1997 budget anticipated receiving $60
million of proceeds from the securitization of $151.7 million of loans held by
the Sunny Day Fund. This fund was created to finance large-scale economic
development loans to attract significant employment opportunities to the
Commonwealth. Its funding was generally obtained from General Fund
appropriations. The fund has been abolished and its loans have been transferred
to the Pennsylvania Industrial Development Fund ("PIDA"). In September 1996,
PIDA issued bonds secured by its loan revenues, including the Sunny Day Fund
loans. The bond proceeds were used to refund outstanding debt of the
Commonwealth. The effect of this transaction on the fiscal 1997 budget is a
reduction of the amount of debt service needed to be paid from the General Fund
by $84.7 million, $24.7 million above the amount anticipated in the fiscal 1997
budget.

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

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long-term obligations supported by payments from the City's General Fund are
rated Baa by Moody's and BBB- 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 March 11, 1997 describing General
Obligation Bonds, First Series of 1997 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 million 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 1997 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. In December of 1994, the
Third Circuit reversed Judge Kelly's ruling, finding that he erred in refusing
to certify the class. Consistent with the Third Circuit's ruling, the District
Court recently certified the class, and the parties have resumed discovery.

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. On December 7, 1992,
the State Association of County Commissioners filed an action in mandamus
seeking to compel the Commonwealth to comply with the decision in County of
Allegheny. The Court issued the writ on July 26, 1996, and appointed retired
Justice and Senior Judge Frank J. Montemuro, Jr. as special master to devise and
submit a plan for implementation. The Court indicated that it intends to require
implementation by January 1, 1998. On January 28, 1997, the Supreme Court
granted Justice Montemuro's request for a 90-day extension of time within to
file his report. The Court also announced the establishment of a tripartite
committee, including representatives of the Executive Department, the
Legislative Department and Justice Montemuro, to develop an implementation plan.
Following issuance of the writ, the President Pro Tempore of the Senate and the
Speaker of the House filed a petition seeking reconsideration from the Court.
The General Assembly has yet to consider legislation implementing the Supreme
Court of Pennsylvania's judgment.

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Fidelity Bank v. Commonwealth of Pennsylvania

On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed a declaratory
judgment action in the Commonwealth Court of Pennsylvania in which Fidelity
raised various challenges to the constitutional validity of the Amended Bank
Shares Act (Act No. 1989-21) and related legislation. After the Commonwealth
Court ruled in favor of the Commonwealth, finding no constitutional
deficiencies, Fidelity, the Commonwealth, and certain intervenor banks filed
Notices of Appeal to the Pennsylvania Supreme Court on August 5, 1994. Pursuant
to a Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues, including interest. This
credit represents a credit of approximately five percent (5%) of the potential
claim of Fidelity, had the constitutional issues been resolved in favor of
Fidelity. Pursuant to a separate Settlement Agreement dated as of April 21,
1995, the Commonwealth settled with the intervening banks, referred to as "New
Banks," in connection with issues concerning the New Bank Tax Credit law which
were raised in the above-referenced Pennsylvania Supreme Court appeal. As part
of the settlement, the Commonwealth agreed neither to assess nor attempt to
recoup any new bank tax credits which had been granted or taken by any of the
intervening banks. No expenditure of Commonwealth funds is required in order to
implement this aspect of the settlement with the intervening banks, since the
credits have already been claimed by said banks. Although the described
settlements have quantified the Commonwealth's exposure to Fidelity and the
intervening banks, other banks have filed protective petitions which are
currently pending with the Commonwealth Court. Depending upon the outcomes of
these administrative appeals, one or more of these banks may seek to raise the
issues which were advanced by Fidelity, although not brought to final resolution
by the Pennsylvania Supreme Court.

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 former Governor Robert P. Casey and former 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 has been assigned to
Judge Pellegrini. Judge Pellegrini conducted a trial beginning January 6, 1997.
The petitioners have rested their case, and the trial has recessed until March
or April, when the Commonwealth will have an opportunity to cross-examine one of
the petitioners' expert witnesses and to present rebuttal to that witness. At
that time, Judge Pellegrini will establish a briefing schedule and a date for
oral argument.

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 challenged the conditions of confinement
at each institution and included 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 were sought. The ACLU sought injunctive relief which would
modify conditions, change practices and procedures and increase the number of
staff deployment. On August 1, 1994, the parties submitted a proposed settlement
agreement to the Court for its review. The Court held hearings on the proposed
Settlement Agreement in December 1994. The Court approved the Settlement
Agreement with a January 17, 1995 Memorandum. On February 3, 1995, the
Commonwealth paid $1.3 million in attorneys' fees to the plaintiffs' attorneys
in accordance with the Agreement. The remaining $100,000 in attorneys' fees will
be paid by the end of the year. All aspects of the case have now been dismissed.
The parties are currently complying with monitoring provisions outlined in the
Agreement. The monitoring phase will expire on January 6, 1998. Attorneys' fees
for the three year monitoring period will not exceed $60,000 in any one year.

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Envirotest/Synterra Partners

On November 11, 1993, the Commonwealth of Pennsylvania, Department of
Transportation and Envirotest/Synterra Partners ("Envirotest"), a partnership,
entered into a "Contract for Centralized Emissions Inspection Facilities."
Thereafter, Envirotest acquired certain land and constructed approximately 85
automobile emissions inspection facilities throughout various regions of the
Commonwealth. By Act of the General Assembly in October 1994 (Act No. 1994-95),
the emissions testing program was suspended and the Department of Transportation
was directed to consider other alternatives to the centralized testing program.
Former Governor Robert P. Casey vetoed the legislation and the General Assembly
overrode the veto in November 1994. As a result, the program was suspended and
the Department of Transportation was prohibited from expending funds to
implement the program. On December 15, 1995, Envirotest Systems Corporation,
Envirotest Partners (successor to Envirotest/Synterra Partners) and the
Commonwealth of Pennsylvania entered into a Settlement Agreement ("Agreement")
pursuant to which the parties settled all claims which Envirotest might have had
against the Commonwealth arising from the suspension of the emissions testing
program. Under the Agreement, Envirotest is to receive $145 million, with
interest at 6 percent per annum, payable $25 million in 1995, and $40 million
each in 1996, 1997, and 1998. An additional $11 million may be required to be
paid in 1998, depending upon the results of property liquidations by Envirotest.

Pennsylvania Human Relations Commission v. School District of Philadelphia,
et. al. v. Commonwealth of Pennsylvania, et. al.

On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia,
were joined as additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the "remedial phase" of the proceeding
to "determine their liability, if any, to pay additional costs necessary to
remedy the unlawful conditions found to exist in the Philadelphia public
schools." On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
Orders of the Commonwealth Court." In addition, a group of intervenors (led by
ASPIRA of Pennsylvania) on March 4, 1996 filed a third-party complaint against
the Commonwealth of Pennsylvania and the City of Philadelphia requesting
Commonwealth Court to declare that "it is the obligation of the Commonwealth and
the city to supply the additional funds identified as necessary for the District
to fully comply with the orders of the Commonwealth Court," and to require the
Commonwealth and the City to supply such additional funding as is necessary for
the District to comply with the orders. By order dated April 30, 1996, Judge
Doris A. Smith of Commonwealth Court, overruled the Commonwealth's and the
City's preliminary objections seeking dismissal of the claims against them. The
Commonwealth and the City thereafter filed answers to the complaints, asserting
numerous defenses. The Commonwealth also asserted a cross-claim against the City
of Philadelphia claiming that if any party is liable, sole liability rests with
the City; in the alternative, the Commonwealth argued that if it is held to be
liable, it has a right of indemnity or contribution against the City. Trial
commenced on May 30, 1996. During the course of the trial, upon motion of the
Commonwealth, the Supreme Court of Pennsylvania on July 3, 1996 assumed
extraordinary plenary jurisdiction and directed Judge Smith to conclude the
proceedings within 60 days and to file with the Supreme Court findings of fact,
conclusions of law and a final opinion. The Supreme Court retained jurisdiction.
The evidence in the trial was concluded on July 11, 1996, after 19 days of
trial. On August 20, 1996, Judge Smith issued an Opinion and Order. Judge Smith
specifically found that "[b]ecause of the lack of adequate funds to comply with
the remedial order, the School District is entitled to additional resources for
1996-1997 of $45.1 million." In filings made on August 30, 1996, the
Commonwealth requested the Supreme Court to enter judgments in favor of the
Commonwealth and the Governor on all claims. On September 10, 1996, the Supreme
Court of Pennsylvania issued an order granting the Commonwealth's Motion to
Vacate. The Court directed its Prothonotary to establish a briefing schedule and
a date for oral argument and indicated that it would issue a further order
limiting the issued to be addressed. Finally, the Supreme Court stated that

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Commonwealth Court "is divested of jurisdiction of th[e] matter..., and all
further proceedings in the Commonwealth Court are stayed pending further order
of th[e Supreme] Court." The Supreme Court again retained jurisdiction. On
January 28, 1997, the Supreme court issued an order directing the parties to
brief certain issues. The Commonwealth's brief was due March 19, 1997.
Responsive briefs must be filed within 30 days thereafter.

Ridge v. State Employee's Retirement Board

On August 1, 1983, the United States Supreme Court in Arizona Governing
Committee v. Norris, 463 U.S. 1073 (1983) held that the use of gender distinct
actuarial factors to calculate pension benefits violated federal civil rights
laws. Norris and the subsequent Florida v. Long, 487 U.S. 223 (1988) limited
required application of gender neutral actuarial factors to benefits based on
service credited on or after August 1, 1983. Benefits based upon service
credited before August 1, 1983, could continue to be calculated using gender
distinct actuarial factors. The State Employee's Retirement Board and its sister
agency, the Public School Employee's Retirement Board, have been in full
compliance with Norris, using gender neutral factors for benefits based upon
post-July 31, 1983, service and gender distinct actuarial factors for benefits
based upon pre-August 1, 1983 service. On December 29, 1993, Joseph H. Ridge,
former judge of the Allegheny Court of Common Please filed in the Commonwealth
Court a Petition for Review in the Nature of Complaint in Mandamus and for a
Declaratory Judgment against the State Employes' Retirement Board. Judge Ridge
filed an amended Petition for Review on February 7, 1995. Judge Ridge alleges
that the Retirement Board's use of gender distinct actuarial factors for
benefits based upon his pre-August 1, 1983 service violates Article I, Section
26 (equal protection) and Article I, Section 28 (equal rights) of the
Pennsylvania Constitution. He seeks "topped up" benefits equal to those that a
similarly situated female would be receiving. Due to the constitutional nature
of the claim, it is possible that a decision adverse to the Retirement Board
would be applicable to other members of the State Employes' Retirement System
and Public School Employes Retirement System who accrued service between the
effective date of the state constitutional provisions and before August 1, 1983,
and who have received, are receiving, or will receive benefits less than those
received by other members of the systems because of their sex or the sex of
their survivors annuitants. The Commonwealth Court granted the Retirement
Board's preliminary objections to Judge Ridge's claims for punitive damages,
attorneys fees and compensatory damages other than a recalculation of his
pension benefits should he prevail. The Commonwealth Court also denied Judge
Ridge's preliminary objections to the Retirement Board's New Matter. On November
20, 1996, the Commonwealth Court heard oral argument en banc on Judge Ridge's
motion for judgment of the pleadings. A decision on that motion is pending.

Yesenia Marrero, et al. v. Commonwealth, et al.

On February 24, 1997, five residents of the City of Philadelphia, on their own
behalf and on behalf of their school-aged children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, ASPIRA, Inc. of Pennsylvania and the Philadelphia Branch of the
NAACP, filed in the Commonwealth Court of Pennsylvania a civil action for
declaratory judgment against the Commonwealth of Pennsylvania, the General
Assembly of Pennsylvania, the presiding officers of the General Assembly, the
Governor of Pennsylvania, the State Board of Education, the Department of
Education, and the Secretary of Education. Citing the Education Clause of the
Constitution of Pennsylvania, as well a provisions of the Declaration of Rights
under the Pennsylvania Constitution, the petitioners claim, inter alia, that
Pennsylvania's "statutory education financing system in unconstitutional as
applied to the School District [of Philadelphia]"; that "[t]he system of funding
public education violated the constitutional mandate to provide a thorough and
efficient system of public education in the City [of Philadelphia]"; that "[t]he
scheme for financing public education precludes the Commonwealth from providing
the constitutionally required thorough and efficient system of public education
in the circumstances faced by the School District [of Philadelphia]"; and that
"Defendants have failed to provide the School District [of Philadelphia] with
the resources and other assistance necessary to provide all of its students with
the quality of education to which they are [c]onstitutionally entitled." The
respondents will have thirty (30) days from the date of service to respond to
the petition for review.

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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 or 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 SEC
generally requires that when mutual funds, such as the Fund, effect transactions
of the foregoing nature, such funds must either segregate cash or readily
marketable portfolio securities with its custodian in an amount of its
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or cover requirements.

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 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

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portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities.

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

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

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

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

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

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

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

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

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

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foreign securities exchanges and in the over-the-counter markets. All calls sold
by the Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.

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

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

The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by 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,

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or is less than, in the case of a put, the exercise price of the option (except
if, in the case of an OTC option, physical delivery is specified). This amount
of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.

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

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

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 securities at least
equal to the current amount of the

B-17
<PAGE> 87

obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate liquid 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 to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.

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

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

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

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

B-18
<PAGE> 88

TRUSTEES AND OFFICERS

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

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Partner, Ray & Berndtson, Inc. An executive recruiting
Sears Tower and management consulting firm. Formerly, Executive Vice
233 South Wacker Drive President of ABN AMRO, N.A., a Dutch bank holding
Suite 4020 company. Prior to 1992, Executive Vice President of La
Chicago, IL 60606 Salle National Bank. Trustee of each of the funds in the
Date of Birth: 06/03/48 Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the funds in the Fund Complex.
Dennis J. McDonnell*...................... President and a Director of VKAC. President, Chief
One Parkview Plaza Operating Officer and a Director of the Advisers.
Oakbrook Terrace, IL 60181 Director or officer of certain other subsidiaries of
Date of Birth: 05/20/42 VKAC. Prior to November 1996, Executive Vice President
and a Director of VKAC Holding. President and Trustee of
each of the funds in the Fund Complex. President,
Chairman of the Board and Trustee of other investment
companies advised by the Advisers or their affiliates.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee of each of the funds
in the Fund Complex.
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director, Pacesetter Software, a software
Date of Birth: 10/10/22 programming company specializing in white collar
productivity. Director, Panasia Bank. Trustee of each of
the funds in the Fund Complex.
</TABLE>

B-19
<PAGE> 89

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

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

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

OFFICERS

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

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers.
Date of Birth: 06/25/56 Director of Asset Management. Officer of
certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.

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

B-20
<PAGE> 90

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell............... Not applicable Chairman, President, Chief Executive
2800 Post Oak Blvd. Officer and a Director of VKAC. Chairman,
Houston, TX 77056 Chief Executive Officer and a Director of
Date of Birth: 10/19/39 the Advisers and the Distributor. Chairman
and a Director of ACCESS. Director or
officer of certain other subsidiaries of
VKAC. Chairman of the Board of Governors
and the Executive Committee of the
Investment Company Institute. Prior to
November, 1996, President, Chief Executive
Officer and a Director of VKAC Holding.
President, Chief Executive Officer and a
Trustee/Director of certain investment
companies advised by Asset Management and
prior to July 1996, President, Chief
Executive Officer and a Trustee of the
funds in the Fund Complex and closed-end
investment companies advised by Advisory
Corp.

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

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

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

B-21
<PAGE> 91

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

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

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

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

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

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

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

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

B-22
<PAGE> 92

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

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

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

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

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

B-23
<PAGE> 93

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

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

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

1996 COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
YEAR FIRST PENSION OR ESTIMATED MAXIMUM BEFORE DEFERRAL
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON COMPLEX PAID
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan* 1995 $3,125 $ 499 $2,500 $104,875
Philip P. Gaughan 625 1,858 2,000 16,875
Linda Hutton Heagy* 1995 3,125 56 2,500 104,875
Dr. Roger Hilsman 3,125 0 2,500 103,750
R. Craig Kennedy* 1993 3,125 47 2,500 104,875
Donald C. Miller 3,125 3,555 2,500 104,875
Jack E. Nelson* 1987 3,125 350 2,500 97,875
David Rees 750 0 2,500 22,000
Jerome L. Robinson* 1992 3,125 2,405 2,500 101,625
Lawrence J. Sheehan 750 0 0 22,000
Dr. Fernando Sisto* 1995 3,125 861 2,500 104,875
Wayne W. Whalen* 1987 3,125 247 2,500 104,875
William S. Woodside 3,125 0 2,500 104,875
</TABLE>

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

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

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

(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1996. The
following trustees deferred compensation from the

B-24
<PAGE> 94

Fund during the fiscal year ended December 31, 1996: Mr. Branagan, $875; Ms.
Heagy, $2,500; Mr. Kennedy, $1,500; Mr. Miller, $3,125; Mr. Nelson, $3,125;
Mr. Robinson, $3,125; and Mr. Whalen, $3,125. Amounts deferred are retained
by the Fund and earn a rate of return determined by reference to either the
return on the common shares of the Fund or other funds in the Fund Complex
as selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each Fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The cumulative
deferred compensation (including interest) accrued with respect to each
trustee from the Trust as of December 31, 1996 is as follows: Mr. Branagan,
$864; Mr. Gaughan, $2,941; Ms. Heagy, $3,412; Mr. Kennedy, $7,792; Mr.
Miller, $9,083; Mr. Nelson, $9,476; Mr. Robinson, $8,925; and Mr. Whalen,
$7,967. The deferred compensation plan is described above the Compensation
Table.

(3) The amounts shown in this column represent the Retirement Benefits accrued
by the Fund during its fiscal year ended December 31, 1996. The retirement
plan is described above the Compensation Table.

(4) This is the estimated maximum annual benefits payable by the Fund in each
year of the 10-year period commencing in the year of such trustee's
retirement from the Fund assuming: the trustee has 10 or more years of
service on the Board of Trustees (including years of service prior to the
adoption of the retirement plan) and retires at or after attaining the age
of 60. Trustees retiring prior to the age of 60 or with fewer than 10 years
of service for the Fund may receive reduced retirement benefits from the
Fund. The actual annual benefit may be less if the trustee is subject to the
Fund Complex retirement benefit cap or if the trustee is not fully vested at
the time of retirement. Each incumbent nominee to the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in the Compensation Table.

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

As of April 4, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund. As of April 4, 1997, no trustee or
officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc.

B-25
<PAGE> 95

As of April 4, 1997, no person was known by the Fund to own beneficially or to
hold of record as much as 5% of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 4, 1997 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
NFSC FEBO #027-226173.................................... 642,545 A 5.03%
Mary Alice Morrissey
James D. Morrissey
1328 Old Ford Road
Huntingdon Valley, PA 19006-8106
Donaldson Lufkin Jenrette Securities Corporation Inc. ... 12,152 C 6.59%
P.O. Box 2052
Jersey City, NJ 07303-2052
Stifel Nicolaus & Co. Inc. .............................. 27,584 C 14.96%
A/C 8806-5995
Wise Business Forms Inc.
500 North Broadway
St. Louis, MO 63102-2110
</TABLE>

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 ACCOUNTANTS'

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants will be subject to
ratification by the shareholders of the Fund at any annual meeting of
shareholders.

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, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services, Inc. ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a
wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly-
owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly-owned
subsidiary of Morgan Stanley Group Inc. The principal office of the Fund, the
Adviser, the Distributor and VKAC is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

B-26
<PAGE> 96

options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

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

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

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

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

For the years ended December 31, 1996, 1995 and 1994, the Fund paid advisory
expenses of $1,665,021, $1,212,968, and $832,111, respectively.

OTHER AGREEMENTS

FUND ACCOUNTING AGREEMENT. The Fund has also entered into a fund accounting
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 American Capital mutual funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.

For the years ended December 31, 1996, 1995 and 1994, the Fund paid expenses
of approximately $9,900, $9,500, and $8,300, respectively, representing the
Adviser's cost of providing accounting services.

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

For the years ended December 31, 1996, 1995 and 1994, the Fund paid expenses
of approximately $12,300, $16,800, and $14,500, respectively, representing Van
Kampen American Capital's cost of providing legal services.

B-27
<PAGE> 97

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

TAX STATUS OF THE FUND

The Fund, will be treated as separate corporations for federal income tax
purposes. The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under the Code. If the Fund so qualifies and
distributes each year to its shareholders at least 90% of its net investment
income (including tax-exempt interest, taxable income and net short-term capital
gain, but not net capital gains, which are the excess of long-term capital gains
over net short-term capital losses) in each year, it will not be required to pay
federal income taxes on any income distributed to shareholders. The Fund intends
to distribute at least the minimum amount of net investment income necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gains distributed to shareholders.

B-28
<PAGE> 98

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.

1997 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% 7.5% 8.0%
- ---------------- ---------------- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,000 $ 0-40,100 17.40% 3.63% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.69%
24,000-58,150 40,100-96,900 30.00% 4.29 5.00 5.71 6.43 7.14 7.86 8.57 9.29 10.00 10.71 11.43
58,150-121,300 96,900-147,700 32.90% 4.47 5.22 5.96 6.71 7.45 8.20 8.94 9.69 10.43 11.18 11.92
121,300-263,750 147,700-263,750 37.80% 4.62 5.63 6.43 7.23 8.04 8.84 9.65 10.45 11.25 12.06 12.86
Over 263,750 Over 263,750 41.30% 5.11 5.98 6.81 7.67 8.52 9.37 10.22 11.07 11.93 12.78 13.63
</TABLE>

THE DISTRIBUTOR

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight, July 1995. VKAC manages or supervises more than $57 billion
in mutual funds, closed-end funds and unit investment trusts -- assets which
have been entrusted to VKAC in more than 2 million investor accounts. VKAC has
one of the largest research teams (outside of the rating agencies) in the
country, with more than 80 analysts devoted to various specializations.

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 MSAM Holdings II, Inc. which, in turn, is a wholly-owned
subsidiary of Morgan Stanley Group Inc. The principal office of the Fund, the
Adviser, the Distributor and VKAC is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

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

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

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

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

B-29
<PAGE> 99

has received purchase orders. A discussion of how to purchase and redeem the
Fund's shares and how the Fund's shares are priced is contained in the
Prospectus.

DISTRIBUTION AND SERVICE PLANS

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

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

For the fiscal year ended December 31, 1996, the Fund's aggregate expense
under the Plans for Class A shares was $561,373. Such expenses were paid to
reimburse the Distributor for payments made to financial intermediaries for
servicing Fund shareholders and for administering the Plans. For the fiscal year
ended December 31, 1996, the Fund's aggregate expense under the Plans for Class
B shares was $477,471. Such expenses were paid to reimburse the Distributor for
the following payments: $369,310 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$108,161 for fees paid to financial intermediaries for servicing Class B
shareholders and administering Plans. For the fiscal year ended December 31,
1996, the Fund's aggregate expense under the Plans for Class C shares was
$33,962. Such expenses were paid to reimburse the Distributor for the following
payments: $26,394 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class C shares of the Fund and $7,568 for
fees paid to financial intermediaries for servicing Class C shareholders and
administering the Plans.

B-30
<PAGE> 100

PERFORMANCE INFORMATION

From time to time marketing materials may provide a portfolio manager update,
an adviser update and/or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how Van Kampen American
Capital believes the Fund compares relative to other Van Kampen American Capital
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which studied investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless of if shareholders purchased their funds
in direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund will also be marketed on the
Internet.

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,
1996 was (1.05%); (ii) the 5 year period ending December 31, 1996 was 6.28%; and
(iii) the approximately 9 year, 8 month period from May 1, 1987 (the
commencement of investment operations of the Fund) through December 31, 1996 was
9.67%.

The Fund's yield for the 30 day period ending December 30, 1996 (calculated in
the manner described in the Prospectus under the heading "Fund Performance") was
4.48%. The Fund's tax-equivalent yield for the 30 day period ending December 30,
1996 (calculated in the manner described in the Prospectus under the heading
"Fund Performance" and assuming a 37.8% tax rate) was 7.20%. The Fund's current
distribution rate for the month ending December 31, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.87%.

The Class A Share's cumulative non-standardized total return, including
payment of the maximum sales charge, from its inception to December 31, 1996 (as
calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 117.21%.

The Class A Shares cumulative non-standardized total return, excluding payment
of any sales charge, was 128.02%.

CLASS B SHARES

The average annual total return including payment of the CDSC with respect to
the Class B Shares for (i) the one year period ended December 31, 1996 was
(0.87%) and (ii) the approximately 3 year, 8 month period from May 1, 1993 (the
commencement of the sale of Class B Shares) through December 31, 1996 was 4.31%.

The Class B Share's yield for the 30 day period ending December 30, 1996
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.94%. The Class B Share's tax-equivalent yield for the 30 day
period ending December 30, 1996 (calculated in the manner described in the
Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 6.33%. The Class B Share's current distribution rate for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.36%.

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,
1996 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 16.76%.

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,
1996 was 19.26%.

B-31
<PAGE> 101

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, 1996 was 2.09%
and (ii) the approximately 3 year, 5 month period from August 13, 1993 (the
commencement of the sale of Class C Shares) through December 31, 1996 was 4.22%.

The Class C Share's yield for the 30 day period ending December 30, 1996
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.94%. The Class C Share's tax-equivalent yield for the 30 day
period ending December 30, 1996 (calculated in the manner described in the
Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 6.33%. The Class C Share's current distribution rate for the month ending
December 31, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.36%.

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, 1996 (as calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 15.05%.

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,
1996 was 15.05%.

B-32
<PAGE> 102

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Pennsylvania Tax Free Income Fund as of December 31,
1996, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP
Chicago, Illinois
February 4, 1997

B-33
<PAGE> 103

PORTFOLIO OF INVESTMENTS

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
PENNSYLVANIA 96.1%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,744,895
500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser C (MBIA Insd).......................... 8.250 01/01/16 528,485
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec (b)..... 0/8.625 02/15/04 1,802,401
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
(AMBAC Insd).................................... 6.500 03/01/11 1,126,410
1,495 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp South
Hills Hlth Sys A (MBIA Insd).................... 5.500 05/01/10 1,514,390
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd)............. 6.000 11/01/12 2,568,950
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd)............. 6.250 11/01/23 2,608,075
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,197,716
2,100 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh
Mercy Hlth Sys Inc (AMBAC Insd)................. 5.625 08/15/26 2,070,054
965 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,011,204
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,607,900
1,810 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
1983 Ser B...................................... * 10/01/15 254,106
1,950 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
Single Family Ser Z (GNMA Collateralized)....... 6.875 05/01/26 2,036,853
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver,
PA Inc Ser A (AMBAC Insd)....................... 6.250 07/01/22 2,106,860
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev OH
Edison Proj Ser A Rfdg.......................... 7.750 09/01/24 4,743,810
3,195 Bellefonte, PA Area Sch Dist (MBIA Insd)........ 5.400 05/15/20 3,122,218
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.631 11/10/20 7,162,500
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,080,360
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks
Village Inc Proj Rfdg........................... 7.500 05/15/13 1,027,120
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks
Village Inc Proj Rfdg........................... 7.700 05/15/22 1,010,800
1,000 Boyertown, PA Area Sch Dist (AMBAC Insd)........ 5.250 02/01/17 957,480
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 2,906,090
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500 09/01/15 1,060,650
</TABLE>

See Notes to Financial Statements

B-34

<PAGE> 104

PORTFOLIO OF INVESTMENTS (CONTINUED)

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

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

PENNSYLVANIA (CONTINUED)
$1,000 Cambria Cnty, PA Indl Dev Auth Res Recovery Rev
Cambria Cogen Proj Ser F........................ 7.750% 09/01/19 $ 1,033,520
2,685 Central Greene, PA Sch Dist Ser AA Rfdg (AMBAC
Insd)........................................... 5.250 02/15/24 2,567,128
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650 05/15/20 978,360
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 1,959,261
90 Chester Cnty, PA Hosp Auth Rev Brandywine
Hosp............................................ 7.000 07/01/10 92,474
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 622,774
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 668,315
975 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj............................................ 8.500 07/01/13 1,077,394
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj............................................ 8.500 07/01/21 1,105,020
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 07/01/07 1,167,923
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,302,051
2,000 Delaware Cnty, PA Auth Hosp Rev Crozer Chester
Med Cent Ser A, B & C (Prerefunded @ 12/15/00)
(MBIA Insd)..................................... 7.500 12/15/20 2,261,540
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/01)........................ 8.350 06/01/15 2,817,565
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle
Village Proj (Prerefunded @ 06/01/02)........... 9.250 06/01/22 1,842,540
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle
Village Proj Rfdg............................... 7.000 06/01/26 2,987,520
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,131,920
2,065 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,318,066
3,250 Harrisburg, PA Auth Rev Pooled Bond Pgm Ser I
(MBIA Insd)..................................... 5.625 04/01/19 3,229,297
5,000 Harrisburg, PA Pkg Auth Rev Gtd Ser H Rfdg
(AMBAC Insd).................................... 5.125 08/01/16 4,710,950
1,045 Harrisburg, PA Wtr & Swr Auth Swr Rev Second Ser
Rfdg (FGIC Insd)................................ * 10/15/08 562,733
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 653,855
1,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.375 12/15/04 1,048,080
2,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.500 12/15/10 2,101,760
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700 04/01/26 2,054,600
4,100 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg
Hosp Ser A Rfdg................................. 8.100 07/15/10 4,476,585
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA
Pwr & Lt Co Proj Ser A Rfdg (MBIA Insd)......... 6.400 11/01/21 1,067,370

</TABLE>

See Notes to Financial Statements

B-35

<PAGE> 105

PORTFOLIO OF INVESTMENTS (CONTINUED)

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

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

PENNSYLVANIA (CONTINUED)
$4,570 Lower Providence Township PA Swr Auth Swr Rev
Gtd (MBIA Insd)................................. 5.250% 05/01/22 $ 4,375,364
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,130,420
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00)....................................... 7.750 07/01/16 2,795,000
5,000 Lycoming Cnty, PA Auth Hosp Rev Divine
Providence Hosp Rfdg (Connie Lee Insd).......... 5.250 11/15/15 4,811,450
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,159,070
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 845,085
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 3,058,920
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 515,175
410 Montgomery Cnty, PA Higher Edl & Hlth Auth
Nursing Home Rev Delco Sys Svcs Proj A.......... 9.875 11/01/18 418,754
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,169,787
3,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.750 11/15/17 2,878,440
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,688,800
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery........................................ 7.500 01/01/12 3,230,220
4,225 New Kensington Arnold, PA Sch Dist Rfdg (AMBAC
Insd)........................................... 5.375 05/15/26 4,079,618
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,572,480
1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875 11/01/19 1,150,510
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,657,550
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd
Luzerne Cnty Cmnty College (AMBAC Insd)......... 6.625 08/15/15 1,096,480
2,323 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,425,398
3,000 Penn Manor Sch Dist PA (FGIC Insd).............. 5.200 06/01/16 2,888,100
2,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev
MacMillan Ltd Partnership Proj.................. 7.600 12/01/20 2,237,840
3,000 Pennsylvania Econ Dev Fin Auth Recycling Rev
Ponderosa Fibres Proj Ser A..................... 9.250 01/01/22 2,786,910
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 3,207,210
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,586,160

</TABLE>

See Notes to Financial Statements

B-36

<PAGE> 106

PORTFOLIO OF INVESTMENTS (CONTINUED)

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

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

PENNSYLVANIA (CONTINUED)
$5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600% 01/01/19 $ 4,981,050
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.964 10/03/23 4,430,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,034,720
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,051,460
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,635,950
1,365 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
47.............................................. 6.750 10/01/09 1,527,749
1,455 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
47.............................................. 6.750 10/01/10 1,622,718
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B............................... 6.800 09/01/10 924,052
2,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia Funding Pgm (MBIA Insd).... 5.600 06/15/15 1,973,920
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,206,920
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.540 09/01/26 2,295,000
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.990 03/01/20 2,915,625
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,155,200
2,000 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.000 11/15/06 2,006,060
4,595 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.600 11/15/10 4,731,150
60 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ First Ser (MBIA Insd)...................... 7.700 05/01/12 60,791
3,950 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 4,125,854
1,590 Pennsylvania St Indl Dev Auth Rev Econ Dev
(AMBAC Insd).................................... 6.000 07/01/06 1,724,721
1,250 Philadelphia, PA Auth for Indl Dev Coml Dev
Philadelphia Arpt Rev Rfdg...................... 7.750 12/01/17 1,345,000
3,000 Philadelphia, PA Auth for Indl Dev Rev Long Term
Care Maplewood.................................. 8.000 01/01/24 3,108,780
2,500 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.400 02/15/17 2,429,650
4,815 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 4,613,974
3,000 Philadelphia, PA Gas Wks Rev Fourteenth Ser (FSA
Insd)........................................... 6.250 07/01/08 3,229,500
3,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Childrens Hosp Ser A Rfdg (MBIA Insd)....... 5.000 02/15/21 2,724,510
250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Albert Einstein Med Cent.................... 7.000 10/01/21 264,600
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 2,864,540
1,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Frankford Hosp Ser A........................ 6.000 06/01/14 995,130

</TABLE>
See Notes to Financial Statements

B-37

<PAGE> 107

PORTFOLIO OF INVESTMENTS (CONTINUED)

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

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

PENNSYLVANIA (CONTINUED)
$4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Friends Hosp................................ 6.200% 05/01/11 $ 4,037,640
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,146,040
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 832,875
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 1,730,212
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 1,637,255
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 1,829,970
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,379,508
1,800 Philadelphia, PA Wtr & Swr Rev Sixteenth Ser
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,056,716
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 2,092,840
1,425 Pittsburgh, PA Sch Dist Ser B (AMBAC Insd)...... * 08/01/08 775,684
4,070 Pittsburgh, PA Sch Dist Ser B (AMBAC Insd)...... * 08/01/09 2,076,555
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,504,072
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,517,496
910 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 958,512
2,000 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev
Ser A Rfdg (FGIC Insd).......................... * 09/01/06 1,232,640
1,000 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev
Ser A Rfdg (FGIC Insd).......................... * 09/01/07 584,390
1,500 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev
Ser A Rfdg (FGIC Insd).......................... * 09/01/08 824,115
250 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Cmnty Med Cent Proj (BIGI Insd)................. 7.875 07/01/10 267,485
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg....................... 6.875 12/01/09 2,793,391
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 04/01/07 366,552
3,000 South Fork Muni Auth PA Hosp Good Samaritan Med
Cent Ser B Rfdg (MBIA Insd)..................... 5.250 07/01/26 2,876,400
1,250 State Pub Sch Bldg Auth PA College Rev Reading
Area College Cap Proj A (MBIA Insd)............. 5.100 02/15/14 1,202,287
2,180 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (MBIA Insd)...................... 6.500 02/01/14 2,382,260

</TABLE>
See Notes to Financial Statements

B-38

<PAGE> 108

PORTFOLIO OF INVESTMENTS (CONTINUED)

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

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

PENNSYLVANIA (CONTINUED)
$1,500 Washington Cnty, PA Auth Lease Rev Muni Fac Pool
Cap Ser C Subser C-1D (Prerefunded @ 06/15/00)
(AMBAC Insd).................................... 7.450% 12/15/18 $ 1,687,215
2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01)....................................... 7.400 06/01/16 3,325,003
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 360,892
------------
268,309,298
------------
GUAM 1.0%
2,750 Guam Govt Ser A................................. 5.750 09/01/04 2,767,518
------------
PUERTO RICO 0.1%
205 Puerto Rico Comwlth Pub Impt Rfdg............... 7.125 07/01/02 211,734
------------
TOTAL LONG-TERM INVESTMENTS 97.2%
(Cost $253,325,630) (a)..................................................... 271,288,550
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.8%................................ 5,100,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.0%................................... 2,827,494
------------
NET ASSETS 100.0%............................................................ $279,216,044
============
</TABLE>

*Zero coupon bond

(a) At December 31, 1996, for federal income tax purposes, cost is $253,325,630,
the aggregate gross unrealized appreciation is $18,281,606 and the aggregate
gross unrealized depreciation is $318,686, resulting in net unrealized
appreciation of $17,962,920.

(b) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.

See Notes to Financial Statements

B-39

<PAGE> 109

STATEMENT OF ASSETS AND LIABILITIES

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

<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $253,325,630)
(Note 1).................................................. $271,288,550
Short-Term Investments (Note 1)............................. 5,100,000
Receivables:
Interest.................................................. 3,997,093
Fund Shares Sold.......................................... 61,916
Other....................................................... 4,337
------------
Total Assets.......................................... 280,451,896
------------
LIABILITIES:
Payables:
Income Distributions...................................... 482,074
Distributor and Affiliates (Notes 2 and 6)................ 207,430
Fund Shares Repurchased................................... 151,685
Investment Advisory Fee (Note 2).......................... 141,756
Custodian Bank............................................ 31,703
Accrued Expenses............................................ 129,718
Deferred Compensation and Retirement Plans (Note 2)......... 91,486
------------
Total Liabilities..................................... 1,235,852
------------
NET ASSETS.................................................. $279,216,044
============
NET ASSETS CONSIST OF:
Paid in Surplus (Note 3).................................... $264,973,340
Net Unrealized Appreciation on Securities................... 17,962,920
Accumulated Undistributed Net Investment Income............. 317,894
Accumulated Net Realized Loss on Securities................. (4,038,110)
------------
NET ASSETS.................................................. $279,216,044
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $227,444,837 and 13,004,205 shares of
beneficial interest issued and outstanding)............. $ 17.49
Maximum sales charge (4.75%* of offering price)......... .87
------------
Maximum offering price to public........................ $ 18.36
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $48,408,634 and 2,768,667 shares of
beneficial interest issued and outstanding)............. $ 17.48
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,362,573 and 192,348 shares of
beneficial interest issued and outstanding)............. $ 17.48
============
</TABLE>

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

See Notes to Financial Statements

B-40

<PAGE> 110

STATEMENT OF OPERATIONS

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

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $17,777,434
-----------
EXPENSES:
Investment Advisory Fee (Note 2)............................ 1,665,021
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $561,373, $477,471 and $33,962,
respectively) (Note 6).................................... 1,072,806
Shareholder Services (Note 2)............................... 336,116
Custody..................................................... 108,110
Legal (Note 2).............................................. 35,980
Trustees Fees and Expenses (Note 2)......................... 34,948
Other....................................................... 169,749
-----------
Total Expenses.......................................... 3,422,730
Less Expenses Reimbursed (Note 2)....................... 10,028
-----------
Net Expenses............................................ 3,412,702
-----------
NET INVESTMENT INCOME....................................... $14,364,732
===========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments............................................... $ 2,074,777
Options................................................... (102,594)
Futures................................................... (365,681)
-----------
Net Realized Gain on Securities............................. 1,606,502
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................... 23,582,229
End of the Period:
Investments............................................. 17,962,920
-----------
Net Unrealized Depreciation on Securities During the
Period.................................................... (5,619,309)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.............. $(4,012,807)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $10,351,925
===========
</TABLE>

See Notes to Financial Statements

B-41

<PAGE> 111

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 14,364,732 $ 14,192,265
Net Realized Gain/Loss on Securities................. 1,606,502 (5,635,081)
Net Unrealized Appreciation/Depreciation on
Securities During the
Period............................................. (5,619,309) 31,028,321
------------ ------------
Change in Net Assets from Operations................. 10,351,925 39,585,505
------------ ------------
Distributions from Net Investment Income............. (14,101,435) (14,259,564)
Distributions in Excess of Net Investment Income
(Note 1)........................................... -0- (7,423)
------------ ------------
Distributions from and in Excess of Net Investment
Income*............................................ (14,101,435) (14,266,987)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... (3,749,510) 25,318,518
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................ 35,010,881 27,514,827
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 8,324,756 8,632,984
Cost of Shares Repurchased........................... (37,239,983) (27,500,706)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... 6,095,654 8,647,105
------------ ------------
TOTAL INCREASE IN NET ASSETS......................... 2,346,144 33,965,623
NET ASSETS:
Beginning of the Period.............................. 276,869,900 242,904,277
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $317,894 and
$(7,423), respectively)............................ $279,216,044 $276,869,900
============ ============
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares..................... $(11,821,553) $(12,063,809)
Class B Shares..................... (2,128,485) (2,062,857)
Class C Shares..................... (151,397) (140,285)
Class D Shares..................... -- (36)
------------ ------------
$(14,101,435) $(14,266,987)
============ ============
</TABLE>

See Notes to Financial Statements

B-42

<PAGE> 112

FINANCIAL HIGHLIGHTS

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

Year Ended December 31
---------------------------------------------------
Class A Shares 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $17.737 $16.081 $18.062 $16.899 $16.373
------- ------- ------- ------- -------
Net Investment Income................. .919 .946 .965 1.027 1.074
Net Realized and Unrealized Gain/Loss
on Securities....................... (.263) 1.660 (1.985) 1.164 .525
------- ------- ------- ------- -------
Total from Investment Operations...... .656 2.606 (1.020) 2.191 1.599
Less Distributions from and in Excess
of Net Investment Income (Note 1)... .903 .950 .961 1.028 1.073
------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $17.490 $17.737 $16.081 $18.062 $16.899
======= ======= ======= ======= =======
Total Return* (a)..................... 3.86% 16.62% (5.72%) 13.25% 10.09%
Net Assets at End of the Period (In
millions)........................... $227.4 $226.7 $203.2 $221.7 $153.8
Ratio of Expenses to Average Net
Assets*............................. 1.09% 1.00% .90% .71% .72%
Ratio of Net Investment Income to
Average Net Assets*................. 5.32% 5.57% 5.73% 5.80% 6.41%
Portfolio Turnover.................... 57% 28% 8% 1% 10%

*If certain expenses had not been assumed by VKAC, total return would have been lower and the
ratios would have been as follows:

Ratio of Expenses to Average Net
Assets.............................. 1.09% 1.14% 1.17% 1.09% 1.17%
Ratio of Net Investment Income to
Average Net Assets.................. 5.31% 5.42% 5.46% 5.41% 5.95%
</TABLE>

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

See Notes to Financial Statements

B-43

<PAGE> 113

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
May 1, 1993
Year Ended December 31, (Commencement of
----------------------------- Distribution) to
Class B Shares 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $17.731 $16.080 $18.055 $17.460
------- ------- ------- -------
Net Investment Income................ .788 .819 .841 .586
Net Realized and Unrealized Gain/Loss
on Securities...................... (.264) 1.659 (1.985) .603
------- ------- ------- -------
Total from Investment Operations..... .524 2.478 (1.144) 1.189
Less Distributions from and in Excess
of Net Investment Income (Note
1)................................. .771 .827 .831 .594
------- ------- ------- -------
Net Asset Value,
End of the Period.................. $17.484 $17.731 $16.080 $18.055
======= ======= ======= =======

Total Return* (a).................... 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the Period (In
millions).......................... $48.4 $46.8 $37.6 $ 27.7
Ratio of Expenses to Average Net
Assets*............................ 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment Income to
Average Net Assets*................ 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover................... 57% 28% 8% 1%

* If certain expenses had not been assumed by VKAC, total return would have been lower and
the ratios would have been as follows:

Ratio of Expenses to Average Net
Assets............................. 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment Income to
Average Net Assets................. 4.55% 4.66% 4.71% 4.13%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

B-44

<PAGE> 114

FINANCIAL HIGHLIGHTS (CONTINUED)

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

<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31, (Commencement of
---------------------------- Distribution) to
Class C Shares 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $17.729 $16.079 $18.045 $17.850
------- ------ ------ ------
Net Investment Income............... .788 .812 .850 .325
Net Realized and Unrealized
Gain/Loss on Securities........... (.264) 1.665 (1.985) .208
------- ------ ------ ------
Total from Investment Operations.... .524 2.477 (1.135) .533

Less Distributions from and in
Excess of Net Investment Income
(Note 1).......................... .771 .827 .831 .338
------- ------ ------ ------
Net Asset Value, End of the
Period............................ $17.482 $17.729 $16.079 $18.045
======= ======= ======= =======

Total Return* (a)................... 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of the Period (In
millions)......................... $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to Average Net
Assets*........................... 1.85% 1.75% 1.63% 1.54%
Ratio of Net Investment Income to
Average Net Assets*............... 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover.................. 57% 28% 8% 1%
</TABLE>

* If certain expenses had not been assumed by VKAC, 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............................ 1.85% 1.90% 1.90% 1.89%
Ratio of Net Investment Income to
Average Net Assets................ 4.55% 4.61% 4.70% 3.73%
</TABLE>

** Non-Annualized

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

See Notes to Financial Statements

B-45

<PAGE> 115

NOTES TO FINANCIAL STATEMENTS

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

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund") is
organized as a Pennsylvania trust and is registered as a non-diversified
open-end management investment company under the Investment Company Act of 1940,
as amended. The Fund's investment objective is to provide 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 commenced investment operations on May 1,
1987. The distribution of the Fund's Class B and Class C shares commenced on May
1, 1993, and August 13, 1993, respectively. On May 2, 1995, all Class D
shareholders redeemed their shares and the class was eliminated. The Fund will
no longer offer Class D shares.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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

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

B-46

<PAGE> 116

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

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

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

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At December 31, 1996, the Fund had an accumulated capital loss carryforward for
tax purposes of $4,038,110 which expires on December 31, 2003.

E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and for federal income
tax purposes, the amount of distributable net investment income may differ
between book and federal income tax purposes for a particular period. These
differences are temporary in nature, but may result in book basis distribution
in excess of net investment income for certain periods. Permanent book and tax
basis differences relating to the recognition of certain expenses which are not
deductible for tax purposes totaling $62,020 have been reclassified from
accumulated undistributed net investment income to paid in surplus.

For the year ended December 31, 1996, 99.87% of the income distributions
made by the Fund were exempt from federal income taxes.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Fund's Investment Advisory Agreement, 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>

B-47

<PAGE> 117

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

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

For the year ended December 31, 1996, the Fund recognized expenses of
approximately $30,900 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1996, the Fund recognized expenses of approximately $250,100,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

Additionally, for the year ended December 31, 1996, the Fund reimbursed VKAC
approximately $62,000 related to the direct cost of consolidating the VKAC
open-end fund complex. Payment was contingent upon the realization by the Fund
of cost efficiencies in certain expense categories resulting from the
consolidation.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC. During the year, the Adviser reimbursed the Fund for certain trustee's
compensation in connection with the July, 1995 increase in the number of
trustees of the Fund.

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

3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C. There are an unlimited number of shares of each class without par
value authorized. At December 31, 1996, paid in surplus aggregated $213,006,053,
$48,564,507 and

B-48

<PAGE> 118

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

$3,402,780 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,590,112 $ 27,397,512
Class B.......................................... 406,876 7,067,219
Class C.......................................... 31,825 546,150
---------- -------------
Total Sales........................................ 2,028,813 $ 35,010,881
========== =============
Dividend Reinvestment:
Class A.......................................... 402,847 $ 6,971,101
Class B.......................................... 72,020 1,245,925
Class C.......................................... 6,228 107,730
---------- -------------
Total Dividend Reinvestment........................ 481,095 $ 8,324,756
========== =============
Repurchases:
Class A.......................................... (1,768,713) $(30,558,627)
Class B.......................................... (349,466) (6,031,703)
Class C.......................................... (37,401) (649,653)
---------- -------------
Total Repurchases.................................. (2,155,580) $(37,239,983)
========== =============
</TABLE>

B-49

<PAGE> 119

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

At December 31, 1995, paid in surplus aggregated $209,246,584, $46,293,822
and $3,399,300 for Classes A, B and C, respectively. For the year ended December
31, 1995, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,119,488 $ 19,063,890
Class B.......................................... 432,811 7,360,052
Class C.......................................... 64,263 1,090,885
Class D.......................................... -0- -0-
---------- ------------
Total Sales........................................ 1,616,562 $ 27,514,827
========== ============
Dividend Reinvestment:
Class A.......................................... 429,117 $ 7,328,175
Class B.......................................... 70,444 1,203,406
Class C.......................................... 5,929 101,400
Class D.......................................... -0- 3
---------- ------------
Total Dividend Reinvestment........................ 505,490 $ 8,632,984
========== ============
Repurchases:
Class A.......................................... (1,402,145) $(23,853,016)
Class B.......................................... (200,582) (3,410,196)
Class C.......................................... (13,519) (235,564)
Class D.......................................... (112) (1,930)
---------- ------------
Total Repurchases.................................. (1,616,358) $(27,500,706)
========== ============
</TABLE>

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

B-50

<PAGE> 120

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

the expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.

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

For the year ended December 31, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$69,800 and CDSC on redeemed shares of approximately $133,600. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $158,923,000 and $157,502,077,
respectively.

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

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on securities. Upon disposition, a realized gain or
loss is recognized accordingly, except when exercising an option contract or
taking delivery of a security underlying a futures contract. In these instances
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.

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

B-51

<PAGE> 121

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.

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

<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995................ -0- -0-
Options Written and Purchased (Net)............. 175 (102,585)
Options Expired (Net)........................... (175) 102,585
---- --------
Outstanding at December 31, 1996................ -0- -0-
==== ========
</TABLE>

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

Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).

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

<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995.......................... 0
Futures Opened............................................ 875
Futures Closed............................................ (875)
----
Outstanding at December 31, 1996.......................... 0
====
</TABLE>

C. INVERSE FLOATING SECURITY--These instruments, which are identified in the
portfolio of investments, have a coupon which 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. The price of these

B-52

<PAGE> 122

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

securities may be more volatile than the price of a comparable fixed rate
security. These instruments are typically used by the Fund to enhance the yield
of the portfolio.

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

Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1996, are payments to VKAC of approximately
$370,500.

B-53

<PAGE> 123

PART C: OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

List all financial statements and exhibits as part of the Registration
Statement.

(a) FINANCIAL STATEMENTS:

Included in Part A of the Registration Statement:
Financial Highlights

Included in Part B of the Registration Statement:

Report of Independent Accountants

Financial Statements
Notes to Financial Statements

(b) EXHIBITS:
(1) First Amended and Restated Agreement and Declaration of Trust(14)

(2) Amended and Restated By-Laws(15)

(4) Specimen of Share Certificate

(i) Class A Shares(15)

(ii) Class B Shares(15)

(iii) Class C Shares(15)

(5) Investment Advisory Agreement+

(6) (a) Distribution and Service Agreement+

(b) Form of Dealer Agreement(14)
(c) Form of Broker Agreement(14)
(d) Form of Bank Agreement(14)
(e) Underwriting Agreement(1)
(f) Agreement Among Underwriters(1)
(g) Selected Dealer Agreement(1)
(8) (a) Form of Custodian Agreement(1)

(b) Transfer Agency Agreement(15)

(9) (a) Fund Accounting Agreement+
(b) Legal Services Agreement+
(10) Opinion and Consent of Saul, Ewing, Remick & Saul(11)
(11) Consent of KPMG Peat Marwick LLP+
(13) Letter of Understanding relating to initial capital(1)

(15) (a) Distribution Plan Pursuant to Rule 12b-1(15)

(b) Form of Shareholder Assistance Agreement(14)
(c) Form of Administrative Services Agreement(14)

(d) Service Plan(15)

(16) Computation of Performance Quotations+
(17) (a) List of certain investment companies in response to Item 29(a)+
(b) List of Officers and Directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)+

(18) Amended Multi-Class Plan+

(24) Power of Attorney+

(27) Financial Data Schedules+
- ---------------
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-11384,
filed March 4, 1987.

(11) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on February 25, 1994.

(14) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on August 24, 1995.

(15) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on April 26, 1996.

+ Filed herewith.

C-1
<PAGE> 124

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

Not applicable.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of April 4, 1997:

<TABLE>
<CAPTION>
(2)
NUMBER OF
RECORD
HOLDERS
TITLE OF CLASS* ---------
<S> <C>
Shares of beneficial interest, par value $0.01 per
share:
Class A Shares...................................... 6,324
Class B Shares...................................... 1,547
Class C Shares...................................... 80
</TABLE>

ITEM 27. INDEMNIFICATION.

Reference is made to Article 8, Section 8.4 of the Registrant's Amended and
Restated Agreement and Declaration of Trust.

Article 8, Section 8.4 of the Amended and Restated Agreement and Declaration
of Trust provides that each officer and trustee of the Registrant shall be
indemnified by the Registrant against all liabilities incurred in connection
with the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, in which the officer or trustee may be or may have been
involved by reason of being or having been an officer or trustee, except that
such indemnity shall not protect any such person against a liability to the
Registrant or any shareholder thereof to which such person would otherwise be
subject by reason of (i) not acting in good faith in the reasonable belief that
such person's actions were not in the best interests of the Trust, (ii) willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office (iii) for a criminal proceeding,
not having a reasonable cause to believe that such conduct was unlawful
(collectively, "Disabling Conduct"). Absent a court determination that an
officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.

The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.

Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in

C-2
<PAGE> 125

connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See "Investment Advisory Services" in the Prospectus and "Trustees and
Officers" and "Investment Advisory and Other Services" in the Statement of
Additional Information for information regarding the business of the Adviser.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of Van Kampen American
Capital Investment Advisory Corp., reference is made to the Adviser's current
Form ADV filed under the Investment Advisers Act of 1940, incorporated herein by
reference.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.

(b) Van Kampen American Capital Distributors, Inc., which is an affiliated
person of an affiliated person of Registrant, is the sole principal underwriter
for Registrant. The name, principal business address and positions and offices
with Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading "Trustees and Officers" in Part B of this Registration Statement, none
of such persons has any position or office with Registrant.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, ACCESS Investor Services, Inc., 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153, or at the State Street Bank and
Trust Company, 1776 Heritage Drive, North Quincy, MA 02105; (ii) by the Adviser,
will be maintained at its offices, located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 and (iii) all such accounts, books and other documents
required to be maintained by Van Kampen American Capital Distributors, Inc., the
principal underwriter, will be maintained at its offices located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

(a) Not applicable.

(b) Not applicable.

(c) The Registrant provides the information required by Item 5A in its
annual report to shareholders and hereby undertakes to furnish without charge to
each person to whom a prospectus is delivered with a copy of its latest annual
report.

C-3
<PAGE> 126

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA
TAX FREE INCOME FUND, certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oakbrook Terrace and the State of Illinois, on the
30th day of April, 1997.

VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND

By: /s/ RONALD A. NYBERG

---------------------------------------
Ronald A. Nyberg, Vice President and
Secretary

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
this Registration Statement has been signed on April 30, 1997 by the following
persons in the capacities indicated:

<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:

/s/ DENNIS J. McDONNELL* President and Trustee
- -----------------------------------------------------
Dennis J. McDonnell

Principal Financial Officer:

/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- -----------------------------------------------------
Edward C. Wood III
Trustees:

/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan

/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy

/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy

/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson

Trustee
- -----------------------------------------------------
Jerome L. Robinson

/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney

/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto

/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.

/s/ RONALD A. NYBERG April 30, 1997
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>

<PAGE> 127

SCHEDULE OF EXHIBITS TO

POST-EFFECTIVE AMENDMENT 16 TO FORM N-1A

SUBMITTED TO THE SECURITIES AND EXCHANGE

COMMISSION ON APRIL 30, 1997

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C> <C>
(5) Investment Advisory Agreement
(6) (a) Distribution and Service Agreement
(9) (a) Fund Accounting Agreement
(b) Legal Services Agreement
(11) Consent of KPMG Peat Marwick LLP
(16) Computation of Performance Quotations
(17) (a) List of certain investment companies in response to Item
29(a)
(b) List of Officers and Directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)
(18) Amended Multi-Class Plan
(24) Power of Attorney
(27) Financial Data Schedules
</TABLE>

<PAGE> 1
EXHIBIT (5)

INVESTMENT ADVISORY AGREEMENT

THIS INVESTMENT ADVISORY AGREEMENT dated as of October 31, 1996 by and
between VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND (the
"Fund"), a Pennsylvania trust (the "Trust"), and VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CORP. (the "Adviser"), a Delaware corporation.

1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.

(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.

(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.

(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.

2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:

AVERAGE DAILY
NET ASSETS % PER ANNUM
------------------ ---------------
<S> <C>
First $500 million 0.60% of 1.00%
Over $500 million 0.50% of 1.00%
</TABLE>

(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.

(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset value of such share as of the close of
business of the last day on which such calculation was made.
<PAGE> 2
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.

3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs

of acquiring and disposing of portfolio securities, cost of listing shares of
the New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of 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 on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.

4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.

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

6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.

(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.

(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.

7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.

8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.

9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder and that any such resort may
only be had upon the assets and property of the Fund.
<PAGE> 3

10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.

<PAGE> 4

IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.

VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.

By: /S/ Dennis J. McDonnell
-------------------------------------
Dennis J. McDonnell, President

VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME
FUND

By: /S/ Dennis J. McDonnell
--------------------------------------
Dennis J. McDonnell, President

<PAGE> 1
EXHIBIT (6)(a)

DISTRIBUTION AND SERVICE AGREEMENT

THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of October 31, 1996 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE
INCOME FUND, a Pennsylvania trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").

1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.

The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.

The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.

2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").

The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor

1
<PAGE> 2

from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.

3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.

4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.

In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.

2
<PAGE> 3

5. Expenses.

(a) The Fund will pay or cause to be paid:

(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund will
exercise its best efforts to obtain said registration and
qualification;

(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in connection
with any meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;

(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and

(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.

(b) The Distributor will pay the costs and expenses of qualifying and
maintaining qualification of the Shares for sale under the securities laws of
the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.

(c) The Fund shall reimburse the Distributor for out-of-pocket costs and
expenses actually incurred by it in connection with distribution of each class
of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.

(d) The Fund shall compensate the Distributor for providing services to,
and the maintenance of, shareholder accounts in the Fund (including prepaying
service fees to eligible brokers, dealers and financial intermediaries and
expenses incurred in connection therewith) and the Distributor may pay as agent
for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"),
as such Service Plan may be in effect from time to time; provided, however,
that no service fee payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees of the
Fund and by a majority of the Disinterested Trustees by vote cast in person at
a meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The
persons authorized to direct the payment of funds

3
<PAGE> 4

pursuant to this Agreement and the Service Plan shall provide
to the Fund's Board of Trustees, and the Trustees shall review, at least
quarterly, a written report with respect to each of the classes of Shares of
the amounts paid as service fees for each such class of Shares.

6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.

(a) Subject to and in conformity with all applicable federal and state
legislation, any applicable rules of the National Association of Securities
Dealers, Inc., and any applicable rules and regulations of the Securities and
Exchange Commission under the 1940 Act, the Distributor may accept offers of
holders of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in the then current
Prospectus of the Fund.

(b) The Distributor agrees to notify the Fund at such times as the Fund
may specify of the number of each class of Shares, respectively, repurchased
for the Fund's account and the time or times of such repurchases, and the Fund
shall notify the Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as described below,
if any, applicable to repurchases of Shares of such class.

(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.

(d) The Distributor agrees that all repurchases of Shares made by the
Distributor shall be made only as agent for the Fund's account and pursuant to
the terms and conditions herein set forth.

(e) The Fund agrees to authorize and direct its Custodian to pay, for the
Fund's account, the repurchase price (together with any applicable contingent
deferred sales charge) of any Shares so repurchased for the Fund against the
authorized transfer of book shares from an open account and against delivery of
any other documentation required by the Board of Trustees of the Fund or, in
the case of certificated Shares, against delivery of the certificates
representing such Shares in proper form for transfer to the Fund.

(f) The Distributor shall receive no commissions or other compensation in
respect of any repurchases of FESC Shares for the Fund under the foregoing
authorization and appointment as agent. With respect to any repurchase of CDSC
Shares or Combination Shares, the Distributor shall receive the deferred sales
charge, if any, applicable to the respective class of Shares that have been
held for less than a specified period of time with respect to such class as set
forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.

(g) If any FESC Shares sold to the Distributor under the terms of this
Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial
purchases.

4
<PAGE> 5

7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.

The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first

5
<PAGE> 6

written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall
have received notice of service on any designated agent). However, failure to
notify the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action
is brought otherwise than on account of its indemnity agreement contained in
this paragraph. In the case of any notice to the Distributor, it shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.

8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.

This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.

For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.

9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.

10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.

11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,

6
<PAGE> 7

THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.

VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND

By: /s/ Dennis J. McDonnell
---------------------------------
Name: Dennis J. McDonnell
Title: President

VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.

By: /s/ Ronald A. Nyberg
---------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President

<PAGE> 1
EXHIBIT 9(a)

FUND ACCOUNTING AGREEMENT

THIS AGREEMENT, dated October 31, 1996, by and between the parties set
forth in Schedule A hereto (designated collectively hereafter as the "Funds")
and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware
corporation ("Advisory Corp.").

W I T N E S S E T H:

WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and

WHEREAS, Advisory Corp. has the capability of providing certain
accounting services to the Funds; and

WHEREAS, each desires to utilized Advisory Corp. in the provision of
such accounting services; and

WHEREAS, Advisory Corp. intends to maintain its staff in order to
accommodate the provision of all such services.

NOW THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties hereto as
follows:

1. Appointment of Advisory Corp.. As agent, Advisory Corp. shall provide
each of the Funds the accounting services ("Accounting Services") as set forth
in Paragraph 2 of this Agreement. Advisory Corp. accepts such appointment and
agrees to furnish the Accounting Services in return for the compensation
provided in Paragraph 3 of this Agreement.

2. Accounting Services to be Provided. Advisory Corp. will provide to each
respective Fund accounting related services in connection with the maintenance
of the financial records of such Fund, including without limitation: (i)
maintenance of the general ledger and other financial books and records; (ii)
processing of portfolio transactions; (iii) coordination of the valuation of
portfolio securities; (iv) calculation of the Fund's net asset value; (v)
coordination of financial and regulatory reporting; (vi) preparation of
financial reports for each Fund's Board of Trustees; (vii) coordination of tax
and financial compliance issues; (viii) the establishment and maintenance of
accounting policies; (ix) recommendations with respect to dividend policies;
(x) preparation of each Fund's financial reports and other accounting and tax
related notice information to shareholders; and (xi) the assimilation and
interpretation of accounting data for meaningful management review. Advisory
Corp. shall provide accurate maintenance of each Fund's financial books and
records as required by the applicable securities statutes and regulations, and
shall hire persons (collectively the "Accounting Service Group") as needed to
provide such Accounting Services.

<PAGE> 2

3. Expenses and Reimbursements. Advisory Corp. shall be reimbursed by the
Funds for all costs and services incurred in connection with the provision of
the aforementioned Accounting Services ("Accounting Service Expenses"),
including but not limited to all salary and related benefits paid to the
personnel of the Accounting Service Group, overhead and expenses related to
office space and related equipment and out-of-pocket expenses.

The Accounting Services Expenses will be paid by Advisory Corp. and
reimbursed by the Funds. Advisory Corp. will tender to each Fund a monthly
invoice as of the last business day of each month which shall certify the total
support service expenses expended. Except as provided herein, Advisory Corp.
will receive no other compensation in connection with Accounting Services
rendered in accordance with this Agreement.

4. Payment for Accounting Service Expenses Among the Funds. As to one
quarter (25%) of the Accounting Service Expenses incurred under the Agreement,
the expense shall be allocated between all Funds based on the number of classes
of shares of beneficial interest that each respective Fund has issued. As to
the remaining three quarters (75%) of the Accounting Service Expenses incurred
under the Agreement, the expense shall be allocated between all Funds based on
their relative net assets. For purposes of determining the percentage of
expenses to be allocated to any Fund, the liquidation preference of any
preferred shares issued by any such Fund shall not be considered a liability of
such Fund for the purposes of calculating relative net assets of such Fund.

5. Maintenance of Records. All records maintained by Advisory Corp. in
connection with the performance of its duties under this Agreement will remain
the property of each respective Fund and will be preserved by Advisory Corp.
for the periods prescribed in Section 31 of the 1940 Act and the rules
thereunder or such other applicable rules that may be adopted from time to time
under the act. In the event of termination of the Agreement, such records will
be promptly delivered to the respective Funds. Such records may be inspected
by the respective Funds at reasonable times.

6. Liability of Advisory Corp. Advisory Corp. shall not be liable to any
Fund for any action taken or thing done by it or its agents or contractors on
behalf of the fund in carrying out the terms and provisions of the Agreement if
done in good faith and without gross negligence or misconduct on the part of
Advisory Corp., its agents or contractors.

7. Indemnification By Funds. Each Fund will indemnify and hold Advisory
Corp. harmless from all lost, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Advisory Corp. resulting from: (a) any
claim, demand, action or suit in connection with Advisory Corp.'s acceptance of
this Agreement; (b) any action or omission by Advisory Corp. in the performance
of its duties hereunder; (c) Advisory Corp.'s acting upon instructions believed
by it to have been executed by a duly authorized officer of the Fund; or (d)
Advisory Corp.'s acting upon information provided by the Fund in form and under
policies agreed to by Advisory Corp. and the Fund. Advisory Corp. shall not be
entitled to such indemnification in respect of actions or omissions
constituting gross negligence or willful misconduct of Advisory Corp. or its
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, Advisory Corp. shall give the Fund reasonable
opportunity to defend against said claim in its own name or in the name of
Advisory Corp.

8. Indemnification By Advisory Corp. Advisory Corp. will indemnify and
hold harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Advisory Corp.'s failure to comply
with the terms of this Agreement or which arises out of the gross negligence or
willful misconduct of Advisory Corp. or its agents or contractors; provided
that such negligence or misconduct is not attributable to the Funds, their
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, the Fund shall give Advisory Corp. reasonable
opportunity to defend against said claim in its own name or in the name of such
Fund.

2
<PAGE> 3

9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.

10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers or shareholders of both the Funds and Advisory
Corp. (including Advisory Corp.'s affiliates), and that the existence of any
such dual interest shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision of applicable
law.

11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May, 1998, and
thereafter from year to year, if such continuation is specifically approved at
least annually by the Board of Trustees of each Fund, including a majority of
the independent Trustees of each Fund. This Agreement may be modified or
amended from time to time by mutual agreement between the parties hereto and
may be terminated after May, 1998, by at least sixty (60) days' written notice
given by one party to the others. Upon termination hereof, each Fund shall pay
to Advisory Corp. such compensation as may be due as of the date of such
termination and shall likewise reimburse Advisory Corp. for its costs, expenses
and disbursements payable under this Agreement to such date. This Agreement
may be amended in the future to include as additional parties to the Agreement
other investment companies for with Advisory Corp., any subsidiary or affiliate
serves as investment advisor or distributor if such amendment is approved by
the President of each Fund.

12. Assignment. Any interest of Advisory Corp. under this Agreement shall
not be assigned or transferred, either voluntarily or involuntarily, by
operation of law or otherwise, without the prior written consent of the Funds.
This Agreement shall automatically and immediately terminate in the event of
its assignment without the prior written consent of the Funds.

13. Notice. Any notice under this Agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President and that of Advisory Corp. for
this purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attention: President.

14. Personal Liability. As provided for in the Agreement and Declaration of
Trust of the various Funds, under which the Funds are organized as
unincorporated trusts, the shareholders, trustees, officers, employees and
other agents of the Fund shall not personally be found by or liable for the
matters set forth hereto, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.

15. Interpretative Provisions. In connection with the operation of this
Agreement, Advisory Corp. and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor of this
Agreement.

16. State Law. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Illinois.

17. Captions. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.

3
<PAGE> 4

IN WITNESS WHEREOF, the parties have caused this amended and restated
Agreement to be executed as of the day and year first above written.

ALL OF THE PARTIES SET FORTH IN SCHEDULE A

By: /s/ Ronald A. Nyberg
----------------------------------
Ronald A. Nyberg, Vice President

VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.

By: /s/ Dennis J. McDonnell
----------------------------------
Dennis J. McDonnell, President

4
<PAGE> 5

SCHEDULE A

I. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):

CLOSED END FUNDS

Van Kampen American Capital Municipal Income Trust
Van Kampen American Capital California Municipal Trust
Van Kampen American Capital Intermediate Term High Income Trust
Van Kampen American Capital Limited Term High Income Trust
Van Kampen American Capital Investment Grade Municipal Trust
Van Kampen American Capital Municipal Trust
Van Kampen American Capital California Quality Municipal Trust
Van Kampen American Capital Florida Quality Municipal Trust
Van Kampen American Capital New York Quality Municipal Trust
Van Kampen American Capital Ohio Quality Municipal Trust
Van Kampen American Capital Pennsylvania Quality Municipal Trust
Van Kampen American Capital Trust For Insured Municipals
Van Kampen American Capital Trust For Investment Grade Municipals
Van Kampen American Capital Trust For Investment Grade California Municipals
Van Kampen American Capital Trust For Investment Grade Florida Municipals
Van Kampen American Capital Trust For Investment Grade New Jersey Municipals
Van Kampen American Capital Trust For Investment Grade New York Municipals
Van Kampen American Capital Trust For Investment Grade Pennsylvania Municipals
Van Kampen American Capital Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust
Van Kampen American Capital Advantage Pennsylvania Municipal Income Trust
Van Kampen American Capital Strategic Sector Municipal Trust
Van Kampen American Capital Value Municipal Income Trust
Van Kampen American Capital California Value Municipal Income Trust
Van Kampen American Capital Massachusetts Value Municipal Income Trust
Van Kampen American Capital New Jersey Value Municipal Income Trust
Van Kampen American Capital New York Value Municipal Income Trust
Van Kampen American Capital Ohio Value Municipal Income Trust
Van Kampen American Capital Pennsylvania Value Municipal Income Trust
Van Kampen American Capital Municipal Opportunity Trust II
Van Kampen American Capital Florida Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust II
Van Kampen American Capital Select Sector Municipal Trust

INSTITUTIONAL FUNDS

II. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC.
("MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):

The Explorer Institutional Trust
on behalf of its series
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund

5
<PAGE> 6

OPEN END FUNDS

III. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER AMERICAN CAPITAL FUNDS"):

Van Kampen American Capital Comstock Fund ("Comstock Fund")
Van Kampen American Capital Corporate Bond Fund ("Corporate Bond Fund")
Van Kampen American Capital Emerging Growth Fund ("Emerging Growth Fund")
Van Kampen American Capital Enterprise Fund ("Enterprise Fund")
Van Kampen American Capital Equity Income Fund ("Equity Income Fund")
Van Kampen American Capital Limited Maturity Government Fund ("Limited Maturity
Government Fund")
Van Kampen American Capital Global Managed Assets Fund ("Global Managed Assets
Funds")
Van Kampen American Capital Government Securities Fund ("Government Securities
Fund")
Van Kampen American Capital Government Target Fund ("Government Target Fund")
Van Kampen American Capital Growth and Income Fund ("Growth and Income Fund")
Van Kampen American Capital Harbor Fund ("Harbor Fund")
Van Kampen American Capital High Income Corporate Bond Fund ("High Income
Corporate Bond Fund")

Van Kampen American Capital Life Investment Trust ("Life Investment Trust
" or "LIT") on behalf of its Series

Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Real Estate Securities Portfolio ("LIT Real Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")

Van Kampen American Capital Pace Fund ("Pace Fund")
Van Kampen American Capital Real Estate Securities Fund ("Real Estate
Securities Fund")
Van Kampen American Capital Reserve Fund ("Reserve Fund")
Van Kampen American Capital Small Capitalization Fund ("Small Capitalization
Fund")

Van Kampen American Capital Tax-Exempt Trust ("Tax-Exempt Trust")
on behalf of its Series

Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund")

Van Kampen American Capital U.S. Government Trust for Income ("U.S. Government
Trust for Income")

6
<PAGE> 7

IV. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):

Van Kampen American Capital U.S. Government Trust ("U.S. Government Trust")
on behalf of its series
Van Kampen American Capital U.S. Government Fund ("U.S. Government Fund")

Van Kampen American Capital Tax Free Trust ("Tax Free Trust")
on behalf of its series
Van Kampen American Capital Insured Tax Free Income Fund ("Insured Tax Free
Income Fund")
Van Kampen American Capital Tax Free High Income Fund ("Tax Free High Income
Fund")
Van Kampen American Capital California Insured Tax Free Fund ("California
Insured Tax Free Fund")
Van Kampen American Capital Municipal Income Fund ("Municipal Income Fund")
Van Kampen American Capital Intermediate Term Municipal Income Fund
(Intermediate Term Municipal Income Fund")
Van Kampen American Capital Florida Insured Tax Free Income Fund ("Florida
Insured Tax Free Income Fund")

Van Kampen American Capital New Jersey Tax Free Income Fund ("New Jersey
Tax Free Income Fund")
Van Kampen American Capital New York Tax Free Income Fund ("New York Tax Free
Income Fund")
Van Kampen American Capital California Tax Free Income Fund ("California Tax
Free Income Fund")
Van Kampen American Capital Michigan Tax Free Income Fund ("Michigan Tax Free
Income Fund")
Van Kampen American Capital Missouri Tax Free Income Fund ("Missouri Tax Free
Income Fund")
Van Kampen American Capital Ohio Tax Free Income Fund ("Ohio Tax Free Income
Fund")

Van Kampen American Capital Trust ("VKAC Trust")
Van Kampen American Capital High Yield Fund ("High Yield Fund")
Van Kampen American Capital Short-Term Global Income Fund ("Short-Term Global
Income Fund")
Van Kampen American Capital Strategic Income Fund ("Strategic Income Fund")

Van Kampen American Capital Equity Trust ("Equity Trust")
on behalf of its series
Van Kampen American Capital Utility Fund ("Utility Fund")
Van Kampen American Capital Balanced Fund ("Balanced Fund")
Van Kampen American Capital Growth Fund ("Growth Fund")
Van Kampen American Capital Value Fund ("Value Fund")
Van Kampen American Capital Great American Companies Fund ("Great American
Companies Fund")
Van Kampen American Capital Prospector Fund ("Prospector Fund")
Van Kampen American Capital Aggressive Growth Fund ("Aggressive Growth Fund")

Van Kampen American Capital Foreign Securities Fund ("Foreign Securities Fund")

Van Kampen American Capital Pennsylvania Tax Free Income Fund ("Pennsylvania
Tax Free Income Fund")
Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund"); and

<PAGE> 1

EXHIBIT 9(b)

LEGAL SERVICES AGREEMENT

THIS AGREEMENT, dated as of October 31, 1996, by and between the
parties as set forth in Schedule 1, attached hereto and incorporated by
reference (designated collectively hereafter as the "Funds"), and VAN KAMPEN
AMERICAN CAPITAL, INC. (formerly Van Kampen Merritt Holdings Corp.), a Delaware
corporation ("Van Kampen").

W I T N E S S E T H:

WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and

WHEREAS, Van Kampen has the capability of providing certain legal
services to the Funds; and

WHEREAS, each Fund desires to utilize Van Kampen in the provision of
such legal services; and

WHEREAS, Van Kampen intends to increase its staff in order to
accommodate the provision of all such services.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties hereto as
follows:

1. Appointment of Van Kampen. As agent, Van Kampen shall provide each of
the Funds the legal services (the "Legal Services") as set forth in Paragraph 2
of this Agreement. Van Kampen accepts such appointments and agrees to furnish
the Legal Services in return for the compensation provided in Paragraph 3 of
this Agreement.

2. Legal Services to be Provided. Van Kampen will provide to the Funds the
following legal services, including without limitation: accurate maintenance of
the Funds' Corporate Minute books and records, preparation and oversight of
each Fund's regulatory reports and other information provided to shareholders
as well as responding to day-to-day legal issues on behalf of the Funds. Van
Kampen shall hire persons (collectively the "Legal Services Group") as needed
to provide such Legal Services and in such numbers as may be agreed from time
to time.

3. Expenses and Reimbursement. The Legal Services expenses (the "Legal
Services Expenses") for which Van Kampen may be reimbursed are salary and
salary related benefits, including but not limited to bonuses, group insurance
and other regular wages paid to the personnel of the Legal Services Group, as
well as overhead and expenses related to office space and necessary equipment.
The Legal Services Expenses will be paid by Van Kampen and reimbursed by the
Funds. Van Kampen will

1
<PAGE> 2

tender to each Fund a monthly invoice as of the last business day of each month
which shall certify the total Legal Service Expenses expended. Except as
provided herein, Van Kampen will receive no other compensation in connection
with Legal Services rendered in accordance with this Agreement, and Van Kampen
will be responsible for all other expenses relating to the providing of Legal
Services.

4. Payment for Legal Services Expense Among the Funds. One half (50%) of
the Legal Services Expenses incurred under the Agreement shall be attributable
equally to each respective Fund and all other funds to whom Van Kampen provides
Legal Services, including all other Funds for which Van Kampen serves as
investment adviser and distributor and the Govett Funds (the Non-Participating
Funds"). Van Kampen shall assume the costs of Legal Services for the
Non-Participating Funds for which reimbursement is not received. The remaining
one half (50%) of the Legal Services Expenses shall be in allocated (a) in the
event services are attributable to specific funds (including the
Non-Participating Funds) based on such specific time allocations; and (b) in
the event services are attributable only to types of funds (i.e. closed-end and
open-end funds), the relative amount of time spent on each type of fund and
then further allocated between funds of that type on the basis of relative net
assets at the end of the period.

5. Maintenance of Records. All records maintained by Van Kampen in
connection with the performance of its duties under this Agreement will remain
the property of each respective Fund and will be preserved by Van Kampen for
the periods prescribed in Section 31 of the 1940 Act and the rules thereunder
or such other applicable rules that may be adopted from time to time under the
Act. In the event of termination of the Agreement, such records will be
promptly delivered to the respective Funds. Such records may be inspected by
the respective Funds at reasonable times.

6. Liability of Van Kampen. Van Kampen shall not be liable to any Fund for
any action taken or thing done by it or its agents or contractors on behalf of
the Fund in carrying out the terms and provisions of the Agreement if done in
good faith and without negligence or misconduct on the part of Van Kampen, its
agents or contractors.

7. Indemnification By Funds. Each Fund will indemnify and hold Van Kampen
harmless from all loss, cost, damage and expense, including reasonable expenses
for legal counsel, incurred by Van Kampen resulting from (a) any claim, demand,
action or suit in connection with Van Kampen's acceptance of this Agreement;
(b) an action or omission by Van Kampen in the performance of its duties
hereunder; (c) Van Kampen's acting upon instructions believed by it to have
been executed by a duly authorized office of the Fund; or (d) Van Kampen's
acting upon information provided by the Fund in form and under policies agreed
to by Van Kampen and the Fund. Van Kampen shall not be entitled to such
indemnification in respect of action or omissions constituting negligence or
willful misconduct of Van Kampen or its agents or contractors. Prior to
confessing any claim against it which may be subject to this indemnification,
Van

2
<PAGE> 3
Kampen shall give the Fund reasonable opportunity to defend against said
claim on its own name or in the name of Van Kampen.

8. Indemnification By Van Kampen. Van Kampen will indemnify and hold
harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Van Kampen's failure to comply
with the terms of this Agreement or which arises out of the negligence or
willful misconduct of Van Kampen or its agents or contractors; provided, that
such negligence or misconduct is not attributable to the Funds, their agents or
contractors. Prior to confessing any claim against it which may be subject to
this indemnification, the Fund shall give Van Kampen reasonable opportunity to
defend against said claim in its own name or in the name of such Fund.

9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as necessary to effectuate the purposes hereof.

10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers, or shareholders of both the Funds and Van Kampen
(including Van Kampen's affiliates), and that the existence of any such dual
interest shall not affect the validity hereof or of any transactions hereunder
except as otherwise provided by a specific provision of applicable law.

11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May 31, 1996,
and thereafter from year to year if such continuation is specifically approved
at least annually by the Board of Trustees of each Fund, including a majority
of the independent Trustees of each Fund. The Agreement may be modified or
amended from time to time by mutual agreement between the and shall likewise
reimburse Van Kampen for its costs, expenses and disbursements payable under
this Agreement to such date. This Agreement may be amended in the future to
include as additional parties to the Agreement other investment companies for
which Van Kampen, any subsidiary or affiliate serves as investment advisor or
distributor.

12. Assignment. Any interest of Van Kampen under this Agreement shall not
be assigned or transferred, either voluntarily or involuntarily, by operation
of law or otherwise, without the prior written consent of the Fund. This
Agreement shall automatically and immediately terminate in the event of its
assignment without the prior written consent of the Fund.

13. Notice. Any notice under this agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President

3
<PAGE> 4

and the address of Van Kampen. for this purpose is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: General Counsel.

14. Personal Liability. As provided for in the Declaration of Trust of the
various Funds, under which the Funds are organized as unincorporated trust
under the laws of the State of Delaware and Pennsylvania, as the case may be,
the shareholders, trustees, officers, employees and other agents of the Fund
shall not personally be found by or liable for the matters set forth hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.

15. Interpretative Provisions. In connection with the operation of this
agreement, Van Kampen and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their opinion be consistent with the general tenor of this Agreement.

16. State Law. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Illinois.

17. Captions. The captions in the Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction effect.

4
<PAGE> 5

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.

ALL OF THE PARTIES SET FORTH IN SCHEDULE 1 ATTACHED HERETO

By: /s/ Ronald A. Nyberg
-------------------------
Ronald A. Nyberg
Executive Vice President

VAN KAMPEN AMERICAN CAPITAL, INC.

By: /s/ Dennis J. McDonnell
-------------------------
Dennis J. McDonnell
Executive Vice President

5
<PAGE> 6

SCHEDULE 1

1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund

2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series, Van
Kampen American Capital Insured Tax Free Income Fund, Van Kampen American
Capital Tax Free High Income Fund, Van Kampen American Capital California
Insured Tax Free Fund, Van Kampen American Capital Municipal Income Fund,
Van Kampen American Capital Limited Term Municipal Income Fund, Van Kampen
American Capital New York Tax Free Income Fund, Van Kampen American Capital
New Jersey Tax Free Income Fund, Van Kampen American Capital Florida Insured
Tax Free Income Fund, Van Kampen American Capital California Tax Free Income
Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen
American Capital Missouri Tax Free Income Fund and Van Kampen American
Capital Ohio Tax Free Income Fund

3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital Short-Term
Global Income Fund and Van Kampen American Capital Strategic Income Fund

4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital Balanced
Fund, Van Kampen American Capital Value Fund, Van Kampen American Capital
Growth Fund, Van Kampen American Capital Great American Companies Fund, Van
Kampen American Capital Prospector Fund and Van Kampen American Capital
Aggressive Growth Fund

5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND

6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND

7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND

8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST

9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST

10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST

11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II

12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST

13. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST

14. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST

15. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST

16. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST

17. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST

18. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST

19. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST

6
<PAGE> 7
20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS

21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS

22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS

23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS

24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS

25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW
YORK MUNICIPALS

26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE
PENNSYLVANIA MUNICIPALS

27. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST

28. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST

29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL
INCOME TRUST

30. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST

31. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST

32. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL
INCOME TRUST

33. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL
INCOME TRUST

34. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL
INCOME TRUST

35. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME
TRUST

36. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME
TRUST

37. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL
INCOME TRUST

38. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II

39. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST

40. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II

41. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST

42. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts, Explorer
Institutional Active Core Fund and Explorer Institutional Limited Duration
Fund

<PAGE> 1
EXHIBIT 11

CONSENT OF INDEPENDENT AUDITORS ACCOUNTANTS

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

We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Legal Counsel and Independent Accountants" in the Statement of
Additional Information.

KPMG Peat Marwick LLP

Chicago, Illinois

April 22, 1997

<PAGE> 1
EXHIBIT 16

CALCULATION OF YIELD

The Fund calculates its yield quotations based on a 30-day period ended on
the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:

a-b 6
YIELD (y) = 2[(----- + 1) - 1]
cd

Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period

Class A Shares
a = $ 1,092,512
b = $ 208,492
c = 12,995,504
d = $18.39
y = 4.48

<TABLE>
<S> <C>
Class B Shares

Formula

Class A Share Yield + Sales Charge Effect - Expense Differential

Class A Share Yield 4.48%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.48% .21%
- Expense Differential between Class A Shares and Class B Shares .75%
----
Class B Share SEC Yield 3.94%
====
- Waived Expense Adjustment .00%
----
Class B Share SEC Yield (Without Expense Waiver) 3.94%
====

Class C Shares

Formula

Class A Share Yield + Sales Charge Effect - Expense Differential

Class A Share Yield 4.48%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.48% .21%
- Expense Differential between Class A Shares and Class C Shares .75%
----
Class C Share SEC Yield 3.94%
====
-Waived Expense Adjustment .00%
----
Class C Share SEC Yield (Without Expense Waiver) 3.94%
====
</TABLE>
<PAGE> 2

PENNSYLVANIA TAX FREE INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995

Class A Shares

Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------

$1,086,104.27 - $197,765.09 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.52%
12,773,778.390 X $18.62 -----

Class A Shares $1,086,104.27 - $217,662.97 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 4.42%
Expense Waiver 12,773,778.390 X $18.62 -----

Waived Expense Adjustment (4.52%-4.42%) 0.10%
-----

</TABLE>

<TABLE>
<S> <C>
Class B Shares

Formula

Class A Share Yield + Sales Charge Effect - Expense Differential

Class A Share Yield 4.52%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.52% .21%
- Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 3.98%
=====

- Waived Expense Adjustment .10%
-----
Class B Share SEC Yield (Without Expense Waiver) 3.88%
=====
Class C Shares

Formula

Class A Share Yield + Sales Charge Effect - Expense Differential

Class A Share Yield 4.52%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.52% .21%
- Expense Differential between Class A Shares and Class C Shares .75%
-----
Class C Share SEC Yield 3.98%
=====

- Waived Expense Adjustment .10%
-----
Class C Share SEC Yield (Without Expense Waiver) 3.88%
=====

</TABLE>

<PAGE> 3
PENNSYLVANIA TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1996

Current Annual Income Per Share
-------------------------------
Current Offering Price

<TABLE>
<S> <C> <C>
Class A Shares

$.8940
------
$18.36 =4.87%

Class B Shares
$.7620
------
$17.48 =4.36%

Class C Shares
$.7620
------
$17.48 =4.36%

</TABLE>

<PAGE> 4
PENNSYLVANIA TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD

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

SEC Yield
------------
1 - Tax Rate

Class A Shares 4.48%
-------
1-37.8% =7.20%

Class B Shares
3.94%
-------
1-37.8% =6.33%

Class C Shares
3.94%
-------
1-37.8% =6.33%

</TABLE>

CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE

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

Distribution Rate
-----------------
1 - Tax Rate

Class A Shares 4.87%
-------
1-37.8% =7.83%

Class B Shares
4.36%
-------
1-37.8% =7.01%

Class C Shares
4.36%
-------
1-37.8% =7.01%

</TABLE>

<PAGE> 5
PENNSYLVANIA TAX FREE INCOME FUND - CLASS A SHARES

TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $ 989.50 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD (1.05)% = T

Excluding Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,038.59 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD 3.86% = T

<CAPTION>
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1996

<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,355.95 = ERV
Five years ended 12/31/96 = (60 Mos.) 5 = n

TOTAL RETURN FOR THE PERIOD 6.28% = T

Excluding Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,423.77 = ERV
Five years ended 12/31/96 = (60 Mos.) 5 = n

TOTAL RETURN FOR THE PERIOD 7.32% = T

</TABLE>

<PAGE> 6
PENNSYLVANIA TAX FREE INCOME FUND - CLASS A SHARES

TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996

<TABLE>
<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,172.12 = ERV
Inception through 12/31/96 = (116 Mos.) 9.67 = n

TOTAL RETURN FOR THE PERIOD 8.35% = T

Excluding Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,280.22 = ERV
Inception through 12/31/96 = (116 Mos.) 9.67 = n

TOTAL RETURN FOR THE PERIOD 8.90% = T

NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996

Formula ERV - P
---------
P = T

Including Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,172.12 = ERV

TOTAL RETURN FOR THE PERIOD 117.21% = T

Excluding Payment of the Sales Charge
Net Asset Value $17.49
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,280.22 = ERV

TOTAL RETURN FOR THE PERIOD 128.02% = T
</TABLE>

<PAGE> 7
PENNSYLVANIA TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $ 991.30 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD (0.87)% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,034.74 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD 3.07% = T

</TABLE>

TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996

<TABLE>
<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,167.61 = ERV
Inception through 12/31/96 = (44 Mos.) 3.67 = n

TOTAL RETURN FOR THE PERIOD 4.31% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,192.61 = ERV
Inception through 12/31/96 = (44 Mos.) 3.67 = n

TOTAL RETURN FOR THE PERIOD 4.92% = T
</TABLE>

<PAGE> 8
PENNSYLVANIA TAX FREE INCOME FUND - CLASS B SHARES

NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996

<TABLE>
<S> <C>
Formula ERV - P
---------
P = T

Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,167.61 = ERV

TOTAL RETURN FOR THE PERIOD 16.76% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,192.61 = ERV

TOTAL RETURN FOR THE PERIOD 19.26% = T
</TABLE>

<PAGE> 9
PENNSYLVANIA TAX FREE INCOME FUND - CLASS C SHARES

TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996

<TABLE>

<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,020.90 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD 2.09% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Invesetment $1,000.00 = P
Ending Redeemable Value $1,030.76 = ERV
One year period ended 12/31/96 = (12 Mos.) 1 = n

TOTAL RETURN FOR THE PERIOD 3.08% = T

<CAPTION>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996

<S> <C>
n
Formula P(1+T) = ERV

Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,150.50 = ERV
Inception through 12/31/96 = (41 Mos.) 3.39 = n

TOTAL RETURN FOR THE PERIOD 4.22% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,150.50 = ERV
Inception through 12/31/96 = (41 Mos.) 3.39 = n

TOTAL RETURN FOR THE PERIOD 4.22% = T

</TABLE>

<PAGE> 10
PENNSYLVANIA TAX FREE INCOME FUND - CLASS C SHARES

NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996

<S> <C>
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,150.50 = ERV

TOTAL RETURN FOR THE PERIOD 15.05% = T

Excluding Payment of the CDSC
Net Asset Value $17.48
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,150.50 = ERV

TOTAL RETURN FOR THE PERIOD 15.05% = T

</TABLE>

<PAGE> 1
EXHIBIT 17(a)

INVESTMENT COMPANIES FOR WHICH

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS INC.
ACTS AS PRINCIPAL UNDERWRITER OR DEPOSITOR
APRIL 4, 1997

Van Kampen American Capital U.S. Government Trust
Van Kampen American Capital U.S. Government Fund
Van Kampen American Capital Tax Free Trust
Van Kampen American Capital Insured Tax Free Income Fund
Van Kampen American Capital Tax Free High Income Fund
Van Kampen American Capital California Insured Tax Free Fund
Van Kampen American Capital Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal Income Fund
Van Kampen American Capital Florida Insured Tax Free Income Fund
Van Kampen American Capital New Jersey Tax Free Income Fund
Van Kampen American Capital New York Tax Free Income Fund
Van Kampen American Capital Trust
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund

Van Kampen American Capital Equity Trust
Van Kampen American Capital Utility Fund

Van Kampen American Capital Value Fund
Van Kampen American Capital Great American Companies Fund
Van Kampen American Capital Growth Fund
Van Kampen American Capital Prospector Fund
Van Kampen American Capital Aggressive Growth Fund
Van Kampen American Capital Foreign Securities Fund

Van Kampen American Capital Pennsylvania Tax Free Income Fund
Van Kampen American Capital Tax Free Money Fund
Van Kampen American Capital Prime Rate Income Trust

Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Government Target Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust

Van Kampen American Capital Enterprise Portfolio
Van Kampen American Capital Domestic Income Portfolio
Van Kampen American Capital Emerging Growth Portfolio
Van Kampen American Capital Global Equity Portfolio
Van Kampen American Capital Government Portfolio
Van Kampen American Capital Money Market Portfolio
Van Kampen American Capital Asset Allocation Portfolio
Van Kampen American Capital Real Estate Securities Portfolio
Van Kampen American Capital Growth and Income Portfolio

<PAGE> 2
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Texas Tax Free Income Fund

Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
Internet Trust
Michigan Real Estate Income and Growth Trust
Van Kampen American Capital Insured Income Trust
Van Kampen American Capital Insured Income Trust (Intermediate)
Strategic Ten Trust, United States
Strategic Ten Trust, United Kingdom
Strategic Ten Trust, Hong Kong
Strategic Five Trust, United States
Global Fifteen Trust
Global Thirty Trust
Van Kampen American Capital Equity Opportunity Trust

Great International Firms Trust
Gruntal & Co. Incorported Undervalued Growth Opportunities

Principal Trust Princor Emerging Growth and Treasury
International Assets Advisory Corporation Global Blue Chip Trust

Renaissance Trust
Mississippi Insured Municipal Trust
Blue Chip Opportunity and Treasury Trust
Wheat First Butcher Singer Wheat First Strategic Opportunity Unit Trust
Baby Boomer Opportunity Trust
Van Kampen American Capital Utility Income Trust
Global Energy Trust
Michigan Select Trust
Internatinal Assets Advisory Corp. Latin American Trust
Brand Name Equity Trust
Aggressive Growth Series Global Health Care Trust
Global Precious Metals Trust

<PAGE> 3

<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 387
Insured Municipals Income Trust (Discount) Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 106 1009
Insured Municipals Income Trust (Intermediate Term) Series 5 through 89
Insured Municipals Income Trust (Limited Term) Series 9 through 86
Insured Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 93
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 9
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 18
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 164
California Insured Municipals Income Trust (Premium Bond Series) Series 1
California Insured Municipals Income Trust (1st Intermediate Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 21
California Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 22
Colorado Insured Municipals Income Trust Series 1 through 83
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series 1 through 34
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investor's Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 113
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 13
Georgia Insured Municipals Income Trust Series 1 through 83
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust Series 1
Indiana Insured Municipals Income Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 59
Louisiana Insured Municipals Income Trust Series 1 through 17
Maine Investor's Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 through 81
Massachusetts Insured Municipals Income Trust Series 1 through 34
Massachusetts Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Financial Institutions Trust Series 1
Michigan Insured Municipals Income Trust Series 1 through 143
Michigan Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust (1st Intermediate Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Michigan Select Trust Series 1
Minnesota Insured Municipals Income Trust Series 1 through 60
Minnesota Investors' Quality Tax-Exempt Trust Series 1 through 21
Mississippi Insured Municipals Income Trust Series 1
Missouri Insured Municipals Income Trust Series 1 through 100
Missouri Insured Municipals Income Trust (Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
Missouri Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1
</TABLE>

<PAGE> 4

<TABLE>
<S> <C>
Nebraska Investors' Quality Tax-Exempt Trust Series 1 through 9
New Mexico Insured Municipals Income Trust Series 1 through 18
New Jersey Insured Municipals Income Trust Series 1 through 118
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust-Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 140
New York Insured Tax-Free Bond Trust Series 1
New York Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 through 17
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 91
Ohio Insured Municipals Income Trust Series 1 through 106
Ohio Insured Municipals Income Trust (Premium Bond Series) Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 17
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust - Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 228
Pennsylvania Insured Municipals Income Trust (Premium Bond Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 85
Stepstone Growth Equity and Treasury Securities Trust Series 1
Tennessee Insured Municipals Income Trust Series 1-3 and 5-39
Texas Insured Municipals Income Trust Series 1 through 40
Texas Insured Municipal Income Trust (Intermediate Ladder) Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 76
Van Kampen American Capital Equity Opportunity Trust Series 1 through 54
Van Kampen American Capital Utility Income Trust Series 1 through 8
Van Kampen American Capital Insured Income Trust Series 1 through 64
Van Kampen American Capital Insured Income Trust (Intermediate Term) Series 1 through 62
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 7
Principal Financial Institutions Trust Series 1
Internet Trust Series 1 through 5
Michigan Real Estate Income and Growth Trust Series 1
Strategic Ten Trust, United States Series 1 through 14
Strategic Ten Trust, United Kingdom Series 1 through 12
Strategic Ten Trust, Hong Kong Series 1 through 12
Strategic Five Trust, United States Series 1 through 8
Global Fifteen Trust Series 1 through 2
Global Thirty Trust Series 1 through 3
Great International Firms Trust Series 1 through 3
Undervalued Growth Opportunities Trust Series 1
Emerging Growth and Treasury Series 1
Global Blue Chip Trust Series 1
Renaissance Trust Series 1
Blue Chip Opportunity and Treasury Trust Series 1 through 4
Wheat First Strategic Opportunity Unit Trust Series 1
Baby Boomer Opportunity Trust Series 1 through 2
</TABLE>

<PAGE> 1
EXHIBIT 17 (b)
Officers
Van Kampen American Capital Distributors, Inc.

NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & Chief Executive Officer Houston, TX

William R. Molinari President & Chief Operating Oakbrook Terrace, IL
Officer

Ronald A. Nyberg Executive Vice President, General Oakbrook Terrace, IL
Counsel & Assistant Secretary

William R. Rybak Executive Vice President & Chief Oakbrook Terrace, IL
Financial Officer
Paul R. Wolkenberg Executive Vice President Houston, TX

Robert A. Broman Sr. Vice President Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
Keith K. Furlong Sr. Vice President Oakbrook Terrace, IL
Douglas B. Gehrman Sr. Vice President Houston, TX
Richard D. Humphrey Sr. Vice President Houston, TX
D. Bruce Johnston Sr. Vice President Oakbrook Terrace, IL
Scott E. Martin Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Mark T. McGannon Sr. Vice President Oakbrook Terrace, IL
Charles G. Millington Sr. Vice President & Treasurer Oakbrook Terrace,
Robert S. West Sr. Vice President Oakbrook Terrace, IL
John H. Zimmermann, III Sr. Vice President Oakbrook Terrace, IL

Dominic C. Martellaro 1st Vice President Danville, CA
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
James J. Ryan 1st Vice President Oakbrook Terrace, IL
Michael L. Stallard 1st Vice President Oakbrook Terrace, IL
Patrick J. Woelfel 1st Vice President Oakbrook Terrace, IL

Laurence J. Althoff Vice President & Controller Oakbrook Terrace, IL
James K. Ambrosio Vice President Massapequa, NY
Brian P. Arcara Vice President Buffalo, NY
Sheldon Barker Vice President Moon, PA
Patricia A. Bettlach Vice President Chesterfield, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
Christopher M. Bisaillon Vice President Oakbrook Terrace, IL
James J. Boyne Vice President, Associate General Oakbrook Terrace, IL
Counsel & Assistant Secretary
Michael P. Boos Vice President Oakbrook Terrace, IL
Robert C. Brooks Vice President Oakbrook Terrace, IL
Brooksley Burke Vice President Marina Del Ray, CA
William F Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Christine Cleary Byrum Vice President Tampa, FL
Glenn M. Cackovic Vice President Laguna Niguel, CA
Joseph N. Caggiano Vice President New York, NY
</TABLE>
<PAGE> 2

<TABLE>
<S> <C> <C>
Richard J. Charlino Vice President Houston, TX
Deanna Margaret Chiaro Vice President Oakbrook Terrace, IL
Scott A. Chriske Vice President Plano, TX
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
Suzanne Cummings Vice President Oakbrook Terrace, IL
Ken DeFrancesca Vice President Oakbrook Terrace, IL
Daniel R. DeJong Vice President Oakbrook Terrace, IL
Tracey M. DeLusant Vice President New York, NY
Mark B. Doremus Vice President Houston, TX
Michael E. Eccleston Vice President Oakbrook Terrace, IL
Jonathan Eckard Vice President Tampa, FL
Charles Edward Fisher Vice President Naperville, IL
William J. Fow Vice President Redding, CT
Nicholas J. Foxhoven Vice President Englewood, CO
Charles Friday Vice President Gibsonia, PA
Erich P. Gerth Vice President Piedmont, CA
Richard G. Golod Vice President Annapolis, MD
Timothy D. Griffith Vice President Kirkland, WA
Kyle D. Haas Vice President Oakbrook Terrace, IL
Daniel Hamilton Vice President Austin, TX
John A. Hanhauser Vice President Philadelphia, PA
John G. Hansen Vice President Oakbrook Terrace, IL
Eric J. Hargens Vice President Orlando, FL
Calvin B. Hays Vice President Richmond, VA
Joseph Hays Vice President Cherry Hill, NJ
Gregory Heffington Vice President Ft. Collins, CO
Scott F. Heyer Vice President Tampa, FL
Susan J. Hill Vice President Oakbrook Terrace, IL
David S. Hogaboom Vice President Oakbrook Terrace, IL
Bryn M. Hoggard Vice President Houston, TX
Robert S. Hunt Vice President Phoenix, MD
Lowell Jackson Vice President Norcross, GA
Kevin G. Jajuga Vice President Baltimore, MD
Jeffrey S. Kinney Vice President Overland Park, KS
Dana R. Klein Vice President Oakbrook Terrace, IL
Ann Marie Klingenhagen Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
David R. Kowalski Vice President & Director Oakbrook Terrace, IL
of Compliance
Richard D. Kozlowski Vice President Atlanta, GA
Thomas W. Knowles Vice President Cary, NC
Patricia D. Lathrop Vice President Tampa, FL
Brian Laux Vice President Statten Island, NY
S. William Lehew III Vice President Charlotte, NC
Tony E. Leal Vice President Daphne, AL
Eric Levinson Vice President San Francisco, CA
Jonathan Linstra Vice President Oakbrook Terrace, IL
Walter Lynn Vice President Flower Mound, TX
Richard M. Lundgren Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Carl Mayfield Vice President Lakewood, CO
Brooks D. McCartney Vice President Puyallup, WA
Anne Therese McGrath Vice President Los Gatos, CA
John Mills Vice President Kenner, LA
</TABLE>
<PAGE> 3

<TABLE>
<S> <C> <C>
Ted Morrow Vice President Dallas, TX
Robert Muller, Jr. Vice President Cypress, TX
Michael D. Ossmen Vice President Oakbrook Terrace, IL
Christopher Petrungaro Vice President Oakbrook Terrace, IL
Anthony Piazza Vice President Old Bridge, NJ
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Fairlawn, OH
Daniel D. Reams Vice President Royal Oak, MI
Walter E. Rein Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
Suzette N. Rothberg Vice President Plymouth, MN
Jeffrey Rourke Vice President Oakbrook Terrace, IL
Thomas Rowley Vice President St. Louis, MO
Heather R. Sabo Vice President Richmond, VA
Stephanie Scarlata Vice President Bedford Corners, NY
Ronald J. Schuster Vice President Tampa, FL
Jeffrey C. Shirk Vice President Swampscott, MA
Kimberly M. Spangler Vice President Fairfax, VA
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
Gary R. Steele Vice President Philadelphia, PA
Richard Stefanec Vice President Los Angeles, CA
James D. Stevens Vice President North Andover, MA
William C. Strafford Vice President Granger, IN
Eric Studer Vice President Flemington, NJ
David A. Tabone Vice President Scottsdale, AZ
James C. Taylor Vice President Naperville, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Todd Volkman Vice President Austin, TX
Christopher Walsh Vice President Oakbrook Terrace, IL
Jeff Warland Vice President Oakbrook Terrace, IL
Sandra A. Waterworth Vice President and Assistant Oakbrook Terrace, IL
Secretary
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
Harold Whitworth, III Vice President Oakbrook Terrace, IL
Kirk Wiggins Vice President Arlington, TX
James R. Yount Vice President Mercer Island, WA
Patrick M. Zacchea Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Nicholas Dalmaso Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Huey P. Falgout, Jr. Asst. Vice President & Asst. Secretary Houston, TX
Walter C. Gray Asst. Vice President Houston, TX
Michael B. Kollins Asst. Vice President Oakbrook Terrace, IL
Laurie L. Jones Asst. Vice President Houston, TX
Ivan R. Lowe Asst. Vice President Houston, TX
Linda S. MacAyeil Asst. Vice President Oakbrook Terrace, IL
Stuart R. Moehlman Asst. Vice President Houston, TX
Gregory S. Parker Asst. Vice President Houston, TX
David B. Partain Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Michael Quinn Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
</TABLE>

<PAGE> 4

<TABLE>
<S> <C> <C>
Thomas J. Sauerborn Asst. Vice President New York, NY
Bruce Saxon Asst. Vice President Oakbrook Terrace, IL
Andrew J. Scherer Asst. Vice President Oakbrook Terrace, IL
Traci T. Tighe Asst. Vice President Oakbrook Terrace, IL
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Robert A. Watson Asst. Vice President Oakbrook Terrace, IL
Natalie Wilson Asst. Vice President New York, NY
Barbara A. Withers Asst. Vice President Oakbrook Terrace, IL

Gina M. Costello Asst. Secretary Oakbrook Terrace, IL
Cathy Napoli Asst. Secretary Oakbrook Terrace, IL

Elizabeth M. Brown Officer Houston, TX
John Browning Offcer Oakbrook Terrace. IL
Leticia George Officer Houston, TX
Sarah Kessler Officer Oakbrook Terrace, IL
William D. McLaughlin Officer Houston, TX
Becky Newman Officer Houston, TX
Rosemary Pretty Officer Houston, TX
Colette Saucedo Officer Houston, TX
Frederick Shepherd Officer Houston, TX
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
</TABLE>

<PAGE> 1

EXHIBIT 18

AMENDED
MULTI-CLASS PLAN

FOR

VAN KAMPEN AMERICAN CAPITAL FAMILY OF FUNDS

This Plan is adopted pursuant to Rule 18f-3 under the Act to provide
for the issuance and distribution of multiple classes of shares by each of the
Funds in accordance with the terms, procedures and conditions set forth below.
A majority of the Trustees of the Funds, including a majority of the Trustees
who are not interested persons of the Funds within the meaning of the Act,
found this Multi-Class Plan, including the expense allocations, to be in the
best interest of each Fund and each Class of Shares of each Fund. The Fund
adopted this Plan on January 26, 1996 and amended the Plan as of January 1,
1997.

A. Definitions. As used herein, the terms set forth below shall have the
meanings ascribed to them below.

1. The Act - Investment Company Act of 1940, as amended.

2. CDSC - contingent deferred sales charge.

3. CDSC Period - the period of years following acquisition during
which Shares are assessed a CDSC upon redemption.

4. Class - a class of Shares of a Fund.

5. Class A Shares - shall have the meaning ascribed in Section B. 1.

6. Class B Shares - shall have the meaning ascribed in Section B. 1.

7. Class C Shares - shall have the meaning ascribed in Section B. 1.

8. Distribution Expenses - expenses incurred in activities which are
primarily intended to result in the distribution and sale of
Shares as defined in a Plan of Distribution and/or board
resolutions.

9. Distribution Fee - a fee paid by a Fund to the Distributor in
reimbursement of Distribution Expenses.

10. Distributor - Van Kampen American Capital Distributors, Inc.

11. Fund - an investment company listed on Exhibit A hereto and each
series thereof.

12. Money Market Fund - Van Kampen American Capital Reserve Fund or
Van Kampen American Capital Tax Free Money Market Fund.
<PAGE> 2

13. Plan of Distribution - Any plan adopted under Rule 12b-1 under the
Act with respect to payment of a Distribution Fee.

14. Service Fee - a fee paid to financial intermediaries for the
ongoing provision of personal services to Fund shareholders and/or
the maintenance of shareholder accounts.

15. Share - a share of beneficial interest in a Fund.

16. Trustees - the trustees of a Fund.

B. Classes. Each Fund may offer three Classes as follows:

1. Class A Shares. Class A Shares shall be offered at net asset
value plus a front-end sales charge as approved from time to
time by the Trustees and set forth in the Funds' prospectus,
which may be reduced or eliminated for Money Market Funds,
larger purchases, under a combined purchase privilege, under a
right of accumulation, under a letter of intent or for certain
categories of purchasers as permitted by Rule 22(d) of the Act
and as set forth in the Fund's prospectus. Class A Shares that
are not subject to a front-end sales charge as a result of the
foregoing, may be subject to a CDSC for the CDSC Period set forth
in Section D.1. The offering price of Shares subject to a
front-end sales charge shall be computed in accordance with Rule
22c-1 and Section 22(d) of the Act and the rules and regulations
thereunder. Class A Shares shall be subject to ongoing Service
Fees approved from time to time by the Trustees and set forth in
the Funds' prospectus. Although shares of Van Kampen American
Capital Tax Free Money Market Fund are not designated as "Class A"
they are substantially similar to Class A Shares as defined herein
and shall be treated as Class A shares for the purposes of this
Plan.

2. Class B Shares. Class B Shares shall be (1) offered at net asset
value, (2) subject to a CDSC for the CDSC Period set forth in
Section D. 1, (3) subject to ongoing Service Fees and
Distribution Fees approved from time to time by the Trustees and
set forth in the Funds' prospectus and (4) converted to Class A
Shares three to ten years after the calendar month in which the
shareholder's order to purchase was accepted, which number of
years shall be as approved from time to time by the Trustees and
set forth in the respective Fund's prospectus.

3. Class C Shares. Class C Shares shall be (1) offered at net
asset value, (2) subject to a CDSC for the CDSC Period set forth
in Section D. 1. , (3) subject to ongoing Service Fees and
Distribution Fees approved from time to time by the Trustees and
set forth in the Funds' prospectus and (4) prior to January 1,
1997, converted to Class A Shares eight to fifteen years after
the calendar month in which the shareholder's order to purchase
was accepted, which number of years shall be as approved from
time to time by the Trustees and set forth in the respective
Fund's prospectus.

<PAGE> 3

C. Rights and Privileges of Classes. Each Class of each Fund will
represent an interest in the same portfolio of investments of that
Fund and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions except as
described otherwise herein.

D. CDSC. A CDSC may be imposed upon redemption of Class A Shares, Class
B Shares and Class C Shares that do not incur a front end sales charge
subject to the following conditions:

1. CDSC Period. The CDSC Period for Class A Shares and Class C Shares
shall be one year. The CDSC Period for Class B Shares shall be at
least three but not more than ten years as recommended by the
Distributor and approved by the Trustees.

2. CDSC Rate. The CDSC rate shall be recommended by the Distributor
and approved by the Trustees. If a CDSC is imposed for a period
greater than one year the CDSC rate must decline during the CDSC
Period such that (a) the CDSC rate is less in the last year of the
CDSC Period than in the first and (b) in each succeeding year the
CDSC rate shall be less than or equal to the CDSC rate in the
preceding year.

3. Disclosure and Changes. The CDSC rates and CDSC Period shall be
disclosed in a Fund's prospectus and may be decreased at the
discretion of the Distributor but may not be increased unless
approved as set forth in Section L.

4. Method of Calculation. The CDSC shall be assessed on an amount
equal to the lesser of the then current market value or the cost of
the Shares being redeemed. No sales charge shall be imposed on
increases in the net asset value of the Shares being redeemed above
the initial purchase price. No CDSC shall be assessed on Shares
derived from reinvestment of dividends or capital gains
distributions. The order in which Class B Shares and Class C
Shares are to be redeemed when not all of such Shares would be
subject toa CDSC shall be as determined by the Distributor in
accordance with the provisions of Rule 6c-10 under the Act.

5. Waiver. The Distributor may in its discretion waive a CDSC
otherwise due upon the redemption of Shares under circumstances
previously approved by the Trustees and disclosed in the Fund's
prospectus or statement of additional information and as allowed
under Rule 6c-10 under the Act.

6. Calculation of offering price. The offering price of Shares subject
to a CDSC shall be computed in accordance with Rule 22c-1 and
Section 22(d) of the Act and the rules and regulations thereunder.

7. Retention by Distributor. The CDSC paid with respect to Shares of
a Fund may be retained by the Distributor to reimburse the
Distributor for commissions paid by it in

<PAGE> 4

connection with the sale of Shares subject to a CDSC and
Distribution Expenses to the extent of such commissions and
Distribution Expenses eligible for reimbursement and approved by
the Trustees.

E. Service and Distribution Fees. Class A Shares shall be subject to a
Service Fee and Class B and Class C Shares shall be subject to a
Service Fee and a Distribution Fee. The Service Fee applicable to any
class shall not exceed 0.25% per annum of the average daily net assets
of the Class and the Distribution Fee shall not exceed 0.75% per annum
of the average daily net assets of the Class. All other terms and
conditions with respect to Service Fees and Distribution Fees shall be
governed by the plans adopted by the Fund with respect to such fees
and Rule 12b-1 of the Act.

F. Conversion. Shares purchased through the reinvestment of dividends
and distributions paid on Shares subject to conversion shall be
treated as if held in a separate sub-account . Each time any Shares
in a Shareholder's account (other than Shares held in the sub-
account) convert to Class A Shares, a proportionate number of Shares
held in the sub-account shall also convert to Class A Shares. All
conversions shall be effected on the basis of the relative net asset
values of the two Classes without the imposition of any sales load or
other charge. So long as any Class of Shares converts into Class A
Shares, the Distributor shall waive or reimburse each Fund, or take
such other actions with the approval of the Trustees as may be
reasonably necessary, to ensure the expenses, including payments
authorized under a Plan of Distribution, applicable to the Class A
Shares are not higher than the expenses, including payments authorized
under the Plan of Distribution, applicable to the class of shares
converting into Class A Shares.

G. Allocation of Expenses, Income and Gains Among Classes.

1. Expenses applicable to a particular class. Each Class of each
Fund shall pay any Service Fee, Distribution Fee and CDSC
applicable to that Class. Other expenses applicable to a
particular Class such as incremental transfer agency fees, but not
including advisory or custodial fees or other expenses related to
the management of the Fund's assets, shall be allocated between
Classes in different amounts if they are actually incurred in
different amounts by the Classes or the Classes receive services
of a different kind or to a different degree than other Classes.

2. Distribution Expenses. Distribution Expenses actually
attributable to the sale of all Classes shall be allocated to each
Class based upon the ratio which sales of each Class bears to the
sales of all Shares of the Fund. For this purpose, Shares issued
upon reinvestment of dividends or distributions, upon conversion
from Class B Shares or Class C Shares to Class A Shares or upon
stock splits will not be considered sales.

3. Income, capital gains and losses, and other expenses applicable to
all Classes. Income, realized and unrealized capital gains and
losses, and expenses such as advisory fees applicable to all
Classes shall be allocated to each Class on the basis of the net
asset value of that Class in relation to the net asset value of
the Fund.

<PAGE> 5

4. Determination of nature of expenses. The Trustees shall determine
in their sole discretion whether any expense other than those
listed herein is properly treated as attributed to a particular
Class or all Classes.

H. Exchange Privilege. Exchanges of Shares shall be permitted between
Funds as follows.

1. General. Shares of one Fund may be exchanged for Shares of the
same Class of another Fund at net asset value and without sales
charge, provided that

a. The Distributor may specify that certain Funds may not be
exchanged within a designated period, which shall not exceed
90 days, after acquisition without prior Distributor approval.

b. Class A Shares of a Money Market Fund that were not acquired
in exchange for Class B or Class C Shares of a Fund may be
exchanged for Class A Shares of another Fund only upon payment
of the excess, if any, of the sales charge rate applicable to
the Shares being acquired over the sales charge rate
previously paid.

c. Shares of a Money Market Fund acquired through an exchange of
Class B Shares or Class C Shares may be exchanged only for the
same Class of another Fund as the Class they were acquired in
exchange for or any Class into which those shares were
converted.

2. Target Fund. Shares of Van Kampen American Capital Government
Target Fund may be exchanged for Class A Shares of a Fund.

3. CDSC Computation. The acquired Shares will remain subject to the
CDSC rate schedule and CDSC Period for the original Fund upon the
redemption of the Shares from the Van Kampen American Capital
complex of funds. For purposes of computing the CDSC payable on a
disposition of the new Shares, the holding period for the
original Shares shall be added to the holding period of the new
Shares.

I. Voting Rights of Classes.

1. Shareholders of each Class shall have exclusive voting rights on
any matter submitted to them that relates solely to the Plan of
Distribution related to that Class, provided that

a. If any amendment is proposed to the plan under which Service
Fees are paid with respect to Class A Shares of a Fund that
would increase materially the amount to be borne by Class A
Shares under that plan, then no Class B Shares or Class C
Shares shall convert into Class A Shares of that Fund until
the holders of Class B Shares and Class C Shares of that Fund
have also approved the proposed amendment.

<PAGE> 6

b. If the holders of either the Class B Shares and/or Class C
Shares referred to in subparagraph a. do not approve the
proposed amendment, the Trustees of the Fund and the
Distributor shall take such action as is necessary to ensure
that the Class voting against the amendment shall convert into
another Class identical in all material respects to Class A
Shares of the Fund as constituted prior to the amendment.

2. Shareholders shall have separate voting rights on any matter
submitted to shareholders in which the interest of one Class
differs from the interests of any other Class.

J. Dividends. Dividends paid by a Fund with respect to each Class, to
the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in substantially
the same amount, except any Distribution Fees,Service Fees or
incremental expenses relating to a particular Class will be borne
exclusively by that Class.

K. Reports to Trustees. The Distributor shall provide to the Trustees of
each Fund quarterly and annual statements concerning distribution and
Shareholder servicing expenditures complying with paragraph (b)(3)(ii)
of Rule 12b-1 of the Act, as it may be amended from time to time. The
Distributors also shall provide the Trustees such information as the
Trustees may from time to time deem to be reasonably necessary to
evaluate this Plan.

L. Amendment. Any material amendment to this Plan shall be approved by
the affirmative vote of a majority of the Trustees of a Fund,
including the affirmative vote of the trustees of the Fund
who are not interested persons of the Fund, except that any amendment
that increases the CDSC rate schedule or CDSC Period must also be
approved by the affirmative vote of a majority of the Shares of the
affected Class. The Distributor shall provide the Trustees such
information as may be reasonably necessary to evaluate any amendment
to this Plan.

<PAGE> 7

EXHIBIT A

VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE FUND
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
VAN KAMPEN AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME FUND
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL PACE FUND
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
VAN KAMPEN AMERICAN CAPITAL TRUST

<PAGE> 1

EXHIBIT (24)

POWER OF ATTORNEY

The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open-End Trusts, as indicated on Schedule 1 attached hereto and
incorporated by reference, each a Delaware business trust, except for the Van
Kampen American Capital Pennsylvania Tax Free Income Fund, being a Pennsylvania
business trust (individually, a "Trust"), do hereby, in the capacities shown
below, individually appoint Dennis J. McDonnell and Ronald A. Nyberg, each of
Oakbrook Terrace, Illinois, and each of them, as the agents and
attorneys-in-fact with full power of substitution and resubstitution, for each
of the undersigned, to execute and deliver, for and on behalf of the
undersigned, any and all amendments to the Registration Statement filed by each
Trust with the Securities and Exchange Commission pursuant to the provisions of
the Securities Act of 1933 and the Investment Company Act of 1940.

This Power of Attorney may be executed in multiple counterparts, each of which
shall be deemed an original, but which taken together shall constitute one
instrument.

Dated: April 15, 1997

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ FERNANDO SISTO, SC.D. Trustee
- -----------------------------------------------------
Fernando Sisto, Sc.D.

/s/ DENNIS J. MCDONNELL President and Trustee
- -----------------------------------------------------
Dennis J. McDonnell

/s/ J. MILES BRANAGAN Trustee
- -----------------------------------------------------
J. Miles Branagan

/s/ LINDA HUTTON HEAGY Trustee
- -----------------------------------------------------
Linda Hutton Heagy

/s/ PHILLIP ROONEY Trustee
- -----------------------------------------------------
Phillip Rooney

/s/ R. CRAIG KENNEDY Trustee
- -----------------------------------------------------
R. Craig Kennedy

/s/ JACK E. NELSON Trustee
- -----------------------------------------------------
Jack E. Nelson

/s/ WAYNE W. WHALEN Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen

Trustee
- -----------------------------------------------------
Jerome L. Robinson

/s/ EDWARD C. WOOD III Vice President and
- ----------------------------------------------------- Chief Financial Officer
Edward C. Wood III
</TABLE>

2
<PAGE> 2

SCHEDULE 1

<TABLE>
<S> <S>
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
3. VAN KAMPEN AMERICAN CAPITAL TRUST
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME
5. FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
8. VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
9. VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
10. VAN KAMPEN AMERICAN CAPITAL ENTERPRISE FUND
11. VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
12. VAN KAMPEN AMERICAN CAPITAL LIMITED MATURITY GOVERNMENT FUND
13. VAN KAMPEN AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND
14. VAN KAMPEN AMERICAN CAPITAL GOVERNMENT SECURITIES FUND
15. VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
16. VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME FUND
17. VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
18. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME CORPORATE BOND FUND
19. VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
20. VAN KAMPEN AMERICAN CAPITAL PACE FUND
21. VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
22. VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
23. VAN KAMPEN AMERICAN CAPITAL SMALL CAPITALIZATION FUND
24. VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
25. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
26. VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
27. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> VKAC-PENNSYLVANIA TAX FREE INCOME FUND - A SHARES
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 258425630<F1>
<INVESTMENTS-AT-VALUE> 276388550<F1>
<RECEIVABLES> 4059009<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4337<F1>
<TOTAL-ASSETS> 280451896<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1235852<F1>
<TOTAL-LIABILITIES> 1235852<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 213006053
<SHARES-COMMON-STOCK> 13004205
<SHARES-COMMON-PRIOR> 12779959
<ACCUMULATED-NII-CURRENT> 317894<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (4038110)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 17962920<F1>
<NET-ASSETS> 227444837
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17777434<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3412702)<F1>
<NET-INVESTMENT-INCOME> 14364732<F1>
<REALIZED-GAINS-CURRENT> 1606502<F1>
<APPREC-INCREASE-CURRENT> (5619309)<F1>
<NET-CHANGE-FROM-OPS> 10351925<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (11821553)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1590112
<NUMBER-OF-SHARES-REDEEMED> (1768713)
<SHARES-REINVESTED> 402847
<NET-CHANGE-IN-ASSETS> 769323
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (5644612)<F1>
<OVERDISTRIB-NII-PRIOR> (7423)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1665021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3422730<F1>
<AVERAGE-NET-ASSETS> 226356659
<PER-SHARE-NAV-BEGIN> 17.737
<PER-SHARE-NII> 0.919
<PER-SHARE-GAIN-APPREC> (0.263)
<PER-SHARE-DIVIDEND> (0.903)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.490
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> VKAC-PENNSYLVANIA TAX FREE INCOME FUND-B SHARES
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 258425630<F1>
<INVESTMENTS-AT-VALUE> 276388550<F1>
<RECEIVABLES> 4059009<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4337<F1>
<TOTAL-ASSETS> 280451896<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1235852<F1>
<TOTAL-LIABILITIES> 1235852<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 48564507
<SHARES-COMMON-STOCK> 2768667
<SHARES-COMMON-PRIOR> 2639237
<ACCUMULATED-NII-CURRENT> 317894<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (4038110)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 17962920<F1>
<NET-ASSETS> 48408634
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17777434<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3412702)<F1>
<NET-INVESTMENT-INCOME> 14364732<F1>
<REALIZED-GAINS-CURRENT> 1606502<F1>
<APPREC-INCREASE-CURRENT> (5619309)<F1>
<NET-CHANGE-FROM-OPS> 10351925<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2128485)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 406876
<NUMBER-OF-SHARES-REDEEMED> (349466)
<SHARES-REINVESTED> 72020
<NET-CHANGE-IN-ASSETS> 1612765
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (5644612)<F1>
<OVERDISTRIB-NII-PRIOR> (7423)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1665021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3422730<F1>
<AVERAGE-NET-ASSETS> 47748895
<PER-SHARE-NAV-BEGIN> 17.731
<PER-SHARE-NII> 0.788
<PER-SHARE-GAIN-APPREC> (0.264)
<PER-SHARE-DIVIDEND> (0.771)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.484
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> VKAC-PENNSYLVANIA TAX FREE INCOME FUND-C SHARES
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 258425630<F1>
<INVESTMENTS-AT-VALUE> 276388550<F1>
<RECEIVABLES> 4059009<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4337<F1>
<TOTAL-ASSETS> 280451896<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1235852<F1>
<TOTAL-LIABILITIES> 1235852<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 3402780
<SHARES-COMMON-STOCK> 192348
<SHARES-COMMON-PRIOR> 191696
<ACCUMULATED-NII-CURRENT> 317894<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (4038110)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 17962920<F1>
<NET-ASSETS> 3362573
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17777434<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3142702)<F1>
<NET-INVESTMENT-INCOME> 14364732<F1>
<REALIZED-GAINS-CURRENT> 1606502<F1>
<APPREC-INCREASE-CURRENT> (5619309)<F1>
<NET-CHANGE-FROM-OPS> 10351925<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (151397)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 31825
<NUMBER-OF-SHARES-REDEEMED> (37401)
<SHARES-REINVESTED> 6228
<NET-CHANGE-IN-ASSETS> (35944)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (5644612)<F1>
<OVERDISTRIB-NII-PRIOR> (7423)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1665021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3422730<F1>
<AVERAGE-NET-ASSETS> 3395836
<PER-SHARE-NAV-BEGIN> 17.729
<PER-SHARE-NII> 0.788
<PER-SHARE-GAIN-APPREC> (0.264)
<PER-SHARE-DIVIDEND> (0.771)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.482
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>