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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-4386
Van Kampen Tax Free Trust
-----------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
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(Address of principal executive offices) (Zip code)
Ronald Robinson
1221 Avenue of the Americas, New York, New York 10020
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(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: 9/30
Date of reporting period: 9/30/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
Insured Tax Free Income Fund performed during the annual period. The
portfolio management team will provide an overview of the market
conditions and discuss some of the factors that affected investment
performance during the reporting period. In addition, this report
includes the fund's financial statements and a list of fund investments
as of September 30, 2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative Minimum
Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN INSURED TAX FREE LEHMAN BROTHERS MUNICIPAL BOND
INCOME FUND INDEX
--------------------------- ------------------------------
9/93 9523.00 10000.00
12/93 9602.00 10140.70
9019.00 9583.91
9114.00 9689.41
9124.00 9755.81
12/94 8997.00 9616.39
9657.00 10295.80
9843.00 10543.80
10042.00 10847.00
12/95 10571.00 11294.80
10335.00 11158.80
10396.00 11244.10
10672.00 11501.80
12/96 10956.00 11794.80
10863.00 11766.60
11215.00 12171.80
11538.00 12538.80
12/97 11853.00 12878.90
11953.00 13027.10
12125.00 13225.60
12518.00 13631.40
12/98 12522.00 13713.40
12585.00 13835.00
12243.00 13590.60
12042.00 13536.50
12/99 11893.00 13431.40
12329.00 13823.90
12501.00 14032.70
12781.00 14372.30
12/00 13461.00 15000.70
13686.00 15333.50
13711.00 15433.10
14094.00 15866.50
12/01 13980.00 15769.60
14058.00 15918.30
14588.00 16500.70
15402.00 17284.40
12/02 15348.00 17284.30
15484.00 17492.10
15852.00 17943.30
9/03 15849.00 17957.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 12/14/84 since 5/03/93 since 8/13/93
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/ SALES W/O SALES W/ SALES W/O SALES W/ SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 8.09% 7.81% 5.01% 5.01% 4.57% 4.57%
10-year 5.23 4.71 4.65 4.65 4.40 4.40
5-year 4.83 3.82 4.00 3.75 4.00 4.00
1-year 2.90 -1.99 2.08 -1.85 2.08 1.10
- ------------------------------------------------------------------------------------------------
30-Day SEC Yield 3.53% 2.96% 2.96%
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 4.75 percent for Class A
shares, a contingent deferred sales charge of 4.00 percent for Class B shares
(in year one and declining to zero after year six), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. The since inception and 10-year returns for Class B
and C shares reflect their conversion into Class A shares seven and 10 years
after purchase, respectively. See footnote 3 in the Notes to Financial
Statements for additional information. Figures shown above assume reinvestment
of all dividends and capital gains. SEC yield is a calculation for determining
the amount of portfolio income, excluding non-income items as prescribed by the
SEC. Yields are subject to change. Distribution rate represents the monthly
annualized distributions of the fund at the end of the period and not the
earnings of the fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen Insured Tax Free Income Fund is managed by the Adviser's
Municipal Fixed-Income team.(1) Members of the team include James F.
Willison, Managing Director; Joseph R. Arcieri, Executive Director; and
Joseph A. Piraro, Vice President. The following discussion reflects their
views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was largely
characterized by the persistent weakness of the U.S. economy. One of the
most closely watched economic indicators, employment strength, was in
negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also seemed to weigh heavily on
the minds of investors over the course of the year. At the same time,
ongoing budgetary and fiscal difficulties at the state and local levels
contributed to ratings downgrades for many municipal bonds. The Federal
Reserve Board (the Fed) attempted to allay these fears and keep the
economy moving in the right direction by cutting the Fed Funds target
rate twice during the period for a total reduction of 0.75 percent.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
approximately where they began, the road between those two points was
decidedly bumpy. The 12-month period can be divided into two distinct
market environments. The first of these, which lasted from October 2002
to mid-June 2003, saw municipal yields fall by roughly 80 basis points to
levels not seen since the late 1960s. These plummeting yields led to a
surge in issuance as municipalities moved to lock in low financing rates
and, in the case of older bonds, low refinancing costs. These record
levels of supply met with record levels of demand as investors in search
of relative investment stability poured cash into municipal bond funds.
Demand for municipal bonds was also strong from so-called "cross-over"
buyers--investors who traditionally favor taxable investments but were
drawn to municipal bonds because of their relatively attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew. Issuance remained
strong throughout this leg of the period, though it abated somewhat in
the last three months. These forces combined to drive municipal-bond
yields off of their historic lows, ending the period where they began.
(1)Team members may change at any time without notice.
2
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund underperformed its benchmark index.
-- The fund returned 2.90 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0605 translated to a distribution
rate of 3.59 percent based on the fund's maximum offering price (as
of September 30, 2003, Class A shares adjusted for sales charges).
See Performance Summary for additional information and index definition.
Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. With interest rates at low levels early in the period, we moved to
attempt to protect the fund from any sudden rate increases. One of our
primary tactics was to reduce the fund's duration (a measure of
interest-rate sensitivity) below that of its benchmark index. This
defensive positioning, which benefited the fund later in the fiscal year,
was a drag on performance during the bond market rally that occurred last
winter and spring.
<Table>
TOP 5 SECTORS AS OF 9/30/03 TOP 5 STATES AS OF 9/30/03
Public Education 13.7% Illinois 16.4%
Water & Sewer 13.2 Texas 10.9
Wholesale Electric 11.1 California 10.6
Public Building 9.5 Florida 8.5
Transportation 9.0 Washington 7.2
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Morgan Stanley is a full-service securities firm engaged in securities trading
and brokerage activities, investment banking, research and analysis, financing
and financial advisory services.
3
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. The majority of the fund's holdings are concentrated in
essential-services bonds. Because these securities are backed by specific
projects rather than tax receipts, they tend to provide a more reliable
income stream than other municipal issues in weak economic environments
such as that of the past year. Sectors within essential services that
contributed positively to the fund's performance during the period
included transportation, public education, and water and sewer bonds.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY
ISSUES.
A. Over the past year we increased the fund's exposure to bonds with
structural characteristics designed to withstand interest-rate volatility
relatively well. Many of those purchases were concentrated in bonds that
feature the premium coupons of longer maturities while trading to a
shorter, more intermediate call date. In an environment of rising
interest rates, these bonds offer the dual cushion of high income (to
offset capital losses) and moderate interest-rate vulnerability. In our
opinion, their income stream alone makes them an appealing investment,
regardless of interest-rate considerations.
In terms of sector composition, the two largest weightings in the
portfolio at the end of September were water and sewer bonds and
education bonds. We maintained a very low percentage of assets in the
health-care sector because of our concerns about financial difficulties
in that area. Another area of concern was zero-coupon bonds, which were
underperforming other types of securities. Consequently, we made efforts
to eliminate some of the portfolio's zero-coupon holdings during the
period.
At the security level, we took advantage of relative-value opportunities
created by the volatile interest-rate environment during the period. For
example, the rapid increase in yields during June and July allowed us to
invest in newer securities carrying higher yields. We funded many of
these purchases through carefully managed selling of lower-coupon
holdings that allowed the portfolio to benefit from targeted tax losses
that offset capital gains elsewhere in the portfolio.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. We believe that the economy has lately shown clear signs of improvement,
though the employment picture remains soft and the likelihood of a
sustained rebound is questionable. In this environment, we believe the
Fed is likely to maintain a neutral stance in the absence of stronger
economic growth. We will continue to monitor the market closely for
compelling investment opportunities.
4
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
5
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 98.2%
ALABAMA 2.1%
$1,760 Alabama St Brd Ed Rev Shelton St Cmnty College
Rfdg (AMBAC Insd).............................. 5.500% 10/01/10 $ 2,030,354
4,035 Alabama St Brd Ed Tuit Rev John C Calhoun Cmty
College A (FGIC Insd).......................... 5.250 05/01/23 4,266,770
1,525 Alabama Wtr Pollutn Ctl Auth (AMBAC Insd)...... 5.500 08/15/13 1,731,332
1,955 Alabama Wtr Pollutn Ctl Auth Revolving Fd Ln
Ser A (AMBAC Insd)............................. 6.750 08/15/17 2,147,079
3,120 Huntsville, AL Hlthcare Auth Ser A (MBIA
Insd).......................................... 5.400 06/01/22 3,339,367
3,000 Huntsville, AL Hlthcare Auth Ser A (MBIA
Insd).......................................... 5.500 06/01/27 3,204,150
1,030 Jefferson Cnty, AL Swr Rev Cap Impt Wt
(Prerefunded @ 08/01/12) (FGIC Insd)........... 5.000 02/01/41 1,150,077
1,000 Mobile, AL Wtr & Swr Commr Wt (FGIC Insd)...... 5.250 01/01/20 1,071,450
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev
Decatur Gen Hosp Rfdg (Connie Lee Insd)........ 6.250 03/01/13 5,725,445
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA
Insd).......................................... 6.500 04/01/16 2,511,912
--------------
27,177,936
--------------
ALASKA 0.5%
4,130 Anchorage, AK Ser A (FGIC Insd)................ 5.500 06/01/17 4,634,810
1,425 Anchorage, AK Wtr Rev Rfdg (AMBAC Insd)........ 6.000 09/01/19 1,644,550
--------------
6,279,360
--------------
ARIZONA 0.7%
1,000 Arizona Sch Fac Brd Ctf Part Ser A (MBIA
Insd).......................................... 5.250 09/01/17 1,109,280
2,900 Arizona Tourism & Sports Auth Multi Purp Stad
Fac Ser A (MBIA Insd).......................... 5.375 07/01/22 3,132,812
1,000 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease
Oblig Irvington Proj Tucson Elec Pwr Co Ser A
Rfdg (FSA Insd)................................ 7.250 07/15/10 1,052,600
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem
Hosp Ser A Rfdg (AMBAC Insd)................... 6.000 09/01/12 2,141,906
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem
Hosp Ser A Rfdg (AMBAC Insd)................... 6.125 09/01/17 2,009,332
--------------
9,445,930
--------------
ARKANSAS 0.5%
6,265 Little Rock, AR Sch Dist Ser B Rfdg (FSA
Insd).......................................... 5.500 02/01/25 6,688,451
--------------
</Table>
6 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA 10.4%
$3,270 Alhambra, CA Redev Agy Tax A Indl Redev Proj
Rfdg (FSA Insd)................................ 5.000% 05/01/19 $ 3,460,020
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev
Agy Pool Rev Ser A (FSA Insd).................. 6.000 12/15/14 3,054,656
2,060 Burbank, CA Pub Fin Auth Golden State Redev
Proj Ser A (AMBAC Insd)........................ 5.250 12/01/21 2,210,050
5,000 California St (XLCA Insd)...................... 5.000 10/01/28 5,063,300
3,000 California St (CIFG Insd)...................... 5.000 02/01/29 3,035,490
10,000 California St Dept Wtr Res Pwr Ser A (AMBAC
Insd) (a)...................................... 5.500 05/01/16 11,194,400
5,000 California St Dept Wtr Res Pwr Ser A (XLCA
Insd).......................................... 5.375 05/01/17 5,483,050
5,000 California St Dept Wtr Res Pwr Ser A (AMBAC
Insd).......................................... 5.375 05/01/18 5,483,050
3,000 California St Pub Wks Brd UCLA Replacement Hosp
Ser A (FSA Insd)............................... 5.375 10/01/20 3,242,130
3,000 California St Pub Wks Brd UCLA Replacement Hosp
Ser A (FSA Insd)............................... 5.000 10/01/22 3,086,520
425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC
Insd).......................................... 6.700 08/01/21 545,215
3,500 Golden St Tob Sec Enhanced Asset Bkd B (AMBAC
Insd).......................................... 5.000 06/01/38 3,496,885
10,000 Golden St Tob Sec Enhanced Asset Bkd B (AMBAC
Insd).......................................... 5.000 06/01/43 9,939,500
265 Golden West Sch Fin Auth CA Rev Ser A Rfdg
(MBIA Insd).................................... 5.750 08/01/19 314,009
6,500 Grossmont, CA Uni High Sch Dist Ctf Part (MBIA
Insd).......................................... * 11/15/21 2,092,090
5,000 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B
(FSA Insd)..................................... 5.000 07/01/26 5,090,450
8,265 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B
(FSA Insd)..................................... 5.000 07/01/27 8,408,067
3,580 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B
(FSA Insd)..................................... 5.000 07/01/28 3,639,177
2,000 Metropolitan Wtr Dist South CA Auth Ser B 1
(FGIC Insd).................................... 5.000 10/01/29 2,032,280
6,500 Metropolitan Wtr Dist South CA Auth Ser B 1
(FGIC Insd).................................... 5.000 10/01/36 6,589,440
5,000 Metropolitan Wtr Dist South CA Auth Ser B 2
(FGIC Insd).................................... 5.000 10/01/27 5,088,650
1,250 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC
Insd).......................................... 5.500 06/01/21 1,393,650
1,465 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC
Insd).......................................... 5.500 06/01/24 1,600,014
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA (CONTINUED)
$1,365 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC
Insd).......................................... 5.500% 06/01/28 $ 1,483,919
3,005 Poway, CA Ctf Part City Office Bldg Proj (AMBAC
Insd).......................................... 5.000 01/01/23 3,082,018
5,000 Poway, CA Redev Agy Tax Paguay Redev Proj Ser A
(MBIA Insd) (b)................................ 5.000 06/15/33 5,062,950
9,285 San Jose, CA Arpt Rev Ser A Rfdg (FSA Insd).... 5.375 03/01/18 10,223,528
2,000 Santa Rosa, CA Wastewtr Rev Cap Apprec Ser B
(AMBAC Insd)................................... * 09/01/19 934,820
3,500 University, CA Rev Gen Ser A (AMBAC Insd)...... 5.000 05/15/27 3,560,025
8,560 University, CA Rev Gen Ser A (AMBAC Insd)...... 5.000 05/15/33 8,680,354
1,660 Upland, CA Pub Fin Auth Rev Lease Wtr Sys Impt
Proj (AMBAC Insd).............................. 5.000 10/01/27 1,689,432
1,250 Vallejo City, CA Uni Sch Ser A Rfdg (MBIA
Insd).......................................... 5.900 02/01/17 1,493,400
3,000 Vallejo City, CA Uni Sch Ser A Rfdg (MBIA
Insd).......................................... 5.900 08/01/25 3,510,210
2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev
Cmnty Fac Rfdg (FSA Insd)...................... 6.500 09/01/14 2,227,340
--------------
137,490,089
--------------
COLORADO 5.9%
2,000 Arapahoe, CO Pk & Rec Dist (FGIC Insd)......... 5.250 12/01/22 2,132,460
1,365 Colorado St Brd Governors Univ & Impt Ser A
Rfdg (AMBAC Insd).............................. 5.250 03/01/16 1,524,459
1,035 Colorado St Colleges Brd Ser B Rfdg (MBIA
Insd).......................................... 5.000 05/15/22 1,076,245
11,850 Denver, CO City & Cnty Arpt Rev Ser A (MBIA
Insd).......................................... 5.700 11/15/25 12,754,866
3,605 Denver, CO City & Cnty Arpt Rev Ser B (XLCA
Insd).......................................... 5.750 11/15/16 4,173,040
4,310 Denver, CO City & Cnty Arpt Rev Ser B (XLCA
Insd).......................................... 5.750 11/15/17 4,961,758
4,505 Denver, CO City & Cnty Arpt Rev Ser B (XLCA
Insd).......................................... 5.750 11/15/18 5,157,865
5,345 Denver, CO City & Cnty Arpt Rev Ser B (XLCA
Insd).......................................... 5.750 11/15/20 6,057,702
8,525 Denver, CO City & Cnty Arpt Rev Ser B (XLCA
Insd).......................................... 5.000 11/15/33 8,588,511
3,265 Denver, CO Convention Ctr Sr Ser A (XLCA
Insd).......................................... 5.000 12/01/17 3,531,163
2,000 Denver, CO Convention Ctr Sr Ser A (XLCA
Insd).......................................... 5.000 12/01/22 2,070,020
9,265 Denver, CO Convention Ctr Sr Ser A (XLCA
Insd).......................................... 5.000 12/01/28 9,386,835
2,200 Denver, CO Convention Ctr Sr Ser A (XLCA
Insd).......................................... 5.000 12/01/33 2,193,048
2,000 Fremont Cnty, CO Ctf Part & Impt Ser A Rfdg
(MBIA Insd).................................... 5.250 12/15/26 2,083,000
1,175 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/19 1,294,615
2,825 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/20 3,087,668
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
COLORADO (CONTINUED)
$3,080 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375% 12/01/21 $ 3,339,459
1,650 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/22 1,777,297
2,000 Westminster, CO Wtr & Wastewtr Util Enterprise
Rev (Prerefunded @ 12/01/04) (AMBAC Insd)...... 6.250 12/01/14 2,115,700
--------------
77,305,711
--------------
DISTRICT OF COLUMBIA 0.3%
1,000 District Columbia Ctf Part Dist Pub Safety &
Emergency (AMBAC Insd)......................... 5.500 01/01/19 1,105,130
2,000 District Columbia Ctf Part Dist Pub Safety &
Emergency (AMBAC Insd)......................... 5.500 01/01/20 2,192,820
--------------
3,297,950
--------------
FLORIDA 8.4%
1,000 Brevard Cnty, FL Sch Brd Ctf Part Ser A (AMBAC
Insd).......................................... 5.400 07/01/12 1,148,060
2,000 Brevard Cnty, FL Util Rev Rfdg (FGIC Insd)..... 5.250 03/01/12 2,271,220
7,055 Broward Cnty, FL Sch Brd Ctf (MBIA Insd)....... 5.250 07/01/17 7,824,066
500 Dade Cnty, FL Aviation Rev Ser B (MBIA Insd)... 5.600 10/01/26 533,215
1,000 Dade Cnty, FL Ed Fac Auth Rev Exchanged From
Univ of Miami Ser B (MBIA Insd)................ 5.750 04/01/20 1,099,740
500 Dade Cnty, FL Sch Dist (MBIA Insd)............. 5.000 02/15/13 545,175
750 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC Insd).... 5.375 10/01/16 839,017
1,250 Escambia Cnty, FL Hlth Fac Auth Rev (AMBAC
Insd).......................................... 5.950 07/01/20 1,346,012
1,000 Escambia Cnty, FL Util Auth Util Sys Rev (FGIC
Insd).......................................... 5.250 01/01/24 1,045,680
1,000 Florida Intergovnmtl Fin Ser C1 (AMBAC Insd)... 5.125 02/01/31 1,018,900
575 Florida Muni Ln Council Rev Ser B (MBIA
Insd).......................................... 5.750 11/01/14 663,964
1,185 Florida St Brd of Ed Cap Outlay Pub Ed Ser C
(FGIC Insd).................................... 5.000 06/01/23 1,221,486
2,000 Florida St Brd of Ed Cap Outlay Pub Ed Ser C
(FGIC Insd).................................... 5.750 06/01/29 2,170,880
1,250 Florida St Brd of Ed Lottery Rev Ser A (FGIC
Insd).......................................... 6.000 07/01/12 1,470,975
1,000 Florida St Brd of Ed Lottery Rev Ser A (FGIC
Insd).......................................... 6.000 07/01/14 1,172,720
2,750 Florida St Brd of Ed Lottery Rev Ser B (FGIC
Insd).......................................... 5.250 07/01/13 3,061,822
750 Florida St Brd of Regt Hsg Rev (MBIA Insd)..... 5.750 07/01/14 863,437
1,365 Florida St Correctional Privatization Commn Ctf
Part (MBIA Insd)............................... 5.375 08/01/14 1,528,977
1,750 Florida St Div Bd Fin Dept Gen Svc Rev Dept
Environmental Prot Presvtn 2000 Ser A (AMBAC
Insd).......................................... 5.000 07/01/12 1,918,630
1,500 Florida St Div Bd Fin Dept Gen Svc Rev Dept
Environmental Prot Presvtn 2000 Ser B (FSA
Insd).......................................... 5.250 07/01/11 1,679,325
1,000 Florida St Muni Pwr Agy Rev Stanton Proj Rfdg
(FSA Insd)..................................... 5.500 10/01/14 1,137,990
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
FLORIDA (CONTINUED)
$2,080 Florida St Muni Pwr Agy Rev Stanton Proj Rfdg
(FSA Insd)..................................... 5.500% 10/01/15 $ 2,363,608
500 Gulf Breeze, FL Rev Loc Govt (FGIC Insd)....... 5.650 12/01/20 554,290
1,340 Gulf Breeze, FL Rev Venice Loc Govt (FGIC
Insd).......................................... 5.150 12/01/20 1,462,087
1,480 Hillsborough Cnty, FL Sch Brd (AMBAC Insd)..... 5.375 10/01/16 1,656,890
1,300 Hillsborough Cnty, FL Util Jr Lien Rfdg (AMBAC
Insd).......................................... 5.500 08/01/11 1,504,061
1,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA
Insd).......................................... 6.100 10/01/18 1,131,140
1,000 Jacksonville, FL Cap Impt Rev Crossover Ser B
Rfdg (AMBAC Insd).............................. 5.250 10/01/14 1,120,610
3,210 Jacksonville, FL Cap Impt Rev Crossover Ser B
Rfdg (AMBAC Insd).............................. 5.250 10/01/15 3,589,326
1,750 Jea, FL Wtr & Swr Sys Rev Ser A (MBIA Insd).... 5.375 10/01/30 1,837,132
1,000 Key West, FL Util Brd Elec Rev Cap Apprec Ser D
(Escrowed to Maturity) (AMBAC Insd)............ * 10/01/13 682,540
1,500 Lee Cnty, FL Trans Fac Ser A Rfdg (AMBAC
Insd).......................................... 5.500 10/01/14 1,697,760
835 Martin Cnty, FL Cons Util Sys Rev (Prerefunded
@ 10/01/04) (FGIC Insd)........................ 5.750 10/01/08 887,471
1,000 Miami-Dade Cnty, FL Hlth Fac Miami Childrens
Hosp Ser A Rfdg (AMBAC Insd)................... 5.125 08/15/26 1,025,750
1,000 Miami-Dade Cnty, FL Sch Dist Rfdg (FSA Insd)... 5.375 08/01/13 1,150,530
1,000 Orange Cnty, FL Sch Brd Ctf Part Ser A (AMBAC
Insd).......................................... 5.250 08/01/14 1,124,310
1,000 Orlando, FL Cmnty Redev Agy Tax Rep Drive
Universal Blvd Rfdg (AMBAC Insd)............... 5.125 04/01/19 1,066,670
1,000 Orlando, FL Cmnty Redev Agy Tax Rep Drive
Universal Blvd Rfdg (AMBAC Insd)............... 5.125 04/01/20 1,059,330
1,000 Palm Beach Cnty, FL Pub Impt Rev Convention Ctr
Proj (FGIC Insd)............................... 5.125 11/01/30 1,023,880
1,000 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC
Insd).......................................... 5.500 08/01/16 1,123,480
4,180 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC
Insd).......................................... 5.000 08/01/18 4,494,043
800 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC
Insd).......................................... 5.125 08/01/26 822,264
4,000 Palm Beach Cnty, FL Sch Brd Ctf Ser C (FSA
Insd).......................................... 5.000 08/01/21 4,172,400
4,000 Palm Beach Cnty, FL Sch Brd Ctf Ser C (FSA
Insd).......................................... 5.000 08/01/22 4,145,720
1,000 Pembroke Pines, FL Charter Sch Ser A (MBIA
Insd).......................................... 5.000 07/01/26 1,017,300
750 Polk Cnty, FL Sch Brd Ctf Part Master Lease Ser
A (FSA Insd)................................... 5.500 01/01/16 836,077
1,700 Port Palm Beach Dist FL Rev Impt Rfdg (XLCA
Insd).......................................... * 09/01/25 545,326
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
FLORIDA (CONTINUED)
$ 290 Port Palm Beach Dist FL Rev Impt Rfdg (XLCA
Insd).......................................... * 09/01/26 $ 87,342
1,000 Port Saint Lucie, FL Spl Assmt Rev Util Svc
Area No 3 & 4A (MBIA Insd)..................... 5.000% 10/01/18 1,065,170
1,000 Reedy Creek, FL Impt Dist FL Ser 2 Rfdg (MBIA
Insd).......................................... 5.500 10/01/13 1,137,380
1,000 Reedy Creek, FL Impt Dist FL Ser A Rfdg (AMBAC
Insd).......................................... 5.500 06/01/12 1,139,950
535 Saint Johns Cnty, FL Indl Dev Auth Professional
Golf Proj Rfdg (MBIA Insd)..................... 5.250 09/01/12 606,695
1,000 Saint Lucie Cnty, FL Sch Brd Ctf Ser A (FSA
Insd).......................................... 5.000 07/01/21 1,042,760
3,525 Santa Rosa Bay Brdg Auth FL Rev Cap Apprec
(MBIA Insd).................................... * 07/01/18 1,803,390
1,515 Seminole Cnty, FL Sales Tax Rev (FGIC Insd).... 5.375 10/01/16 1,693,437
4,000 Sunrise, FL Util Sys Rev Rfdg (AMBAC Insd)..... 5.200 10/01/22 4,296,280
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem
Regl Med Ser A Rfdg (MBIA Insd) (a)............ 6.625 12/01/13 10,811,200
1,890 Tampa Bay, FL Sales Tax Rev Ser A (AMBAC
Insd).......................................... 5.375 10/01/17 2,101,510
1,000 Tampa Bay, FL Wtr Util Sys Rev (Prerefunded @
10/01/11) (FGIC Insd).......................... 5.500 10/01/12 1,166,630
1,000 Village Ctr Cmnty Dev Dist FL Ser A (MBIA
Insd).......................................... 5.200 11/01/25 1,040,570
3,735 Volusia Cnty, FL Ed Fac Auth Rev Ed Fac Embry
Riddle Ser B Rfdg (AMBAC Insd)................. 5.250 10/15/19 4,047,844
1,000 Volusia Cnty, FL Ed Fac Auth Rev Ed Fac Embry
Riddle Ser B Rfdg (AMBAC Insd)................. 5.250 10/15/22 1,062,160
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem
Hlth Impt & Rfdg (AMBAC Insd).................. 5.750 11/15/13 534,085
--------------
110,291,689
--------------
GEORGIA 3.1%
1,600 Athens, GA Hsg Auth Student East Campus Hsg
Rfdg (AMBAC Insd).............................. 5.250 12/01/18 1,751,520
4,150 Georgia Muni Elec Auth Pwr Rev Cap Apprec Gen
Ser B (BIGI Insd).............................. * 01/01/08 3,735,456
4,000 Georgia Muni Elec Auth Pwr Rev Gen Ser A (MBIA
Insd).......................................... 6.500 01/01/12 4,768,640
14,690 Georgia Muni Elec Auth Pwr Rev Ser Y (AMBAC
Insd).......................................... 6.400 01/01/13 17,727,892
9,590 Georgia Muni Elec Auth Pwr Rev Ser Y (MBIA
Insd).......................................... 6.500 01/01/17 11,771,629
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
GEORGIA (CONTINUED)
$ 860 Georgia Muni Elec Auth Pwr Rev Ser Y (Escrowed
to Maturity) (AMBAC Insd)...................... 6.400% 01/01/13 $ 1,039,878
410 Georgia Muni Elec Auth Pwr Rev Ser Y (Escrowed
to Maturity) (MBIA Insd)....................... 6.500 01/01/17 510,192
--------------
41,305,207
--------------
ILLINOIS 16.1%
2,215 Bolingbrook, IL Cap Apprec Ser C Rfdg (MBIA
Insd).......................................... * 01/01/19 1,060,099
2,595 Bolingbrook, IL Cap Apprec Ser C Rfdg (MBIA
Insd).......................................... * 01/01/20 1,164,766
6,225 Chicago, IL Brd of Ed Cap Apprec Sch Reform B 1
(FGIC Insd).................................... * 12/01/15 3,647,912
2,845 Chicago, IL Brd of Ed Cap Apprec Sch Reform B 1
(FGIC Insd).................................... * 12/01/19 1,302,640
1,500 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser
A (FGIC Insd).................................. * 12/01/19 686,805
1,020 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser
A (FGIC Insd).................................. * 12/01/25 313,701
8,000 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser
A (FGIC Insd).................................. * 12/01/29 1,958,720
3,250 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser
A (FGIC Insd).................................. * 12/01/30 752,082
5,000 Chicago, IL Cap Apprec City Colleges (FGIC
Insd).......................................... * 01/01/27 1,456,250
2,000 Chicago, IL Lakefront Millenium Pkg Fac (MBIA
Insd) (c)...................................... 0/5.700 01/01/25 1,819,200
2,000 Chicago, IL Lakefront Millenium Pkg Fac (MBIA
Insd) (c)...................................... 0/5.750 01/01/29 1,808,040
3,000 Chicago, IL O'Hare Intl Arpt Rev Gen Arpt 3rd
Lien B 2 (MBIA Insd)........................... 5.250 01/01/27 3,041,310
3,000 Chicago, IL O'Hare Intl Arpt Rev Gen Arpt 3rd
Lien C 2 Rfdg (FSA Insd)....................... 5.250 01/01/30 3,031,740
8,750 Chicago, IL O'Hare Intl Arpt Rev Rols RR II
239-2 (FSA Insd)............................... 5.750 01/01/20 10,386,512
10,000 Chicago, IL O'Hare Intl Arpt Rev Rols RR II
239-3 (FSA Insd)............................... 5.750 01/01/21 11,716,900
2,500 Chicago, IL Park Dist Ser C (FGIC Insd)........ 5.500 01/01/19 2,753,825
10,000 Chicago, IL Proj Ser A Rfdg (FGIC Insd)........ 5.375 01/01/34 10,447,700
5,000 Chicago, IL Proj Ser A Rfdg (MBIA Insd)........ 5.500 01/01/38 5,265,400
5,000 Chicago, IL Proj Ser A Rfdg (AMBAC Insd)....... 5.625 01/01/39 5,326,500
5,000 Chicago, IL Sales Tax Rev (Prerefunded @
01/01/09) (FGIC Insd).......................... 5.375 01/01/30 5,743,200
2,300 Chicago, IL Wtr Rev (FGIC Insd)................ 5.250 11/01/27 2,369,253
3,270 Chicago, IL Wtr Rev Cap Apprec (FGIC Insd)..... * 11/01/10 2,562,568
</Table>
12 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ILLINOIS (CONTINUED)
$2,055 Cook Cnty, IL Cmnty Cons Sch Dist No 015
Palatine Cap Apprec (FSA Insd)................. * 12/01/10 $ 1,610,339
2,895 Cook Cnty, IL Cmnty Sch Dist Ser B (FGIC
Insd).......................................... 9.000% 12/01/14 4,283,095
3,155 Cook Cnty, IL Cmnty Sch Dist Ser B (FGIC
Insd).......................................... 9.000 12/01/15 4,676,530
1,505 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA
Insd).......................................... 8.200 12/01/14 2,117,369
1,775 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA
Insd).......................................... 8.100 12/01/16 2,503,691
2,605 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC
Insd).......................................... * 12/01/17 1,355,850
2,995 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC
Insd).......................................... * 12/01/18 1,465,004
4,210 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC
Insd).......................................... * 12/01/19 1,930,664
4,050 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC
Insd).......................................... * 12/01/20 1,737,531
3,000 Du Page Cnty, IL Cmnty High Sch (FSA Insd)..... 5.600 01/01/22 3,294,690
2,045 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/17 2,284,899
1,860 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/20 2,036,998
1,180 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/21 1,283,285
10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth
Edison Co Proj Ser D Rfdg (AMBAC Insd)......... 6.750 03/01/15 10,936,200
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co
Proj Ser B First Mtg Rfdg (MBIA Insd).......... 7.400 12/01/24 38,011,400
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford
Sch 205 (FSA Insd)............................. 6.650 02/01/11 2,436,780
5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford
Sch 205 (FSA Insd)............................. 6.650 02/01/12 5,803,272
2,000 Illinois Ed Fac Auth Rev DePaul Univ (AMBAC
Insd).......................................... 5.625 10/01/14 2,278,960
2,000 Illinois Med Dist (MBIA Insd).................. 5.250 06/01/32 2,070,400
3,500 Illinois Muni Elec Agy Pwr Supply Sys Rev Rfdg
(FSA Insd)..................................... 5.000 02/01/21 3,614,170
2,000 Kane Cook & Du Page Cntys IL Ser A (FGIC
Insd).......................................... 7.000 12/15/11 2,514,900
1,000 Kane Cook & Du Page Cntys IL Ser A (FGIC
Insd).......................................... 7.000 12/15/12 1,268,630
2,700 Lake Cnty, IL Cmnty Cons Sch Dist No 50
Woodland Cap Apprec Ser B (FGIC Insd).......... * 12/01/13 1,781,622
1,200 Lake Cnty, IL Cmnty Cons Sch Dist No 50
Woodland Cap Apprec Ser B (FGIC Insd).......... * 12/01/14 748,572
2,500 Lake Cnty, IL Cmnty Cons Sch Dist No 50
Woodland Ser A (FGIC Insd)..................... 6.000 12/01/20 2,855,250
3,440 Lake Cnty, IL Cmnty High Sch Dist No 117
Antioch Cap Apprec Ser B (FGIC Insd)........... * 12/01/10 2,688,085
</Table>
See Notes to Financial Statements 13
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ILLINOIS (CONTINUED)
$6,790 Lake Cnty, IL Cmnty Unit Sch Dist No 60
Waukegan Cap Apprec Ser A (FSA Insd)........... * 12/01/17 $ 3,525,300
3,175 Lake Cnty, IL Cmnty Unit Sch Dist No 95 Lake
Zurich Cap Apprec (FGIC Insd).................. * 12/01/15 1,867,249
3,000 McHenry & Kane Cnty, IL Cmnty Cons Sch Dist No
158 Cap Apprec (FGIC Insd)..................... * 01/01/17 1,631,370
4,000 McHenry & Kane Cnty, IL Cmnty Cons Sch Dist No
158 Cap Apprec (FGIC Insd)..................... * 01/01/18 2,043,000
2,080 McHenry Cnty, IL Cmnty High Sch Dist No 154 Cap
Apprec (FGIC Insd)............................. * 01/01/16 1,197,123
1,000 McHenry Cnty, IL Consv Dist Ser A (FGIC
Insd).......................................... 5.500% 02/01/16 1,118,760
1,330 McHenry Cnty, IL Consv Dist Ser A (FGIC
Insd).......................................... 5.500 02/01/17 1,483,868
6,000 Metropolitan Pier & Expo Auth IL Dedicated St
Tax Rev McCormick Pl Expansion Ser A (MBIA
Insd).......................................... 5.250 06/15/42 6,185,520
4,000 Rosemont, IL Ser A Rfdg (FGIC Insd)............ 5.000 12/01/19 4,264,120
2,000 Southern IL Univ Rev Cap Apprec Hsg & Aux Ser A
(MBIA Insd).................................... * 04/01/20 886,720
1,495 Will Cnty, IL Sch Dist No 017 (AMBAC Insd)..... 5.000 12/01/16 1,617,171
--------------
212,023,510
--------------
INDIANA 3.3%
2,000 Brownsburg, IN Sch Bldg First Mtg 1999 Ser A
(FSA Insd)..................................... 5.250 09/15/22 2,123,420
1,785 Center Grove, IN 2000 Bldg First Mtg (AMBAC
Insd).......................................... 5.500 07/15/17 2,000,664
1,885 Center Grove, IN 2000 Bldg First Mtg (AMBAC
Insd).......................................... 5.500 07/15/18 2,100,324
2,500 Evansville Vanderburgh, IN Pub Lease Corp First
Mtg (MBIA Insd)................................ 5.750 07/15/18 2,790,100
3,900 Evansville Vanderburgh, IN Sch First Mtg (FSA
Insd).......................................... 5.000 07/15/19 4,111,263
1,855 Hamilton Southeastern, IN Cons First Mtg (FSA
Insd).......................................... 5.500 07/15/16 2,086,467
1,075 Hamilton Southeastern, IN Cons First Mtg (FSA
Insd).......................................... 5.500 01/15/19 1,190,616
1,515 Indiana Bd Bk Spl Pgm Ser A (Escrowed to
Maturity) (AMBAC Insd)......................... 9.750 08/01/09 1,882,039
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosp
Proj Impt & Rfdg (MBIA Insd)................... 6.400 05/01/12 5,072,600
500 Indiana St Dev Fin Auth Pollutn South IN B Rmkt
Rfdg (AMBAC Insd).............................. 5.000 03/01/30 500,940
2,265 Indianapolis, IN Loc Pub Impt Ser B (FSA
Insd).......................................... 5.000 01/15/20 2,370,232
2,335 Lake Cnty, IN Bldg Corp First Mtg (MBIA
Insd).......................................... 5.750 08/01/11 2,677,358
2,670 Marion Cnty, IN Convention & Rec Lease Rent Ser
A Rfdg (AMBAC Insd)............................ 5.000 06/01/20 2,798,133
</Table>
14 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
INDIANA (CONTINUED)
$1,550 Marion Cnty, IN Convention & Rec Lease Rent Ser
A Rfdg (AMBAC Insd)............................ 5.000% 06/01/21 $ 1,609,505
1,605 Mount Vernon of Hancock Cnty First Mtg Ser B
(AMBAC Insd)................................... 5.500 07/15/16 1,805,272
1,695 Mount Vernon of Hancock Cnty First Mtg Ser B
(AMBAC Insd)................................... 5.500 07/15/17 1,899,790
4,000 New Albany Floyd Cnty, IN Sch First Mtg (FGIC
Insd).......................................... 5.750 07/15/20 4,493,800
2,130 Northwest Allen Cnty, IN First Mtg (MBIA
Insd).......................................... 5.250 07/15/19 2,317,717
--------------
43,830,240
--------------
IOWA 0.2%
2,375 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp
Proj (FSA Insd)................................ 5.750 07/01/17 2,642,401
--------------
KANSAS 1.4%
16,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co
Proj Rfdg (MBIA Insd).......................... 7.000 06/01/31 17,488,675
450 Dodge, KS Uni Sch Dist No 443 Rfdg (FGIC
Insd).......................................... 5.000 09/01/12 503,955
--------------
17,992,630
--------------
KENTUCKY 0.2%
3,000 Kentucky St Ppty & Bldgs Commn Proj No 79 (MBIA
Insd) (b)...................................... 5.125 10/01/19 3,244,350
--------------
LOUISIANA 2.2%
4,065 Calcasieu Parish, LA Mem Hosp Svc Dist Hosp Rev
Lake Charles Mem Hosp Proj Ser A (Connie Lee
Insd).......................................... 6.375 12/01/12 4,879,260
5,530 Calcasieu Parish, LA Mem Hosp Svc Dist Hosp Rev
Lake Charles Mem Hosp Proj Ser A (Connie Lee
Insd).......................................... 6.500 12/01/18 6,864,444
1,375 Greater New Orleans Expwy Impt Rfdg (AMBAC
Insd).......................................... 5.250 11/01/15 1,553,626
1,450 Greater New Orleans Expwy Impt Rfdg (AMBAC
Insd).......................................... 5.250 11/01/16 1,626,683
1,525 Greater New Orleans Expwy Impt Rfdg (AMBAC
Insd).......................................... 5.250 11/01/17 1,699,979
1,930 Louisiana Loc Govt Environment BRCC Fac Corp
Proj (MBIA Insd)............................... 5.375 12/01/16 2,162,604
2,035 Louisiana Loc Govt Environment BRCC Fac Corp
Proj (MBIA Insd)............................... 5.375 12/01/17 2,265,260
2,150 Louisiana Loc Govt Environment BRCC Fac Corp
Proj (MBIA Insd)............................... 5.375 12/01/18 2,375,793
2,265 Louisiana Loc Govt Environment BRCC Fac Corp
Proj (MBIA Insd)............................... 5.375 12/01/19 2,486,472
</Table>
See Notes to Financial Statements 15
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
LOUISIANA (CONTINUED)
$2,395 Louisiana Loc Govt Environment BRCC Fac Corp
Proj (MBIA Insd)............................... 5.375% 12/01/20 $ 2,606,239
2,635 New Orleans, LA Home Mtg Auth Single Family Mtg
Rev 1985 Ser A (MBIA Insd)..................... * 09/15/16 690,897
--------------
29,211,257
--------------
MASSACHUSETTS 0.7%
3,700 Massachusetts Muni Whsl Elec Co Nuclear Mix 1-
A (MBIA Insd).................................. 5.250 07/01/13 4,133,196
2,500 Massachusetts Muni Whsl Elec Co Proj No 6-A
(MBIA Insd).................................... 5.250 07/01/16 2,751,425
1,010 Massachusetts St Cons Ln Ser D (MBIA Insd)..... 5.250 11/01/19 1,097,476
1,700 Massachusetts St Hlth & Ed Fac Auth Rev Mt
Auburn Hosp Ser B1 (MBIA Insd)................. 6.250 08/15/14 1,810,466
--------------
9,792,563
--------------
MICHIGAN 1.1%
2,455 Detroit, MI Wtr Supply Sys Rev Sr Lien Ser C
Rfdg (MBIA Insd)............................... 5.250 07/01/17 2,728,953
1,400 Huron, MI Sch Dist (FSA Insd).................. 5.250 05/01/21 1,493,282
1,150 Kalamazoo, MI City Sch Dist Bldg & Site (FSA
Insd).......................................... 5.250 05/01/16 1,268,692
500 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B
(AMBAC Insd)................................... 5.000 04/01/04 507,655
2,500 Michigan St Strategic Fd Ltd Oblig Rev Detroit
Ed Conv Rfdg (AMBAC Insd)...................... 4.850 09/01/30 2,731,600
2,675 Wayne Charter Cnty, MI Arpt Rev Ser C Rfdg
(FGIC Insd).................................... 5.375 12/01/17 2,960,262
2,990 Wayne Charter Cnty, MI Arpt Rev Ser C Rfdg
(FGIC Insd).................................... 5.375 12/01/20 3,237,153
--------------
14,927,597
--------------
MINNESOTA 0.1%
1,000 Brainerd, MN Rev Evangelical Lutheran Ser B
Rfdg (FSA Insd)................................ 6.650 03/01/17 1,014,400
--------------
MISSISSIPPI 0.5%
1,450 Harrison Cnty, MS Wastewtr Mgmt & Solid
Wastewtr Treatment Fac Ser A Rfdg (FGIC
Insd).......................................... 5.500 02/01/08 1,649,709
1,675 Harrison Cnty, MS Wastewtr Mgmt & Solid
Wastewtr Treatment Fac Ser A Rfdg (FGIC
Insd).......................................... 5.500 02/01/09 1,920,187
1,265 Harrison Cnty, MS Wastewtr Mgmt & Solid
Wastewtr Treatment Fac Ser A Rfdg (FGIC
Insd).......................................... 5.500 02/01/10 1,452,018
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev
Wastewtr Treatment Fac Ser A Rfdg (FGIC
Insd).......................................... 8.500 02/01/13 1,381,970
--------------
6,403,884
--------------
</Table>
16 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MISSOURI 0.4%
$1,170 Mehlville, MO Sch Dist No R-9 Ctf Part Ser A
(FSA Insd)..................................... 5.500% 03/01/16 $ 1,312,775
1,225 Mehlville, MO Sch Dist No R-9 Ctf Part Ser A
(FSA Insd)..................................... 5.500 03/01/17 1,372,711
1,990 Saint Louis, MO Arpt Rev Cap Impt Pgm Ser A
(MBIA Insd).................................... 5.375 07/01/17 2,186,413
--------------
4,871,899
--------------
NEVADA 1.1%
10,000 Director St, NV Dept Business & Ind Las Vegas
Monorail Proj First Tier (AMBAC Insd).......... 5.625 01/01/32 10,823,500
2,500 Reno, NV Cap Impt Rev (FGIC Insd).............. 5.125 06/01/26 2,553,175
1,000 Washoe County, NV Ctf Part Pub Safety Training
Fac Proj (AMBAC Insd).......................... 4.800 09/01/09 1,071,120
--------------
14,447,795
--------------
NEW HAMPSHIRE 0.2%
2,500 New Hampshire St Tpk Sys Rev Ser C Rfdg
(Inverse Fltg) (FGIC Insd)..................... 12.618 11/01/17 3,293,225
--------------
NEW JERSEY 3.2%
3,625 Morristown, NJ Rfdg (FSA Insd)................. 6.400 08/01/14 4,018,784
10,000 New Jersey St Trans Corp Ctf Fed Trans Admin
Grants Ser A (AMBAC Insd)...................... 5.500 09/15/13 11,527,400
6,800 New Jersey St Trans Corp Ctf Fed Trans Admin
Grants Ser A (Prerefunded @ 09/15/09) (AMBAC
Insd).......................................... 5.875 09/15/12 8,038,280
6,040 New Jersey St Trans Tr Fd Trans Sys Ser A (FSA
Insd).......................................... 5.500 06/15/12 6,974,992
5,000 New Jersey St Trans Tr Fd Trans Sys Ser A
(AMBAC Insd)................................... 5.500 12/15/14 5,821,800
1,000 New Jersey St Trans Tr Fd Trans Sys Ser B
(Prerefunded @ 12/15/11) (MBIA Insd)........... 6.000 12/15/17 1,205,160
4,000 New Jersey St Trans Tr Fd Trans Sys Ser C (FSA
Insd).......................................... 5.500 06/15/20 4,453,000
--------------
42,039,416
--------------
NEW YORK 3.4%
5,000 Long Island Pwr Auth NY Elec Gen Ser C (CIFG
Insd).......................................... 5.000 09/01/33 5,072,100
5,000 Metropolitan Trans Auth NY Svc Contract Ser A
Rfdg (FGIC Insd)............................... 5.000 07/01/25 5,100,850
5,470 New York City Hlth & Hosp Hlth Sys Ser A (FSA
Insd).......................................... 5.000 02/15/21 5,676,219
4,350 New York City Indl Dev Agy Civic Fac Rev USTA
Natl Tennis Cent Proj (FSA Insd)............... 6.375 11/15/14 4,680,122
</Table>
See Notes to Financial Statements 17
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK (CONTINUED)
$14,000 New York City Muni Wtr Fin Auth Ser B (MBIA
Insd).......................................... 5.500% 06/15/27 $ 14,972,020
5,250 New York City Transitional Future Tax Secd Ser
A Rfdg (FGIC Insd)............................. 5.500 11/01/14 5,962,583
3,105 New York St Dorm Auth Rev Insd Brooklyn Law Sch
Ser B (XLCA Insd).............................. 5.375 07/01/21 3,369,701
15 New York St Med Care Fac Fin Agy Rev
(Prerefunded @ 08/15/04) (FSA Insd)............ 6.500 08/15/15 16,011
--------------
44,849,606
--------------
NORTH CAROLINA 1.4%
2,350 Dare Cnty, NC Ctf Part (AMBAC Insd)............ 5.000 06/01/23 2,423,978
1,690 North Carolina Cap Fac Fin Johnson & Wales Univ
Proj Ser A (XLCA Insd)......................... 5.000 04/01/20 1,782,156
10,000 North Carolina Muni Pwr Agy Ser A (MBIA
Insd).......................................... 5.250 01/01/18 10,954,100
2,935 North Carolina Muni Pwr Agy Ser A (MBIA
Insd).......................................... 5.250 01/01/19 3,191,372
--------------
18,351,606
--------------
NORTH DAKOTA 0.9%
5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly
Station Rfdg (AMBAC Insd)...................... 7.200 06/30/13 6,248,700
5,000 Oliver Cnty, ND Pollutn Ctl Rev Square Butte
Elec Coop Ser A Rfdg (AMBAC Insd).............. 5.300 01/01/27 5,146,600
--------------
11,395,300
--------------
OHIO 0.1%
1,595 Toledo, OH City Sch Dist Sch Fac Impt (FSA
Insd).......................................... 5.000 12/01/25 1,633,870
--------------
OKLAHOMA 2.3%
1,355 Jenks, OK Aquarium Auth Rev First Mtg (MBIA
Insd).......................................... 6.000 07/01/20 1,568,765
1,000 McAlester, OK Pub Wks Auth Util Cap Apprec (FSA
Insd).......................................... * 02/01/34 210,260
8,320 McAlester, OK Pub Wks Auth Util Cap Apprec Ser
A (FSA Insd)................................... * 02/01/30 1,944,301
2,680 McAlester, OK Pub Wks Auth Util Cap Apprec Ser
A (Prerefunded @ 02/01/09) (FSA Insd).......... * 02/01/30 710,468
2,100 Midwest City, OK Muni Auth (Prerefunded @
06/01/10) (FSA Insd)........................... 5.150 06/01/15 2,305,800
5,660 Mustang, OK Impt Auth Util Rev (FSA Insd)...... 5.800 10/01/30 6,243,716
2,020 Oklahoma City, OK Arpt Tr Jr Lien 27th Ser A
(FSA Insd)..................................... 5.000 07/01/17 2,129,221
4,000 Sapulpa, OK Muni Auth Cap Impt Rev Rfdg (FSA
Insd).......................................... 5.750 07/01/30 4,735,400
</Table>
18 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
OKLAHOMA (CONTINUED)
$2,000 Tulsa, OK Cmnty College Rev (AMBAC Insd)....... 5.500% 07/01/22 $ 2,194,000
8,260 Tulsa, OK Tulsa Indl Auth Rev Univ Tulsa Ser A
(MBIA Insd).................................... 5.375 10/01/31 8,695,632
--------------
30,737,563
--------------
OREGON 0.6%
1,000 Emerald Peoples Util Dist Ser A Rfdg (FSA
Insd).......................................... 5.250 11/01/21 1,081,730
4,835 Oregon St Dept Admin Ser B Rfdg (MBIA Insd).... 5.250 05/01/17 5,312,746
1,300 Portland, OR Arpt Rev Ser 15 Intl Arpt Ser A
Rfdg (FGIC Insd)............................... 5.000 07/01/13 1,424,098
--------------
7,818,574
--------------
PENNSYLVANIA 4.0%
5,000 Allegheny Cnty, PA Hosp Dev Auth Rev Insd Hlth
Sys Ser A (MBIA Insd).......................... 6.500 11/15/30 5,824,450
4,875 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh
Mercy Hlth Sys Inc (Escrowed to Maturity)
(AMBAC Insd)................................... 5.625 08/15/26 5,391,116
2,065 Gateway, PA Sch Dist Alleghany (FGIC Insd)..... 5.000 10/15/28 2,098,866
3,000 Lycoming Cnty, PA Auth College Rev PA College
of Technology (AMBAC Insd)..................... 5.350 07/01/26 3,132,510
1,375 Pennsylvania St Higher Ed Fac Auth Rev St Sys
Higher Ed Ser P (AMBAC Insd)................... 5.000 12/15/16 1,485,371
12,440 Philadelphia, PA Gas Wks Rev 1975 Gen Ordinance
17th Ser (FSA Insd)............................ 5.375 07/01/17 14,213,820
2,990 Philadelphia, PA Gas Wks Rev 1998 Gen Ordinance
4th Ser (FSA Insd)............................. 5.250 08/01/18 3,287,475
4,655 Philadelphia, PA Gas Wks Rev 1998 Gen Ordinance
4th Ser (FSA Insd)............................. 5.250 08/01/21 4,988,996
2,000 Philadelphia, PA Sch Dist Ser A (FSA Insd)..... 5.500 02/01/26 2,125,460
5,000 State Pub Sch Bldg Auth PA Sch Lease
Philadelphia Sch Dist Proj (FSA Insd).......... 5.250 06/01/26 5,205,450
5,000 State Pub Sch Bldg Auth PA Sch Lease
Philadelphia Sch Dist Proj (FSA Insd).......... 5.000 06/01/33 5,066,650
--------------
52,820,164
--------------
SOUTH CAROLINA 0.7%
2,430 Columbia, SC Ctf Part Tourism Dev Fee Pledge
(AMBAC Insd)................................... 5.250 06/01/19 2,650,085
6,500 South Carolina Jobs Econ Elec & Gas Co Proj Ser
A (AMBAC Insd)................................. 5.200 11/01/27 6,734,910
--------------
9,384,995
--------------
</Table>
See Notes to Financial Statements 19
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
SOUTH DAKOTA 1.0%
$1,585 Rapid City, SD Sales Tax Rev Rfdg (AMBAC
Insd).......................................... 5.500% 06/01/12 $ 1,800,861
5,205 South Dakota St Lease Rev Tr Ctf Ser A (FSA
Insd).......................................... 6.625 09/01/12 6,404,961
4,000 South Dakota St Lease Rev Tr Ctf Ser A (FSA
Insd).......................................... 6.700 09/01/17 5,112,840
--------------
13,318,662
--------------
TEXAS 10.7%
1,165 Alamo, TX Cmnty College Dist Combined Fee Rfdg
(FSA Insd)..................................... 5.000 11/01/22 1,198,902
2,150 Austin, TX Cft Oblig (MBIA Insd)............... 5.375 09/01/18 2,369,021
2,250 Austin, TX Ctf Oblig (MBIA Insd)............... 5.375 09/01/19 2,461,545
295 Austin, TX Rev Sub Lien Rfdg (MBIA Insd)....... 5.250 05/15/15 333,843
8,865 Austin, TX Util Sys Rev Rfdg (FSA Insd)........ 5.000 11/15/11 9,774,372
12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA
Insd).......................................... * 11/15/10 9,817,000
5,000 Brazos River Auth, TX Rev Houston Ind Inc Proj
Ser C (AMBAC Insd)............................. 5.125 05/01/19 5,301,200
2,000 Colorado River, TX Muni Wtr Dist Sys Rfdg
(AMBAC Insd)................................... 5.375 01/01/19 2,193,780
1,400 Corpus Christi, TX Util Sys Rev Impt & Rfdg
(FSA Insd)..................................... 5.250 07/15/17 1,537,802
15,400 Dallas Cnty, TX Util & Reclamation Dist Ser B
Rfdg (AMBAC Insd).............................. 5.875 02/15/29 16,155,524
5,000 El Paso, TX Ctf Oblig (FSA Insd)............... 5.750 08/15/25 5,449,750
4,500 Harris Cnty, TX Toll Rd Sr Lien Rfdg (MBIA
Insd).......................................... 5.125 08/15/17 4,844,070
4,605 Houston, TX Arpt Sys Rev Sub Lien (FSA Insd)... 5.500 07/01/17 5,133,976
2,000 Houston, TX Arpt Sys Rev Sub Lien (FSA Insd)... 5.500 07/01/18 2,215,680
5,000 Houston, TX Hotel Occupancy Convention & Entmt
Ser A Rfdg (AMBAC Insd)........................ 5.375 09/01/14 5,562,950
2,000 Houston, TX Pub Impt Ser B Rfdg (FSA Insd)..... 5.500 03/01/18 2,210,880
12,400 Houston, TX Wtr & Swr Sys Rev Cap Apprec Ser A
Rfdg (FSA Insd)................................ * 12/01/20 5,319,848
1,790 Laredo, TX Cmnty College Dist Combined Fee Rev
Bldg Rfdg (AMBAC Insd)......................... 5.300 08/01/26 1,855,228
4,335 North Harris Cnty, TX Regl Wtr Sr Lien (FGIC
Insd) (b)...................................... 5.250 12/15/19 4,730,135
5,000 North Harris Cnty, TX Regl Wtr Sr Lien (FGIC
Insd) (b)...................................... 5.000 12/15/33 5,029,450
1,000 San Antonio, TX Indpt Sch Dist Pub Fac Corp
Lease Rev (AMBAC Insd)......................... 5.850 10/15/10 1,139,260
2,080 San Antonio, TX Muni Drain Util (MBIA Insd).... 5.000 02/01/21 2,165,696
1,750 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev
Ser B (Escrowed to Maturity) (FGIC Insd)....... 5.000 09/01/15 1,950,095
1,060 Tarrant Regl Wtr Dist TX Impt Rfdg (FSA
Insd).......................................... 5.250 03/01/18 1,160,923
2,000 Tarrant Regl Wtr Dist TX Impt Rfdg (FSA
Insd).......................................... 5.250 03/01/20 2,156,260
</Table>
20 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
TEXAS (CONTINUED)
$10,000 Texas St Tpk Auth Cent TX Tpk First Tier Ser A
(AMBAC Insd)................................... 5.500% 08/15/39 $ 10,571,500
26,905 Texas St Tpk Auth Dallas Northtwy Rev George
Bush Tpk (FGIC Insd)........................... 5.250 01/01/23 28,741,266
--------------
141,379,956
--------------
UTAH 0.5%
660 Provo, UT Elec Rev 1984 Ser A Rfdg (Escrowed to
Maturity) (AMBAC Insd)......................... 10.375 09/15/15 949,720
6,835 Utah St Muni Fin Coop Loc Govt Rev Pool Cap
Salt Lake (FSA Insd)........................... * 03/01/09 5,816,380
--------------
6,766,100
--------------
VIRGINIA 0.2%
1,950 Virginia St Hsg Dev Auth Comwlth Mtg Ser J
Subser J-1 (MBIA Insd)......................... 5.200 07/01/19 2,028,137
--------------
WASHINGTON 7.1%
4,115 Chelan Cnty, WA Sch Dist No 246 (FSA Insd)..... 5.000 12/01/21 4,283,592
1,930 Clark Cnty, WA Pub Util Dist No 001 Elec Rev
Rfdg (AMBAC Insd).............................. 5.500 01/01/12 2,206,723
2,990 Clark Cnty, WA Pub Util Dist No 001 Wtr Rev
(FSA Insd)..................................... 5.125 01/01/20 3,161,387
11,340 Energy Northwest WA Elec Rev Columbia
Generating Ser A Rfdg (FSA Insd)............... 5.500 07/01/17 12,615,070
4,040 Energy Northwest WA Elec Rev Columbia
Generating Ser F (MBIA Insd)................... 5.250 07/01/16 4,490,824
4,500 Energy Northwest WA Elec Rev Proj No 3 Ser A
Rfdg (FSA Insd)................................ 5.500 07/01/17 5,005,980
10,000 Energy Northwest WA Elec Rev Proj No 3 Ser A
Rfdg (XLCA Insd)............................... 5.500 07/01/17 11,274,100
14,500 Energy Northwest WA Elec Rev Proj No 3 Ser A
Rfdg (FSA Insd)................................ 5.500 07/01/18 16,038,160
5,000 Energy Northwest WA Elec Rev Proj No 3 Ser B
Rfdg (FSA Insd)................................ 6.000 07/01/16 5,814,250
1,865 Energy Northwest WA Wind Proj (AMBAC Insd)..... 5.000 07/01/23 1,903,960
2,335 Grant Cnty, WA Pub Util Dist No 2 Rev Second
Ser C Rfdg (AMBAC Insd)........................ 6.000 01/01/17 2,610,997
1,025 Grant Cnty, WA Pub Util Dist No 2 Rev Second
Ser C Rfdg (AMBAC Insd)........................ 6.000 01/01/17 1,146,155
350 Pierce Cnty, WA Swr Rev Ser A (Escrowed to
Maturity) (MBIA Insd).......................... 9.000 02/01/05 386,540
2,000 Seattle, WA Muni Lt & Pwr Rev Impt & Rfdg (FSA
Insd).......................................... 5.500 03/01/18 2,213,060
2,565 Snohomish Cnty, WA Pub Util 1 (FSA Insd)....... 5.500 12/01/23 2,764,788
145 Snohomish Cnty, WA Pub Util 1 (FSA Insd)....... 5.000 12/01/24 147,390
</Table>
See Notes to Financial Statements 21
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
WASHINGTON (CONTINUED)
$2,000 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.750% 12/01/25 $ 2,215,000
2,420 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.750 12/01/26 2,673,882
3,000 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.250 09/01/33 3,120,900
1,965 Tacoma, WA Solid Waste Util Rev Rfdg (AMBAC
Insd).......................................... 5.375 12/01/18 2,159,790
2,075 Tacoma, WA Solid Waste Util Rev Rfdg (AMBAC
Insd).......................................... 5.375 12/01/19 2,267,353
3,090 Washington St Pub Pwr Supply Sys Nuclear Proj
No 1 Rev Ser A Rfdg (AMBAC Insd)............... 5.700 07/01/09 3,489,815
1,600 Washington St Ser R 99A Rfdg (FGIC Insd)....... 5.000 01/01/17 1,700,416
--------------
93,690,132
--------------
WEST VIRGINIA 0.4%
1,530 West Virginia Econ Dev Auth Lease Rev
Correctional Juvenile & Pub-A (MBIA Insd)...... 5.500 06/01/19 1,705,721
2,750 West Virginia St Wtr Dev Auth Ser A 1 (AMBAC
Insd).......................................... 5.250 11/01/23 2,929,603
--------------
4,635,324
--------------
WISCONSIN 1.4%
1,505 Oak Creek Franklin, WI Jt Sch Dist Rfdg (FGIC
Insd).......................................... 5.500 04/01/17 1,687,346
1,635 Oak Creek Franklin, WI Jt Sch Dist Rfdg (FGIC
Insd).......................................... 5.500 04/01/19 1,812,496
1,350 Plover, WI Wtr Sys Rev (AMBAC Insd)............ 5.400 12/01/16 1,515,591
1,500 Plover, WI Wtr Sys Rev (AMBAC Insd)............ 5.500 12/01/18 1,684,635
1,270 Racine, WI Wtrwks Rev Sys Mtg (MBIA Insd)...... 5.250 09/01/14 1,407,706
1,405 Racine, WI Wtrwks Rev Sys Mtg (MBIA Insd)...... 5.250 09/01/16 1,552,975
3,950 Two Rivers, WI Pub Sch Dist Rfdg (Prerefunded @
03/01/10) (FSA Insd)........................... 6.000 03/01/18 4,675,141
3,920 University of WI Hosp & Clinics Auth Rev (FSA
Insd).......................................... 6.200 04/01/29 4,409,138
--------------
18,745,028
--------------
WYOMING 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC
Insd).......................................... 6.700 05/01/12 2,049,520
--------------
</Table>
22 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
PUERTO RICO 0.7%
$5,000 Puerto Rico Comwlth Hwy & Tran Sub (FGIC
Insd).......................................... 5.250% 07/01/18 $ 5,566,550
3,000 Puerto Rico Indl Tourist Ed Med & Environmental
Ctl Fac Hosp Aux (MBIA Insd)................... 6.250 07/01/16 3,229,500
--------------
8,796,050
--------------
TOTAL LONG-TERM INVESTMENTS 98.2%
(Cost $1,200,887,389)..................................................... 1,293,418,077
SHORT-TERM INVESTMENTS 2.2%
(Cost $28,300,000)........................................................ 28,300,000
--------------
TOTAL INVESTMENTS 100.4%
(Cost $1,229,187,389)..................................................... 1,321,718,077
LIABILITIES IN EXCESS OF OTHER ASSETS (0.4%)............................... (5,193,426)
--------------
NET ASSETS 100.0%.......................................................... $1,316,524,651
==============
</Table>
* Zero coupon bond
(a) All or a portion of these securities have been physically segregated in
connection with open futures contracts.
(b) Securities purchased on a when-issued or delayed delivery basis.
(c) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
AMBAC--AMBAC Indemnity Corp.
BIGI--Bond Investor Guaranty Inc.
CIFG--CDC IXIS Financial Guaranty
Connie Lee--Connie Lee Insurance Co.
FGIC--Financial Guaranty Insurance Co.
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
XLCA--XL Capital Assurance Inc.
See Notes to Financial Statements 23
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $1,229,187,389)..................... $1,321,718,077
Receivables:
Interest.................................................. 15,848,173
Investments Sold.......................................... 3,903,908
Fund Shares Sold.......................................... 704,668
Other....................................................... 243,533
--------------
Total Assets............................................ 1,342,418,359
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 20,430,579
Variation Margin on Futures............................... 1,483,719
Fund Shares Repurchased................................... 1,126,834
Income Distributions...................................... 1,061,546
Distributor and Affiliates................................ 654,865
Investment Advisory Fee................................... 537,861
Custodian Bank.............................................. 134,596
Trustees' Deferred Compensation and Retirement Plans........ 285,483
Accrued Expenses............................................ 178,225
--------------
Total Liabilities....................................... 25,893,708
--------------
NET ASSETS.................................................. $1,316,524,651
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $1,210,175,498
Net Unrealized Appreciation................................. 85,171,911
Accumulated Net Realized Gain............................... 19,906,082
Accumulated Undistributed Net Investment Income............. 1,271,160
--------------
NET ASSETS.................................................. $1,316,524,651
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,209,885,135 and 62,801,126 shares of
beneficial interest issued and outstanding)............. $ 19.27
Maximum sales charge (4.75%* of offering price)......... .96
--------------
Maximum offering price to public........................ $ 20.23
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $82,557,110 and 4,290,657 shares of
beneficial interest issued and outstanding)............. $ 19.24
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $24,082,406 and 1,252,479 shares of
beneficial interest issued and outstanding)............. $ 19.23
==============
</Table>
* On sales of $100,000 or more, the sales charge will be reduced.
24 See Notes to Financial Statements
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 64,363,646
------------
EXPENSES:
Investment Advisory Fee..................................... 6,642,253
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $2,919,931, $849,653 and $242,618,
respectively)............................................. 4,012,202
Shareholder Services........................................ 802,115
Custody..................................................... 111,219
Legal....................................................... 94,842
Trustees' Fees and Related Expenses......................... 30,917
Other....................................................... 512,882
------------
Total Expenses............................................ 12,206,430
Less Credits Earned on Cash Balances...................... 22,964
------------
Net Expenses.............................................. 12,183,466
------------
NET INVESTMENT INCOME....................................... $ 52,180,180
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 25,836,638
Futures................................................... (4,881,398)
------------
Net Realized Gain........................................... 20,955,240
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... $122,207,697
------------
End of the Period:
Investments............................................. 92,530,688
Futures................................................. (7,358,777)
------------
85,171,911
------------
Net Unrealized Depreciation During the Period............... (37,035,786)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(16,080,546)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 36,099,634
============
</Table>
See Notes to Financial Statements 25
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 52,180,180 $ 51,420,856
Net Realized Gain.................................. 20,955,240 13,448,439
Net Unrealized Appreciation/Depreciation During the
Period........................................... (37,035,786) 50,316,254
-------------- --------------
Change in Net Assets from Operations............... 36,099,634 115,185,549
-------------- --------------
Distributions from Net Investment Income:
Class A Shares................................... (47,030,700) (49,103,481)
Class B Shares................................... (2,660,042) (1,848,687)
Class C Shares................................... (760,360) (491,695)
-------------- --------------
(50,451,102) (51,443,863)
-------------- --------------
Distributions from Net Realized Gain:
Class A Shares................................... (11,285,930) (26,330,149)
Class B Shares................................... (786,390) (1,162,430)
Class C Shares................................... (214,972) (298,526)
-------------- --------------
(12,287,292) (27,791,105)
-------------- --------------
Total Distributions................................ (62,738,394) (79,234,968)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (26,638,760) 35,950,581
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 323,995,612 278,755,452
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 47,057,129 60,225,964
Cost of Shares Repurchased......................... (381,484,901) (211,381,640)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... (10,432,160) 127,599,776
-------------- --------------
TOTAL INCREASE/DECREASE IN NET ASSETS.............. (37,070,920) 163,550,357
NET ASSETS:
Beginning of the Period............................ 1,353,595,571 1,190,045,214
-------------- --------------
End of the Period (Including accumulated
undistributed net investment income of $1,271,160
and $143,367, respectively)...................... $1,316,524,651 $1,353,595,571
============== ==============
</Table>
26 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES --------------------------------------------------------
2003 2002 (a) 2001 2000 1999
--------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 19.65 $ 19.22 $ 18.27 $ 18.08 $ 19.96
-------- -------- -------- -------- --------
Net Investment Income............. .77 .81 .86 .91 .91
Net Realized and Unrealized
Gain/Loss....................... (.23) .87 .98 .17 (1.64)
-------- -------- -------- -------- --------
Total from Investment Operations.... .54 1.68 1.84 1.08 (.73)
-------- -------- -------- -------- --------
Less:
Distributions from Net Investment
Income.......................... .74 .81 .89 .88 .92
Distributions from Net Realized
Gain............................ .18 .44 -0- .01 .23
-------- -------- -------- -------- --------
Total Distributions................. .92 1.25 .89 .89 1.15
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 19.27 $ 19.65 $ 19.22 $ 18.27 $ 18.08
======== ======== ======== ======== ========
Total Return (b).................... 2.90% 9.28% 10.28% 6.13% -3.80%
Net Assets at End of the Period (In
millions)......................... $1,209.9 $1,244.3 $1,129.6 $1,086.6 $1,178.3
Ratio of Expenses to Average Net
Assets............................ .86% .87% .90% .90% .92%
Ratio of Net Investment Income to
Average Net Assets................ 4.02% 4.30% 4.55% 5.10% 4.77%
Portfolio Turnover.................. 61% 54% 80% 69% 92%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01, and increase the ratio of net
investment income to average net assets from 4.27% to 4.30%. Per share,
ratios and supplemental data for the periods prior to September 30, 2002
have not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
See Notes to Financial Statements 27
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD... $19.63 $19.20 $18.26 $18.08 $19.96
------ ------ ------ ------ ------
Net Investment Income.................... .63 .66 .70 .78 .76
Net Realized and Unrealized Gain/Loss.... (.24) .88 .99 .15 (1.64)
------ ------ ------ ------ ------
Total from Investment Operations........... .39 1.54 1.69 .93 (.88)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income................................. .60 .67 .75 .74 .77
Distributions from Net Realized Gain..... .18 .44 -0- .01 .23
------ ------ ------ ------ ------
Total Distributions........................ .78 1.11 .75 .75 1.00
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD......... $19.24 $19.63 $19.20 $18.26 $18.08
====== ====== ====== ====== ======
Total Return (b)........................... 2.08% 8.47% 9.42% 5.25% -4.60%*
Net Assets at End of the Period (In
millions)................................ $ 82.6 $ 87.2 $ 49.2 $ 43.0 $ 56.8
Ratio of Expenses to Average Net Assets.... 1.62% 1.63% 1.69% 1.68% 1.68%
Ratio of Net Investment Income to Average
Net Assets............................... 3.26% 3.53% 3.76% 4.34% 3.99%
Portfolio Turnover......................... 61% 54% 80% 69% 92%*
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01, and increase the ratio of net
investment income to average net assets from 3.50% to 3.53%. Per share,
ratios and supplemental data for the periods prior to September 30, 2002
have not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4%, charged on certain redemptions
made within one year of purchase and declining to 0% after the sixth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
28 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD... $19.62 $19.19 $18.25 $18.08 $19.95
------ ------ ------ ------ ------
Net Investment Income.................... .63 .67 .69 .79 .76
Net Realized and Unrealized Gain/Loss.... (.24) .87 1.00 .13 (1.63)
------ ------ ------ ------ ------
Total from Investment Operations........... .39 1.54 1.69 .92 (.87)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income................................. .60 .67 .75 .74 .77
Distributions from Net Realized Gain..... .18 .44 -0- .01 .23
------ ------ ------ ------ ------
Total Distributions........................ .78 1.11 .75 .75 1.00
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD......... $19.23 $19.62 $19.19 $18.25 $18.08
====== ====== ====== ====== ======
Total Return (b)........................... 2.08% 8.48% 9.42% 5.19% -4.55%*
Net Assets at End of the Period (In
millions)................................ $ 24.1 $ 22.1 $ 11.2 $ 5.4 $ 8.3
Ratio of Expenses to Average Net Assets.... 1.62% 1.63% 1.65% 1.68% 1.68%
Ratio of Net Investment Income to Average
Net Assets............................... 3.25% 3.53% 3.80% 4.35% 3.99%
Portfolio Turnover......................... 61% 54% 80% 69% 92%*
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01, and increase the ratio of net
investment income to average net assets from 3.50% to 3.53%. Per share,
ratios and supplemental data for the periods prior to September 30, 2002
have not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
See Notes to Financial Statements 29
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Insured Tax Free Income Fund (the "Fund") is organized as a series of
the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to
provide investors a high level of current income exempt from federal income
taxes, with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. The Fund commenced
investment operations on December 14, 1984. The distribution of the Fund's Class
B and Class C Shares commenced on May 3, 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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using procedures established in good faith by the Board of Trustees.
Futures contracts are valued at the settlement price established each day on the
exchange on which they are traded. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payment is made. At September 30, 2003, the Fund had $17,702,361 of when-issued
and delayed delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute
30
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is required.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation were as follows:
<Table>
Cost of investments for tax purposes........................ $1,228,311,298
==============
Gross tax unrealized appreciation........................... $ 93,933,455
Gross tax unrealized depreciation........................... (526,676)
--------------
Net tax unrealized appreciation on investments.............. $ 93,406,779
==============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and a portion of futures gains, which are
included as ordinary income for tax purposes.
The tax character of distributions paid during the years ended September 30,
2003 and 2002 was as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary Income........................................... $ 4,974,664 $14,184,819
Long-term capital gain.................................... 7,723,917 13,744,102
----------- -----------
$12,698,581 $27,928,921
=========== ===========
</Table>
Due to inherent differences in the recognition of income, expenses, and
realized gain/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting have been identified and appropriately
reclassified on the Statement of Assets and Liabilities. A permanent difference
relating to book to tax accretion differences totaling $619,542 was reclassified
from accumulated undistributed net investment income to accumulated net realized
gain. Additionally, a permanent difference relating to the Fund's investments in
other regulated investment companies totaling $32,138 was reclassified from
accumulated undistributed net investment income to accumulated net realized
gain.
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $ 264,854
Undistributed long-term capital gain........................ 11,838,027
</Table>
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of gains or losses recognized for tax purposes on
open futures transactions on September 30, 2003.
31
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
F. INSURANCE EXPENSES The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
G. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $22,964 as a result of credits earned on cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .525%
Next $500 million........................................... .500%
Next $500 million........................................... .475%
Over $1.5 billion........................................... .450%
</Table>
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $53,200 representing legal expenses provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $157,200 representing
Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen")
cost of providing accounting and legal services to the Fund, which are reported
as part of "Other" and "Legal" expenses, respectively, in the Statement of
Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
September 30, 2003, the Fund recognized expenses of approximately $634,200,
representing transfer agency fees paid to VKIS. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of $199,311 are included in
"Other" assets on the Statement of Assets and Liabilities at September 30, 2003.
Appreciation/depreciation and distributions received from these investments are
recorded with
32
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
an offsetting increase/decrease in the deferred compensation obligations and do
not affect the net asset value of the Fund. Benefits under the retirement plan
are payable upon retirement 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 $2,500.
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $1,105,797,284, $80,244,698 and
$24,133,516 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 15,358,941 $ 294,205,218
Class B................................................... 997,166 19,179,849
Class C................................................... 552,551 10,610,545
----------- -------------
Total Sales................................................. 16,908,658 $ 323,995,612
=========== =============
Dividend Reinvestment:
Class A................................................... 2,306,810 $ 44,213,876
Class B................................................... 112,868 2,160,427
Class C................................................... 35,696 682,826
----------- -------------
Total Dividend Reinvestment................................. 2,455,374 $ 47,057,129
=========== =============
Repurchases:
Class A................................................... (18,180,737) $(348,581,095)
Class B................................................... (1,260,175) (24,097,852)
Class C................................................... (461,820) (8,805,954)
----------- -------------
Total Repurchases........................................... (19,902,732) $(381,484,901)
=========== =============
</Table>
33
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $1,115,955,023, $83,001,975 and
$21,646,012 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 11,854,715 $ 222,434,143
Class B................................................... 2,417,973 43,950,889
Class C................................................... 666,929 12,370,420
----------- -------------
Total Sales................................................. 14,939,617 $ 278,755,452
=========== =============
Dividend Reinvestment:
Class A................................................... 3,087,862 $ 57,682,494
Class B................................................... 108,130 2,016,147
Class C................................................... 28,266 527,323
----------- -------------
Total Dividend Reinvestment................................. 3,224,258 $ 60,225,964
=========== =============
Repurchases:
Class A................................................... (10,413,420) $(196,238,859)
Class B................................................... (645,598) (12,219,836)
Class C................................................... (155,217) (2,922,945)
----------- -------------
Total Repurchases........................................... (11,214,235) $(211,381,640)
=========== =============
</Table>
Class B Shares purchased on or after June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, 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 Class B Shares received on such shares, automatically
convert to Class A Shares seven years after the end of the calendar month in
which the shares were purchased. For the years ended September 30, 2003 and
2002, 177,637 and 129,662 Class B Shares converted to Class A Shares,
respectively, and are shown in the above tables as sales of Class A Shares and
repurchases of Class B Shares. Class C Shares purchased before January 1, 1997,
and any dividend reinvestment plan Class C Shares received on such shares,
automatically convert to Class A Shares ten years after the end of the calendar
month in which such shares were purchased. Class C Shares purchased on or after
January 1, 1997 do not possess a conversion feature. For the years ended
September 30, 2003 and 2002, no Class C Shares converted to Class A Shares.
Class B and Class C Shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C Shares will be imposed on
34
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
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
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 4.00% 1.00%
Second...................................................... 3.75% None
Third....................................................... 3.50% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth....................................................... 1.00% None
Seventh and Thereafter...................................... None None
</Table>
For the year ended September 30, 2003, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $217,500 and CDSC on redeemed shares of approximately $294,800.
Sales charges do not represent expenses of the Fund.
On September 13, 2002, the Fund acquired all of the assets and liabilities
of the Van Kampen Florida Insured Tax Free Income Fund (the "VKFITFI Fund")
through a tax free reorganization approved by VKFITFI Fund shareholders on
August 28, 2002. The Fund issued 2,203,153, 1,707,524 and 243,096 shares of
Classes A, B and C, valued at $42,873,349, $33,194,271 and $4,723,361,
respectively in exchange for VKFITFI Fund's net assets. The shares of VKFITFI
Fund were converted into Fund shares at a ratio of 1.215 to 1, 1.212 to 1 and
1.209 to 1 for Classes A, B and C, respectively. Included in these net assets
was a capital loss carryforward of $1,308,223 which is included in the
accumulated net realized gain/loss. Also included in these net assets was a
deferred compensation balance of $128,639 which is included in accumulated
undistributed net investment income. Net unrealized appreciation of VKFITFI Fund
as of September 13, 2002 was $6,342,242. Shares issued in connection with this
reorganization are included in proceeds from shares sold for the year ended
September 30, 2002. Combined net assets on the day of reorganization were
$1,338,185,210.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $784,830,604 and $783,694,202,
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
35
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
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 unrealized appreciation/depreciation.
Upon disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures contract. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. FUTURES CONTRACTS A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in exchange traded futures contracts on U.S. Treasury
Notes and typically closes the contract prior to the delivery date. Upon
entering into futures contracts, the Fund maintains an amount of cash or liquid
securities with a value equal to a percentage of the contract amount with either
a futures commission merchant pursuant to rules and regulations promulgated
under the 1940 Act, as amended, or with its custodian in an account in the
broker's name. This amount is known as initial margin. During the period the
futures contract is open, payments are received from or made to the broker based
upon changes in the value of the contract (the variation margin). The risk of
loss associated with a futures contract is in excess of the variation margin
reflected on the Statement of Assets and Liabilities.
Transactions in futures contracts, for the year ended September 30, 2003,
were as follows:
<Table>
<Caption>
CONTRACTS
Outstanding at September 30, 2002........................... -0-
Futures Opened.............................................. 9,079
Futures Closed.............................................. (7,329)
------
Outstanding at September 30, 2003........................... 1,750
======
</Table>
The futures contracts outstanding as of September 30, 2003, and the
descriptions and unrealized appreciation/depreciation are a follows:
<Table>
<Caption>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
Short Contracts:
U.S. Treasury Notes 10-Year Futures December 2003 (Current
Notional Value of $114,625 per contract)................ 339 $(1,918,906)
U.S. Treasury Notes 5-Year Futures December 2003 (Current
Notional Value of $113,469 per contract)................ 1,411 (5,439,871)
----- -----------
1,750 $(7,358,777)
===== ===========
</Table>
36
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
B. INVERSE FLOATING RATE SECURITIES An Inverse Floating Rate security is one
where the coupon is inversely indexed to a short-term floating interest rate
multiplied by a specified factor. As the floating rate rises, the coupon is
reduced. Conversely as the floating rate declines, the coupon is increased. 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
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and maintenance of shareholder accounts
with respect to such classes of shares.
Annual fees under the Plans of up to .25% of Class A average daily net
assets and 1.00% each of Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately $2,450,430 and
$76,041 for Class B and Class C Shares, respectively. This amount may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
Included in the fees for the year ended September 30, 2003, are payments
retained by Van Kampen of approximately $905,800 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $100,000.
37
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Insured Tax Free Income
Fund
We have audited the accompanying statement of assets and liabilities of the
Van Kampen Insured Tax Free Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 2003, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
four years in the period then ended. 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. The financial highlights of the Fund for the year ended
September 30, 1999 were audited by other auditors whose report dated November 5,
1999 expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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 the
Van Kampen Insured Tax Free Income Fund at September 30, 2003, 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 four years in the period then ended in conformity with accounting
principles generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
38
VAN KAMPEN INVESTMENTS
THE VAN KAMPEN
FAMILY OF FUNDS
Global/International
Emerging Markets
Emerging Markets Income
European Value Equity
Global Equity Allocation
Global Franchise
Global Value Equity
International Advantage
International Magnum
Growth
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Growth
Small Cap Value
Technology
Growth and Income
Comstock
Equity and Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Value Opportunities
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
Tax Free
California Insured Tax Free
High Yield Municipal*
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Strategic Municipal Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Senior Loan Fund
For more complete information, including risk considerations, fees, sales
charges and ongoing expenses, please contact your financial advisor for a
prospectus. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - Visit our Web site at
VANKAMPEN.COM.
To view a prospectus
select Literature,
Download Fund Info. (COMPUTER ICON)
- - Call us at (800) 847-2424
Telecommunications Device
for the Deaf (TDD) users,
call (800) 421-2833. (PHONE ICON)
- - E-mail us by visiting
VANKAMPEN.COM and
selecting Contact Us.
(MAIL ICON)
* Open to new investors for a limited time
39
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN INSURED TAX FREE INCOME FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1173
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
September 30, 2003. The Fund designated 99.2% of the income distributions as
tax-exempt income distribution. The Fund designated and paid $7,723,917 as a
long-term capital gain distribution. In January, the Fund provides tax
information to shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
40
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
41
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
42
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
43
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1984 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
44
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
45
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1984 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
46
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
47
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
48
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 32, 332, 532
TFIN ANR
11/03 12224K03-AP-11/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
Strategic Municipal Income Fund performed during the annual period. The
portfolio management team will provide an overview of the market
conditions and discuss some of the factors that affected investment
performance during the reporting period. In addition, this report
includes the fund's financial statements and a list of fund investments
as of September 30, 2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative
Minimum Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN STRATEGIC MUNICIPAL LEHMAN BROTHERS MUNICIPAL BOND
INCOME FUND INDEX
------------------------------ ------------------------------
9/93 9523.00 10000.00
12/93 9854.00 10140.70
9303.00 9583.91
9370.00 9689.41
9497.00 9755.81
12/94 9369.00 9616.39
9939.00 10295.80
10098.00 10543.80
10365.00 10847.00
12/95 10823.00 11294.80
10611.00 11158.80
10708.00 11244.10
10918.00 11501.80
12/96 11170.00 11794.80
11222.00 11766.60
11528.00 12171.80
11905.00 12538.80
12/97 12181.00 12878.90
12358.00 13027.10
12532.00 13225.60
12911.00 13631.40
12/98 12909.00 13713.40
12979.00 13835.00
12793.00 13590.60
12588.00 13536.50
12/99 12380.00 13431.40
12517.00 13823.90
12543.00 14032.70
12747.00 14372.30
12/00 12802.00 15000.70
13081.00 15333.50
13177.00 15433.10
13444.00 15866.50
12/01 13364.00 15769.60
13464.00 15918.30
13827.00 16500.70
14153.00 17284.40
12/02 14184.00 17284.30
14246.00 17492.10
14663.00 17943.30
9/03 14749.00 17957.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 6/28/85 since 4/30/93 since 8/13/93
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 6.57% 6.29% 4.51% 4.51% 4.00% 4.00%
10-year 4.47 3.96 3.89 3.89 3.71 3.71
5-year 2.70 1.70 1.92 1.68 2.06 2.06
1-year 4.21 -0.75 3.42 -0.53 4.10 3.11
- ---------------------------------------------------------------------------------------------
30-Day SEC Yield 5.64% 5.17% 5.13%
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 4.75 percent for Class A
shares, a contingent deferred sales charge of 4.00 percent for Class B shares
(in year one and declining to zero after year five), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. The since inception and 10-year returns for Class B
and C shares reflect their conversion into Class A shares seven and 10 years
after purchase, respectively. See footnote 3 in the Notes to Financial
Statements for additional information. Certain non-recurring payments were made
to Class C shares, resulting in an increase to the one-year total return of 0.68
percent. Figures shown above assume reinvestment of all dividends and capital
gains. SEC yield is a calculation for determining the amount of portfolio
income, excluding non-income items as prescribed by the SEC. Yields are subject
to change. Distribution rate represents the monthly annualized distributions of
the fund at the end of the period and not the earnings of the fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen Strategic Municipal Income Fund is managed by the Adviser's
Municipal Fixed-Income team.(1) Members of the team include Dennis S.
Pietrzak, Executive Director; Wayne Godlin, Executive Director; and James
D. Phillips, Vice President. The following discussion reflects their
views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was
largely characterized by the persistent weakness of the U.S. economy. One
of the most closely watched economic indicators, employment strength, was
in negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also seemed to weigh heavily on
the minds of investors. The Federal Reserve Board (the Fed) attempted to
allay these fears and keep the economy moving in the right direction by
cutting the Fed Funds target rate twice during the period, for a total
reduction of 0.75 percent. At the same time, ongoing budgetary and fiscal
difficulties at the state and local levels contributed to ratings
downgrades for many municipal bonds.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
roughly where they began, the road between those two points was decidedly
bumpy. From October 2002 to mid-June 2003, municipal yields fell by
roughly 80 basis points to levels not seen since the late 1960s. These
plummeting yields led to a surge in issuance as municipalities moved to
lock in low financing rates and, in the case of older bonds, refinancing
costs. These record levels of supply met with record levels of demand as
investors in search of relative investment stability poured cash into
municipal bond funds. Demand for municipal bonds was also strong from
so-called "cross-over" buyers--investors who traditionally favor taxable
investments but were drawn to municipal bonds for their relatively
attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew. Issuance remained
strong throughout this leg of the period, though it abated somewhat in
the last three months.
(1)Team members may change at any time without notice.
2
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund outperformed its benchmark index.
-- The fund returned 4.21 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0625 translated to a distribution
rate of 5.48 percent based on the fund's maximum offering price (as
of September 30, 2003, Class A shares adjusted for sales charges).
See Performance Summary for additional information and index definition.
Q. WHAT FACTORS HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. The fund's performance was primarily driven by strong returns from
the portfolio's high-grade segment. The portfolio contained several
AAA-rated pre-refunded securities that benefited from rising investor
demand for high-quality and shorter-duration securities. We sold these
<Table>
TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03
Continuing Care 17.6% AAA/Aaa 11.4%
Health Care 14.8 AA/Aa 2.8
Industrial Revenue 14.2 A/A 6.1
Tax District 11.4 BBB/Baa 6.2
Multi-Family Housing 7.1 BB/Ba 2.4
B/B 3.8
TOP 5 STATES AS OF 9/30/03 CC/Ca 0.1
Illinois 10.7% Non-Rated 67.2
Texas 10.7
Florida 9.0
Pennsylvania 8.0
New York 4.7
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Rating allocations based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
positions into a strong market in order to redeploy the assets into
holdings with greater total-return potential.
Q. WHAT HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. One of the key detractors from performance during the period was our
avoidance of the airline industry. Airline bonds rallied strongly during
the period, based on what many saw to be excessively low valuations. We
continue to believe, however, that the industry faces serious challenges
going forward.
The portfolio also experienced a few isolated security-specific
incidents, where borrowers needed to restructure their operations for
various reasons. The impact of these on the portfolio, however, was
limited due to the small size of the positions in question.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING
KEY THEMES.
A. Our strategy for the fund remained consistent with our long-term
approach of keeping the portfolio exposed to both high-quality and
higher-yielding instruments. This strategy was particularly challenging
given the volatile market environment, and called for frequent portfolio
adjustments in order to maintain desired balance.
Within the investment-grade portion of the portfolio, we continued to
focus on high-quality securities with premium coupons and moderate
interest-rate sensitivity. We believe these securities are attractive
because they offer higher income and may be less affected by rising
interest rates.
Our strategy within the high-yield component of the portfolio continued
to be driven by relative-value considerations. For example, through
credit research, our analysts identified a bond issued by the Athens
County Ohio Hospital Facilities Authority that we added to the portfolio.
This bond was attractive to us because of the issuer's protected
competitive position as a rural hospital, and we took advantage of
relatively low valuations in purchasing the bond.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. We believe that the economy has lately shown some signs of improvement,
though the employment picture remains murky and the likelihood of a
sustained rebound is questionable. In this environment, we believe the
Fed is likely to maintain a neutral stance in the absence of signs of
strong economic growth. We will continue to monitor the market closely
for compelling investment opportunities.
4
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
5
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 98.2%
ALABAMA 1.7%
$1,000 Alabama Drinking Wtr Fin Auth Revolving Fd
Ln Ser C (AMBAC Insd)...................... 5.750% 08/15/18 $ 1,144,400
2,000 Alabama Drinking Wtr Fin Auth Revolving Fd
Ln Ser C (AMBAC Insd)...................... 5.375 08/15/23 2,111,900
2,000 Alabama Wtr Pollutn Ctl Auth (AMBAC
Insd)...................................... 5.750 08/15/18 2,269,320
1,500 Colbert Cnty Northwest Auth Hlth Care
Facs....................................... 5.750 06/01/27 1,433,640
2,500 Huntsville/Carlton Cove, AL Carlton Cove
Inc Proj Ser A............................. 7.000 11/15/17 2,290,375
238 Mobile, AL Indl Dev Brd Solid Waste Disp
Rev Mobile Energy Svcs Co Proj Rfdg (a)
(b)........................................ 6.950 01/01/20 1,666
1,395 Valley, AL Spl Care Fac Fin Auth Rev Lanier
Mem Hosp Ser A............................. 5.600 11/01/16 1,287,348
2,050 Valley, AL Spl Care Fac Fin Auth Rev Lanier
Mem Hosp Ser A............................. 5.650 11/01/22 1,806,091
------------
12,344,740
------------
ALASKA 0.8%
1,630 Alaska Indl Dev & Expt Auth Williams Lynxs
AK Cargoport (c)........................... 7.800 05/01/14 1,675,314
4,000 Juneau, AK City & Borough Rev Saint Anns
Care Ctr Proj.............................. 6.875 12/01/25 3,988,200
------------
5,663,514
------------
ARIZONA 3.3%
2,000 Arizona Hlth Fac Auth Hosp John C Lincoln
Hlth Network............................... 6.375 12/01/37 2,072,440
1,000 Flagstaff, AZ Indl Dev Auth Rev Sr Living
Cmnty Northn AZ Proj....................... 7.500 03/01/35 1,033,460
1,000 Maricopa Cnty, AZ Indl Dev Auth AZ Charter
Sch Proj 1 Ser A........................... 6.625 07/01/20 1,008,440
1,000 Maricopa Cnty, AZ Indl Dev Auth Horizon
Cmnty Learning Ctr Proj 1 Ser A............ 7.125 06/01/10 1,032,450
4,000 Maricopa Cnty, AZ Indl Dev Auth
Multi-Family Hsg Rev Natl Hlth Fac II Proj
Ser B (c).................................. 6.625 07/01/33 3,597,960
2,605 Maricopa Cnty, AZ Indl Dev Christian Care
Mesa Inc Proj Ser A........................ 7.750 04/01/15 2,735,510
</Table>
6 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ARIZONA (CONTINUED)
$2,000 Maricopa Cnty, AZ Indl Dev Christian Care
Mesa Inc Proj Ser A........................ 7.875% 04/01/27 $ 2,068,680
350 Maricopa Cnty, AZ Uni Sch Dist No 41
Gilbert Cap Apprec Rfdg (FGIC Insd)........ * 01/01/08 315,833
1,500 Peoria, AZ Indl Dev Auth Rev Sierra Winds
Life Ser A Rfdg............................ 6.375 08/15/29 1,431,480
1,355 Pima Cnty, AZ Indl Dev Auth Dev Radisson
City Ctr Proj Rfdg (c)..................... 7.000 12/02/12 1,339,526
2,130 Pima Cnty, AZ Indl Dev Auth Multi-Family
Rev (c).................................... 6.625 10/01/28 1,972,721
1,000 Pima Cnty, AZ Indl Dev Auth Rev La Posada
at Park Ctr Ser A.......................... 7.000 05/15/27 1,007,540
520 Pima Cnty, AZ Indl Dev Auth Ser A.......... 7.250 11/15/18 505,554
500 Pima Cnty, AZ Indl Dev Auth Ser A.......... 8.250 11/15/22 510,505
1,110 Red Hawk Canyon Cmnty Fac Dist No 2 AZ Dist
Assmt Rev.................................. 6.500 12/01/12 1,165,755
2,150 Tucson, AZ Multi-Family Rev Hsg Catalina
Asstd Living Ser A......................... 6.500 07/01/31 1,886,668
------------
23,684,522
------------
CALIFORNIA 3.5%
2,000 California St Dept Wtr Res Pwr Ser A (AMBAC
Insd)...................................... 5.500 05/01/16 2,238,880
1,000 California Statewide Cmnty Dev Auth Elder
Care Alliance Ser A........................ 8.250 11/15/32 994,380
985 California Statewide Cmnty Dev Auth
Multi-Family Rev Hsg Heritage Pointe Sr Apt
Ser QQ (c)................................. 7.500 10/01/26 965,989
1,000 California Statewide Cmnty Dev Auth San
Francisco Art Institute (c)................ 7.375 04/01/32 1,010,170
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg
Rev (Escrowed to Maturity) (MBIA Insd)..... * 09/01/17 2,565,000
2,500 Corona, CA Ctf Part Vista Hosp Sys Inc Ser
C (a) (b).................................. 8.375 07/01/11 1,125,000
2,300 Foothill/Eastern Tran Corridor Agy CA Toll
Rd Rev (MBIA Insd)......................... * 01/15/18 1,107,887
1,460 Healdsburg, CA Ctf Partn Nuestro Hosp Inc
(a) (c).................................... 6.375 11/01/28 87,454
920 Indio, CA Pub Fin Auth Rev Tax Increment... 6.500 08/15/27 961,952
1,900 Lake Elsinore, CA Pub Fin Auth Loc Agy Rev
Ser F...................................... 7.100 09/01/20 2,029,884
1,750 Los Angeles, CA Regl Arpt Impt Corp Lease
Rev Fac Sublease LA Intl Ser A-1 Rfdg...... 7.125 12/01/24 1,538,407
3,075 Los Angeles, CA Regl Arpt Impt Corp Lease
Rev Ser C.................................. 7.500 12/01/24 2,761,012
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA (CONTINUED)
$1,470 Millbrae, CA Residential Fac Rev Magnolia
of Millbrae Proj Ser A..................... 7.375% 09/01/27 $ 1,502,443
1,000 Perris, CA Cmnty Fac Dist Spl Tax No 01-2
Ser A...................................... 6.375 09/01/32 1,016,370
1,000 San Jose, CA Multi-Family Hsg Rev Helzer
Courts Apt Ser A........................... 6.400 12/01/41 960,450
1,000 San Luis Obispo, CA Ctf Partn Vista Hosp
Sys Inc (a) (b)............................ 8.375 07/01/29 450,000
1,240 Simi Vly, CA Cmnty Dev Agy Coml Sycamore
Plaza II Rfdg (c).......................... 6.000 09/01/12 1,311,362
1,965 Vallejo, CA Ctf Partn Touro Univ........... 7.250 06/01/16 1,990,604
------------
24,617,244
------------
COLORADO 2.5%
1,000 Bromley Pk Met Dist CO No 2 Ser B.......... 8.050 12/01/32 1,014,930
1,000 Colorado Ed & Cultural Fac Charter Sch
Frontier Academy........................... 7.250 06/01/20 1,034,550
2,000 Colorado Hlth Fac Auth Rev Baptist Home
Assn Ser A................................. 6.375 08/15/24 1,581,220
1,060 Colorado Hlth Fac Auth Rev Christian Living
Campus Proj................................ 7.050 01/01/19 1,052,029
6,200 Colorado Hlth Fac Auth Rev Christian Living
Campus Proj (Prerefunded @ 01/01/05)....... 9.000 01/01/25 6,891,858
2,500 Elk Vly, CO Pub Impt Fee Ser A............. 7.300 09/01/22 2,569,875
755 Lafayette, CO Indl Dev Rev Rocky Mtn Instr
Proj Ser A................................. 6.750 10/01/14 540,723
2,015 Lafayette, CO Indl Dev Rev Rocky Mtn Instr
Proj Ser A................................. 7.000 10/01/18 1,423,779
1,830 Skyland Metro Dist CO Gunnison Cnty Rfdg... 6.750 12/01/22 1,819,075
------------
17,928,039
------------
CONNECTICUT 0.5%
1,500 Connecticut St Dev Auth Indl Afco Cargo Bdl
LLC Proj................................... 8.000 04/01/30 1,564,425
2,000 Mohegan Tribe Indians CT Pub Impt Priority
Dist (c)................................... 6.250 01/01/31 2,098,220
------------
3,662,645
------------
DELAWARE 0.1%
1,120 Wilmington, DE Multi-Family Rent Rev Hsg
Electra Arms Sr Assoc Proj................. 6.250 06/01/28 1,001,426
------------
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
DISTRICT OF COLUMBIA 0.1%
$1,000 District of Columbia Rev Methodist Home
Issue...................................... 6.000% 01/01/29 $ 890,780
85 District of Columbia Ser A-1 (Escrowed to
Maturity) (MBIA Insd)...................... 6.500 06/01/10 103,679
------------
994,459
------------
FLORIDA 8.8%
3,590 Escambia Cnty, FL Rev ICF/MR Pensacola Care
Dev Ctr.................................... 10.250 07/01/11 3,607,017
1,520 Escambia Cnty, FL Rev ICF/MR Pensacola Care
Dev Ctr Ser A.............................. 10.250 07/01/11 1,527,205
915 Fishhawk Cmnty Dev Dist of FL Spl Assmt
Rev........................................ 6.650 05/01/07 924,635
1,435 Fishhawk Cmnty Dev Dist of FL Spl Assmt
Rev........................................ 7.625 05/01/18 1,527,227
3,720 Florida Hsg Fin Corp Rev Hsg Beacon Hill
Apt Ser C.................................. 6.610 07/01/38 3,476,414
5,400 Florida Hsg Fin Corp Rev Hsg Cypress Trace
Apt Ser G.................................. 6.600 07/01/38 5,045,004
1,000 Florida Hsg Fin Corp Rev Hsg Westbrook Apt
Ser U-1.................................... 6.450 01/01/39 930,660
4,905 Florida Hsg Fin Corp Rev Hsg Westchase Apt
Ser B...................................... 6.610 07/01/38 4,561,503
320 Heritage Harbor Cmnty Dev Dist FL Rev
Recntl..................................... 7.750 05/01/23 307,392
850 Heritage Harbor Cmnty Dev Dist FL Rev Spl
Assmt Ser A................................ 6.700 05/01/19 869,907
1,500 Hillsborough Cnty, FL Hsg Fin Hsg Clipper
Cove Apt Proj Ser A........................ 7.375 07/01/40 1,494,540
850 Lake Saint Charles, FL Cmnty Dev Dist Spl
Assmt Rev.................................. 7.875 05/01/17 888,462
2,000 Lee Cnty, FL Indl Dev Auth Hlthcare Fac Rev
Cypress Cove Hlthpk Ser A.................. 6.750 10/01/32 2,013,720
3,550 Leon Cnty, FL Ed Fac Auth Rev Southgate
Residence Hall Ser A Rfdg.................. 6.750 09/01/28 3,271,928
530 Marshall Creek Cmnty Dev FL Spl Assmt Ser
B.......................................... 6.750 05/01/07 533,885
1,425 Miromar Lakes Cmnty Dev Dist Ser B......... 7.250 05/01/12 1,473,079
950 Northern Palm Beach Cnty Dist FL Impt Wtr
Ctl & Impt Unit Dev No 16 Rfdg............. 7.500 08/01/24 1,001,243
2,050 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg.................. 8.625 07/01/20 2,142,188
2,250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg.................. 8.750 07/01/26 2,321,955
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
FLORIDA (CONTINUED)
$1,560 Orange Cnty, FL Hlth Fac Auth Rev Hosp
Adventist Hlth Sys......................... 5.875% 11/15/11 $ 1,750,226
1,000 Orange Cnty, FL Hlth Fac Auth Rev Hosp
Adventist Hlth Sys......................... 6.375 11/15/20 1,107,220
2,000 Orange Cnty, FL Hlth Fac Auth Rev
Westminster Cmnty Care..................... 6.600 04/01/24 1,549,040
2,395 Pinellas Cnty, FL Ed Fac Auth Rev College
Harbor Proj Ser A.......................... 8.250 12/01/21 2,466,179
1,685 Pinellas Cnty, FL Ed Fac Auth Rev College
Harbor Proj Ser A.......................... 8.500 12/01/28 1,745,930
1,000 Saddlebrook, FL Cmnty Ser A................ 6.900 05/01/33 1,019,020
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac
Sunnyside Pptys............................ 6.700 07/01/25 3,950,580
545 Stoneybrook West Cmnty Dev Dist FL Spl
Assmt Rev Ser B............................ 6.450 05/01/10 552,973
20,341 Sun N Lake of Sebring, FL Impt Dist Spl
Assmt Ser A (a) (c) (d).................... 10.000 12/15/11 4,305,420
680 Tampa Palms, FL Open Space & Trans Cmnty
Dev Dist Rev Cap Impt Area 7 Proj.......... 8.500 05/01/17 702,304
947 Tara Cmnty Dev Dist 1 FL Cap Impt Rev Ser B
(c)........................................ 6.750 05/01/10 963,752
1,847 University Square Cmnty Dev Dist FL Cap
Impt Rev (c)............................... 6.750 05/01/20 1,929,727
204 Vista Lakes Cmnty Dev Dist FL Cap Impt Rev
Ser B...................................... 6.350 05/01/05 204,747
2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen
Proj Rfdg (Prerefunded @ 11/01/06)......... 7.625 11/01/26 2,404,420
------------
62,569,502
------------
GEORGIA 2.4%
2,000 Atlanta, GA Tax Alloc Atlantic Sta Proj.... 7.750 12/01/14 2,058,420
2,415 Atlanta, GA Urban Residential Fin Auth
Multi-Family Rev John Eagan Proj Ser A..... 6.750 07/01/30 2,376,505
2,750 De Kalb Cnty, GA Residential Care Fac Kings
Bridge Ser A............................... 8.250 07/01/26 2,891,048
4,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg
Rev Azalea Manor Proj Ser A (c)............ 6.500 02/01/28 3,230,720
2,000 Fulton Cnty, GA Residential Care Sr Lien
RHA Asstd Living Ser A..................... 7.000 07/01/29 1,941,740
1,000 Private Colleges & Univ Auth GA Mercer Hsg
Corp Proj Ser A............................ 6.000 06/01/21 1,031,590
2,930 Renaissance on Peachtree Unit Invt Tr Ctf
GA Custody Ctf............................. 12.374 10/01/25 3,473,837
------------
17,003,860
------------
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
HAWAII 0.8%
$3,000 Hawaii St Dept Budget & Fin Kahala Nui Proj
Ser A...................................... 8.000% 11/15/33 $ 2,992,770
2,825 Kuakini, HI Hlth Sys Ser A................. 6.375 07/01/32 2,902,772
------------
5,895,542
------------
IDAHO 0.1%
1,000 Idaho Hlth Fac Auth Rev Vly Vista Care Ser
A Rfdg..................................... 7.875 11/15/29 969,250
------------
ILLINOIS 10.5%
2,500 Bolingbrook, IL Cap Apprec Ser B (MBIA
Insd)...................................... * 01/01/29 623,025
1,993 Bolingbrook, IL Spl Svc Area No 01-1....... 7.375 07/01/31 2,104,708
1,500 Bolingbrook, IL Spl Svc Area No 1 Spl Tax
Augusta Vlg Proj (c)....................... 6.750 03/01/32 1,504,890
1,910 Bolingbrook, IL Spl Svc Area No 3 Lakewood
Ridge Proj................................. 7.050 03/01/31 2,002,864
992 Cary, IL Spl Tax Svc Area No 1 Cambridge
Ser A...................................... 7.625 03/01/30 1,076,241
3,000 Chicago, IL Lakefront Millenium Pkg Fac
(MBIA Insd) (e)............................ 0/5.700 01/01/25 2,728,800
7,750 Chicago, IL O'Hare Intl Arpt Rev RR II R
239-1 (Variable Rate Coupon) (c)........... 10.220 01/01/19 9,319,453
3,600 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airl Inc Proj Ser B Rfdg (a) (b).... 6.100 11/01/35 720,000
5,000 Chicago, IL Proj Ser A Rfdg (MBIA Insd).... 5.500 01/01/38 5,265,400
4,000 Chicago, IL Spl Assmt Lakeshore East
Proj....................................... 6.625 12/01/22 3,982,320
920 Chicago, IL Tax Increment Alloc Read
Dunning Ser B (ACA Insd)................... 7.250 01/01/14 1,015,579
2,000 Chicago, IL Tax Increment Alloc Sub Cent
Loop Redev Ser A........................... 6.500 12/01/05 2,157,900
3,000 Chicago, IL Tax Increment Alloc Sub Cent
Loop Redev Ser A (ACA Insd)................ 6.500 12/01/06 3,386,640
1,925 Chicago, IL Tax Increment Alloc Sub Cent
Loop Redev Ser A (ACA Insd)................ 6.500 12/01/08 2,245,801
1,295 Gilberts, IL Spl Svc Area No 9 Spl Tax Big
Timber Proj................................ 7.375 03/01/11 1,363,493
1,245 Gilberts, IL Spl Svc Area No 9 Spl Tax Big
Timber Proj................................ 7.750 03/01/27 1,350,476
1,500 Godfrey, IL Rev United Methodist Vlg Ser
A.......................................... 5.875 11/15/29 1,216,515
2,700 Hoopeston, IL Hosp Cap Impt Rev Hoopeston
Cmnty Mem Hosp Rfdg........................ 6.550 11/15/29 2,479,572
1,865 Huntley, IL Increment Alloc Rev Huntley
Redev Proj Ser A........................... 8.500 12/01/15 1,997,583
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ILLINOIS (CONTINUED)
$ 271 Huntley, IL Spl Svc Area No 10 Spl Tax Ser
A.......................................... 6.250% 03/01/09 $ 274,515
2,621 Huntley, IL Spl Svc Area No 10 Spl Tax Ser
A.......................................... 6.500 03/01/29 2,661,573
1,405 Illinois Dev Fin Auth Rev Cmnty Fac Clinic
Altgeld Proj............................... 8.000 11/15/16 1,149,023
1,500 Illinois Ed Fac Auth Rev Peace Mem
Ministries Proj............................ 7.500 08/15/26 1,515,600
1,000 Illinois Hlth Fac Auth Rev Center Baptist
Home Proj.................................. 7.125 11/15/29 962,710
2,500 Illinois Hlth Fac Auth Rev Decatur Mem
Hosp....................................... 5.750 10/01/24 2,566,850
3,000 Illinois Hlth Fac Auth Rev Fairview Oblig
Group Ser A Rfdg........................... 7.400 08/15/23 2,999,610
1,000 Illinois Hlth Fac Auth Rev Lifelink Corp
Oblig Group Ser B (Prerefunded @
02/15/05).................................. 8.000 02/15/25 1,093,160
650 Illinois Hlth Fac Auth Rev Loyola Univ Hlth
Sys Ser A.................................. 6.000 07/01/21 675,838
1,200 Illinois Hlth Fac Auth Rev Lutheran Sr
Ministries Oblig Ser A..................... 7.375 08/15/31 1,217,904
1,710 Illinois Hlth Fac Auth Rev Proctor Cmnty
Hosp Proj.................................. 7.500 01/01/11 1,710,086
700 Illinois Hlth Fac Auth Rev Silver Cross
Hosp & Med Rfdg............................ 5.500 08/15/19 713,608
2,375 Lake Cnty, IL Fst Presv Dist Ld Acquisition
& Dev...................................... 5.750 12/15/16 2,764,144
675 Lake Cnty, IL Fst Presv Dist Ld Acquisition
& Dev...................................... 5.750 12/15/17 783,851
80 Lake, Cook, Kane & McHenry Cntys, IL Cmnty
Unit Sch Dist No 22 (FGIC Insd)............ 5.750 12/01/19 90,812
1,250 Montgomery, IL Spl Assmt Impt Lakewood
Creek Proj................................. 7.750 03/01/30 1,391,100
1,800 Peoria, IL Spl Tax Weaverridge Spl Svc
Area....................................... 8.050 02/01/17 1,933,452
2,095 Regional Tran Auth IL Ser B (AMBAC Insd)... 8.000 06/01/17 2,933,880
3,953 Robbins, IL Res Recovery Rev Restructuring
Proj Ser A (a)............................. 8.375 10/15/16 5,930
1,547 Robbins, IL Res Recovery Rev Restructuring
Proj Ser B (a)............................. 8.375 10/15/16 2,320
965 Sterling, IL Rev Hoosier Care Proj Ser A... 7.125 06/01/34 882,164
------------
74,869,390
------------
</Table>
12 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
INDIANA 1.1%
$ 825 Crawfordsville, IN Redev Cmnty Redev Dist
Tax Increment Rev (c)...................... 7.000% 02/01/12 $ 840,098
1,935 Indiana Hlth Fac Fin Auth Rev Hoosier Care
Proj Ser A................................. 7.125 06/01/34 1,770,757
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Fed
Express Corp Proj.......................... 7.100 01/15/17 3,166,440
2,000 Petersburg, IN Pollutn Ctl Rev IN Pwr &
Lt......................................... 6.375 11/01/29 1,899,020
------------
7,676,315
------------
IOWA 0.5%
1,500 Cedar Rapids, IA Rev First Mtg Cottage
Grove Ser A Rfdg........................... 5.875 07/01/28 1,128,225
2,000 Estherville, IA Hosp Rev Avera Holy Family
Proj....................................... 6.250 07/01/26 2,111,780
------------
3,240,005
------------
KANSAS 0.7%
955 Lawrence, KS Coml Dev Rev Holiday Inn Sr
Ser A Rfdg................................. 8.000 07/01/16 823,888
1,000 Lenexa, KS Hlthcare Fac Rev Lakeview Vlg
Inc Ser B.................................. 6.250 05/15/26 1,004,790
960 Manhattan, KS Coml Dev Rev Holiday Inn Sr
Ser A Rfdg................................. 8.000 07/01/16 826,714
1,000 Olathe, KS Sr Living Fac Rev Aberdeen Vlg
Inc Ser A.................................. 8.000 05/15/30 1,028,650
1,500 Overland Pk, KS Dev Corp Rev First Tier
Overland Park Ser A........................ 7.375 01/01/32 1,508,655
------------
5,192,697
------------
KENTUCKY 0.5%
1,000 Kenton Cnty, KY Arpt Brd Spl Fac Rev Mesaba
Aviation Inc Proj Ser A.................... 6.700 07/01/29 723,630
3,000 Newport, KY Pub Pptys Corp Rev First Mtg
Pub Pkg & Plaza Ser A 1.................... 8.500 01/01/27 2,909,700
------------
3,633,330
------------
LOUISIANA 1.3%
2,135 Louisiana Hsg Fin Agy Rev Multi-Family Hsg
Plantation Ser A........................... 7.125 01/01/28 2,100,797
2,000 Louisiana Loc Govt Envir Fac Hlthcare Saint
James Place Ser A Rfdg..................... 8.000 11/01/29 1,934,080
</Table>
See Notes to Financial Statements 13
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
LOUISIANA (CONTINUED)
$1,000 Louisiana Pub Fac Auth Rev Progressive
Hlthcare................................... 6.375% 10/01/20 $ 809,170
1,000 Louisiana Pub Fac Auth Rev Progressive
Hlthcare................................... 6.375 10/01/28 767,820
3,424 Louisiana St Univ & Agric & Mechanical
College Univ Rev Master Agreement (c)...... 5.750 10/30/18 3,285,798
------------
8,897,665
------------
MAINE 0.0%
25 Maine Hlth & Higher Ed Fac Auth Rev Ser B
(Prerefunded @ 07/01/04) (FSA Insd)........ 7.000 07/01/24 26,621
------------
MARYLAND 1.3%
1,000 Baltimore Cnty, MD Mtg Rev Shelter Elder
Care Ser A................................. 7.250 11/01/29 960,430
730 Maryland St Econ Dev Corp Air Cargo Rev
Afco Cargo BWI II LLC Proj................. 6.250 07/01/07 715,269
1,200 Maryland St Econ Dev Corp MD Golf Course
Sys........................................ 8.250 06/01/28 1,167,192
3,000 Montgomery Cnty, MD Econ Dev Editorial Proj
In Ed Ser A (c)............................ 6.400 09/01/28 2,774,040
3,000 Prince Georges Cnty, MD Spl Oblig Spl Assmt
Woodview Ser A............................. 8.000 07/01/26 3,293,850
------------
8,910,781
------------
MASSACHUSETTS 4.6%
1,000 Massachusetts St Dev Fin Agy Briarwood Ser
B.......................................... 8.000 12/01/22 1,035,690
910 Massachusetts St Dev Fin Agy Rev Gtr Lynn
Mental Hlth (c)............................ 7.750 06/01/18 927,390
1,965 Massachusetts St Dev Fin Agy Rev Hillcrest
Ed Ctr Inc................................. 6.375 07/01/29 1,879,935
3,000 Massachusetts St Dev Fin Agy Rev Hlthcare
Fac Alliance Ser A......................... 7.100 07/01/32 2,763,300
1,000 Massachusetts St Dev Fin Agy Rev MCHSP
Human Svc Providers Ser A (Prerefunded @
07/01/10).................................. 8.000 07/01/20 1,292,480
3,765 Massachusetts St Dev Fin Agy Rev New
England Ctr For Children................... 6.000 11/01/19 3,392,943
3,100 Massachusetts St Hlth & Ed Civic
Investments Ser B.......................... 9.150 12/15/23 3,506,596
1,000 Massachusetts St Hlth & Ed Nichols College
Issue Ser C................................ 6.000 10/01/17 929,750
1,929 Massachusetts St Hsg Fin Agy Hsg Rev Insd
Rental Ser A (AMBAC Insd).................. 6.650 07/01/19 1,987,804
</Table>
14 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MASSACHUSETTS (CONTINUED)
$1,965 Massachusetts St Indl Fin Agy Assisted
Living Fac Rev Marina Bay LLC Proj......... 7.500% 12/01/27 $ 2,002,767
410 Massachusetts St Indl Fin Agy Rev Dimmock
Cmnty Hlth Ctr............................. 8.000 12/01/06 422,936
1,085 Massachusetts St Indl Fin Agy Rev Dimmock
Cmnty Hlth Ctr............................. 8.375 12/01/13 1,168,263
675 Massachusetts St Indl Fin Agy Rev Dimmock
Cmnty Hlth Ctr............................. 8.500 12/01/20 727,589
645 Massachusetts St Indl Fin Agy Rev First Mtg
GF/Pilgrim Inc Proj........................ 6.500 10/01/15 583,899
2,000 Massachusetts St Indl Fin Agy Rev First Mtg
GF/Pilgrim Inc Proj........................ 6.750 10/01/28 1,745,940
795 Massachusetts St Indl Fin Agy Rev Gtr Lynn
Mental Hlth (c)............................ 6.200 06/01/08 767,191
2,965 Massachusetts St Indl Fin Agy Rev Gtr Lynn
Mental Hlth (c)............................ 6.375 06/01/18 2,751,075
4,500 Massachusetts St Indl Fin Agy Rev Swr Fac
Res Ctl Composting (c)..................... 9.250 06/01/10 4,512,870
------------
32,398,418
------------
MICHIGAN 1.3%
895 Detroit, MI Loc Dev Fin Auth Tax Increment
Sub Ser C (c).............................. 6.850 05/01/21 888,162
2,390 Meridian, MI Econ Dev Corp Ltd Oblig Rev
First Mtg Burcham Hills Ser A Rfdg......... 7.500 07/01/13 2,451,758
3,430 Meridian, MI Econ Dev Corp Ltd Oblig Rev
First Mtg Burcham Hills Ser A Rfdg......... 7.750 07/01/19 3,531,940
995 Michigan Muni Bd Auth Rev Pub Sch Academy
Fac Pgm.................................... 8.125 10/01/31 975,110
11,084 Michigan St Strategic Fd Ltd Oblig Rev
Great Lakes Pulp & Fiber Proj (a) (f)...... 8.000 12/01/27 1,717,950
------------
9,564,920
------------
MINNESOTA 2.9%
2,000 Aitkin, MN Hlth Fac Rev Riverwood Hlthcare
Ctr Proj................................... 7.750 02/01/31 1,990,680
1,000 Cambridge, MN Hsg & Hlthcare Fac Rev
Grandview West Proj Ser B.................. 6.000 10/01/33 839,480
2,000 Carlton, MN Hlth & Hsg Fac Intermediate
Faith Social Svc Inc Proj.................. 7.500 04/01/19 2,071,020
1,000 Dakota Cnty, MN Hsg & Redev................ 6.250 05/01/29 918,970
1,500 Duluth, MN Econ Dev Auth Saint Lukes Hosp.. 7.250 06/15/32 1,537,020
2,000 Glencoe, MN Hlthcare Fac Rev............... 7.500 04/01/31 2,047,680
6,890 Minneapolis & Saint Paul, MN Met Northwest
Airl Proj Ser A............................ 7.000 04/01/25 6,060,789
</Table>
See Notes to Financial Statements 15
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MINNESOTA (CONTINUED)
$1,000 Minneapolis & Saint Paul, MN Met Northwest
Airl Proj Ser B............................ 6.500% 04/01/25 $ 921,200
1,500 Saint Cloud, MN Hsg & Redev Auth Sterling
Heights Apt Proj........................... 7.550 04/01/39 1,481,745
1,500 Saint Paul, MN Port Auth Hotel Fac Rev
Radisson Kellogg Proj Ser 2 Rfdg........... 7.375 08/01/29 1,529,385
1,280 St Paul, MN Hsg & Redev Auth Hosp Rev
Healtheast Proj Ser A Rfdg................. 6.625 11/01/17 1,271,923
------------
20,669,892
------------
MISSISSIPPI 0.3%
1,900 Mississippi Dev Bank Spl Oblig Diamond
Lakes Util Ser A Rfdg...................... 6.250 12/01/17 1,847,332
------------
MISSOURI 4.6%
1,000 Fenton, MO Tax Increment Rev............... 6.125 10/01/21 1,021,490
1,000 Fenton, MO Tax Increment Rev............... 7.000 10/01/21 1,081,290
400 Ferguson, MO Tax Increment Rev Crossings at
Halls Ferry Proj........................... 7.250 04/01/07 409,452
3,095 Ferguson, MO Tax Increment Rev Crossings at
Halls Ferry Proj........................... 7.625 04/01/17 3,302,303
484 Ferguson, MO Tax Increment Rev Crossings at
Halls Ferry Proj........................... 7.625 04/01/18 515,470
1,525 Jefferson Cnty, MO Jr College Dist Student
Hsg Sys Rev Jefferson College.............. 7.250 07/01/31 1,435,803
996 Kansas City, MO Indl Dev Auth Multi-Family
Hsg Rev Brentwood Manor Apt Proj Ser B..... 7.250 10/15/38 988,440
965 Kansas City, MO Multi-Family Hsg Rev Vlg
Green Apt Proj............................. 6.250 04/01/30 817,326
10,820 Missouri St Hlth & Edl Fac Rev Drivers Ser
362 (c).................................... 9.230 05/15/11 12,448,626
2,220 Nevada, MO Hosp Rev Nevada Regional Med
Ctr........................................ 6.750 10/01/22 2,290,152
1,000 Saint Louis, MO Indl Dev Auth Rev Sr Lien
Saint Louis Convention Ser A............... 7.200 12/15/28 983,760
5,000 Saline Cnty, MO Indl Dev Auth Hlth Fac Rev
(c)........................................ 6.500 12/01/28 5,036,100
1,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd)..... 6.000 06/01/15 1,207,330
1,305 Three Riv Jr College Dist MO Cmnty
College.................................... 7.000 09/01/18 1,199,269
------------
32,736,811
------------
</Table>
16 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW HAMPSHIRE 0.9%
$2,000 New Hampshire Higher Ed & Hlth Fac Auth Rev
Havenwood-Heritage Heights................. 7.350% 01/01/18 $ 2,041,940
2,000 New Hampshire Higher Ed & Hlth Fac Auth Rev
Havenwood-Heritage Heights................. 7.450 01/01/25 2,034,500
1,000 New Hampshire Hlth & Ed Fac Auth Rev NH
College Issue.............................. 7.500 01/01/31 1,078,570
1,000 New Hampshire St Business Fin Auth Rev
Alice Peck Day Hlth Sys Ser A.............. 6.875 10/01/19 1,003,960
------------
6,158,970
------------
NEW JERSEY 3.6%
2,240 Camden Cnty, NJ Impt Auth Lease Rev
Dockside Refrig (a) (b) (c)................ 8.400 04/01/24 2,038,400
1,940 New Jersey Econ Dev Auth Asstd Living
Rev........................................ 6.750 08/01/30 1,665,975
2,000 New Jersey Econ Dev Auth Cedar Crest Vlg
Inc Fac Ser A.............................. 7.000 11/15/16 2,038,440
2,000 New Jersey Econ Dev Auth Continental Airl
Inc Proj................................... 6.250 09/15/19 1,701,900
2,000 New Jersey Econ Dev Auth First Mtg
Franciscan Oaks Proj....................... 5.700 10/01/17 1,830,300
1,000 New Jersey Econ Dev Auth Retirement Cmnty
Rev Ser A.................................. 8.000 11/15/15 1,047,620
1,000 New Jersey Econ Dev Auth Retirement Cmnty
Rev Ser A.................................. 8.125 11/15/18 1,032,900
1,440 New Jersey Econ Dev Auth Retirement Cmnty
Rev Ser A.................................. 8.125 11/15/23 1,501,344
1,000 New Jersey Econ Dev Auth Rev First Mtg
Winchester Gardens Ser A................... 8.500 11/01/16 1,054,220
1,500 New Jersey Econ Dev Auth Rev First Mtg
Winchester Gardens Ser A................... 8.625 11/01/25 1,578,765
1,000 New Jersey Econ Dev Auth Rev Kapkowsi Rd
Landfill Ser A (Prerefunded @ 05/15/14).... 6.375 04/01/18 1,237,670
1,580 New Jersey Econ Dev Auth Rev Kullman Assoc
Proj Ser A................................. 6.125 06/01/18 1,336,048
2,000 New Jersey Econ Dev Auth Rev Sr Living Fac
Esplanade Bear............................. 7.000 06/01/39 1,655,400
3,000 New Jersey Econ Dev Auth Rev Sr Mtg Arbor
Glen Proj Ser A (Prerefunded @ 05/15/06)... 8.750 05/15/26 3,620,100
1,010 New Jersey Hlthcare Fac Fin Auth Rev
Raritan Bay Med Ctr Issue Rfdg............. 7.250 07/01/14 1,042,239
1,090 New Jersey St Ed Fac Auth Rev Felician
College of Lodi Ser D (c).................. 7.375 11/01/22 1,020,262
------------
25,401,583
------------
</Table>
See Notes to Financial Statements 17
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW MEXICO 0.7%
$4,195 Albuquerque, NM Retirement Fac Rev La Vida
Llena Proj Ser B Rfdg...................... 6.600% 12/15/28 $ 4,098,851
1,040 New Mexico Hsg Auth Region III Sr Brentwood
Gardens Apt Ser A.......................... 6.850 12/01/31 1,010,838
------------
5,109,689
------------
NEW YORK 4.7%
990 Bethlehem, NY Indl Dev Agy Sr Hsg Rev Van
Allen Proj Ser A........................... 6.875 06/01/39 895,346
1,400 Brookhaven, NY Indl Dev Agy Sr Residential
Hsg Rev Woodcrest Estates Fac Ser A........ 6.375 12/01/37 1,308,118
2,330 Monroe Cnty, NY Indl Dev Agy Woodland Vlg
Proj....................................... 8.000 11/15/15 2,438,555
3,000 New York City Indl Dev Agy Field Hotel
Assoc LP JFK Rfdg.......................... 6.000 11/01/28 1,704,330
3,000 New York City Indl Dev Agy JFK Intl Arpt
Proj Ser B (a)............................. 8.500 08/01/28 2,085,090
2,185 New York City Indl Dev Agy LaGuardia Assoc
LP Proj Rfdg (a)........................... 5.800 11/01/13 1,448,546
5,000 New York City Ser A........................ 7.000 08/01/07 5,690,150
2,130 New York City Ser D........................ 8.000 02/01/05 2,305,597
870 New York City Ser D (Escrowed to
Maturity).................................. 8.000 02/01/05 949,849
2,500 New York St Energy Resh & Dev Auth Gas Fac
Rev (Inverse Fltg) (g)..................... 11.509 04/01/20 3,259,725
1,985 Saratoga Cnty, NY Indl Dev Agy Sr Hsg Rev
Highpointe at Malta Proj Ser A............. 6.875 06/01/39 1,822,131
1,000 Suffolk Cnty, NY Indl Dev Agy Continuing
Care Retirement Cmnty Rev.................. 7.250 11/01/28 1,047,150
990 Suffolk Cnty, NY Indl Dev Agy Eastern Long
Is Hosp Assoc Ser A........................ 7.750 01/01/22 981,149
1,400 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev
Spellman High Voltage Fac Ser A............ 6.375 12/01/17 1,280,076
1,445 Suffolk Cnty, NY Indl Dev Agy Peconic
Landing Ser A.............................. 8.000 10/01/20 1,461,589
1,000 Syracuse, NY Indl Dev Agy Rev First Mtg
Jewish Home Ser A.......................... 7.375 03/01/31 1,021,320
2,315 Utica, NY Indl Dev Agy Civic Utica College
Civic Fac.................................. 6.750 12/01/21 2,337,594
1,000 Westchester Cnty, NY Indl Dev Hebrew Hosp
Sr Hsg Inc Ser A........................... 7.375 07/01/30 1,052,860
------------
33,089,175
------------
NORTH CAROLINA 0.3%
2,000 North Carolina Med Care Comm First Mtg
United Methodist Homes..................... 7.000 10/01/17 2,074,760
------------
</Table>
18 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NORTH DAKOTA 0.2%
$1,000 Grand Forks, ND Sr Hsg Rev Spl Term 4000
Vly Square Proj............................ 6.250% 12/01/34 $ 838,990
965 Grand Forks, ND Sr Hsg Rev Spl Term 4000
Vly Square Proj............................ 6.375 12/01/34 809,664
------------
1,648,654
------------
OHIO 2.2%
1,500 Akron Bath Copley, OH St Twp Hosp Dist Rev
Summa Hosp Ser A........................... 5.375 11/15/24 1,346,295
5,000 Athens Cnty, OH Hosp Facs Rev Impt
O'Bleness Mem Ser A Rfdg................... 7.125 11/15/33 5,010,500
3,000 Cleveland-Cuyahoga Cnty, OH Spl Assmt/Tax
Increment.................................. 7.000 12/01/18 3,066,330
623 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park
Lane Apts Ser A1 Rfdg (e).................. 1.250/6.000 10/01/37 479,472
1,081 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park
Lane Apts Ser A2 Rfdg (a).................. 5.460 10/01/37 26,493
1,760 Dayton, OH Spl Fac Rev Afco Cargo Day LLC
Proj....................................... 6.300 04/01/22 1,520,622
1,500 Lucas Cnty, OH Hlthcare & Impt Sunset
Retirement Rfdg............................ 6.500 08/15/20 1,600,890
2,905 Madison Cnty, OH Hosp Impt Rev Madison Cnty
Hosp Proj Rfdg............................. 6.400 08/01/28 2,685,382
------------
15,735,984
------------
OKLAHOMA 2.0%
685 Langston, OK Econ Dev Langston Cmnty Dev
Corp Proj Ser A............................ 7.000 08/01/10 685,096
750 Langston, OK Econ Dev Langston Cmnty Dev
Corp Proj Ser A............................ 7.400 08/01/17 740,018
1,000 Langston, OK Econ Dev Langston Cmnty Dev
Corp Proj Ser A............................ 7.625 08/01/20 992,370
1,000 Oklahoma Cnty, OK Fin Auth Epworth Villa
Proj Ser A Rfdg............................ 7.000 04/01/25 998,890
1,065 Oklahoma Dev Fin Auth Rev Hillcrest
Hlthcare Sys Ser A Rfdg.................... 5.750 08/15/12 873,928
1,000 Oklahoma Dev Fin Auth Rev Hillcrest
Hlthcare Sys Ser A Rfdg.................... 5.750 08/15/15 781,660
4,000 Oklahoma Dev Fin Auth Rev Hillcrest
Hlthcare Sys Ser A Rfdg.................... 5.625 08/15/19 2,932,320
3,250 Tulsa Cnty, OK Pub Fac Auth (AMBAC Insd)... 6.250 11/01/22 3,816,053
3,000 Tulsa, OK Muni Arpt Trust Rev American Airl
Proj Rfdg.................................. 6.250 06/01/20 2,144,970
------------
13,965,305
------------
</Table>
See Notes to Financial Statements 19
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
OREGON 1.1%
$2,000 Clackamas Cnty, OR Hosp Fac Willamette View
Inc Proj Ser A............................. 7.500% 11/01/29 $ 2,124,860
2,145 Clatsop Care Ctr Hlth Dist OR Rev Sr Hsg... 6.875 08/01/28 2,094,614
3,878 Oregon St Hlth Hsg Ed & Cultural Fac
Auth....................................... 7.250 06/01/28 3,768,697
------------
7,988,171
------------
PENNSYLVANIA 7.9%
2,000 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser
B.......................................... 9.250 11/15/15 1,971,220
2,000 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser
B.......................................... 9.250 11/15/22 1,966,240
1,500 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser
B.......................................... 9.250 11/15/30 1,471,695
2,000 Allegheny Cnty, PA Indl Dev Auth Lease
Rev........................................ 6.625 09/01/24 1,823,360
6,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl
Rev Collateral Toledo Edison Co Proj Ser A
Rfdg....................................... 7.750 05/01/20 6,565,080
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks
Vlg Inc Proj Rfdg (Prerefunded @
05/15/06).................................. 7.700 05/15/22 1,174,720
1,000 Bucks Cnty, PA Indl Dev Auth Rev First Mtg
Hlthcare Fac Chandler...................... 6.200 05/01/19 947,400
1,500 Chester Cnty, PA Hlth & Ed Fac Chester Cnty
Hosp Ser A................................. 6.750 07/01/31 1,380,450
2,500 Cliff House Ctf Trust Var Sts Ctf Partn Ser
A.......................................... 6.625 06/01/27 2,139,400
2,000 Cumberland Cnty, PA Indl Dev Auth Rev First
Mtg Woods Cedar Run Ser A Rfdg............. 6.500 11/01/28 1,392,240
5,000 Dauphin Cnty, PA Gen Auth Rev Hotel & Conf
Ctr Hyatt Regency (c)...................... 6.200 01/01/29 3,946,550
3,000 Dauphin Cnty, PA Gen Auth Rev Office & Pkg
Riverfront Office.......................... 6.000 01/01/25 2,569,410
1,000 Lancaster Cnty, PA Hosp Auth Rev Hlth Ctr
Saint Anne's Home.......................... 6.625 04/01/28 962,000
1,200 Lehigh Cnty, PA Gen Purp Auth First Mtg
Bible Fellowship Church.................... 7.625 11/01/21 1,242,096
2,000 Lehigh Cnty, PA Gen Purp Auth Rev Kidspeace
Oblig Group Rfdg........................... 6.000 11/01/23 1,928,500
1,000 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev
Lifepath Inc Proj.......................... 6.100 06/01/18 890,440
2,000 Montgomery Cnty, PA Higher Ed & Temple
Continuing Care Ctr (a).................... 6.750 07/01/29 897,240
500 Montgomery Cnty, PA Indl Dev Auth Rev First
Mtg The Meadowood Corp Rfdg................ 7.000 12/01/10 518,145
2,500 Montgomery Cnty, PA Indl Dev Auth Rev First
Mtg The Meadowood Corp Rfdg................ 7.250 12/01/15 2,535,400
</Table>
20 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
PENNSYLVANIA (CONTINUED)
$6,000 Montgomery Cnty, PA Indl Dev Auth Rev First
Mtg The Meadowood Corp Rfdg................ 7.400% 12/01/20 $ 6,076,020
925 Montgomery Cnty, PA Indl Dev Auth Rev
Wordsworth Academy......................... 7.750 09/01/24 944,860
1,435 Northeastern PA Hosp & Ed Auth Hlthcare
Rev........................................ 7.125 10/01/29 1,388,922
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery
Rev Colver Proj Ser D...................... 7.050 12/01/10 3,103,470
980 Pennsylvania St Higher Ed Student Assn Inc
Proj Ser A................................. 6.750 09/01/32 1,014,672
2,150 Philadelphia, PA Auth Indl Dev Rev Coml Dev
Rfdg....................................... 7.750 12/01/17 2,185,798
1,500 Scranton Lackawanna, PA Hlth & Welfare Auth
Rev Rfdg................................... 7.250 01/15/17 1,472,250
2,000 Scranton Lackawanna, PA Hlth & Welfare Auth
Rev Rfdg................................... 7.350 01/15/22 1,956,480
1,500 Westmoreland Cnty, PA Indl Dev Hlthcare Fac
Redstone Ser B............................. 8.000 11/15/23 1,624,455
------------
56,088,513
------------
RHODE ISLAND 0.3%
1,825 Rhode Island St Econ Dev Corp Rev Oblig
Providence Place........................... 7.250 07/01/20 1,782,094
------------
SOUTH CAROLINA 0.7%
115 Charleston Cnty, SC Ctf Part Ser B (MBIA
Insd)...................................... 7.000 06/01/19 121,656
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl
Inc Ser 84................................. 3.198 06/15/04 993,900
2,000 South Carolina Jobs Econ Dev First Mtg
Westley Commons Proj....................... 7.750 10/01/24 1,863,440
2,000 South Carolina Jobs Econ Impt Palmetto
Health Ser C Rfdg.......................... 6.375 08/01/34 2,020,000
------------
4,998,996
------------
SOUTH DAKOTA 0.3%
590 Keystone, SD Econ Dev Rev Wtr Quality Mgmt
Corp Ser A................................. 5.500 12/15/08 563,645
1,760 Keystone, SD Econ Dev Rev Wtr Quality Mgmt
Corp Ser A................................. 6.000 12/15/18 1,565,291
------------
2,128,936
------------
TENNESSEE 2.9%
940 Chattanooga, TN Indl Dev Brd Indl Rev Dev
Mkt Street Proj Rfdg....................... 7.000 12/15/12 798,098
4,625 Chattanooga, TN Indl Dev Brd Indl Rev Dev
Warehouse Row Ltd Proj Rfdg................ 7.000 12/15/12 3,926,810
</Table>
See Notes to Financial Statements 21
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
TENNESSEE (CONTINUED)
$3,000 Elizabethton, TN Hlth & Ed Fac Brd Rev Rfdg
(MBIA Insd)................................ 7.750% 07/01/29 $ 3,918,690
2,970 SCA Tax Exempt Trust Multi-Family Mtg
Memphis Hlth Ed Rev Ser A6 (FSA Insd)...... 7.350 01/01/30 3,094,918
5,495 Sullivan Cnty, TN Hlth Ed & Hsg Fac Brd
Rev........................................ 8.410 11/01/19 5,451,370
2,900 Trenton, TN Hlth & Ed Fac Brd Rev Inc Proj
Ser A (c).................................. 10.000 11/01/19 3,100,738
1,160 Trenton, TN Hlth & Ed Fac Brd Rev Inc Proj
Ser B (a) (b) (c).......................... 10.000 11/01/20 115,884
------------
20,406,508
------------
TEXAS 10.5%
680 Abia Dev Corp TX Arpt Fac Rev Austin Belly
Port Dev LLC Proj Ser A.................... 6.250 10/01/08 656,982
3,000 Abia Dev Corp TX Arpt Fac Rev Austin Belly
Port Dev LLC Proj Ser A.................... 6.500 10/01/23 2,687,430
1,000 Atlanta, TX Hosp Auth Fac Rev.............. 6.700 08/01/19 964,950
2,035 Atlanta, TX Hosp Auth Fac Rev.............. 6.750 08/01/29 1,934,837
1,000 Austin-Bergstorm Landhost Enterprises Inc
TX Arpt Hotel Sr Ser A..................... 6.750 04/01/27 842,750
1,960 Bell Cnty, TX Indl Dev Corp Solid Waste
Disposal Rev............................... 7.600 12/01/17 1,368,942
1,000 Bexar Cnty, TX Hsg Fin Corp Multi-Family
Hsg Rev Woodland Ridge Apt Proj Ser A...... 7.000 01/01/39 984,420
2,000 Brazos Cnty, TX Hlth Fac Dev Oblig Grp..... 5.375 01/01/32 2,009,220
735 Comal Cnty, TX Hlth Fac Dev Hlthcare Sys
McKenna Mem Proj Ser A..................... 6.250 02/01/32 749,759
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg
(c)........................................ * 08/01/11 1,017,602
3,445 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg... 7.250 04/01/32 3,505,219
2,970 Dallas, TX Wtrwks & Swr Sys Rev Rfdg....... 5.750 10/01/17 3,383,840
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland
Oil Proj Ser 84 Rfdg....................... 8.920 04/01/04 2,505,700
6,400 Houston, TX Arpt Sys Rev Spl Fac
Continental Airl Ser B..................... 6.125 07/15/17 5,173,632
3,000 Houston, TX Arpt Sys Rev Spl Fac
Continental Airl Ser C..................... 5.700 07/15/29 2,077,830
1,750 Houston, TX Arpt Sys Rev Sub Lien Ser A
(FSA Insd)................................. 5.125 07/01/32 1,763,370
8,880 Lower CO River Auth TX Rev Ser A Rfdg
(Variable Rate Coupon) (FSA Insd) (c)...... 10.389 05/15/14 11,509,279
3,750 Lower CO River Auth TX Rev Ser A Rfdg
(Variable Rate Coupon) (FSA Insd) (c)...... 10.389 05/15/15 4,860,338
1,445 Lubbock, TX Hlth Fac Dev Corp Rev First Mtg
Carillon Proj Ser A........................ 6.500 07/01/19 1,098,200
</Table>
22 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
TEXAS (CONTINUED)
$2,305 Meadow Parc Dev Inc TX Multi-Family Rev Hsg
Meadow Parc Apt Proj....................... 6.500% 12/01/30 $ 2,141,783
2,500 Metropolitan Hlth Fac Dev Corp TX Wilson N
Jones Mem Hosp Proj........................ 7.250 01/01/31 2,333,775
2,950 Midlothian, TX Dev Auth Tax Increment
Contract Rev............................... 6.700 11/15/23 3,000,681
2,000 Midlothian, TX Dev Auth Tax Increment
Contract Rev............................... 7.875 11/15/26 2,206,080
250 San Antonio, TX Hlth Fac Dev Corp Rev
Encore Nursing Ctr Partn................... 8.250 12/01/19 253,598
1,819 Texas Gen Svcs Comm Part Interests......... 7.250 08/01/11 1,849,292
4,800 Texas St Dept Hsg & Cmnty Affairs Home Mtg
Rev (Inverse Fltg) (GNMA Collateralized)... 6.900 07/02/24 5,066,112
875 Texas St Higher Edl Coordinating Brd
College Student Ln Rev..................... 7.849 10/01/25 878,281
2,000 Texas St Tpk Auth Dallas North Thruway Rev
Addison Arpt Toll Tunnel Proj (Prerefunded
@ 01/01/05) (FGIC Insd).................... 6.750 01/01/15 2,180,540
2,000 Texas St Tpk Auth Dallas North Thruway Rev
Addison Arpt Toll Tunnel Proj (Prerefunded
@ 01/01/05) (FGIC Insd).................... 6.600 01/01/23 2,176,820
1,000 Wichita Cnty,TX Hlth Fac Rolling Meadows
Fac Ser A Rfdg............................. 6.250 01/01/28 960,740
2,500 Woodhill Pub Fac Corp TX Hsg-Woodhill Apt
Proj....................................... 7.500 12/01/29 2,477,000
------------
74,619,002
------------
UTAH 0.2%
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj (a)................................... 7.800 09/01/15 400,000
1,165 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj (a)................................... 8.000 09/01/20 466,000
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac
Proj (a)................................... 7.800 09/01/25 400,000
325 Utah St Hsg Fin Agy Single Family Mtg Mezz
A1 (AMBAC Insd)............................ 6.100 07/01/13 341,409
------------
1,607,409
------------
</Table>
See Notes to Financial Statements 23
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
VERMONT 0.4%
$1,015 Vermont Ed & Hlth Bldg Fin Agy Rev Hlthcare
Fac Copley Manor Proj (a).................. 6.250% 04/01/29 $ 450,822
1,000 Vermont Ed & Hlth Bldg Fin Agy Rev VT
Council Dev Mental Hlth Ser A.............. 6.000 12/15/09 1,112,750
1,000 Vermont Ed & Hlth Bldg Fin Bennington
College Proj............................... 6.625 10/01/29 1,005,880
------------
2,569,452
------------
VIRGINIA 1.7%
1,000 Greensville Cnty, VA Indl Dev Wheeling
Steel Proj Ser A........................... 7.000 04/01/14 680,000
2,500 Henrico Cnty, VA Econ Dev Utd Methodist Ser
A Rfdg..................................... 6.500 06/01/22 2,480,250
6,000 Peninsula Port Auth VA Baptist Homes Ser
A.......................................... 7.375 12/01/32 6,099,420
1,500 Pittsylvania Cnty, VA Indl Dev Auth Rev
Exempt Fac Ser A (c)....................... 7.450 01/01/09 1,483,395
1,700 Virginia Small Business Fin Auth Rev Indl
Dev SIL Clean Wtr Proj..................... 7.250 11/01/24 1,680,331
------------
12,423,396
------------
WASHINGTON 1.4%
6,580 Energy Northwest WA Elec Rev Proj No 3 Ser
A Rfdg (FSA Insd).......................... 5.500 07/01/17 7,319,855
1,000 King Cnty, WA Pub Hosp Dist No 004
Snoqualmie Vly Hosp........................ 7.250 12/01/15 1,036,120
1,000 Port Seattle, WA Spl Fac Rev Northwest Airl
Proj....................................... 7.125 04/01/20 874,390
1,000 Port Seattle, WA Spl Fac Rev Northwest Airl
Proj....................................... 7.250 04/01/30 863,560
------------
10,093,925
------------
WISCONSIN 1.2%
800 Baldwin, WI Hosp Rev Mtg Ser A............. 6.125 12/01/18 798,744
1,000 Baldwin, WI Hosp Rev Mtg Ser A............. 6.375 12/01/28 1,001,150
1,750 Milwaukee, WI Rev Sr Air Cargo............. 6.500 01/01/25 1,770,615
3,000 Wisconsin St Hlth & Ed Fac Auth Rev
Milwaukee Catholic Home Inc Proj........... 7.500 07/01/26 3,022,350
1,000 Wisconsin St Hlth & Ed Fac Auth Rev Oakwood
Vlg Proj Ser A............................. 7.625 08/15/30 1,039,150
1,000 Wisconsin St Hlth & Ed Fac Divine Savior
Hlthcare Ser C............................. 7.500 05/01/32 1,002,400
------------
8,634,409
------------
WYOMING 0.2%
1,500 Teton Cnty, WY Hosp Dist Hosp Saint Johns
Med Ctr.................................... 6.750 12/01/27 1,470,075
------------
</Table>
24 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
PUERTO RICO 0.2%
$2,465 Puerto Rico Port Auth Rev Spl Fac Amern
Airl Ser A................................. 6.250% 06/01/26 $ 1,405,099
------------
U. S. VIRGIN ISLANDS 0.4%
2,500 Northern Mariana Islands Ser A............. 7.375 06/01/30 2,560,275
------------
TOTAL MUNICIPAL BONDS......................................................... 697,959,300
------------
TAXABLE NOTE 0.1%
976 Divine Family Trust (d).................... 6.000 10/29/04 966,397
------------
TOTAL INVESTMENTS 98.3%
(Cost $736,786,476)......................................................... 698,925,697
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%................................... 11,851,394
------------
NET ASSETS 100.0%............................................................ $710,777,091
============
</Table>
* Zero coupon bond
(a) Non-income producing security.
(b) This borrower has filed for protection in federal bankruptcy court.
(c) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers.
(d) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(e) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(f) Payment-in-kind security.
(g) An Inverse Floating Rate security is one where the coupon is inversely
indexed to a short-term floating interest rate multiplied by a specific
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. All of the Trust's portfolio holdings including
derivative instruments, are marked to market each day with the change in
value reflected in the unrealized appreciation/depreciation. Upon
disposition a realized gain or loss is recognized accordingly.
See Notes to Financial Statements 25
YOUR FUND'S INVESTMENTS
September 30, 2003
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Co.
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
26 See Notes to Financial Statements
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $736,786,476)....................... $698,925,697
Receivables:
Interest.................................................. 14,906,546
Investments Sold.......................................... 1,059,000
Fund Shares Sold.......................................... 289,943
Other....................................................... 149,343
------------
Total Assets............................................ 715,330,529
------------
LIABILITIES:
Payables:
Fund Shares Repurchased................................... 1,560,586
Income Distributions...................................... 1,201,526
Custodian Bank............................................ 845,138
Distributor and Affiliates................................ 319,807
Investment Advisory Fee................................... 281,368
Trustees' Deferred Compensation and Retirement Plans........ 194,897
Accrued Expenses............................................ 150,116
------------
Total Liabilities....................................... 4,553,438
------------
NET ASSETS.................................................. $710,777,091
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $828,716,452
Accumulated Undistributed Net Investment Income............. 3,564,047
Net Unrealized Depreciation................................. (37,860,779)
Accumulated Net Realized Loss............................... (83,642,629)
------------
NET ASSETS.................................................. $710,777,091
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $560,865,859 and 43,052,976 shares of
beneficial interest issued and outstanding)............. $ 13.03
Maximum sales charge (4.75%* of offering price)......... .65
------------
Maximum offering price to public........................ $ 13.68
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $115,578,643 and 8,877,104 shares of
beneficial interest issued and outstanding)............. $ 13.02
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $34,332,589 and 2,618,663 shares of
beneficial interest issued and outstanding)............. $ 13.11
============
</Table>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements 27
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 51,161,275
------------
EXPENSES:
Investment Advisory Fee..................................... 3,543,296
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,374,865, $1,298,373 and $368,302,
respectively)............................................. 3,041,540
Shareholder Services........................................ 463,816
Legal....................................................... 215,415
Custody..................................................... 58,821
Trustees' Fees and Related Expenses......................... 27,415
Other....................................................... 393,116
------------
Total Expenses.......................................... 7,743,419
Less Credits Earned on Cash Balances.................... 8,642
------------
Net Expenses............................................ 7,734,777
------------
NET INVESTMENT INCOME....................................... $ 43,426,498
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (3,546,709)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (26,406,315)
End of the Period......................................... (37,860,779)
------------
Net Unrealized Depreciation During the Period............... (11,454,464)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(15,001,173)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 28,425,325
============
</Table>
28 See Notes to Financial Statements
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 43,426,498 $ 45,693,443
Net Realized Loss.................................. (3,546,709) (24,732,738)
Net Unrealized Appreciation/Depreciation During the
Period........................................... (11,454,464) 17,786,818
------------- -------------
Change in Net Assets from Operations............... 28,425,325 38,747,523
------------- -------------
Distributions from Net Investment Income:
Class A Shares................................... (31,090,893) (31,960,261)
Class B Shares................................... (6,152,493) (7,625,939)
Class C Shares................................... (1,735,013) (1,952,996)
------------- -------------
Total Distributions................................ (38,978,399) (41,539,196)
------------- -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (10,553,074) (2,791,673)
------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 55,882,726 92,763,808
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 24,291,545 23,840,923
Cost of Shares Repurchased......................... (125,918,977) (174,785,925)
------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... (45,744,706) (58,181,194)
------------- -------------
TOTAL DECREASE IN NET ASSETS....................... (56,297,780) (60,972,867)
NET ASSETS:
Beginning of the Period............................ 767,074,871 828,047,738
------------- -------------
End of the Period (Including accumulated
undistributed net investment income of $3,564,047
and ($277,011), respectively).................... $ 710,777,091 $ 767,074,871
============= =============
</Table>
See Notes to Financial Statements 29
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $13.21 $13.25 $13.27 $13.91 $15.08
------ ------ ------ ------ ------
Net Investment Income..................... .79 .78 .77 .77 .81
Net Realized and Unrealized Gain/Loss..... (.25) (.11) (.05) (.63) (1.17)
------ ------ ------ ------ ------
Total from Investment Operations............ .54 .67 .72 .14 (.36)
Less Distributions from Net Investment
Income.................................... .72 .71 .74 .78 .81
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $13.03 $13.21 $13.25 $13.27 $13.91
====== ====== ====== ====== ======
Total Return (b)............................ 4.21% 5.28% 5.46% 1.27% -2.51%
Net Assets at End of the Period (In
millions)................................. $560.9 $579.1 $607.1 $621.5 $745.2
Ratio of Expenses to Average Net Assets..... .89% .86% .87% .91% .96%
Ratio of Net Investment Income to Average
Net Assets................................ 6.07% 5.99% 5.88% 5.91% 5.46%
Portfolio Turnover.......................... 14% 14% 22% 37% 77%
</Table>
(a) As required, effective October 31, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets from 5.95% to 5.99%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees of up to .25% and do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
30 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES --------------------------------------------------
2003 (c) 2002 (a) 2001 2000 1999
--------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD..... $13.20 $13.24 $13.27 $13.90 $15.07
------ ------ ------ ------ ------
Net Investment Income...................... .69 .70 .68 .69 .69
Net Realized and Unrealized Gain/Loss...... (.25) (.12) (.06) (.64) (1.16)
------ ------ ------ ------ ------
Total from Investment Operations............. .44 .58 .62 .05 (.47)
Less Distributions from Net Investment
Income..................................... .62 .62 .65 .68 .70
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD........... $13.02 $13.20 $13.24 $13.27 $13.90
====== ====== ====== ====== ======
Total Return (b)............................. 3.42% 4.49% 4.71% .48% -3.25%
Net Assets at End of the Period (In
millions).................................. $115.6 $149.5 $176.5 $221.4 $282.5
Ratio of Expenses to Average Net Assets...... 1.64% 1.62% 1.63% 1.67% 1.73%
Ratio of Net Investment Income to Average Net
Assets..................................... 5.32% 5.23% 5.12% 5.15% 4.70%
Portfolio Turnover........................... 14% 14% 22% 37% 77%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01, and increase the ratio of net
investment income to average net assets from 5.19% to 5.23%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4% charged on certain redemptions
made within one year of purchase and declining to 0% after the sixth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of up to 1% and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) Based on average shares outstanding.
See Notes to Financial Statements 31
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES --------------------------------------------------
2003 (d) 2002 (a) 2001 2000 1999
--------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD..... $13.20 $13.24 $13.27 $13.90 $15.07
------ ------ ------ ------ ------
Net Investment Income...................... .79 .70 .68 .69 .69
Net Realized and Unrealized Gain/Loss...... (.26) (.12) (.06) (.64) (1.16)
------ ------ ------ ------ ------
Total from Investment Operations............. .53 .58 .62 .05 (.47)
Less Distributions from Net Investment
Income..................................... .62 .62 .65 .68 .70
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD........... $13.11 $13.20 $13.24 $13.27 $13.90
====== ====== ====== ====== ======
Total Return (b)............................. 4.10%(c) 4.49% 4.71% .48% -3.25%
Net Assets at End of the Period (In
millions).................................. $ 34.3 $ 38.5 $ 44.4 $ 49.1 $ 61.5
Ratio of Expenses to Average Net Assets...... 1.64% 1.62% 1.62% 1.67% 1.73%
Ratio of Net Investment Income to Average Net
Assets..................................... 6.00%(c) 5.23% 5.13% 5.15% 4.69%
Portfolio Turnover........................... 14% 14% 22% 37% 77%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01, and increase the ratio of net
investment income to average net assets from 5.19% to 5.23%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of up to 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(c) Certain non-recurring payments were made to Class C Shares, resulting in an
increase to the Total Return and Ratio of Net Investment Income to Average
Net Assets of .68% and .69%, respectively.
(d) Based on average shares outstanding.
32 See Notes to Financial Statements
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Strategic Municipal Income Fund (the "Fund") is organized as a series
of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered
as a diversified, open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment
objective is to provide investors a high level of current income exempt from
federal income tax primarily through investment in a diversified portfolio of
medium- and lower-grade municipal securities. The Fund commenced investment
operations on June 28, 1985. The distribution of the Fund's Class B and Class C
shares commenced on April 30, 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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using 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, which approximates market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payment is made. At September 30, 2003, the Fund had no when-issued or delayed
delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute
33
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset these losses against any future realized capital
gains. At September 30, 2003, the Fund had an accumulated capital loss
carryforward for tax purposes of $78,989,131 which expires between September 30,
2004 and September 30, 2011. Of this amount, $9,606,294 will expire on September
30, 2004.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $738,476,853
============
Gross tax unrealized appreciation........................... $ 26,755,368
Gross tax unrealized depreciation........................... (66,306,524)
------------
Net tax unrealized depreciation on investments.............. $(39,551,156)
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
The tax character of distributions paid during the years ended September 30,
2003 and 2002 was as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary income........................................... $113,206 $210,294
Long-term capital gain.................................... -0- -0-
-------- --------
$113,206 $210,294
======== ========
</Table>
Due to inherent differences in the recognition of income, expenses and
realized gain/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting have been identified and appropriately
reclassified on the Statement of Assets and Liabilities. Permanent book and tax
differences relating to a portion of the capital loss carry forward expiring in
the current year totaling $29,216,115 has been reclassified from accumulated net
realized loss to capital. Additionally, a permanent book and tax difference
relating to the Fund's investment in other regulated investment companies
totaling $13,637 was reclassified from accumulated undistributed net investment
income to accumulated net realized loss. A permanent book and tax difference
relating to the book to tax amortization differences on bonds sold totaling
$8,397 was reclassified from accumulated undistributed net investment income to
accumulated net realized loss. Additionally, a permanent difference relating to
book to tax amortization differences totaling $629,075 was reclassified from
accumulated undistributed net investment income to accumulated net realized
loss.
34
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $103,011
</Table>
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October losses which are not realized for
tax purposes until the first day of the following fiscal year, the deferral of
losses related to wash sale transactions and the capitalization of
reorganization and restructuring costs, and losses recognized for tax purposes
but not for book purposes.
F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $8,642 as a result of credits earned on cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .50%
Over $500 million........................................... .45%
</Table>
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $29,000 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.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $115,300 representing
Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen")
cost of providing accounting and legal services to the Fund, which are reported
as part of "Other" and "Legal" expenses in the Statement of Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
September 30, 2003, the Fund recognized expenses of approximately $377,400
representing transfer agency fees paid to VKIS. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of $116,914 are included in
35
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
"Other" assets on the Statement of Assets and Liabilities at September 30, 2003.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund. Benefits under the
retirement plan are payable upon retirement 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 $2,500.
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $654,459,030, $135,935,365 and
$38,322,057 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 3,764,226 $ 48,895,391
Class B................................................... 330,503 4,299,420
Class C................................................... 205,707 2,687,915
---------- -------------
Total Sales................................................. 4,300,436 $ 55,882,726
========== =============
Dividend Reinvestment:
Class A................................................... 1,530,608 $ 19,879,267
Class B................................................... 256,324 3,326,662
Class C................................................... 83,177 1,085,616
---------- -------------
Total Dividend Reinvestment................................. 1,870,109 $ 24,291,545
========== =============
Repurchases:
Class A................................................... (6,076,868) $ (78,875,948)
Class B................................................... (3,037,630) (39,421,866)
Class C................................................... (584,518) (7,621,163)
---------- -------------
Total Repurchases........................................... (9,699,016) $(125,918,977)
========== =============
</Table>
36
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $687,614,413, $172,481,948 and
$43,580,912 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 6,042,249 $ 79,393,394
Class B................................................... 758,304 9,941,317
Class C................................................... 262,118 3,429,097
----------- -------------
Total Sales................................................. 7,062,671 $ 92,763,808
=========== =============
Dividend Reinvestment:
Class A................................................... 1,453,948 $ 19,024,194
Class B................................................... 283,146 3,702,423
Class C................................................... 85,216 1,114,306
----------- -------------
Total Dividend Reinvestment................................. 1,822,310 $ 23,840,923
=========== =============
Repurchases:
Class A................................................... (9,943,857) $(124,596,365)
Class B................................................... (3,050,451) (39,875,659)
Class C................................................... (789,710) (10,313,901)
----------- -------------
Total Repurchases........................................... (13,784,018) $(174,785,925)
=========== =============
</Table>
Class B Shares purchased on or after June 1, 1996 and any dividend
reinvestment plan Class B Shares received on such shares, 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 Class B Shares received on such shares, automatically
convert to Class A Shares seven years after the end of the calendar month in
which the shares were purchased. For the years ended September 30, 2003 and
2002, 740,191 and 654,389 Class B Shares automatically converted to Class A
Shares, respectively, and are shown in the above tables as sales of Class A
Shares and repurchases of Class B Shares. Class C Shares purchased before
January 1, 1997, and any dividend reinvestment plan Class C Shares received
thereon, automatically convert to Class A Shares ten years after the end of the
calendar month in which the shares are purchased. Class C Shares purchased on or
after January 1, 1997 do not possess a conversion feature. For the years ended
September 30, 2003 and 2002, no Class C Shares converted to Class A Shares.
Class B and C Shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and C
Shares will be
37
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
imposed on most redemptions made within six years of the purchase for Class B
Shares and one year of the purchase for Class C Shares as detailed in the
following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 4.00% 1.00%
Second...................................................... 3.75% None
Third....................................................... 3.50% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth....................................................... 1.00% None
Seventh and Thereafter...................................... None None
</Table>
For the year ended September 30, 2003, Van Kampen, as distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $98,000 and CDSC on redeemed shares of approximately $199,600.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $103,844,729 and $137,995,583,
respectively.
5. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and maintenance of shareholder accounts
with respect to such classes of shares.
Annual fees under the Plans of up to 0.25% of Class A average daily net
assets and 1.00% each for Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately 2,322,200 and
1,200 for Class B and Class C Shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
Included in the fees for the year ended September 30, 2003, are payments
retained by Van Kampen of approximately $691,800 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $78,300.
38
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Strategic Municipal
Income Fund
We have audited the accompanying statement of assets and liabilities of the
Van Kampen Strategic Municipal Income Fund (the "Fund"), including the portfolio
of investments, as of September 30, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. 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. The financial highlights of the Fund
for the year ended September 30, 1999 were audited by other auditors whose
report dated November 9, 1999 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Van Kampen Strategic Municipal Income Fund at September 30, 2003, 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 four years in the period then ended in conformity with accounting
principles generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
39
VAN KAMPEN INVESTMENTS
THE VAN KAMPEN
FAMILY OF FUNDS
Global/International
Emerging Markets
Emerging Markets Income
European Value Equity
Global Equity Allocation
Global Franchise
Global Value Equity
International Advantage
International Magnum
Growth
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Growth
Small Cap Value
Technology
Growth and Income
Comstock
Equity and Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Value Opportunities
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
Tax Free
California Insured Tax Free
High Yield Municipal*
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Strategic Municipal Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Senior Loan Fund
For more complete information, including risk considerations, fees, sales
charges and ongoing expenses, please contact your financial advisor for a
prospectus. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - Visit our Web site at
VANKAMPEN.COM.
To view a prospectus
select Literature,
Download Fund Info. (COMPUTER ICON)
- - Call us at (800) 847-2424
Telecommunications Device
for the Deaf (TDD) users,
call (800) 421-2833. (PHONE ICON)
- - E-mail us by visiting
VANKAMPEN.COM and
selecting Contact Us.
(MAIL ICON)
* Open to new investors for a limited time
40
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN STRATEGIC MUNICIPAL INCOME FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following is furnished with respect to
the distributions paid by the Fund during its taxable year ended September 30,
2003. The Fund designated 99.7% of the income distributions as a tax-exempt
income distribution. In January, the Fund provides tax information to
shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
41
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
42
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
43
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
44
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1985 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
45
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
46
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1985 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
47
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
48
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
49
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 39, 399, 539
STMI ANR
11/03 12240K03-AP-11/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
California Insured Tax Free Fund performed during the annual period. The
portfolio management team will provide an overview of the market
conditions and discuss some of the factors that affected investment
performance during the reporting period. In addition, this report
includes the fund's financial statements and a list of fund investments
as of September 30, 2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative Minimum
Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN CA INSURED TAX FREE LEHMAN BROTHERS MUNICIPAL BOND
FUND INDEX
------------------------------ ------------------------------
9/93 9674.00 10000.00
12/93 9744.00 10140.70
9002.00 9583.91
9039.00 9689.41
9052.00 9755.81
12/94 8892.00 9616.39
9570.00 10295.80
9737.00 10543.80
9981.00 10847.00
12/95 10517.00 11294.80
10304.00 11158.80
10372.00 11244.10
10658.00 11501.80
12/96 10959.00 11794.80
10864.00 11766.60
11276.00 12171.80
11590.00 12538.80
12/97 11938.00 12878.90
12062.00 13027.10
12249.00 13225.60
12700.00 13631.40
12/98 12693.00 13713.40
12789.00 13835.00
12455.00 13590.60
12263.00 13536.50
12/99 12047.00 13431.40
12591.00 13823.90
12747.00 14032.70
13145.00 14372.30
12/00 13807.00 15000.70
13977.00 15333.50
13921.00 15433.10
14471.00 15866.50
12/01 14304.00 15769.60
14321.00 15918.30
14827.00 16500.70
15775.00 17284.40
12/02 15640.00 17284.30
15747.00 17492.10
16052.00 17943.30
9/03 16038.00 17957.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 12/13/85 since 4/30/93 since 8/13/93
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 7.29% 7.09% 5.19% 5.19% 4.63% 4.63%
10-year 5.19 4.84 4.69 4.69 4.40 4.40
5-year 4.78 4.09 4.02 4.02 4.03 4.03
1-year 1.67 -1.62 0.87 -2.03 0.92 -0.05
- ---------------------------------------------------------------------------------------------
30-Day SEC Yield 3.59% 2.98% 2.98%
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 3.25 percent for Class A
shares, a contingent deferred sales charge of 3.00 percent for Class B shares
(in year one and declining to zero after year four), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. Certain non-recurring payments were made to Class C
shares, resulting in an increase to the one-year total return of 0.03 percent.
The since inception and 10-year returns for Class B and C shares reflect their
conversion into Class A shares six and 10 years after purchase, respectively.
See footnote 3 in the Notes to Financial Statements for additional information.
Figures shown above assume reinvestment of all dividends and capital gains. SEC
yield is a calculation for determining the amount of portfolio income, excluding
non-income items as prescribed by the SEC. Yields are subject to change.
Distribution rate represents the monthly annualized distributions of the fund at
the end of the period and not the earnings of the fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen California Insured Tax Free Fund is managed by the Adviser's
Municipal Fixed-Income team.(1) Members of the team include Dennis S.
Pietrzak, Executive Director; John R. Reynoldson, Executive Director; and
Joseph A. Piraro, Vice President. The following discussion reflects their
views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was
largely characterized by the persistent weakness of the U.S. economy. One
of the most closely watched economic indicators, employment strength, was
in negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also seemed to weigh heavily on
the minds of investors over the course of the year. At the same time,
ongoing budgetary and fiscal difficulties at the state and local levels
contributed to ratings downgrades for many municipal bonds. The Federal
Reserve Board (the Fed) attempted to allay these fears and keep the
economy moving in the right direction by cutting the Fed Funds target
rate twice during the period for a total reduction of 0.75 percent.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
approximately where they began, the road between those two points was
decidedly bumpy. The 12-month period can be divided into two distinct
market environments. The first of these, which lasted from October 2002
to mid-June 2003, saw municipal yields fall by roughly 80 basis points to
levels not seen since the late 1960s. These plummeting yields led to a
surge in issuance as municipalities moved to lock in low financing rates
and, in the case of older bonds, low refinancing costs. These record
levels of supply met with record levels of demand as investors in search
of relative stability poured cash into municipal bond funds. Demand for
municipal bonds was also strong from so-called "cross-over"
buyers--investors who traditionally favor taxable investments but were
drawn to municipal bonds because of their relatively attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew.
(1)Team members may change at any time without notice.
2
Issuance remained strong throughout this leg of the period, though it
abated somewhat in the last three months. These forces combined to drive
municipal-bond yields off of their historic lows, ending the period where
they began.
California faced a host of economic problems during the year, including a
$38 billion budget deficit that led Moody's and Standard & Poor's to
downgrade the state's general obligations in February. Against this
backdrop, state municipal debt issuance rose significantly. California
issued approximately $46 billion in the first nine months of 2003, an
increase of about 60 percent compared to the same period in 2002. Because
of fiscal and credit concerns, valuations in the state's municipal bond
market declined to extremely low levels during the period, drawing buying
interest from many national investors seeking to benefit from relatively
attractive yields in the California market.
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund underperformed its benchmark index.
-- The fund returned 1.67 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0595 translated to a distribution
rate of 3.67 percent based on the fund's maximum offering price (as
of September 30, 2003, Class A shares adjusted for sales charges).
See Performance Summary for additional information and index definition.
<Table>
TOP 5 SECTORS AS OF 9/30/03
Tax District 22.7%
Public Education 21.0
Public Building 14.1
General Purpose 10.8
Water & Sewer 8.4
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Morgan Stanley is a full-service securities firm engaged in securities trading
and brokerage activities, investment banking, research and analysis, financing
and financial advisory services.
3
Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. With interest rates at low levels early in the period, we moved to
attempt to protect the fund from any sudden rate increases. One of our
primary tactics was to reduce the fund's duration (a measure of
interest-rate sensitivity) below that of its benchmark. This defensive
positioning, which benefited the fund later in the fiscal year, was a
drag on performance during the bond market rally that occurred last
winter and spring.
The fund's position in California general obligation bonds also detracted
from overall performance. These bonds underwent considerable volatility
during the period, reflecting investors' concerns about California's
creditworthiness and fiscal outlook.
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. The majority of the fund's holdings are concentrated in
essential-services bonds. Because these securities are backed by specific
projects rather than tax receipts, they tend to provide a more reliable
income stream than other municipal issues in weak economic environments
such as that of the past year. Sectors within essential services that
contributed positively to the fund's performance during the period
included transportation, public education, and water and sewer bonds.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY
ISSUES.
A. Over the past year we increased the fund's exposure to bonds with
structural characteristics designed to withstand interest-rate volatility
relatively well. Many of those purchases were concentrated in bonds that
feature the premium coupons of longer maturities while trading to a
shorter, more intermediate call date. In an environment of rising
interest rates, these bonds offer the dual cushion of high income (to
offset capital losses) and moderate interest-rate vulnerability. In our
opinion, their income stream alone makes them an appealing investment,
regardless of interest rate considerations.
We continued to emphasize essential services in the portfolio throughout
the period. These sectors tend to outperform bonds backed by tax revenues
in periods of economic weakness because their revenue streams come from
receipts from public services that are in demand no matter what the
economic climate. By the end of the period, this strategy resulted in
public education and tax districts comprising the two largest sector
weights in the portfolio.
We maintained a very low percentage of assets in the health-care sector
because of concerns about financial difficulties in that area. We also
4
shied away from the airport sector because of the negative circumstances
currently surrounding the airline industry.
At the security level, we took advantage of relative-value opportunities
created by the volatile interest-rate environment during the period. For
example, the rapid increase in yields during June and July allowed us to
invest in newer securities carrying higher yields. We funded many of
these purchases through carefully managed selling of lower-coupon
holdings that allowed the portfolio to benefit from targeted tax losses
that offset capital gains elsewhere in the portfolio.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. We believe that the economy has lately shown clear signs of improvement,
though the employment picture remains soft and the likelihood of a
sustained rebound is questionable. In this environment, we believe the
Fed is likely to maintain a neutral stance in the absence of signs of
strong economic growth. We will continue to monitor the markets closely
for compelling investment opportunities.
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
5
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS 102.1%
$ 1,925 Alhambra, CA City Elem Sch Dist Cap Apprec Ser A
(FSA Insd)...................................... * 09/01/20 $ 842,341
2,900 Anaheim, CA Pub Fin Auth Rev Elec Sys Generation
Ser B Rfdg (FSA Insd)........................... 5.000% 10/01/16 3,136,814
2,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)............................... 11.630 12/28/18 2,697,360
4,070 Anaheim, CA Uni High Sch Dist Ser A (FSA
Insd)........................................... 5.000 08/01/25 4,143,952
1,430 Bay Area Govt Assn CA Lease Rev Cap Proj Ser A
(AMBAC Insd).................................... 5.250 07/01/17 1,563,076
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy
Pool Ser A2 (FSA Insd).......................... 6.400 12/15/14 3,246,810
1,730 Brea & Olinda, CA Uni Sch Dist Ser A Rfdg (FSA
Insd)........................................... 5.500 08/01/17 1,926,182
1,850 Brea & Olinda, CA Uni Sch Dist Ser A Rfdg (FSA
Insd)........................................... 5.500 08/01/18 2,047,894
7,000 California Edl Fac Auth Rev Univ Of The Pacific
(MBIA Insd)..................................... 5.875 11/01/20 8,021,440
2,000 California Infrastructure & Econ Dev Bk Rev Bay
Area Toll Brdgs First Lien Ser A (FGIC Insd).... 5.000 07/01/29 2,031,500
3,000 California Infrastructure & Econ Dev Bk Rev Bay
Area Toll Brdgs First Lien Ser A (AMBAC Insd)... 5.000 07/01/33 3,042,570
1,050 California Spl Dist Assn Fin Corp Ctf Partn Pgm
Ser DD (FSA Insd)............................... 5.625 01/01/27 1,138,704
1,250 California St (FGIC Insd)....................... 6.250 09/01/12 1,507,325
2,385 California St (XLCA Insd)....................... 6.250 09/01/12 2,853,796
2,450 California St (FGIC Insd)....................... 5.000 10/01/14 2,636,592
1,000 California St (XLCA Insd)....................... 5.000 10/01/28 1,012,660
1,200 California St Dept Transn Ctf Ser A Rfdg (MBIA
Insd)........................................... 5.250 03/01/16 1,315,668
2,000 California St Dept Vet Affairs Ser A (AMBAC
Insd)........................................... 5.300 12/01/21 2,097,160
2,000 California St Dept Wtr Res Pwr Supply Rev Ser A
(AMBAC Insd).................................... 5.500 05/01/16 2,238,880
1,000 California St Dept Wtr Res Pwr Supply Rev Ser A
(AMBAC Insd).................................... 5.375 05/01/18 1,096,610
2,500 California St Dept Wtr Res Pwr Supply Rev Rite
Ser B (Inverse Fltg) (MBIA Insd) (c)............ 9.409 05/01/21 2,859,550
2,500 California St Pub Wks Brd Lease Dept Corrections
Ten Admin Ser A (AMBAC Insd).................... 5.250 03/01/17 2,714,925
</Table>
6 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 4,125 California St Pub Wks Brd Lease Rev CA St Univ
Ser A Rfdg (AMBAC Insd)......................... 5.500% 10/01/14 $ 4,613,689
2,000 California St Pub Wks Brd Lease Rev Dept
Corrections Ser B Rfdg (AMBAC Insd)............. 5.250 01/01/12 2,251,180
1,000 California St Pub Wks Brd Lease Rev Var Cmnty
College Proj Ser B Rfdg (AMBAC Insd)............ 5.625 03/01/16 1,102,730
7,750 California St Rfdg (FGIC Insd).................. 5.000 02/01/23 7,859,972
1,000 California St Univ Rev & Colleges Systemwide Ser
A (AMBAC Insd).................................. 5.375 11/01/18 1,100,250
1,000 Carson, CA Redev Agy Redev Proj Area No 1 Tax
Alloc (MBIA Insd)............................... 5.500 10/01/15 1,166,310
2,000 Castaic Lake Wtr Agy CA Ctf Partn Wtr Sys Impt
Proj Ser A Rfdg (MBIA Insd)..................... 7.000 08/01/12 2,525,520
3,000 Castaic Lake Wtr Agy CA Rev Ctf Partn Ser A
(MBIA Insd)..................................... 5.250 08/01/23 3,140,970
2,000 Cerritos, CA Pub Fin Auth Rev Tax Alloc Redev
Proj Ser A (AMBAC Insd)......................... 5.000 11/01/19 2,179,540
2,335 Chaffey, CA Uni High Sch Dist Ser B (FGIC
Insd)........................................... 5.500 08/01/16 2,631,708
1,205 Channel Islands Beach, CA Cmnty Svcs Dist Ctf
Partn CA Spl Dist Fin Proj BB (FSA Insd)........ 5.700 09/01/21 1,353,914
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area
Ser A Rfdg (FGIC Insd).......................... 6.250 09/01/13 5,502,274
1,000 Coronado, CA Uni Sch Dist Ser B (FGIC Insd)..... 5.375 08/01/26 1,059,480
1,000 East Bay, CA Muni Util Dist Wtr Sys Rev (MBIA
Insd)........................................... 5.000 06/01/21 1,035,680
1,300 Folsom Cordova, CA Uni Sch Dist Sch Fac Impt
Dist No 2 Ser A (MBIA Insd)..................... 5.375 10/01/17 1,437,917
1,360 Folsom, CA Pub Fin Auth City Hall & Cmnty Ctr
Rfdg (FSA Insd) (a)............................. 5.000 10/01/16 1,471,792
1,480 Fontana, CA Redev Agy Tax Alloc Dwntwn Redev
Proj Rfdg (MBIA Insd)........................... 5.000 09/01/21 1,525,747
650 Fresno, CA Jt Pwrs Fin Auth Ser A (FSA Insd).... 5.000 06/01/17 698,217
590 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA
Insd)........................................... 5.900 08/01/17 710,224
630 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA
Insd)........................................... 5.900 08/01/18 757,342
675 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA
Insd)........................................... 5.900 08/01/19 810,979
720 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA
Insd)........................................... 5.900 08/01/20 861,682
2,000 Glendale, CA Redev Agy Tax Ctr Glendale Redev
Proj (MBIA Insd)................................ 5.250 12/01/20 2,160,100
2,425 Glendora, CA Pub Fin Auth Tax Alloc Proj No 1
Ser A (MBIA Insd) (b)........................... 5.000 09/01/24 2,467,607
20,000 Grossmont, CA Uni High Sch Dist Ctf Part (MBIA
Insd)........................................... * 11/15/21 6,437,200
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,750 Hacienda La Puente, CA Uni Sch Dist Ser A (MBIA
Insd)........................................... 5.500% 08/01/20 $ 1,930,933
1,250 Hemet, CA Uni Sch Dist Ctf Partn Nutrition Ctr
Proj (FSA Insd)................................. 5.875 04/01/27 1,398,513
1,950 Imperial Irr Dist CA Ctf Partn Wtr Sys Proj
(AMBAC Insd).................................... 5.000 07/01/19 2,057,211
2,000 Inglewood, CA Redev Agy Tax Alloc Merged Redev
Proj Ser A Rfdg (AMBAC Insd).................... 5.250 05/01/23 2,196,860
1,715 Irvine, CA Pub Fac & Infrastructure Ser B (AMBAC
Insd)........................................... 5.000 09/02/23 1,759,624
2,250 La Mesa Spring Vly, CA Sch Dist Ser A (FGIC
Insd)........................................... 5.000 08/01/26 2,287,620
2,000 La Quinta, CA Redev Agy Tax Alloc Redev Proj
Area No 1 (AMBAC Insd).......................... 5.000 09/01/22 2,072,340
1,000 Livermore-Amador Vly Wtr Mgmt Agy CA Swr Rev Ser
A (AMBAC Insd).................................. 5.250 08/01/16 1,104,770
1,000 Long Beach, CA Bond Fin Auth Lease Rev Rainbow
Harbor Refin Proj Ser A (AMBAC Insd)............ 5.250 05/01/24 1,040,720
1,200 Long Beach, CA Bond Fin Auth Pub Lease Safety
Fac Proj (AMBAC Insd)........................... 5.250 11/01/15 1,336,008
1,260 Long Beach, CA Bond Fin Auth Pub Lease Safety
Fac Proj (AMBAC Insd)........................... 5.250 11/01/16 1,392,602
1,545 Long Beach, CA Bond Fin Auth Pub Lease Safety
Fac Proj (AMBAC Insd)........................... 5.250 11/01/20 1,660,999
2,740 Los Angeles Cnty, CA Ctf Partn Antelope Vly
Courthouse Ser A (AMBAC Insd)................... 5.750 11/01/16 3,134,944
1,000 Los Angeles Cnty, CA Ctf Partn Disney Pkg Proj
Rfdg (AMBAC Insd)............................... 4.750 03/01/23 1,002,010
1,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev
Prop A First Tier Sr Ser C Rfdg (AMBAC Insd).... 5.000 07/01/23 1,020,890
2,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev
Prop A Second Tier Sr Ser A Rfdg (AMBAC Insd)... 5.000 07/01/25 2,008,340
1,235 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev
Prop C Second Tier Sr Ser A Rfdg (FGIC Insd).... 5.000 07/01/15 1,339,271
1,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev
Prop C Second Tier Sr Ser A Rfdg (FGIC Insd).... 5.000 07/01/16 1,079,510
1,265 Los Angeles Cnty, CA Schs Regionalized Business
Svcs Ctf Partn Cap Apprec Pooled Fin Ser A
(AMBAC Insd).................................... * 08/01/24 421,473
1,320 Los Angeles Cnty, CA Schs Regionalized Business
Svcs Ctf Partn Cap Apprec Pooled Fin Ser A
(AMBAC Insd).................................... * 08/01/25 413,662
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 2,460 Los Angeles Cnty, CA Schs Regionalized Business
Svcs Ctf Partn Cap Apprec Pooled Fin Ser A
(AMBAC Insd).................................... * 08/01/28 $ 650,990
342 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR
Lease Ltd (FSA Insd)............................ 7.375% 12/15/06 346,422
1,975 Los Angeles, CA Ctf Partn Real Ppty Pgm Ser T
(MBIA Insd)..................................... 5.000 02/01/19 2,077,246
2,380 Los Angeles, CA Mtg Rev FHA Security 8 Asstd
Proj Ser A Rfdg (MBIA Insd)..................... 6.100 07/01/25 2,421,150
1,000 Los Angeles, CA Ser A (MBIA Insd)............... 5.000 09/01/16 1,080,520
1,375 Los Angeles, CA Spl Assmt Landscaping & Ltg Dist
No 96 Ser 1 (AMBAC Insd)........................ 5.000 03/01/21 1,428,061
1,000 Los Angeles, CA Uni Sch Dist 1997 Election Ser E
(MBIA Insd)..................................... 5.500 07/01/17 1,118,800
2,860 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B (FSA
Insd)........................................... 5.000 07/01/26 2,911,737
1,000 Lynwood, CA Uni Sch Dist 2002 Election Ser A
(FSA Insd)...................................... 5.000 08/01/27 1,030,740
1,500 Modesto, CA Irr Dist Ctfs Partn Cap Impts Ser A
(FSA Insd)...................................... 5.250 07/01/18 1,622,370
1,105 Monrovia, CA Fin Auth Lease Rev Hillside
Wilderness Preserve (AMBAC Insd)................ 5.000 12/01/20 1,169,455
2,000 Montclair, CA Redev Agy Tax Redev Proj No V Rfdg
(MBIA Insd)..................................... 5.000 10/01/20 2,093,720
1,000 Mount Pleasant, CA Elem Sch Dist 1998 Election
Ser C (FSA Insd)................................ 5.500 03/01/26 1,066,150
1,570 Mountain View, CA Shoreline Tax Alloc Ser A
(MBIA Insd)..................................... 5.250 08/01/16 1,734,253
370 M-S-R Pub Pwr Agy CA San Juan Proj Rev Adj Sub
Lien Ser E (MBIA Insd).......................... 6.000 07/01/22 374,355
2,000 Natomas, CA Uni Sch Dist Rfdg (FGIC Insd)....... 5.250 09/01/16 2,199,080
1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)............................... 5.750 09/01/15 1,405,475
3,915 Oak Grove, CA Sch Dist 1995 Election (FGIC
Insd)........................................... 5.250 08/01/25 4,080,839
1,000 Oakland, CA Uni Sch Dist Alameda Cnty (FSA
Insd)........................................... 5.000 08/01/17 1,045,970
1,300 Oceanside, CA Ctf Partn Ser A Rfdg (AMBAC
Insd)........................................... 5.200 04/01/23 1,354,314
1,930 Ontario, CA Redev Fin Auth Rev Proj No 1 Ctr
City & Cimarron (MBIA Insd)..................... 5.250 08/01/15 2,137,243
3,025 Orange Cnty, CA Pub Fin Auth Lease Rev Juvenile
Justice Ctr Fac Rfdg (AMBAC Insd)............... 5.375 06/01/17 3,366,129
5,000 Orange Cnty, CA Recovery Ctfs Partn Ser A (MBIA
Insd)........................................... 5.800 07/01/16 5,595,150
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,270 Palm Desert, CA Fin Auth Proj Area No 3 (MBIA
Insd)........................................... 5.125% 04/01/33 $ 1,304,455
1,340 Palm Springs, CA Fin Lease Rev Convention Ctr
Proj Ser A Rfdg (MBIA Insd)..................... 5.250 11/01/19 1,451,381
1,000 Perris, CA Sch Dist Ctf Partn Rfdg (FSA Insd)... 6.100 03/01/16 1,039,850
2,020 Pomona, CA Pub Fin Auth Rev Merged Redev Proj
Ser AD (MBIA Insd).............................. 5.000 02/01/15 2,182,287
1,110 Pomona, CA Pub Fin Auth Rev Merged Redev Proj
Ser AD (MBIA Insd).............................. 5.000 02/01/16 1,194,016
1,360 Port Hueneme, CA Ctf Partn Cap Impt Pgm Rfdg
(MBIA Insd)..................................... 6.000 04/01/19 1,635,998
1,055 Poway, CA Redev Agy Tax Alloc Paguay Redev Proj
(AMBAC Insd).................................... 5.375 06/15/20 1,143,536
3,000 Poway, CA Redev Agy Tax Alloc Paguay Redev Proj
Ser A (MBIA Insd) (b)........................... 5.000 06/15/33 3,037,770
3,000 Rancho Cucamonga, CA Redev Agy Rancho Redev Proj
(MBIA Insd)..................................... 5.375 09/01/25 3,173,340
1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac Dist 883
Ser A Rfdg (AMBAC Insd)......................... 6.000 09/01/17 1,850,386
1,000 Redding, CA Elec Sys Rev Ctf Partn (Inverse
Fltg) (MBIA Insd)............................... 11.590 07/01/22 1,447,720
1,600 Redding, CA Jt Pwrs Auth Wtr Ser A Rfdg (AMBAC
Insd)........................................... 5.000 06/01/21 1,669,088
1,400 Redding, CA Redev Agy Tax Alloc Canby Hilltop
Cypress Redev Ser A (MBIA Insd)................. 5.000 09/01/23 1,440,208
2,000 Rialto, CA Spl Tax Cmnty Fac Dist 87-1 Rfdg (FSA
Insd)........................................... 5.625 09/01/18 2,235,620
1,000 Riverside Cnty, CA Ctf Partn Historic Courthouse
Proj (MBIA Insd)................................ 5.875 11/01/27 1,119,030
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert
Redev Proj (MBIA Insd).......................... * 08/01/31 388,101
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert
Redev Proj (MBIA Insd).......................... * 08/01/33 348,227
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert
Redev Proj (MBIA Insd).......................... * 08/01/35 309,933
1,310 Rowland, CA Uni Sch Dist Ser A (FSA Insd)....... 5.500 09/01/20 1,445,939
1,000 Sacramento, CA City Fin Auth Rev Cap Impt (AMBAC
Insd)........................................... 5.000 12/01/33 1,014,670
1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec
Ser A (MBIA Insd)............................... 6.400 09/01/18 1,014,200
2,565 San Diego, CA Uni Sch Dist Election 1998 Ser E
(FSA Insd)...................................... 5.250 07/01/18 2,829,246
3,000 San Francisco, CA City & Cnty George R Moscone
Ctr Rfdg (FSA Insd)............................. 5.000 07/01/17 3,200,520
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,500 San Francisco, CA City & Cnty Redev Fin Auth Tax
Alloc San Francisco Redev Proj Ser A (FSA
Insd)........................................... 5.000% 08/01/15 $ 1,617,870
2,000 San Francisco, CA City & Cnty Second Ser Issue
26B (FGIC Insd)................................. 5.000 05/01/22 2,064,020
1,000 San Joaquin Cnty, CA Rev Ctf Partn Solid Waste
Sys Fac Proj (MBIA Insd)........................ 5.000 04/01/22 1,033,230
2,000 San Jose, CA Arpt Rev Ser A Rfdg (FSA Insd)..... 5.375 03/01/17 2,216,400
2,675 San Jose, CA Fin Auth Lease Rev Convention Ctr
Proj Ser F Rfdg (MBIA Insd)..................... 5.000 09/01/17 2,876,187
1,000 San Leandro, CA Ctf Partn Lib & Fire Stations
Fin (AMBAC Insd)................................ 5.750 11/01/29 1,103,490
1,000 San Leandro, CA Jt Proj Area Fin (MBIA Insd).... 5.100 12/01/26 1,024,290
1,260 San Luis, CA Wtr Dists Rev Ctf Partn Cap Impt
Proj Rfdg (AMBAC Insd).......................... 5.500 11/01/16 1,408,541
1,460 San Marcos, CA Redev Agy Tax Alloc (FSA Insd)... 5.375 08/01/25 1,536,095
2,000 San Mateo, CA Uni High Sch Dist Cap Apprec
Election of 2000 Ser B (FGIC Insd).............. * 09/01/24 667,500
975 Santa Clara Cnty, CA Brd Ed Rfdg (MBIA Insd).... 5.000 04/01/25 991,604
1,715 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd)
(b)............................................. 5.250 07/01/18 1,880,069
1,000 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd)
(b)............................................. 5.250 07/01/19 1,088,680
2,000 Santa Fe Springs, CA Cmnty Dev Comm Tax Alloc
Ser A Rfdg (MBIA Insd).......................... 5.375 09/01/20 2,183,360
2,065 Santa Fe Springs, CA Cmnty Dev Comm Tax Alloc
Ser A Rfdg (MBIA Insd).......................... 5.375 09/01/21 2,235,032
1,000 Shasta, CA Jt Pwrs Fin Auth Cnty Admin Bldg Proj
Ser A (MBIA Insd)............................... 5.250 04/01/22 1,061,840
1,105 Sierra Uni Sch Dist CA Ctf Partn (FSA Insd)
(b)............................................. 5.000 03/01/17 1,152,968
1,000 South Gate, CA Pub Fin Auth South Gate Redev
Proj No 1 (XLCA Insd)........................... 5.750 09/01/22 1,105,580
2,750 Southern CA Pub Pwr Transmission Rev Southn
Transmission Sub Ser A Rfdg (FSA Insd).......... 5.250 07/01/16 3,030,390
1,135 Sweetwater, CA Auth Wtr Rev (FSA Insd).......... 5.250 04/01/15 1,251,508
1,195 Sweetwater, CA Auth Wtr Rev (FSA Insd).......... 5.250 04/01/16 1,317,523
1,500 Tahoe Truckee, CA Uni Sch Dist Sch Fac Impt Dist
No 1 Rfdg (MBIA Insd)........................... 5.500 08/01/18 1,736,145
2,150 Temecula, CA Redev Agy Tax Alloc Rev Temecula
Redev Proj No 1 (MBIA Insd)..................... 5.125 08/01/27 2,193,301
1,000 University of CA Rev Gen Ser A (AMBAC Insd)..... 5.000 05/15/26 1,017,920
1,000 University of CA Rev Multi Purp Proj Ser F (FGIC
Insd)........................................... 5.000 09/01/16 1,073,490
1,000 University of CA Rev Multi Purp Proj Ser M (FGIC
Insd)........................................... 5.125 09/01/17 1,080,270
1,000 University of CA Rev Resh Fac Ser E (AMBAC
Insd)........................................... 5.000 09/01/19 1,049,280
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,540 Vallejo City, CA Uni Sch Dist Ser A Rfdg (MBIA
Insd)........................................... 5.900% 02/01/20 $ 1,830,752
2,000 Ventura Cnty, CA Ctf Partn Pub Fin Auth Ser I
(FSA Insd)...................................... 5.250 08/15/16 2,198,920
2,000 Vista, CA Uni Sch Dist Ser A (FSA Insd)......... 5.000 08/01/23 2,052,320
1,060 Woodland, CA Fin Auth Lease Rev Cap Proj Rfdg
(XLCA Insd)..................................... 5.000 03/01/25 1,074,236
------------
TOTAL LONG-TERM INVESTMENTS 102.1%
(Cost $250,722,925)......................................................... 268,630,634
SHORT-TERM INVESTMENTS 0.8%
(Cost $2,245,000)........................................................... 2,245,000
------------
TOTAL INVESTMENTS 102.9%
(Cost $252,967,925)......................................................... 270,875,634
LIABILITIES IN EXCESS OF OTHER ASSETS (2.9%)................................. (7,653,678)
------------
NET ASSETS 100.0%............................................................ $263,221,956
============
</Table>
* Zero coupon bond
(a) All or a portion of these securities have been physically segregated in
connection with open futures contracts.
(b) Securities purchased on a when-issued or delayed delivery basis.
(c) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers.
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Co.
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
XLCA--XL Capital Assurance Inc.
12 See Notes to Financial Statements
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $252,967,925)....................... $270,875,634
Cash........................................................ 73,567
Receivables:
Interest.................................................. 2,883,764
Fund Shares Sold.......................................... 217,439
Other....................................................... 118,993
------------
Total Assets............................................ 274,169,397
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 9,473,132
Fund Shares Repurchased................................... 514,041
Income Distributions...................................... 229,452
Variation Margin on Futures............................... 213,719
Distributor and Affiliates................................ 168,829
Investment Advisory Fee................................... 100,314
Trustees Deferred Compensation and Retirement Plans......... 170,327
Accrued Expenses............................................ 77,627
------------
Total Liabilities....................................... 10,947,441
------------
NET ASSETS.................................................. $263,221,956
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $246,153,324
Net Unrealized Appreciation................................. 16,847,748
Accumulated Net Realized Gain............................... 271,509
Accumulated Undistributed Net Investment Income............. (50,625)
------------
NET ASSETS.................................................. $263,221,956
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $195,353,928 and 10,371,801 shares of
beneficial interest issued and outstanding)............. $ 18.84
Maximum sales charge (3.25%* of offering price)......... .63
------------
Maximum offering price to public........................ $ 19.47
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $49,812,060 and 2,646,644 shares of
beneficial interest issued and outstanding)............. $ 18.82
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $18,055,968 and 959,243 shares of
beneficial interest issued and outstanding)............. $ 18.82
============
</Table>
* On sales of $25,000 or more, the sales charge will be reduced.
See Notes to Financial Statements 13
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $12,928,039
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,257,632
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $493,426, $522,742 and $173,640,
respectively)............................................. 1,189,808
Shareholder Services........................................ 143,483
Legal....................................................... 34,735
Trustees' Fees and Related Expenses......................... 23,426
Custody..................................................... 22,898
Other....................................................... 187,028
-----------
Total Expenses.......................................... 2,859,010
Less Credits Earned on Cash Balances.................... 4,070
-----------
Net Expenses............................................ 2,854,940
-----------
NET INVESTMENT INCOME....................................... $10,073,099
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 566,717
Futures................................................... (309,466)
-----------
Net Realized Gain........................................... 257,251
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 23,550,782
-----------
End of the Period:
Investments............................................. 17,907,709
Futures................................................. (1,059,961)
-----------
16,847,748
-----------
Net Unrealized Depreciation During the Period............... (6,703,034)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(6,445,783)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,627,316
===========
</Table>
14 See Notes to Financial Statements
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 10,073,099 $ 9,724,962
Net Realized Gain.................................. 257,251 2,313,461
Net Unrealized Appreciation/Depreciation During the
Period........................................... (6,703,034) 9,135,971
------------ ------------
Change in Net Assets from Operations............... 3,627,316 21,174,394
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................... (7,904,427) (7,620,889)
Class B Shares................................... (1,686,177) (1,810,095)
Class C Shares................................... (557,298) (414,336)
------------ ------------
(10,147,902) (9,845,320)
------------ ------------
Distributions from Net Realized Gain:
Class A Shares................................... (1,755,292) (295,777)
Class B Shares................................... (460,678) (88,471)
Class C Shares................................... (133,437) (19,226)
------------ ------------
(2,349,407) (403,474)
------------ ------------
Total Distributions................................ (12,497,309) (10,248,794)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (8,869,993) 10,925,600
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 48,488,523 65,568,344
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 8,957,796 6,741,692
Cost of Shares Repurchased......................... (53,753,503) (48,379,678)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... 3,692,816 23,930,358
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS.............. (5,177,177) 34,855,958
NET ASSETS:
Beginning of the Period............................ 268,399,133 233,543,175
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of ($50,625)
and $107,952, respectively)...................... $263,221,956 $268,399,133
============ ============
</Table>
See Notes to Financial Statements 15
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES ------------------------------------------------
2003 2002 (c) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.45 $18.64 $17.67 $17.28 $18.77
------ ------ ------ ------ ------
Net Investment Income..................... .74 .77 .81 .82 .83
Net Realized and Unrealized Gain/Loss..... (.44) .85 .94 .38 (1.45)
------ ------ ------ ------ ------
Total from Investment Operations............ .30 1.62 1.75 1.20 (.62)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .75 .78 .78 .81 .87
Distributions from Net Realized Gain...... .16 .03 -0- -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .91 .81 .78 .81 .87
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $18.84 $19.45 $18.64 $17.67 $17.28
====== ====== ====== ====== ======
Total Return (a)............................ 1.67% 9.01% 10.09% 7.20% -3.44%
Net Assets at End of the Period (In
millions)................................. $195.4 $200.4 $174.9 $152.5 $162.0
Ratio of Expenses to Average Net Assets
(b)....................................... .87% .87% .89% .98% .92%
Ratio of Net Investment Income to Average
Net Assets................................ 3.93% 4.18% 4.43% 4.79% 4.52%
Portfolio Turnover.......................... 25% 32% 39% 52% 44%
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 3.25% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratio would decrease by .01% for the year ended September 30,
2000.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets from 4.16% to 4.18%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
16 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES ------------------------------------------------
2003 2002 (c) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.44 $18.65 $17.69 $17.26 $18.76
------ ------ ------ ------ ------
Net Investment Income..................... .60 .63 .67 .68 .68
Net Realized and Unrealized Gain/Loss..... (.45) .84 .94 .43 (1.45)
------ ------ ------ ------ ------
Total from Investment Operations............ .15 1.47 1.61 1.11 (.77)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .61 .65 .65 .68 .73
Distributions from Net Realized Gain...... .16 .03 -0- -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .77 .68 .65 .68 .73
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $18.82 $19.44 $18.65 $17.69 $17.26
====== ====== ====== ====== ======
Total Return (a)............................ 0.87% 8.16% 9.27% 6.63% -4.20%
Net Assets at End of the Period (In
millions)................................. $ 49.8 $ 53.0 $ 47.7 $ 38.3 $ 45.3
Ratio of Expenses to Average Net Assets
(b)....................................... 1.62% 1.63% 1.65% 1.74% 1.68%
Ratio of Net Investment Income to Average
Net Assets................................ 3.18% 3.42% 3.67% 4.03% 3.76%
Portfolio Turnover.......................... 25% 32% 39% 52% 44%
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 3%, charged on certain redemptions
made within one year of purchase and declining to 0% after the fourth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on the Fund
distributions or the redemption of Fund shares.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratio would decrease by .01% for the year ended September 30,
2000.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets from 3.40% to 3.42%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
See Notes to Financial Statements 17
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES ------------------------------------------------
2003 2002 (c) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.43 $18.64 $17.68 $17.26 $18.75
------ ------ ------ ------ ------
Net Investment Income..................... .61 .64 .68 .68 .69
Net Realized and Unrealized Gain/Loss..... (.45) .83 .93 .42 (1.45)
------ ------ ------ ------ ------
Total from Investment Operations............ .16 1.47 1.61 1.10 (.76)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .61 .65 .65 .68 .73
Distributions from Net Realized Gain...... .16 .03 -0- -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .77 .68 .65 .68 .73
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $18.82 $19.43 $18.64 $17.68 $17.26
====== ====== ====== ====== ======
Total Return (a)............................ 0.92%(d) 8.16% 9.27% 6.57% -4.15%
Net Assets at End of the Period (In
millions)................................. $ 18.1 $ 15.0 $ 11.0 $ 6.6 $ 7.4
Ratio of Expenses to Average Net Assets
(b)....................................... 1.62% 1.63% 1.65% 1.74% 1.69%
Ratio of Net Investment Income to Average
Net Assets................................ 3.20%(d) 3.41% 3.67% 4.03% 3.75%
Portfolio Turnover.......................... 25% 32% 39% 52% 44%
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1% charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratio would decrease by .01% for the year ended September 30,
2000.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets from 3.39% to 3.41%. Per share,
ratios and supplemental data for periods prior to September 30, 2002 have
not been restated to reflect this change in presentation.
(d) Certain non-recurring payments were made to Class C Shares, resulting in an
increase to the Total Return and Ratio of Net Investment Income to Average
Net Assets of .03%.
18 See Notes to Financial Statements
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen California Insured Tax Free Fund (the "Fund") is organized as a
series of the Van Kampen Tax Free Trust, a Delaware business trust, and is
registered as a diversified, open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's
investment objective is to provide only California investors with a high level
of current income exempt from federal and California income taxes, with
liquidity and safety of principal, primarily through investment in a diversified
portfolio of insured California municipal securities. The Fund commenced
investment operations on December 13, 1985. The distribution of the Fund's Class
B shares and Class C shares commenced on April 30, 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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using procedures established in good faith by the Board of Trustees.
Futures contracts are valued at the settlement price established each day on the
exchange on which they are traded. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payment is made. At September 30, 2003, the Fund had $9,473,132 of when-issued
and delayed delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
19
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax law which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At September 30, 2003, the Fund had an accumulated capital loss
carryforward for tax purposes of $29,472, which will expire on September 30,
2011.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $252,866,156
------------
Gross tax unrealized appreciation........................... $ 18,142,132
Gross tax unrealized depreciation........................... (132,654)
------------
Net tax unrealized appreciation on investments.............. $ 18,009,478
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, and a portion of futures gains, which are
included in ordinary income for tax purposes.
The tax character of distributions paid during the years ended September 30,
2003 and 2002 was as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary income........................................... $ 58,761 $ 48,176
Long-term capital gain.................................... 2,326,272 385,485
---------- --------
$2,385,033 $433,661
========== ========
</Table>
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting for the 2003 fiscal year have been
identified and appropriately reclassified on the Statement of Assets and
Liabilities. A permanent difference relating to the Fund's investment in other
regulated investment companies totaling $10,125 was reclassified to accumulated
net realized gain from accumulated undistributed net investment income.
Additionally, a permanent difference relating to book to tax accretion
differences totaling $93,899 was reclassified from accumulated undistributed net
investment income to accumulated net realized gain.
20
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $6,520
</Table>
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year and
gains or losses recognized for tax purposes on open future transactions on
September 30, 2003.
F. INSURANCE EXPENSE The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
G. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $4,070 as a result of credits earned on cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $100 million.......................................... .500%
Next $150 million........................................... .450%
Next $250 million........................................... .425%
Over $500 million........................................... .400%
</Table>
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $12,800 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.
Under separate Accounting Services and Legal Services Agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $58,100 representing Van
Kampen Investment Inc.'s or its affiliates' (collectively "Van Kampen") cost of
providing accounting and legal services to the Fund, which are reported as part
of "Other" and "Legal" expenses, respectively, in the Statement of Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
September 30, 2003, the Fund
21
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
recognized expenses of approximately $116,500 representing transfer agency fees
paid to VKIS. Transfer agency fees are determined through negotiations with the
Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of $95,780 are included in
"Other" assets on the Statement of Assets and Liabilities at September 30, 2003.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund. Benefits under the
retirement plan are payable upon retirement 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 $2,500.
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $179,566,488, $48,435,951 and
$18,150,885 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 1,661,438 $ 31,350,394
Class B................................................... 428,696 8,090,363
Class C................................................... 480,104 9,047,766
---------- ------------
Total Sales................................................. 2,570,238 $ 48,488,523
========== ============
Dividend Reinvestment:
Class A................................................... 366,301 $ 6,890,766
Class B................................................... 83,899 1,577,306
Class C................................................... 26,042 489,724
---------- ------------
Total Dividend Reinvestment................................. 476,242 $ 8,957,796
========== ============
Repurchases:
Class A................................................... (1,957,587) $(36,611,996)
Class B................................................... (593,532) (11,117,759)
Class C................................................... (320,896) (6,023,748)
---------- ------------
Total Repurchases........................................... (2,872,015) $(53,753,503)
========== ============
</Table>
22
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $177,937,324, $49,886,041 and
$14,637,143 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 2,363,919 $ 43,821,231
Class B................................................... 799,096 14,892,121
Class C................................................... 367,401 6,854,992
---------- ------------
Total Sales................................................. 3,530,416 $ 65,568,344
========== ============
Dividend Reinvestment:
Class A................................................... 280,419 $ 5,198,487
Class B................................................... 68,135 1,261,680
Class C................................................... 15,185 281,525
---------- ------------
Total Dividend Reinvestment................................. 363,739 $ 6,741,692
========== ============
Repurchases:
Class A................................................... (1,722,209) $(31,827,451)
Class B................................................... (696,543) (12,857,656)
Class C................................................... (198,946) (3,694,571)
---------- ------------
Total Repurchases........................................... (2,617,698) $(48,379,678)
========== ============
</Table>
Class B Shares purchased on or after June 1, 1996 and any dividend
reinvestment plan Class B Shares received on such shares, 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 Class B Shares received on such shares, automatically
convert to Class A Shares six years after the end of the calendar month in which
the shares were purchased. For the years ended September 30, 2003 and 2002,
44,998 and 177,057 Class B Shares automatically converted to Class A Shares,
respectively, and are shown in the above tables as sales of Class A Shares and
repurchases of Class B Shares. Class C Shares purchased before January 1, 1997,
and any dividend reinvestment plan Class C Shares received thereon,
automatically convert to Class A Shares ten years after the end of the calendar
month in which such shares are purchased. Class C Shares purchased on or after
January 1, 1997 do not possess a conversion feature. For the years ended
September 30, 2003 and 2002, no Class C shares converted to Class A Shares.
Classes B and C Shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions
23
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
made within four years of the purchase for Class B Shares and one year of the
purchase for Class C Shares as detailed in the following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 3.00% 1.00%
Second...................................................... 2.50% None
Third....................................................... 2.00% None
Fourth...................................................... 1.00% None
Fifth and Thereafter........................................ None None
</Table>
For the year ended September 30, 2003, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $44,400 and CDSC on redeemed shares of approximately $94,600.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $77,150,961 and $66,815,452,
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, to manage the portfolio's effective yield, maturity and duration, or
generate potential gain. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in value
reflected in the unrealized appreciation/depreciation. Upon disposition, a
realized gain or loss is recognized accordingly, except when taking delivery of
a security underlying a futures contract. In this instance, the recognition of
gain or loss is postponed until the disposal of the security underlying the
futures contract.
Summarized below are the different 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 exchange traded futures on U.S. Treasury Bonds and
Notes and typically closes the contract prior to delivery date. Upon entering
into futures contracts, the Fund maintains an amount of cash or liquid
securities with a value equal to a percentage of the contract amount
24
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
with either a futures commission merchant pursuant to rules and regulations
promulgated under the 1940 Act, as amended, or with its custodian in an account
in the broker's name. This amount is known as initial margin. During the period
the futures contract is open, payments are received from or made to the broker
based upon changes in the value of the contract (the variation margin). The risk
of loss associated with a futures contract is in excess of the variation margin
reflected on the Statement of Assets and Liabilities.
Transactions in futures contracts for the year ended September 30, 2003,
were as follows:
<Table>
<Caption>
CONTRACTS
Outstanding at September 30, 2002........................... -0-
Futures Opened.............................................. 1,657
Futures Closed.............................................. (1,405)
------
Outstanding at September 30, 2003........................... 252
======
</Table>
The futures contracts outstanding as of September 30, 2003 and the
descriptions and unrealized appreciation/depreciation are as follows:
<Table>
<Caption>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
SHORT CONTRACTS:
U.S. Treasury Notes 10-Year Futures December 2003 (Current
Notional Value of $114,625 per contract)................ 49 $ (277,364)
U.S. Treasury Notes 5-Year Futures December 2003 (Current
Notional Value of $113,469 per contract)................ 203 (782,597)
--- -----------
252 $(1,059,961)
=== ===========
</Table>
B. INDEXED SECURITY An inverse floating rate security is one where the coupon is
inversely indexed to a short-term floating interest rate multiplied by a
specific 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. These instruments are identified in the portfolio of
investments.
6. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and maintenance of shareholder accounts
with respect to such classes of shares.
25
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
Annual fees under the Plans of up to 0.25% of Class A average daily net
assets and 1.00% each for Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately $14,900 and
$28,000 for Class B and Class C Shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
Included in the fees for the year ended September 30, 2003 are payments
retained by Van Kampen of approximately $503,900 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $56,800.
26
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen California Insured Tax
Free Fund:
We have audited the accompanying statement of assets and liabilities of the
Van Kampen California Insured Tax Free Fund (the "Fund"), including the
portfolio of investments, as of September 30, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. 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. The financial highlights of the Fund
for the year ended September 30, 1999 were audited by other auditors whose
report dated November 11, 1999 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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 the
Van Kampen California Insured Tax Free Fund at September 30, 2003, 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 four years in the period then ended in conformity with accounting
principles generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
27
VAN KAMPEN INVESTMENTS
THE VAN KAMPEN
FAMILY OF FUNDS
Global/International
Emerging Markets
Emerging Markets Income
European Value Equity
Global Equity Allocation
Global Franchise
Global Value Equity
International Advantage
International Magnum
Growth
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Growth
Small Cap Value
Technology
Growth and Income
Comstock
Equity and Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Value Opportunities
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
Tax Free
California Insured Tax Free
High Yield Municipal*
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Strategic Municipal Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Senior Loan Fund
For more complete information, including risk considerations, fees, sales
charges and ongoing expenses, please contact your financial advisor for a
prospectus. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - Visit our Web site at
VANKAMPEN.COM.
To view a prospectus
select Literature,
Download Fund Info. (COMPUTER ICON)
- - Call us at (800) 847-2424
Telecommunications Device
for the Deaf (TDD) users,
call (800) 421-2833. (PHONE ICON)
- - E-mail us by visiting
VANKAMPEN.COM and
selecting Contact Us.
(MAIL ICON)
* Open to new investors for a limited time
28
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following is furnished with respect to
the distributions paid by the Fund during its taxable year ended September 30,
2003. The Fund designated 99.7% of the income distributions as a tax-exempt
income distribution. The Fund designated and paid $2,326,272 as a long-term
capital gain distribution. In January, the Fund provides tax information to
shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
29
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
30
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
31
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
32
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1985 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
33
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
34
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1985 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
35
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
36
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
37
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 41, 341, 541
CAI ANR 11/03 12216K03-AP-11/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
Municipal Income Fund performed during the annual period. The portfolio
management team will provide an overview of the market conditions and
discuss some of the factors that affected investment performance during
the reporting period. In addition, this report includes the fund's
financial statements and a list of fund investments as of September 30,
2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative Minimum
Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN MUNICIPAL INCOME LEHMAN BROTHERS MUNICIPAL BOND
FUND INDEX
--------------------------- ------------------------------
9/93 9523.00 10000.00
12/93 9662.00 10140.70
8999.00 9583.91
9115.00 9689.41
9151.00 9755.81
12/94 9047.00 9616.39
9684.00 10295.80
9768.00 10543.80
9965.00 10847.00
12/95 10459.00 11294.80
10296.00 11158.80
10379.00 11244.10
10630.00 11501.80
12/96 10884.00 11794.80
10882.00 11766.60
11246.00 12171.80
11556.00 12538.80
12/97 11878.00 12878.90
12008.00 13027.10
12171.00 13225.60
12545.00 13631.40
12/98 12492.00 13713.40
12517.00 13835.00
12225.00 13590.60
12013.00 13536.50
12/99 11814.00 13431.40
12038.00 13823.90
12128.00 14032.70
12336.00 14372.30
12/00 12767.00 15000.70
13020.00 15333.50
13049.00 15433.10
13437.00 15866.50
12/01 13247.00 15769.60
13334.00 15918.30
13823.00 16500.70
14560.00 17284.40
12/02 14487.00 17284.30
14641.00 17492.10
15005.00 17943.30
9/03 15041.00 17957.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 8/01/90 since 8/24/92 since 8/13/93
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 6.32% 5.93% 4.93% 4.93% 4.01% 4.01%
10-year 4.68 4.17 4.22 4.22 3.89 3.89
5-year 3.70 2.69 2.92 2.67 2.92 2.92
1-year 3.31 -1.60 2.48 -1.47 2.48 1.50
- ---------------------------------------------------------------------------------------------
30-Day SEC Yield 3.83% 3.29% 3.30%
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 4.75 percent for Class A
shares, a contingent deferred sales charge of 4.00 percent for Class B shares
(in year one and declining to zero after year six), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. The since inception and 10-year returns for Class B
and C shares reflect their conversion into Class A shares six and 10 years after
purchase, respectively. See footnote 3 in the Notes to Financial Statements for
additional information. Figures shown above assume reinvestment of all dividends
and capital gains. SEC yield is a calculation for determining the amount of
portfolio income, excluding non-income items as prescribed by the SEC. Yields
are subject to change. Distribution rate represents the monthly annualized
distributions of the fund at the end of the period and not the earnings of the
fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen Municipal Income Fund is managed by the Adviser's Municipal
Fixed-Income team.(1) Current members of the team include James F.
Willison, Managing Director; Joseph R. Arcieri, Executive Director; and
Timothy Haney, Vice President. The following discussion reflects their
views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was
largely characterized by the persistent weakness of the U.S. economy. One
of the most closely watched economic indicators, employment strength, was
in negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also weighed heavily on the minds
of investors. The Federal Reserve Board (the Fed) attempted to allay
these fears and keep the economy moving in the right direction by cutting
the Fed Funds target rate twice, for a total reduction of 0.75 percent.
At the same time, ongoing budgetary and fiscal difficulties at the state
and local levels contributed to ratings downgrades for many municipal
bonds.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
roughly where they began, the road between those two points was decidedly
bumpy. From October 2002 to mid-June 2003, municipal yields fell by
roughly 80 basis points to levels not seen since the late 1960s. These
plummeting yields led to a surge in issuance as municipalities moved to
lock in low financing rates and, in the case of older bonds, low
refinancing costs. These record levels of supply met with record levels
of demand as investors in search of relative investment stability poured
cash into municipal bond funds. Demand for municipal bonds was also
strong from so-called "cross-over" buyers--investors who traditionally
favor taxable investments but were drawn to municipal bonds for their
relatively attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew. Issuance remained
strong throughout this leg of the period, though it abated somewhat in
the last three months.
(1)Team members may change at any time without notice.
2
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund underperformed its benchmark index.
-- The fund returned 3.31 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0530 translated to a distribution
rate of 4.08 percent based on the fund's maximum offering price (as
of September 30, 2003, Class A shares adjusted for sales charges).
See Performance Summary for additional information and index definition.
Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. In an effort to help protect the fund from the effects of potentially
rising interest rates, we trimmed the portfolio's duration (a measure of
interest-rate sensitivity) at the beginning of the period. While this
defensive positioning proved beneficial during the summer when interest
rates spiked, it kept the fund from benefiting fully from the
<Table>
TOP 5 SECTORS AS OF 9/30/03 RATINGS ALLOCATION AS OF 9/30/03
Transportation 15.0% AAA/Aaa 67.6%
Public Education 13.3 AA/Aa 15.2
General Purpose 13.3 A/A 3.4
Health Care 7.8 BBB/Baa 4.0
Water & Sewer 7.7 BB/Ba 0.8
B/B 0.3
TOP 5 STATES AS OF 9/30/03 CCC/Caa 0.0
New York 13.8% CC/Ca 0.2
New Jersey 10.6 Non-Rated 8.5
California 8.5
Texas 8.4
Illinois 8.2
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Rating allocations based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
strong price appreciation earlier in the period when rates declined last
winter and spring.
As part of our defensive structure, we positioned the fund for a
flattening of the yield curve (where either short-term rates rise,
long-term rates decline, or both), by underweighting the fund's exposure
to securities with five- to ten-year maturities. Unfortunately, the yield
curve remained quite steep throughout the fiscal year, and bonds in that
maturity range performed well.
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. In order to strike an optimum balance between income and principal
preservation, we used a barbell approach to structure the fund's
portfolio during the period. We emphasized both ends of the maturity
spectrum--short and, to a lesser extent, long--while underweighting
intermediate maturities. Longer-term bonds helped us maintain the fund's
yield in light of falling interest rates, while short-term bonds provided
a buffer against price volatility.
On the long end of the maturity spectrum, we emphasized bonds in the 15-
to 20-year range because we believed they presented greater opportunities
than 30-year bonds. We sought premium bonds that were priced to their
call date in an effort to maximize the fund's income while protecting the
fund from excessive vulnerability to adverse shifts in interest rates.
These bonds provided a favorable yield during a challenging year for
income-oriented investors.
Helping augment the fund's price earlier in the period was our overweight
position relative to the benchmark index in zero-coupon bonds, which sell
at a deep discount from face value. These bonds experienced strong price
appreciation during the bond market rally that lasted through mid-June.
While these bonds suffered when interest rates spiked from mid-June
through July, the benefits of the fund's below-benchmark duration offset
the bond's poor performance during that time.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY
ISSUES.
A. With interest rates falling to historic lows during the period, our
analysis indicated an increasing probability that the next significant
movement in interest rates would be upward. As a result, we lowered the
fund's interest-rate risk profile by trimming the portfolio's duration.
We also adjusted the fund's positioning along the maturity spectrum to
deemphasize areas that appeared fully valued in favor of more
attractively priced securities.
Credit quality was key in a year when many municipalities faced budget
shortfalls. In this environment, we were highly selective in choosing
bonds for the portfolio. We focused our purchases on higher-quality
4
securities, and by the end of the period had increased the fund's
holdings of AAA rated bonds by 4 percent to make up just under
three-fourths of the portfolio.
Many of our trades during the period were concentrated in so-called
"specialty states." These are states such as California and New York that
have high tax brackets and a substantial need for public financing.
Specialty states provided ample total return opportunities that we sought
to take advantage of through relative-value trading. Here we were able to
lock in gains by selling a given bond once it hit our valuation targets,
then replacing it with a comparable bond offering greater potential value
for the portfolio.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. The economy has lately shown clear signs of improvement, though the
employment picture remains murky and the likelihood of a sustained
rebound is questionable. In this environment, we believe the Fed is
likely to maintain a neutral stance in the absence of signs of strong
economic growth. We will continue to monitor the market closely for
compelling investment opportunities.
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
5
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 97.0%
ALABAMA 0.7%
$ 1,865 Alabama St Univ Rev Gen Tuition & Fee Ser B
(MBIA Insd)..................................... 5.250% 03/01/33 $ 1,936,150
2,930 Alabama Wtr Pollutn Ctl Auth Revolving Fd Ln Ser
A (AMBAC Insd) (a).............................. 6.750 08/15/17 3,217,872
238 Mobile, AL Indl Dev Brd Solid Waste Disp Rev
Mobile Energy Svcs Co Proj Rfdg (b) (c)......... 6.950 01/01/20 1,666
------------
5,155,688
------------
ARIZONA 3.2%
8,685 Arizona Sch Facs Brd Ctfs Ser B (FGIC Insd)..... 5.250 09/01/17 9,675,611
4,250 Maricopa Cnty, AZ Indl Dev Waste Mgmt Inc
Proj............................................ 4.800 12/01/31 4,347,452
5,000 Phoenix, AZ Civic Impt Corp Amt Sr Lien Ser B
(FGIC Insd)..................................... 5.250 07/01/32 5,096,200
500 Scottsdale, AZ Indl Dev Auth Rev First Mtg
Westminster Vlg Ser A Rfdg...................... 8.250 06/01/15 520,530
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp
Ser A Rfdg (AMBAC Insd)......................... 6.000 09/01/12 2,141,906
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp
Ser A Rfdg (AMBAC Insd)......................... 6.125 09/01/17 2,009,332
------------
23,791,031
------------
ARKANSAS 0.6%
1,400 Jackson Cnty, AR Hlthcare Fac Brd First Mtg Hosp
Rev Newport Hosp & Clinic Inc................... 7.375 11/01/11 1,404,494
3,042 Maumell, AR Dogwood Addition Prd Muni Ppty
Owners Rfdg..................................... 7.500 03/01/06 3,023,619
------------
4,428,113
------------
CALIFORNIA 8.2%
4,870 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec
Sub Pub Impts Proj C (FSA Insd)................. * 09/01/20 2,120,495
305 California Infrastructure & Econ Dev Bk Rev Bay
Area Toll Brdgs 1st Lien A (FSA Insd)........... 5.250 07/01/20 329,251
5,000 California Infrastructure & Econ Dev Bk Rev
Rites-PA-1202R (Inverse Fltg) (FSA Insd) (d).... 9.159 07/01/11 5,795,150
10,000 California St Dept Wtr Res Pwr Ser A (AMBAC
Insd)........................................... 5.500 05/01/16 11,194,400
5,000 California St Dept Wtr Res Pwr Ser A (XLCA
Insd)........................................... 5.375 05/01/17 5,483,050
6,575 California St Dept Wtr Res Pwr Supply Rev Rites-
PA-1201R (Inverse Fltg) (MBIA Insd) (d)......... 9.159 05/01/20 7,606,420
</Table>
6 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CALIFORNIA (CONTINUED)
$ 2,640 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd)........................................... * 09/01/13 $ 1,548,307
5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC
Insd)........................................... * 09/01/14 2,963,803
3,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap
Apprec Rfdg (MBIA Insd)......................... * 01/15/17 1,541,820
21,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap
Apprec Rfdg..................................... * 01/15/24 6,456,660
15,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap
Apprec Rfdg..................................... * 01/15/30 3,176,850
6,695 San Francisco, CA City & Cnty Second Ser Issue
29 B Rfdg (FGIC Insd)........................... 5.125% 05/01/20 7,122,208
5,000 West Contra Costa Calif Uni Election of 2002 Ser
B (FSA Insd) (e)................................ 5.000 08/01/26 5,083,600
------------
60,422,014
------------
COLORADO 6.0%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A
(Escrowed to Maturity).......................... 8.875 08/01/10 3,857,828
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A
(Escrowed to Maturity).......................... 8.875 08/01/12 5,584,659
5,000 Arapahoe Cnty, CO Wtr & Waste Proj Ser A (MBIA
Insd)........................................... 5.125 12/01/32 5,111,600
5,000 Colorado Dept Transn Rev Rev Antic Nts Ser A
(AMBAC Insd).................................... 5.250 12/15/16 5,624,200
5,000 Colorado Springs, CO Utils Rev Sys Sub Lien Ser
A Impt & Rfdg................................... 5.000 11/15/21 5,211,500
6,500 E 470 Pub Hwy Auth Co Rev Cap Apprec Sr Ser B
(MBIA Insd)..................................... * 09/01/20 2,832,570
15,000 E 470 Pub Hwy Auth Co Rev Cap Apprec Sr Ser B
(MBIA Insd)..................................... * 09/01/20 6,586,500
1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A
(Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/14 775,355
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A
(Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/15 786,254
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A
(Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/16 737,179
1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A
(Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/18 607,039
3,690 Jefferson Cnty, CO Residential Mtg Rev (Escrowed
to Maturity).................................... 11.500 09/01/12 5,923,741
------------
43,638,425
------------
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CONNECTICUT 1.7%
$ 2,785 Bridgeport, CT Rol Ser II R 182 (Inverse Fltg)
(FGIC Insd) (d)................................. 9.580% 08/15/15 $ 3,473,870
2,950 Bridgeport, CT Rol Ser II R 182 (Inverse Fltg)
(FGIC Insd) (d)................................. 9.580 08/15/16 3,641,893
2,530 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A, 144A-Private Placement (f)................... 6.400 09/01/11 2,744,240
2,470 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A, 144A-Private Placement (Prerefunded @
09/01/07) (f)................................... 6.400 09/01/11 2,843,093
------------
12,703,096
------------
DISTRICT OF COLUMBIA 1.1%
5,150 District Columbia Tax Incrmnt Gallary Place Proj
(FSA Insd)...................................... 5.250 07/01/27 5,316,602
3,000 Metropolitan Washington DC Arpts Auth Sys Ser A
(FGIC Insd) (e)................................. 5.250 10/01/32 3,050,580
------------
8,367,182
------------
FLORIDA 6.9%
5,000 Broward Cnty, FL Arpt Sys Rev Ser J-I (AMBAC
Insd)........................................... 5.250 10/01/26 5,109,700
9,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser
A Rfdg (MBIA Insd).............................. * 02/01/18 4,219,200
5,000 Escambia Cnty, FL Hlth Fac Auth Rev (AMBAC
Insd)........................................... 5.950 07/01/20 5,384,050
5,405 Florida St Brd of Edl Pub Ed Ser B (e).......... 5.000 06/01/16 5,937,663
5,700 Florida St Brd of Edl Pub Ed Ser B (e).......... 5.000 06/01/17 6,218,301
6,385 Lake Cnty, FL Sch Brd Ctfs Part (AMBAC Insd).... 5.375 07/01/16 7,135,046
500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg....................... 8.625 07/01/20 522,485
595 Orange Cnty, FL Tourist Dev Tax Rev (Escrowed to
Maturity) (AMBAC Insd).......................... 6.000 10/01/16 596,053
12,860 Orlando, FL Utils Commn Wtr Rfdg................ 5.250 10/01/19 13,966,989
675 Tampa Palms, FL Open Space & Tran Cmnty Dev Dist
Rev Cap Impt Area 7 Proj........................ 8.500 05/01/17 697,140
823 Tampa Palms, FL Open Space & Tran Cmnty Dev Dist
Rev Cap Impt Area 7 Proj........................ 7.500 05/01/18 856,908
------------
50,643,535
------------
GEORGIA 1.2%
2,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg Rev
Azalea Manor Proj Ser A (d)..................... 6.500 02/01/28 1,615,360
6,315 Municipal Elec Auth GA Combustion Turbine Proj
Ser A (MBIA Insd)............................... 5.250 11/01/17 6,959,256
------------
8,574,616
------------
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
HAWAII 0.4%
$ 1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)....... 6.350% 07/01/07 $ 1,510,813
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)....... 6.400 07/01/08 1,598,017
------------
3,108,830
------------
ILLINOIS 8.0%
5,000 Chicago, IL Brd Edl Cap Apprec Sch Reform B-1
(FGIC Insd)..................................... * 12/01/22 1,872,400
5,000 Chicago, IL Brd Edl Cap Apprec Sch Reform Ser A
(FGIC Insd)..................................... * 12/01/20 2,145,100
3,000 Chicago, IL Lakefront Millennium Pkg Fac (MBIA
Insd) (g)....................................... 0/5.650 01/01/19 2,829,030
1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr
Chicago (Escrowed to Maturity).................. 7.000 01/01/11 1,232,720
8,050 Chicago, IL O'Hare Intl Arpt Rev Gen Airport 3rd
Lien C 2 Rfdg (XLCA Insd)....................... 5.250 01/01/34 8,103,291
5,100 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Proj Ser B (b) (c)........................ 5.200 04/01/11 1,045,500
900 Chicago, IL O'Hare Intl Arpt Spl United Airl
Proj Ser A (b) (c).............................. 5.350 09/01/16 189,000
3,210 Chicago, IL Proj & Rfdg Ser C (FGIC Insd)....... 5.750 01/01/16 3,673,524
365 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)................................. 7.000 09/01/27 365,679
210 Chicago, IL Tax Increment Alloc Santn Drain &
Ship Canal Ser A................................ 7.375 01/01/05 212,535
1,000 Chicago, IL Tax Increment Alloc Santn Drain &
Ship Canal Ser A................................ 7.750 01/01/14 1,054,770
2,000 Chicago, IL Tax Increment Alloc Sub Cent Loop
Redev Ser A..................................... 6.500 12/01/05 2,157,900
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago
Ctf Part (FGIC Insd)............................ 8.750 01/01/07 1,215,210
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park
(FSA Insd)...................................... * 12/01/11 1,666,700
5,000 Cook Cnty, IL Ser A (FGIC Insd)................. 5.500 11/15/31 5,274,850
1,500 Hodgkins, IL Tax Increment Ser A Rfdg........... 7.625 12/01/13 1,593,225
1,405 Huntley, IL Increment Alloc Rev Huntley Redev
Proj Ser A...................................... 8.500 12/01/15 1,504,881
320 Illinois Dev Fin Auth Rev Cmnty Fac Clinic
Altgeld Proj.................................... 8.000 11/15/06 273,491
5,000 Illinois St First Ser (FSA Insd)................ 5.250 12/01/21 5,342,800
9,250 Metropolitan Pier & Expo Auth IL Dedicated St
Tax Rev Cap Apprec McCormick Rfdg (MBIA Insd)... * 06/15/19 6,187,510
3,555 Metropolitan Pier & Expo Auth IL Dedicated St
Tax Rev Cap Apprec McCormick Ser A Rfdg (MBIA
Insd)........................................... * 12/15/15 2,089,665
2,800 Regional Tran Auth IL Ser A (AMBAC Insd)........ 8.000 06/01/17 3,921,176
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ILLINOIS (CONTINUED)
$ 3,773 Robbins, IL Res Recovery Rev Restructuring Proj
Ser A (b) (h)................................... 8.375% 10/15/16 $ 5,660
1,477 Robbins, IL Res Recovery Rev Restructuring Proj
Ser B (b) (h)................................... 8.375 10/15/16 2,215
275 Round Lake Beach, IL Tax Increment Rev Rfdg..... 7.200 12/01/04 279,900
500 Round Lake Beach, IL Tax Increment Rev Rfdg..... 7.500 12/01/13 511,275
1,275 Saint Charles, IL Indl Dev Rev Tri-City Ctr Proj
(d)............................................. 7.500 11/01/13 1,270,168
4,270 Will Cnty, IL Fst Presv Dist Ser B (FGIC
Insd)........................................... * 12/01/15 2,502,263
------------
58,522,438
------------
INDIANA 1.2%
2,500 Indiana Bond Bank Spl Pgm Hendricks Redev....... 6.200 02/01/23 2,501,975
1,940 Indiana Hlth Fac Fin Auth Rev Hoosier Care Proj
Ser A........................................... 7.125 06/01/34 1,775,333
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D
(Escrowed to Maturity).......................... 6.750 02/01/14 679,613
140 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/11 78,441
140 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/12 72,692
135 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/13 64,932
130 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/14 57,921
130 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/15 53,655
135 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/16 51,613
225 Saint Joseph Cnty, IN Redev Dist Tax Increment
Rev Ser B....................................... * 06/30/17 79,686
3,295 Vigo Cnty, IN Elem Sch Bldg First Mtg Impt &
Rfdg (FSA Insd)................................. 5.250 01/10/22 3,481,794
------------
8,897,655
------------
IOWA 0.5%
640 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp
Proj (FSA Insd)................................. 6.000 07/01/07 728,230
2,400 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp
Proj (FSA Insd)................................. 5.750 07/01/17 2,670,216
------------
3,398,446
------------
KANSAS 1.0%
6,600 Sedgwick Cnty, KS Uni Sch Dist No 259 Wichita
(MBIA Insd)..................................... 5.625 09/01/13 7,562,808
------------
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
LOUISIANA 0.3%
$ 420 Louisiana St Hlth Edl Auth Rev Lambeth House Ser
A Rfdg.......................................... 5.250% 01/01/05 $ 420,315
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf
States Util Co Proj Ser A....................... 7.500 05/01/15 1,433,446
------------
1,853,761
------------
MASSACHUSETTS 4.3%
5,000 Massachusetts St Cons Ln Ser A (Prerefunded @
01/01/13) (AMBAC Insd).......................... 5.250 01/01/18 5,489,200
7,500 Massachusetts St Fed Hwy Ser A.................. 5.750 06/15/14 8,794,200
3,500 Massachusetts St Hlth & Edl Facs Auth Rev (MBIA
Insd)........................................... 5.000 07/01/13 3,657,780
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Ctr
Inc Proj (Prerefunded @ 07/01/05)............... 8.450 07/01/18 1,693,020
5,355 Massachusetts St Indl Fin Agy Rev First Mtg
Reeds Landing Proj.............................. 7.100 10/01/28 5,335,133
5,000 Massachusetts St Rol-R 143-Ser II (Inverse Fltg)
(MBIA Insd) (d)................................. 9.330 11/01/16 6,417,950
------------
31,387,283
------------
MICHIGAN 3.9%
875 Detroit, MI Loc Dev Fin Auth Tax Increment Ser C
(d)............................................. 6.850 05/01/21 868,315
5,000 Detroit, MI Sew Disp Rev Sr Lien Ser A Rfdg
(FGIC Insd)..................................... 5.125 07/01/31 5,097,000
1,400 Hillsdale, MI Hosp Fin Auth Hosp Rev Hillsdale
Cmnty Hlth Cent................................. 5.250 05/15/26 1,209,558
5,000 Michigan St Bldg Auth Rev Facs Prog Ser II...... 5.500 10/15/16 5,644,350
5,000 Michigan St Strategic Fd Detroit Edison Co Proj
C Rfdg (XLCA Insd).............................. 5.450 12/15/32 5,159,200
2,000 Michigan St Strategic Fd Detroit Edison Pollutn
Ctl Ser B Rfdg.................................. 5.650 09/01/29 2,034,740
9,739 Michigan St Strategic Fd Ltd Oblig Rev Great
Lakes Pulp & Fiber Proj (b) (h)................. 8.000 12/01/27 1,509,622
1,970 Michigan St Strategic Fd Solid Genesee Pwr Sta
Proj Rfdg....................................... 7.500 01/01/21 1,901,483
5,000 Western Townships, MI Util Sew Rfdg (MBIA
Insd)........................................... 5.250 01/01/16 5,484,350
------------
28,908,618
------------
MISSISSIPPI 0.1%
985 Ridgeland, MS Urban Renewal Rev The Orchard Ltd
Proj Ser A Rfdg................................. 7.750 12/01/15 1,011,142
------------
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MISSOURI 1.1%
$ 2,835 Kansas City, MO Port Auth Fac Riverfront Park
Proj Ser A...................................... 5.750% 10/01/06 $ 2,886,880
3,935 Macon, MO Ctfs Partn (MBIA Insd)................ 5.250 08/01/17 4,321,614
595 Saint Louis, MO Tax Increment Rev Scullin Redev
Area Ser A...................................... 10.000 08/01/10 730,035
------------
7,938,529
------------
NEBRASKA 0.8%
5,435 Nebraska Pub Pwr Dist Rev Ser A (AMBAC Insd).... 5.000 01/01/18 5,826,863
------------
NEW HAMPSHIRE 0.8%
1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev.... 8.800 06/01/09 1,666,649
890 New Hampshire Higher Edl & Hlth Fac Auth Rev
Daniel Webster College Issue Rfdg............... 6.100 07/01/09 943,222
795 New Hampshire St Business Fin Auth Elec Fac Rev
Plymouth Cogeneration (d)....................... 7.750 06/01/14 794,126
1,000 New Hampshire St Business Fin Auth Rev Alice
Peck Day Hlth Sys Ser A......................... 6.875 10/01/19 1,003,960
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC
Insd)........................................... 6.750 11/01/11 1,176,400
------------
5,584,357
------------
NEW JERSEY 10.3%
2,000 Camden Cnty, NJ Impt Auth Lease Rev Dockside
Refrig (b) (c) (d).............................. 8.400 04/01/24 1,820,000
3,250 Landis, NJ Sew Auth Swr Rev (Inverse Fltg) (FGIC
Insd)........................................... 10.070 09/19/19 4,195,133
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg
(MBIA Insd)..................................... 6.250 08/15/10 7,191,532
500 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen-Trenton Ser A........................ 6.200 12/01/10 500,145
9,725 New Jersey Econ Dev Auth Drivers Ser 365
(Inverse Fltg) (FGIC Insd) (d).................. 9.340 06/15/11 11,427,264
2,000 New Jersey Econ Dev Auth Holt Hauling & Warehsg
Rev Ser G Rfdg (b).............................. 8.400 12/15/15 1,820,000
1,900 New Jersey Econ Dev Auth Rev First Mtg
Winchester Gardens Ser A........................ 8.500 11/01/16 2,003,018
350 New Jersey Econ Dev Auth Rev RWJ Hlthcare Corp
(FSA Insd)...................................... 6.250 07/01/14 370,549
1,000 New Jersey Econ Dev Auth Rev Utd Methodist Homes
(Prerefunded @ 07/01/05)........................ 7.500 07/01/20 1,124,460
1,000 New Jersey Econ Dev Auth Rev Utd Methodist Homes
(Prerefunded @ 07/01/05)........................ 7.500 07/01/25 1,124,460
8,000 New Jersey Econ Dev Auth Sch Facs Constr Ser F
(FGIC Insd)..................................... 5.250 06/15/17 8,889,360
</Table>
12 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW JERSEY (CONTINUED)
$ 3,480 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA
Insd)........................................... 6.500% 01/01/16 $ 4,311,372
5,710 New Jersey St Tran Corp Ctfs Fed Tran Admin
Grants Ser A (AMBAC Insd)....................... 5.750 09/15/10 6,527,387
10,000 New Jersey St Tran Corp Ctfs Fed Tran Admin
Grants Ser B (AMBAC Insd)....................... 6.000 09/15/15 11,693,400
5,500 New Jersey St Tran Tr Fd Auth Rols RR II R 236
(Inverse Fltg) (FSA Insd) (d)................... 9.810 06/15/20 6,745,750
5,000 New Jersey St Tran Tr Fd Auth Tran Sys Ser C
(FSA Insd)...................................... 5.500 06/15/16 5,712,800
------------
75,456,630
------------
NEW YORK 13.4%
10,000 Nassau Cnty, NY Interim Fin Auth Ser A.......... 5.750 11/15/14 11,427,900
5,000 New York City Ser A............................. 7.000 08/01/07 5,690,150
21,860 New York City Ser B (MBIA Insd)................. 5.875 08/01/15 25,438,701
1,420 New York City Ser D............................. 8.000 02/01/05 1,537,065
5,000 New York City Ser D (MBIA Insd)................. 5.200 08/01/14 5,478,800
5,000 New York City Transitional Drivers Ser 307
(Inverse Fltg) (AMBAC Insd) (d)................. 9.120 08/01/19 5,848,550
2,295 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser A........................................... 5.750 02/15/11 2,499,140
2,280 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser A........................................... 5.750 02/15/12 2,548,789
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev
(Inverse Fltg).................................. 11.509 04/01/20 3,259,725
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev
Brooklyn Union Gas Ser B (Inverse Fltg)......... 12.504 07/01/26 3,725,400
2,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev Niagara Mohawk Pwr Corp Ser A Rfdg (FGIC
Insd)........................................... 7.200 07/01/29 2,125,680
10,725 New York St Environmental Facs Revolving Fds-2nd
Resolution (e).................................. 5.000 06/15/20 11,336,861
2,000 New York St Twy Auth Svc Ctl Rol-R 142 Ser II
(Inverse Fltg) (d).............................. 9.280 04/01/16 2,414,860
3,000 New York St Twy Auth Svc Ctl Rol-R 142 Ser II
(Inverse Fltg) (d).............................. 9.280 04/01/18 3,557,520
1,200 Port Auth NY & NJ Cons 95th Ser................. 6.125 07/15/22 1,257,900
10,000 Triborough Brdg & Tunl Auth NY Gen Ser B Rfdg... 5.000 11/15/22 10,328,700
------------
98,475,741
------------
NORTH CAROLINA 1.3%
8,700 North Carolina Muni Pwr Agy Ser A (MBIA Insd)... 5.250 01/01/19 9,459,945
------------
</Table>
See Notes to Financial Statements 13
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
OHIO 0.2%
$ 1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd
Part Proj Rfdg (AMBAC Insd)..................... 6.375% 04/01/29 $ 1,070,660
------------
OKLAHOMA 0.1%
625 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class
B (GNMA Collateralized)......................... 7.997 08/01/18 679,850
------------
OREGON 2.4%
5,000 Oregon Hlth Sciences Univ Insd Ser A (MBIA
Insd)........................................... 5.250 07/01/22 5,325,700
1,000 Port Morrow, OR Pollutn Ctl Portland Gen A
Rfdg............................................ 5.200 05/01/33 1,013,730
10,000 Portland, OR Swr Sys Rev Ser A (FGIC Insd)...... 5.750 08/01/18 11,402,600
------------
17,742,030
------------
PENNSYLVANIA 2.3%
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650 05/15/20 5,221,750
740 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg.......... 8.000 08/01/12 745,720
5,000 Pennsylvania St Tpk Commn Oil Sub Ser B (MBIA
Insd)........................................... 5.000 12/01/31 5,077,400
5,250 Philadelphia, PA Auth Indl Ser B (FSA Insd)..... 5.500 10/01/16 5,890,080
------------
16,934,950
------------
RHODE ISLAND 0.5%
1,490 Rhode Island St Econ Dev Corp Rev............... 7.250 07/01/10 1,499,059
2,000 Rhode Island St Hlth & Edl Bldg Higher Edl
Johnson & Wales Rfdg (XLCA Insd)................ 5.375 04/01/19 2,199,860
------------
3,698,919
------------
SOUTH CAROLINA 0.1%
1,070 Piedmont Muni Pwr Agy SC Elec Rev............... 5.000 01/01/25 954,119
------------
SOUTH DAKOTA 0.1%
1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron
Regl Med Ctr.................................... 7.250 04/01/20 1,034,450
------------
TENNESSEE 1.0%
4,000 Elizabethton, TN Hlth & Edl Fac Brd Rev Rfdg
(MBIA Insd)..................................... 7.750 07/01/29 5,224,920
2,000 Springfield, TN Hlth & Edl Jesse Holman Jones
Hosp Proj (Prerefunded @ 04/01/06).............. 8.500 04/01/24 2,387,780
------------
7,612,700
------------
TEXAS 8.2%
1,955 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal
Rev............................................. 7.600 12/01/17 1,365,450
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint
Luke's Lutheran Hosp (Escrowed to Maturity)..... 7.000 05/01/21 650,385
</Table>
14 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
TEXAS (CONTINUED)
$ 4,000 Brazos River Auth TX Pollutn Ctl Rev Adj Elec Co
Proj Ser C Rfdg................................. 5.750% 05/01/36 $ 4,164,960
90 Coastal Wtr Auth TX Conveyance Sys Rev (Escrowed
to Maturity) (AMBAC Insd)....................... 6.250 12/15/17 90,167
5,000 Dallas-Fort Worth, TX Intl Arpt Rev Impt Jt Ser
A Impt & Rfdg (FGIC Insd)....................... 5.500 11/01/31 5,176,150
7,350 Grapevine Colleyville Indpt Sch Dist TX (PSFG
Insd)........................................... * 08/15/11 5,468,621
10,000 Houston, TX Hotel Occupancy Tax Convtn &
Entertnmnt Ser B (AMBAC Insd)................... 5.750 09/01/14 11,493,500
7,500 Lower CO River Auth TX Rev Ser A Rfdg (Inverse
Fltg) (FSA Insd) (d)............................ 10.389 05/15/14 9,720,675
6,250 Lower CO River Auth TX Rev Ser A Rfdg (Inverse
Fltg) (FSA Insd) (d)............................ 10.389 05/15/15 8,100,563
3,250 Lower CO River Auth TX Rev Ser A Rfdg (Inverse
Fltg) (FSA Insd) (d)............................ 10.389 05/15/16 4,212,293
2,000 Metropolitan Hlth Fac Dev Corp TX Wilson N Jones
Mem Hosp Proj................................... 7.200 01/01/21 1,919,760
500 Texas Genl Svcs Cmnty Partn Interests Office
Bldg & Land Acquisition Proj.................... 7.000 08/01/19 507,345
500 Texas Genl Svcs Cmnty Partn Interests Office
Bldg & Land Acquisition Proj.................... 7.000 08/01/24 507,360
685 Texas Genl Svcs Cmnty Partn Lease Purchase
Ctfs............................................ 7.500 02/15/13 695,794
3,475 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev
Coll Ser C Rfdg (Inverse Fltg) (GNMA
Collateralized)................................. 12.552 07/02/24 3,860,482
1,185 Texas St Higher Edl Coordinating Brd College
Student Ln Rev.................................. 7.849 10/01/25 1,189,444
990 Texas St Vet Hsg Assistance (MBIA Insd)......... 6.800 12/01/23 1,013,968
------------
60,136,917
------------
UTAH 2.0%
1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj
(b)............................................. 7.800 09/01/15 536,000
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj
(b)............................................. 8.000 09/01/20 400,000
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj
(b)............................................. 7.800 09/01/25 400,000
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg... 6.150 02/15/12 12,828,530
70 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1
(FHA Gtd)....................................... 7.100 07/01/14 72,933
95 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2
(FHA Gtd)....................................... 7.200 01/01/27 98,564
------------
14,336,027
------------
VERMONT 0.1%
1,000 Vermont Edl & Hlth Bldgs Fing Agy Rev Bennington
College Proj.................................... 6.625 10/01/29 1,005,880
------------
</Table>
See Notes to Financial Statements 15
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
WASHINGTON 2.2%
$ 5,000 Energy Northwest WA Elec Rev Proj No 3 Ser A
Rfdg (XLCA Insd)................................ 5.500% 07/01/17 $ 5,637,050
8,000 King Cnty WA Sch Dist No 411 (FGIC Insd)........ 5.250 12/01/20 8,651,520
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No
1 Rev (FGIC Insd)............................... 7.125 07/01/16 1,612,375
------------
15,900,945
------------
WEST VIRGINIA 0.8%
1,500 West Virginia St Hosp Fin Auth Hosp Rev Bears &
Bulls WV Univ Med Corp Rfdg (MBIA Insd)......... 6.100 01/01/18 1,518,030
4,000 West Virginia St Hosp Fin Auth Hosp Rev Bears &
Bulls WV Univ Med Corp Rfdg (MBIA Insd)......... 6.100 01/01/18 4,048,080
------------
5,566,110
------------
WISCONSIN 0.0%
105 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem
Hosp Assn (ACA Insd)............................ 7.200 11/01/05 110,157
------------
TOTAL LONG-TERM INVESTMENTS 97.0%
(Cost $679,984,363).......................................................... 711,900,460
SHORT-TERM INVESTMENTS 3.8%
(Cost $27,750,000)........................................................... 27,750,000
------------
TOTAL INVESTMENTS 100.8%
(Cost $707,734,363).......................................................... 739,650,460
LIABILITIES IN EXCESS OF OTHER ASSETS (0.8%).................................. (5,781,423)
------------
NET ASSETS 100.0%............................................................. $733,869,037
============
</Table>
* Zero coupon bond
(a) All or a portion of these securities have been physically segregated in
connection with open future contracts.
(b) Non-income producing security.
(c) This borrower has filed for protection in federal bankruptcy court.
(d) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers.
(e) Security purchased on a when-issued or delayed delivery basis.
16 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
(f) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(g) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(h) Payment-in-kind security.
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Co.
FHA--Federal Housing Administration
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
PSFG--Permanent School Fund Guaranty
XLCA--XL Capital Assurance Inc.
See Notes to Financial Statements 17
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $707,734,363)....................... $739,650,460
Cash........................................................ 92,077
Receivables:
Investments Sold.......................................... 18,793,278
Interest.................................................. 9,293,983
Fund Shares Sold.......................................... 161,739
Other....................................................... 176,999
------------
Total Assets............................................ 768,168,536
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 31,064,501
Fund Shares Repurchased................................... 1,204,320
Income Distributions...................................... 833,948
Distributor and Affiliates................................ 305,711
Investment Advisory Fee................................... 288,668
Variation Margin on Futures............................... 233,844
Trustees' Deferred Compensation and Retirement Plans........ 218,789
Accrued Expenses............................................ 149,718
------------
Total Liabilities....................................... 34,299,499
------------
NET ASSETS.................................................. $733,869,037
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $729,918,079
Net Unrealized Appreciation................................. 30,747,521
Accumulated Undistributed Net Investment Income............. 135,804
Accumulated Net Realized Loss............................... (26,932,367)
------------
NET ASSETS.................................................. $733,869,037
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $658,487,434 and 44,372,967 shares of
beneficial interest issued and outstanding)............. $ 14.84
Maximum sales charge (4.75%* of offering price)......... .74
------------
Maximum offering price to public........................ $ 15.58
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $58,372,639 and 3,938,621 shares of
beneficial interest issued and outstanding)............. $ 14.82
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $17,008,964 and 1,149,097 shares of
beneficial interest issued and outstanding)............. $ 14.80
============
</Table>
* On sales of $100,000 or more, the sales charge will be reduced.
18 See Notes to Financial Statements
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 40,563,678
------------
EXPENSES:
Investment Advisory Fee..................................... 3,628,734
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,670,190, $612,369 and $184,375,
respectively)............................................. 2,466,934
Shareholder Services........................................ 451,236
Legal....................................................... 146,812
Custody..................................................... 64,036
Trustees' Fees and Related Expenses......................... 26,119
Other....................................................... 377,619
------------
Total Expenses.......................................... 7,161,490
Less Credits Earned on Cash Balances.................... 12,346
------------
Net Expenses............................................ 7,149,144
------------
NET INVESTMENT INCOME....................................... $ 33,414,534
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 12,070,841
Futures................................................... (743,478)
------------
Net Realized Gain........................................... 11,327,363
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 52,585,737
------------
End of the Period:
Investments............................................. 31,916,097
Futures................................................. (1,168,576)
------------
30,747,521
------------
Net Unrealized Depreciation During the Period............... (21,838,216)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(10,510,853)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 22,903,681
============
</Table>
See Notes to Financial Statements 19
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 33,414,534 $ 36,560,116
Net Realized Gain.................................. 11,327,363 794,190
Net Unrealized Appreciation/Depreciation During the
Period........................................... (21,838,216) 23,742,553
------------- -------------
Change in Net Assets from Operations............... 22,903,681 61,096,859
------------- -------------
Distributions from Net Investment Income:
Class A Shares................................... (30,423,796) (33,015,759)
Class B Shares................................... (2,325,118) (2,621,270)
Class C Shares................................... (700,757) (735,588)
------------- -------------
Total Distributions................................ (33,449,671) (36,372,617)
------------- -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (10,545,990) 24,724,242
------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 127,051,831 147,636,068
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 22,094,872 22,552,780
Cost of Shares Repurchased......................... (184,959,736) (200,100,482)
------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... (35,813,033) (29,911,634)
------------- -------------
TOTAL DECREASE IN NET ASSETS....................... (46,359,023) (5,187,392)
NET ASSETS:
Beginning of the Period............................ 780,228,060 785,415,452
------------- -------------
End of the Period (Including accumulated
undistributed net investment income of $135,804
and $946,449, respectively)...................... $ 733,869,037 $ 780,228,060
============= =============
</Table>
20 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES --------------------------------------------------
2003 (a) 2002 (c) 2001 2000 1999
--------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.03 $14.56 $14.06 $14.50 $15.99
------ ------ ------ ------ ------
Net Investment Income.................... .67 .71 .74 .79 .82
Net Realized and Unrealized Gain/Loss.... (.19) .46 .49 (.42) (1.46)
------ ------ ------ ------ ------
Total from Investment Operations........... .48 1.17 1.23 .37 (.64)
Less Distributions from Net Investment
Income................................... .67 .70 .73 .81 .85
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD......... $14.84 $15.03 $14.56 $14.06 $14.50
====== ====== ====== ====== ======
Total Return (b)........................... 3.31% 8.35% 8.93% 2.69% -4.25%
Net Assets at End of the Period (In
millions)................................ $658.5 $696.4 $701.5 $688.3 $777.5
Ratio of Expenses to Average Net Assets.... .88% .87% .83% .89% .88%
Ratio of Interest Expense to Average Net
Assets................................... N/A N/A N/A .01% .17%
Ratio of Net Investment Income to Average
Net Assets............................... 4.53% 4.89% 5.16% 5.58% 5.34%
Portfolio Turnover......................... 46% 49% 31% 45% 116%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deductions of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by $.01, decrease net realized and unrealized gains and
losses by $.01 and increase the ratio of net investment income to average
net assets from 4.85% to 4.89%. Per share, ratios and supplemental data for
periods prior to September 30, 2002 have not been restated to reflect this
change in presentation.
N/A=Not Applicable.
See Notes to Financial Statements 21
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES --------------------------------------------------
2003 (a) 2002 (c) 2001 2000 1999
--------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.02 $14.54 $14.05 $14.49 $15.98
------ ------ ------ ------ ------
Net Investment Income.................... .56 .60 .63 .68 .71
Net Realized and Unrealized Gain/Loss.... (.20) .48 .48 (.42) (1.47)
------ ------ ------ ------ ------
Total from Investment Operations........... .36 1.08 1.11 .26 (.76)
Less Distributions from Net Investment
Income................................... .56 .60 .62 .70 .73
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD......... $14.82 $15.02 $14.54 $14.05 $14.49
====== ====== ====== ====== ======
Total Return (b)........................... 2.48% 7.64% 8.06% 1.90% -4.95%
Net Assets at End of the Period (In
millions)................................ $ 58.4 $ 65.0 $ 66.6 $ 69.5 $106.6
Ratio of Expenses to Average Net Assets.... 1.63% 1.62% 1.59% 1.67% 1.63%
Ratio of Interest Expense to Average Net
Assets................................... N/A N/A N/A .01% .17%
Ratio of Net Investment Income to Average
Net Assets............................... 3.78% 4.13% 4.40% 4.86% 4.57%
Portfolio Turnover......................... 46% 49% 31% 45% 116%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4%, charged on certain redemptions
made within one year of purchase and declining to 0% after the sixth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by $.01, decrease net realized and unrealized gains and
losses by $.01 and increase the ratio of net investment income to average
net assets from 4.09% to 4.13%. Per share, ratios and supplemental data for
periods prior to September 30, 2002 have not been restated to reflect this
change in presentation.
N/A=Not Applicable.
22 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES --------------------------------------------------
2003 (a) 2002 (c) 2001 2000 1999
--------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.00 $14.52 $14.04 $14.48 $15.96
------ ------ ------ ------ ------
Net Investment Income.................... .56 .60 .63 .68 .70
Net Realized and Unrealized Gain/Loss.... (.20) .48 .47 (.42) (1.45)
------ ------ ------ ------ ------
Total from Investment Operations........... .36 1.08 1.10 .26 (.75)
Less Distributions from Net Investment
Income................................... .56 .60 .62 .70 .73
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD......... $14.80 $15.00 $14.52 $14.04 $14.48
====== ====== ====== ====== ======
Total Return (b)........................... 2.48% 7.65% 8.00% 1.91% -4.90%
Net Assets at End of the Period (In
millions)................................ $ 17.0 $ 18.8 $ 17.4 $ 13.8 $ 17.5
Ratio of Expenses to Average Net Assets.... 1.63% 1.62% 1.62% 1.66% 1.63%
Ratio of Interest Expense to Average Net
Assets................................... N/A N/A N/A .01% .17%
Ratio of Net Investment Income to Average
Net Assets............................... 3.78% 4.13% 4.37% 4.84% 4.55%
Portfolio Turnover......................... 46% 49% 31% 45% 116%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(c) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by $.01, decrease net realized and unrealized gains and
losses by $.01 and increase the ratio of net investment income to average
net assets from 4.09% to 4.13%. Per share, ratios and supplemental data for
periods prior to September 30, 2002 have not been restated to reflect this
change in presentation.
N/A=Not Applicable.
See Notes to Financial Statements 23
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Municipal Income Fund (the "Fund") is organized as a series of the
Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to
provide a high level of current income exempt from federal income tax,
consistent with preservation of capital. The Fund commenced investment
operations on August 1, 1990. The distribution of the Fund's Class B and Class C
shares commenced on August 24, 1992 and August 13, 1993, respectively.
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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using 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, which approximates market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payment is made. At September 30, 2003, the Fund had $31,064,501 of when-issued
and delayed delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
24
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset these losses against any future realized capital
gains. At September 30, 2003, the Fund had an accumulated capital loss
carryforward for tax purposes of $28,396,676 which will expire between September
30, 2008 and September 30, 2010.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $707,403,296
============
Gross tax unrealized appreciation........................... $ 51,267,617
Gross tax unrealized depreciation........................... (19,020,453)
------------
Net tax unrealized appreciation investments................. $ 32,247,164
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and a portion of futures gains, which are
included in ordinary income for tax purposes.
The tax character of distributions paid during 2003 and 2002 were as
follows:
<Table>
<Caption>
2003 2002
Distribution paid from:
Ordinary Income........................................... $239,149 $83,445
Long-term capital gain.................................... -- --
-------- -------
$239,149 $83,445
======== =======
</Table>
Due to inherent differences in the recognition of income, expenses and
realized gains/ losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting have been identified and appropriately
reclassified on the Statement of Assets and Liabilities. A permanent book and
tax difference related to the Fund's investment in other regulated investment
companies totaling $14,813 was reclassified from accumulated undistributed net
investment income to accumulated net realized loss. Additionally, a permanent
book and tax difference of $790,321 related to book to tax amortization
differences were reclassified from accumulated undistributed net investment
income to accumulated net realized loss.
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $141,325
</Table>
25
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of gains or losses recognized for tax purposes on
open futures transactions on September 30, 2003.
F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $12,346 as a result of credits earned on cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .50%
Over $500 million........................................... .45%
</Table>
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $28,500 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.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $103,800 representing
Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen")
cost of providing accounting and legal services to the Fund, which are reported
as part of "Other" and "Legal" expenses, respectively, in the Statement of
Operations.
Van Kampen Investor Services Inc. (VKIS) an affiliate of the Adviser, serves
as the shareholder servicing agent for the Fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $360,800 representing
transfer agency fees paid to VKIS. Transfer agency fees are determined through
negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund and, to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of approximately $141,000
are included in "Other" assets on the Statements of Assets and Liabilities at
September 30, 2003. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund. Benefits under the retirement plan are payable
26
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
upon retirement 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
$2,500.
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $651,646,248, $60,665,432 and
$17,606,399 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 7,801,000 $ 114,651,871
Class B................................................... 503,655 7,411,147
Class C................................................... 338,633 4,988,813
----------- -------------
Total Sales................................................. 8,643,288 $ 127,051,831
=========== =============
Dividend Reinvestment:
Class A................................................... 1,375,257 $ 20,229,463
Class B................................................... 96,732 1,421,035
Class C................................................... 30,289 444,374
----------- -------------
Total Dividend Reinvestment................................. 1,502,278 $ 22,094,872
=========== =============
Repurchases:
Class A................................................... (11,127,622) $(163,537,726)
Class B................................................... (988,417) (14,485,338)
Class C................................................... (474,542) (6,936,672)
----------- -------------
Total Repurchases........................................... (12,590,581) $(184,959,736)
=========== =============
</Table>
27
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $680,302,640, $66,318,588 and
$19,109,884 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 9,146,949 $ 132,261,572
Class B................................................... 779,839 11,279,454
Class C................................................... 282,384 4,095,042
----------- -------------
Total Sales................................................. 10,209,172 $ 147,636,068
=========== =============
Dividend Reinvestment:
Class A................................................... 1,426,526 $ 20,624,689
Class B................................................... 102,707 1,483,411
Class C................................................... 30,823 444,680
----------- -------------
Total Dividend Reinvestment................................. 1,560,056 $ 22,552,780
=========== =============
Repurchases:
Class A................................................... (12,440,538) $(180,091,131)
Class B................................................... (1,132,658) (16,316,746)
Class C................................................... (254,346) (3,692,605)
----------- -------------
Total Repurchases........................................... (13,827,542) $(200,100,482)
=========== =============
</Table>
Class B Shares purchased on or after June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, 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 Class B Shares received on such shares, automatically
convert to Class A Shares six years after the end of the calendar month in which
the shares were purchased. For the years ended September 30, 2003 and 2002,
155,348 and 402,684 Class B Shares converted to Class A Shares, respectively and
are shown in the above tables as sales of Class A Shares and repurchases of
Class B Shares. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Class C Shares purchased on or after January 1, 1997
do not possess a conversion feature. For the years ended September 30, 2003 and
2002, no Class C Shares converted to Class A Shares.
Class B and C Shares are offered without a front end sales charges, but are
subject to a contingent deferred sale charge (CDSC). The CDSC will be imposed on
most redemptions
28
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
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
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 4.00% 1.00%
Second...................................................... 3.75% None
Third....................................................... 3.50% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth....................................................... 1.00% None
Seventh and Thereafter...................................... None None
</Table>
For the year ended September 30, 2003, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $95,200 and CDSC on redeemed shares of approximately $104,500.
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 $339,813,524 and $380,612,095,
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, to manage the portfolio's effective yield, maturity and duration, or
generate potential gain. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in value
reflected in unrealized appreciation/depreciation. Upon disposition, a realized
gain or loss is recognized accordingly, except when taking delivery of a
security underlying a future contract. In this instance, the recognition of gain
or loss is postponed until the disposal of the security underlying the future
contract.
Summarized below are the different types of derivative financial instruments
used by the Fund.
A. FUTURES CONTRACT 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 Notes. Upon entering into futures
contracts, the Fund maintains an amount of cash or liquid securities with a
value equal to a percentage of the contract amount with
29
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
either a futures commission merchant pursuant to rules and regulations
promulgated under the 1940 Act, as amended, or with its custodian in an account
in the broker's name. This amount is known as initial margin. During the period
the futures contract is open, payments are received from or made to the broker
based upon changes in the value of the contract (the variation margin). The risk
of loss associated with a futures contract is in excess of the variation margin
reflected on the statement of Assets and Liabilities.
Transactions in futures contracts for the year ended September 30, 2003,
were as follows:
<Table>
<Caption>
CONTRACTS
Outstanding at September 30, 2002........................... -0-
Futures Opened.............................................. 2,937
Futures Closed.............................................. (2,661)
------
Outstanding at September 30, 2003........................... 276
======
</Table>
The futures contracts outstanding as of September 30, 2003, and the
descriptions and unrealized appreciation/depreciation are as follows:
<Table>
<Caption>
UNREALIZED
CONTRACTS DEPRECIATION
SHORT CONTRACTS:
U.S. Treasury Notes 10-Year Futures
December 2003 (Current Notional Value of $114,625 per
contract)............................................... 53 $ (292,100)
U.S. Treasury Notes 5-Year Futures
December 2003 (Current Notional Value of $113,469 per
contract)............................................... 223 (876,476)
--- -----------
276 $(1,168,576)
=== ===========
</Table>
B. INDEXED SECURITIES These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
6. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively, the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and the maintenance of shareholder
accounts with respect to such classes of shares.
30
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
Annual fees under the Plans of up to 0.25% of Class A average daily net
assets and 1.00% each for Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately $3,129,600 and
$188,700 for Class B and Class C Shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
Included in these fees for the year ended September 30, 2003, are payments
retained by Van Kampen of approximately $525,000 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $67,400.
31
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Municipal Income Fund
We have audited the accompanying statement of assets and liabilities of the
Van Kampen Municipal Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 2003, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
four years in the period then ended. 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. The financial highlights of the Fund for the year ended
September 30, 1999 were audited by other auditors whose report dated November 9,
1999 expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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 the
Van Kampen Municipal Income Fund at September 30, 2003, 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 four years in the period then ended in conformity with accounting principles
generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
32
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN MUNICIPAL INCOME FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following is furnished with respect to
the distribution paid by the Fund during its taxable year ended September 30,
2003. The Fund designated 99.3% of the income distributions as a tax-exempt
income distribution. In January, the Fund provides tax information to
shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
33
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
34
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
35
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
36
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1990 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
37
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
38
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1990 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
39
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
40
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
41
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 49, 349, 549
MIF ANR 11/03 12228K03-AP-11/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
Intermediate Term Municipal Income Fund performed during the annual
period. The portfolio management team will provide an overview of the
market conditions and discuss some of the factors that affected
investment performance during the reporting period. In addition, this
report includes the fund's financial statements and a list of fund
investments as of September 30, 2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative Minimum
Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN INTERMEDIATE TERM LEHMAN BROTHERS MUNICIPAL BOND
MUNICIPAL INCOME FUND INDEX
---------------------------- ------------------------------
9/93 9676.00 10000.00
12/93 9828.00 10140.70
9433.00 9583.91
9606.00 9689.41
9674.00 9755.81
12/94 9502.00 9616.39
10113.00 10295.80
10370.00 10543.80
10651.00 10847.00
12/95 10957.00 11294.80
10869.00 11158.80
10954.00 11244.10
11183.00 11501.80
12/96 11425.00 11794.80
11435.00 11766.60
11740.00 12171.80
12059.00 12538.80
12/97 12349.00 12878.90
12515.00 13027.10
12695.00 13225.60
13011.00 13631.40
12/98 13086.00 13713.40
13201.00 13835.00
13037.00 13590.60
12998.00 13536.50
12/99 12881.00 13431.40
13039.00 13823.90
13252.00 14032.70
13535.00 14372.30
12/00 13720.00 15000.70
14066.00 15333.50
14156.00 15433.10
14508.00 15866.50
12/01 14416.00 15769.60
14534.00 15918.30
15083.00 16500.70
15738.00 17284.40
12/02 15744.00 17284.30
15900.00 17492.10
16197.00 17943.30
9/03 16262.00 17957.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 5/28/93 since 5/28/93 since 10/19/93
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 5.75% 5.41% 5.31% 5.31% 4.44% 4.44%
10-year 5.33 4.98 4.87 4.87 -- --
5-year 4.56 3.87 3.89 3.89 3.79 3.79
1-year 3.33 0.01 2.96 -0.02 2.69 1.70
- ---------------------------------------------------------------------------------------------
30-Day Subsidized SEC
Yield 3.14% 2.50% 2.52%
30-Day SEC Yield 3.04 2.40 2.42
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 3.25 percent for Class A
shares, a contingent deferred sales charge of 3.00 percent for Class B shares
(in year one and declining to zero after year four), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. The since inception and 10-year returns for Class B
shares reflect its conversion into Class A shares six years after purchase. See
footnote 3 in the Notes to Financial Statements for additional information.
Certain non-recurring payments were made to Class B and C shares, resulting in
an increase to the one-year total return by approximately 0.28 percent and 0.06
percent, respectively. Figures shown above assume reinvestment of all dividends
and capital gains. The fund's adviser has waived or reimbursed fees and expenses
from time to time; absent such waivers/reimbursements the fund's returns would
have been lower. SEC yield is a calculation for determining the amount of
portfolio income, excluding non-income items as prescribed by the SEC. The
subsidized SEC yields reflect some or all of the expenses that the adviser had
voluntarily waived. Yields are subject to change. Distribution rate represents
the monthly annualized distributions of the fund at the end of the period and
not the earnings of the fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen Intermediate Term Municipal Income Fund is managed by the
Adviser's Municipal Fixed-Income team. Current members of the team
include Timothy Haney, Vice President.(1) The following discussion
reflects his views on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was
largely characterized by the persistent weakness of the U.S. economy. One
of the most closely watched economic indicators, employment strength, was
in negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also weighed heavily on the minds
of investors. The Federal Reserve Board (the Fed) attempted to allay
these fears and keep the economy moving in the right direction by cutting
the Fed Funds target rate twice, for a total reduction of 0.75 percent.
At the same time, ongoing budgetary and fiscal difficulties at the state
and local levels contributed to ratings downgrades for many municipal
bonds.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
roughly where they began, the road between those two points was decidedly
bumpy. From October 2002 to mid-June 2003, municipal yields fell by
roughly 80 basis points to levels not seen since the late 1960s. These
plummeting yields led to a surge in issuance as municipalities moved to
lock in low financing rates and, in the case of older bonds, low
refinancing costs. These record levels of supply met with record levels
of demand as investors in search of relative investment stability poured
cash into municipal bond funds. Demand for municipal bonds was also
strong from so-called "cross-over" buyers--investors who traditionally
favor taxable investments but were drawn to municipal bonds for their
relatively attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew. Issuance remained
strong throughout this leg of the period, though it abated somewhat in
the last three months.
(1)Team members may change at any time without notice.
2
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund underperformed its benchmark index.
-- The fund returned 3.33 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0305 translated to a distribution
rate of 3.29 percent based on the fund's maximum offering price on
September 30, 2003 (as of September 30, 2003, Class A shares
adjusted for sales charges).
See Performance Summary for additional information and index definition.
Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. In an effort to help protect the fund from a potential rise in interest
rates, we trimmed the portfolio's duration (a measure of interest-rate
sensitivity) at the beginning of the period. While this defensive
positioning proved beneficial later in the period when rates did indeed
<Table>
TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03
Water & Sewer 15.1% AAA/Aaa 75.7%
General Purpose 15.0 AA/Aa 4.5
Public Education 9.8 A/A 9.4
Public Building 8.7 BBB/Baa 3.6
Airport 8.3 CCC/Caa 0.1
Non-Rated 6.7
TOP 5 STATES AS OF 9/30/03
New York 10.70%
California 8.10
Florida 6.20
Pennsylvania 5.30
New Jersey 5.00
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Rating allocations based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
rise, the fund was not able to fully benefit from the strong price
appreciation earlier in the period when rates declined last winter and
spring.
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. In order to strike an optimum balance between income and principal
preservation, we used a barbell approach to structure the fund's
portfolio during the period. We shifted assets out of the middle part of
the maturity spectrum and into the shorter and, to a lesser extent,
longer segments of the intermediate portion of the yield curve. The
longer-term bonds helped us maintain the fund's yield in light of falling
interest rates, while shorter-term bonds provided a buffer against price
volatility.
Strong fund inflows during the period were used to improve both the
credit quality and income potential of the fund. A significant amount of
this new cash was allocated to AAA-rated bonds with premium coupons and
relatively moderate interest-rate sensitivity. We also increased the
fund's commitment to A-rated issues, which offered strong income as well
as appreciation potential relative to other issues. This combination of
bonds generated a favorable stream of income during a challenging period
for income-oriented investors.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING
KEY ISSUES.
A. The growing budgetary difficulties faced by local and state
municipalities led us to be highly selective in choosing bonds for the
fund's portfolio. As mentioned earlier, we focused on improving the
fund's credit quality by purchasing higher-rated securities. By the end
of the period, we had increased the fund's holdings of AAA-rated bonds by
4.1 percent, to make up just over three-fourths of the portfolio.
With interest rates falling to historic lows during the period, our
analysis indicated an increasing probability that the next significant
movement in interest rates would be upward. As a result, we lowered the
fund's duration. We also adjusted the fund's positioning along the
maturity spectrum to deemphasize areas that appeared fully valued, in
favor of more attractively-priced securities.
Many of our trades during the period were concentrated in so-called
"specialty states". These are states such as California and New York that
have high tax brackets as well as a substantial need for public
financing. Specialty state issues provided ample total return
opportunities, which we sought to take advantage of through
relative-value trading. Here we were able to lock in gains by selling a
given bond once it hit our valuation target, then replacing it with a
comparable bond offering greater potential value for the portfolio.
4
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. The economy has lately shown clear signs of improvement, though the
employment picture remains murky and the likelihood of a sustained
rebound is questionable. In this environment, we believe the Fed is
likely to maintain a neutral stance in the absence of signs of strong
economic growth. We will continue to monitor the market closely for
compelling investment opportunities.
5
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
6
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 98.2%
ALABAMA 1.5%
$1,260 Dothan Houston Cnty, AL Arpt Auth (MBIA Insd)... 5.400% 12/01/15 $ 1,371,233
350 West Jefferson Cnty, AL Amusement & Pub Park
Auth (Prerefunded @ 12/01/06)................... 7.500 12/01/08 382,879
------------
1,754,112
------------
ARIZONA 1.9%
345 Maricopa Cnty, AZ Indl Dev Auth Sr Living Fac
Rev Christian Care Mesa Inc Proj A (a).......... 7.250 04/01/05 351,952
1,000 Maricopa Cnty, AZ Pollutn Ctl Adj AZ Pub Svc Co
Ser C Rfdg...................................... 1.700 05/01/29 1,000,340
755 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 794,713
------------
2,147,005
------------
ARKANSAS 1.9%
1,000 Arkansas St Fed Hwy Grant Antic Ser A........... 5.500 08/01/06 1,113,620
1,000 Beaver, AR Wtr Dist............................. 5.000 11/15/17 1,078,550
------------
2,192,170
------------
CALIFORNIA 7.9%
210 California Edl Fac Auth Rev Pacific Grad Sch
(a)............................................. 6.950 11/01/07 224,465
1,000 California St (AMBAC Insd) (b).................. 6.400 09/01/08 1,197,420
1,000 California St................................... 5.250 02/01/15 1,087,620
1,500 California St Dept Wtr Res Pwr Ser A (AMBAC
Insd)........................................... 5.375 05/01/18 1,644,915
1,275 Madera, CA Uni Sch Dist Election 2002 (FSA
Insd)........................................... 5.250 08/01/23 1,340,688
2,295 Modesto, CA Irr Dist Ctfs Partn Cap Impts Ser A
Rfdg (MBIA Insd)................................ 5.000 07/01/16 2,491,245
1,100 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd)
(c)............................................. 5.250 07/01/20 1,187,461
------------
9,173,814
------------
COLORADO 1.1%
210 Colorado Hlth Fac Auth Rev Sr Living Fac Eaton
Ter Ser A....................................... 6.800 07/01/09 213,559
7 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
E............................................... 8.125 12/01/24 6,644
1,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.400 11/15/04 1,060,800
------------
1,281,003
------------
CONNECTICUT 4.8%
145 Mashantucket Western Pequot Tribe, 144A--Private
Placement (Escrowed to Maturity) (d)............ 6.500 09/01/06 166,179
565 New Britain, CT................................. 5.000 04/15/04 576,859
560 New Britain, CT................................. 5.000 04/15/05 591,158
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CONNECTICUT (CONTINUED)
$ 305 New Haven, CT Indl Fac Rev Adj Govt Ctr Thermal
Energies (a).................................... 7.250% 07/01/09 $ 296,207
1,000 New Haven, CT Ser B Rfdg (FGIC Insd)............ 5.250 11/01/11 1,142,790
1,250 New Haven, CT Ser B Rfdg (FGIC Insd)............ 5.375 11/01/12 1,438,912
1,225 Regional Sch Dist No 16 CT Rfdg (AMBAC Insd).... 5.000 03/15/13 1,375,736
------------
5,587,841
------------
FLORIDA 6.1%
2,000 Broward Cnty, FL Arpt Sys Rev Ser E Rfdg (MBIA
Insd) (b)....................................... 5.375 10/01/13 2,165,600
1,150 Florida Hsg Fin Agy Hsg Maitland Club Apts Ser
B-1 (AMBAC Insd) (a)............................ 6.750 08/01/14 1,202,946
500 Highlands Cnty, FL Hlth Facs Hosp Adventist
Health (a)...................................... 3.350 11/15/32 515,125
190 Lee Cnty, FL Indl Dev Auth Econ Rev Encore
Nursing Ctr Part Rfdg........................... 8.125 12/01/07 194,454
115 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg (a)................... 8.125 07/01/06 118,835
250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg....................... 8.625 07/01/20 261,242
2,000 Orange Cnty, FL Sch Brd Ctf Part Ser A (AMBAC
Insd)........................................... 5.250 08/01/14 2,248,620
300 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj
Rfdg (Escrowed to Maturity)..................... 7.125 11/01/06 332,808
------------
7,039,630
------------
GEORGIA 2.5%
1,000 Athens, GA Hsg Auth Student Hsg Univ of GA East
Campus Hsg (AMBAC Insd)......................... 5.250 12/01/21 1,070,130
1,370 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg Rev
North Hill Apts Proj Rfdg (FNMA Collateralized)
(Variable Rate Coupon).......................... 6.625 01/01/25 1,439,843
360 Forsyth Cnty, GA Hosp Auth Rev Antic Ctfs GA
Baptist Hlthcare Sys Proj (Escrowed to Maturity)
(a)............................................. 6.000 10/01/08 395,860
------------
2,905,833
------------
ILLINOIS 2.0%
200 Bedford Park, IL Tax Increment 71st & Cicero
Proj Rfdg....................................... 7.000 01/01/06 203,984
210 Chicago, IL Tax Increment Alloc Santn Drain &
Ship Canal Ser A (a)............................ 7.375 01/01/05 212,535
250 Chicago, IL Tax Increment Alloc Sub Cent Loop
Redev Ser A..................................... 6.500 12/01/05 269,737
545 Clay Cnty, IL Hosp Rev (a)...................... 5.500 12/01/10 508,191
293 Huntley, IL Spl Svc Area No. 7 Spl Tax (a)...... 6.000 03/01/09 314,966
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
ILLINOIS (CONTINUED)
$ 500 Illinois Health Facs Auth Rev Elmhurst Mem
Healthcare Rfdg (a)............................. 5.000% 01/01/04 $ 504,135
265 Peoria, IL Spl Tax Weaverridge Spl Svc Area
(a)............................................. 7.625 02/01/08 280,730
------------
2,294,278
------------
INDIANA 2.2%
1,000 Allen Cnty, IN Juvenile Justice Ctr First Mtg
(AMBAC Insd).................................... 5.500 01/01/18 1,109,840
1,400 Indiana Bd Bk Spl Prog Hendricks Redev Ser B.... 6.000 02/01/12 1,401,064
------------
2,510,904
------------
KANSAS 2.5%
500 Burlington, KS Envrn Impt Rev................... 4.750 09/01/15 536,675
1,000 Shawnee Cnty, KS Sch Dist 501 Topeka............ 5.000 02/01/20 1,051,770
320 Wyandotte Cnty, KS City KS Univ Brd of Public
Utility Office Bldg Complex Proj (MBIA Insd).... 5.000 05/01/11 358,790
860 Wyandotte Cnty, KS City KS Univ Brd of Public
Utility Office Bldg Complex Proj (MBIA Insd).... 5.000 05/01/12 950,575
------------
2,897,810
------------
KENTUCKY 0.9%
1,000 Louisville & Jefferson Cnty, KY Ser C........... 5.500 07/01/17 1,090,950
------------
LOUISIANA 1.3%
265 Louisiana Hsg Fin Agy Rev Multi-Family Hsg
Plantation Ser A (a)............................ 7.200 01/01/06 264,338
1,065 Louisiana Loc Govt Envir Pkg Facs Garage Proj
Ser A (AMBAC Insd).............................. 5.000 10/01/12 1,175,270
------------
1,439,608
------------
MARYLAND 0.6%
625 Maryland St Economic Dev Corp. Univ MD College
Park Proj....................................... 5.750 06/01/13 673,213
------------
MASSACHUSETTS 0.3%
95 Massachusetts St Indl Fin Agy East Boston
Neighborhood Proj............................... 7.250 07/01/06 94,496
295 Massachusetts St Indl Fin Agy Rev Gtr Lynn
Mental Hlth (a)................................. 6.200 06/01/08 284,681
------------
379,177
------------
MICHIGAN 3.4%
1,000 Brighton, MI Area Sch Dist Rfdg................. 5.250 05/01/18 1,100,780
1,110 Brighton, MI Area Sch Dist Rfdg................. 5.250 05/01/20 1,202,519
335 John Tolfree Hlth Sys Corp MI Mtg Rev Rfdg
(a)............................................. 5.450 09/15/06 341,857
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MICHIGAN (CONTINUED)
$1,000 Michigan Higher Ed Facs Auth Ltd Oblig Kalamazoo
Clg Proj Rfdg................................... 5.250% 12/01/16 $ 1,074,050
250 Michigan St Strategic Fd Ltd Oblig Rev United
Waste Sys Proj (a).............................. 5.200 04/01/10 259,200
------------
3,978,406
------------
MINNESOTA 0.6%
490 Dakota Cnty, MN Hsg & Redev Auth Multi-Family
Hsg Rev Affordable Hsg View Pointe Proj (a)..... 6.000 11/01/09 483,846
150 Minneapolis, MN Multi-Family Rev Hsg Belmont
Apts Proj....................................... 7.000 11/01/06 152,055
------------
635,901
------------
MISSOURI 3.3%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser A (FSA
Insd)........................................... 7.000 09/01/12 1,587,630
1,000 Macon, MO Ctfs Partn (MBIA Insd)................ 5.250 08/01/17 1,098,250
1,000 St. Louis, MO Arpt Rev Arpt Dev Prog Ser A (MBIA
Insd)........................................... 5.500 07/01/09 1,143,070
------------
3,828,950
------------
MONTANA 0.4%
400 Crow Fin Auth, MT Tribal Purp Rev (a)........... 5.400 10/01/07 445,944
------------
NEBRASKA 3.3%
1,545 Nebraska Pub Pwr Dist Rev Ser B (AMBAC Insd).... 5.000 01/01/15 1,691,559
1,975 Omaha, NE Rfdg.................................. 5.000 11/01/16 2,164,699
------------
3,856,258
------------
NEW JERSEY 4.9%
1,015 Bordentown, NJ Swr Auth Rev Ser F (MBIA Insd)... 5.250 12/01/15 1,147,732
500 Camden Cnty, NJ Impt Auth Lease Rev Kaighn Pt
Marine Terminal A (e) (f) (g)................... 7.375 06/01/07 35,000
1,400 Essex Cnty, NJ Impt Auth Lease Gtd Cnty
Correctional Fac Proj (FGIC Insd)............... 5.750 10/01/30 1,545,390
130 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen
Proj Ser A (Escrowed to Maturity)............... 8.000 05/15/04 135,355
800 New Jersey Hlthcare Facs Fin Auth Rev Christ
Hosp Group Issue (Connie Lee Insd).............. 7.000 07/01/06 916,208
670 New Jersey St Edl Facs Auth Fairleigh Dickinson
Univ Ser D (ACA Insd)........................... 5.000 07/01/05 708,183
455 Rahway, NJ Ctfs Partn (MBIA Insd)............... 5.500 02/15/16 510,164
565 Rahway, NJ Ctfs Partn (MBIA Insd)............... 5.600 02/15/17 638,156
------------
5,636,188
------------
</Table>
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK 10.5%
$ 305 Brookhaven, NY Indl Dev Agy Sr Residential Hsg
Rev Woodcrest Estates Fac Ser A (a)............. 5.875% 12/01/09 $ 312,601
1,000 Long Island Pwr Auth NY Elec Gen Ser C.......... 5.500 09/01/17 1,088,030
1,000 Metropolitan Trans Auth NY Svc Contract Ser B
(MBIA Insd)..................................... 5.500 07/01/14 1,157,950
1,000 New York City Hlth & Hosp Hlth Sys Ser A (AMBAC
Insd)........................................... 5.000 02/15/11 1,110,790
500 New York City Ser A............................. 7.000 08/01/07 569,015
2,000 New York City Transitional Future Tax Secd Ser C
Rfdg (AMBAC Insd)............................... 5.250 08/01/18 2,185,220
3,325 New York St Environmental Facs Ser B............ 5.000 06/15/18 3,558,448
1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (Prerefunded @ 02/15/05) (AMBAC Insd)..... 6.200 08/15/05 1,089,600
1,000 Niagara Falls, NY Pub Impt (MBIA Insd).......... 6.900 03/01/20 1,042,850
------------
12,114,504
------------
NORTH CAROLINA 3.5%
1,040 Buncombe Cnty, NC Met Swr Dist Rfdg (MBIA
Insd)........................................... 5.000 07/01/18 1,120,194
630 North Carolina Eastn Mun Pwr Agy Pwr Sys Rev Ser
D............................................... 6.450 01/01/14 699,136
1,000 North Carolina Infrastructure Correctional Facs
Projs........................................... 5.000 10/01/16 1,093,420
1,000 North Carolina Muni Pwr Agy Ser A (MBIA Insd)... 5.250 01/01/19 1,087,350
------------
4,000,100
------------
OHIO 3.5%
500 Athens Cnty, OH Hosp Facs Rev & Impt O' Bleness
Mem Ser A Rfdg (a).............................. 6.250 11/15/13 500,065
210 Cleveland-Cuyahoga Cnty, OH Port Auth Rev Dev-
Port Cleveland Bd Fd B.......................... 6.500 05/15/05 210,603
500 Dayton, OH Spl Facs Rev Afco Cargo Day LLC Proj
(a)............................................. 6.000 04/01/09 464,775
1,670 Toledo, OH Swr Sys Rev.......................... 5.000 11/15/18 1,799,909
1,000 University Cincinnati OH Gen Ser C.............. 5.000 06/01/18 1,075,740
------------
4,051,092
------------
OKLAHOMA 1.9%
1,000 Midwest City, OK Muni Auth (MBIA Insd).......... 5.250 09/01/19 1,086,080
1,000 Oklahoma City, OK Arpt Trust Jr Lien 28th Ser
(MBIA Insd)..................................... 4.000 07/01/04 1,020,720
40 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 5.750 10/01/03 40,002
------------
2,146,802
------------
</Table>
See Notes to Financial Statements 11
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
OREGON 3.4%
$2,575 Emerald Peoples Util Dist OR Ser A Rfdg (FSA
Insd)........................................... 5.250% 11/01/16 $ 2,900,274
1,000 Port Morrow, OR Pollutn Ctl Portland Gen A
Rfdg............................................ 5.200 05/01/33 1,013,730
------------
3,914,004
------------
PENNSYLVANIA 5.2%
900 Philadelphia, PA Gas Wks Rev Third Ser (FSA
Insd)........................................... 5.000 08/01/10 1,011,591
2,000 Philadelphia, PA Redev Auth Rev Neighborhood
Trans A (FGIC Insd)............................. 5.500 04/15/16 2,252,980
2,470 York Cnty, PA Sch Technology (FGIC Insd)........ 5.375 02/15/16 2,773,267
------------
6,037,838
------------
RHODE ISLAND 1.6%
1,835 Rhode Island St Cons Cap Dev Ln Ser A........... 5.000 08/01/12 1,877,297
------------
SOUTH CAROLINA 2.0%
1,020 Berkeley Cnty, SC Impt & Rfdg (FSA Insd)........ 5.000 09/01/17 1,108,475
1,065 Lexington, SC Wtr & Swr Rev & Impt Comb Ser A
Rfdg (MBIA Insd)................................ 5.000 04/01/14 1,158,432
------------
2,266,907
------------
TENNESSEE 3.2%
1,045 Clarksville, TN Wtr Swr & Gas Rfdg (FSA Insd)... 5.000 02/01/13 1,164,736
1,150 Franklin, TN Spl Sch Dist Cap Apprec (FSA
Insd)........................................... * 06/01/15 710,459
1,505 Gatlinburg, TN Pub Bldg Auth Rfdg (AMBAC
Insd)........................................... 5.750 12/01/11 1,768,616
------------
3,643,811
------------
TEXAS 2.9%
1,000 Austin, TX Util Sys Rev Comb Ser A Rfdg (MBIA
Insd)........................................... 5.375 11/15/05 1,023,380
500 Brazos River Auth, TX Pollutn Ctl Rev Elec Proj
Ser C Rfdg (Variable Rate Coupon)............... 5.750 05/01/36 520,620
1,450 Mesquite, TX Indpt Sch Dist Ser A............... 4.250 08/15/11 1,451,073
300 San Antonio, TX Hsg Fin Corp Multi-Family Hsg
Rev Beverly Oaks Arpt Proj Ser A (a)............ 7.500 02/01/10 304,167
------------
3,299,240
------------
UTAH 0.1%
165 Utah St Hsg Fin Agy Single Family Mtg Mezz Ser A
(FHA/VA Gtd).................................... 7.150 07/01/12 168,120
------------
VIRGINIA 2.6%
1,190 James City Svc Auth VA Wtr & Swr................ 5.125 01/15/16 1,320,495
1,125 James City Svc Auth VA Wtr & Swr................ 5.125 01/15/17 1,239,165
500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt
Fac Ser A (a)................................... 7.450 01/01/09 494,465
------------
3,054,125
------------
WASHINGTON 1.5%
1,500 Clark Cnty, WA Sch Dist 114 Evergreen (FSA
Insd)........................................... 5.500 12/01/15 1,698,015
------------
</Table>
12 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
WEST VIRGINIA 1.3%
$1,500 West Virginia St Hosp Fin Auth (MBIA Insd)...... 6.100% 01/01/18 $ 1,518,030
------------
PUERTO RICO 1.6%
1,700 Puerto Rico Comwlth Ser C Rfdg (MBIA Insd)...... 5.000 07/01/28 1,900,600
------------
TOTAL LONG-TERM INVESTMENTS 98.2%
(Cost $109,858,398)....................................................... 113,439,480
SHORT-TERM INVESTMENT 1.4%
(Cost $1,600,000)......................................................... 1,600,000
------------
TOTAL INVESTMENTS 99.6%
(Cost $111,458,398)....................................................... 115,039,480
OTHER ASSETS IN EXCESS OF LIABILITIES 0.4%................................. 436,098
------------
NET ASSETS 100.0%.......................................................... $115,475,578
============
</Table>
* Zero coupon bond
(a) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers.
(b) All or a portion of these securities have been physically segregated in
connection with open futures contracts.
(c) Securities purchased on a when-issued or delayed delivery basis.
(d) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(e) Non-income producing security.
(f) This borrower has filed for protection in federal bankruptcy court.
(g) Security is in default.
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corp.
Connie Lee--Connie Lee Insurance Co.
FGIC--Financial Guaranty Insurance Co.
FHA/VA--Federal Housing Administration/Department of Veterans Affairs
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements 13
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $111,458,398)....................... $115,039,480
Receivables:
Interest.................................................. 1,619,137
Investments Sold.......................................... 1,416,133
Fund Shares Sold.......................................... 266,367
Other....................................................... 106,301
------------
Total Assets............................................ 118,447,418
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,168,794
Custodian Bank............................................ 1,109,939
Fund Shares Repurchased................................... 144,075
Variation Margin on Futures............................... 137,219
Income Distributions...................................... 85,086
Distributor and Affiliates................................ 81,831
Investment Advisory Fee................................... 37,240
Trustees' Deferred Compensation and Retirement Plans........ 142,881
Accrued Expenses............................................ 64,775
------------
Total Liabilities....................................... 2,971,840
------------
NET ASSETS.................................................. $115,475,578
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $111,503,739
Net Unrealized Appreciation................................. 2,900,450
Accumulated Net Realized Gain............................... 1,061,974
Accumulated Undistributed Net Investment Income............. 9,415
------------
NET ASSETS.................................................. $115,475,578
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $70,140,529 and 6,519,378 shares of
beneficial interest issued and outstanding)............. $ 10.76
Maximum sales charge (3.25%* of offering price)......... .36
------------
Maximum offering price to public........................ $ 11.12
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $23,901,926 and 2,216,931 shares of
beneficial interest issued and outstanding)............. $ 10.78
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $21,433,123 and 1,997,043 shares of
beneficial interest issued and outstanding)............. $ 10.73
============
</Table>
* On sales of $25,000 or more, the sales charge will be reduced.
14 See Notes to Financial Statements
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 4,567,462
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $154,236, $221,688 and $185,973,
respectively)............................................. 561,897
Investment Advisory Fee..................................... 512,303
Accounting.................................................. 59,824
Shareholder Services........................................ 57,424
Legal....................................................... 27,472
Trustees' Fees and Related Expenses......................... 18,062
Custody..................................................... 9,216
Other....................................................... 122,603
-----------
Total Expenses.......................................... 1,368,801
Investment Advisory Fee Reduction....................... 199,084
Less Credits Earned on Cash Balances.................... 916
-----------
Net Expenses............................................ 1,168,801
-----------
NET INVESTMENT INCOME....................................... $ 3,398,661
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 695,283
Futures................................................... 382,770
-----------
Net Realized Gain........................................... 1,078,053
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 4,044,161
End of the Period:
Investments............................................. 3,581,082
Futures................................................. (680,632)
-----------
2,900,450
-----------
Net Unrealized Depreciation During the Period............... (1,143,711)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $ (65,658)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,333,003
===========
</Table>
See Notes to Financial Statements 15
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 3,398,661 $ 2,488,001
Net Realized Gain.................................. 1,078,053 536,628
Net Unrealized Appreciation/Depreciation During the
Period........................................... (1,143,711) 2,502,287
------------ ------------
Change in Net Assets from Operations............... 3,333,003 5,526,916
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................... (2,298,933) (1,693,416)
Class B Shares................................... (666,166) (453,963)
Class C Shares................................... (558,258) (301,977)
------------ ------------
(3,523,357) (2,449,356)
------------ ------------
Distributions from Net Realized Gain:
Class A Shares................................... (246,892) -0-
Class B Shares................................... (92,417) -0-
Class C Shares................................... (78,490) -0-
------------ ------------
(417,799) -0-
------------ ------------
Total Distributions................................ (3,941,156) (2,449,356)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (608,153) 3,077,560
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 65,586,619 53,848,977
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 2,827,927 1,662,317
Cost of Shares Repurchased......................... (36,079,223) (23,625,199)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... 32,335,323 31,886,095
------------ ------------
TOTAL INCREASE IN NET ASSETS....................... 31,727,170 34,963,655
NET ASSETS:
Beginning of the Period............................ 83,748,408 48,784,753
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $9,415 and
$142,494, respectively).......................... $115,475,578 $ 83,748,408
============ ============
</Table>
16 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES ------------------------------------------------
2003 2002 (b) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.86 $10.42 $10.14 $10.22 $10.73
------ ------ ------ ------ ------
Net Investment Income..................... .38 .42 .49 .46 .47
Net Realized and Unrealized Gain/Loss..... (.03) .44 .23 (.05) (.48)
------ ------ ------ ------ ------
Total from Investment Operations............ .35 .86 .72 .41 (.01)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .40 .42 .43 .49 .50
Distributions from Net Realized Gain...... .05 -0- .01 -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .45 .42 .44 .49 .50
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $10.76 $10.86 $10.42 $10.14 $10.22
====== ====== ====== ====== ======
Total Return* (a)........................... 3.33% 8.48% 7.19% 4.13% -0.10%
Net Assets at End of the Period (In
millions)................................. $ 70.1 $ 53.5 $ 29.1 $ 26.6 $ 29.5
Ratio of Expenses to Average Net Assets*.... .84% .85% .77% 1.44% 1.28%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.55% 4.08% 4.78% 4.65% 4.49%
Portfolio Turnover.......................... 35% 75% 106% 85% 65%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.04% 1.14% 1.23% N/A N/A
Ratio of Net Investment Income to Average
Net Assets............................. 3.35% 3.79% 4.32% N/A N/A
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 3.25% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(b) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets by .01%. Per share, ratios and
supplemental data for periods prior to September 30, 2002 have not been
restated to reflect this change in presentation.
N/A=Not Applicable
See Notes to Financial Statements 17
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES ------------------------------------------------
2003 2002 (b) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.84 $10.41 $10.13 $10.20 $10.71
------ ------ ------ ------ ------
Net Investment Income..................... .32 .35 .42 .38 .39
Net Realized and Unrealized Gain/Loss..... (.01) .42 .22 (.04) (.47)
------ ------ ------ ------ ------
Total from Investment Operations............ .31 .77 .64 .34 (.08)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .32 .34 .35 .41 .43
Distributions from Net Realized Gain...... .05 -0- .01 -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .37 .34 .36 .41 .43
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $10.78 $10.84 $10.41 $10.13 $10.20
====== ====== ====== ====== ======
Total Return* (a)........................... 2.96%(c) 7.61% 6.42% 3.46% -0.81%
Net Assets at End of the Period (In
millions)................................. $ 23.9 $ 17.1 $ 11.1 $ 8.6 $ 10.4
Ratio of Expenses to Average Net Assets*.... 1.59% 1.60% 1.52% 2.20% 1.97%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.08%(c) 3.34% 4.02% 3.90% 3.80%
Portfolio Turnover.......................... 35% 75% 106% 85% 65%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.79% 1.89% 1.98% N/A N/A
Ratio of Net Investment Income to Average
Net Assets............................. 2.88%(c) 3.05% 3.56% N/A N/A
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 3%, charged on certain redemptions
made within one year of purchase and declining to 0% after the fourth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions of the redemption of Fund shares.
(b) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets by .01%. Per share, ratios and
supplemental data for periods prior to September 30, 2002 have not been
restated to reflect this change in presentation.
(c) Certain non-recurring payments were made to Class B Shares, resulting in an
increase to the Ratio of Net Investment Income to Average Net Assets and
Total Return of .28%.
N/A=Not Applicable
18 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES ------------------------------------------------
2003 2002 (b) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.82 $10.40 $10.12 $10.20 $10.71
------ ------ ------ ------ ------
Net Investment Income..................... .30 .34 .42 .39 .40
Net Realized and Unrealized Gain/Loss..... (.02) .42 .22 (.06) (.48)
------ ------ ------ ------ ------
Total from Investment Operations............ .28 .76 .64 .33 (.08)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .32 .34 .35 .41 .43
Distributions from Net Realized Gain...... .05 -0- .01 -0- -0-
------ ------ ------ ------ ------
Total Distributions......................... .37 .34 .36 .41 .43
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $10.73 $10.82 $10.40 $10.12 $10.20
====== ====== ====== ====== ======
Total Return* (a)........................... 2.69%(c) 7.52% 6.42% 3.36% -0.81%
Net Assets at End of the Period (In
millions)................................. $ 21.4 $ 13.2 $ 8.6 $ 6.4 $ 5.6
Ratio of Expenses to Average Net Assets*.... 1.59% 1.60% 1.52% 2.20% 2.02%
Ratio of Net Investment Income to Average
Net Assets*............................... 2.84%(c) 3.33% 4.02% 3.90% 3.75%
Portfolio Turnover.......................... 35% 75% 106% 85% 65%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.79% 1.89% 1.98% N/A N/A
Ratio of Net Investment Income to Average
Net Assets............................. 2.64%(c) 3.04% 3.56% N/A N/A
</Table>
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of up to 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(b) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended September 30, 2002 was to increase net investment
income per share by less than $.01, decrease net realized and unrealized
gains and losses per share by less than $.01 and increase the ratio of net
investment income to average net assets by .01%. Per share, ratios and
supplemental data for periods prior to September 30, 2002 have not been
restated to reflect this change in presentation.
(c) Certain non-recurring payments were made to Class C Shares, resulting in an
increase to the Ratio of Net Investment Income to Average Net Assets and
Total Return of .06%.
N/A=Not Applicable
See Notes to Financial Statements 19
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Intermediate Term Municipal Income Fund (the "Fund") is organized as
a series of the Van Kampen Tax Free Trust (the "Trust"), a Delaware business
trust, and is registered as a diversified, open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), as amended.
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund commenced investment operations on May 28, 1993 with two
classes of common shares, Class A and Class B shares. The distribution of the
Fund's Class C shares commenced on October 19, 1993.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services are valued at fair value
using 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, which approximates market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payment is made. At September 30, 2003, the Fund had $1,168,794 of when-issued
and delayed delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute
20
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
substantially all of its taxable income, if any, to its shareholders. Therefore,
no provision for federal income taxes is required.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $111,446,591
------------
Gross tax unrealized appreciation........................... $ 4,199,580
Gross tax unrealized depreciation........................... (606,691)
------------
Net tax unrealized appreciation on investments.............. $ 3,592,889
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short term capital gains and a portion of futures gains, which are
included in ordinary income for tax purposes.
The tax character of distributions paid during the years ended September 30,
2003 and 2002 was as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary Income........................................... $318,534 $2,452
Long Term Capital Gain.................................... 113,705 -0-
</Table>
Due to inherent differences in the recognition of income, expenses, and
realized gains/ losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting for the 2003 fiscal year have been
identified and appropriately reclassified on the Statement of Assets and
Liabilities. For the tax year ended September 30, 2003, a permanent book and tax
difference relating to the Fund's investment in other regulated investment
companies totaling $9,380 was reclassified from accumulated undistributed net
investment income to accumulated net realized gain. Also, a permanent difference
of $17,763 relating to book to tax amortization differences were reclassified
from accumulated undistributed net investment income to accumulated net realized
gain.
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $213,183
Undistributed long-term capital gain........................ $167,866
</Table>
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of losses recognized for tax purposes for open
futures contracts at September 30, 2003.
21
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $916 as a result of credits earned on cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .50%
Over $500 million........................................... .45%
</Table>
For the year ended September 30, 2003, the Adviser waived $199,084 of its
investment advisory fee. This waiver is voluntary in nature and can be
discontinued at the Adviser's discretion.
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $3,700 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.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $43,500 representing Van
Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of
providing accounting and legal services to the Fund, which are reported as part
of "Accounting" and "Legal" expenses, respectively, in the Statement of
Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
September 30, 2003, the Fund recognized expenses of approximately $44,800,
representing transfer agency fees paid to VKIS. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund, and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of approximately $91,000 are
included in "Other" assets on the Statement of Assets and Liabilities at
September 30, 2003. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund. Benefits under the retirement plan are payable upon retirement 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 $2,500.
22
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $68,210,867, $22,672,428 and
$20,620,444 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 3,510,100 $ 37,536,509
Class B................................................... 1,307,031 14,035,027
Class C................................................... 1,310,574 14,015,083
---------- ------------
Total Sales................................................. 6,127,705 $ 65,586,619
========== ============
Dividend Reinvestment:
Class A................................................... 184,280 $ 1,971,012
Class B................................................... 41,458 444,020
Class C................................................... 38,700 412,895
---------- ------------
Total Dividend Reinvestment................................. 264,438 $ 2,827,927
========== ============
Repurchases:
Class A................................................... (2,098,791) $(22,416,093)
Class B................................................... (707,557) (7,574,011)
Class C................................................... (572,938) (6,089,119)
---------- ------------
Total Repurchases........................................... (3,379,286) $(36,079,223)
========== ============
</Table>
23
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $51,119,439, $15,767,392 and
$12,281,585 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 3,495,876 $ 36,550,416
Class B................................................... 861,798 9,041,768
Class C................................................... 787,431 8,256,793
---------- ------------
Total Sales................................................. 5,145,105 $ 53,848,977
========== ============
Dividend Reinvestment:
Class A................................................... 118,435 $ 1,241,803
Class B................................................... 23,048 241,192
Class C................................................... 17,157 179,322
---------- ------------
Total Dividend Reinvestment................................. 158,640 $ 1,662,317
========== ============
Repurchases:
Class A................................................... (1,482,136) $(15,423,840)
Class B................................................... (379,038) (3,970,421)
Class C................................................... (406,444) (4,230,938)
---------- ------------
Total Repurchases........................................... (2,267,618) $(23,625,199)
========== ============
</Table>
Class B Shares purchased on or after June 1, 1996, and any dividend
reinvestment plan Class B 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 Class B Shares received thereon, automatically
convert to Class A Shares six years after the end of the calendar month in which
the shares were purchased. For the years ended September 30, 2003 and 2002,
49,940 and 27,888 Class B Shares converted to Class A Shares and are shown in
the above tables as sales of Class A Shares and repurchases of Class B Shares.
Class C Shares purchased before January 1, 1997, and any dividend reinvestment
plan Class C Shares received thereon, automatically convert to Class A Shares
ten years after the end of the calendar month in which such shares were
purchased. Class C Shares purchased on or after January 1, 1997 do not possess a
conversion feature. For the years ended September 30, 2003 and 2002, no Class C
Shares converted to Class A Shares.
Class B and C Shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C Shares will be
24
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
imposed on most redemptions made within four years of the purchase for Class B
Shares and one year of the purchase for Class C Shares as detailed in the
following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 3.00% 1.00%
Second...................................................... 2.50% None
Third....................................................... 2.00% None
Fourth...................................................... 1.00% None
Fifth and Thereafter........................................ None None
</Table>
For the year ended September 30, 2003, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $25,300 and CDSC on redeemed shares of approximately $82,300.
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 $70,773,818 and $34,038,138 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 or generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
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 futures contract.
A. FUTURES CONTRACTS During the period, the Fund invested in futures contracts,
a type of derivative. 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 exchange traded futures contracts on U.S. Treasury
Bonds and typically closes the contract prior to delivery date. These contracts
are generally used to manage the Fund's effective maturity and duration. Upon
entering into futures contracts, the Fund maintains, an amount of cash or liquid
securities with a value equal to a percentage of the contract amount with either
a
25
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
future commission merchant pursuant to rules and regulations promulgated in the
1940 Act, as amended, or with its custodian in an account in the broker's name.
This amount is known as initial margin. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The risk of loss associated
with a futures contract is in excess of the variation margin reflected on the
Statement of Assets and Liabilities.
Transactions in futures contracts for the year ended September 30, 2003,
were as follows:
<Table>
<Caption>
CONTRACTS
Outstanding at September 30, 2002........................... -0-
Futures Opened.............................................. 575
Futures Closed.............................................. (413)
----
Outstanding at September 30, 2003........................... 162
====
</Table>
The futures contracts outstanding as of September 30, 2003, and the
description and unrealized appreciation/depreciation were as follows:
<Table>
<Caption>
UNREALIZED
CONTRACTS DEPRECIATION
SHORT CONTRACTS:
U.S. Treasury Notes 5 year futures, December 2003........... 131 $(505,157)
(Current Notional Value of $113,469 per contract)
U.S. Treasury Notes 10 year futures, December 2003.......... 31 (175,475)
(Current Notional Value of $114,625 per contract).........
--- ---------
162 $(680,632)
=== =========
</Table>
6. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares, and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively, the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and the maintenance of shareholder
accounts with respect to such classes of shares.
Annual fees under the Plans of up to .25% of Class A average daily net
assets and 1.00% each of Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately $104,500, and
$39,200, for Class B and Class C shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
26
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
Included in these fees for the year ended September 30, 2003, are payments
retained by Van Kampen of approximately $284,700 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $15,500.
27
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Intermediate Term
Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of the
Van Kampen Intermediate Term Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of September 30, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. 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. The financial highlights of the Fund
for the year ended September 30, 1999 were audited by other auditors whose
report dated November 9, 1999 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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 the
Van Kampen Intermediate Term Municipal Income Fund at September 30, 2003, 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 four years in the period then ended in conformity with
accounting principles generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
28
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
September 30, 2003. The Fund designated 99.6% of the income distributions as a
tax-exempt income distribution. The Fund designated and paid $113,705 as a
long-term capital gain distribution. In January, the Fund provides tax
information to shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
29
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
30
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
31
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
32
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1993 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
33
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
34
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1993 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
35
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
36
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
37
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 138, 338, 538
INF ANR 11/03 12226K03-AP-11/03
Item 1. Report to Shareholders
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen New
York Tax Free Income Fund performed during the annual period. The
portfolio management team will provide an overview of the market
conditions and discuss some of the factors that affected investment
performance during the reporting period. In addition, this report
includes the fund's financial statements and a list of fund investments
as of September 30, 2003.
This material must be preceded or accompanied by a prospectus for the
fund being offered.
Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the fund will achieve its investment
objective. The fund is subject to market risk, which is the possibility
that the market values of securities owned by the fund will decline and,
therefore, the value of the fund shares may be less than what you paid
for them. Accordingly, you can lose money investing in this fund. Please
see the prospectus for more complete information on investment risks.
Income may subject certain individuals to the federal Alternative Minimum
Tax (AMT).
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Performance Summary
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index from 7/30/94 through 9/30/03. Class A shares, adjusted for
sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN NEW YORK TAX FREE LEHMAN BROTHERS MUNICIPAL BOND
INCOME FUND INDEX
---------------------------- ------------------------------
7/94 9527.00 10000.00
9422.00 9887.29
12/94 9248.00 9746.00
9958.00 10434.60
10046.00 10685.90
10320.00 10993.20
12/95 10850.00 11447.00
10624.00 11309.20
10735.00 11395.60
11077.00 11656.80
12/96 11408.00 11953.80
11430.00 11925.20
11833.00 12335.80
12247.00 12707.80
12/97 12654.00 13052.40
12852.00 13202.70
13090.00 13403.80
13554.00 13815.10
12/98 13602.00 13898.20
13713.00 14021.50
13443.00 13773.80
13201.00 13718.90
12/99 12937.00 13612.40
13292.00 14010.20
13470.00 14221.80
13849.00 14566.00
12/00 14534.00 15202.80
14842.00 15540.20
14980.00 15641.10
15368.00 16080.40
12/01 15184.00 15982.10
15385.00 16132.80
15966.00 16723.10
16849.00 17517.30
12/02 16790.00 17517.20
16963.00 17727.80
17428.00 18185.10
9/03 17470.00 18199.30
</Table>
Index data source: Bloomberg
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 7/29/94 since 7/29/94 since 7/29/94
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES
TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
Since Inception 6.83% 6.27% 6.24% 6.24% 6.06% 6.06%
5-year 5.21 4.19 4.43 4.17 4.45 4.45
1-year 3.69 -1.22 2.93 -1.05 2.92 1.93
- ---------------------------------------------------------------------------------------------
30-Day Subsidized SEC
Yield 3.71% 3.16% 3.16%
30-Day SEC Yield 3.38 2.81 2.81
</Table>
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and fund shares, when redeemed, may be worth
more or less than their original cost. The returns shown in this report do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
As a result of recent market activity, current performance may vary from the
figures shown. For more up-to-date information, please visit vankampen.com or
speak with your financial advisor. Average annual total return with sales
charges includes payment of the maximum sales charge of 4.75 percent for Class A
shares, a contingent deferred sales charge of 4.00 percent for Class B shares
(in year one and declining to zero after year six), a contingent deferred sales
charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1
fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent
for Class B and C shares. Certain non-recurring payments were made to Class C
shares, resulting in an increase to the one-year total return of 0.03 percent.
The since inception return for Class B shares reflect its conversion into Class
A shares seven years after purchase. See footnote 3 in the Notes to Financial
Statements for additional information. Figures shown above assume reinvestment
of all dividends and capital gains. The fund's adviser has waived or reimbursed
fees and expenses from time to time; absent such waivers/reimbursements the
fund's returns would have been lower. SEC yield is a calculation for determining
the amount of portfolio income, excluding non-income items as prescribed by the
SEC. The subsidized SEC yields reflect some or all of the expenses that the
adviser had voluntarily waived. Yields are subject to change. Distribution rate
represents the monthly annualized distributions of the fund at the end of the
period and not the earnings of the fund.
The Lehman Brothers Municipal Bond Index is generally representative of
investment-grade, tax-exempt bonds. Index is unmanaged and does not include any
sales charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003
Van Kampen New York Tax Free Income Fund is managed by the Adviser's
Municipal team.(1) Members of the team include Dennis S. Pietrzak,
Executive Director; John R. Reynoldson, Executive Director; and Timothy
D. Haney, Vice President. The following discussion reflects their views
on the fund's performance.
Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE
OVERALL MARKET ENVIRONMENT.
A. The economic backdrop for the 12 months ended September 30 was
largely characterized by the persistent weakness of the U.S. economy. One
of the most closely watched economic indicators, employment strength, was
in negative territory for much of the period. Repeated comments from
government and Wall Street officials suggesting that the U.S. economy
might be entering a deflationary period also weighed heavily on the minds
of investors. The Federal Reserve Board (the Fed) attempted to allay
these fears and keep the economy moving in the right direction by cutting
the Fed Funds target rate twice, for a total reduction of 0.75 percent.
At the same time, ongoing budgetary and fiscal difficulties at the state
and local levels contributed to ratings downgrades for many municipal
bonds.
The uncertain climate had a definite effect on the municipal bond market.
While yields on intermediate- and long-term bonds ended the period
roughly where they began, the road between those two points was decidedly
bumpy. From October 2002 to mid-June 2003, municipal yields fell by
roughly 80 basis points to levels not seen since the late 1960s. These
plummeting yields led to a surge in issuance as municipalities moved to
lock in low financing rates and, in the case of older bonds, refinancing
costs. These record levels of supply met with record levels of demand as
investors in search of relative investment stability poured cash into
municipal bond funds. Demand for municipal bonds was also strong from
so-called "cross-over" buyers--investors who traditionally favor taxable
investments but were drawn to municipal bonds for their relatively
attractive yields.
The municipal market reversed abruptly in mid-June, when yields began to
climb from their lows and investors shifted their attention to the rising
equity market. Interest from cross-over investors also evaporated as the
relative attractiveness of the taxable market grew. Issuance remained
strong throughout this leg of the period, though it abated somewhat in
the last three months.
(1)Team members may change at any time without notice.
2
The New York economy faced enormous challenges during the period, with
Wall Street revenues and general tax receipts across the state declining.
Demand for New York debt remained strong, however, and helped support
price levels in spite of these challenges. State and local municipalities
were quick to respond to this demand by stepping up their issuance of new
and refinanced debt.
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. The fund underperformed its benchmark index.
-- The fund returned 3.69 percent for the 12 months that ended
September 30, 2003. Performance figures are for Class A shares, and
assume the reinvestment of all distributions but do not reflect the
deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no
guarantee of future results.
-- The fund's benchmark, the Lehman Brothers Municipal Bond Index,
returned 3.89 percent for the same period.
-- The fund's monthly dividend of $0.0520 translated to a distribution
rate of 3.62 percent based on the fund's maximum offering price (as
of September 30, 2003, Class A shares adjusted for sales charges).
See Performance Summary for additional information and index definition.
Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD?
A. The fund's positions in higher-yielding paper lagged in the broader rally
early in the period. While these bonds continued to produce strong
income, their relatively low interest-rate sensitivity caused them to
trail more rate-responsive bonds. The fund's holdings in the housing
sector also dampened performance somewhat. Housing bonds in general
lagged the market during the rally because of their perceived
vulnerability to refinancing.
<Table>
TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03
General Purpose 22.3% AAA/Aaa 49.6%
Higher Education 19.9 AA/Aa 32.5
Transportation 8.1 A/A 11.9
Industrial Revenue 7.6 BBB/Baa 3.5
Water & Sewer 7.3 Non-Rated 2.5
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy securities in the sectors shown above. Securities are
classified by sectors that represent broad groupings of related industries.
Rating allocations based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Morgan Stanley is a full-service securities firm engaged
in securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
3
Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD?
A. One of our key strategies during the period was to shift the portfolio's
maturity profile to take advantage of compelling relative-value
opportunities. Our analysis indicated that the most attractive part of
the curve was in the 15- to 20-year range, where several securities with
premium coupons were available. These bonds were attractive because they
offered a combination of strong income and moderate interest-rate
sensitivity, and were strong performers for the year.
The fund also benefited from our avoidance of certain segments of the
market that we felt offered weaker total-return opportunities. For
example, we made a strategic decision to avoid tobacco bonds, which
proved a benefit to the fund when these issues suffered from a string of
highly-publicized setbacks.
Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING
KEY THEMES.
A. As mentioned earlier, we actively adjusted the portfolio's maturity
profile to take advantage of relative-value and income opportunities.
With interest rates at historic lows for much of the period, we also
moved to trim the fund's duration (a broad measure of interest-rate
sensitivity) slightly in order to help protect the portfolio from any
potential increase in rates.
Demand among retail investors for higher-yielding, lower- and non-rated
bonds grew sharply during the period. We capitalized on this demand by
selling from the portfolio several of these types of securities that had
met their performance targets, and we reinvested the capital elsewhere.
Many of the securities we bought were also from lower-rating categories,
and rapidly reached their own price targets.
The portfolio remained well diversified during the period, with exposure
to all major sectors of the New York market. We added selectively to the
fund's holdings of new sectors such as Personal Income Tax bonds, or
PITs, that allowed us to further diversify the portfolio's exposure.
Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW OF THE FUND, DO YOU HAVE ANY
CLOSING THOUGHTS?
A. The economy has lately shown clear signs of improvement, though
the employment picture remains soft and the likelihood of a sustained
rebound is questionable. In this environment, we believe the Fed is
likely to maintain a neutral stance in the absence of signs of strong
economic growth. We will continue to monitor the market closely for
compelling investment opportunities.
4
ANNUAL HOUSEHOLDING NOTICE
To reduce expenses, the fund attempts to eliminate duplicate mailings to
the same address. The fund delivers a single copy of certain shareholder
documents to investors who share an address, even if the accounts are
registered under different names. The fund's prospectus and shareholder
reports (including annual privacy notices) will be delivered to you in
this manner indefinitely unless you instruct us otherwise. You can
request multiple copies of these documents by either calling (800)
341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has
received your instructions, we will begin sending individual copies for
each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES
A description of the fund's policies and procedures with respect to the
voting of proxies relating to the fund's portfolio securities is
available without charge, upon request, by calling 1-800-847-2424. This
information is also available on the Securities and Exchange Commission's
website at http://www.sec.gov.
5
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2003
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 99.0%
NEW YORK 98.1%
$ 330 Bethlehem, NY Indl Dev Agy Sr Hsg Rev Van
Allen Proj Ser A........................... 6.875% 06/01/39 $ 298,449
1,250 Erie Cnty, NY Indl Dev Agy Sch Fac Rev City
of Buffalo Proj (FSA Insd)................. 5.750 05/01/21 1,390,787
1,250 Erie Cnty, NY Indl Dev Agy Sch Fac Rev City
of Buffalo Proj (FSA Insd)................. 5.750 05/01/22 1,385,075
1,250 Hempstead Town, NY Indl Dev Adelphi Univ
Civic Fac.................................. 5.750 06/01/22 1,347,562
500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY
Institute of Technology Rfdg (Prerefunded @
03/01/06).................................. 7.500 03/01/26 582,785
1,250 Long Island Pwr Auth, NY Elec Sys Rev Gen
Ser A (AMBAC Insd)......................... 5.500 12/01/09 1,442,025
2,000 Long Island Pwr Auth, NY Elec Sys Rev Gen
Ser C...................................... 5.500 09/01/19 2,139,520
1,000 Metropolitan Trans Auth NY Rev Ser A Rfdg
(AMBAC Insd)............................... 5.500 11/15/19 1,113,280
1,000 Metropolitan Trans Auth NY Svc Contract Ser
A Rfdg..................................... 5.125 01/01/29 1,016,850
1,000 Monroe Cnty, NY Indl Dev Agy Nazareth
College Rochester Proj (MBIA Insd)......... 5.250 10/01/21 1,068,370
1,155 Monroe Cnty, NY Indl Dev Agy Saint John
Fisher College Proj (a).................... 5.375 06/01/09 1,307,090
2,510 Nassau Cnty, NY Interim Fin Auth Sales Tax
Secd Ser A................................. 5.750 11/15/13 2,868,403
1,000 Nassau Cnty, NY Interim Fin Auth Sales Tax
Secd Ser A1 (AMBAC Insd)................... 5.375 11/15/16 1,120,150
1,500 Nassau Cnty, NY Interim Fin Auth Sales Tax
Secd Ser B Rfdg (AMBAC Insd)............... 5.000 11/15/17 1,621,860
2,425 New York City Fiscal 2003 Ser I............ 5.750 03/01/15 2,695,897
1,500 New York City Hlth & Hosp Corp Rev Hlth Sys
Ser A (FSA Insd)........................... 5.500 02/15/18 1,667,175
1,000 New York City Hlth & Hosp Corp Rev Hlth Sys
Ser A (FSA Insd)........................... 5.500 02/15/19 1,103,940
1,000 New York City Hsg Dev Corp Ser A........... 5.500 11/01/34 1,033,810
475 New York City Indl Dev Agy Civic Fac Rev
Cmnty Res Developmentally Disabled......... 7.500 08/01/26 482,942
</Table>
6 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK (CONTINUED)
$ 500 New York City Indl Dev Agy Civic Fac Rev
College of New Rochelle Proj............... 5.750% 09/01/17 $ 528,660
1,800 New York City Indl Dev Agy Civic Fac Rev
New York Inst of Technology Proj (MBIA
Insd)...................................... 5.250 03/01/18 1,972,872
500 New York City Indl Dev Agy Civic Fac Rev
YMCA Greater NY Proj....................... 6.000 08/01/07 563,630
1,015 New York City Indl Dev Agy Fac Rev Royal
Charter-NY Presbyterian (FSA Insd)......... 5.250 12/15/11 1,155,395
1,405 New York City Indl Dev Agy Fac Rev Royal
Charter-NY Presbyterian (FSA Insd)......... 5.375 12/15/16 1,577,689
1,000 New York City Indl Dev Agy Spl Arpt Fac Rev
Airl JFK I LLC Proj Ser A.................. 5.500 07/01/28 954,430
1,440 New York City Indl Dev Agy Spl Fac Rev
Terminal One Group Assn Proj............... 6.100 01/01/09 1,475,582
500 New York City Muni Wtr Fin Ser B........... 6.000 06/15/33 588,495
825 New York City Muni Wtr Fin Ser B
(Prerefunded @ 06/15/10)................... 6.000 06/15/33 993,424
2,500 New York City Ser A........................ 5.500 08/01/20 2,656,925
1,000 New York City Ser A Rfdg................... 5.250 03/15/14 1,104,030
1,000 New York City Ser A Rfdg................... 5.250 03/15/15 1,101,280
1,000 New York City Ser B (MBIA Insd)............ 5.875 08/01/15 1,163,710
1,000 New York City Ser H (FGIC Insd)............ 6.000 08/01/12 1,188,050
1,000 New York City Transitional Fin Auth Rev
Future Tax Secd Ser A Rfdg (b)............. 5.500/14.000 11/01/26 1,134,240
1,500 New York City Transitional Fin Auth Rev
Future Tax Secd Ser C (AMBAC Insd)......... 5.250 08/01/21 1,600,905
1,000 New York City Transitional Fin Auth Rev
Future Tax Secd Ser D (MBIA Insd).......... 5.250 02/01/19 1,088,810
1,540 New York City Transitional Future Tax Secd
Ser B...................................... 5.500 02/01/15 1,720,473
2,000 New York St Dorm Auth Lease Rev Court Fac
Ser A...................................... 5.500 05/15/20 2,141,020
510 New York St Dorm Auth Lease Rev Insd St
Judicial Inst At Pace (AMBAC Insd)......... 5.500 07/01/09 588,382
600 New York St Dorm Auth Lease Rev Insd St
Judicial Inst At Pace (AMBAC Insd)......... 5.500 07/01/10 693,822
1,500 New York St Dorm Auth Lease Rev Muni Hlth
Fac Impt Pg Ser 1 (FSA Insd)............... 5.500 01/15/14 1,692,060
1,000 New York St Dorm Auth Lease Rev St Univ
Dorm Fac................................... 5.375 07/01/16 1,104,130
1,000 New York St Dorm Auth Rev City Univ Cons
Third Ser 1 (FGIC Insd).................... 5.250 07/01/25 1,036,410
1,230 New York St Dorm Auth Rev City Univ Ser D
Rfdg (FSA Insd)............................ 5.750 07/01/12 1,435,004
</Table>
See Notes to Financial Statements 7
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK (CONTINUED)
$ 750 New York St Dorm Auth Rev City Univ Sys
Cons Ser A................................. 5.625% 07/01/16 $ 863,865
1,000 New York St Dorm Auth Rev City Univ Sys
Cons Ser B................................. 6.000 07/01/14 1,177,730
175 New York St Dorm Auth Rev City Univ Third
Ser 2...................................... 6.000 07/01/05 188,997
425 New York St Dorm Auth Rev City Univ Third
Ser 2 (Escrowed to Maturity)............... 6.000 07/01/05 461,163
1,455 New York St Dorm Auth Rev Insd NY Sarc Inc
Ser A (FSA Insd)........................... 5.000 07/01/11 1,627,665
1,055 New York St Dorm Auth Rev Insd NY St Rehab
Assn Ser A (AMBAC Insd).................... 5.500 07/01/13 1,203,175
1,040 New York St Dorm Auth Rev Insd NY St Rehab
Assn Ser A (AMBAC Insd).................... 5.500 07/01/15 1,175,106
1,500 New York St Dorm Auth Rev Mem Sloan-
Kettering Ctr Ser 1 (MBIA Insd)............ 5.000 07/01/20 1,574,895
1,000 New York St Dorm Auth Rev Mental Hlth Svc
Fac Impt Ser B (MBIA Insd)................. 5.250 08/15/31 1,033,470
1,200 New York St Dorm Auth Rev Miriam Osborn Mem
Home Ser B (ACA Insd)...................... 6.375 07/01/29 1,303,092
750 New York St Dorm Auth Rev Nursing Home
Menorah Campus (FHA Gtd)................... 5.950 02/01/17 811,073
1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm
Ser C (MBIA Insd).......................... 5.250 10/01/16 1,108,470
1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm
Ser D (MBIA Insd).......................... 5.500 10/01/17 1,125,750
1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm
Ser I (MBIA Insd).......................... 5.750 10/01/18 1,148,740
1,000 New York St Dorm Auth Rev Secd Hosp North
Gen Hosp Rfdg.............................. 5.750 02/15/17 1,141,940
1,000 New York St Dorm Auth Rev Secd Hosp North
Gen Hosp Rfdg.............................. 5.750 02/15/18 1,116,170
1,000 New York St Dorm Auth Rev Second Hosp
Interfaith Med Cent Ser D (FSA Insd)....... 5.750 02/15/08 1,141,220
1,000 New York St Dorm Auth Rev St Personal
Income Tax Ed Ser A........................ 5.375 03/15/20 1,086,440
1,000 New York St Dorm Auth Rev St Personal
Income Tax Ed Ser A........................ 5.000 03/15/32 1,010,870
1,000 New York St Dorm Auth Rev St Univ Ed Fac
1989 Res (MBIA Insd)....................... 6.000 05/15/15 1,170,760
1,000 New York St Dorm Auth Rev St Univ Ed Fac
Ser A...................................... 5.250 05/15/21 1,093,740
1,140 New York St Dorm Auth Rev St Univ Ed Fac
Ser A (FSA Insd)........................... 5.875 05/15/17 1,369,459
</Table>
8 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK (CONTINUED)
$1,665 New York St Dorm Auth Rev St Univ Ed Fac
Ser B (FSA Insd)........................... 5.250% 05/15/13 $ 1,890,657
1,000 New York St Dorm Auth Rev Insd Brooklyn Law
Sch Ser B (XLCA Insd)...................... 5.375 07/01/23 1,072,060
500 New York St Energy Resh & Dev Auth Gas Fac
Rev Brooklyn Union Gas Ser B (Inverse Fltg)
(c)........................................ 12.504 07/01/26 620,900
2,500 New York St Environ Fac Corp St Clean Wtr &
Drinking Revolving Fds..................... 5.000 06/15/21 2,618,325
1,000 New York St Environ Fac Corp St Clean Wtr &
Drinking Revolving Fds Pooled Fin Pgm I.... 5.250 09/15/19 1,089,000
1,890 New York St Environ Fac Corp St Clean Wtr &
Drinking Revolving Fds Ser B............... 5.000 12/15/21 1,973,273
2,280 New York St Loc Govt Assist Corp Ser E
Rfdg....................................... 6.000 04/01/14 2,716,506
1,500 New York St Med Care Fac Fin Hosp & Nursing
Home Ser D Agy Rev (FHA Gtd)............... 6.200 02/15/28 1,616,100
1,000 New York St Mtg Agy Rev Homeowner Mtg Ser
71......................................... 5.400 04/01/29 1,020,770
1,645 New York St Mtg Agy Rev Homeowner Mtg Ser
82......................................... 5.650 04/01/30 1,768,276
1,000 New York St Mtg Agy Rev Ser 101............ 5.400 04/01/32 1,022,670
1,885 New York St Ser C Rfdg..................... 5.000 04/15/19 1,995,668
1,000 New York St Twy Auth Svc Contract Rev Loc
Hwy & Brdg................................. 6.000 04/01/07 1,138,120
1,000 New York St Twy Auth Svc Contract Rev Loc
Hwy & Brdg (AMBAC Insd).................... 5.500 04/01/11 1,139,990
1,500 New York St Twy Auth Svc Contract Rev Loc
Hwy & Brdg................................. 5.500 04/01/16 1,672,845
500 New York St Urban Dev Corp Rev Correctional
Fac Ser A Rfdg............................. 5.500 01/01/14 563,660
1,400 New York St Urban Dev Corp Rev Personal
Income Tax St Fac Ser A.................... 5.375 03/15/18 1,532,230
420 Niagara Falls, NY Pub Impt (MBIA Insd)..... 6.900 03/01/20 437,997
325 Oneida Cnty, NY Indl Dev Agy Civic Fac
Saint Elizabeth Med Ser A.................. 5.875 12/01/29 281,707
200 Port Auth NY & NJ Spl Oblig................ 7.000 10/01/07 209,384
555 Rockland Cnty, NY Indl Dev Agy Civic Fac
Rev Dominican College Proj................. 6.250 05/01/28 539,038
1,000 Rockland Cnty, NY Solid Waste Ser B (AMBAC
Insd)...................................... 5.000 12/15/23 1,040,910
1,000 Rondout Vly Cent Sch Dist NY Accord Ser A
Rfdg (FGIC Insd)........................... 5.000 03/01/19 1,056,570
1,320 Sodus, NY Cent Sch Dist Rfdg (FGIC Insd)... 5.125 06/15/18 1,421,680
</Table>
See Notes to Financial Statements 9
YOUR FUND'S INVESTMENTS
September 30, 2003
<Table>
<Caption>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW YORK (CONTINUED)
$ 110 Syracuse, NY Hsg Auth Rev Sub Proj Loretto
Rest Ser B................................. 7.500% 08/01/10 $ 110,532
250 Syracuse, NY Indl Dev Agy Rev First Mtg
Jewish Home Ser A.......................... 7.375 03/01/21 257,060
2,000 Triborough Brdg & Tunl Auth NY Gen Purp Ser
A.......................................... 5.250 01/01/18 2,167,540
1,500 Triborough Brdg & Tunl Auth NY Rev Gen Purp
Ser A...................................... 5.000 01/01/32 1,513,515
1,000 Ulster Cnty, NY Res Recovery Agy Solid
Waste Sys Rev Rfdg......................... 5.250 03/01/18 1,093,570
1,000 Upper Mohawk Vly Regl Wtr Fin Auth NY Wtr
Sys Rev (AMBAC Insd)....................... 5.750 04/01/20 1,131,970
380 Utica, NY Indl Dev Agy Civic Fac Rev Utica
College Proj Ser A......................... 5.750 08/01/28 366,119
500 Westchester Cnty, NY Indl Dev Agy Mtg
Kendal on Hudson Proj Ser A................ 6.375 01/01/24 501,425
1,000 Yonkers, NY Indl Dev Agy Civic Fac Rev
Cmnty Dev Ppty Yonkers Inc Ser A........... 6.625 02/01/26 1,059,340
------------
119,518,595
------------
U. S. VIRGIN ISLANDS 0.9%
1,000 Virgin Islands Pub Fin Auth Rev Gross Rcpt
Taxes Ln Nt Ser A.......................... 6.375 10/01/19 1,111,560
------------
TOTAL INVESTMENTS 99.0%
(Cost $114,427,751)......................................................... 120,630,155
OTHER ASSETS IN EXCESS OF LIABILITIES 1.0%................................... 1,197,754
------------
NET ASSETS 100.0%............................................................ $121,827,909
============
</Table>
(a) All or a portion of this security has been physically segregated in
connection with open futures contracts.
(b) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(c) An Inverse Floating Rate security is one where the coupon is inversely
indexed to a short-term floating interest rate multiplied by a specific
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. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in
value reflected in the unrealized appreciation/ depreciation. Upon
disposition, a realized gain or loss is recognized accordingly.
10 See Notes to Financial Statements
YOUR FUND'S INVESTMENTS
September 30, 2003
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Co.
FHA--Federal Housing Administration
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
XLCA--XL Capital Assurance Inc.
See Notes to Financial Statements 11
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2003
<Table>
ASSETS:
Total Investments (Cost $114,427,751)....................... $120,630,155
Receivables:
Interest.................................................. 1,608,776
Investments Sold.......................................... 245,000
Fund Shares Sold.......................................... 210,851
Other....................................................... 63,864
------------
Total Assets............................................ 122,758,646
------------
LIABILITIES:
Payables:
Fund Shares Repurchased................................... 221,919
Custodian Bank............................................ 183,287
Variation Margin on Futures............................... 145,719
Income Distributions...................................... 111,885
Distributor and Affiliates................................ 91,781
Investment Advisory Fee................................... 24,645
Trustees' Deferred Compensation and Retirement Plans........ 89,881
Accrued Expenses............................................ 61,620
------------
Total Liabilities....................................... 930,737
------------
NET ASSETS.................................................. $121,827,909
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $116,336,982
Net Unrealized Appreciation................................. 5,479,882
Accumulated Undistributed Net Investment Income............. 65,106
Accumulated Net Realized Loss............................... (54,061)
------------
NET ASSETS.................................................. $121,827,909
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $63,603,672 and 3,879,124 shares of
beneficial interest issued and outstanding)............. $ 16.40
Maximum sales charge (4.75%* of offering price)......... .82
------------
Maximum offering price to public........................ $ 17.22
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $40,501,305 and 2,473,212 shares of
beneficial interest issued and outstanding)............. $ 16.38
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $17,722,932 and 1,081,471 shares of
beneficial interest issued and outstanding)............. $ 16.39
============
</Table>
* On sales of $100,000 or more, the sales charge will be reduced.
12 See Notes to Financial Statements
Statement of Operations
For the Year Ended September 30, 2003
<Table>
INVESTMENT INCOME:
Interest.................................................... $ 5,191,976
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $135,372, $409,945 and $143,100,
respectively)............................................. 688,417
Investment Advisory Fee..................................... 657,224
Accounting.................................................. 56,663
Shareholder Services........................................ 52,997
Legal....................................................... 19,857
Trustees' Fees and Related Expenses......................... 17,725
Custody..................................................... 10,865
Other....................................................... 65,564
-----------
Total Expenses.......................................... 1,569,312
Investment Advisory Fee Reduction....................... 556,273
Less Credits Earned on Cash Balances.................... 945
-----------
Net Expenses............................................ 1,012,094
-----------
NET INVESTMENT INCOME....................................... $ 4,179,882
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 749,380
Futures................................................... 240,435
-----------
Net Realized Gain........................................... 989,815
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 7,122,812
End of the Period:
Investments............................................. 6,202,404
Futures................................................. (722,522)
-----------
5,479,882
-----------
Net Unrealized Depreciation During the Period............... (1,642,930)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $ (653,115)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,526,767
===========
</Table>
See Notes to Financial Statements 13
Statements of Changes in Net Assets
<Table>
<Caption>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
----------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................. $ 4,179,882 $ 3,823,772
Net Realized Gain.................................. 989,815 1,168,453
Net Unrealized Appreciation/Depreciation During the
Period........................................... (1,642,930) 3,243,757
------------ ------------
Change in Net Assets from Operations............... 3,526,767 8,235,982
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................... (2,244,033) (2,039,139)
Class B Shares................................... (1,406,581) (1,433,678)
Class C Shares................................... (484,424) (354,893)
------------ ------------
Total Distributions................................ (4,135,038) (3,827,710)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES....................................... (608,271) 4,408,272
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................... 44,156,929 29,177,083
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................... 2,899,936 2,645,188
Cost of Shares Repurchased......................... (24,649,019) (21,982,908)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS..................................... 22,407,846 9,839,363
------------ ------------
TOTAL INCREASE IN NET ASSETS....................... 21,799,575 14,247,635
NET ASSETS:
Beginning of the Period............................ 100,028,334 85,780,699
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $65,106
and $59,000, respectively)....................... $121,827,909 $100,028,334
============ ============
</Table>
14 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.49 $15.76 $14.91 $14.94 $16.22
------ ------ ------ ------ ------
Net Investment Income..................... .69 .74 .73 .77 .79
Net Realized and Unrealized Gain/Loss..... (.10) .73 .88 (.07) (1.19)
------ ------ ------ ------ ------
Total from Investment Operations............ .59 1.47 1.61 .70 (.40)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .68 .74 .76 .73 .79
Distributions from Net Realized Gain...... -0- -0- -0- -0- .09
------ ------ ------ ------ ------
Total Distributions......................... .68 .74 .76 .73 .88
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $16.40 $16.49 $15.76 $14.91 $14.94
====== ====== ====== ====== ======
Total Return* (b)........................... 3.69% 9.63% 10.97% 4.91% -2.61%
Net Assets at End of the Period (In
millions)................................. $ 63.6 $ 47.5 $ 43.5 $ 29.0 $ 36.6
Ratio of Expenses to Average Net Assets*.... .55% .38% .53% .61% .33%
Ratio of Net Investment Income to Average
Net Assets*............................... 4.19% 4.68% 4.74% 5.26% 5.03%
Portfolio Turnover.......................... 27% 43% 30% 58% 67%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..... 1.06% 1.07% 1.13% 1.32% 1.23%
Ratio of Net Investment Income to Average
Net Assets................................ 3.68% 3.99% 4.14% 4.56% 4.13%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting discount on fixed income securities. The effect of this change for
the year ended September 30, 2002 was to increase net investment income per
share by less than $.01, decrease net realized and unrealized gains and
losses per share by less than $.01 and increase the ratio of net investment
income to average net assets by .01%. Per share, ratios and supplemental
data for periods prior to September 30, 2002 have not been restated to
reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include Rule 12b-1 fees of up to .25% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares.
See Notes to Financial Statements 15
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS B SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.47 $15.74 $14.90 $14.92 $16.21
------ ------ ------ ------ ------
Net Investment Income..................... .56 .62 .62 .66 .68
Net Realized and Unrealized Gain/Loss..... (.09) .73 .86 (.06) (1.20)
------ ------ ------ ------ ------
Total from Investment Operations............ .47 1.35 1.48 .60 (.52)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .56 .62 .64 .62 .68
Distributions from Net Realized Gain...... -0- -0- -0- -0- .09
------ ------ ------ ------ ------
Total Distributions......................... .56 .62 .64 .62 .77
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $16.38 $16.47 $15.74 $14.90 $14.92
====== ====== ====== ====== ======
Total Return* (b)........................... 2.93% 8.83% 10.09% 4.17% -3.34%
Net Assets at End of the Period (In
millions)................................. $ 40.5 $ 40.5 $ 35.0 $ 28.8 $ 28.2
Ratio of Expenses to Average Net Assets*.... 1.29% 1.13% 1.28% 1.36% 1.08%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.45% 3.92% 3.99% 4.51% 4.27%
Portfolio Turnover.......................... 27% 43% 30% 58% 67%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..... 1.80% 1.82% 1.88% 2.07% 1.98%
Ratio of Net Investment Income to Average
Net Assets................................ 2.94% 3.24% 3.39% 3.81% 3.37%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting discount on fixed income securities. The effect of this change for
the year ended September 30, 2002 was to increase net investment income per
share by less than $.01, decrease net realized and unrealized gains and
losses per share by less than $.01 and increase the ratio of net investment
income to average net assets by .01%. Per share, ratios and supplemental
data for periods prior to September 30, 2002 have not been restated to
reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4%, charged on certain redemptions
made within one year of purchase and declining to 0% after the sixth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
16 See Notes to Financial Statements
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 30,
CLASS C SHARES ------------------------------------------------
2003 2002 (a) 2001 2000 1999
------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.48 $15.75 $14.91 $14.92 $16.20
------ ------ ------ ------ ------
Net Investment Income..................... .56 .62 .60 .68 .68
Net Realized and Unrealized Gain/Loss..... (.09) .73 .88 (.07) (1.19)
------ ------ ------ ------ ------
Total from Investment Operations............ .47 1.35 1.48 .61 (.51)
------ ------ ------ ------ ------
Less:
Distributions from Net Investment
Income.................................. .56 .62 .64 .62 .68
Distributions from Net Realized Gain...... -0- -0- -0- -0- .09
------ ------ ------ ------ ------
Total Distributions......................... .56 .62 .64 .62 .77
------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE PERIOD.......... $16.39 $16.48 $15.75 $14.91 $14.92
====== ====== ====== ====== ======
Total Return* (b)........................... 2.92%(c) 8.83% 10.09% 4.24% -3.28%
Net Assets at End of the Period (In
millions)................................. $ 17.7 $ 12.0 $ 7.3 $ 4.6 $ 5.1
Ratio of Expenses to Average Net Assets*.... 1.30% 1.13% 1.30% 1.36% 1.08%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.45%(c) 3.92% 3.97% 4.52% 4.28%
Portfolio Turnover.......................... 27% 43% 30% 58% 67%
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..... 1.81% 1.82% 1.90% 2.07% 1.98%
Ratio of Net Investment Income to Average
Net Assets................................ 2.94%(c) 3.23% 3.37% 3.81% 3.38%
</Table>
(a) As required, effective October 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting discount on fixed income securities. The effect of this change for
the year ended September 30, 2002 was to increase net investment income per
share by less than $.01, decrease net realized and unrealized gains and
losses per share by less than $.01 and increase the ratio of net investment
income to average net assets by .01%. Per share, ratios and supplemental
data for periods prior to September 30, 2002 have not been restated to
reflect this change in presentation.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1% charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(c) Certain non-recurring payments were made to Class C Shares, resulting in an
increase to the Total Return and Ratio of Net Investment Income to Average
Net Assets of .03%.
See Notes to Financial Statements 17
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen New York Tax Free Income Fund (the "Fund") is organized as a series
of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered
as a non-diversified, open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's
investment objective is to provide investors with a high level of current income
exempt from federal, New York State and New York City income taxes, consistent
with preservation of capital. The Fund seeks to achieve its investment objective
by investing at least 80% of its total assets in a portfolio of New York
municipal securities that are rated investment grade at the time of purchase.
The Fund commenced investment operations on July 29, 1994, with three classes of
common shares, Class A, Class B and Class C.
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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using 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, which approximates market value.
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
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
payments is made. At September 30, 2003, the Fund had no when-issued and delayed
delivery purchase commitments.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
18
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At September 30, 2003, the Fund had an accumulated capital loss
carryforward for tax purposes of $733,829 which will expire on September 30,
2009.
At September 30, 2003, the cost and related gross unrealized appreciation
and depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $114,472,272
============
Gross tax unrealized appreciation........................... $ 6,317,379
Gross tax unrealized depreciation........................... (159,496)
------------
Net tax unrealized appreciation on investments.............. $ 6,157,883
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
The tax character of distributions paid during the years ended September 30,
2003 and 2002 was as follows:
<Table>
<Caption>
2003 2002
Distributions paid from:
Ordinary Income........................................... $6,501 $25,277
Long-term capital gain.................................... -0- -0-
------ -------
$6,501 $25,277
====== =======
</Table>
Due to inherent differences in the recognition of income, expenses and
realized gains/ losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting have been identified and appropriately
reclassified on the Statement of Assets and Liabilities. A permanent book and
tax difference related to the Fund's investment in other regulated investment
companies totaling $5,660 was reclassified from accumulated undistributed net
investment income to accumulated net realized loss. Additionally, permanent
differences relating to book and tax amortization totaling $44,398 has been
reclassified from accumulated undistributed net investment income to accumulated
net realized loss.
19
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
As of September 30, 2003, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $11,191
</Table>
Net realized gains and losses may differ for financial reporting purposes
primarily as a result of the deferral of losses relating to wash sale
transactions and gains or losses recognized for tax purposes on open future
transactions at September 30, 2003.
F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's
custody fee was reduced by $945 as a result of credits earned on cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... 0.60%
Over $500 million........................................... 0.50%
</Table>
For the year ended September 30, 2003, the Adviser voluntarily waived
$556,273 of its investment advisory fees. This waiver is voluntary in nature and
can be discontinued at the Adviser's discretion.
For the year ended September 30, 2003, the Fund recognized expenses of
approximately $5,500, 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.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended September
30, 2003, the Fund recognized expenses of approximately $38,300 representing Van
Kampen Investments or its affiliates' (collectively "Van Kampen") cost of
providing accounting and legal services to the Fund, which are reported as part
of "Accounting" and "Legal" expenses, respectively, in the Statement of
Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
September 30, 2003, the Fund recognized expenses of approximately $37,800
representing transfer agency fees paid to VKIS. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation.
Amounts deferred are retained by the Fund and
20
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
to the extent permitted by the 1940 Act, as amended, may be invested in the
common shares of those funds selected by the trustees. Investments in such funds
of $47,333 are included in "Other" assets on the Statement of Assets and
Liabilities at September 30, 2003. Appreciation/ depreciation and distributions
received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund. Benefits under the retirement plan are payable upon
retirement 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
$2,500.
3. CAPITAL TRANSACTIONS
At September 30, 2003, capital aggregated $61,360,150, $37,757,810 and
$17,219,022 for Classes A, B and C, respectively. For the year ended September
30, 2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 1,655,466 $ 27,062,415
Class B................................................... 519,637 8,452,098
Class C................................................... 531,210 8,642,416
---------- ------------
Total Sales................................................. 2,706,313 $ 44,156,929
========== ============
Dividend Reinvestment:
Class A................................................... 96,700 $ 1,569,395
Class B................................................... 60,400 978,904
Class C................................................... 21,673 351,637
---------- ------------
Total Dividend Reinvestment................................. 178,773 $ 2,899,936
========== ============
Repurchases:
Class A................................................... (751,111) $(12,180,934)
Class B................................................... (568,107) (9,209,533)
Class C................................................... (200,158) (3,258,552)
---------- ------------
Total Repurchases........................................... (1,519,376) $(24,649,019)
========== ============
</Table>
21
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
At September 30, 2002, capital aggregated $44,909,274, $37,536,341 and
$11,483,521 for Classes A, B and C, respectively. For the year ended September
30, 2002, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 932,347 $ 14,737,924
Class B................................................... 555,685 8,780,808
Class C................................................... 357,695 5,658,351
---------- ------------
Total Sales................................................. 1,845,727 $ 29,177,083
========== ============
Dividend Reinvestment:
Class A................................................... 91,984 $ 1,451,414
Class B................................................... 59,837 942,959
Class C................................................... 15,889 250,815
---------- ------------
Total Dividend Reinvestment................................. 167,710 $ 2,645,188
========== ============
Repurchases:
Class A................................................... (903,144) $(14,306,507)
Class B................................................... (377,400) (5,933,734)
Class C................................................... (110,184) (1,742,667)
---------- ------------
Total Repurchases........................................... (1,390,728) $(21,982,908)
========== ============
</Table>
Class B Shares purchased on or after June 1, 1996 and any dividend
reinvestment plan Class B Shares received on such shares, 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 Class B Shares received on such shares, automatically
convert to Class A Shares seven years after the end of the calendar month in
which the shares were purchased. For the years ended September 30, 2003 and
2002, 49,822 and 50,806 Class B Shares automatically converted to Class A
Shares, respectively, and are shown in the above tables as sales of Class A
Shares and repurchases of Class B Shares. Class C Shares purchased before
January 1, 1997, and any dividend reinvestment plan Class C Shares received on
such shares, automatically convert to Class A Shares ten years after the end of
the calendar month in which the shares are purchased. Class C Shares purchased
on or after January 1, 1997 do not possess a conversion feature. For the years
ended September 30, 2003 and 2002, no Class C Shares converted to Class A
Shares. Class B and Class C Shares are offered without a front end sales charge,
but are subject to a contingent deferred sales charge (CDSC). The CDSC for Class
B and Class C Shares will be
22
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
imposed on most redemptions made within six years of the purchase for Class B
Shares and one year of the purchase for Class C Shares as detailed in the
following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 4.00% 1.00%
Second...................................................... 3.75% None
Third....................................................... 3.50% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth....................................................... 1.00% None
Seventh and Thereafter...................................... None None
</Table>
For the year ended September 30, 2003, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $69,300 and CDSC on redeemed shares of approximately $124,700.
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 $50,805,844 and $29,560,781,
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 or to generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
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 futures contract.
During the period, the Fund invested in futures contracts, a type of
derivative. 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 exchange traded futures contracts on U.S. Treasury Bonds or
Notes and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the Fund's effective maturity and
duration. Upon entering into futures contracts, the Fund maintains an amount of
cash or liquid securities with a value equal to percentage of the contract
amount with either a future
23
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
commission merchant pursuant to rules and regulations promulgated in the 1940
Act, as amended, or with its custodian in an account in the broker's name. This
amount is known as initial margin. 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 (variation margin). The risk of loss associated with a
futures contract is in excess of the variation margin reflected on the Statement
of Assets and Liabilities.
Transactions in futures contracts for the year ended September 30, 2003, are
as follows:
<Table>
<Caption>
CONTRACTS
Outstanding at September 30, 2002........................... -0-
Futures Opened.............................................. 724
Futures Closed.............................................. (552)
----
Outstanding at September 30, 2003........................... 172
====
</Table>
The futures contracts outstanding as of September 30, 2003, and the
descriptions and unrealized appreciation/depreciation are as follows:
<Table>
<Caption>
UNREALIZED
CONTRACTS DEPRECIATION
SHORT CONTRACTS:
U.S. Treasury Notes 10-Year Futures December 2003 (Current
Notional Value of $114,625 per contract).................. 33 $(186,796)
U.S. Treasury Notes 5-Year Futures December 2003 (Current
Notional Value of $113,469 per contract).................. 139 (535,726)
--- ---------
172 $(722,522)
=== =========
</Table>
6. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and the maintenance of shareholder
accounts with respect to such classes of shares.
Annual fees under the Plans of up to .25% of Class A average daily net
assets and 1.00% each of Class B and Class C average daily net assets are
accrued daily. The amount of distribution expenses incurred by Van Kampen and
not yet reimbursed ("unreimbursed receivable") was approximately $864,210 and
$37,738 for Class B and Class C Shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
24
NOTES TO
FINANCIAL STATEMENTS
September 30, 2003
Included in these fees for the year ended September 30, 2003, are payments
retained by Van Kampen of approximately $380,700 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $20,900.
25
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen New York Tax Free Income
Fund
We have audited the accompanying statement of assets and liabilities of the
Van Kampen New York Tax Free Income Fund (the "Fund"), including the portfolio
of investments, as of September 30, 2003, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. 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. The financial highlights of the Fund
for the year ended September 30, 1999 were audited by other auditors whose
report dated November 11, 1999 expressed an unqualified opinion on those
financial highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2003, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Van Kampen New York Tax Free Income Fund at September 30, 2003, 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 four years in the period then ended in conformity with accounting
principles generally accepted in the United States.
-s- Ernst & Young LLP
Chicago, Illinois
November 4, 2003
26
VAN KAMPEN INVESTMENTS
THE VAN KAMPEN
FAMILY OF FUNDS
Global/International
Emerging Markets
Emerging Markets Income
European Value Equity
Global Equity Allocation
Global Franchise
Global Value Equity
International Advantage
International Magnum
Growth
Aggressive Growth
American Value
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Growth
Small Cap Value
Technology
Growth and Income
Comstock
Equity and Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Value Opportunities
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
Tax Free
California Insured Tax Free
High Yield Municipal*
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Strategic Municipal Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Senior Loan Fund
For more complete information, including risk considerations, fees, sales
charges and ongoing expenses, please contact your financial advisor for a
prospectus. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - Visit our Web site at
VANKAMPEN.COM.
To view a prospectus
select Literature,
Download Fund Info. (COMPUTER ICON)
- - Call us at (800) 847-2424
Telecommunications Device
for the Deaf (TDD) users,
call (800) 421-2833. (PHONE ICON)
- - E-mail us by visiting
VANKAMPEN.COM and
selecting Contact Us.
(MAIL ICON)
* Open to new investors for a limited time
27
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following is furnished with respect to
the distributions paid by the Fund during its taxable year ended September 30,
2003. The Fund designated 99.8% of the income distributions as a tax-exempt
income distribution. In January, the Fund provides tax information to
shareholders for the preceding calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
28
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory
Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds
Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp.
and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers." The term "Fund Complex" includes each of the investment companies
advised by the Advisers or their affiliates as of the date of this Statement of
Additional Information. Trustees serve until reaching their retirement age or
until their successors are duly elected and qualified. Officers are annually
elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Former
Director of the World
Presidents
Organization-Chicago
Chapter. Director of the
Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing
1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
29
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing
CAC, llc. since 2003 private company offering General Partner of funds
4350 LaJolla Village Drive capital investment and in the Fund Complex.
Suite 980 management advisory Director of TeleTech
San Diego, CA 92122-6223 services. Prior to July Holdings Inc.,
2000, Managing Partner of Stericycle, Inc.,
Equity Group Corporate TheraSense, Inc., GATX
Investment (EGI), a Corporation, Arris Group,
company that makes Inc. and Trustee of the
private investments in University of Chicago
other companies. Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems Inc.
Prior to February 2001,
Vice Chairman and
Director of Anixter
International, Inc. and
IMC Global Inc. Prior to
July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM). Prior to April
1999, Director of Metal
Management, Inc.
</Table>
30
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing
Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing
11 DuPont Circle, N.W. since 1994 the German Marshall Fund General Partner of funds
Washington, D.C. 20016 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
31
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing
423 Country Club Drive since 1994 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing
2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds
Room 285 Academy of in the Fund Complex.
Washington, D.C. 20418 Sciences/National Director of Neurogen
Research Council, an Corporation, a
independent, federally pharmaceutical company,
chartered policy since January 1998.
institution, since 2001
and previously Chief
Operating Officer from
1993 to 2001. Director of
the Institute for Defense
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, and
Trustee of Colorado
College. Prior to 1993,
Executive Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
32
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing
1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds
New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex.
Officer Complex. Chairman,
President, Chief
Executive Officer and
Director of the Advisers
and VK Advisors Inc.
since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
33
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing
333 West Wacker Drive since 1994 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom in the Fund Complex.
(Illinois), legal counsel
to funds in the Fund
Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Advisers by reason
of their current or former positions with Morgan Stanley or its affiliates.
34
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and
Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
</Table>
35
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive Officer and Managing Director of Morgan Stanley Investment
Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
36
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you conduct with
us, our affiliates, or third parties. We may also collect information you
provide when using our Web site, and text files (also known as "cookies") may be
placed on your computer to help us to recognize you and to facilitate
transactions you initiate. We do not disclose any nonpublic personal information
about you or any of our former customers to anyone, except as permitted by law.
For instance, so that we may continue to offer you Van Kampen investment
products and services that meet your investing needs, and to effect transactions
that you request or authorize, we may disclose the information we collect to
companies that perform services on our behalf, such as printers and mailers that
assist us in the distribution of investor materials. These companies will use
this information only for the services for which we hired them, and are not
permitted to use or share this information for any other purpose. To protect
your nonpublic personal information internally, we permit access to it only by
authorized employees, and maintain physical, electronic and procedural
safeguards to guard your nonpublic personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc.,
Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many
Van Kampen mutual funds and Van Kampen unit investment trusts.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling (800)
847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2003 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 235, 325, 425
NYTF ANR
11/03 12230K03-AP-11/03
Item 2. Code of Ethics.
(a) The Trust has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Trust or
a third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Trust has amended its Code of Ethics during the period covered by
the shareholder report presented in Item 1 hereto
(d) The Trust has granted a waiver or an implicit waiver from a provision
of its Code of Ethics.
(e) Not applicable.
(f)
(1) The Trust's Code of Ethics is attached hereto as Exhibit 10A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Trust's Board of Trustees has determined that it has three "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees : J. Miles Branagan, Jerry Choate and R. Craig Kennedy.
Under applicable securities laws, a person who is determined to be an audit
committee financial expert will not be deemed an "expert" for any purpose,
including without limitation for the purposes of Section 11 of the Securities
Act of 1933, as a result of being designated or identified as an audit committee
financial expert. The designation or identification of a person as an audit
committee financial expert does not impose on such person any duties,
obligations, or liabilities that are greater than the duties, obligations, and
liabilities imposed on such person as a member of the audit committee and Board
of Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
Applicable only for reports covering fiscal years ending on or after December
15, 2003.
Item 5. Audit Committee of Listed Registrants.
Applicable only for reports covering periods ending on or after the earlier of
(i) the first annual shareholder meeting after January 15, 2004 or (ii) October
31, 2004.
Item 6. [Reserved.]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. [Reserved.]
Item 9. Controls and Procedures
(a) The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal half-year that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10. Exhibits.
(a) The Code of Ethics for Principal Executive and Senior Financial Officers
is attached hereto.
(b) A separate certification for each Principal Executive Officer and Principal
Financial Officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Van Kampen Tax Free Trust
-------------------------
By:/s/Ronald E. Robison
---------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: November 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/Ronald E. Robison
---------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: November 19, 2003
By: /s/ John L. Sullivan
--------------------
Name: John L. Sullivan
Title: Principal Financial Officer
Date: November 19, 2003