VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUN, 485BPOS, 1998-04-30

VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUN
485BPOS, 1998-04-30

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998

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. 17 [X]
and

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 18 [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.

TITLE OF SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST, PAR VALUE
$0.01 PER SHARE.

================================================================================
<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 IN PROSPECTUS 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>

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
-------------- -----------------------------------
<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
</TABLE>

i
<PAGE> 3

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
-------------- -----------------------------------
<S> <C> <C>
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
Accountants; Investment Advisory and Other
Services; Trustees and Officers; The Distributor;
Notes to Financial Statements
Item 17. Brokerage Allocation and Other
Practices.......................... 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 Accountants'
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 and 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, 1998, 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, 1998.

<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 "Adviser"). 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........................................ 17
Investment Practices........................................ 22
Investment Advisory Services................................ 25
Alternative Sales Arrangements.............................. 26
Purchase of Shares.......................................... 28
Shareholder Services........................................ 37
Redemption of Shares........................................ 42
Distribution and Service Plans.............................. 45
Distributions from the Fund................................. 47
Tax Status.................................................. 48
Fund Performance............................................ 53
Description of Shares of the Fund........................... 55
Additional Information...................................... 56
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. There is no assurance
that the Fund will achieve its investment objective. See "Investment Objective
and Policies." THE FUND IS AVAILABLE FOR PURCHASE ONLY BY RESIDENTS OF
PENNSYLVANIA.

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 and 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.

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, Class B Shares and Class C Shares sometimes are
referred to herein collectively as "CDSC Shares." See "Alternative Sales
Arrangements."

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 contingent deferred sales charge ("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 by the Distributor 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%(2) 1.00%(2)
Other expenses (as a percentage of average daily
net assets).................................... 0.19% 0.19% 0.19%
Total expenses (as a percentage of average daily
net assets).................................... 1.04% 1.79% 1.79%
</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.

(2)Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a fund-level expense by NASD
Rules.

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 1.04% for Class A Shares, 1.79% for
Class B Shares and 1.79% for Class C Shares,
(ii) 5.00% annual return and (iii) redemption
at the end of each time period
Class A Shares................................ $67 $89 $112 $177
Class B Shares................................ $58 $91 $112 $191*
Class C Shares................................ $28 $56 $ 97 $211
You would pay the following expenses on the same
$1,000 investment assuming no redemption at
the end of each period:
Class A Shares................................ $67 $89 $112 $177
Class B Shares................................ $18 $56 $ 97 $191*
Class C Shares................................ $18 $56 $ 97 $211
</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. To facilitate such
comparison, all Funds are required by the SEC to utilize a 5.00% annual return
assumption. 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.
Class B Shares acquired through the exchange privilege are subject to the CDSC
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made. 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,
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $17.490 $17.737 $16.081 $18.062 $16.899 $16.373
------- ------- ------- ------- ------- -------
Net Investment Income......... 0.928 0.919 0.946 0.965 1.027 1.074
Net Realized and Unrealized
Gain/Loss................... 0.528 (0.263) 1.660 (1.985) 1.164 0.525
------- ------- ------- ------- ------- -------
Total from Investment
Operations.................... 1.456 0.656 2.606 (1.020) 2.191 1.599
------- ------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income...................... 0.908 0.903 0.950 0.961 1.028 1.073
Distributions from Net
Realized Gain on
Investments................. -- -- -- -- -- 0.040
------- ------- ------- ------- ------- -------
Total Distributions............ 0.908 0.903 0.950 0.961 1.028 1.073
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................ $18.038 $17.490 $17.737 $16.081 $18.062 $16.899
======= ======= ======= ======= ======= =======
Total Return*(a)............... 8.59% 3.86% 16.62% (5.72%) 13.25% 10.09%
Net Assets at End of the Period
(In millions)................. $ 223.9 $ 227.4 $ 226.7 $ 203.2 $ 221.7 $ 153.8
Ratio of Expenses to Average
Net Assets*................... 1.04% 1.09% 1.00% 0.90% 0.71% 0.72%
Ratio of Net Investment Income
to Average Net Assets*........ 5.27% 5.32% 5.57% 5.73% 5.80% 6.41%
Portfolio Turnover............. 46% 57% 28% 8% 1% 10%

<CAPTION>
CLASS A SHARES
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1990 1989 1988
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $15.716 $15.698 $15.204 $14.310
------- ------- ------- -------
Net Investment Income......... 1.081 1.080 1.073 1.069
Net Realized and Unrealized
Gain/Loss................... 0.696 0.018 0.518 0.949
------- ------- ------- -------
Total from Investment
Operations.................... 1.777 1.098 1.591 2.018
------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income...................... 1.080 1.080 1.079 1.082
Distributions from Net
Realized Gain on
Investments................. -- 0.018 0.042
------- ------- ------- -------
Total Distributions............ 1.120 1.080 1.097 1.124
------- ------- ------- -------
Net Asset Value, End of the
Period........................ $16.373 $15.716 $15.698 $15.204
======= ======= ======= =======
Total Return*(a)............... 11.64% 7.33% 10.84% 14.54%
Net Assets at End of the Period
(In millions)................. $ 103.1 $ 69.3 $ 47.1 $ 18.3
Ratio of Expenses to Average
Net Assets*................... 0.70% 0.61% 0.61% 0.69%
Ratio of Net Investment Income
to Average Net Assets*........ 6.70% 6.92% 6.81% 7.14%
Portfolio Turnover............. 48% 47% 16% 19%
</TABLE>

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

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

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

<CAPTION>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average
Net Assets....................... 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>

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

N/A = Not applicable.
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 YEAR ENDED OF DISTRIBUTION YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1997
------------ ------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $17.484 $17.731 $16.080 $18.055 $17.460 $17.482
------- ------- ------- ------- ------- -------
Net Investment Income........... 0.791 0.788 0.819 0.841 0.586 0.795
Net Realized and Unrealized
Gain/ Loss.................... 0.531 (0.264) 1.659 (1.985) 0.603 0.529
------- ------- ------- ------- ------- -------
Total from Investment
Operations...................... 1.322 0.524 2.478 (1.144) 1.189 1.324
------- ------- ------- ------- ------- -------
Less Distributions from and in
Excess of Net Investment
Income.......................... 0.775 0.771 0.827 0.831 0.594 0.775
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.......................... $18.031 $17.484 $17.731 $16.080 $18.055 $18.031
======= ======= ======= ======= ======= =======
Total Return*(a)................. 7.78% 3.07% 15.72% (6.39) 6.81%** 7.78%
Net Assets at End of Period
(In millions)................... $ 51.9 $ 48.4 $ 46.8 $ 37.6 $ 27.7 $ 3.0
Ratio of Expenses to Average
Net Assets*..................... 1.79% 1.85% 1.75% 1.64% 1.48% 1.79%
Ratio of Net Investment Income to
Average Net Assets*............. 4.51% 4.56% 4.81% 4.98% 4.47% 4.52%
Portfolio Turnover............... 46% 57% 28% 8% 1%** 46%

<CAPTION>
CLASS C SHARES
-------------------------------------------------------------
AUGUST 13, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED OF DISTRIBUTION)
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $17.729 $16.079 $18.045 $17.850
------- ------- ------- -------
Net Investment Income........... 0.788 0.812 0.850 0.325
Net Realized and Unrealized
Gain/ Loss.................... (0.264) 1.665 (1.985) 0.208
------- ------- ------- -------
Total from Investment
Operations...................... 0.524 2.477 (1.135) 0.533
------- ------- ------- -------
Less Distributions from and in
Excess of Net Investment
Income.......................... 0.771 0.827 0.831 0.338
------- ------- ------- -------
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 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 the Adviser, total return would
have been lower and the ratios would have been as follows:

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

<CAPTION>
<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 net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.

N/A = Not Applicable.

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.

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

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

The 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 and Poor's Ratings Group ("S&P"), Baa and B3 (inclusive)
by Moody's Investors Service, Inc. ("Moody's"), comparably rated short-term
municipal obligations and municipal securities determined by the Adviser to be
of comparable quality. There is no assurance that the Fund will achieve its
investment objective. THE FUND IS AVAILABLE FOR PURCHASE ONLY BY RESIDENTS OF
PENNSYLVANIA.

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

13
<PAGE> 17

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

The Fund may invest in lower grade municipal securities rated at the time of
investment either not lower than B- by S&P or not lower than B3 by Moody's, in
comparably rated 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 a desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.

Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn, greater market price
volatility and less liquid secondary market trading, among others. See
"Municipal Securities--Special Considerations Regarding Medium and Lower Grade
Municipal Securities." 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

14
<PAGE> 18

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, 1997 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, 1997, computed on a monthly basis.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
-------- ------------------ ---------------------
<S> <C> <C>
AAA/Aaa............................. 49.9% 0.9%
AA/Aa............................... 8.0% 0.0%
A/A................................. 14.0% 0.9%
BBB/Baa............................. 13.8% 2.8%
BB/Ba............................... 2.2% 6.9%
B/B................................. 0.0% 0.6%
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........................ 87.9% 12.1%
==== ====
</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.

Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.

16
<PAGE> 20

- ------------------------------------------------------------------------------
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. "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

17
<PAGE> 21

future interest payments, principal payments or both on certain municipal
securities. Participation certificates are obligations issued by state or local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participation in a lease, an installment purchase
contract, or a conditional sales contract. Some municipal securities may not be
backed by the faith, credit and taxing power of the issuer. Certain of the
municipal securities in which the Fund may invest represent relatively recent
innovations in the municipal securities markets. While markets for such recent
innovations progress through stages of development, such markets may be less
developed than more fully developed markets for municipal securities. A more
detailed description of the types of municipal securities in which the Fund may
invest is included in the Statement of Additional Information.

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

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

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

18
<PAGE> 22

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

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

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

19
<PAGE> 23

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, 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

20
<PAGE> 24

investments than are securities that pay interest periodically in cash. As of
December 31, 1997, approximately 4% of the Fund's total net assets were invested
in zero coupon securities and none were invested in payment-in-kind municipal
securities.

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

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

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

All outstanding general obligation bonds of the Commonwealth of Pennsylvania
are rated AA- by S&P and A1 by Moody's. Local municipalities issuing
Pennsylvania municipal securities, although impacted in general by the economic
21
<PAGE> 25

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.

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

22
<PAGE> 26

entered into only for bona fide hedging, risk management or portfolio management
purposes and not for speculative purposes.

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

23
<PAGE> 27

however, it will maintain, in a segregated account with its custodian, cash or
liquid securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. 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.

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

24
<PAGE> 28

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 for managing
institutional portfolios, and more than $60 billion under management or
supervision. Van Kampen American Capital's more than 50 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 Dean Witter & Co. The Adviser's principal office is located at
One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, 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; credit 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.

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

25
<PAGE> 29

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 "1940
Act"), of the Adviser, the Distributor, ACCESS Investor Services, Inc.
("ACCESS") Van Kampen American Capital or Morgan Stanley Dean Witter & Co.), 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 INVESTMENT 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

26
<PAGE> 30

and Class C Shares sometimes are referred to herein collectively as "Contingent
Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $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."

27
<PAGE> 31

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. 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.

28
<PAGE> 32

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial 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 $3 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.

QUANTITY DISCOUNTS

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

Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund at the time of the purchase order 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, his or
her 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 purchasing for a single trust
or for a single fiduciary account; or a "company" as defined is section 2(a)(8)
of the 1940 Act.

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

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

30
<PAGE> 34

in Class A Shares of the Fund, or in any combination of shares of the Fund and
shares of other Participating Funds, although other Participating Funds may have
different sales charges.

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

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding sales
charge table. The size of investment shown in the preceding sales charge 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

31
<PAGE> 35

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

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<PAGE> 36

(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers
through which purchases are made an amount up to 0.50% of the amount
invested over a 12-month period.

(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such
programs.

(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.

(7) 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.

(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 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, provided that ACCESS receives federal funds for the purchase by the
close of

33
<PAGE> 37

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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (8) above. 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 $1 million and 0.50% on the
excess over $3 million; (ii) 4.00% with respect to Class B Shares; and (iii)
1.00% with respect to Class C Shares. Such compensation will not change the
price an investor will pay for CDSC Shares or the amount that the Fund will
receive from such sale.

CDSC Shares redeemed within a specified period of time generally will be
subject to a CDSC at the rates set forth below. 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

34
<PAGE> 38

and the distribution and services fees facilitates the ability of the Fund to
sell such CDSC Shares without a sales charge being deducted at the time of
purchase.

In determining whether a 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.

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>
First............................................ 4.00%
Second........................................... 3.75%
Third............................................ 3.50%
Fourth........................................... 2.50%
Fifth............................................ 1.50%
Sixth............................................ 1.00%
Seventh and after................................ 0.00%
</TABLE>

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

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<PAGE> 39

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 schedule applicable to a share acquired through the
exchange privilege is determined by reference to the Participating Fund from
which such shares originally was purchased.

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; (iv) in circumstances under which no commission or transaction fee
is paid to authorized dealers at the time of purchase of such shares; and (v)
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 180 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 the investor's shares of the Fund 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 who
has an account in any of the Participating Funds will receive statements
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

37
<PAGE> 41

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

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) 341-2911 ((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 debit 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) 341-2911 ((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
Participating Fund so long as the shareholder has 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 for shares of the same
class of any Participating Fund based on the next computed net asset values of
each Fund after requesting the exchange without any sales charge, subject to
certain limitations. Before effecting an exchange, shareholders seeking an
exchange into a Participating Fund should obtain and read a current prospectus
of the fund

38
<PAGE> 42

into which the exchange is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH
OTHER FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR STATE.

To be eligible for exchange, shares of the Fund 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.

No sales charge is imposed upon the exchange of a CDSC Share. When Class B
Shares and Class C Shares are exchanged among Participating Funds, the holding
period and applicable CDSC schedule for purposes of computing the CDSC is based
upon the date and CDSC schedule of the original Participating Fund from which
the initial purchase of such shares was made. Upon redemption from the
Participating Funds' complex of funds, Class B Shares and Class C Shares are
subject to the CDSC schedule imposed by such original fund. 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.

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 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)
341-2911 ((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. 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. Any gain or loss realized by the Shareholder upon redemption of shares
is a taxable event. The Fund reserves the right to amend or terminate the
systematic withdrawal program on 30 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

40
<PAGE> 44

to the agent, a supply of checks drawn on State Street Bank and Trust Company
(the "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 the 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 the 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 ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once 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.

INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instructions and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions

41
<PAGE> 45

through the internet which it reasonably believes to be genuine. If an account
has multiple owners, ACCESS may rely on the instructions of any one owner.

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

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

WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request.

In the case of redemption requests sent directly to ACCESS, 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) ordinarily will 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, which
may take 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

42
<PAGE> 46

the Distributor's close of business on such day. It is the responsibility of
dealers to transmit redemption requests received by them to the Distributor so
they will be received prior to such time. Any change in the redemption price due
to failure of the Distributor to receive a sell order prior to such time must be
settled between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the sell order. Payment for shares redeemed (less any sales charge, if
applicable) will ordinarily be made by check mailed within three business days
to the dealer.

TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 341-2911
((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, which may take 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
redemp-
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<PAGE> 47

tions 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.

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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.

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

In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or 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 death or 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 death or initial determination of disability.

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

44
<PAGE> 48

also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plans.

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

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. 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

45
<PAGE> 49

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
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, 1997, there were $1,504,237 and $2,304 of unreimbursed
distribution expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.90% and 0.08% 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.

46
<PAGE> 50

- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------

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

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

Investors will be entitled to begin receiving dividends on their shares on the
business day after 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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."

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<PAGE> 51

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

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

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

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

48
<PAGE> 52

gains or losses realized by the Fund. These provisions may also require the Fund
to recognize income or gain 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.

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

Certain 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.
These limitations 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.

Interest on certain "private-activity bonds" is 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

49
<PAGE> 53

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. Per
capita volume limitations on certain private-activity bonds could limit the
amount of such bonds available for investment by the Fund.

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

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 shareholder 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 5% 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.

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 gain
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. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. 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. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.

50
<PAGE> 54

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 designated as exempt-interest dividends cannot exceed 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. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates Under the 1997 Tax Act" below. Any
loss recognized 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 gain
dividends received with respect to such shares. Any short-term capital loss on
the sale or exchange of shares held for six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to such
shares. For purposes of determining whether shares

51
<PAGE> 55

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

CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "19997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the securities sold that generated such
capital gain dividends) as well as to sales and exchanges of shares in the Fund.
With respect to capital losses recognized on dispositions of shares held six
months or less where such losses are treated as long-term capital losses to the
extent of prior distributions of capital gain dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisers as to the application of the new capital gains rates to their
particular circumstances.

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

52
<PAGE> 56

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 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
purchasing, holding and disposing of shares as well as the effects of other
state, local and foreign tax laws.

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

53
<PAGE> 57

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) 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

54
<PAGE> 58

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 or reward characteristics
than the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.

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

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

The Fund is 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.

55
<PAGE> 59

- ------------------------------------------------------------------------------
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.

56
<PAGE> 60

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> 61
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> 62
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> 63

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> 64
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> 65
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> 66
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> 67

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> 68

- 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> 69

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> 70

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

PENNSYLVANIA TAX FREE INCOME FUND

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

P R O S P E C T U S

APRIL 30, 1998

- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 71

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, 1998 (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-27
Legal Counsel and Independent Accountants................... B-28
Investment Advisory and Other Services...................... B-28
Portfolio Transactions...................................... B-29
Tax Status of the Fund...................................... B-30
The Distributor............................................. B-30
Distribution and Service Plans.............................. B-31
Transfer Agent.............................................. B-32
Performance Information..................................... B-32
Report of Independent Accountants........................... B-34
Financial Statements........................................ B-35
Notes to Financial Statements............................... B-47
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.

B-1
<PAGE> 72

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.

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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.

During the five year period from fiscal 1993 through fiscal 1997, revenues and
other sources increased by an average 4.7 percent annually. Tax revenues during
this same period increased by an annual average of 4.1 percent.
Intergovernmental revenues, at an 8.5 percent annual average rate of increase,
were the revenue source with the largest rate of growth over the five-year
period. An accounting change in fiscal 1996 that made food stamp coupon revenue
from the federal government an item of intergovernmental revenue is largely
responsible for this increase. Expenditures and other uses during the fiscal
1993 through fiscal 1997 period rose at an average annual rate of 4.9 percent.
Program costs for protection of persons and property increased an average 13.8
percent annually, the largest growth rate of all programs. This high rate of
increase reflects the costs to acquire, staff and operate expanded prison
facilities to house a larger prison population. Public health and welfare
program costs increased at a 5.7 percent annual average rate during the period.
Efforts to control costs for various social programs and the presence of
favorable economic conditions have helped restrain these costs. The fund balance
at June 30, 1997 totaled $1,364.9 million, an increase of $729.7 million over
the $635.2 million balance at June 30, 1996. Of the $832.4 million
unreserved-designated component of fund balance, almost one-half of that amount
is represented by the balance in the Tax Stabilization Reserve Fund. The
increase in the fund balance at June 30, 1997 also includes a return of an
unreserved-undesignated balance. The last such balance was recorded at the end
of fiscal 1994. The fiscal 1997 year-end unreserved-undesignated balance of
$187.3 million is the largest balance recorded since fiscal 1987.

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. Expenditures from Commonwealth revenues
for the fiscal year, including $113.0 million of supplemental appropriations but
excluding pooled financing expenditures, totaled $16,074.7 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

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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 totaled
$222.6 million as of June 30, 1996.

The unappropriated balance of Commonwealth revenues increased during the 1997
fiscal year by $432.9 million. Higher than estimated revenues and slightly lower
expenditures than budgeted caused the increase. The unappropriated balance rose
from an adjusted amount of $158.5 million at the beginning of fiscal 1997, to
$591.4 million (prior to reserves for transfer to the Tax Stabilization Reserve
Fund) at the close of the fiscal year. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1997 operations were $88.7 million representing the
normal fifteen percent of the ending unappropriated balance, plus an additional
$100 million authorized by the General Assembly when it enacted the fiscal 1998
budget. Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 million (3.4 percent) above the estimate made
at the time the budget was enacted. Revenue from taxes was the largest
contributor to higher than estimated receipts. Tax revenue in fiscal 1997 grew
6.1 percent over tax revenues in fiscal 1996. This rate of increase was not
adjusted for legislated tax reductions that affected receipts during both of
those fiscal years and therefor understates the actual underlying rate of tax
revenue growth during fiscal 1997. Receipts from the personal income tax
produced the largest single component of higher revenues for the fiscal year.
Personal income collections were $236.3 million over estimate representing a 6.9
percent increase over fiscal 1996 receipts. Receipts of the sales and use tax
were $185.6 million over estimate representing a 6.2 percent increase.
Collections of corporate taxes, led by the capital stock and franchise and the
gross receipts taxes, also exceeded their estimates for the fiscal year. Non-tax
revenues were $19.8 million (5.8 percent) over estimate mostly due to higher
than anticipated interest earnings. Expenditures from Commonwealth revenues
(excluding pooled financing expenditures) during fiscal 1997 totaled $16,347.7
million and were close to the estimate made in February 1997 with the
presentation of the Governor's fiscal 1998 budget request. Total expenditures
represent an increase over fiscal 1996 expenditures of 1.7 percent. Lapses of
appropriation authority during the fiscal year totaled $200.6 million compared
to an estimate of $100 million. The higher amount of appropriation lapses was
used to support $79.8 million in fiscal 1997 supplemental appropriations over
the February 1997 estimate. Supplemental appropriations for fiscal 1997 totaled
$169.3 million. The largest supplemental appropriations included $100.1 million
for medical assistance costs due to implementation of managed medical care for a
portion of the medical assistance caseload, and an additional $50 million for
bond debt service for potential use to produce present value savings.

The budget for fiscal 1998 was enacted in May 1997. Commonwealth revenues for
the fiscal year at that time were estimated to be $17,435.4 million before
reserves for tax refunds. That estimate represented an increase over estimated
fiscal 1997 commonwealth revenues of 1.0 percent. Although actual fiscal 1997
revenues exceeded the estimate, the adopted fiscal 1998 budget revenue estimate
was not changed and represents a 0.7 percent increase over actual fiscal 1997
revenues. Fiscal 1998 estimates for commonwealth revenues made at the time the
budget was enacted were based on an economic forecast for national economic

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growth to slow through the remainder of calendar year 1997. A growth rate of
just above 1.0 percent was anticipated to be maintained for the last two
quarters of the fiscal year and result in a 1.2 percent growth rate in real
gross domestic product for the second calendar quarter of 1998 over the second
quarter of 1997. This anticipated rate of economic growth is a result of
anticipated slowing of gains in consumer spending, business investment and
residential housing. Inflation was projected to remain modest and the
unemployment rate was projected to reach 6.0 percent by the second calendar
quarter of 1998. The rate of anticipated growth of Commonwealth revenues was
also affected by the enactment of tax reductions and tax revenue dedications
effective for the 1998 fiscal year. Excluding these newly enacted changes,
revenues were projected to increase by 2.4 percent during fiscal 1998. Tax
reductions enacted for the 1998 fiscal year budget totaled an estimated $170.6
million, including $16.2 million reflected in higher projected tax refunds. In
addition, $75 million of existing sales tax revenue has been earmarked for mass
transit funding and one cent of the cigarette tax ($10.8 million) has been
earmarked for children's health program and are no longer included in the
General Fund. Major changes to taxes enacted for fiscal 1998 include: (i) the
repeal of the sales and use tax on computer services ($79.1 million); (ii) an
increase in the amount of income that is exempt from the personal income tax for
low-income families ($25.4 million); (iii) enactment of a research and
development tax credit program for business ($15.0 million); (iv) conforming
state tax laws to federal laws for sub-chapter S and limited liability companies
($16.3 million); and various other miscellaneous changes. Most changes are
effective beginning in July 1997 although some are effective retroactively to
January 1997. The reserve for tax refunds for fiscal 1998 has been increased by
21.3 percent to $655.0 million. A portion of the additional reserves reflect tax
refund liabilities that are expected to result in cash payments in a subsequent
fiscal year. Appropriations enacted for fiscal 1998 are 3.7 percent ($618
million) above appropriations enacted for fiscal 1997 (including supplemental
appropriations). Major funding increases provided by the fiscal 1998 budget
include: (i) $166 million of appropriations for elementary and secondary
education plus an estimated $51 million in reduced employer retirement
contributions payable by local school districts due to a reduction in the
contribution rate; (ii) $42 million for higher education institutions plus $16
million for student scholarships; (iii) $70 million for higher caseload,
utilization, and cost of nursing home care; (iv) $60 million for economic
development assistance through programs providing incentive grants and loans;
and (v) $38 million for corrections including $17 million for operating costs
for new and expanded facilities. The balance of the increase is spread over many
other department and program operations. Through January 1997, commonwealth
revenues are $211.4 million or 2.4 percent above estimate. Most of the above
estimate revenues are accounted for by personal income tax receipts that are
$176.7 million (5.7 percent) above estimate. In the Governor's proposed fiscal
1999 General Fund budget, the estimate of commonwealth revenues anticipated for
fiscal 1998 has been increased by $231.1 million, raising the year-over-year
increase to 2.1 percent. Reflecting the current strength of personal income tax
receipts estimated receipts for that tax constitute $231.5 million of that
increase, raising the personal income tax year-over-year increase to 5.0 percent
from 1.3 percent in the earlier estimate. Inheritance tax receipts have also
been above estimate for the fiscal year to date and have been increased in the
revision by $60 million, making the increase 11.0 percent compared to 1.2
percent originally. From a review of expenditure projections for fiscal 1998,
$100.6 million of supplemental appropriation needs have been identified. Of the
total supplemental appropriation needs identified, $96.2 million are for the
Department of Public Welfare, mostly for the medical assistance program. These
needs arise from delay in implementation of the movement of the final group to
the HealthChoices managed health care program resulting in unanticipated fee for
service costs. The cost of the supplemental appropriations will be appropriated
from an estimated $190 million of expenditure lapses projected to occur during
the fiscal year. The amounts of appropriation lapses over the amount of
supplemental appropriations and estimated additional revenue to be received are
projected to permit the fund to close fiscal 1998 with an unappropriated surplus
balance of $330.1 million. After transfer of the required 15 percent to the Tax
Stabilization Reserve Fund which is estimated to be $49.5 million, the fiscal
1998 ending balance is projected to be $280.6 million.

In February 1998, the Governor presented his proposed General Fund budget for
fiscal 1999 to the General Assembly. Revenue estimates in the proposed budget
were developed using a national economic forecast with a projected real gross
domestic product growth annual rate below 2 percent. Total commonwealth revenues
before reductions for tax refunds and proposed tax changes are estimated to be
$18,191.0 million, 2.9 percent above revised estimates for fiscal 1997. Proposed
appropriations from those revenues total $17,787.4 million, a

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3.0 percent increase over currently estimated appropriations for fiscal 1998. As
proposed, the fiscal 1999 budget assumes the draw down of the currently
estimated $280.6 million unappropriated surplus at June 30, 1998, however, no
appropriation lapses are included in this projection. The proposed fiscal 1999
budget includes five proposed tax reductions representing an estimated $128.1
million (0.7 percent) of fiscal 1999 revenues. The proposal with the largest
effect on revenues is an expansion of the amount of household income eligible
for tax forgiveness from the personal income tax and is estimated at $54.1
million. A 0.5 mill reduction to the tax rate for the capital stock and
franchise tax and an increase from three to ten years in the time period for a
business to recover operating losses for corporate net income tax purposes are
also proposed. Estimated fiscal 1999 costs of these proposals are $46.2 million
and $17.8 million respectively. In addition, funding for two tax credit programs
at $5 million each. All proposed tax changes require legislative enactment. The
General Assembly is reviewing the proposed budget in hearings before its
committees. The General Assembly may change, eliminate or add amounts and items
to the Governor's proposed budget and there can be no assurance that the budget,
as proposed by the Governor, will be enacted into law.

All outstanding general obligation bonds of the Commonwealth are rated AA- by
Standard & Poor's Ratings Group ("S&P") and Aa3 by Moody's Investors Service,
Inc. ("Moody's"). The City of Philadelphia's long-term obligations supported by
payments from the City's General Fund are rated Baa by Moody's and 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 10, 1998 describing General
Obligation Bonds, First Series of 1998 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 1998 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.

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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. 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. 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. On July 26,
1997, Justice Montemuro filed the Interim Report of the Master wherein he
recommended a four phase transition to state funding of a unified Judicial
system, during each of which specified court employees would transfer into the
state payroll system. Justice Montemuro recommended implementation of Phase I
effective July 1, 1998 with completion of the final phase early next century.
Objections to the report were due September 1, 1997. The General Assembly has
yet to enact legislation implementing the Supreme Court of Pennsylvania's
judgment. However, the Governor has proposed as part of this recommended budget
for fiscal 1999 that the General Assembly appropriate $15.6 million to implement
Phase I of the Interim Report of the Master.

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. One of these banks, Royal Bank of
Pennsylvania, has filed a Stipulation of Facts with the Court and in effect is
proceeding forward on behalf of all the other banks. These appeals raise the
issues which were advanced by Fidelity, although not brought to final resolution
by the Pennsylvania Supreme Court. By decision dated January 8, 1998, a panel of
the Commonwealth Court ruled in favor of the Commonwealth, finding no
constitutional violation, Royal Bank has filed exceptions and is awaiting
argument before the Court en banc.

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

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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. Trial and post-trial briefing have been completed,
and oral argument was heard on September 8, 1997. Judge Pellegrini has taken the
case under advisement.

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 preliminary injunction relating to certain
health issues was dismissed in August, 1996. The attorneys' fees in the amount
of $100,000 in connection with the preliminary injunction were paid in January,
1997. 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.

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 received $145 million, with interest at
6 percent per annum, paid in the following fashion: $25 million in 1995, $40
million each in 1996 and 1997. Envirotest will receive an additional $40 million
in 1998. An additional $11 million may be required to be paid in 1998, depending
upon the results of property liquidations by Envirotest. On November 26, 1996,
the Commonwealth of Pennsylvania and Envirotest entered into a Consent to
Assignment pursuant to which Envirotest assigned its right, title and interest
in the base settlement to ES Funding Corporation, which subsequently assigned
the same to Market Street Capital Corp., which thereafter assigned the same to
Market Street Funding Corporation. Pursuant to the assignments, Envirotest
authorized the Commonwealth to remit future payments under the Agreement to PNC
Bank, National Association, as the administrator of the assignees.

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

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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 issues to be addressed. Finally, the Supreme Court stated that
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 Supreme Court heard oral argument on the three issues
on February 3, 1998 and took the matter under advisement.

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

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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. On February 13, 1997, the
Commonwealth Court, after all argument en banc, denied Judge Ridge's motion for
judgment on the pleadings.

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."
Petitioners seek an order that provides, inter alia, as follows: 1. A
declaration "that the Commonwealth has failed to fulfill its obligations to
provide for an adequate system of public schools in the School District [of
Philadelphia]." 2. A declaration "that the present statutory scheme employed for
funding public education in the Commonwealth as applied to the School District
[of Philadelphia] violates Article 3, Section 14 of the Pennsylvania
Constitution." 3. A declaration "that the [l]egislature must amend the present
or enact new education legislation so as to assure that education funding for
the School District [of Philadelphia] accounts and makes adequate provision for
the greater and special educational challenges and needs of students in the
School District in order to redress their disadvantage." The respondents filed
preliminary objections seeking dismissal of the action. After briefs were filed,
Commonwealth Court en banc heard oral argument on September 10, 1997 and took
the matter under advisement. The Commonwealth Court granted respondents'
preliminary objections and dismissed the case on the grounds that the issues it
presented are non-justiciable. An appeal is expected.

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.

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

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

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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.

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

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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 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

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<PAGE> 87

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, 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.

B-17
<PAGE> 88

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 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

B-18
<PAGE> 89

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.

TRUSTEES AND OFFICERS

The tables below list the trustees and officers of the Fund 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"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, 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 Van Kampen American Capital
Exchange Fund).

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/Director of each of the
funds in the Fund Complex.
</TABLE>

B-19
<PAGE> 90

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the 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/Director of each of the funds in the Fund
Complex.
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/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 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.
Trustee/ Director of each of the funds in the Fund
Complex and other funds advised by the Advisers or Van
Kampen American Capital Management, Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
</TABLE>

B-20
<PAGE> 91

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>

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

* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.

OFFICERS

Messrs. McDonnell, 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>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President 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.
</TABLE>

B-21
<PAGE> 92

<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 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. 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.

Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. 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.

Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
</TABLE>

B-22
<PAGE> 93

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

Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. 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 and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice 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.

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 their affiliates.

Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.

Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>

B-23
<PAGE> 94

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael 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 their
affiliates.
</TABLE>

Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan

B-24
<PAGE> 95

Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
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 trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.

For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from 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.

For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund 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.

For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.

B-25
<PAGE> 96

Under the deferred compensation plan, 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 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.

Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such 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 retirement from such Fund. Non-Affiliated 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 such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
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.

Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.

COMPENSATION TABLE

<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,250 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>

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

* Mr. Robinson retired from the Board of Trustees on December 31, 1997.

** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.

(1) Messrs. DeMartini, 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 not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.

(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
following trustees deferred compensation from the Fund during the fiscal
year ended December 31, 1997: Mr. Branagan, $3,000; Ms. Heagy, $3,000; Mr.
Kennedy, $1,500; Mr. Nelson, $3,000; Mr. Robinson, $3,000; Mr. Rooney,
$1,500; Dr. Sisto, $1,500; and Mr. Whalen, $3,000. 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, including former trustees, from the
Fund as of December 31, 1997 is

B-26
<PAGE> 97

as follows: Mr. Branagan, $4,324; Mr. Gaughan, $2,481; Ms. Heagy, $6,482; Mr.
Kennedy, $11,233; Mr. Miller, $10,015; Mr. Nelson, $15,086; Mr. Robinson,
$14,485; Mr. Rooney, $1,512; Dr. Sisto, $1,622; and Mr. Whalen, $12,966. The
deferred compensation plan is described above the Compensation Table.

(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for each of the named trustees for the funds' respective fiscal
years ended in 1997. The retirement plan is described above the Compensation
Table.

(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of his
retirement for each year of the 10-year period since such his retirement.
For the remaining trustees, this is the sum of the estimated maximum annual
benefits payable by the operating investment companies in the Fund Complex
for each year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table.

(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. 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
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated 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
$268,447 during the calendar year ended December 31, 1997.

As of April 1, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.

As of April 1, 1998, 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 1, 1998 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
NFSC FEBO #027-226173.................................... 642,545 A 5.26%
Mary Alice Morrissey
James D. Morrissey
1328 Old Ford Road
Huntingdon Valley, PA 19006-8106
Donaldson Lufkin Jenrette Securities Corporation Inc. ... 9,728 C 5.39%
P.O. Box 2052
Jersey City, NJ 07303-2052
Donaldson Lufkin Jenrette ............................... 11,722 C 6.50%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>

CUSTODIAN

State Street Bank and Trust Company, 225 West 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

B-27
<PAGE> 98

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 an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, 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; credit 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.

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, 1997, 1996 and 1995 the Fund paid advisory
expenses of $1,645,589, $1,665,021 and $1,212,968, 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.
B-28
<PAGE> 99

For the years ended December 31, 1997, 1996 and 1995 the Fund paid expenses of
approximately $8,710, $9,900 and $9,500 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, 1997, 1996 and 1995 the Fund paid expenses of
approximately $11,300, $12,300 and $16,800, respectively, representing Van
Kampen American Capital's cost of providing legal services.

PORTFOLIO TRANSACTIONS

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

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research 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
B-29
<PAGE> 100

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 and each of its series will be treated as separate corporations for
federal income tax purposes. The Fund will be subject to tax if, among other
things, it fails to distribute net capital gains, or if its annual
distributions, as a percentage of its income, are less than the distributions
required by tax laws.

The table 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.

1998 FEDERAL AND PENNSYLVANIA STATE TAXABLE VS. TAX-FREE YIELDS

<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX --------------------------------------------------------------------------------
RETURN RETURN BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- ---------------- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 $ 0-42,350 17.40% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.69% 10.29%
25,350-61,400 42,350-102,300 30.00% 5.00 5.71 6.43 7.14 7.86 8.57 9.29 10.00 10.71 11.43 12.14
61,400-128,100 102,300-155,950 32.90% 5.22 5.96 6.71 7.45 8.20 8.94 9.69 10.43 11.18 11.92 12.67
128,100-278,450 155,950-278,450 37.80% 5.63 6.43 7.23 8.04 8.84 9.65 10.45 11.25 12.06 12.86 13.67
Over 278,450 Over 278,450 41.30% 5.98 6.81 7.67 8.52 9.37 10.22 11.07 11.93 12.78 13.63 14.48
</TABLE>

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

* Please note that the table does not reflect (i) any federal or State
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii)
any local taxes imposed, or (iii) any taxes other than personal income
taxes.

THE DISTRIBUTOR

Shares of the Fund are offered on a continuous basis through Van Kampen
American Capital Distributors, Inc. ("the Distributor"), One Parkview Plaza,
Oakbrook Terrace, IL 60181. The Distributor is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. ("VKAC") which is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Fund, the Adviser,
the Distributor and VKAC is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., and
investment adviser, 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; credit 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.

Pursuant to a distribution agreement, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities
dealers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem the Fund's
shares and how the Fund's shares are priced is contained in the Prospectus.

B-30
<PAGE> 101

Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.

<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $651,095 $93,856
Fiscal Year Ended December 31, 1996......................... $580,225 $69,263
Fiscal Year Ended December 31, 1997......................... $360,849 $50,901
</TABLE>

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 ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $555,799, or 0.25% of the Class A shares' average
net assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $456,468, or 1.00%, of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $334,663 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$121,805 for fees paid to financial intermediaries for servicing Class B
shareholders and

B-31
<PAGE> 102

administering the Class B Plan. For the fiscal year ended December 31, 1997, the
Fund's aggregate expenses under the Class C Plan were $25,930 or 1.00% of the
Class C shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $350 for the commissions and
transactions fees paid to financial intermediaries in respect of sales of Class
C shares of the Fund and $25,580 for fees paid to financial intermediaries for
servicing Class C shareholders and administering the Class C Plan.

TRANSFER AGENT

During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees, determined on a cost plus profit basis, approximating $118,400, $250,100
and $171,000, respectively, for these services. Beginning in 1998, the transfer
agency prices are determined through negotiations with the Fund's Board of
Trustees and are based on competitive market benchmarks.

PERFORMANCE INFORMATION

From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how Van Kampen American
Capital believes the Fund compares relative to other Van Kampen American Capital
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1997 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,
1997 was 3.45%; (ii) the 5 year period ending December 31, 1997 was 6.00%; and
(iii) the 10 year period ending December 31, 1997 was 8.40%; and (iv) the
approximately 10 year, 8 month period from May 1, 1987 (the commencement of
investment operations of the Fund) through December 31, 1997 was 8.37%.

The Fund's yield for the 30 day period ending December 30, 1997 (calculated in
the manner described in the Prospectus under the heading "Fund Performance") was
4.22%. The Fund's tax-equivalent yield for the 30 day period ending December 30,
1997 (calculated in the manner described in the Prospectus under the heading
"Fund Performance" and assuming a 37.8% tax rate) was 6.78%. The Fund's current
distribution rate for the month ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.91%. The taxable equivalent distribution rate with respect to Class A Shares
for the month ending December 31, 1997 was 7.89%.

The Class A Share's cumulative non-standardized total return, including
payment of the maximum sales charge, from its inception to December 31, 1997 (as
calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 135.87%.

The Class A Shares cumulative non-standardized total return, excluding payment
of any sales charge with respect to the Class A Shares from its inception to
December 31, 1997 was 147.61%.

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, 1997 was 3.78%
and (ii) the approximately 4 year, 8 month

B-32
<PAGE> 103

period from May 1, 1993 (the commencement of the sale of Class B Shares) through
December 31, 1997 was 5.26%.

The Class B Share's yield for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.65%. The Class B Share's tax-equivalent yield for the 30 day
period ending December 30, 1997 (calculated in the manner described in the
Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 5.87%. The Class B Share's current distribution rate for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.43%. The taxable equivalent distribution
rate with respect to Class B Shares for the month ending December 31, 1997 was
7.12%.

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,
1997 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 27.04%.

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,
1997 was 28.54%.

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, 1997 was 6.78%
and (ii) the approximately 4 year, 5 month period from August 13, 1993 (the
commencement of the sale of Class C Shares) through December 31, 1997 was 5.02%.

The Class C Share's yield for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.67%. The Class C Share's tax-equivalent yield for the 30 day
period ending December 30, 1997 (calculated in the manner described in the
Prospectus under the heading "Fund Performance" and assuming a 37.8% tax rate)
was 5.90%. The Class C Share's current distribution rate for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.43%. The taxable equivalent distribution
rate with respect to Class C Shares for the month ending December 31, 1997 was
7.12%.

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, 1997 (as calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 24.01%.

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,
1997 was 24.01%.

B-33
<PAGE> 104

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, 1997, 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, 1997, by correspondence with the custodian, a broker. 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,
1997, 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 3, 1998

B-34

<PAGE> 105

PORTFOLIO OF INVESTMENTS

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 99.0%
PENNSYLVANIA 99.0%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,818,675
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec (a)..... 0/8.625 02/15/04 1,949,854
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
Duquesne Univ Proj (AMBAC Insd)................. 6.500 03/01/11 1,175,690
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd) (c)......... 6.000 11/01/12 2,637,775
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd)............. 6.250 11/01/23 2,679,000
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,355,434
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/06 1,050,900
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/07 1,048,810
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.600 05/15/08 1,052,590
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/09 1,061,270
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/10 1,055,940
1,160 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/17 1,201,064
945 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,037,298
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,720,325
950 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
1983 Ser B...................................... * 10/01/15 149,977
1,945 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
Single Family Ser Z (GNMA Collateralized)....... 6.875 05/01/26 2,080,800
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver,
PA Inc Ser A (AMBAC Insd)....................... 6.250 07/01/22 2,167,060
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Collateral Toledo Edison Co Proj Ser A Rfdg..... 7.750 09/01/24 4,754,025
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.170 11/10/20 7,275,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,167,140
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.500 05/15/13 1,106,200
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.700 05/15/22 1,115,680
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 3,030,500
5,650 Butler, PA Area Sch Dist Cap Apprec (FGIC
Insd)........................................... * 11/15/25 1,173,448
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 106
PORTFOLIO OF INVESTMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500% 09/01/15 $ 1,115,390
1,000 Cambria Cnty, PA Indl Dev Auth Res Recovery Rev
Cambria Cogen Proj Ser F........................ 7.750 09/01/19 1,019,160
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650 05/15/20 1,030,130
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 2,035,363
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 660,486
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 714,221
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/21 1,154,670
945 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/13 1,083,424
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 07/01/07 1,213,191
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,435,316
2,500 Deer Lakes Sch Dist PA Ser A (FSA Insd)......... 5.000 01/15/23 2,447,500
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 2,224,560
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/00)........................ 8.350 06/01/15 2,759,526
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj (Prerefunded @ 06/01/02)................... 9.250 06/01/22 1,818,930
500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 6.200 06/01/05 522,595
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 7.000 06/01/26 3,135,330
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,177,140
1,985 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,174,806
5,500 Hampton Twp, PA Sch Dist (FGIC Insd)............ 5.000 09/01/27 5,374,875
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser II
(MBIA Insd)..................................... 5.625 09/15/17 3,142,530
900 Hazleton, PA Hlth Svcs Auth Hosp Rev............ 5.500 07/01/07 939,240
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 677,190
1,750 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............. 5.950 05/01/27 1,870,470
2,500 Jim Thorpe, PA Area Sch Dist Ser A (MBIA
Insd)........................................... 5.375 03/15/22 2,534,700
1,800 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 1,827,018
1,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.375 12/15/04 1,032,880
2,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.500 12/15/10 2,068,400
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 107
PORTFOLIO OF INVESTMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700% 04/01/26 $ 2,158,260
4,100 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg
Hosp Ser A Rfdg................................. 8.100 07/15/10 4,394,831
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 1,098,680
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,166,660
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00)....................................... 7.750 07/01/16 2,756,450
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,134,310
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 854,565
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 3,182,850
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 511,270
405 Montgomery Cnty, PA Higher Edl & Hlth Auth
Nursing Home Rev Delco Sys Svcs Proj A.......... 9.875 11/01/18 423,824
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,317,185
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev GDL Farms Corp Proj Rfdg.............. 6.300 01/01/13 2,014,980
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,730,325
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery........................................ 7.500 01/01/12 3,318,150
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth
Academy......................................... 7.750 09/01/24 1,106,950
1,415 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/17 1,461,992
3,300 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/26 3,394,677
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,623,015
1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875 11/01/19 1,159,560
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,787,775
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd
Luzerne Cnty Cmnty College (Prerefunded @
02/15/05) (AMBAC Insd).......................... 6.625 08/15/15 1,136,940
2,281 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,477,298
1,335 Penn Hills, PA (FGIC Insd)...................... 5.800 12/01/13 1,449,943
1,600 Penn Hills, PA (FGIC Insd)...................... 5.850 12/01/14 1,738,224
1,335 Penn Hills, PA (FGIC Insd)...................... 5.900 12/01/17 1,439,237
2,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev
MacMillan Ltd Partnership Proj.................. 7.600 12/01/20 2,369,260
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 108
PORTFOLIO OF INVESTMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050% 12/01/10 $ 3,322,950
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,667,895
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600 01/01/19 5,253,800
2,500 Pennsylvania Hsg Fin Agy Amt Single Family Mtg
Ser 61A (b)..................................... 5.500 04/01/29 2,512,675
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.447 10/03/23 4,600,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,058,750
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,086,230
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,719,600
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B............................... 6.800 09/01/10 941,035
2,000 Pennsylvania Intergvtl Co-op Auth Spl Tax Rev
City of Philadelphia (MBIA Insd)................ 5.600 06/15/15 2,065,000
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,321,400
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.368 09/01/26 2,317,500
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.433 03/01/20 2,840,625
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,175,600
1,200 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Bryn Mawr College (MBIA Insd).......... 5.625 12/01/27 1,256,076
2,000 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.000 11/15/06 2,074,320
4,595 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.600 11/15/10 5,016,316
5,400 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 5,818,446
1,590 Pennsylvania St Indl Dev Auth Rev Econ Dev
(AMBAC Insd).................................... 6.000 07/01/06 1,775,950
2,505 Philadelphia, PA Auth for Indl Dev Rev Coml Dev
RMK Rfdg........................................ 7.750 12/01/17 2,833,556
3,000 Philadelphia, PA Auth for Indl Dev Rev Long-Term
Care Maplewood.................................. 8.000 01/01/24 3,308,370
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 11,743,332
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.250 07/01/08 3,311,100
250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Albert Einstein Med Cent.................... 7.000 10/01/21 271,123
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 2,998,296
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,369,680
</TABLE>

See Notes to Financial Statements

B-38

<PAGE> 109
PORTFOLIO OF INVESTMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 760 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.300% 07/01/14 $ 770,366
985 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.400 07/01/17 998,406
450 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.500 07/01/21 456,993
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 934,590
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 1,955,962
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 1,861,377
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 2,089,305
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,330,051
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,034,036
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 2,190,520
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,567,652
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,566,583
835 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 871,523
2,665 Radnor Twp, PA Sch Dist......................... 5.750 03/15/19 2,798,756
3,000 Randor Twp, PA Sch Dist......................... 5.750 03/15/26 3,139,350
250 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Cmnty Med Cent Proj (BIGI Insd)................. 7.875 07/01/10 259,550
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Marian Cmnty Hosp Proj Rfdg..................... 7.125 01/15/13 1,062,430
2,400 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/16 914,232
2,245 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/22 620,136
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg....................... 6.875 12/01/09 2,880,232
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 04/01/07 380,081
650 Springfield Twp, PA Swr Auth (Mun Govt Gtd)..... 5.800 10/15/18 653,705
1,000 Springfield Twp, PA Swr Auth (Mun Govt Gtd)..... 6.000 10/15/27 1,009,820
2,180 St Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch
Dist Ser D (MBIA Insd).......................... 6.500 02/01/14 2,418,143
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 1,659,150
</TABLE>

See Notes to Financial Statements

B-39

<PAGE> 110
PORTFOLIO OF INVESTMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01)....................................... 7.400% 06/01/16 $ 3,287,317
1,000 West Shore, PA Area Hosp Auth Hosp Rev Holy
Spirit Hosp Proj (MBIA Insd).................... 5.700 01/01/22 1,046,270
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 358,785
------------
276,035,653
------------
TOTAL LONG-TERM INVESTMENTS 99.0%
(Cost $250,978,398)......................................................... 276,035,653
------------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 0.8%................................ 2,200,000
------------
TOTAL INVESTMENTS 99.8%
(Cost $253,178,398)......................................................... 278,235,653
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2%................................... 586,022
------------
NET ASSETS 100.0%............................................................ $278,821,675
============
</TABLE>

*Zero coupon bond

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

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

See Notes to Financial Statements

B-40

<PAGE> 111

STATEMENT OF ASSETS AND LIABILITIES

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

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $253,178,398)....................... $278,235,653
Cash........................................................ 139,627
Receivables:
Interest.................................................. 4,035,446
Fund Shares Sold.......................................... 206,418
Investments Sold.......................................... 3,622
Other....................................................... 16,890
------------
Total Assets.......................................... 282,637,656
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,511,076
Income Distributions...................................... 493,151
Fund Shares Repurchased................................... 248,974
Distributor and Affiliates................................ 205,962
Investment Advisory Fee................................... 141,382
Trustees' Deferred Compensation and Retirement Plans........ 122,611
Accrued Expenses............................................ 92,825
------------
Total Liabilities..................................... 3,815,981
------------
NET ASSETS.................................................. $278,821,675
============
NET ASSETS CONSIST OF:
Paid in Surplus............................................. $256,151,643
Net Unrealized Appreciation................................. 25,057,255
Accumulated Undistributed Net Investment Income............. 601,938
Accumulated Net Realized Loss............................... (2,989,161)
------------
NET ASSETS.................................................. $278,821,675
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $223,932,480 and 12,414,370 shares of
beneficial interest issued and outstanding)............. $ 18.04
Maximum sales charge (4.75%* of offering price)......... .90
------------
Maximum offering price to public........................ $ 18.94
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $51,910,026 and 2,879,004 shares of
beneficial interest issued and outstanding)............. $ 18.03
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $2,979,169 and 165,221 shares of
beneficial interest issued and outstanding)............. $ 18.03
============
</TABLE>

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

See Notes to Financial Statements

B-41

<PAGE> 112

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $17,301,880
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,645,589
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $551,201, $490,120 and $30,079,
respectively)............................................. 1,071,400
Shareholder Services........................................ 266,800
Trustees' Fees and Expenses................................. 36,431
Legal....................................................... 27,200
Custody..................................................... 8,362
Other....................................................... 183,017
-----------
Total Expenses.......................................... 3,238,799
-----------
NET INVESTMENT INCOME....................................... $14,063,081
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 1,516,339
Futures................................................... (467,390)
-----------
Net Realized Gain........................................... 1,048,949
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 17,962,920
End of the Period:
Investments............................................. 25,057,255
-----------
Net Unrealized Appreciation During the Period............... 7,094,335
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 8,143,284
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $22,206,365
===========
</TABLE>

See Notes to Financial Statements

B-42

<PAGE> 113

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 14,063,081 $ 14,364,732
Net Realized Gain.................................... 1,048,949 1,606,502
Net Unrealized Appreciation/Depreciation............. 7,094,335 (5,619,309)
------------ ------------
Change in Net Assets from Operations................. 22,206,365 10,351,925
------------ ------------
Distributions from Net Investment Income:
Class A Shares..................................... (11,483,502) (11,821,553)
Class B Shares..................................... (2,162,615) (2,128,485)
Class C Shares..................................... (132,920) (151,397)
------------ ------------
Total Distributions.............................. (13,779,037) (14,101,435)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... 8,427,328 (3,749,510)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................ 20,080,197 35,010,881
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 7,972,553 8,324,756
Cost of Shares Repurchased........................... (36,874,447) (37,239,983)
------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS....... (8,821,697) 6,095,654
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................ (394,369) 2,346,144
NET ASSETS:
Beginning of the Period.............................. 279,216,044 276,869,900
------------ ------------
End of the Period (including accumulated
undistributed net investment income of $601,938 and
$317,894, respectively)............................ $278,821,675 $279,216,044
============ ============
</TABLE>

See Notes to Financial Statements

B-43

<PAGE> 114

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------
Class A Shares 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $17.490 $17.737 $16.081 $18.062 $16.899
------- ------- ------- ------- -------
Net Investment Income.............. .928 .919 .946 .965 1.027
Net Realized and Unrealized
Gain/Loss........................ .528 (.263) 1.660 (1.985) 1.164
------- ------- ------- ------- -------
Total from Investment Operations... 1.456 .656 2.606 (1.020) 2.191
Less Distributions from and in
Excess of Net Investment
Income........................... .908 .903 .950 .961 1.028
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.038 $17.490 $17.737 $16.081 $18.062
======= ======= ======= ======= =======
Total Return* (a).................. 8.59% 3.86% 16.62% (5.72%) 13.25%
Net Assets at End of the Period (In
millions)........................ $223.9 $227.4 $226.7 $203.2 $221.7
Ratio of Expenses to Average Net
Assets*.......................... 1.04% 1.09% 1.00% .90% .71%
Ratio of Net Investment Income to
Average Net Assets*.............. 5.27% 5.32% 5.57% 5.73% 5.80%
Portfolio Turnover................. 46% 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........................... N/A 1.09% 1.14% 1.17% 1.09%
Ratio of Net Investment Income to
Average Net Assets............... N/A 5.31% 5.42% 5.46% 5.41%
</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.

N/A = Not applicable

See Notes to Financial Statements

B-44
<PAGE> 115

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 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................. $17.484 $17.731 $16.080 $18.055 $17.460
------- ------- ------- ------- -------
Net Investment Income........ .791 .788 .819 .841 .586
Net Realized and Unrealized
Gain/Loss.................. .531 (.264) 1.659 (1.985) .603
------- ------- ------- ------- -------
Total from Investment
Operations................. 1.322 .524 2.478 (1.144) 1.189
Less Distributions from and
in Excess of Net Investment
Income..................... .775 .771 .827 .831 .594
------- ------- ------- ------- -------
Net Asset Value,
End of the Period.......... $18.031 $17.484 $17.731 $16.080 $18.055
======= ======= ======= ======= =======
Total Return* (a)............ 7.78% 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the
Period (In millions)....... $51.9 $48.4 $46.8 $37.6 $ 27.7
Ratio of Expenses to Average
Net Assets*................ 1.79% 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment
Income to Average Net
Assets*.................... 4.51% 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover........... 46% 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................. N/A 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment
Income to Average Net
Assets..................... N/A 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.

N/A = Not Applicable

See Notes to Financial Statements

B-45
<PAGE> 116

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 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............. $17.482 $17.729 $16.079 $18.045 $17.850
------- ------- ------- ------- -------
Net Investment Income....... .795 .788 .812 .850 .325
Net Realized and Unrealized
Gain/Loss................. .529 (.264) 1.665 (1.985) .208
------- ------- ------- ------- -------
Total from Investment
Operations................ 1.324 .524 2.477 (1.135) .533
Less Distributions from and
in Excess of Net
Investment Income......... .775 .771 .827 .831 .338
------- ------- ------ ------- -------
Net Asset Value, End of the
Period.................... $18.031 $17.482 $17.729 $16.079 $18.045
======= ======= ======= ======= =======
Total Return* (a)........... 7.78% 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of the
Period (In millions)...... $ 3.0 $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to Average
Net Assets*............... 1.79% 1.85% 1.75% 1.63% 1.54%
Ratio of Net Investment
Income to Average Net
Assets*................... 4.52% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover.......... 46% 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> <C>
Ratio of Expenses to Average
Net Assets................ N/A 1.85% 1.90% 1.90% 1.89%
Ratio of Net Investment
Income to Average Net
Assets.................... N/A 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.

N/A = Not Applicable

See Notes to Financial Statements

B-46
<PAGE> 117

NOTES TO FINANCIAL STATEMENTS

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

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.

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

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

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

C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Expenses of the Fund are allocated on a pro rata basis to
each class

B-47
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

of shares, except for distribution and service fees and transfer agency costs
which are unique to each class of shares.

D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, 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, 1997, the Fund had an accumulated capital loss carryforward for
tax purposes of $2,989,161 which expires on December 31, 2003.

At December 31, 1997, for federal income tax purposes, the cost of long- and
short-term investments is $253,178,398; the aggregate gross unrealized
appreciation is $25,069,697 and the aggregate gross unrealized depreciation is
$12,442, resulting in net unrealized appreciation of $25,057,255.

E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays dividends
monthly from net investment income. Net realized gains, if any, are distributed
annually. The Fund designated 99.87% of the income distributions as tax-exempt
income distributions.

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>

For the year ended December 31, 1997, the Fund recognized expenses of
approximately $15,000 representing legal services provided by Skadden, Arps,
Slate, Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of
the Fund is an affiliated person.

For the year ended December 31, 1997, the Fund recognized expenses of
approximately $92,600 representing Van Kampen American Capital Distributors,
Inc.'s or

B-48
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

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, 1997, the Fund recognized expenses of approximately $171,000,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

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

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

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, 1997, paid in surplus aggregated $202,684,294, $50,532,705
and $2,934,644 for Classes A, B and C, respectively. For the year ended December
31, 1997, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 692,357 $ 12,191,057
Class B.......................................... 417,052 7,341,964
Class C.......................................... 31,224 547,176
---------- ------------
Total Sales........................................ 1,140,633 $ 20,080,197
========== ============
Dividend Reinvestment:
Class A.......................................... 377,505 $ 6,642,967
Class B.......................................... 70,331 1,237,722
Class C.......................................... 5,226 91,864
---------- ------------
Total Dividend Reinvestment........................ 453,062 $ 7,972,553
========== ============
Repurchases:
Class A.......................................... (1,659,697) $(29,155,783)
Class B.......................................... (377,046) (6,611,488)
Class C.......................................... (63,577) (1,107,176)
---------- ------------
Total Repurchases.................................. (2,100,320) $(36,874,447)
========== ============
</TABLE>

B-49
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

At December 31, 1996, paid in surplus aggregated $213,006,053, $48,564,507
and $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>

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.

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

B-50
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$50,300 and CDSC on redeemed shares of approximately $99,300. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $124,610,146 and $129,034,925,
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 a call option contract or
taking delivery of a security underlying a futures contract. In these instances
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.

Summarized on the next page are the specific types of derivative financial
instruments used by the Fund.

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

B-51
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

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

<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996.......................... 0
Futures Opened............................................ 900
Futures Closed............................................ (900)
----
Outstanding at December 31, 1997.......................... 0
====
</TABLE>

B. 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 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, 1997, are payments retained by VKAC of
approximately $353,100.

B-52
<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) Custodian Contract(17)

(b) Transfer Agency and Service Agreement+

(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)(17)

(b) List of Officers and Directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(17)

(18) Amended Multi-Class Plan (16)

(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.

(16) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on April 30, 1997.

(17) Incorporated herein by reference to Post-Effective Amendment No. 75 to Van
Kampen American Capital Growth and Income Fund's Registration Statement on
Form N-1A, File No. 2-21657 and 811-1228, filed on March 27, 1998.

+ 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 1, 1998:

<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...................................... 5,787
Class B Shares...................................... 1,505
Class C Shares...................................... 85
</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 connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter

C-2
<PAGE> 125

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
29th day of April, 1998.

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 29, 1998 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/ RICHARD M. DEMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini

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

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

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

/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell

/s/ 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 29, 1998
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>

<PAGE> 127

SCHEDULE OF EXHIBITS TO

POST-EFFECTIVE AMENDMENT 17 TO FORM N-1A

SUBMITTED TO THE SECURITIES AND EXCHANGE

COMMISSION ON APRIL 30, 1998

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S> <C>
(5) Investment Advisory Agreement
(6) (a) Distribution and Service Agreement
(8) (b) Transfer Agency and Service Agreement
(9) (a) Fund Accounting Agreement
(b) Legal Services Agreement
(11) Consent of KPMG Peat Marwick LLP
(16) Computation of Performance Quotations
(24) Power of Attorney
(27) Financial Data Schedules
</TABLE>

<PAGE> 1
EXHIBIT (5)

INVESTMENT ADVISORY AGREEMENT

THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (the "Agreement"),
by and between VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
(the "Fund") and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the
"ADVISER"), a Delaware corporation.

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

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

(c) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.

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

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

2. (a) FEE. For the services and facilities described in Section 1,
the Fund will accrue daily and pay to the Adviser at the end of each calendar
month an investment management fee computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:

<PAGE> 2

FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
-------------------- -------------
First $500 0.60 of 1.00%
Next $500 0.50 of 1.00%

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

(c) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund
shall be calculated as of 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 the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset value of such share as of the close of
business of the last day on which such calculation was made.

(d) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.

3. EXPENSES. In addition to the fee of the Adviser, the Fund shall
assume and pay any expenses for services rendered by a custodian for the
safekeeping of the Fund's securities or other property, for keeping its books
of account, for any other changes of the custodian and for calculating the net
asset value of the Fund as provided above. The adviser shall not be required
to pay, and the Fund shall assume and pay, the charges and expenses of its
operations, including compensation of the trustees (other than those who are
interested persons of the Adviser and other than those who are interested
persons of the distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and expenses of
independent accountants, of legal counsel and of any transfer or dividend
disbursing agent, costs of acquiring and disposing of portfolio securities,
cost of listing shares on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost of
registering shares of the Fund under the federal securities laws, miscellaneous
expenses and all taxes and fees to federal, state or other governmental
agencies on account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not pay or incur
any obligation for any management or administrative expenses for which the Fund
intends to seek reimbursement from the Adviser without first obtaining the
written approval of the Adviser. The Adviser shall arrange, if desired by the
Fund, for officers or employees of the Adviser to serve, without compensation
from the Fund, as trustees, officers or agents of the Fund if duly elected or
appointed to such positions and subject to their individual consent

<PAGE> 3

and to any limitations imposed by the law.

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

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

6. (a) TERM. This Agreement shall become effective on the date hereof
and shall remain in full force until May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.

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

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

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

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

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

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

11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.

<PAGE> 4

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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL PENNSYLVANIA TAX FREE
CORP. INCOME FUND

By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
-------------------------- ---------------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary

<PAGE> 1
EXHIBIT (6)(a)

DISTRIBUTION AND SERVICE AGREEMENT

THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE
INCOME FUND (the "Fund"), and VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a
Delaware corporation (the "Distributor").

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

(b) Best Efforts. The Distributor shall use its best efforts to sell,
through its organization and through other dealers and agents, the Shares which
the Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares. Without
the prior approval of the Board of Trustees, the Distributor shall not,
directly or indirectly, distribute, sell or market, through its organization or
other brokers, dealers or agents, shares of any investment companies unless the
Board of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.

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

(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and
secretary of the Distributor, and (ii) each director, officer and employee of
the Distributor or any of its affiliates (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund
(each person referred to in (i) or (ii) hereinafter being referred to as an
"Essential Person "), in his or her current capacities, is in the best interest
of the Fund and the Fund's shareholders. In connection with the Distributor's
acceptance of employment hereunder, the Distributor hereby agrees and covenants
for itself and on behalf of its Affiliates that neither the Distributor nor any
of its Affiliates shall replace or seek to replace any Essential Person or
cause to be replaced any Essential Person, in each case without first
consulting with the Board of Trustees of the Fund in a timely manner. In
addition, neither the Distributor nor any Affiliate of the Distributor shall
change or seek to change or cause to be changed, in any material respect, the
duties and responsibilities of any Essential Person, in each case without first
consulting with the Board of Trustees of the Fund in a timely manner.

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

<PAGE> 2

company or the acquisition by the Fund of all or substantially all of the
assets of or the outstanding Shares of any investment company; (b) in
connection with a pro rata distribution directly to the holders of Shares in
the nature of a stock dividend or stock split or in connection with any other
recapitalization approved by the Board of Trustees; (c) upon the exercise of
purchase or subscription rights granted to the holders of Shares on a pro rata
basis; (d) in connection with the automatic reinvestment of dividends and
distributions from the Fund; or (e) in connection with the issue and sale of
Shares to trustees, officers and employees of the Fund, to directors, officers
and employees of the investment adviser of the Fund or any principal
underwriter (including the Distributor) of the Fund, to retirees of the
Distributor that purchased shares of any mutual fund distributed by the
Distributor prior to retirement, to directors, officers and employees of Van
Kampen American Capital, Inc. (the parent company of the Distributor), VK/AC
Holding, Inc. (the parent company of The Van Kampen American Capital, Inc.),
Morgan Stanley, Dean Witter, Discover & Co. (the parent company of VK/AC
Holding, Inc.) and to the subsidiaries of Van Kampen American Capital, Inc.;
(f) to any trust, pension, profit-sharing or other benefit plan for any of the
aforesaid persons; and (g) to any group of persons as permitted by Rule 22d-1
under the 1940 Act approved from time to time by the Board of Trustees and set
forth in the then current Prospectus of the Fund.

The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.

3. (a) Public Offering Price. The public offering price per Share shall
be determined in accordance with the then current Prospectus of the Fund. In
no event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. The Fund will cause immediate
notice to be given to the Distributor of each change in net asset value as soon
as it is determined.

(b) Discounts to Dealers. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.

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

<PAGE> 3

harmless from any damage or expense on account of any unlawful act by the
Distributor or its agents or employees. The Distributor is not, however,
to be responsible for the acts of other dealers or agents, except to the extent
that they shall be acting for the Distributor or under its direction or
authority. None of the Distributor, any dealer, any agent or any other person
is authorized by the Fund to give any information or to make any
representations, other than those contained in the Registration Statement or
Prospectus heretofore or hereafter filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "1933 Act") (as
any such Registration Statement and Prospectus may have been or may be amended
from time to time), covering the Shares, and in any supplemental information to
any such Prospectus approved by the Fund in connection with the offer or sale
of Shares. None of the Distributor, any dealer, any broker or any other person
is authorized to act as agent for the Fund in connection with the offering or
sale of Shares to the public or otherwise. All such sales shall be made by the
Distributor as principal for its own account.

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

5. Expenses.

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

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

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

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

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

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

(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with and subject to the terms of a
plan (the "12b-1 Plan") adopted by the Fund pursuant to Rule 12b-1 under the
1940 Act as such 12b-1 Plan may be in effect from time to time; provided,
however, that no payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees 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

<PAGE> 4

Plan shall provide to the Fund's Board of Trustees, and the Trustees shall
review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts
paid by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.

(d) The Fund shall compensate the Distributor for providing services to,
and the maintenance of, shareholder accounts in the Fund (including prepaying
service fees to eligible brokers, dealers and financial intermediaries and
expenses incurred in connection therewith) and the Distributor may pay as agent
for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"),
as such Service Plan may be in effect from time to time; provided, however,
that no service fee payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees of the
Fund and by a majority of the Disinterested Trustees by vote cast in person at
a meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The
persons authorized to direct the payment of funds pursuant to this Agreement
and the Service Plan shall provide to the Fund's Board of Trustees, and the
Trustees shall review, at least quarterly, a written report with respect to
each class of Shares setting forth the amounts paid as service fees for each
such class of Shares comparing the amounts paid as service fees by such class
of Shares with amounts paid by classes of shares issued by investment companies
not governed by the Board of Trustees and distributed by the Distributor or by
direct or indirect Affiliates of the Distributor and such other information as
the Board of Trustees may from time to time request.

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

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

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

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

(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,

<PAGE> 5

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

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

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

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

<PAGE> 6

reimburse the Distributor, officers or trustees or controlling person or
persons, defendant or defendants in the suit for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees to notify the
Distributor promptly of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issuance
or sale of any of the Shares.

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

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

<PAGE> 7

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

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

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

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

11. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.

12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.

<PAGE> 8

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

VAN KAMPEN AMERICAN CAPITAL 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 (8)(b)

TRANSFER AGENCY AND SERVICE AGREEMENT

AGREEMENT made as of the 31st day of May, 1997 by and between each of the
VAN KAMPEN AMERICAN CAPITAL OPEN END FUNDS set forth on Schedule "A" hereto,
which are organized under the laws of the state and as the entities set forth
in Schedule "A" hereto (collectively, the "Funds"), and ACCESS INVESTOR
SERVICES, INC., a Delaware corporation ("ACCESS").

R E C I T A L:
-------------

WHEREAS, each of the Funds desires to appoint ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent and ACCESS
desires to accept such appointments;

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

Article 1. Terms of Appointment; Duties of ACCESS.
---------------------------------------

1.01 Subject to the terms and conditions set forth in this Agreement, each
of the Funds hereby employs and appoints ACCESS as its transfer agent, dividend
disbursing agent and shareholder service agent.

1.02 ACCESS hereby accepts such employment and appointments and agrees
that on and after the effective date of this Agreement it will act as the
transfer agent, dividend disbursing agent and shareholder service agent for
each of the Funds on the terms and conditions set forth herein.

1.03 ACCESS agrees that its duties and obligations hereunder will be
performed in a competent, efficient and workmanlike manner with due diligence
in accordance with reasonable industry practice, and that the necessary
facilities, equipment and personnel for such performance will be provided.

1.04 For a period of one year commencing on the effective date of this
Agreement, ACCESS and each of the Funds agree that the retention of (i) the
chief executive officer, president, chief financial officer, chief operating
officer and secretary of ACCESS and (ii) each director, officer and employee of
ACCESS or any of its Affiliates (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) who serves as an officer of the Funds (each
person referred to in (i) or (ii) hereinafter being referred to as an
"Essential Person"), in his or her current capacities, is in the best interest

<PAGE> 2

of the Funds and the Funds' shareholders. In connection with ACCESS's
acceptance of employment hereunder, ACCESS hereby agrees and covenants for
itself and on behalf of its Affiliates that neither ACCESS nor any of its
Affiliates shall make any material or significant personnel changes or replace
or seek to replace any Essential Person or cause to be replaced any Essential
Person, in each case without first informing the Board of Trustees of the Funds
in a timely manner. In addition, neither ACCESS nor any Affiliate of ACCESS
shall change or seek to change or cause to be changed, in any material
respect, the duties and responsibilities of any Essential Person, in each case
without first informing the Board of Trustees of the Funds in a timely
manner.

1.05 In order to assure compliance with section 1.03 and to implement a
cooperative effort to improve and maintain the quality of transfer agency,
dividend disbursing and shareholder services received by each of the Funds and
their shareholders, ACCESS agrees to provide and maintain quantitative
performance objectives, including maximum target turn-around times and maximum
target error rates, for the various services provided hereunder. ACCESS also
agrees to provide a reporting system designed to provide the Board of Trustees
of each of the Funds (the "Board") on a quarterly basis with quantitative data
comparing actual performance for the period with the performance objectives.
The foregoing procedures are designed to provide a basis for continuing
monitoring by the Board of the quality of services rendered hereunder.

Article 2. Fees and Expenses.
------------------

2.01 For the services to be performed by ACCESS pursuant to this
Agreement, each of the Funds agrees to pay ACCESS the fees provided in the fee
schedules agreed upon from time to time by each of the Funds and ACCESS.

2.02 In addition to the amounts paid under section 2.01 above, each of the
Funds agrees to reimburse ACCESS promptly for such Fund's reasonable
out-of-pocket expenses or advances paid on its behalf by ACCESS in connection
with its performance under this Agreement for postage, freight, envelopes,
checks, drafts, continuous forms, reports and statements, telephone, telegraph,
costs of outside mailing firms, necessary outside record storage costs, media
for storage of records (e.g., microfilm, microfiche and computer tapes) and
printing costs incurred due to special requirements of such Fund. In addition,
any other special out-of-pocket expenses paid by ACCESS at the specific request
of any of the Funds will be promptly reimbursed by the requesting Fund.
Postage for mailings of dividends, proxies, Fund reports and other mailings

Page 2

<PAGE> 3

to all shareholder accounts shall be advanced to ACCESS by the concerned Fund
three business days prior to the mailing date of such materials.

Article 3. Representations and Warranties of Access.
-----------------------------------------

ACCESS represents and warrants to each of the Funds that:

3.01 It is a corporation duly organized and existing and in good standing
under the laws of the State of Delaware.

3.02 It is duly qualified to carry on its business in each jurisdiction in
which the nature of its business requires it to be so qualified.

3.03 It is empowered under applicable laws and regulations and by its
charter and bylaws to enter into and perform this Agreement.

3.04 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.

3.05 It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to perform its
duties and obligations hereunder.

3.06 It will maintain a system regarding "as of" transactions as follows:

(a) Each "as of" transaction effected at a price other than that in
effect on the day of processing for which an estimate has not been given
to any of the affected Funds and which is necessitated by ACCESS' error,
or delay for which ACCESS is responsible or which could have been avoided
through the exercise of reasonable care, will be identified, and the net
effect of such transactions determined, on a daily basis for each such
Fund.
(b) The cumulative net effect of the transactions included in
paragraph (a) above will be determined each day throughout each month.
If, on any day during the month, the cumulative net effect upon any Fund
is negative and exceeds an amount equivalent to 1/2 of 1 cent per share
of such Fund, ACCESS shall promptly make a payment to such Fund (in cash
or through use of a credit as described in paragraph (c) below) in such
amount as necessary to reduce the negative cumulative net effect to less
than 1/2 of 1 cent per share of such Fund. If on the last business day
of the month the cumulative net effect (adjusted by the amount of any
payments or credits used pursuant to the preceding sentence) upon any
Fund is negative, such Fund shall be entitled to a reduction in the
monthly transfer agency fee next payable by an equivalent amount, except
as provided in paragraph (c) below. If on the last

Page 3

<PAGE> 4

business day of the month the cumulative net effect (similarly adjusted)
upon any Fund is positive, ACCESS shall be entitled to recover certain
past payments, credits used and reductions in fees, and to a credit
against all future payments and fee reductions made under this paragraph
to such Fund, as described in paragraph (c) below.

(c) At the end of each month, any positive cumulative net effect
upon any Fund shall be deemed to be a credit to ACCESS which shall first
be applied to recover any payments, credits used and fee reductions made
by ACCESS to such Fund under paragraph (b) above during the calendar year
by increasing the amount of the monthly transfer agency fee next payable
in an amount equal to prior payments, credits used and fee reductions
made during such year, but not exceeding the sum of that month's credit
and credits arising in prior months during such year to the extent such
prior credits have not previously been utilized as contemplated by this
paragraph (c). Any portion of a credit to ACCESS not so used shall
remain as a credit to be used as payment against the amount of any future
negative cumulative net effects which would otherwise require a payment,
use of a credit or fee reduction to such Fund pursuant to paragraph (b)
above.

Article 4. Representations and Warranties of the Funds.
--------------------------------------------

Each of the Funds hereby represents and warrants on behalf of itself
only and not on behalf of any other Funds which are a party to this Agreement
that:

4.01 It is duly organized and existing and in good standing under the laws
of the commonwealth or state set forth in Schedule "A" hereto.

4.02 It is empowered under applicable laws and regulations and by its
Declaration of Trust and by-laws to enter into and perform this Agreement.

4.03 All requisite proceedings have been taken by its Board to authorize
it to enter into and perform this Agreement.

4.04 It is an open-end, management investment company registered under the
Investment Company Act of 1940, as amended.

Page 4
<PAGE> 5

4.05 A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.

Article 5. Indemnification.
---------------
5.01 ACCESS shall not be responsible for and each of the Funds shall
indemnify and hold ACCESS harmless from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities (collectively, "Losses") arising out of or attributable to:

(a) All actions of ACCESS required to be taken by ACCESS for the
benefit of such Fund pursuant to this Agreement, provided that ACCESS has
acted in good faith with due diligence and without negligence or willful
misconduct.

(b) The reasonable reliance by ACCESS on, or reasonable use by
ACCESS of, information, records and documents which have been prepared or
maintained by or on behalf of such Fund or have been furnished to ACCESS
by or on behalf of such Fund.

(d) The offer or sale of such Fund's shares in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state or in violation of any stop
order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such shares in such state unless
such violation results from any failure by ACCESS to comply with written
instructions of such Fund that no offers or sales of such Fund's shares
be made in general or to the residents of a particular state.

(e) Such Fund's refusal or failure to comply with the terms of this
Agreement, or such Fund's lack of good faith, negligence or willful
misconduct or the breach of any representation or warranty of such Fund
hereunder. Notwithstanding the foregoing, no Fund shall be required to
indemnify or hold ACCESS harmless from and against any Losses arising out
of or attributable to any action or failure to take action, or any
information, records or

Page 5
<PAGE> 6

documents prepared or maintained, on behalf of
the Fund by the Fund's investment adviser or distributor, or any person
providing fund accounting or legal services to the Fund that is also an
officer or employee of Van Kampen American Capital, Inc. or its
subsidiaries unless such person or entity is otherwise entitled to
indemnification from the Fund.

5.02 ACCESS shall indemnify and hold harmless each of the Funds from and
against any and all Losses arising out of or attributable to ACCESS' refusal or
failure to comply with the terms of this Agreement, or ACCESS' lack of good
faith, or its negligence or willful misconduct, or the breach of any
representation or warranty of ACCESS hereunder.

5.03 At any time ACCESS may apply to any authorized officer of any of the
Funds for instructions, and may consult with any of the Funds' legal counsel,
at the expense of such concerned Fund, with respect to any matter arising in
connection with the services to be performed by ACCESS under this Agreement,
and ACCESS shall not be liable and shall be indemnified by such concerned Fund
for any action taken or omitted by it in good faith in reasonable reliance upon
such instructions or upon the opinion of such counsel. ACCESS shall be
protected and indemnified in acting upon any paper or document reasonably
believed by ACCESS to be genuine and to have been signed by the proper person
or persons and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the concerned Fund.
ACCESS shall also be protected and indemnified in recognizing stock
certificates which ACCESS reasonably believes to bear the proper manual or
facsimile signatures of the officers of the concerned Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.

5.04 In the event that any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise from such causes.

5.05 In no event and under no circumstances shall any party to this
Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.

5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which one party may be
required to indemnify another, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim.

Page 6
<PAGE> 7

The party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.

Article 6. Covenants of Each of the Funds and ACCESS.
------------------------------------------
6.01 Each of the Funds shall promptly furnish to ACCESS the following:

(a) Certified copies of the resolution of its Board authorizing the
appointment of ACCESS and the execution and delivery of this Agreement.
(b) Certified copies of its Declaration of Trust or Articles of
Incorporation and by-laws and all amendments thereto.

6.02 ACCESS hereby agrees to maintain facilities and procedures
reasonably acceptable to each of the Funds for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such
certificates, forms and devices.

6.03 ACCESS shall keep records relating to the services to be
performed hereunder in the form and manner as it may deem advisable; provided,
however, that all accounts, books and other records of each of the Funds
(hereinafter referred to as "Fund Records") prepared or maintained by ACCESS
hereunder shall be maintained and kept current in compliance with Section 31 of
the Investment Company Act of 1940 and the Rules thereunder (such Section and
Rules being hereinafter referred to as the "1940 Act Requirements"). To the
extent required by the 1940 Act Requirements, ACCESS agrees that all Fund
Records prepared or maintained by ACCESS hereunder are the property of the
concerned Fund and shall be preserved and made available in accordance with the
1940 Act Requirements, and shall be surrendered promptly to the concerned Fund
on its request. ACCESS agrees at such reasonable times as may be requested by
the Board and at least quarterly to provide (i) written confirmation to the
Board that all Fund Records are maintained and kept current in accordance with
the 1940 Act Requirements, and (ii) such other reports regarding its
performance hereunder as may be reasonably requested by the Board.

Page 7
<PAGE> 8

6.04 ACCESS and each of the Funds agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.

6.05 In case of any requests or demands for the inspection of any of
the Fund Records, ACCESS will endeavor to notify each of the concerned
Funds and to secure instructions from an authorized officer of each of the
concerned Funds as to such inspection. ACCESS reserves the right, however, to
exhibit such Fund Records to any person whenever it is advised by its counsel
that it may be held liable for the failure to exhibit such Fund records to such
person.

Article 7. Term and Termination Of Agreement.
----------------------------------
7.01 The initial term of this Agreement shall expire May 31, 1999,
and thereafter this Agreement shall automatically be renewed for
successive one year periods to begin on June 1 of each year unless any party
provides notice to the other party at least 120 days in advance of that date
that this Agreement is not to be renewed.

7.02 Notwithstanding the foregoing, any party may terminate this
Agreement for good and reasonable cause at any time by giving written
notice to the other party at least 60 days prior to the date on which such
termination is to be effective or such shorter period as may be required by
law.

7.03 Any unpaid fees or reimbursable expenses payable to ACCESS at
the termination date of this Agreement shall be due on that termination date.
ACCESS agrees to use its best efforts to cooperate with the Funds and the
successor transfer, dividend disbursement, or shareholder servicing agent
or agents in accomplishing an orderly transition.

Article 8. Miscellaneous.
--------------
8.01 Except as provided in section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by any party
without the written consent of ACCESS or the concerned Fund, as the case may
be; provided, however, that no consent shall be required for any merger of any
of the Funds with, or any sale of all or substantially all the assets of
any of the Funds to, another investment company.

8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.

Page 8
<PAGE> 9

8.03 ACCESS may, without further consent on the part of any of the
Funds, subcontract with DST, Inc., a Missouri corporation, or any other
qualified servicer, for the performance of data processing activities;
provided, however, that ACCESS shall be as fully responsible to each of
the Funds for the acts and omissions of DST, Inc. or other qualified
servicer as it is for its own acts and omissions.

8.04 Without the prior approval of the Boards of Trustees of the
Funds, ACCESS shall not, directly or indirectly, provide services,
including services such as transfer agent, dividend disbursing agent or
shareholder service agent, to any investment companies.

8.05 This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and supersedes
any prior agreement with respect thereto, whether oral or written, and
this Agreement may not be modified except by written instrument executed
by the affected parties.

8.06 The execution of this Agreement has been authorized by the
Funds' Trustees. This Plan is executed on behalf of the Funds or the
Trustees of the Funds as Trustees and not individually and the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Funds individually but are binding only
upon the assets and property of the Funds. A Certificate of Trust in
respect of each of the Funds is on file with the appropriate state
agency.

8.07 For each of those Funds which have one or more portfolios as
set forth in Schedule "A" hereto, all obligations of those Funds under
this Agreement shall apply only on a portfolio-by-portfolio basis and the
assets of one portfolio shall not be liable for the obligations of any
other.

8.08 In the event of a change in the business or regulatory
environment affecting all or any portion of this Agreement, the parties
hereto agree to renegotiate such affected portions in good faith.

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

8.10 (a) Any dispute, controversy, or claim arising out of or
relating to this Agreement, or the breach, termination or validity
thereof, shall be finally settled by arbitration in accordance with
the Expedited Procedures

Page 9

<PAGE> 10

of the commercial arbitration Rules of the American Arbitration
Association (the "AAA") then in effect (the "Rules"). The
arbitration shall be held in Chicago, Illinois.

(b) There shall be one arbitrator who shall be selected jointly by
the parties. If the parties are unable to agree on an arbitrator
within 15 days after a demand for arbitration is made by a party,
the arbitrator shall be appointed by the AAA in accordance with the
Rules. The hearing shall be held within 90 days of the appointment
of the arbitrator. Notwithstanding the Expedited Procedures
of the Rules, the arbitrator, at his discretion, may schedule
additional days of hearings.

(c) Either party may, without inconsistency with this Agreement,
seek from a court any interim or provisional relief in aid of
arbitration, pending the establishment of the arbitral tribunal.
The parties hereby submit to the exclusive jurisdiction of the
federal and state courts located in the northern district of the
state of Illinois for any such relief in aid of arbitration, or for
any relief relating to arbitration, except for the enforcement of an
arbitral award which may be enforced in any court having
jurisdiction.

(d) Any arbitration proceedings or award rendered hereunder and the
validity, effect and interpretation of Section 8.10 shall be
governed by the Federal Arbitration Act (9 U.S.C. Sections 1 et
--
seq.) The award shall be final and binding upon the parties.
---
Judgment upon any award may be entered in any court having
jurisdiction.

(e) This Agreement and the rights and obligations of the Parties
shall remain in full force and effect pending the award in any
arbitration proceeding hereunder.

Page 10

<PAGE> 11

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf and through their duly authorized
officers, as of the date first above written.

EACH OF THE VAN KAMPEN AMERICAN CAPITAL
OPEN END FUNDS LISTED ON SCHEDULE
"A" HERETO

BY: /s/ Ronald A. Nyberg
----------------------------------
Vice President

ATTEST:

/s/ Nicholas Dalmaso
- ----------------------------------
Assistant Secretary

ACCESS INVESTOR SERVICES, INC.

BY: /s/ Paul R. Wolkenberg
---------------------------------
President and Chief Executive Officer

ATTEST:
/s/ Huey P. Falgout
- ---------------------------------
Assistant Secretary

Page 11
<PAGE> 12

SCHEDULE "A"
------------
VAN KAMPEN AMERICAN CAPITAL OPEN-END FUNDS

<TABLE>
<CAPTION>
Organization Type
Fund Name State of [Business Trust
(including Portfolios) Organization "T"]
=====================================================================================================
<S> <C> <C>
Van Kampen American Capital Aggressive Growth Fund DE T
Van Kampen American Capital California Insured Tax Free Fund DE T
Van Kampen American Capital Comstock Fund DE T
Van Kampen American Capital Corporate Bond Fund DE T
Van Kampen American Capital Emerging Growth Fund DE T
Van Kampen American Capital Enterprise Fund DE T
Van Kampen American Capital Equity Income Fund DE T
Van Kampen American Capital Florida Insured Tax Free Income Fund DE T
Van Kampen American Capital Foreign Securities Fund DE T
Van Kampen American Capital Global Managed Assets Fund DE T
Van Kampen American Capital Government Securities Fund DE T
Van Kampen American Capital Government Target Fund DE T
Van Kampen American Capital Great American Companies Fund DE T
Van Kampen American Capital Growth Fund DE T
Van Kampen American Capital Growth and Income Fund DE T
Van Kampen American Capital Harbor Fund DE T
Van Kampen American Capital High Income Corporate Bond Fund DE T
Van Kampen American Capital High Yield Fund DE T
Van Kampen American Capital Insured Tax Free Income Fund DE T
Van Kampen American Capital Intermediate Term Municipal Income Fund DE T
</TABLE>

Page 12
<PAGE> 13

Van Kampen American Capital Limited Maturity Government Fund DE T
Van Kampen American Capital Municipal Income Fund DE T
Van Kampen American Capital New Jersey Tax Free Income Fund DE T
Van Kampen American Capital New York Tax Free Income Fund DE T
Van Kampen American Capital Pace Fund DE T
Van Kampen American Capital Pennsylvania Tax Free Income Fund PA T
Van Kampen American Capital Prospector Fund DE T
Van Kampen American Capital Real Estate Securities Fund DE T
Van Kampen American Capital Reserve Fund DE T
Van Kampen American Capital Short-Term Global Income Fund DE T
Van Kampen American Capital Small Capitalization Fund DE T
Van Kampen American Capital Strategic Income Fund DE T
Van Kampen American Capital Tax-Exempt Trust DE T
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Tax Free High Income Fund DE T
Van Kampen American Capital Tax Free Money Fund DE T
Van Kampen American Capital U.S. Government Fund DE T
Van Kampen American Capital U.S. Government Trust for Income DE T
Van Kampen American Capital Utility Fund DE T
Van Kampen American Capital Value Fund DE T
</TABLE>

PAGE 13
<PAGE> 14

PAGE 14

<PAGE> 1
EXHIBIT (9)(a)

FUND ACCOUNTING AGREEMENT

THIS AGREEMENT, dated May 31, 1997, by and between the parties set
forth in Schedule A hereto (designated collectively hereafter as the "Funds")
and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware
corporation ("Advisory Corp.").

W I T N E S S E T H:

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

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

WHEREAS, each desires to 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.

<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.

<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

<PAGE> 5

SCHEDULE A

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

CLOSED END FUNDS

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

INSTITUTIONAL FUNDS

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

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

<PAGE> 6

OPEN END FUNDS

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

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

Van Kampen American Capital Life Investment Trust ("Life Investment Trust"
or "LIT") on behalf of its Series
Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Real Estate Securities Portfolio ("LIT Real Estate Securities
Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")

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

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

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

<PAGE> 7

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

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

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

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

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

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

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

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 8

AMENDMENT NUMBER ONE

TO THE

FUND ACCOUNTING AGREEMENT

THIS AMENDMENT NUMBER ONE, dated July 24, 1997, to the Fund Accounting
Agreement dated May 31, 1997 (the "Agreement") by and between the parties set
forth in Schedule A, attached hereto and incorporated by reference and VAN
KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation
("Advisory Corp.").

W I T N E S S E T H

WHEREAS, the following party, being an open-end management investment
company as that term is defined in the Investment Company Act of 1940, as
amended, wishes to become party to the Agreement:

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

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

WHEREAS, the original parties desire to add the aforementioned
additional entity as party to the Agreement;

NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule A of
the Agreement be amended to add the party mentioned above as party to the
Agreement.

<PAGE> 9

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 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

<PAGE> 10

SCHEDULE A

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

CLOSED END FUNDS

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

INSTITUTIONAL FUNDS

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

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

<PAGE> 11

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 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")

<PAGE> 12

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 Foreign Securities Fund ("Foreign Securities
Fund")

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

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 13

AMENDMENT NUMBER TWO

TO THE

FUND ACCOUNTING AGREEMENT

THIS AMENDMENT NUMBER TWO, dated April 23, 1998, to the Fund Accounting
Agreement dated May 31, 1997 (the "Agreement") by and between the parties set
forth in Schedule A, attached hereto and incorporated by reference and VAN
KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation
("Advisory Corp.").

W I T N E S S E T H

WHEREAS, the following party, being an open-end management investment
company as that term is defined in the Investment Company Act of 1940, as
amended, wishes to become party to the Agreement:

ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC."):

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

WHEREAS, the original parties desire to add the aforementioned
additional entity as party to the Agreement;

<PAGE> 14

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 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

<PAGE> 15

SCHEDULE A

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

CLOSED END FUNDS

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

Van Kampen American Capital Senior Income 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

<PAGE> 16

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 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")
Morgan Stanley Real Estate Securities Portfolio ("LIT Morgan Stanley
Real Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Strategic Stock Portfolio ("LIT Strategic Stock Portfolio")

Van Kampen American Capital 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")

<PAGE> 17

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 Foreign Securities Fund ("Foreign Securities
Fund")

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

Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund")

<PAGE> 1
EXHIBIT (9)(b)
AMENDED AND RESTATED
LEGAL SERVICES AGREEMENT

THIS AGREEMENT, dated as of May 31, 1997, 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., 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

<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. 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 officer 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 admitting any claim against it
which may be subject to this indemnification, Van Kampen shall give the Fund
reasonable opportunity to defend against said claim on its own name or in the
name of Van Kampen.

<PAGE> 3

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 admitting 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, 1997, 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 and the address of Van Kampen. for this
purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention:
General Counsel.

<PAGE> 4

14. Personal Liability. As provided for in the Declaration of Trust of the
various Funds, under which the Funds are organized as unincorporated trusts
under the laws of the State of Delaware, Massachusetts or Pennsylvania, as the
case may be, the shareholders, trustees, officers, employees and other agents of
the Fund shall not personally be bound 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.

<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
Vice President & Secretary

VAN KAMPEN AMERICAN CAPITAL, INC.

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

<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 Intermediate 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 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

20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS

<PAGE> 7

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> 8

AMENDMENT ONE

TO THE
AMENDED AND RESTATED LEGAL SERVICES AGREEMENT
DATED MAY 31, 1997

THIS AMENDMENT ONE to the Amended and Restated Legal Services Agreement
dated May 31, 1997 by and between the parties as set forth in Schedule 1,
attached hereto and incorporated by reference and VAN KAMPEN AMERICAN CAPITAL,
INC.

W I T N E S S E T H

WHEREAS, Morgan Stanley Fund, Inc. being an open-end management
investment company as that term is defined in the Investment Company Act of
1940, as amended, wishes to become a party to the Agreement; and

WHEREAS, the original parties desire to add the aforementioned
additional entity as a party to the Agreement;

NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule 1 of
the Agreement be amended to add Morgan Stanley Fund, Inc.

<PAGE> 9

IN WITNESS WHEREOF, the parties have caused this Amendment One to be
executed this 31st day of May, 1997.

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: Dennis J. McDonnell
------------------------------
Dennis J. McDonnell
Executive Vice President

MORGAN STANLEY FUND, INC.

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