POST-EFFECTIVE AMENDMENT NO. 42

485APOS 1 pea42.htm POST EFFECTIVE AMENDMENT NO. 42 POST-EFFECTIVE AMENDMENT NO. 42

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

File No. 2-91229

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 41 [X]

and/or

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

File No. 811-4025

Amendment No. 42 [X]

(Check appropriate box or boxes.)

AMERICAN CENTURY MUNICIPAL TRUST
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(Exact Name of Registrant as Specified in Charter)

4500 Main Street, Kansas City, MO 64111
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(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (816) 531-5575

David C. Tucker, Esq., 4500 Main Street, 9th Floor, Kansas City, MO 64111
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(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering: February 27, 2004

It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on February 27, 2004 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.

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YOUR

AMERICAN CENTURY

PROSPECTUS

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A Class

B Class

C Class

Florida Municipal Bond Fund

Arizona Municipal Bond Fund

February 27, 2004

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO
TELLS YOU OTHERWISE IS COMMITTING A CRIME.

American Century Investment Services, Inc.

Dear Investor,

American Century is committed to providing you with an easy-to-read prospectus
that gives you the information you need to make confident investment decisions.

You'll notice that we've combined information about A, B and C Class shares into
one prospectus. These shares are offered primarily through employer-sponsored
retirement plans, or through institutions such as investment advisors, banks,
broker-dealers and insurance companies.

It's important for you to be aware of which class of shares you own or are
considering for purchase while you're reading through your prospectus. Certain
restrictions may apply to one class or another, and different classes may have
different fees, expenses or minimum investment requirements.

Read carefully through the Fund Performance History, Investing with American
Century, and Financial Highlights sections, as they reflect the most significant
differences between the classes. Some sections have separate pages for the
different classes.

After you've reviewed your prospectus, should you have any questions, please
call your investment professional, who will be happy to assist you.

Sincerely,

Brian Jeter

Senior Vice President

Third Party Sales and Services

American Century Investment Services, Inc.

Table of Contents

AN OVERVIEW OF THE FUNDS.....................................................X

FUND PERFORMANCE HISTORY.....................................................X

FEES AND EXPENSES............................................................X

OBJECTIVES, STRATEGIES AND RISKS.............................................X

Florida Municipal Bond Fund

Arizona Municipal Bond Fund

BASICS OF FIXED-INCOME INVESTING.............................................X

MANAGEMENT...................................................................X

INVESTING WITH AMERICAN CENTURY.............................................XX

SHARE PRICE AND DISTRIBUTIONS...............................................XX

TAXES.......................................................................XX

MULTIPLE CLASS INFORMATION..................................................XX

PERFORMANCE INFORMATION OF OTHER CLASS......................................XX

THIS SYMBOL IS USED THROUGHOUT THE BOOK TO HIGHLIGHT DEFINITIONS OF KEY
INVESTMENT TERMS AND TO PROVIDE OTHER HELPFUL INFORMATION.

AN OVERVIEW OF THE FUNDS

WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?

These funds seek high current income and investment returns that are exempt from
federal income tax.

The funds also seek income and investment returns that are exempt from taxes
imposed by Florida, in the case of Florida Municipal Bond, or Arizona, in the
case of Arizona Municipal Bond.

WHAT ARE THE FUNDS' PRIMARY INVESTMENT STRATEGIES AND PRINCIPAL RISKS?
The fund managers invest most of the funds' assets in DEBT SECURITIES issued by
cities, counties and other municipalities, and U.S. territories. The funds
invest in different types of these municipal debt securities and have different
risks. The following chart shows the differences between the funds' primary
investments and principal risks. It is designed to help you compare these funds
with each other; it should not be used to compare these funds with other mutual
funds. A more detailed description about the funds' investment strategies and
risks begins on page x.

DEBT SECURITIES INCLUDE FIXED-INCOME INVESTMENTS SUCH AS NOTES, BONDS,
COMMERCIAL PAPER AND U.S. TREASURY SECURITIES.

FUND PRIMARY INVESTMENTS PRINCIPAL RISKS

Florida Municipal Quality debt securities of Florida economic risk
Bond all maturity ranges Credit risk
Moderate interest rate risk(1)
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Arizona Municipal Quality debt securities of Arizona economic risk
Bond all maturity ranges Credit risk
Moderate interest rate risk(1)
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(1) THE INTEREST RATE RISK IS MODERATE UNDER NORMAL MARKET CONDITIONS, AND IT
MAY FLUCTUATE AS THE PORTFOLIO MANAGERS REPOSITION THE FUND IN RESPONSE TO
CHANGING MARKET CONDITIONS.

At any given time your shares may be worth more or less than the price you paid
for them. In other words, it is possible to lose money by investing in the
funds.

WHO MAY WANT TO INVEST IN THE FUNDS?
The funds may be a good investment if you are

o seeking current tax-free income

o seeking diversification by investing in a fixed-income mutual fund

o comfortable with risk based on Florida's or Arizona's economy

o a Florida or Arizona resident or taxpayer

o comfortable with the funds' other investment risks

WHO MAY NOT WANT TO INVEST IN THE FUNDS?
The funds may not be a good investment if you are

o investing in an IRA or other tax-advantaged retirement plan

o investing for long-term growth

o looking for the added security of FDIC insurance

An investment in the funds is not a bank deposit, and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.

FUND PERFORMANCE HISTORY

FLORIDA MUNICIPAL BOND FUND

ARIZONA MUNICIPAL BOND FUND

When the A, B or C Classes of the funds have investment results for a full
calendar year, this section will feature charts that show

o Annual Total Returns

o Highest and Lowest Quarterly Returns

o Average Annual Total Returns for the A, B or C Classes of the fund,
including a comparison of these returns to a benchmark index

If the A, B or C Classes of a fund had existed during the periods presented,
their performance would have been substantially similar to that of the Investor
Class of that fund because each class represents an investment in the same
portfolio of securities. However, performance of the A, B or C classes would
have been lower than the Investor Class because of their higher expense ratios.

ANNUAL TOTAL RETURNS
The following bar charts show the performance of the funds' Investor Class
shares for each full calendar year in the life of the funds. They indicate the
volatility of the funds' historical returns from year to year. Account fees are
not reflected in the chart below. If they had been included, returns would be
lower than those shown.

INSERT FLORIDA MUNICIPAL BOND FUND ANNUAL TOTAL RETURN CHART - INVESTOR CLASS
(1) (2)

Add 2003: Data to come

(1) AS OF SEPTEMBER 30, 2003, THE END OF THE MOST RECENT CALENDAR QUARTER,
FLORIDA MUNICIPAL BOND'S YEAR-TO-DATE RETURN WAS X%. DATA TO COME

(2) FROM APRIL 11, 1994, TO DECEMBER, 31, 1995, ALL OR A PORTION OF THE FUND'S
MANAGEMENT FEE WAS WAIVED. AS A RESULT, THE FUND'S RETURNS ARE HIGHER THAN
THEY WOULD HAVE BEEN HAD THE WAIVER NOT BEEN IN EFFECT. BEGINNING ON
JANUARY 1, 1996, MANAGEMENT FEES WERE PHASED IN AT A RATE OF 0.10% EACH
MONTH UNTIL JULY 1, 1996.

The highest and lowest quarterly returns for the period reflected in the chart
are:

HIGHEST LOWEST

Florida Municipal Bond
Investor Class Data to come

INSERT ARIZONA MUNICIPAL BOND FUND ANNUAL TOTAL RETURN CHART - INVESTOR CLASS
(1)(2)

Add 2003: Data to come

(1) AS OF SEPTEMBER 30, 2003, THE END OF THE MOST RECENT CALENDAR QUARTER,
ARIZONA MUNICIPAL BOND'S YEAR-TO-DATE RETURN WAS XX%. DATA TO COME

The highest and lowest quarterly returns for the period reflected in the chart
are:

HIGHEST LOWEST
Arizona Municipal Bond
Investor Class Data to come

AVERAGE ANNUAL TOTAL RETURNS

The following table shows the average annual total returns of the funds'
Investor Class shares calculated three different ways. This information is
provided because the funds' A, B and C Class shares did not have a full calendar
year's worth of performance.

Return Before Taxes shows the actual change in the value of fund shares over the
time periods shown, but does not reflect the impact of taxes on fund
distributions or the sale of fund shares. The two after-tax returns take into
account taxes that may be associated with owning fund shares. Return After Taxes
on Distributions is a fund's actual performance, adjusted by the effect of taxes
on distributions made by the fund during the periods shown. Return After Taxes
on Distributions and Sale of Fund Shares is further adjusted to reflect the tax
impact on any change in the value of fund shares as if they had been sold on the
last day of the period.

After-Tax Returns are calculated using the historical highest federal marginal
income tax rates and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. After-Tax Returns shown are not relevant to investors who hold fund
shares through tax-deferred arrangements such as 401(k) plans or IRAs.

The benchmarks are unmanaged indices that have no operating costs and are
included in the table for performance comparison.

INVESTOR CLASS

FOR THE CALENDAR YEAR ENDED LIFE OF
DECEMBER 31, 2003 1 YEAR 5 YEARS 10 YEARS CLASS(1)

Florida Municipal Bond (2)

Return Before Taxes Data to come N/A x%

Return After Taxes on Distributions x% x% N/A x%

Return After Taxes on Distributions
and Sale of Fund Shares x% x% N/A x%

Lehman Brothers Municipal 5-Year
General Obligation Index (reflects x% x% N/A x%(3)
no deduction for fees, expenses
or taxes)

Arizona Municipal Bond (2)

Return Before Taxes x% x% N/A x%

Return After Taxes on Distributions x% x% N/A x%

Return After Taxes on Distributions
and Sale of Fund Shares x% x% N/A x%

Lehman Brothers Municipal 5-Year
General Obligation Index (reflects x% x% N/A x%(3)
no deduction for fees, expenses
or taxes)

(1) THE INCEPTION DATES FOR THE INVESTOR CLASS ARE: FLORIDA MUNICIPAL BOND AND
ARIZONA MUNICIPAL BOND, APRIL 11, 1994. ONLY FUNDS WITH PERFORMANCE HISTORY
FOR LESS THAN 10 YEARS SHOW AFTER-TAX RETURNS FOR LIFE OF FUND.

(2) FROM APRIL 11, 1994, TO DECEMBER 31, 1995, ALL OR A PORTION OF THE FUND'S
MANAGEMENT FEE WAS WAIVED. AS A RESULT, THE FUND'S RETURNS ARE HIGHER THAN
THEY WOULD HAVE BEEN HAD THE WAIVER NOT BEEN IN EFFECT. BEGINNING ON
JANUARY 1, 1996, MANAGEMENT FEES WERE PHASED IN AT A RATE OF 0.10% EACH
MONTH UNTIL JULY 1, 1996.

(3) SINCE MARCH 31, 1994, THE DATE CLOSEST TO THE CLASS'S INCEPTION DATE FOR
WHICH DATA IS AVAILABLE.

Performance information is designed to help you see how fund returns can vary.
Keep in mind that past performance (before and after taxes) does not predict how
the funds will perform in the future.

For current performance information, including yields, please call us at
1-800-378-9878.

FEES AND EXPENSES

The following tables describe the fees and expenses you may pay if you buy and
hold shares of the fund.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

A CLASS B CLASS C CLASS

Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.50% None None

Maximum Deferred Sales Charge (Load) None(1) 5.00%(2) 1.00%(3)
(as a percentage of the original offering
price for B Class shares or the lower of
the original offering price or redemption
proceeds for A and C Class shares)

(1) INVESTMENTS OF $1 MILLION OR MORE IN A CLASS SHARES MAY BE SUBJECT TO A
CONTINGENT DEFERRED SALES CHARGE OF 1.00% IF THE SHARES ARE REDEEMED WITHIN
ONE YEAR OF THE DATE OF PURCHASE.

(2) THE CHARGE IS 5.00% DURING THE FIRST YEAR AFTER PURCHASE, DECLINES OVER THE
NEXT FIVE YEARS AS SHOWN ON PAGE 15, AND IS ELIMINATED AFTER SIX YEARS.

(3) THE CHARGE IS 1.00% DURING THE FIRST YEAR AFTER PURCHASE, AND IS ELIMINATED
THEREAFTER.

ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)

DISTRIBUTION TOTAL ANNUAL
MANAGEMENT AND SERVICE OTHER FUND OPERATING
FEE(1) (12B-1)FEES(2) EXPENSES(3) EXPENSES
Florida Municipal
Bond

A Class 0.50% 0.25% 0.01% 0.76%
B Class 0.50% 1.00% 0.01% 1.51%
C Class 0.50% 1.00% 0.01% 1.51%

Arizona Municipal
Bond

A Class 0.50% 0.25% 0.01% 0.76%
B Class 0.50% 1.00% 0.01% 1.51%
C Class 0.50% 1.00% 0.01% 1.51%

(1) BASED ON ASSETS OF ALL CLASSES OF THE FUNDS DURING THE FUND'S MOST RECENT
FISCAL YEAR. THE FUNDS HAVE STEPPED FEE SCHEDULES. AS A RESULT, THE FUNDS'
MANAGEMENT FEE RATES GENERALLY DECREASE AS FUND ASSETS INCREASE AND
INCREASE AS FUND ASSETS DECREASE.

(2) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. A PORTION OF THE FEE IS USED TO COMPENSATE SUCH FINANCIAL
INTERMEDIARIES FOR ONGOING RECORDKEEPING AND ADMINISTRATIVE SERVICES THAT
WOULD OTHERWISE BE PERFORMED BY AN AFFILIATE OF THE ADVISOR, AND A PORTION
IS USED TO COMPENSATE THEM FOR DISTRIBUTION AND OTHER SHAREHOLDER SERVICES.
FOR MORE INFORMATION, SEE SERVICE AND DISTRIBUTION FEES, PAGE X.

(3) OTHER EXPENSES INCLUDE THE FEES AND EXPENSES OF THE FUNDS' INDEPENDENT
TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST.

EXAMPLE
The examples in the table below are intended to help you compare the costs of
investing in a fund with the costs of investing in other mutual funds. Of
course, your actual costs may be higher or lower. Assuming you . . .

invest $10,000 in the fund

redeem all of your shares at the end of the periods shown below

earn a 5% return each year

incur the same operating expenses as shown above

. . . your cost of investing in the fund would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
Florida Municipal Bond

A Class $524 $682 $853 $1,347
B Class $553 $775 $919 $1,589
C Class $153 $475 $819 $1,789

Arizona Municipal Bond

A Class $524 $682 $853 $1,347
B Class $553 $775 $919 $1,589
C Class $153 $475 $819 $1,789

You would pay the following expenses if you did not redeem your shares:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
Florida Municipal Bond

A Class $524 $682 $853 $1,347
B Class $153 $475 $819 $1,589
C Class $153 $475 $819 $1,789

Arizona Municipal Bond

A Class $524 $682 $853 $1,347
B Class $153 $475 $819 $1,589
C Class $153 $475 $819 $1,789

OBJECTIVES, STRATEGIES AND RISKS

FLORIDA MUNICIPAL BOND FUND

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
Florida Municipal Bond seeks safety of principal and high current income that is
exempt from federal income tax. It also seeks to be exempt from the Florida
intangible personal property tax.

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVE?
The fund managers buy QUALITY DEBT SECURITIES and will invest at least 80% of
the fund's assets in MUNICIPAL SECURITIES that are exempt from the Florida
intangible personal property tax, and that have interest payments exempt from
federal income tax. Cities, counties and other municipalities in Florida and
U.S. territories usually issue these securities for public projects, such as
schools and roads. The fund also may invest in municipal securities issued by
states other than Florida; however, it is expected that the fund's shares will
be exempt from the Florida intangible personal property tax.

A QUALITY DEBT SECURITY IS ONE THAT HAS BEEN RATED BY AN INDEPENDENT RATING
AGENCY IN ITS TOP FOUR CREDIT QUALITY CATEGORIES OR DETERMINED BY THE ADVISOR TO
BE OF COMPARABLE CREDIT QUALITY. THE DETAILS OF THE FUND'S CREDIT QUALITY
STANDARDS ARE DESCRIBED IN THE STATEMENT OF ADDITIONAL INFORMATION.

A MUNICIPAL SECURITY IS A DEBT OBLIGATION ISSUED BY OR ON BEHALF OF A STATE, ITS
POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, THE DISTRICT OF COLUMBIA
OR A U.S. TERRITORY OR POSSESSION..

The fund managers also may buy quality debt securities exempt from the Florida
intangible personal property tax and with interest payments exempt from federal
income tax, but not exempt from the federal alternative minimum tax. Cities,
counties and other municipalities in Florida and U.S. territories usually issue
these securities (called private activity bonds) to fund for-profit private
projects, such as hospitals and athletic stadiums. The fund also may invest in
obligations of other issuers such as the Commonwealth of Puerto Rico that are
exempt from federal income tax and the Florida intangible personal property tax.

In the event of exceptional market or economic conditions, the fund may, as a
temporary defensive measure, invest all or a substantial portion of its assets
in cash or cash-equivalent securities. To the extent the fund assumes a
defensive position, it will not be pursuing its investment objective and may
generate taxable income.

The fund managers are not limited to a specific weighted average maturity range.
However, the fund managers monitor the fund's weighted average maturity, and
seek to adjust it as appropriate, taking into account market conditions and
other relevant factors.

The fund also may invest in derivative instruments such as options, futures
contracts, options on futures contracts, and swap agreements (including, but not
limited to, credit default swap agreements), or in mortgage- or asset-backed
securities, provided that such investments are in keeping with the fund's
investment objective.

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?

When interest rates change, the fund's share value will be affected. Generally,
when interest rates rise, the fund's share value will decline. The opposite is
usually true when interest rates decline. The interest rate risk is higher for
Florida Municipal Bond than for funds that have shorter weighted average
maturities, such as money market and short-term bond funds.

The fund may invest part of its assets in securities rated in the lowest
investment-grade category (for example, Baa or BBB). The issuers of these
securities are more likely to pose a credit risk, that is, to have problems
making interest and principal payments.

Because the fund invests primarily in Florida municipal securities, it will be
sensitive to events that affect Florida's economy. Florida Municipal Bond may
have a higher level of risk than funds that invest in a larger universe of
securities.

At any given time the value of your shares of Florida Municipal Bond may be
worth more or less than the price you paid for them. In other words, it is
possible to lose money by investing in the fund.

The use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional instruments. Derivatives are subject to a number of risks
including liquidity, interest rate, market and credit risk. They also involve
the risk of mispricing or improper valuation, the risk that changes in the value
of the derivative may not correlate perfectly with the underlying asset, rate or
index, and the risk of default or bankruptcy of the other party to a swap
agreement. Gains or losses involving some futures, options and other derivatives
may be substantial, in part because a relatively small price movement in these
securities may result in an immediate and substantial gain or loss for the fund.

INCOME FROM THE FUND MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX. FOR
MORE INFORMATION, SEE TAXES IN THIS PROSPECTUS.

ARIZONA MUNICIPAL BOND FUND

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
Arizona Municipal Bond seeks safety of principal and high current income that is
exempt from federal and Arizona income taxes.

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVE?
The fund managers buy QUALITY DEBT SECURITIES, and will invest at least 80% of
the fund's assets in MUNICIPAL SECURITIES with interest payments exempt from
regular federal and Arizona income taxes. Cities, counties and other
municipalities in Arizona and U.S. territories usually issue these securities
for public projects, such as schools and roads.

A MUNICIPAL SECURITY IS A DEBT OBLIGATION ISSUED BY OR ON BEHALF OF A
STATE, ITS POLITICAL SUBDIVISIONS, AGENCIES OR INSTRUMENTALITIES, THE DISTRICT
OF COLUMBIA OR A U.S. TERRITORY OR POSSESSION.

The fund managers also may buy quality debt securities with interest payments
exempt from federal and Arizona income taxes, but not exempt from the federal
alternative minimum tax. Cities, counties and other municipalities in Arizona
and U.S. territories usually issue these securities (called private activity
bonds) to fund for-profit private projects, such as hospitals and athletic
stadiums. The fund also may invest in obligations of other issuers such as the
Commonwealth of Puerto Rico that are exempt from federal and Arizona income tax.

The fund managers are not limited to a specific weighted average maturity range.
However, the fund managers monitor the fund's weighted average maturity and seek
to adjust it as appropriate, taking into account market conditions and other
relevant factors.

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
When interest rates change, the fund's share value will be affected. Generally,
when interest rates rise, the fund's share value will decline. The opposite is
usually true when interest rates decline. The interest rate risk is higher for
Arizona Municipal Bond than for funds that have shorter weighted average
maturities, such as money market and short-term bond funds.

Because the fund invests primarily in Arizona municipal securities, it will be
sensitive to events that affect Arizona's economy. Arizona Municipal Bond may
have a higher level of risk than funds that invest in a larger universe of
securities. At any given time the value of your shares of Arizona Municipal Bond
may be worth more or less than the price you paid for them. In other words, it
is possible to lose money by investing in the fund.

INCOME FROM THE FUND MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX. FOR
MORE INFORMATION, SEE TAXES IN THIS PROSPECTUS.

BASICS OF FIXED-INCOME INVESTING

DEBT SECURITIES

When a fund buys a debt security, also called a fixed-income security, it is
essentially lending money to the security's issuer. Notes, bonds, commercial
paper and U.S. Treasury securities are examples of debt securities. After the
debt security is first sold by the issuer, it may be bought and sold by other
investors. The price of the debt security may rise or fall based on many
factors, including changes in interest rates, liquidity and credit quality.

The fund managers decide which debt securities to buy and sell by

determining which debt securities help a fund meet its maturity requirements

identifying debt securities that satisfy a fund's credit quality standards

evaluating current economic conditions and assessing the risk of inflation

evaluating special features of the debt securities that may make them more or
less attractive

WEIGHTED AVERAGE MATURITY

Like most loans, debt securities eventually must be repaid or refinanced at some
date. This date is called the maturity date. The number of days left to a debt
security's maturity date is called the remaining maturity. The longer a debt
security's remaining maturity, generally the more sensitive its price is to
changes in interest rates.

Because a bond fund will own many debt securities, the fund managers calculate
the average of the remaining maturities of all the debt securities the fund owns
to evaluate the interest rate sensitivity of the entire portfolio. This average
is weighted according to the size of the fund's individual holdings and is
called the WEIGHTED AVERAGE MATURITY. The following chart shows how fund
managers would calculate the weighted average maturity for a fund that owned
only two debt securities.

AMOUNT OF PERCENT OF REMAINING WEIGHTED
SECURITY OWNED PORTFOLIO MATURITY MATURITY

Debt Security A $100,000 25% 4 years 1 year

Debt Security B $300,000 75% 12 years 9 years

Weighted Average Maturity 10 years

TYPES OF RISK

The basic types of risk the funds face are described below.

Interest Rate Risk

Generally, interest rates and the prices of debt securities move in opposite
directions. When interest rates fall, the prices of most debt securities rise;
when interest rates rise, prices fall. Because the funds invest primarily in
debt securities, changes in interest rates will affect the funds' performance.
This sensitivity to interest rate changes is called interest rate risk.

The degree to which interest rate changes affect fund performance varies and is
related to the weighted average maturity of a particular fund. For example, when
interest rates rise, you can expect the share value of a long-term bond fund to
fall more than that of a short-term bond fund. When rates fall, the opposite is
true.

The following table shows the likely effect of a 1% (100 basis points) increase
in interest rates on the price of 7% coupon bonds of differing maturities:

REMAINING MATURITY CURRENT PRICE PRICE AFTER 1% INCREASE CHANGE IN PRICE

1 year $100.00 $99.06 -0.94%
3 years $100.00 $97.38 -2.62%
10 years $100.00 $93.20 -6.80%
30 years $100.00 $88.69 -11.31%

CREDIT RISK

Credit risk is the risk that an obligation won't be paid and a loss will result.
A high credit rating indicates a high degree of confidence by the rating
organization that the issuer will be able to withstand adverse business,
financial or economic conditions and make interest and principal payments on
time. Generally, a lower credit rating indicates a greater risk of non-payment.
A lower rating also may indicate that the issuer has a more senior series of
debt securities, which means that if the issuer has difficulties making its
payments, the more senior series of debt is first in line for payment. Credit
quality may be lower when the issuer has any of the following: a high debt
level, a short operating history, a difficult, competitive environment, or a
less stable cash flow.

The fund managers do not invest solely on the basis of a debt security's credit
rating; they also consider other factors, including potential returns. Higher
credit ratings usually mean lower interest rate payments, so the managers often
purchase debt securities that aren't the highest rated to increase return. If a
fund purchases lower-rated debt securities, it assumes additional credit risk.

Debt securities rated in one of the highest four categories by a nationally
recognized securities rating organization are considered investment grade.
Although they are considered investment grade, an investment in these debt
securities still involves some credit risk because even an AAA rating is not a
guarantee of payment. For a complete description of the ratings system, see the
Statement of Additional Information. The funds' credit quality restrictions
apply at the time of purchase; the funds will not necessarily sell debt
securities if they are downgraded by a rating agency.

LIQUIDITY RISK

Debt securities can become difficult to sell, or less liquid, for a variety of
reasons, such as lack of an active trading market. The chance that a fund will
have difficulty selling its debt securities is called liquidity risk.

MANAGEMENT

WHO MANAGES THE FUNDS?
The Board of Trustees, investment advisor and fund management teams play key
roles in the management of the funds.

THE BOARD OF TRUSTEES
The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the funds, it has hired an investment advisor to do so.
More than two-thirds of the trustees are independent of the funds' advisor; that
is, they are not employed by and have no financial interest in the advisor.

THE INVESTMENT ADVISOR

The funds' investment advisor is American Century Investment Management, Inc.
The advisor has been managing mutual funds since 1958 and is headquartered at
4500 Main Street, Kansas City, Missouri 64111.

The advisor is responsible for managing the investment portfolios of the funds
and directing the purchase and sale of their investment securities. The advisor
also arranges for transfer agency, custody and all other services necessary for
the funds to operate.

For the services it provides to the funds during the most recent fiscal year,
the advisor receives a unified management fee based on a percentage of the
average net assets of the specific class of shares of the funds. The rate of the
management fee for each fund is determined daily on a class-by-class basis using
a two-step formula that takes into account each fund's strategy (money market,
bond or equity) and the total amount of mutual fund assets the advisor manages.
The management fee is paid monthly in arrears.

The Statement of Additional Information contains detailed information about the
calculation of the management fee. Out of each fund's fee, the advisor paid all
expenses of managing and operating that fund except brokerage expenses, taxes,
interest, fees and expenses of the independent trustees (including legal counsel
fees), and extraordinary expenses. A portion of each fund's management fee may
be paid by the funds' advisor to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed by
an affiliate of the advisor.

The A, B and C Classes of the fund were not in operation for the full fiscal
year ended May 31, 2003. Each class will pay the advisor a unified management
fee calculated by adding the appropriate Investment Category and Complex Fees
from the following schedules:

INVESTMENT CATEGORY FEE SCHEDULE COMPLEX FEE SCHEDULE (A, B AND C CLASS)

CATEGORY ASSETS FEE RATE COMPLEX ASSETS FEE RATE

FIRST $1 BILLION 0.2800% FIRST $2.5 BILLION 0.3100%
NEXT $1 BILLION 0.2280% NEXT $7.5 BILLION 0.3000%
NEXT $3 BILLION 0.1980% NEXT $15 BILLION 0.2985%
NEXT $5 BILLION 0.1780% NEXT $25 BILLION 0.2970%
NEXT $15 BILLION 0.1650% NEXT $50 BILLION 0.2960%
NEXT $25 BILLION 0.1630% NEXT $100 BILLION 0.2950%
THEREAFTER 0.1625% NEXT $100 BILLION 0.2940%
NEXT $200 BILLION 0.2930%
NEXT $250 BILLION 0.2920%
NEXT $500 BILLION 0.2910%
THEREAFTER 0.2900%

THE FUND MANAGEMENT TEAM

The advisor uses a team of portfolio managers, assistant portfolio managers and
analysts to manage the funds. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity. Team members buy and sell
securities for a fund as they see fit, guided by the funds' investment
objectives and strategy.

The portfolio managers on the Municipal Bond team are identified below.

FLORIDA MUNICIPAL BOND

ARIZONA MUNICIPAL BOND

G. DAVID MACEWEN
Mr. MacEwen, Chief Investment Officer -- Fixed Income and Senior Vice President,
supervises the American Century Municipal Bond team. He has been a member of the
team since May 1991, when he joined American Century as a Municipal Portfolio
Manager. He has a bachelor's degree in economics from Boston University and an
MBA in finance from the University of Delaware.

STEVEN M. PERMUT
Mr. Permut, Vice President, Director of Municipal Investments and Senior
Portfolio Manager, has been a member of the team since January 1988. He joined
American Century in June 1987. He has a bachelor's degree in business and
geography from State University of New York -- Oneonta and an MBA in finance
from Golden Gate University -- San Francisco.

ROBERT J. MILLER
Mr. Miller, Vice President and Portfolio Manager, has been a member of the team
since April 2000. He joined American Century in June 1998 as a Senior Municipal
Analyst. Before joining American Century, he was a Managing Director for
Washington Square Holdings, LLC from May 1997 to June 1998. He has a bachelor's
degree in business administration-finance from San Jose State University and an
MBA from New York University.

KENNETH M. SALINGER
Mr. Salinger, Vice President and Portfolio Manager, has been a member of the
team since October 1996. He joined American Century in April 1992. He has a
bachelor's degree in quantitative economics from the University of California --
San Diego. He is a CFA charterholder.

CODE OF ETHICS
American Century has a Code of Ethics designed to ensure that the interests of
fund shareholders come before the interests of the people who manage the funds.
Among other provisions, the Code of Ethics prohibits portfolio managers and
other investment personnel from buying securities in an initial public offering
or profiting from the purchase and sale of the same security within 60 calendar
days. In addition, the Code of Ethics requires portfolio managers and other
employees with access to information about the purchase or sale of securities by
the funds to obtain approval before executing permitted personal trades.

FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies contained in the Statement of Additional
Information and the investment objectives of the funds may not be changed
without shareholder approval. The Board of Trustees may change any other
policies and investment strategies.

INVESTING WITH AMERICAN CENTURY

CHOOSING A SHARE CLASS
The shares offered by this prospectus are intended for purchase by participants
in employer-sponsored retirement or savings plans and for persons purchasing
shares through investment advisors, broker-dealers, banks, insurance companies
and other financial intermediaries that provide various administrative and
distribution services.

The funds offer the A, B and C Classes through this prospectus. Although each
class of shares represents an interest in the same fund, each has a different
cost structure, as described below. Which class is right for you depends on many
factors, including how long you plan to hold the shares, how much you plan to
invest, the fee structure of each class, and how you wish to compensate your
financial advisor for the services provided to you. Your financial advisor can
help you choose the option that is most appropriate.

The following chart provides a summary description of each class offered by this
prospectus:

A CLASS B CLASS

Initial sales charge (1) No initial sales charge

Generally no CDSC (2) Contingent deferred sales charge on
redemptions within six years

12b-1 fee of 0.25% 12b-1 fee of 1.00%

No conversion feature Convert to A Class shares eight years after purchase

Generally more appropriate Purchase orders limited to amounts less than $100,000
for long-term investors

C CLASS

No initial sales charge

Contingent deferred sales
charge on redemptions
within 12 months

12b-1 fee of 1.00%

No conversion feature

Purchase orders limited to
amounts less than $1,000,000;
generally more appropriate
for short-term investors

(1) THE SALES CHARGE FOR A CLASS SHARES DECREASES DEPENDING ON THE SIZE OF YOUR
INVESTMENT, AND MAY BE WAIVED FOR SOME PURCHASES. THERE IS NO SALES CHARGE
FOR PURCHASES OF $1,000,000 OR MORE.

(2) A CDSC OF 1.00% WILL BE CHARGED ON CERTAIN PURCHASES OF $1,000,000 OR MORE
THAT ARE REDEEMED WITHIN ONE YEAR OF PURCHASE.

MINIMUM INITIAL INVESTMENT AMOUNT (FOR ALL CLASSES)
To open an account, the minimum investment is $5,000 for all accounts. The funds
are not available for retirement accounts.

CALCULATION OF SALES CHARGES

A Class
A Class shares are sold at their offering price, which is net asset value plus
an initial sales charge. This sales charge varies depending on the amount of
your investment, and is deducted from your purchase before it is invested. The
sales charges and the amounts paid to your financial advisor are:

AMOUNT PAID TO
SALES CHARGE SALES CHARGE FINANCIAL ADVISOR
AS A % OF AS A % OF NET AS A % OF
PURCHASE AMOUNT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE

Less than $50,000 4.50% 4.71% 4.00%

$50,000 - $99,999 4.50% 4.71% 4.00%

$100,000 - $249,999 3.50% 3.63% 3.00%

$250,000 - $499,999 2.50% 2.56% 2.00%

$500,000 - $999,999 2.00% 2.04% 1.75%

$1,000,000 - $3,999,999 0.00% 0.00% 1.00%(1)

$4,000,000 - $9,999,999 0.00% 0.00% 0.50%(1)

$10,000,000 or more 0.00% 0.00% 0.25%(1)

(1) FOR PURCHASES OVER $1,000,000 BY QUALIFIED RETIREMENT PLANS, NO UPFRONT
AMOUNT WILL BE PAID TO FINANCIAL ADVISORS.

There is no front-end sales charge for purchases of $1,000,000 or more, but if
you redeem your shares within one year of purchase you will pay a 1.00% deferred
sales charge, subject to the exceptions listed below.

REDUCTIONS AND WAIVERS OF SALES CHARGES FOR A CLASS

You may qualify for a reduction or waiver of certain sales charges, but you or
your financial advisor must provide such information to American Century at the
time of purchase in order to take advantage of such reduction or waiver.

You and your immediate family (your spouse and your children under the age of
21) may combine investments to reduce your A Class sales charge in the following
ways:

ACCOUNT AGGREGATION. Investments made by you and your immediate family may be
aggregated if made for your own account(s) and/or certain other accounts, such
as:

Certain trust accounts

Solely controlled business accounts

Single-participant retirement plans

Endowments or foundations established and controlled by you or an immediate
family member

CONCURRENT PURCHASES. You may combine simultaneous purchases in A, B or C Class
shares of any two or more American Century Advisor Funds to qualify for a
reduced A Class sales charge.

RIGHTS OF ACCUMULATION. You may take into account the current value of your
existing holdings in A, B or C Class shares of any American Century Advisor Fund
to determine your A Class sales charge.

LETTER OF INTENT. A Letter of Intent allows you to combine all non-money market
fund purchases of all A, B and C Class shares you intend to make over a 13-month
period to determine the applicable sales charge. At your request, purchases made
during the previous 90 days may be included; however, capital appreciation,
capital gains and reinvested dividends do not apply toward these combined
purchases. A portion of your account will be held in escrow to cover additional
A Class sales charges that will be due if your total investments over the
13-month period do not qualify for the applicable sales charge reduction.

WAIVERS FOR CERTAIN INVESTORS. The sales charge on A Class shares may be waived
for:

purchases by registered representatives and other employees of certain financial
intermediaries (and their immediate family members) having sales agreements with
the advisor or distributor

wrap accounts maintained for clients of certain financial intermediaries who
have entered into agreements with American Century

present or former officers, directors and employees (and their families) of
American Century

qualified retirement plan purchases

IRA Rollovers from any American Century Advisor Fund held in a qualified
retirement plan

certain other investors as deemed appropriate by American Century

B CLASS
B Class shares are sold at their net asset value without an initial sales
charge. However, if you redeem your shares within six years of purchase you will
pay a contingent deferred sales charge (CDSC). There is no CDSC on shares
acquired through reinvestment of dividends or capital gains.

REDEMPTIONS DURING CDSC AS A % OF ORIGINAL PURCHASE PRICE

1st year 5.00%

2nd year 4.00%

3rd year 3.00%

4th year 3.00%

5th year 2.00%

6th year 1.00%

After 6th year None

B Class shares will automatically convert to A Class shares in the month of the
eight-year anniversary of the purchase date.

C CLASS
C Class shares are sold at their net asset value without an initial sales
charge. However, if you redeem your shares within 12 months of purchase you will
pay a CDSC of 1.00% of the original purchase price or the current market value
at redemption, whichever is less.

The CDSC will not be charged on shares acquired through reinvestment of
dividends or distributions or increases in the net asset value of shares.

CALCULATION OF CONTINGENT DEFERRED SALES CHARGE (CDSC)

To minimize the amount of the CDSC you may pay when you redeem shares, the fund
will first redeem shares acquired through reinvested dividends and capital gain
distributions, which are not subject to a CDSC. Shares that have been in your
account long enough that they are not subject to a CDSC are redeemed next. For
any remaining redemption amount, shares will be sold in the order they were
purchased (earliest to latest).

CDSC WAIVERS

Any applicable contingent deferred sales charge may be waived in the following
cases:

redemptions through systematic withdrawal plans not exceeding annually

o 12% of the lesser of the original purchase cost or current market
value for A Class shares

o 12% of the original purchase cost for B Class shares

o 12% of the lesser of the original purchase cost or current market
value for C Class shares

distributions from IRAs due to attainment of age 59 1/2 for A Class and C Class
shares

required minimum distributions from retirement accounts upon reaching age 70 1/2

tax-free returns of excess contributions to IRAs

redemptions due to death or post-purchase disability

exchanges, unless the shares acquired by exchange are redeemed within the
original CDSC period

IRA rollovers from any American Century Advisor Fund held in a qualified
retirement plan, for A Class shares only

if no broker was compensated for the sale

BUYING AND SELLING SHARES

Your ability to purchase, exchange and redeem shares will depend on the policies
of the financial intermediary through which you do business. Some policy
differences may include

minimum investment requirements

exchange policies

fund choices

cutoff time for investments

In addition, your financial intermediary may charge a transaction fee for the
purchase or sale of fund shares. Please contact your intermediary or plan
sponsor for a complete description of its policies. Copies of the fund's annual
report, semiannual report and Statement of Additional Information are available
from your intermediary or plan sponsor.

The fund has authorized certain FINANCIAL INTERMEDIARIES to accept orders on the
fund's behalf. American Century has contracts with these intermediaries
requiring them to track the time investment orders are received and to comply
with procedures relating to the transmission of orders. Orders must be received
by the intermediary on a fund's behalf before the time the net asset value is
determined in order to receive that day's share price. If those orders are
transmitted to American Century and paid for in accordance with the contract,
they will be priced at the net asset value next determined after your request is
received in the form required by the intermediary.

FINANCIAL INTERMEDIARIES INCLUDE BANKS, BROKER-DEALERS, INSURANCE COMPANIES AND
INVESTMENT ADVISORS.

REINSTATEMENT PRIVILEGE

Within 90 days of a redemption of any A or B Class shares, you may reinvest all
of the redemption proceeds in A Class shares of any American Century Advisor
Fund at the then-current net asset value without paying an initial sales charge.
Any CDSC you paid on an A Class redemption that you are reinvesting will be
credited to your account. You or your financial advisor must notify the fund's
transfer agent in writing at the time of the reinvestment to take advantage of
this privilege, and you may use it only once.

EXCHANGING SHARES

You may exchange shares of the fund for shares of the same class of another
American Century Advisor Fund without a sales charge if you meet the following
criteria:

The exchange is for a minimum of $100

For an exchange that opens a new account, the amount of the exchange must meet
or exceed the minimum account size requirement for the fund receiving the
exchange

For purposes of computing any applicable CDSC on shares that have been
exchanged, the holding period will begin as of the date of purchase of the
original fund owned. Exchanges from a money market fund are subject to a sales
charge on the fund being purchased, unless the money market fund shares were
acquired by exchange from a fund with a sales charge or by reinvestment of
dividends or capital gains distributions.

YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS

American Century and its affiliated companies use procedures reasonably designed
to confirm that telephone, electronic and other instructions are genuine. These
procedures include recording telephone calls, requesting personalized security
codes or other information, and sending confirmation of transactions. If we
follow these procedures, we are not responsible for any losses that may occur
due to unauthorized instructions. For transactions conducted over the Internet,
we recommend the use of a secure Internet browser. In addition, you should
verify the accuracy of your confirmation statements immediately after you
receive them.

REDEMPTIONS

If you sell your B or C Class or, in certain cases, A Class shares within a
certain time after their purchase, you will pay a sales charge the amount of
which is contingent upon the amount of time you have held your shares, as
described above.

Your redemption proceeds will be calculated using the NET ASSET VALUE (NAV) next
determined after we receive your transaction request in good order.

A fund's NET ASSET VALUE, or NAV, is the price of the fund's shares.

However, we reserve the right to delay delivery of redemption proceeds up to
seven days. For example, each time you make an investment with American Century,
there is a seven-day holding period before we will release redemption proceeds
from those shares, unless you provide us with satisfactory proof that your
purchase funds have cleared. For funds with CheckWriting privileges, we will not
honor checks written against shares subject to this seven-day holding period.
Investments by wire generally require only a one-day holding period. If you
change your address, we may require that any redemption request made within 15
days be submitted in writing and be signed by all authorized signers with their
signatures guaranteed. If you change your bank information, we may impose a
15-day holding period before we will transfer or wire redemption proceeds to
your bank. In addition, we reserve the right to honor certain redemptions with
securities, rather than cash, as described in the next section.

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

If, during any 90-day period, you redeem fund shares worth more than $250,000
(or 1% of the value of a fund's assets if that amount is less than $250,000), we
reserve the right to pay part or all of the redemption proceeds in excess of
this amount in readily marketable securities instead of in cash. The fund
managers would select these securities from the fund's portfolio. A payment in
securities can help the fund's remaining shareholders avoid tax liabilities that
they might otherwise have incurred had the fund sold securities prematurely to
pay the entire redemption amount in cash.

We will value these securities in the same manner as we do in computing the
fund's net asset value. We may provide these securities in lieu of cash without
prior notice. Also, if payment is made in securities, you may have to pay
brokerage or other transaction costs to convert the securities to cash.

If your redemption would exceed this limit and you would like to avoid being
paid in securities, please provide us with an unconditional instruction to
redeem at least 15 days prior to the date on which the redemption transaction is
to occur. The instruction must specify the dollar amount or number of shares to
be redeemed and the date of the transaction. This minimizes the effect of the
redemption on a fund and its remaining investors.

REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS

If your account balance falls below the minimum initial investment amount for
any reason other than as a result of market fluctuation, we will notify you and
give you 90 days to meet the minimum. If you do not meet the deadline, American
Century reserves the right to redeem the shares in the account and send the
proceeds to your address of record. Please note that shares redeemed in this
manner may be subject to a sales charge if held less than the applicable time
period. Please note that you may incur tax liability as a result of the
redemption.

MODIFYING OR CANCELING AN INVESTMENT

Investment instructions are irrevocable. That means that once you have mailed or
otherwise transmitted your investment instruction, you may not modify or cancel
it. Each fund reserves the right to suspend the offering of shares for a period
of time and to reject any specific investment (including a purchase by
exchange). Additionally, we may refuse a purchase if, in our judgment, it is of
a size that would disrupt the management of a fund.

ABUSIVE TRADING PRACTICES

We discourage market timing and other abusive trading practices, and we take
steps to minimize the effect of these activities in our funds.

Excessive, short-term (market timing) or other abusive trading practices may
disrupt portfolio management strategies and harm fund performance. To minimize
harm to a fund and its shareholders, we reserve the right to reject any purchase
order (including exchanges) from any investor we believe has a history of
abusive trading or whose trading, in our judgment, has been or may be disruptive
to a fund. In making this judgment, we may consider trading done in multiple
accounts under common ownership or control.

SIGNATURE GUARANTEES

A signature guarantee - which is different from a notarized signature - is a
warranty that the signature presented is genuine. We may require a signature
guarantee for the following transactions:

Your redemption or distribution check, Check-A-Month or automatic redemption is
made payable to someone other than the account owners

Your redemption proceeds or distribution amount is sent by wire or EFT to a
destination other than your personal bank account

You are transferring ownership of an account over $100,000

We reserve the right to require a signature guarantee for other transactions, at
our discretion.

A NOTE ABOUT MAILINGS TO SHAREHOLDERS

To reduce the amount of mail you receive from us, we may deliver a single copy
of certain investor documents (such as shareholder reports and prospectuses) to
investors who share an address, even if accounts are registered under different
names. If you prefer to receive multiple copies of these documents individually
addressed, please contact your financial intermediary directly.

RIGHT TO CHANGE POLICIES

We reserve the right to change any stated investment requirement, including
those that relate to purchases, exchanges and redemptions. We also may alter,
add or discontinue any service or privilege. Changes may affect all investors or
only those in certain classes or groups.

SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE
American Century determines the NAV of each fund as of the close of regular
trading on the New York Stock Exchange (usually 4 p.m. Eastern time) on each day
the Exchange is open. On days when the Exchange is closed (including certain
U.S. holidays), we do not calculate the NAV. A fund share's NAV is the current
value of the fund's assets, minus any liabilities, divided by the number of fund
shares outstanding.

If current market prices of securities owned by a fund are not readily available
from an independent pricing source, the advisor may determine its fair value in
accordance with procedures adopted by the fund's board. For example, if an event
occurs after the close of the exchange on which a fund's portfolio securities
are principally traded that is likely to have changed the value of the
securities, the advisor may determine the securities' fair value.

We will price your purchase, exchange or redemption at the net asset value next
determined after we receive your transaction request in GOOD ORDER.

GOOD ORDER MEANS THAT YOUR INSTRUCTIONS HAVE BEEN RECEIVED IN THE FORM
REQUIRED BY AMERICAN CENTURY. THIS MAY INCLUDE, FOR EXAMPLE, PROVIDING THE FUND
NAME AND ACCOUNT NUMBER, THE AMOUNT OF THE TRANSACTION AND ALL REQUIRED
SIGNATURES.

DISTRIBUTIONS
Federal tax laws require each fund to make distributions to its shareholders in
order to qualify as a regulated investment company. Qualification as a regulated
investment company means that the funds will not be subject to state or federal
income tax on amounts distributed. The distributions generally consist of
dividends and interest received, as well as capital gains realized on the sale
of investment securities.

CAPITAL GAINS ARE INCREASES IN THE VALUES OF CAPITAL ASSETS, SUCH AS STOCK,
FROM THE TIME THE ASSETS ARE PURCHASED.

Each fund pays distributions from net income monthly. Each fund generally pays
capital gains distributions, if any, once a year, usually in December. A fund
may make more frequent distributions, if necessary, to comply with Internal
Revenue Code provisions.

You will participate in fund distributions, when they are declared, starting the
next business day after your purchase is effective. For example, if you purchase
shares on a day a distribution is declared, you will not receive that
distribution. If you redeem shares, you will receive any distribution declared
on the day you redeem. If you redeem all shares, we will include any
distributions received with your redemption proceeds.

For investors investing through taxable accounts, we will reinvest distributions
unless you elect to receive them in cash.

TAXES

TAX-EXEMPT INCOME
Most of the income that the funds receive from municipal securities is exempt
from regular federal income taxes. However, corporate shareholders should be
aware that distributions may be subject to state corporate franchise tax.
Distributions from Arizona Municipal Bond also will be exempt from Arizona
income taxes. Additionally, fund shares of Florida Municipal Bond will generally
be exempt from the Florida intangible personal property tax.

The funds also may purchase private activity bonds. The income from these
securities is subject to the federal alternative minimum tax. If you are subject
to the alternative minimum tax, distributions from the funds that represent
income derived from private activity bonds are taxable to you. Consult your tax
advisor to determine whether you are subject to the alternative minimum tax.

TAXABLE INCOME
The funds' investment performance also is based on sources other than income
from municipal securities. These investment performance sources, while not the
primary source of fund distributions, will generate taxable income to you. Some
of these investment performance sources are:

o Market Discount Purchases. The funds may buy a tax-exempt security for a
price less than the principal amount of the bond. If the price of the bond
increases over time, a portion of the gain may be treated as ordinary
income and taxable as ordinary income if it is distributed to shareholders.

o Capital Gains. When a fund sells a security, even a tax-exempt municipal
security, it can generate a capital gain or loss, which you must report on
your tax return.

o Temporary Investments. Some temporary investments, such as securities loans
and repurchase agreements, can generate taxable income.

TAXABILITY OF DISTRIBUTIONS
Fund distributions may consist of income such as dividends and interest earned
by a fund from its investments, or capital gains generated by a fund from the
sale of its investment securities. Distributions of income are taxed as ordinary
income, unless they are designated as QUALIFIED DIVIDEND INCOME and you meet a
minimum required holding period with respect to your shares of the fund, in
which case distributions of income are taxed as long-term capital gains.

QUALIFIED DIVIDEND INCOME IS A DIVIDEND RECEIVED BY A FUND FROM THE STOCK
OF A DOMESTIC OR QUALIFYING FOREIGN CORPORATION, PROVIDED THAT THE FUND HAS HELD
THE STOCK FOR A REQUIRED HOLDING PERIOD.

For capital gains and for income distributions designated as qualified dividend
income, the following rates apply:

TYPE OF DISTRIBUTION TAX RATE FOR 10% AND TAX RATE FOR
15% BRACKETS ALL OTHER BRACKETS

Short-term capital gains Ordinary Income Ordinary Income

Long-term capital gains (> 1 year)
and Qualified Dividend Income 5% 15%

The tax status of any distributions of capital gains is determined by how long
the fund held the underlying security that was sold, not by how long you have
been invested in the fund, or whether you reinvest your distributions in
additional shares or take them in cash. For taxable accounts, American Century
or your financial intermediary will inform you of the tax status of fund
distributions for each calendar year in an annual tax mailing (Form 1099-DIV).

Distributions also may be subject to state and local taxes. Because everyone's
tax situation is unique, you may want to consult your tax professional about
federal, state and local tax consequences.

TAXES ON TRANSACTIONS
Your redemptions -- including exchanges to other American Century funds -- are
subject to capital gains tax. The table above can provide a general guide for
your potential tax liability when selling or exchanging fund shares. Short-term
capital gains are gains on fund shares you held for 12 months or less. Long-term
capital gains are gains on fund shares you held for more than 12 months. If your
shares decrease in value, their sale or exchange will result in a long-term or
short-term capital loss. However, you should note that loss realized upon the
sale or exchange of shares held for six months or less will be treated as a
long-term capital loss to the extent of any distribution of long-term capital
gain and will be disallowed to the extent of any distribution of tax-exempt
income to you with respect to those shares. If a loss is realized on the
redemption of fund shares, the reinvestment in additional fund shares within 30
days before or after the redemption may be subject to the wash sale rules of the
Internal Revenue Code. This may result in a postponement of the recognition of
such loss for federal income tax purposes.

If you have not certified to us that your Social Security number or tax
identification number is correct and that you are not subject to withholding, we
are required to withhold and pay to the IRS the applicable federal withholding
tax rate on taxable dividends, capital gains distributions and redemption
proceeds.

BUYING A DIVIDEND
Purchasing fund shares in a taxable account shortly before a distribution is
sometimes known as buying a dividend. In taxable accounts, you must pay income
taxes on the distribution whether you reinvest the distribution or take it in
cash. In addition, you will have to pay taxes on the distribution whether the
value of your investment decreased, increased or remained the same after you
bought the fund shares.

The risk in buying a dividend is that the fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. The funds distribute those gains to you, after subtracting any losses,
even if you did not own the shares when the gains occurred.

If you buy a dividend, you incur the full tax liability of the distribution
period, but you may not enjoy the full benefit of the gains realized in the
fund's portfolio.

MULTIPLE CLASS INFORMATION

American Century offers four classes of shares of the funds through financial
intermediaries: A Class, B Class, C Class and Investor Class. The shares offered
by this Prospectus are A, B and C Class shares, which are offered primarily
through employer-sponsored retirement plans or through institutions like
investment advisors, banks, broker-dealers and insurance companies.

The other class has different fees, expenses and/or minimum investment
requirements from the classes offered by this Prospectus. The difference in the
fee structures between the classes is the result of their separate arrangements
for shareholder and distribution services and not the result of any difference
in amounts charged by the advisor for core investment advisory services.
Accordingly, the core investment advisory expenses do not vary by class.
Different fees and expenses will affect performance. For additional information
concerning the other class of shares not offered by this prospectus, call us at
1-800-378-9878.

You also can contact a sales representative or financial intermediary who offers
that class of shares.

Except as described herein, all classes of shares of the funds have identical
voting, dividend, liquidation and other rights, preferences, terms and
conditions. The only differences among the classes are (a) each class may be
subject to different expenses specific to that class; (b) each class has a
different identifying designation or name; (c) each class has exclusive voting
rights with respect to matters solely affecting such class; (d) each class may
have different exchange privileges; and (e) the B Class provides for automatic
conversion from that class into shares of the A Class of the same fund after
eight years.

SERVICE AND DISTRIBUTION FEES
Investment Company Act Rule 12b-1 permits mutual funds that adopt a written plan
to pay certain expenses associated with the distribution of their shares out of
fund assets. Each class offered by this prospectus has a 12b-1 plan. The plans
provide for annual fees of 0.25% for A Class and 1.00% for B Class and C Class
to the distributor for certain ongoing shareholder and administrative services
and for past distribution services. The distributor pays all or a portion of
such fees to the investment advisors, banks, broker-dealers and insurance
companies that make the classes available. Because these fees are paid out of
the funds' assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than other types of sales charges.
The higher fees for B and C Class shares may cost you more over time than paying
the initial sales charge for A Class shares. For additional information about
the plans and their terms, see MULTIPLE CLASS STRUCTURE in the Statement of
Additional Information.

In addition, the advisor or the funds' distributor may make payments for various
services or other expenses out of their past profits or other available sources.
Such expenses may include distribution services, shareholder services or
marketing, promotional or related expenses. The amount of these payments is
determined by the advisor or the distributor and is not paid by you.

PERFORMANCE INFORMATION OF OTHER CLASS

The following financial information is provided to show the performance of the
funds' original class of shares. This class, the Investor Class, has a total
expense ratio that is lower than the A, B and C Classes offered by this
prospectus. If the A, B or C Classes had existed during the periods presented,
their performance would have been lower because of the additional expenses.

The tables on the next few pages itemize what contributed to the changes in the
Investor Class share price during the most recently ended fiscal year. It also
shows the changes in share price for this period in comparison to changes over
the last five fiscal years.

On a per-share basis, the table includes as appropriate

o share price at the beginning of the period

o investment income and capital gains or losses

o distributions of income and capital gains paid to investors

o share price at the end of the period

Each table also includes some key statistics for the period as appropriate

o Total Return - the overall percentage of return of the fund, assuming the
reinvestment of all distributions

o Expense Ratio - the operating expenses of the fund as a percentage of
average net assets

o Net Income Ratio - the net investment income of the fund as a percentage of
average net assets

o Portfolio Turnover - the percentage of the fund's investment portfolio that
is replaced during the period

The Financial Highlights have been audited by PricewaterhouseCoopers LLP,
independent accounts. Their Independent Auditor's Report and the financial
statements are included in the funds' Annual Report, which is available upon
request.

FLORIDA MUNICIPAL BOND FUND
INVESTOR CLASS

Florida Municipal Bond - Financial Highlights

For a Share Outstanding Throughout the Years Ended May 31
-----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
PER-SHARE DATA
-----------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.73 $10.67 $10.08 $10.50 $10.56
-----------------------------------------------------------------------------------------
Income From
Investment Operations
-----------------------------------
Net Investment Income 0.42 0.44 0.47 0.45 0.44
-----------------------------------
Net Realized and Unrealized
Gain (Loss) 0.62 0.19 0.59 (0.41) 0.05
-----------------------------------------------------------------------------------------
Total From Investment Operations 1.04 0.63 1.06 0.04 0.49
-----------------------------------------------------------------------------------------
Distributions
-----------------------------------
From Net Investment Income (0.42) (0.44) (0.47) (0.45) (0.44)
-----------------------------------
From Net Realized Gains (0.06) (0.13) -- (0.01) (0.11)
-----------------------------------------------------------------------------------------
Total Distributions (0.48) (0.57) (0.47) (0.46) (0.55)
-----------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.29 $10.73 $10.67 $10.08 $10.50
=========================================================================================
TOTAL RETURN(1) 9.90% 5.98% 10.70% 0.49% 4.71%

RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.51% 0.51% 0.51% 0.51% 0.51%
-----------------------------------
Ratio of Net Investment Income
to Average Net Assets 3.78% 4.03% 4.49% 4.49% 4.13%
-----------------------------------
Portfolio Turnover Rate 45% 75% 138% 155% 154%
-----------------------------------
Net Assets, End of Period
(in thousands) $70,078 $54,565 $53,860 $46,077 $44,379
-----------------------------------------------------------------------------------------
(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any.

ARIZONA MUNICIPAL BOND FUND
INVESTOR CLASS

Arizona Municipal Bond - Financial Highlights

For a Share Outstanding Throughout the Years Ended May 31
-----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
PER-SHARE DATA
-----------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.89 $10.69 $10.12 $10.62 $10.67
-----------------------------------------------------------------------------------------
Income From
Investment Operations
-----------------------------------
Net Investment Income 0.41 0.44 0.48 0.48 0.46
-----------------------------------
Net Realized and Unrealized
Gain (Loss) 0.59 0.27 0.57 (0.47) 0.01
-----------------------------------------------------------------------------------------
Total From Investment Operations 1.00 0.71 1.05 0.01 0.47
-----------------------------------------------------------------------------------------
Distributions
-----------------------------------
From Net Investment Income (0.41) (0.44) (0.48) (0.48) (0.46)
-----------------------------------
From Net Realized Gains (0.08) (0.07) -- (0.03) (0.06)
-----------------------------------------------------------------------------------------
Total Distributions (0.49) (0.51) (0.48) (0.51) (0.52)
-----------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.40 $10.89 $10.69 $10.12 $10.62
=========================================================================================
TOTAL RETURN(1) 9.36% 6.74% 10.57% 0.20% 4.51%

RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.51% 0.51% 0.51% 0.51% 0.51%
-----------------------------------
Ratio of Net Investment Income
to Average Net Assets 3.70% 4.04% 4.57% 4.71% 4.30%
-----------------------------------
Portfolio Turnover Rate 50% 77% 104% 117% 70%
-----------------------------------
Net Assets, End of Period
(in thousands) $75,787 $66,327 $50,309 $40,594 $45,410
-----------------------------------------------------------------------------------------
(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any.

MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS

ANNUAL AND SEMIANNUAL REPORTS
Annual and semiannual reports contain more information about the funds'
investments and the market conditions and investment strategies that
significantly affected the funds' performance during the most recent fiscal
period.

STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains a more detailed, legal description of the funds' operations,
investment restrictions, policies and practices. The SAI is incorporated by
reference into this Prospectus. This means that it is legally part of this
Prospectus, even if you don't request a copy.

You may obtain a free copy of the SAI or annual and semiannual reports, and ask
questions about the funds or your accounts, by contacting American Century at
the address or telephone numbers listed below.

You also can get information about the funds (including the SAI) from the
Securities and Exchange Commission (SEC). The SEC charges a duplicating fee to
provide copies of this information.

IN PERSON SEC Public Reference Room
Washington, D.C.
Call 202-942-8090 for
location and hours.

ON THE INTERNET o EDGAR database at www.sec.gov

o By email request at publicinfo@sec.gov

BY MAIL SEC Public Reference Section
Washington, D.C. 20549-0102

This Prospectus shall not constitute an offer to sell securities of a fund in
any state, territory, or other jurisdiction where the fund's shares have not
been registered or qualified for sale, unless such registration or qualification
is not required, or under any circumstances in which such offer or solicitation
would be unlawful.

FUND REFERENCE FUND CODE TICKER NEWSPAPER LISTING

Florida Municipal Bond
A Class N/A N/A FLMuBnd
B Class N/A N/A FLMuBnd
C Class N/A N/A FLMuBnd
Arizona Municipal Bond
A Class N/A N/A AzMuBnd
B Class N/A N/A AzMuBnd
C Class N/A N/A AzMuBnd

Investment Company Act File No. 811-4025

American Century Investments
P.O. Box 419786
Kansas City, Missouri 64141-6786

1-800-378-9878

www.americancentury.com

0402
SH-PRS-_____

American Century
statement of
additional information

FEBRUARY 27, 2004

American Century Municipal Trust

Florida Municipal Money Market Fund

Florida Municipal Bond Fund

Arizona Municipal Bond Fund

Tax-Free Money Market Fund

Tax-Free Bond Fund

High-Yield Municipal Fund

This Statement of Additional Information adds to the discussion in the funds'
Prospectuses dated October 1, 2003, and February 27, 2004, but is not a
prospectus. The Statement of Additional Information should be read in
conjunction with the funds' current Prospectuses. If you would like a copy of a
Prospectus, please contact us at the address or telephone numbers listed on the
back cover or visit American Century's Web site at www.americancentury.com.

This Statement of Additional Information incorporates by reference certain
information that appears in the funds' annual and semiannual reports, which are
delivered to all shareholders. You may obtain a free copy of the funds' annual
or semiannual reports by calling 1-800-345-2021.

American Century
Investment Services, Inc.

Table of Contents

THE FUNDS' HISTORY............................................................2

FUND INVESTMENT GUIDELINES....................................................2
Florida Municipal Money Market Fund and
Florida Municipal Bond Fund.............................................3
Arizona Municipal Bond Fund.............................................4
Tax-Free Money Market Fund and Tax-Free Bond Fund ......................4
High-Yield Municipal Fund...............................................5
Credit Quality and Maturity Guidelines..................................5

FUND INVESTMENTS AND RISKS....................................................6
Investment Strategies and Risks.........................................6
Investment Policies....................................................23
Temporary Defensive Measures...........................................25
Portfolio Turnover.....................................................25

MANAGEMENT...................................................................25
The Board of Trustees..................................................29
Ownership of Fund Shares...............................................32
Code of Ethics.........................................................32

THE FUNDS' PRINCIPAL SHAREHOLDERS............................................34

SERVICE PROVIDERS............................................................35
Investment Advisor.....................................................35
Transfer Agent and Administrator.......................................38
Distributor............................................................38

OTHER SERVICE PROVIDERS......................................................39
Custodian Banks........................................................39
Independent Accountants................................................39

BROKERAGE ALLOCATION.........................................................39

INFORMATION ABOUT FUND SHARES................................................39
Multiple Class Structure...............................................40
Buying and Selling Fund Shares.........................................46
Valuation of a Fund's Securities.......................................46

TAXES....................................................................... 48
Federal Income Tax.....................................................48
Alternative Minimum Tax................................................50

HOW FUND PERFORMANCE INFORMATION IS CALCULATED...............................50
Performance Comparisons................................................55
Permissible Advertising Information....................................55
Multiple Class Performance Advertising.................................56

FINANCIAL STATEMENTS.........................................................56

EXPLANATION OF FIXED-INCOME SECURITIES RATINGS...............................56

THE FUNDS' HISTORY

American Century Municipal Trust is a registered open-end management investment
company that was organized as a Massachusetts business trust on May 1, 1984.
From then until January 1997, it was known as Benham Municipal Income Trust.
Throughout this Statement of Additional Information we refer to American Century
Municipal Trust as the Trust.

Each fund described in this Statement of Additional Information is a separate
series of the Trust and operates for many purposes as if it were an independent
company. Each fund has its own investment objective, strategy, management team,
assets, and tax identification and stock registration number.

Fund Ticker Symbol Inception Date
--------------------------------------------------------------------------------
FLORIDA MUNICIPAL MONEY MARKET

Investor Class BEFXX 04/11/1994
--------------------------------------------------------------------------------
FLORIDA MUNICIPAL BOND

Investor Class ACBFX 04/11/1994
A Class N/A 02/27/2004
B Class N/A 02/27/2004
C Class N/A 02/27/2004
--------------------------------------------------------------------------------
ARIZONA MUNICIPAL BOND

Investor Class BEAMX 04/11/1994
A Class N/A 02/27/2004
B Class N/A 02/27/2004
C Class N/A 02/27/2004
--------------------------------------------------------------------------------
TAX-FREE MONEY MARKET

Investor Class BNTXX 07/31/1984
--------------------------------------------------------------------------------
TAX-FREE BOND

Investor Class TWTIX 03/02/1987
Institutional Class N/A 04/15/2003
--------------------------------------------------------------------------------
HIGH-YIELD MUNICIPAL

Investor Class ABHYX 03/31/1998
A Class AYMAX 01/31/2003
B Class AYMBX 01/31/2003
C Class AYMCX 07/24/2002

FUND INVESTMENT GUIDELINES
This section explains the extent to which the funds' advisor, American Century
Investment Management, Inc., can use various investment vehicles and strategies
in managing a fund's assets. Descriptions of the investment techniques and risks
associated with each appear in the section, Investment Strategies and Risks,
which begins on page 6. In the case of the funds' principal investment
strategies, these descriptions elaborate upon discussions contained in the
Prospectuses.

Florida Municipal Money Market, Tax-Free Money Market and Tax-Free Bond are
diversified as defined in the Investment Company Act of 1940 (the Investment
Company Act). High-Yield Municipal, Florida Municipal Bond and Arizona Municipal
Bond are non-diversified. Diversified means that, with respect to 75% of its
total assets, each fund will not invest more than 5% of its total assets in the
securities of a single issuer or own more than 10% of the outstanding voting
securities of a single issuer (other than the U.S. government). Non-diversified
means that a fund may invest a greater percentage of its assets in a smaller
number of securities than a diversified fund.

The money market funds operate pursuant to Rule 2a-7 under the Investment
Company Act of 1940, which permits the valuation of portfolio securities on the
basis of amortized cost. To rely on the rule, the funds must be diversified. For
Tax-Free Money Market, diversified under Rule 2a-7 means that the fund must not
invest more than 5% of its assets in securities of any one issuer, or, with
respect to 75% of its assets, more than 10% of its assets in securities
guaranteed by any one guarantor, other than the U.S. government, although it may
invest up to 25% of its assets in securities with the highest credit ratings for
a period of up to three business days. For Florida Municipal Money Market,
diversified under Rule 2a-7 means that with respect to 75% of its assets, the
fund must not invest more than 5% of its assets in securities of any one issuer
or more than 10% of its assets in securities guaranteed by any one guarantor,
other than the U.S. government. Each fund also must not invest more than (a) the
greater of 1% of assets or $1 million in conduit securities of a single issuer
rated in the second highest credit quality category; and (b) 5% of its assets in
conduit securities rated in the second highest credit quality category. Conduit
securities are issued by states or municipalities, but ultimate responsibility
for the payment of principal and interest rests with a non-governmental entity,
such as a corporation or project. The money market funds are considered
diversified provided that they comply with the definition of diversified under
Rule 2a-7.

To meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year

(1) no more than 25% of its total assets are invested in the securities of a
single issuer (other than the U.S. government or a regulated investment
company), and

(2) with respect to at least 50% of its total assets, no more than 5% of its
total assets are invested in the securities of a single issuer (other than
the U.S. government or a regulated investment company) or it does not own
more than 10% of the outstanding voting securities of a single issuer.

In general, within the restrictions outlined here and in the funds'
Prospectuses, the fund managers have broad powers to decide how to invest fund
assets, including the power to hold them uninvested.

So long as a sufficient number of acceptable securities are available, the fund
managers intend to keep the funds fully invested. However, under exceptional
conditions, the funds may assume a defensive position, temporarily investing all
or a substantial portion of their assets in cash or short-term securities.

For an explanation of the securities ratings referred to in the Prospectuses and
this Statement of Additional Information, see Explanation of Fixed-Income
Securities Ratings beginning on page 56.

FLORIDA MUNICIPAL MONEY MARKET FUND
FLORIDA MUNICIPAL BOND FUND

The Florida Municipal Money Market Fund and Florida Municipal Bond Fund seek to
obtain as high a level of current income exempt from regular federal income tax
as is consistent with prudent investment management and conservation of
shareholders' capital. In addition, fund shares are intended to be exempt from
the Florida intangible personal property tax.

The funds are designed for individuals in upper tax brackets seeking income free
from regular federal income tax, although the funds may generate some taxable
income. The funds also provide an investment that is intended to be exempt from
the Florida intangible personal property tax. Because of this emphasis on
tax-exempt income, the funds by themselves do not constitute a balanced
investment plan.

Each fund intends to remain fully invested in municipal obligations (obligations
issued by or on behalf of a state, its political subdivisions, agencies and
instrumentalities). As a fundamental policy, each fund will invest at least 80%
of its net assets in obligations that are exempt from the Florida intangible
personal property tax and that have interest payments exempt from federal income
tax. The funds are not limited, however, in their investments in securities that
are subject to the federal Alternative Minimum Tax (AMT).

The funds sometimes invest in obligations of the Commonwealth of Puerto Rico and
its public corporations (as well as the U.S. territories of Guam and the Virgin
Islands) that are exempt from federal income tax and Florida intangible personal
property tax. The funds may also invest in (1) obligations issued by other
states and their political subdivisions, and (2) U.S. government securities.

Each fund is authorized under normal conditions to invest as much as 100% of its
net assets in municipal obligations for which the interest is a tax preference
item for purposes of the AMT. If you are or become subject to the AMT, a portion
of your income distributions that are exempt from the regular federal income tax
may not be exempt from the AMT. Interest from AMT bonds is considered to be
exempt from federal income tax for purposes of the 80% policy noted above.

A fund may need to sell certain investments near the end of each calendar year
so that on January 1 of each year, its portfolio consists only of investments
that are exempt from the Florida intangible personal property tax. As a result,
a fund could incur additional costs or taxable income or gains.

ARIZONA MUNICIPAL BOND FUND
Arizona Municipal Bond seeks to obtain as high a level of current income exempt
from Arizona and regular federal income tax as is consistent with prudent
investment management and conservation of shareholders' capital.

Arizona Municipal Bond is designed for individuals in upper tax brackets seeking
income free from Arizona state and regular federal income taxes, although the
fund may generate some taxable income. Because of this emphasis on tax-exempt
income, the fund by itself does not constitute a balanced investment.

The fund intends to remain fully invested in municipal obligations (obligations
issued by or on behalf of a state, its political subdivisions, agencies and
instrumentalities). As a fundamental policy, the fund will invest at least 80%
of its net assets in obligations with interest exempt from federal and Arizona
state income tax. The fund is not limited, however, in its investments in
securities that are subject to the AMT.

The fund sometimes invests in obligations of the Commonwealth of Puerto Rico and
its public corporations (as well as the U.S. territories of Guam and the Virgin
Islands) that are exempt from federal and Arizona state income taxes. The fund
may also invest in (1) obligations issued by other states and their political
subdivisions, and (2) U.S. government securities.

The fund is authorized under normal conditions to invest as much as 100% of its
net assets in municipal obligations for which the interest is a tax preference
item for purposes of the AMT. If you are or become subject to the AMT, a portion
of your income distributions that are exempt from the regular federal income tax
may not be exempt from the AMT. Interest from AMT bonds is considered to be
exempt from federal income tax for purposes of the 80% policy noted above.

TAX-FREE MONEY MARKET FUND
TAX-FREE BOND FUND

Tax-Free Money Market Fund and Tax-Free Bond Fund seek as high a level of
current income exempt from regular federal income tax as is consistent with
prudent investment management and conservation of shareholders' capital.

Each fund intends to remain fully invested in municipal obligations, although
for temporary defensive purposes, each may invest a portion of its assets in
U.S. government securities, the interest income on which is subject to federal
income tax. As a fundamental policy, each fund will invest at least 80% of its
net assets in obligations with interest exempt from federal income taxes. The
municipal obligations in which the funds may invest include securities issued by
U.S. territories or possessions, such as Puerto Rico, provided that the interest
on these securities is exempt from regular federal income tax.

The funds may invest up to 20% of their total assets in municipal obligations
for which the interest is a tax preference item for purposes of the AMT. If you
are or become subject to the AMT, a portion of your income distributions that
are exempt from the regular federal income tax may not be exempt from the AMT.

HIGH-YIELD MUNICIPAL FUND

High-Yield Municipal Fund seeks to provide as high a level of current income
exempt from federal income tax as is consistent with its investment policies,
which permit investment in lower-rated and unrated securities. As a secondary
objective, the fund seeks capital appreciation.

The fund intends to remain fully invested in municipal obligations (obligations
issued by or on behalf of a state or its political subdivisions, agencies and
instrumentalities). The fund also may invest in securities issued by U.S.
territories or possessions, such as Puerto Rico, provided that the interest on
these securities is exempt from regular federal income tax. As a fundamental
policy, the fund will invest at least 80% of its net assets in obligations with
interest exempt from regular federal income tax. The fund is not limited,
however, in its investments in securities that are subject to the AMT.

The fund is authorized, under normal conditions, to invest as much as 100% of
its net assets in municipal obligations for which the interest is a tax
preference item for purposes of the AMT. If you are or become subject to the
AMT, a portion of your income distributions that are exempt from regular federal
income tax may not be exempt from the AMT.

The fund intends to remain fully invested in municipal obligations, although for
temporary defensive purposes, it may invest a portion of its assets in U.S.
government securities, the interest income on which is subject to federal income
tax.

CREDIT QUALITY AND MATURITY GUIDELINES

THE MONEY MARKET FUNDS

Tax-Free Money Market Fund and Florida Municipal Money Market Fund seek to
maintain a $1.00 share price, although there is no guarantee they will be able
to do so. Shares of the funds are neither insured nor guaranteed by the U.S.
government.

The money market funds may be appropriate for investors seeking share price
stability who can accept the lower yields that short-term obligations typically
provide.

In selecting investments for the money market funds, the advisor adheres to
regulatory guidelines concerning the quality and maturity of money market fund
investments as well as to internal guidelines designed to minimize credit risk.
In particular, each fund:

o buys only U.S. dollar-denominated obligations with remaining maturities of
397 days or less (and variable- and floating-rate obligations with demand
features that effectively shorten their maturities to 397 days or less);

o maintains a dollar-weighted average portfolio maturity of 90 days or less;

o restricts its investments to high-quality obligations determined by the
advisor, pursuant to guidelines established by the Board of Trustees, to
present minimal credit risks.

To be considered high-quality, an obligation must be:

o a U.S. government obligation; or

o rated (or of an issuer rated with respect to a class of short-term
obligations) within the two highest rating categories for short-term debt
obligations by at least two nationally recognized statistical rating
agencies (or one if only one has rated the obligation); or

o an obligation without short-term ratings judged by the advisor, pursuant to
guidelines established by the Board of Trustees, to be of quality
comparable to the securities listed above.

The fund managers intend to buy only obligations that are designated as
first-tier securities as defined by the SEC; that is, securities rated, when
acquired, within the highest category designated by a rating agency.

NON-MONEY MARKET FUNDS (EXCEPT HIGH-YIELD MUNICIPAL)

Tax-Free Bond, Arizona Municipal Bond and Florida Municipal Bond have identical
policies governing the quality of securities in which they may invest.

In terms of credit quality, each of these funds restricts its investments to

o municipal bonds rated, when acquired, within the four highest categories
designated by a rating agency

o municipal notes (including variable-rate demand obligations) and tax-exempt
commercial paper rated, when acquired, within the two highest categories
designated by a rating agency

o unrated obligations judged by the advisor, under the direction of the Board
of Trustees, to be of quality comparable to the securities listed above.

HIGH-YIELD MUNICIPAL FUND

High-Yield Municipal invests primarily in long- and intermediate-term municipal
obligations. Although High-Yield Municipal typically invests a significant
portion of its assets in investment-grade bonds, the advisor does not adhere to
specific rating criteria in selecting investments for this fund. The fund
invests in securities rated or judged by the advisor to be below
investment-grade quality (for example, bonds rated BB/Ba or lower, which are
sometimes referred to as junk bonds) or unrated bonds.

Many issuers of medium- and lower-quality bonds choose not to have their
obligations rated and a large portion of High-Yield's portfolio may consist of
obligations that, when acquired, were not rated. Unrated securities may be less
liquid than comparable rated securities and may involve the risk that the
portfolio managers may not accurately evaluate the security's comparative credit
quality. Analyzing the creditworthiness of issuers of lower-quality, unrated
bonds may be more complex than analyzing the creditworthiness of issuers of
higher-quality bonds. There is no limit to the percentage of assets that the
fund may invest in unrated securities. The fund also may invest in securities
that are in technical or monetary default.

High-Yield Municipal may invest in investment-grade municipal obligations if the
advisor considers it appropriate to do so. Investments of this nature may be
made due to market considerations (for example, a limited supply of medium- and
lower-grade municipal obligations) or to increase liquidity of the fund.
Investing in high-grade obligations may lower the fund's return.

High-Yield Municipal may purchase private activity municipal securities. The
interest from these securities is treated as a tax-preference item in
calculating federal AMT liability. Under normal circumstances, it is possible
that a substantial portion of the fund's total assets will be invested in
private activity securities. Therefore, the fund is better suited for investors
who do not expect alternative minimum tax liability. See Taxes, page 48.

FUND INVESTMENTS AND RISKS

INVESTMENT STRATEGIES AND RISKS

This section describes investment vehicles and techniques that the fund managers
can use in managing a fund's assets. It also details the risks associated with
each, because each investment vehicle and technique contributes to a fund's
overall risk profile.

CONCENTRATION IN TYPES OF MUNICIPAL ACTIVITIES

From time to time, a significant portion of a fund's assets may be invested in
municipal obligations that are related to the extent that economic, business or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if a fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds could
suffer as a group. Additional financing might be required to comply with the new
environmental requirements, and outstanding debt might be downgraded in the
interim. Among other factors that could negatively affect bonds issued to
finance similar types of projects are state and federal legislation regarding
financing for municipal projects, pending court decisions relating to the
validity or means of financing municipal projects, material or manpower
shortages and declining demand for projects or facilities financed by the
municipal bonds.

ABOUT THE RISKS AFFECTING ARIZONA MUNICIPAL SECURITIES

As noted in the Prospectus, the Arizona Municipal Bond Fund is susceptible to
events that affect issuers of Arizona municipal obligations. These include
possible adverse effects of Arizona constitutional amendments, legislative
measures, voter initiatives and other matters described below.

The following information about risk factors is provided in view of the fund's
policy of concentrating its assets in Arizona municipal securities. This
information is based on certain official statements of the state of Arizona
published in connection with the issuance of specific Arizona municipal
securities as well as from other publicly available sources. It does not
constitute a complete description of the risks associated with investing in
securities of these issuers. While the advisor has not independently verified
the information contained in the official statements, it has no reason to
believe the information is inaccurate.

Geographically, Arizona is the nation's sixth largest state in terms of area. It
is divided into three distinct topographic regions: the northern third, which is
high plateau country traversed by deep canyons, such as Grand Canyon National
Park; central Arizona, which is rugged, mountainous and heavily forested; and
the southern third, which encompasses desert areas and flat, fertile
agricultural lands in valleys between mountains rich in mineral deposits. These
topographic areas all have different climates, which have distinctively
influenced development in each region. The Phoenix metropolitan area is the
state's primary economic center as it represents approximately two-thirds of the
state's population. The Tucson area, while of secondary importance, also is a
major economic area in the state.

Located in the country's sunbelt, Arizona's population has been, and is
projected to continue to be, one of the fastest growing in the United States.
Over the last several decades, the state has outpaced most other regions of the
country in population and personal income growth, gross state product and job
creation. Arizona was the second-fastest growing state in the nation between
1990 and 2000 with 10 year population growth of approximately 40%.

Under its constitution, the state of Arizona is not permitted to issue general
obligation bonds secured by the full faith and credit of the state. However,
certain agencies and instrumentalities of the state are authorized to issue
bonds secured by revenues from specific projects and activities, and the state
and local governmental units may enter into lease transactions. The particular
source of payments and security for an Arizona municipal obligation is detailed
in the instrument itself and in related offering materials.

The state and local governmental units are subject to limitations imposed by
Arizona law with respect to ad valorem taxation, bonded indebtedness, the amount
of annual increases in taxes, and other matters. These limitations may affect
the ability of the issuers to generate revenues to satisfy their debt
obligations. There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that may be levied without voter approval. If such a proposal were enacted,
there might be an adverse impact on state or local government financing.

Arizona's ballot initiatives, health and education equity litigation, combined
with long-term expenditure pressure stemming from the boom in population growth
has created fiscal and economic uncertainties for the state. In addition, the
relatively large concentration of jobs in the high tech sector has exposed the
state's finances to some instability. The Arizona economy continues to diversify
away from its historical reliance on the mining and agricultural employment
sectors. Significant job growth has occurred in the areas of aerospace and high
technology, construction, finance, insurance and real estate. Despite the recent
slowdown, Arizona's economy has grown in recent years and is among the fastest
growing economies in the nation. Arizona's economy is showing signs of
rebounding. However, manufacturing remains sluggish and reduced government
hiring persists.

Arizona has experienced a general economic slowdown to its revenues, while
facing high expenditure needs. The state's fund balance ended $667.5 million
lower in fiscal 2002 to a level of $712.8 million. Revenue shortfalls combined
with expenditures requirements resulted in projected deficits of approximately
$400 million in fiscal 2003 and $967 million in fiscal 2004. Mid-year spending
reductions, inter-fund transfers and federal aid combined with a rebound in
revenues have helped bridge the budget gaps. Arizona's current debt ratings are
"A1" by Moody's and "AA-" by Standard and Poor's. Both rating agencies have a
negative outlook on their respective ratings.

The Supreme Court of Arizona has determined that Arizona's taxation of dividends
paid from investments in the state is unconstitutional. Arizona is now liable
for refunds to certain taxpayers affected by the outcome of litigation. The
financial impact of this liability is uncertain and it is likely the final
amount will be paid over a number of years, adding stress to the state's cash
reserves. The governor already, with the use of line-item veto power, deferred a
$75 million payment of a judgment against the state regarding the taxation of
dividends under former law. Additional liabilities may arise from currently
pending litigation related to the state's alleged underfunding of the School
Facilities Board Building Renewal Fund and from litigation related to funding of
bilingual education programs.

A potential long-term credit concern for all states is the impact of eCommerce
on tax collections. The proliferation of eCommerce spending could potentially
negatively impact municipal credit quality since eCommerce spending is exempt
from sales taxes. The most vulnerable bonds would be credits secured solely by
sales tax revenues. For fiscal year 2002 sales tax revenues represented
approximately 30% of general fund revenues.

ABOUT THE RISKS AFFECTING FLORIDA MUNICIPAL SECURITIES

As noted in the Prospectus, the Florida Municipal Money Market and Florida
Municipal Bond funds are susceptible to events that affect issuers of Florida
municipal obligations. These include possible adverse affects of Florida
constitutional amendments, legislative measures, voter initiatives and other
matters described below.

The following information about risk factors is provided in view of the funds'
policies of concentrating their assets in Florida municipal securities. This
information is based on official debt offering documents, independent municipal
credit reports relating to securities offerings of Florida issuers and other
publicly available sources. It does not constitute a complete description of the
risks associated with investing in securities of these issuers. While the
advisor has not independently verified this information, it has no reason to
believe the information is inaccurate.

Because the funds invest primarily in Florida municipal securities, they will be
affected by political and economic conditions and developments within the state
of Florida. In general, the credit quality and credit risk of any issuer's debt
depend on the state and local economy, the health of the issuer's finances, the
amount of the issuer's debt, the quality of management and the strength of legal
provisions in debt documents that protect debt holders. Credit risk is usually
lower whenever the economy is strong, growing and diversified, financial
operations are sound, and the debt burden is reasonable.

The state of Florida's economy is characterized by a large service sector, a
dependence on the tourism and construction industries and a large retirement
population. The management of rapid growth has been the major challenge facing
state and local governments. Florida's population has grown rapidly and it is
now the fourth largest state with a population of approximately 17 million; this
growth is expected to continue, but at reduced rates. It is anticipated that
from the years 2000 through 2010, Florida's population will grow by 18.7%
compared to an 11.1% increase for the nation. As this growth continues, the
demand for both public and private services will increase, which may strain the
service sector's capacity and impede the state's budget balancing efforts. For
example, school districts have experienced difficulty in funding school
construction as the districts have been unable to obtain voter approval to issue
debt to finance the necessary school construction.

The state is outperforming the nation in employment and income growth as the
economy continues to recover from the negative shocks of the September 11, 2001,
terrorist attacks on the tourism industry. For the 12 months ended June 2003,
the state's employment was up approximately 1.1%. Construction, health care and
service sector jobs are growing while manufacturing and some trade occupations
are still contracting. Most of the growth in the state is occurring in the
southern metro areas while Orlando and Jacksonville are growing more slowly.
Florida ranks twentieth among all states in personal per capita income, with a
2002 per capita income that is about 96% of the U.S. figure.

Debt levels in the state of Florida are moderate to high, reflecting the
tremendous capital demands associated with rapid population growth. Florida is
unusual among states in that all general obligation full faith and credit debt
issues of municipalities must be approved by public referendum and are,
therefore, relatively rare. Most debt instruments issued by local municipalities
and authorities have a narrower pledge of security, such as a sales tax stream,
special assessment revenue, user fees, utility taxes or fuel taxes. Credit
quality of such debt instruments tends to be somewhat lower than that of general
obligation debt. The state of Florida issues general obligation debt for a
variety of purposes; however, the state constitution requires a specific revenue
stream to be pledged to state general obligation bonds as well.

The state of Florida is heavily dependent upon sales tax with nearly
three-quarters of the state's general fund revenues being derived from sales and
use taxes, which makes the state's general fund vulnerable to recession. This
dependence upon sales tax, combined with economic recession, has resulted in
budgetary shortfalls in the past. Florida has reacted to preserve an adequate
financial position primarily through expenditure reductions. State officials,
however, still face tremendous capital and operating pressures due to the growth
that will continue to strain the state's narrow revenue base. As a
counterbalance to the dependence on the historically volatile sales tax, the
state enacted a constitutional amendment establishing a Budget Stabilization
Fund and has since made yearly deposits to that Fund. For fiscal year 2004, the
state set aside remains at $959 million for the Fund, meeting the required
minimum Fund level of 5% of General Fund revenues. General Fund revenues and
sales tax revenues are budgeted to increase by 2.6% and 5.2% respectively, in
fiscal year 2004. General Fund spending is budgeted to increase by 6.8% in
fiscal year 2004.

The state also has established a constitutional state revenue limitation to
restrain the growth of spending. To date, this cap has not yet posed a
constraint. The cap, which became effective in fiscal 1996, limits the amount of
taxes and other revenues that can be raised by the state in any fiscal year. It
allows annual revenue to grow by the average annual growth in personal income
over the previous five years. Exempted from the cap are revenues that are
directly pledged to bonds, including any new debt issuances. The cap does not
appear to have become a major impediment to the state raising sufficient annual
revenue to fund state expenditure growth. The legislature may increase the
revenue cap by a two-thirds vote of each house.

ABOUT THE RISKS AFFECTING PUERTO RICO MUNICIPAL SECURITIES

From time to time, the funds invest in obligations of the Commonwealth of Puerto
Rico and its public corporations, which are exempt from federal, state and city
or local income taxes. The majority of the Commonwealth's debt is issued by the
major public agencies that are responsible for many of the island's public
functions, such as water, wastewater, highways, electricity, education and
public construction. As of December 31, 2002, public sector debt issued by the
Commonwealth and its public corporations totaled $30.4 billion.

Since the 1980s, Puerto Rico's economy and financial operations have paralleled
the economic cycles of the United States. The island's economy, particularly the
manufacturing sector, has experienced substantial gains in employment. Much of
these economic gains have been attributable in part to favorable treatment under
Section 936 of the federal Internal Revenue Code for U.S. corporations doing
business in Puerto Rico (see discussion below). The number of persons employed
in Puerto Rico as of June 2003 was approximately 1.2 million, up 3.5% from the
previous year. The unemployment rate is still high however at 12.5% as of June
2003.

Debt ratios for the Commonwealth are high as it assumes much of the
responsibility for local infrastructure. Sizable infrastructure programs are
ongoing to upgrade the island's water, sewer and road systems. The
Commonwealth's general obligation debt is secured by a first lien on all
available revenues. The Commonwealth seeks to correlate the growth in public
sector debt to the growth of the economic base available to service that debt.
However, public sector debt has increased at a greater pace than growth in gross
product over the last few years. Between fiscal years 1997 and 2002, debt
increased approximately 37.3% while gross product rose approximately 19%.

The current ratio of tax-supported debt to aggregate personal income is
approximately 50%, about twenty times the average level of the fifty states, and
more than four times as high as the most heavily indebted of the states. The
ratio is affected by the low levels of income in Puerto Rico (per capita income
was 36% of the national average in 2002) and by the large absolute amount of
debt.

The Commonwealth finished fiscal year 2002 with an operating surplus of $110.6
million (approximately 1.4% of general fund revenues) which resulted in an
ending cash balance of $235 million. The Commonwealth is currently estimating an
operating loss for fiscal 2003 of $198 million and budgeting break-even
performance for the fiscal year 2004. In fiscal year 2003 , the General Fund
experienced a slight increase in tax revenues offset by $126 million of higher
than anticipated expenditures in education, police and health reform.

On April 14, 2003, Standard & Poor's removed the Commonwealth's outstanding
general obligation debt from credit watch with negative implications and
assigned to it a rating of "A-" with negative outlook. Standard & Poor's had
previously announced on December 11, 2002, that it was placing its ratings and
underlying ratings on the Commonwealth's outstanding debt on credit watch with
negative implications, reflecting concerns over the Commonwealth's general
ability to enforce appropriate accounting, fiscal and management controls with
respect to equipment leases entered into by certain Commonwealth agencies and
municipalities.

As a result of 1995 federal legislation, tax credits provided by Section 936 of
the Internal Revenue Code are being phased out over a ten-year period ending in
tax year 2005. Section 936 has offered an important economic development
incentive for Puerto Rico, providing a particular impetus for the manufacturing
sector. For U.S. corporations doing business in Puerto Rico, Section 936
generally eliminated the U.S. tax on income related to their island operations.
It granted these corporations tax credits to offset federal tax liability on
earnings from Puerto Rico operations (active income) and permitted them to
invest such earnings in qualified investments in Puerto Rico (passive income)
with interest earned free from U.S. tax. As a result of the 1996 legislation,
the active income credit has been reduced and is no longer available to new or
expanded operations in Puerto Rico. It will also be phased out entirely after
tax year 2005. The passive income credit has already been eliminated entirely.

To offset the loss of the 936 tax credit, in 1998, the Commonwealth passed the
Tax Incentives Law that provided for various tax reduction/incentives. While
this law may promote development, it must be balanced by the costs of the
development in terms of lost tax dollars. The risk Puerto Rico faces is being
too generous with tax incentives, whereby, government revenues are negatively
impacted by development incentives.

Another long-term issue, with broad implications for the Commonwealth, is the
question of political status - specifically, the potential for a transition to
statehood, as contemplated by proposed federal legislation in 1999 and the
subject of a non-binding plebiscite in Puerto Rico in December 1998. The
statehood option in the 1998 plebiscite received the support of 45.6% of the
voters, about the same percentage of support in the previous plebiscite in 1993.

A potential long-term credit concern for Puerto Rico is the impact of eCommerce
on tax collections. The proliferation of eCommerce spending could potentially
impact municipal credit quality since eCommerce spending is exempt from sales
taxes. The most vulnerable bonds would be credits secured solely by sales tax
revenues.

An additional long term risk is the Commonwealth's dependence on capital
intensive manufacturing industries which represent 42% of the island's GDP,
especially the pharmaceuticals industry (25% of the island's GDP). A final risk
factor with the Commonwealth is the large amount of unfunded pension
liabilities. The two main public pension systems are largely underfunded. The
combined funded ratio of the two plans is 35% with a total unfunded liability of
$8 billion. A measure enacted by the legislature in 1990 is designed to address
the solvency of the plans over a 50-year period.

MUNICIPAL NOTES

Each fund may invest in municipal notes, which are issued by state and local
governments or government entities to provide short-term capital or to meet cash
flow needs.

Tax anticipation notes (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use and business taxes,
and are payable from these future taxes. TANs usually are general obligations of
the issuer. General obligations are backed by the issuer's full faith and credit
based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.

Revenue anticipation notes (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.

Bond anticipation notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.

Tax-exempt commercial paper is an obligation with a stated maturity of up to 365
days (most commonly ranging from two to 270 days) issued to finance seasonal
cash flow needs or to provide short-term financing in anticipation of
longer-term financing.

Revenue anticipation warrants, or reimbursement warrants, are issued to meet the
cash flow needs of state governments at the end of a fiscal year and in the
early weeks of the following fiscal year. These warrants are payable from
unapplied money in the state's General Fund, including the proceeds of revenue
anticipation notes issued following enactment of a state budget or the proceeds
of refunding warrants issued by the state.

MUNICIPAL BONDS

Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.

General obligation (GO) bonds are issued by states, counties, cities, school
districts, towns and regional districts to fund a variety of public projects,
including construction of and improvements to schools, highways, and water and
sewer systems. GO bonds are backed by the issuer's full faith and credit based
on its ability to levy taxes for the timely payment of interest and repayment of
principal, although such levies may be constitutionally or statutorily limited
as to rate or amount.

Revenue bonds are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and sea port facilities, schools and hospitals.

Industrial development bonds (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic and
pollution control projects, as well as public facilities such as mass transit
systems, air and sea port facilities and parking garages. Payment of interest
and repayment of principal on an IDB depend solely on the ability of the
facility's operator to meet financial obligations, and on the pledge, if any, of
the real or personal property financed. The interest earned on IDBs may be
subject to the federal alternative minimum tax.

VARIABLE- AND FLOATING-RATE OBLIGATIONS

Variable- and floating-rate demand obligations (VRDOs and FRDOs) carry rights
that permit holders to demand payment of the unpaid principal plus accrued
interest, from the issuers or from financial intermediaries. Floating-rate
securities, or floaters, have interest rates that change whenever there is a
change in a designated base rate. Variable-rate instruments provide for a
specified, periodic adjustment in the interest rate, which typically is based on
an index. These rate formulas are designed to result in a market value for the
VRDO or FRDO that approximates par value.

OBLIGATIONS WITH TERM PUTS ATTACHED

The funds may invest in fixed-rate bonds subject to third-party puts and
participation interests in such bonds that are held by a bank in trust or
otherwise, which have tender options or demand features attached. These tender
options or demand features permit the funds to tender (or put) their bonds to an
institution at periodic intervals and to receive the principal amount thereof.
The fund managers expect that the funds will pay more for securities with puts
attached than for securities without these liquidity features.

Some obligations with term puts attached may be issued by municipalities. The
fund managers may buy securities with puts attached to keep a fund fully
invested in municipal securities while maintaining sufficient portfolio
liquidity to meet redemption requests or to facilitate management of the fund's
investments. To ensure that the interest on municipal securities subject to puts
is tax-exempt to the funds, the advisor limits the funds' use of puts in
accordance with applicable interpretations and rulings of the Internal Revenue
Service (IRS).

Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect the funds' weighted
average maturities. When a fund has paid for a put, the cost will be reflected
as unrealized depreciation on the underlying security for the period the put is
held. Any gain on the sale of the underlying security will be reduced by the
cost of the put.

There is a risk that the seller of an obligation with a put attached will not be
able to repurchase the underlying obligation when (or if) a fund attempts to
exercise the put. To minimize such risks, the funds will purchase obligations
with puts attached only from sellers deemed creditworthy by the advisor under
the direction of the Board of Trustees.

TENDER OPTION BONDS

Tender option bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
the money market funds. However, any of the funds may purchase these
instruments.

TOBs are created by municipal bond dealers who purchase long-term, tax-exempt
bonds place the certificates in trusts, and sell interests in the trusts with
puts or other liquidity guarantees attached. The credit quality of the resulting
synthetic short-term instrument is based on the put provider's short-term rating
and the underlying bond's long-term rating.

There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
fund managers monitor the credit quality of bonds underlying the funds' TOB
holdings and intend to sell or put back any TOB if the ratings on the underlying
bond fall below the requirements under Rule 2a-7.

The fund managers also take steps to minimize the risk that a fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (1) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (2) legal opinions relating to the tax ownership of
the underlying bonds, and (3) other elements of the structure that could result
in taxable income or other adverse tax consequences. After purchase, the fund
managers monitor factors related to the tax-exempt status of the fund's TOB
holdings in order to minimize the risk of generating taxable income.

WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS

The funds may engage in municipal securities transactions on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date.

For example, a fund may sell a security and at the same time make a commitment
to purchase the same or a comparable security at a future date and specified
price. Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash-and-carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
particular security that a fund owns. The fund will sell that security to the
broker-dealer and simultaneously enter into a forward commitment agreement to
buy it back at a future date. This type of transaction generates income for the
fund if the dealer is willing to execute the transaction at a favorable price in
order to acquire a specific security.

When purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of that security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of actually receiving or
delivering them, it may sell the securities before the settlement date if doing
so is deemed advisable as a matter of investment strategy.

In purchasing securities on a when-issued or forward commitment basis, a fund
will segregate cash, cash equivalents or other appropriate liquid securities on
its records in an amount sufficient to meet the purchase price. When the time
comes to pay for the when-issued securities, the fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the fund's payment
obligation). Selling securities to meet when-issued or forward commitment
obligations may generate taxable capital gains or losses.

As an operating policy, no fund will commit more than 50% of its total assets to
when-issued or forward commitment agreements. If fluctuations in the value of
securities held cause more than 50% of a fund's total assets to be committed
under when-issued or forward commitment agreements, the fund managers need not
sell such agreements, but they will be restricted from entering into further
agreements on behalf of the fund until the percentage of assets committed to
such agreements is below 50% of total assets.

MUNICIPAL LEASE OBLIGATIONS

Each fund may invest in municipal lease obligations. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the funds will
not hold such obligations directly as a lessor of the property but will purchase
a participation interest in a municipal lease obligation from a bank or other
third party.

Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchases or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.

Many leases and contracts include nonappropriation clauses, which provide that
the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.

INVERSE FLOATERS

The funds (except the money market funds) may hold inverse floaters. An inverse
floater is a type of derivative security that bears an interest rate that moves
inversely to market interest rates. As market interest rates rise, the interest
rate on inverse floaters goes down, and vice versa. Generally, this is
accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater program).

Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. A Dutch Auction is an auction system
in which the price of the security is gradually lowered until it meets a
responsive bid and is sold. Floaters and inverse floaters may be brought to
market by (1) a broker-dealer who purchases fixed-rate bonds and places them in
a trust or (2) an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.

In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:

o Floater holders receive interest based on rates set at a six-month interval
or at a Dutch Auction, which is typically held every 28 to 35 days. Current
and prospective floater holders bid the minimum interest rate that they are
willing to accept on the floaters, and the interest rate is set just high
enough to ensure that all of the floaters are sold.

o Inverse floater holders receive all of the interest that remains, if any,
on the underlying bonds after floater interest and auction fees are paid.
The interest rates on inverse floaters may be significantly reduced, even
to zero, if interest rates rise.

Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on the inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.

Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.

Floater holders subject to a Dutch Auction procedure generally do not have the
right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.

The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.

LOWER-QUALITY BONDS

As indicated in the Prospectus, an investment in High-Yield Municipal carries
greater risk than an investment in the other funds because the fund may invest
without limitation in lower-rated bonds and unrated bonds judged by the advisor
to be of comparable quality (collectively, lower-quality bonds).

While the market values of higher-quality bonds tend to correspond to market
interest rate changes, the market values of lower-quality bonds tend to reflect
the financial condition of their issuers. The ability of an issuer to make
payment could be affected by litigation, legislation or other political events,
or the bankruptcy of the issuer. Lower-quality municipal bonds are more
susceptible to these risks than higher-quality municipal bonds. In addition,
lower-quality bonds may be unsecured or subordinated to other obligations of the
issuer.

Projects financed through the issuance of lower-quality bonds often carry higher
levels of risk. The issuer's ability to service its debt obligations may be
adversely affected by an economic downturn, weaker-than-expected economic
development, a period of rising interest rates, the issuer's inability to meet
projected revenue forecasts, a higher level of debt, or a lack of needed
additional financing.

The market for lower-quality bonds tends to be concentrated among a smaller
number of dealers than the market for higher-quality bonds. This market may be
dominated by dealers and institutions (including mutual funds), rather than by
individuals. To the extent that a secondary trading market for lower-quality
bonds exists, it may not be as liquid as the secondary market for higher-quality
bonds. Limited liquidity in the secondary market may adversely affect market
prices and hinder the advisor's ability to dispose of particular bonds when it
determines that it is in the best interest of a fund to do so. Reduced liquidity
also may hinder the advisor's ability to obtain market quotations for purposes
of valuing a fund's portfolio and determining its net asset value.

The advisor continually monitors securities to determine their relative
liquidity.

A fund may incur expenses in excess of its ordinary operating expenses if it
becomes necessary to seek recovery on a defaulted bond, particularly a
lower-quality bond.

REPURCHASE AGREEMENTS

Each fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of that fund.

A repurchase agreement occurs when, at the time a fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund's money is invested in the
security.

Because the security purchased constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund's risk is the seller's ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.

The funds will limit repurchase agreement transactions to securities issued by
the U.S. government and its agencies and instrumentalities, and will enter into
such transactions with those banks and securities dealers who are deemed
creditworthy by the funds' advisor.

Repurchase agreements maturing in more than seven days would count toward a
fund's 15% limit on illiquid securities.

SHORT-TERM SECURITIES

In order to meet anticipated redemptions, anticipated purchases of additional
securities for a fund's portfolio, or, in some cases, for temporary defensive
purposes, each fund may invest a portion of its assets in money market and other
short-term securities.

Examples of those securities include:

o Securities issued or guaranteed by the U.S. government and its agencies and
instrumentalities

o Commercial Paper

o Certificates of Deposit and Euro Dollar Certificates of Deposit

o Bankers' Acceptances

o Short-term notes, bonds, debentures or other debt instruments

o Repurchase agreements

o Money market funds

Under the Investment Company Act, a fund's investment in other investment
companies (including money market funds) currently is limited to (a) 3% of the
total voting stock of any one investment company; (b) 5% of the fund's total
assets with respect to any one investment company; and (c) 10% of a fund's total
assets in the aggregate. For the non-money market funds, these investments may
include investments in money market funds managed by the advisor. Any
investments in money market funds must be consistent with the investment
policies and restrictions of the fund making the investment.

STRUCTURED AND DERIVATIVE SECURITIES

To the extent permitted by its investment objectives and policies, each fund may
invest in structured securities and securities that are commonly referred to as
derivative securities.

Structured investments involve the transfer of specified financial assets to a
special purpose entity, generally a trust, or the deposit of financial assets
with a custodian, and the issuance of securities or depository receipts backed
by, or representing interests in, those assets.

Structured investments are traded over the counter in the same manner as
traditional municipal securities. The cash flow on the underlying instruments
may be apportioned among the newly issued structured securities to create
securities with different investment characteristics, such as varying
maturities, payment priorities, interest rate provisions, and prepayment
characteristics, and the extent of such payments made with respect to structured
securities is dependent on the extent of the cash flow on the underlying
instruments. If the structured security involves no credit enhancement, its
credit risk generally will be equivalent to that of the underlying instruments.

Structured investments include, for example, single family and multi-family
residential mortgage-backed securities and commercial mortgage-backed
securities. Structured investments may also include securities backed by other
types of collateral.

A derivative security is a financial arrangement the value of which is based on,
or derived from, the performance of certain underlying assets or benchmarks,
such as interest rates, indices or other financial or non-financial indicators.
The value of these securities, and hence their total return, is typically a
function of the price movement of the underlying asset or changes in the
underlying benchmark.

There are many different types of derivative securities and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a fund from exposure to changing interest rates
or securities prices, and for cash management purposes as a low-cost method of
gaining exposure to a particular securities market without investing directly in
those securities.

There are a range of risks associated with investments in structured and
derivative securities, including:

o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the fund managers
anticipate;

o the possibility that there may be no liquid secondary market, or the
possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position
when desired;

o the risk that adverse price movements in an instrument can result in a loss
substantially greater than a fund's initial investment; and

o the risk that the issuer of the structured or derivative security (the
counterparty) will fail to perform its obligations.

In addition, structured securities are subject to the risk that the issuers of
the underlying securities may be unable or unwilling to repay principal and
interest (credit risk), and requests by the issuers of the underlying securities
to reschedule or restructure outstanding debt and to extend additional loan
amounts (prepayment risk).

The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates. Some
derivative securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.

A fund may not invest in a structured or derivative security unless the
reference index, the underlying assets or the instrument to which it relates is
an eligible investment for the fund. For example, a security whose underlying
value is linked to the price of oil would not be a permissible investment
because the funds may not invest in oil and gas leases or futures.

To manage the risks of investing in structured and derivative securities, the
advisor has adopted, and the Board of Trustees has approved, a policy regarding
investments in derivative securities. That policy specifies factors that must be
considered in connection with a purchase of derivative securities and provides,
among other things, that a fund may not invest in a derivative security if it
would be possible for a fund to lose more money than it had invested. The policy
also establishes a committee that must review certain proposed purchases before
the purchases can be made. A fund may not invest in a structured or derivative
security if its credit, interest rate, liquidity, counterparty and other risks
associated with ownership of the security are outside acceptable limits set
forth in the fund's prospectus.

SINGLE- AND MULTI-FAMILY MORTGAGE-RELATED SECURITIES

A single-or multi-family mortgage-backed security represents an ownership
interest in a pool of mortgage loans. The loans are made by financial
institutions or municipal agencies to finance home and other real estate
purchases. As the loans are repaid, investors receive payments of both interest
and principal.

Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest during the life of the security.
However, unlike a bond, which returns principal to the investor in one lump sum
at maturity, single- or multi-family mortgage-backed securities return principal
to the investor in increments during the life of the security.

Because the timing and speed of principal repayments vary, the cash flow on
single- or multi-family mortgage-backed securities is irregular. If mortgage
holders sell their homes, refinance their loans, prepay their mortgages or
default on their loans, the principal may be distributed pro rata to investors.

As with other fixed-income securities, the prices of single- or multi-family
mortgage-backed securities fluctuate in response to changing interest rates;
when interest rates fall, the prices of these securities rise, and vice versa.
Changing interest rates have additional significance for mortgage-backed
securities investors, however, because they influence prepayment rates (the
rates at which mortgage holders prepay their mortgages), which in turn affect
the yields on mortgage-backed securities. When interest rates decline,
prepayment rates generally increase. Mortgage holders take advantage of the
opportunity to refinance their mortgages at lower rates with lower monthly
payments. When interest rates rise, mortgage holders are less inclined to
refinance their mortgages. The effect of prepayment activity on yield depends on
whether the mortgage-backed security was purchased at a premium or at a
discount.

A fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.

SWAP AGREEMENTS

Each fund may invest in swap agreements, consistent with its investment
objective and strategies. A fund may enter into a swap agreement in order to,
for example, attempt to obtain or preserve a particular return or spread at a
lower cost than obtaining a return or spread through purchases and/or sales of
instruments in other markets; protect against currency fluctuations; attempt to
manage duration to protect against any increase in the price of securities the
fund anticipates purchasing at a later date; or gain exposure to certain markets
in the most economical way possible.

Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include, for example, interest rate
swaps, under which fixed- or floating-rate interest payments on a specific
principal amount are exchanged and total return swaps, under which one party
agrees to pay the other the total return of a defined underlying asset (usually
an index, stock, bond or defined portfolio of loans and mortgages) in exchange
for fee payments, often a variable stream of cashflows based on LIBOR. The funds
may enter into credit default swap agreements to hedge an existing position by
purchasing or selling credit protection. Credit default swaps enable an investor
to buy/sell protection against a credit event of a specific issuer. The seller
of credit protection against a security or basket of securities receives an
up-front or periodic payment to compensate against potential default event(s).
The fund may enhance returns by selling protection or attempt to mitigate credit
risk by buying protection. Market supply and demand factors may cause
distortions between the cash securities market and the credit default swap
market.

Whether a fund's use of swap agreements will be successful depends on the
advisor's ability to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Interest rate swaps
could result in losses if interest rate changes are not correctly anticipated by
the fund. Total return swaps could result in losses if the reference index,
security, or investments do not perform as anticipated by the fund. Credit
default swaps could result in losses if the fund does not correctly evaluate the
creditworthiness of the issuer on which the credit default swap is based.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The funds will enter into swap agreements only with counterparties
that meet certain standards of creditworthiness. Certain restrictions imposed on
the funds by the Internal Revenue Code may limit the funds' ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.

FUTURES AND OPTIONS

Each non-money market fund may enter into futures contracts, options or options
on futures contracts. Futures contracts provide for the sale by one party and
purchase by another party of a specific security at a specified future time and
price. Some futures and options strategies, such as selling futures, buying puts
and writing calls, hedge a fund's investments against price fluctuations. Other
strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure. The funds do not use futures and options transactions
for speculative purposes.

Although other techniques may be used to control a fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.

Futures contracts are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (CFTC), a U.S. government agency. The funds may
engage in futures and options transactions based on securities indices such as
the Bond Buyer Index of Municipal Bonds, provided that the transactions are
consistent with the fund's investment objectives. The funds also may engage in
futures and options transactions based on specific securities, such as U.S.
Treasury bonds or notes.

Index futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e., buying a contract that has previously been sold
or selling a contract that has previously been bought).

Unlike when a fund purchases or sells a bond, no price is paid or received by
the fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund's investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish margin deposit requirements that are higher
than the exchange minimums. Cash held in the margin accounts generally is not
income-producing. However, coupon bearing securities, such as Treasury bills and
bonds, held in margin accounts generally will earn income. Subsequent payments
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying debt securities or index fluctuates, making the
future more or less valuable, a process known as marking the contract to market.
Changes in variation margin are recorded by the fund as unrealized gains or
losses. At any time prior to expiration of the future, the fund may elect to
close the position by taking an opposite position. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the fund and the fund realizes a loss or gain.

RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS

Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the fund managers apply a hedge at an inappropriate
time or judge interest rate trends incorrectly, futures and options strategies
may lower a fund's return.

A fund could suffer losses if it were unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the fund managers consider it appropriate or desirable to
do so. In the event of adverse price movements, a fund would be required to
continue making daily cash payments to maintain its required margin. If the fund
had insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when the fund managers would not otherwise elect
to do so. In addition, a fund may be required to deliver or take delivery of
instruments underlying futures contracts it holds. The fund managers will seek
to minimize these risks by limiting the contracts entered into on behalf of the
funds to those traded on national futures exchanges and for which there appears
to be a liquid secondary market.

A fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract at the same time
that it experiences a decline in the value of its hedged portfolio securities. A
fund also could lose margin payments it has deposited with a margin broker, if,
for example, the broker became bankrupt.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

OPTIONS ON FUTURES

By purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is exercised.

Although they do not currently intend to do so, the funds may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the funds would give up some
ability to participate in a price increase on the underlying security. If a fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS

Each non-money market fund may enter into futures contracts, options or options
on futures contracts.

Under the Commodity Exchange Act, a fund may enter into futures and options
transactions (a) for hedging purposes without regard to the percentage of assets
committed to initial margin and option premiums or (b) for other than hedging
purposes, provided that assets committed to initial margin and option premiums
do not exceed 5% of the fund's total assets. To the extent required by law, each
fund will segregate cash, cash equivalents or other appropriate liquid
securities on its records in amount sufficient to cover its obligations under
the futures contracts and options.

MUNICIPAL BOND INSURERS

Securities held by the funds may be (a) insured under a new-issue insurance
policy obtained by the issuer of the security or (b) insured under a secondary
market insurance policy purchased by the fund or a previous bond holder. The
following paragraphs provide some background on the bond insurance organizations
most frequently relied upon for municipal bond insurance in the United States.

AMBAC Indemnity Corporation (AMBAC Indemnity) is a Wisconsin-domiciled stock
insurance corporation. AMBAC Indemnity is a wholly owned subsidiary of AMBAC
Inc., a publicly held company. Moody's Investors Service, Inc. (Moody's) and
Standard & Poor's Corporation (S&P) have rated AMBAC Indemnity's
claims-paying ability Aaa and AAA, respectively.

Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of FGIC
Corporation, a Delaware corporation. FGIC's claims-paying ability was rated
Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.

Municipal Bond Investors Assurance (MBIA) Corporation is a monoline insurance
company organized as a New York corporation. MBIA's claims-paying ability was
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively. Financial
Security Assurance, Inc. (FSA) is a financial guaranty insurance company
operated in New York which became a separately capitalized Dexia subsidiary on
July 5, 2000. FSA's claims-paying ability was rated Aaa/AAA/AAA by Moody's,
S&P and Fitch, respectively.

XL Capital Assurance, Inc. (XLCA) was formed in 1999 as an indirect, wholly
owned New York-domiciled subsidiary of XL Capital Ltd. (XL Capital). XLCA's
claims-paying ability is rated Aaa/AAA/AAA by Moody's, S&P and Fitch,
respectively. Pursuant to an arms-length reinsurance treaty, XLCA cedes a
substantial amount of its exposure to XL Financial Assurance Ltd. (XLFA), a
Bermuda-domiciled financial guaranty reinsurer.

CDC IXIS Financial Guaranty North America (CIFG NA) is a wholly owned subsidiary
of CDC IXIS Financial Guaranty Holding. The parent of the holding company is CDC
IXIS, which is a AAA-rated French financial institution that owns 100% of the
holding company. All three companies are rated Aaa/AAA/AAA by Moody's, S&P
and Fitch, respectively.

Radian Asset Assurance, Inc. is the surviving entity and name for the former
Asset Guaranty. On Feb. 28, 2001, Radian Group, Inc., the holding company of
mortgage insurers Radian Guaranty, Inc. and Radian Insurance, Inc, acquired
Enhance Financial, the former parent of Asset Guaranty. On Feb. 4, 2002, Radian
Group, Inc. (NYSE:RDN) officially renamed its bond insurance subsidiaries to
begin with the name Radian. Therefore, the former Asset Guaranty Assurance Co.
has been renamed Radian Asset Assurance, Inc., which is rated AA by S&P and
Fitch only.

American Capital Access Holdings, Inc. is the parent company of ACA Financial
Guaranty Corp. (ACA). The parent of ACA is primarily owned by seven
institutional investors. ACA was established in 1997 as the sole dedicated
provider of A-rated credit enhancement to the municipal market but has since
expanded into the structured finance and alternative risk transfer markets. ACA
is rated A by S&P and Fitch only.

RESTRICTED AND ILLIQUID SECURITIES

The funds may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the funds' criteria for selection. Rule 144A
securities are securities that are privately placed with and traded among
qualified institutional investors rather than the general public. Although Rule
144A securities are considered restricted securities, they are not necessarily
illiquid.

With respect to securities eligible for resale under Rule 144A, the staff of the
SEC has taken the position that the liquidity of such securities in the
portfolio of a fund offering redeemable securities is a question of fact for the
Board of Trustees to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the Board of Trustees is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the Board of
Trustees of the funds has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the advisor. The board retains the
responsibility to monitor the implementation of the guidelines and procedures it
has adopted.

Because the secondary market for restricted securities is generally limited to
certain qualified institutional investors, the liquidity of such securities may
be limited accordingly and a fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the advisor will consider
appropriate remedies to minimize the effect on such fund's liquidity.

INVESTMENT POLICIES

Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the policies described below apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund's net assets will not be considered
in determining whether it has complied with its investment policies.

For purposes of the funds' investment restrictions, the party identified as the
"issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an Industrial Development
Bond, if the bond were backed only by the assets and revenues of a
non-governmental user, the non-governmental user would be deemed the sole
issuer. If, in either case, the creating government or some other entity were to
guarantee the security, the guarantee would be considered a separate security
and treated as an issue of the guaranteeing entity.

FUNDAMENTAL INVESTMENT POLICIES

The funds' fundamental investment policies are set forth below. These investment
policies and the funds' investment objectives set forth in their prospectuses
may not be changed without approval of a majority of the outstanding votes of
shareholders of a fund, as determined in accordance with the Investment Company
Act.

Subject Policy

Senior Securities A fund may not issue senior securities, except as permitted
under the Investment Company Act.

Borrowing A fund may not borrow money, except for temporary or
emergency purposes (not for leveraging or investment) in an
amount not exceeding 33-1/3% of the fund's total assets.

Lending A fund may not lend any security or make any other loan if,
as a result, more than 33-1/3% of the fund's total assets
would be lent to other parties, except (i) through the
purchase of debt securities in accordance with its
investment objective, policies and limitations or (ii) by
engaging in repurchase agreements with respect to portfolio
securities.

Real Estate A fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments.
This policy shall not prevent a fund from investing in
securities or other instruments backed by real estate or
securities of companies that deal in real estate or are
engaged in the real estate business.

Concentration A fund may not concentrate its investments in securities of
issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities).

Underwriting A fund may not act as an underwriter of securities issued by
others, except to the extent that the fund may be considered
an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities.

Commodities A fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments, provided that this limitation shall not
prohibit the fund from purchasing or selling options and
futures contracts or from investing in securities or other
instruments backed by physical commodities.

Control A fund may not invest for purposes of exercising control
over management.

For purposes of the investment restrictions relating to lending and borrowing,
the funds have received an exemptive order from the SEC regarding an interfund
lending program. Under the terms of the exemptive order, the funds may borrow
money from or lend money to other ACIM-advised funds that permit such
transactions. All such transactions will be subject to the limits for borrowing
and lending set forth above. The funds will borrow money through the program
only when the costs are equal to or lower than the costs of short-term bank
loans. Interfund loans and borrowings normally extend only overnight, but can
have a maximum duration of seven days. The funds will lend through the program
only when the returns are higher than those available from other short-term
instruments (such as repurchase agreements). The funds may have to borrow from a
bank at a higher interest rate if an interfund loan is called or not renewed.
Any delay in repayment to a lending fund could result in a lost investment
opportunity or additional borrowing costs.

For purposes of the investment restriction relating to concentration, a fund
shall not purchase any securities that would cause 25% or more of the value of
the fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that

(a) there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, any state, territory or possession of the United
States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions and repurchase agreements
secured by such obligations,

(b) wholly owned finance companies will be considered to be in the industries
of their parents if their activities are primarily related to financing the
activities of their parents,

(c) utilities will be divided according to their services; for example, gas,
gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry, and

(d) personal credit and business credit businesses will be considered separate
industries.

NONFUNDAMENTAL INVESTMENT POLICIES

In addition, the funds are subject to the following investment policies that are
not fundamental and may be changed by the Board of Trustees.

Subject Policy

Leveraging A fund may not purchase additional investment securities at
any time during which outstanding borrowings exceed 5% of
the total assets of the fund.

Futures A fund may enter into futures contracts and write and buy
and Options put and call options relating to futures contracts. A fund
may not, however, enter into leveraged transactions if it
would be possible for the fund to lose more money than it
invested. The money market funds may not purchase or sell
futures contracts or call options. This limitation does not
apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to
securities that incorporate features similar to options or
futures contracts.

Liquidity A fund may not purchase any security or enter into a
repurchase agreement if, as a result, more than 15% of its
net assets (10% for the money market funds) would be
invested in illiquid securities. Illiquid securities include
repurchase agreements not entitling the holder to payment of
principal and interest within seven days and securities that
are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market.

Short Sales A fund may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount
to the securities sold short, and provided that transactions
in futures contracts and options are not deemed to
constitute selling securities short.

Margin A fund may not purchase securities on margin, except to
obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments
in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on
margin.

The Investment Company Act imposes certain additional restrictions upon the
funds' ability to acquire securities issued by insurance companies,
broker-dealers, underwriters or investment advisors, and upon transactions with
affiliated persons as defined by the Act. It also defines and forbids the
creation of cross and circular ownership. Neither the SEC nor any other agency
of the federal or state government participates in or supervises the management
of the funds or their investment practices or policies.

TEMPORARY DEFENSIVE MEASURES

For temporary defensive purposes, a fund may invest in securities that may not
fit its investment objective or its stated market. During a temporary defensive
period, a fund may direct its assets to the following investment vehicles:

(1) interest-bearing bank accounts or Certificates of Deposit;

(2) U.S. government securities and repurchase agreements collateralized by U.S.
government securities; and

(3) other money market funds.

To the extent a fund assumes a defensive position, it will not be pursuing its
investment objective and may generate taxable income.

PORTFOLIO TURNOVER

The portfolio turnover rate of each fund (except those of the money market
funds) is listed in the Financial Highlights table in the Prospectuses. Because
of the short-term nature of the money market funds' investments, portfolio
turnover rates are not generally used to evaluate their trading activities.

For Florida Municipal Bond, the lower portfolio turnover rate for 2002 can be
attributed to a decrease in security selection opportunities that satisfied the
fund's investment criteria.

MANAGEMENT

The individuals listed below serve as trustees or officers of the funds. Each
trustee serves until his or her successor is duly elected and qualified or until
he or she retires. Mandatory retirement age for independent trustees is 75; the
remaining independent trustees may waive this requirement on a case-by-case
basis. Those listed as interested trustees are "interested" primarily by virtue
of their engagement as officers of American Century Companies, Inc. (ACC) or its
wholly-owned subsidiaries, including the funds' investment advisor, American
Century Investment Management, Inc. (ACIM); the funds' principal underwriter,
American Century Investment Services, Inc. (ACIS); and the funds' transfer
agent, American Century Services Corporation (ACSC).

The other trustees (more than two-thirds of the total number) are independent;
that is, they are not employees or officers of, and have no financial interest
in, ACC or any of its wholly-owned subsidiaries, including ACIM, ACIS and ACSC.

All persons named as officers of the funds also serve in similar capacities for
other funds advised by ACIM. Only officers with policy-making functions are
listed. No officer is compensated for his or her service as an officer of the
funds. The listed officers are interested persons of the funds and are appointed
or re-appointed on an annual basis.

Number of
Portfolios
in Fund
Length Complex Other
Position(s) of Time Overseen Directorships
Held with Served Principal Occupation(s) by Held by
Name, Address (Age) Funds (years) During Past 5 Years Trustee Trustee

---------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES

William M. Lyons Trustee, 6 Chief Executive Officer, ACC 35 None
4500 Main Street Chairman and other ACC subsidiaries
Kansas City, MO 64111 of the (September 2000 to present)
(48) Board President, ACC
(June 1997 to present)
Chief Operating Officer,
ACC (June 1996 to
September 2000)
President, ACIM (September
2002 to present)
President, ACIS
(July 2003 to present)
Also serves as: Executive
Vice President, ACSC and
other ACC subsidiaries
---------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES

Albert Eisenstat Trustee 8 Retired, General Partner, 35 Independent Director,
1665 Charleston Road Discovery Ventures Sungard Data Systems
Mountain View, CA 94043 (Venture capital firm, (1991 to present)
(73) 1996 to 1998) Independent Director,
Business Objects S/A
(1994 to present)
Independent Director
Commercial Metals
(1983-2001)

Ronald J. Gilson Trustee 8 Charles J. Meyers Professor 35 None
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 Stanford Law School
(57) (1979 to present)
Mark and Eva Stern
Professor of Law and
Business, Columbia
University School of Law
(1992 to present)
Counsel, Marron, Reid &
Sheehy (a San Francisco
law firm, 1984 to present)

Kathryn A. Hall Trustee 2 President and Chief 35 Director, Princeton
1665 Charleston Road Investment Officer, University
Mountain View, CA 94043 Offit Hall Capital Investment Company
(46) Management, LLC (1997 to present)
(April 2002 to present) Director, Stanford
President and Managing Management Company
Director, Laurel Management (2001 to present)
Company, L.L.C. Director, UCSF
(1996 to April 2002) Foundation
(2000 to present)
Director, San
Francisco
Day School
(1999 to present)

---------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES

Myron S. Scholes Trustee 23 Partner, Oak Hill Capital 35 Director, Dimensional
1665 Charleston Road Management, (1999-present) Fund Advisors
Mountain View, CA 94043 Principal, Long-Term (investment advisor,
(62) Capital Management 1982 to present)
(investment advisor, Director,
1993 to January 1999) Smith Breeden
Frank E. Buck Professor Family of Funds
of Finance, Stanford (1992 to present)
Graduate School of Business
(1981 to present)

Kenneth E. Scott Trustee 32 Ralph M. Parsons Professor 35 Not applicable
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 Stanford Law School
(75) (1972 to present)

John B. Shoven Trustee 1 Professor of Economics, 35 Director, Cadence
1665 Charleston Road Stanford University Design Systems
Mountain View, CA 94043 (1977 to present) (1992 to present)
(56) Director, Watson
Wyatt Worldwide
(2002 to present)
Director,
Palmsource Inc.
(2002 to present)

Jeanne D. Wohlers Trustee 19 Retired, Director and Partner, 35 Director, Indus
1665 Charleston Road Windy Hill Productions, LP International
Mountain View, CA 94043 (educational software, (software solutions,
(58) 1994 to 1998) January 1999 to present)
Director, Quintus
Corporation
(automation solutions,
1995 to present)

---------------------------------------------------------------------------------------------------------------
Officers
William M. Lyons President 3 See entry above under 35 See entry above
4500 Main Street "Interested Trustees." under "Interested
Kansas City, MO 64111 Trustees."
(48)

Robert T. Jackson Executive 3 Chief Administrative Officer, Not Not
4500 Main St. Vice ACC (August 1997 to present) applicable applicable
Kansas City, MO 64111 President Chief Financial Officer, ACC
(58) (May 1995 to October 2002)
President, ACSC
(January 1999 to present)
Executive Vice President, ACC
(May 1995 to present)
Also serves as: Executive
Vice President and Chief
Financial Officer, ACIM,
ACIS and other ACC
subsidiaries, and Treasurer, ACIM

---------------------------------------------------------------------------------------------------------------
OFFICERS

Maryanne Roepke, CPA Senior Vice 3 Senior Vice President and Not Not
4500 Main St. President, Assistant Treasurer, ACSC applicable applicable
Kansas City, MO 64111 Treasurer
(48) and Chief
Accounting
Officer

David C. Tucker Senior Vice 5 Senior Vice President, Not Not
4500 Main St. President ACIM, ACIS, ACSC and applicable applicable
Kansas City, MO 64111 and other ACC subsidiaries
(45) General (June 1998 to present)
Counsel General Counsel, ACC,
ACIM, ACIS, ACSC and
other ACC subsidiaries
(June 1998 to present)

C. Jean Wade Controller 7 Vice President, ACSC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City, MO 64111 Controller-Fund Accounting,
(40) ACSC (June 1997 to present)

Robert Leach Controller 7 Vice President, ACSC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City MO 64111 Controller-Fund Accounting,
(37) ACSC (June 1997 to present)

Jon Zindel Tax Officer 6 Vice President, Corporate Tax, Not Not
4500 Main Street ACSC (April 1998 to present) applicable applicable
Kansas City, MO 64111 Vice President, ACIM, ACIS
(36) and other ACC subsidiaries
(April 1999 to present)
President, American Century
Employee Benefit Services, Inc.
(January 2000 to December 2000)
Treasurer, American Century
Employee Benefit Services, Inc.
(December 2000 to present)
Treasurer, American Century
Ventures, Inc. (December 1999
to January 2001)

THE BOARD OF TRUSTEES

The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. The board has the authority
to manage the business of the funds on behalf of their investors, and it has all
powers necessary or convenient to carry out that responsibility. Consequently,
the trustees may adopt bylaws providing for the regulation and management of the
affairs of the funds and may amend and repeal them to the extent that such
bylaws do not reserve that right to the funds' investors. They may fill
vacancies in or reduce the number of board members, and may elect and remove
such officers and appoint and terminate such agents as they consider
appropriate. They may appoint from their own number and establish and terminate
one or more committees consisting of two or more trustees who may exercise the
powers and authority of the board to the extent that the trustees determine.
They may, in general, delegate such authority as they consider desirable to any
officer of the funds, to any committee of the board and to any agent or employee
of the funds or to any custodian, transfer or investor servicing agent, or
principal underwriter. Any determination as to what is in the interests of the
funds made by the trustees in good faith shall be conclusive.

BOARD REVIEW OF INVESTMENT MANAGEMENT CONTRACTS

The Board of Trustees oversees each fund's management and performance on a
continuous basis, and the board determines annually whether to approve and renew
the fund's investment management agreement. ACIM provides the board with
monthly, quarterly, and annual analyses of ACIM's performance in the following
areas:

o Investment performance of the funds (short-, medium- and long-term);

o Shareholder services provided;

o Compliance with investment restrictions; and

o Fund accounting services provided (including the valuation of portfolio
securities);

Leaders of each fund's portfolio management team meet with the board
periodically to discuss the management and performance of the fund.

When considering whether to renew an investment advisory contract, the board
examines several factors, but does not identify any particular factor as
controlling their decision. Some of the factors considered by the board include:
the nature, extent, and quality of the advisory services provided as well as
other material facts, such as the investment performance of the funds' assets
managed by the adviser and the fair market value of the services provided. To
assess these factors, the board reviews both ACIM's performance and that of its
peers, as reported by independent gathering services such as Lipper Analytical
Services (for fund performance and expenses) and National Quality Review (for
shareholder services).

Additional information is provided to the board detailing other sources of
revenue to ACIM or its affiliates from its relationship with the funds and
intangible or "fall-out" benefits that accrue to the adviser and its affiliates,
if relevant, and the adviser's control of the investment expenses of the funds,
such as transaction costs, including ways in which portfolio transactions for
the funds are conducted and brokers are selected.

The board also reviews the investment performance of each fund compared with a
peer group of funds and an appropriate index or combination of indexes, in
addition to a comparative analysis of the total expense ratios of, and advisory
fees paid by, similar funds.

The board considered the level of ACIM's profits in respect to the management of
the American Century family of funds, including the profitability of managing
each fund. The board conducted an extensive review of ACIM's methodology in
allocating costs to the management of each fund. The board concluded that the
cost allocation methodology employed by ACIM has a reasonable basis and is
appropriate in light of all of the circumstances. They considered the profits
realized by ACIM in connection with the operation of each fund and whether the
amount of profit is a fair entrepreneurial profit for the management of each
fund. The board also considered ACIM's profit margins in comparison with
available industry data, both accounting for and excluding marketing expenses.

Based on their evaluation of all material factors assisted by the advice of
independent legal counsel, the board, including the independent trustees,
concluded that the existing management fee structures are fair and reasonable
and that the existing investment management contracts should be continued.

COMMITTEES

The board has four standing committees to oversee specific functions of the
funds' operations. Information about these committees appears in the table
below. The trustee first named serves as chairman of the committee.

Number of Meetings
Held During Last Fiscal
Committee Members Function Year Ended May 31, 2002

Audit Kenneth E. Scott The Audit Committee recommends 4
Albert Eisenstat the engagement of the funds'
Jeanne D. Wohlers independent auditors and oversees
its activities. The committee receives
reports from the advisor's Internal
Audit Department, which is accountable
to the committee. The committee also
receives reporting about compliance
matters affecting the Trust.

Nominating Kenneth E. Scott The Nominating Committee primarily 1
Ronald J. Gilson considers and recommends individuals
Albert Eisenstat for nomination as trustees. The names
Myron S. Scholes of potential trustee candidates are drawn
Jeanne D. Wohlers from a number of sources, including
recommendations from members of the
board, management and shareholders.
This committee also reviews and makes
recommendations to the board with respect
to the composition of board committees and
other board-related matters, including its
organization, size, composition, responsibilities,
functions and compensation. The Nominating
Committee does not currently have a policy
regarding whether it will consider nominees
recommended by shareholders.

Portfolio Myron S. Scholes The Portfolio Committee reviews quarterly 4
Kathryn A. Hall the investment activities and strategies used
to manage fund assets. The committee
regularly receives reports from portfolio managers,
credit analysts and other investment personnel
concerning the funds' investments.

Quality Ronald J. Gilson The Quality of Service Committee reviews 4
of Myron S. Scholes the level and quality of transfer agent and
Service William M. Lyons administrative services provided to the funds
John B. Shoven and their shareholders. It receives and reviews
reports comparing those services to those of
fund competitors and seeks to improve such
services where feasible and appropriate.

COMPENSATION OF TRUSTEES

The trustees serve as trustees or directors for eight American Century
investment companies. Each trustee who is not an interested person as defined in
the Investment Company Act receives compensation for service as a member of the
board of all eight such companies based on a schedule that takes into account
the number of meetings attended and the assets of the funds for which the
meetings are held. These fees and expenses are divided among the eight
investment companies based, in part, upon their relative net assets. Under the
terms of the management agreement with the advisor, the funds are responsible
for paying such fees and expenses.

The following table shows the aggregate compensation paid by the funds for the
periods indicated and by the eight investment companies served by this board to
each trustee who is not an interested person as defined in the Investment
Company Act.

AGGREGATE TRUSTEE COMPENSATION FOR FISCAL YEAR ENDED MAY 31, 2003

Total Compensation from
Total Compensation the American Century
Name of Trustee from the Funds(1) Family of Funds(2)

Albert A. Eisenstat $6,859 $87,250

Ronald J. Gilson $7,202 $94,500

Myron S. Scholes $6,783 $85,500

Kenneth E. Scott $7,041 $90,750

John B. Shoven $3,311 $78,583

Jeanne D. Wohlers $6,759 $85,000

Kathryn A. Hall $6,925 $88,750

(1) Includes compensation paid to the trustees during the fiscal year ended May
31, 2003, and also includes amounts deferred at the election of the
trustees under the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan.

(2) Includes compensation paid by the eight investment company members of the
American Century family of funds served by this board. The total amount of
deferred compensation included in the preceding table is as follows: Mr.
Scholes, $25,000 ; Mr. Shoven, $29,083 ; Ms. Wohlers, $85,000; and Ms.
Hall, $64,000.

The funds have adopted the American Century Mutual Funds' Independent Directors'
Deferred Compensation Plan. Under the plan, the independent trustees may defer
receipt of all or any part of the fees to be paid to them for serving as
trustees of the funds.

All deferred fees are credited to an account established in the name of the
trustees. The amounts credited to the account then increase or decrease, as the
case may be, in accordance with the performance of one or more of the American
Century funds that are selected by the trustee. The account balance continues to
fluctuate in accordance with the performance of the selected fund or funds until
final payment of all amounts are credited to the account. Trustees are allowed
to change their designation of mutual funds from time to time.

No deferred fees are payable until such time as a trustee resigns, retires or
otherwise ceases to be a member of the Board of Trustees. Trustees may receive
deferred fee account balances either in a lump-sum payment or in substantially
equal installment payments to be made over a period not to exceed 10 years. Upon
the death of a trustee, all remaining deferred fee account balances are paid to
the trustee's beneficiary or, if none, to the trustee's estate.

The plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
voluntarily funded their obligations. The rights of trustees to receive their
deferred fee account balances are the same as the rights of a general unsecured
creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.

No deferred fees were paid to any trustee under the plan during the fiscal year
ended May 31, 2003.

OWNERSHIP OF FUND SHARES

The trustees owned shares in the funds as of December 31, 2003, as shown in the
tables below:

NAME OF TRUSTEES

William M. Albert Ronald J. Myron S.
Lyons Eisenstat Gilson Scholes
----------------------------------------------------------------------------------------------------
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS:
Florida Municipal Money Market Data to come
Florida Municipal Bond
Arizona Municipal Bond
Tax-Free Money Market
Tax-Free Bond
High-Yield Municipal
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEES IN
FAMILY OF INVESTMENT COMPANIES

NAME OF TRUSTEES

Kenneth E. John B. Jeanne D. Kathryn A.
Scott Shoven Wohlers Hall
----------------------------------------------------------------------------------------------------
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS:
Florida Municipal Money Market Data to come
Florida Municipal Bond
Arizona Municipal Bond
Tax-Free Money Market
Tax-Free Bond
High-Yield Municipal
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEES IN
FAMILY OF INVESTMENT COMPANIES

Ranges: A--none, B--$1-$10,000, C--$10,001-$50,000, D--$50,001-$100,000, E--More
than $100,000

CODE OF ETHICS

The funds, their investment advisor and principal underwriter have adopted a
code of ethics under Rule 17j-1 of the Investment Company Act and the code of
ethics permits personnel subject to the code to invest in securities, including
securities that may be purchased or held by the funds, provided that they first
obtain approval from the compliance department before making such investments.

PROXY VOTING GUIDELINES

The Advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. In exercising its voting
obligations, the Advisor is guided by general fiduciary principles. It must act
prudently, solely in the interest of the funds, and for the exclusive purpose of
providing benefits to them. The Advisor attempts to consider all factors of its
vote that could affect the value of the investment. The funds' Board of Trustees
has approved the Advisor's Proxy Voting Guidelines to govern the Advisor's proxy
voting activities.

The Advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these considerations and establish a framework for the
Advisor's consideration of the vote that would be appropriate for the funds. In
particular, the Proxy Voting Guidelines outline principles and factors to be
considered in the exercise of voting authority for proposals addressing:

o Election of Directors

o Ratification of Selection of Auditors

o Equity-Based Compensation Plans

o Anti-Takeover Proposals

= Cumulative Voting

= Staggered Boards

= "Blank Check" Preferred Stock

= Elimination of Preemptive Rights

= Non-targeted Share Repurchase

= Increase in Authorized Common Stock

= "Supermajority" Voting Provisions or Super Voting Share Classes

= "Fair Price" Amendments

= Limiting the Right to Call Special Shareholder Meetings

= Poison Pills or Shareholder Rights Plans

= Golden Parachutes

= Reincorporation

= Confidential Voting

= Opting In or Out of State Takeover Laws

o Shareholder Proposals Involving Social, Moral or Ethical Matters

o Anti-Greenmail Proposals

o Changes to Indemnification Provisions

o Non-Stock Incentive Plans

o Directors Tenure

o Directors' Stock Options Plans

o Directors Share Ownership

Finally, the Proxy Voting Guidelines establish procedures for voting of proxies
in cases in which the Advisor may have a potential conflict of interest.
Companies with which the Advisor has direct business relationships could
theoretically use these relationships to attempt to unduly influence the manner
in which American Century votes on matters for the funds. To ensure that such a
conflict of interest does not affect proxy votes cast for the funds, all
discretionary (including case-by-case) voting for these companies will be voted
in direct consultation with a committee of the independent directors of the
funds.

A copy of the Advisor's Proxy Voting Guidelines are available on the funds' Web
site at www.americancentury.com.

THE FUNDS' PRINCIPAL SHAREHOLDERS

As of February __, 2004, the following companies were the record owners of more
than 5% of the outstanding shares of any class of a fund:

Percentage of
Fund/Class Shareholder Outstanding Shares Owned

FLORIDA MUNICIPAL MONEY MARKET

Investor
Peggy Myers Pers Rep Data to come
Shel Silverstein Estate
New York, New York

FLORIDA MUNICIPAL BOND

Investor
Charles Schwab & Co., Inc.
San Francisco, California

Morgan Guaranty Trust of New York
Newark, Delaware

A
None

B
None

C
None

ARIZONA MUNICIPAL BOND

Investor
Charles Schwab & Co., Inc.
San Francisco, California

National Financial Services Corp.
New York, New York
A
None
B
None
C
None

TAX-FREE BOND

Investor
Charles Schwab & Co., Inc.
San Francisco, California

M L P F & S, Inc.
Jacksonville, Florida

National Financial Services Corp
New York, New York

Institutional

Charles Schwab & Co., Inc.
San Francisco, California

TAX-FREE MONEY MARKET

Investor
American Century Money
Fund Settlement
Jersey City, New Jersey

HIGH-YIELD MUNICIPAL

Investor
National Financial Services Corp.
New York, New York

Pershing LLC
Jersey City, New Jersey
A

Charles Schwab & Co., Inc.
San Francisco, California

B
M L P F & S, Inc. Data to come
Jacksonville, Florida

American Enterprises Investment Services
Minneapolis, Minnesota

Percentage of
Fund/Class Shareholder Outstanding Shares Owned

High-Yield Municipal

C
M L P F & S, Inc. Data to come
Jacksonville, Florida
American Enterprise Investment Services
Minneapolis, Minnesota
--------------------------------------------------------------------------------

The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of any class of a fund's outstanding shares or more than 25% of
the voting securities of American Century Municipal Trust. As of February __,
2004, the officers and trustees of the funds, as a group, owned less than 1% of
any class of a fund's outstanding shares.

Data to come

SERVICE PROVIDERS

The funds have no employees. To conduct the funds' day-to-day activities, the
funds have hired a number of service providers. Each service provider has a
specific function to fill on behalf of the funds that is described below.

ACIM, ACSC and ACIS are wholly owned by ACC. James E. Stowers, Jr., Chairman of
ACC, controls ACC by virtue of his ownership of a majority of its voting stock.

INVESTMENT ADVISOR

American Century Investment Management, Inc. (ACIM) serves as the investment
advisor for each of the funds. A description of the responsibilities of the
advisor appears in the Prospectuses under the heading Management.

For services provided to each fund, the advisor receives a monthly fee based on
a percentage of the average net assets of a fund. The annual rate at which this
fee is assessed is determined monthly in a two-step process. First, a fee rate
schedule is applied to the assets of all the funds of its investment category
managed by the advisor (the Investment Category Fee). The three investment
categories are money market funds, bond funds and equity funds. When calculating
the fee for a money market fund, for example, all the assets of the money market
funds managed by the advisor are aggregated and the fee rate is applied to the
total. Second, a separate fee rate schedule is applied to the assets of all the
funds managed by the advisor (the Complex Fee). The amounts calculated using the
Investment Category Fee and the Complex Fee are then added to determine the
unified management fee payable by a fund to the advisor.

The schedules by which the unified management fee is determined are shown below.
The Investment Category Fees are determined according to the schedule below.

INVESTMENT CATEGORY FEE SCHEDULE
FOR TAX-FREE MONEY MARKET AND FLORIDA MUNICIPAL MONEY MARKET

Category Assets Fee Rate
--------------------------------------------------------------------------------
First $1 billion 0.2700%
Next $1 billion 0.2270%
Next $3 billion 0.1860%
Next $5 billion 0.1690%
Next $15 billion 0.1580%
Next $25 billion 0.1575%

Thereafter 0.1570%

INVESTMENT CATEGORY FEE SCHEDULE
FOR TAX-FREE BOND, ARIZONA MUNICIPAL BOND AND FLORIDA MUNICIPAL BOND

Category Assets Fee Rate
--------------------------------------------------------------------------------
First $1 billion 0.2800%
Next $1 billion 0.2280%
Next $3 billion 0.1980%
Next $5 billion 0.1780%
Next $15 billion 0.1650%
Next $25 billion 0.1630%

Thereafter 0.1625%

INVESTMENT CATEGORY FEE SCHEDULE FOR HIGH-YIELD MUNICIPAL

Category Assets Fee Rate
First $1 billion 0.4100%
Next $1 billion 0.3580%
Next $3 billion 0.3280%
Next $5 billion 0.3080%
Next $15 billion 0.2950%
Next $25 billion 0.2930%

Thereafter 0.2925%

The Complex Fee for the Investor, A, B and C Class shares is determined
according to the schedule below.

COMPLEX FEE SCHEDULE

Complex Assets Fee Rate
--------------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15 billion 0.2985%
Next $25 billion 0.2970%
Next $50 billion 0.2960%
Next $100 billion 0.2950%
Next $100 billion 0.2940%
Next $200 billion 0.2930%
Next $250 billion 0.2920%
Next $500 billion 0.2910%

Thereafter 0.2900%

The Complex Fee schedule for the Institutional Class is lower by 0.2000% at each
graduated step. For example, if the Investor Class Complex Fee is 0.3100% for
the first $2.5 billion, the Institutional Class Complex Fee is 0.1100% (0.3100%
minus 0.2000%).

On the first business day of each month, the funds pay a management fee to the
advisor for the previous month at the specified rate. The fee for the previous
month is calculated by multiplying the applicable fee for the fund by the
aggregate average daily closing value of a fund's net assets during the previous
month. This number is then multiplied by a fraction, the numerator of which is
the number of days in the previous month and the denominator of which is 365
(366 in leap years).

The management agreement between the Trust and the advisor shall continue in
effect until the earlier of the expiration of two years from the date of its
execution or until the first meeting of fund shareholders following such
execution and for as long thereafter as its continuance is specifically approved
at least annually by

(1) the funds' Board of Trustees, or a majority of outstanding shareholder
votes (as defined in the Investment Company Act) and

(2) the vote of a majority of the trustees of the funds who are not parties to
the agreement or interested persons of the advisor, cast in person at a
meeting called for the purpose of voting on such approval.

The management agreement states that the funds' Board of Trustees or a majority
of outstanding shareholder votes may terminate the management agreement at any
time without payment of any penalty on 60 days' written notice to the advisor.
The management agreement shall be automatically terminated if it is assigned.

The management agreement states that the advisor shall not be liable to the
funds or their shareholders for anything other than willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties.

The management agreement also provides that the advisor and its officers,
trustees and employees may engage in other business, render services to others,
and devote time and attention to any other business whether of a similar or
dissimilar nature.

Certain investments may be appropriate for the funds and also for other clients
advised by the advisor. Investment decisions for the funds and other clients are
made with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. In
addition, purchases or sales of the same security may be made for two or more
clients or funds on the same date. Such transactions will be allocated among
clients in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.

The advisor may aggregate purchase and sale orders of the funds with purchase
and sale orders of its other clients when the advisor believes that such
aggregation provides the best execution for the funds. The Board of Trustees has
approved the advisor's policy with respect to the aggregation of portfolio
transactions. Where portfolio transactions have been aggregated, the funds
participate at the average share price for all transactions in that security on
a given day and allocate transaction costs on a pro rata basis. The advisor will
not aggregate portfolio transactions of the funds unless it believes that such
aggregation is consistent with its duty to seek best execution on behalf of the
funds and the terms of the management agreement. The advisor receives no
additional compensation or remuneration as a result of such aggregation.

Unified management fees incurred by each fund for the fiscal periods ended May
31, 2003, 2002 and 2001, are indicated in the following table. As new classes,
information regarding the A, B and C classes of Florida Municipal Bond and
Arizona Municipal Bond was not available as of the fiscal year end.

UNIFIED MANAGEMENT FEES (1)

Fund 2003 2002 2001
--------------------------------------------------------------------------------
FLORIDA MUNICIPAL MONEY MARKET

Investor Class $314,527 $370,570 $413,133

--------------------------------------------------------------------------------
FLORIDA MUNICIPAL BOND

Investor Class $321,620 $267,226 $260,696

A Class N/A N/A N/A

B Class N/A N/A N/A

C Class N/A N/A N/A

--------------------------------------------------------------------------------
ARIZONA MUNICIPAL BOND

Investor Class $359,414 $297,741 $229,286

A Class N/A N/A N/A

B Class N/A N/A N/A

C Class N/A N/A N/A

--------------------------------------------------------------------------------
TAX-FREE MONEY MARKET

Investor Class $1,310,134 $1,224,240 $1,174,251

--------------------------------------------------------------------------------
TAX-FREE BOND

Investor Class $2,611,101 $1,360,649 $835,937

Institutional Class $1,390 N/A (2) N/A (2)

--------------------------------------------------------------------------------
HIGH-YIELD MUNICIPAL

Investor Class $281,749 $195,903 $190,724

A Class $1,326 N/A (2) N/A (2)

B Class $439 N/A (2) N/A (2)

C Class $1,831 N/A (2) N/A (2)

(1) Net of reimbursements or waivers.

(2) The class was not in operation for the fiscal year.

TRANSFER AGENT AND ADMINISTRATOR

American Century Services Corporation, 4500 Main Street, Kansas City, Missouri
64111, serves as transfer agent and dividend-paying agent for the funds. It
provides physical facilities, computer hardware and software, and personnel for
the day-to-day administration of the funds and the advisor. The advisor pays
ACSC for these services.

From time to time, special services may be offered to shareholders who maintain
higher share balances in our family of funds. These services may include the
waiver of minimum investment requirements, expedited confirmation of shareholder
transactions, newsletters and a team of personal representatives. Any expenses
associated with these special services will be paid by the advisor.

DISTRIBUTOR

The funds' shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. The distributor is a wholly owned subsidiary
of ACC and its principal business address is 4500 Main Street, Kansas City,
Missouri 64111.

The distributor is the principal underwriter of the funds' shares. The
distributor makes a continuous, best-efforts underwriting of the funds' shares.
This means that the distributor has no liability for unsold shares.

Certain financial intermediaries unaffiliated with the distributor or the funds
may perform various administrative and shareholder services for their clients
who are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services, and would otherwise be provided
by the distributor or its affiliates. The distributor may pay fees out of its
own resources to such financial intermediaries for the provision of these
services.

OTHER SERVICE PROVIDERS

CUSTODIAN BANKS

J.P. Morgan Chase and Co., 770 Broadway, 10th floor, New York, New York
10003-9598, and Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105,
each serves as custodian of the funds' assets. The custodians take no part in
determining the investment policies of the funds or deciding which securities
are purchased or sold by the funds. The funds, however, may invest in certain
obligations of the custodians and may purchase or sell certain securities from
or to the custodians.

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP are the independent auditors of the funds. The
address of PricewaterhouseCoopers LLP is 1055 Broadway, 10th floor, Kansas City,
Missouri 64105. As the independent auditors of the funds, PricewaterhouseCoopers
provides services including

(1) auditing the annual financial statements for each fund,

(2) assisting and consulting in connection with SEC filings, and

(3) reviewing the annual federal income tax return filed for each fund.

BROKERAGE ALLOCATION

The funds generally purchase and sell debt securities through principal
transactions, meaning the funds normally purchase securities on a net basis
directly from the issuer or a primary market-maker acting as principal for the
securities. The funds do not pay brokerage commissions on these transactions,
although the purchase price for debt securities usually includes an undisclosed
compensation. Purchases of securities from underwriters typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market-makers typically include a dealer's mark-up
(i.e., a spread between the bid and asked prices). During the fiscal years ended
May 31, 2003, 2002 and 2001, the funds did not pay any brokerage commissions.

INFORMATION ABOUT FUND SHARES

The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in a series (or funds). Each of the funds named on the front
of this Statement of Additional Information is a series of shares issued by the
Trust. In addition, each series (or fund) may be divided into separate classes.
See Multiple Class Structure, which follows. Additional funds and classes may be
added without a shareholder vote.

Each fund votes separately on matters affecting that fund exclusively. Voting
rights are not cumulative, so that investors holding more than 50% of the
Trust's (all funds') outstanding shares may be able to elect a Board of
Trustees. The Trust undertakes dollar-based voting, meaning that the number of
votes a shareholder is entitled to is based upon the dollar amount of the
shareholder's investment. The election of trustees is determined by the votes
received from all Trust shareholders without regard to whether a majority of
shares of any one fund voted in favor of a particular nominee or all nominees as
a group.

Each shareholder has rights to dividends and distributions declared by the fund
he or she owns and to the net assets of such fund upon its liquidation or
dissolution proportionate to his or her share ownership interest in the fund.
Shares of each fund have equal voting rights, although each fund votes
separately on matters affecting that fund exclusively.

The Trust shall continue unless terminated by (1) approval of at least
two-thirds of the shares of each fund entitled to vote, or (2) by the Trustees
by written notice to shareholders of each fund. Any fund may be terminated by
(1) approval of at least two-thirds of the shares of that fund, or (2) by the
Trustees by written notice to shareholders of that fund.

Upon termination of the Trust or a fund, as the case may be, the Trust shall pay
or otherwise provide for all charges, taxes, expenses and liabilities belonging
to the Trust or the fund. Thereafter, the Trust shall reduce the remaining
assets belonging to each fund (or the particular fund) to cash, shares of other
securities or any combination thereof, and distribute the proceeds belonging to
each fund (or the particular fund) to the shareholders of that fund ratably
according to the number of shares of that fund held by each shareholder on the
termination date.

Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust is unable to meet its obligations.

The assets belonging to each series are held separately by the custodian and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Your rights as a shareholder are the same for all series of securities unless
otherwise stated. Within their respective fund or class, all shares have equal
redemption rights. Each share, when issued, is fully paid and non-assessable.

In the event of complete liquidation or dissolution of a fund or class,
shareholders of the fund or class of shares shall be entitled to receive, pro
rata, all of the assets less the liabilities of that fund or class.

MULTIPLE CLASS STRUCTURE

The Board of Trustees has adopted a multiple class plan (the Multiclass Plan)
pursuant to Rule 18f-3 adopted by the SEC. The plan is described in the
prospectus of any fund that offers more than one class. Pursuant to such plan,
the funds may issue up to four classes of shares: Investor Class, A Class, B
Class and C Class. Not all funds offer all four classes.

The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The A, B
and C Classes also are made available through financial intermediaries, for
purchase by individual investors who receive advisory and personal services from
the intermediary. The total management fee is the same as for Investor Class,
but the A, B and C Class shares each are subject to a separate Master
Distribution and Individual Shareholder Services Plan (the A Class Plan, B Class
Plan and C Class Plan, respectively, the Plans) described below. The Plans have
been adopted by the funds' Board of Trustees in accordance with Rule 12b-1
adopted by the SEC under the Investment Company Act.

RULE 12B-1

Rule 12b-1 permits an investment company to pay expenses associated with the
distribution of its shares in accordance with a plan adopted by its Board of
Directors and approved by its shareholders. Pursuant to such rule, the Board of
Trustees and initial shareholder of the funds' A, B and C Classes have approved
and entered into the A Class Plan, B Class Plan and C Class Plan, respectively.
The Plans are described below.

In adopting the Plans, the Board of Trustees (including a majority of trustees
who are not interested persons of the funds [as defined in the Investment
Company Act], hereafter referred to as the independent trustees) determined that
there was a reasonable likelihood that the Plans would benefit the funds and the
shareholders of the affected class. Pursuant to Rule 12b-1, information with
respect to revenues and expenses under the Plans is presented to the Board of
Trustees quarterly for its consideration in connection with its deliberations as
to the continuance of the Plans. Continuance of the Plans must be approved by
the Board of Trustees (including a majority of the independent trustees)
annually. The Plans may be amended by a vote of the Board of Trustees (including
a majority of the independent trustees), except that the Plans may not be
amended to materially increase the amount to be spent for distribution without
majority approval of the shareholders of the affected class. The Plans terminate
automatically in the event of an assignment and may be terminated upon a vote of
a majority of the independent trustees or by vote of a majority of the
outstanding voting securities of the affected class.

All fees paid under the Plans will be made in accordance with Section 26 of the
Conduct Rules of the National Association of Securities Dealers (NASD).

A CLASS PLAN

As described in the Prospectus, the A Class shares of the funds are made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through broker-dealers, banks, insurance companies and
other financial intermediaries that provide various administrative, shareholder
and distribution services. The funds' distributor enters into contracts with
various banks, broker-dealers, insurance companies and other financial
intermediaries, with respect to the sale of the funds' shares and/or the use of
the funds' shares in various investment products or in connection with various
financial services.

Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for A Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.

To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
Board of Trustees has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the Advisor, as paying agent for the fund, a fee equal to 0.25%
annually of the average daily net asset value of the A Class shares. During the
fiscal year ended May 31, 2003, the aggregate amount of fees paid under the A
Class Plan was: High-Yield Municipal, $526.

Because the A Classes of Florida Municipal Bond and Arizona Municipal Bond were
not in operation as of the fiscal year end, no fees were paid under the A Class
plan.

Payments may be made for a variety of individual shareholder services,
including, but not limited to:

(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;

(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;

(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;

(e) consolidating shareholder accounts in one place; and

(f) other individual services.

Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.

Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of A Class shares, which services
may include but are not limited to:

(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell A Class
shares pursuant to selling agreements;

(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' A Class
shares;

(d) printing prospectuses, statements of additional information and reports for
other-than-existing shareholders;

(e) preparing, printing and distributing sales literature and advertising
materials provided to the funds' shareholders and prospective shareholders;

(f) receiving and answering correspondence from prospective shareholders,
including distributing prospectuses, statements of additional information,
and shareholder reports;

(g) providing facilities to answer questions from prospective shareholders
about fund shares;

(h) complying with federal and state securities laws pertaining to the sale of
fund shares;

(i) assisting shareholders in completing application forms and selecting
dividend and other account options;

(j) providing other reasonable assistance in connection with the distribution
of fund shares;

(k) organizing and conducting sales seminars and payments in the form of
transactional and compensation or promotional incentives;

(l) profit on the foregoing;

(m) paying service fees for providing personal, continuing services to
investors, as contemplated by the Conduct Rules of the NASD; and

(n) such other distribution and services activities as the advisor determines
may be paid for by the funds pursuant to the terms of the agreement between
the corporation and the funds' distributor and in accordance with Rule
12b-1 of the Investment Company Act.

B Class Plan

As described in the Prospectus, the B Class shares of the funds are made
available to participants in employer-sponsored retirement or savings plans and
to persons purchasing through broker-dealers, banks, insurance companies and
other financial intermediaries that provide various administrative, shareholder
and distribution services. The funds' distributor enters into contracts with
various banks, broker-dealers, insurance companies and other financial
intermediaries, with respect to the sale of the funds' shares and/or the use of
the funds' shares in various investment products or in connection with various
financial services.

Certain recordkeeping and administrative services that are provided by the
funds' transfer agent for the Investor Class shareholders may be performed by a
plan sponsor (or its agents) or by a financial intermediary for B Class
investors. In addition to such services, the financial intermediaries provide
various individual shareholder and distribution services.

To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
Board of Trustees has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the Advisor, as paying agent for the fund, a fee equal to 1.00%
annually of the average daily net asset value of the B Class shares, 0.25% of
which is paid for individual shareholder services (as described below) and 0.75%
of which is paid for distribution services (as described below).

During the fiscal year ended May 31, 2003, the aggregate amount of fees paid
under the B Class Plan was: High-Yield Municipal, $694.

Because the B Classes of Florida Municipal Bond and Arizona Municipal Bond were
not in operation as of the fiscal year end, no fees were paid under the B Class
plan.

Payments may be made for a variety of individual shareholder services,
including, but not limited to:

(a) providing individualized and customized investment advisory services,
including the consideration of shareholder profiles and specific goals;

(b) creating investment models and asset allocation models for use by
shareholders in selecting appropriate funds;

(d) periodic rebalancing of shareholder accounts to ensure compliance with the
selected asset allocation;

(e) consolidating shareholder accounts in one place; and

(f) other individual services.

Individual shareholder services do not include those activities and expenses
that are primarily intended to result in the sale of additional shares of the
funds.

Distribution services include any activity undertaken or expense incurred that
is primarily intended to result in the sale of B Class shares, which services
may include but are not limited to:

(a) the payment of sales commissions, on-going commissions and other payments
to brokers, dealers, financial institutions or others who sell B Class
shares pursuant to selling agreements;

(b) compensation to registered representatives or other employees of the
distributor who engage in or support distribution of the funds' B Class
shares;