POST-EFFECTIVE AMENDMENT NO. 44

485APOS 1 pea44-2005.htm POST-EFFECTIVE AMENDMENT NO. 44 POST-EFFECTIVE AMENDMENT NO. 44

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. 44 [X]

and/or

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

File No. 811-4025

Amendment No. 45 [X]

(Check appropriate box or boxes.)

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

4500 Main Street, Kansas City, MO 64111
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering: July 29, 2005

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 July 29, 2005 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.

JULY 29, 2005

AMERICAN CENTURY INVESTMENTS
PROSPECTUS

ADVISOR CLASS

Tax-Free Bond Fund

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

American Century
Investment Services, Inc., Distributor

Dear Investor:

American Century Investments is committed to helping people make the most of
their financial opportunities. That's why we are focused on achieving superior
results and building long-term relationships with investors.

We believe our relationship with you begins with an easy to read prospectus that
provides you with the information you need to feel confident about your
investment decisions.

Naturally, you may have questions about investing after you read through the
prospectus. Please contact your investment professional with questions or for
more information about our funds.

Sincerely,

Brian Jeter
Senior Vice President
Third Party Sales and Services
American Century Investment Services, Inc.

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

American Century Investment Services, Inc., Distributor

The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.

Table of Contents

AN OVERVIEW OF THE FUND......................................................X

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

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

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

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

MANAGEMENT..................................................................XX

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 FUND

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The fund seeks safety of principal and high current income that is exempt from
federal income tax.

WHAT ARE THE FUND'S PRIMARY INVESTMENT STRATEGIES AND PRINCIPAL RISKS?

The portfolio managers invest at least 80% of the fund's assets in debt
securities with interest payments exempt from federal income tax. Cities,
counties and other municipalities, and U.S. territories usually issue these
securities for public projects, such as schools and roads. The portfolio
managers may buy securities of varying maturity ranges. A more detailed
description about the fund's investment strategies begins on page X.

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

The fund's primary investment risks include credit risk, due to the possibility
the fund will invest in the lowest investment-grade category of debt securities,
and interest rate risk. 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.

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

When the Advisor Class has 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 Advisor Class of the fund, including a
comparison of these returns to a benchmark index.

If the Advisor Class had existed during the period presented, its performance
would have been substantially similar to that of the Investor Class because its
represents an investment in the same portfolio of securities. However,
performance of the Advisor Class would have been higher because of its higher
expense ratio.

ANNUAL TOTAL RETURNS

The following bar chart shows the performance of the fund's Investor Class
shares for each full calendar year in the life of the class. It indicates the
volatility of the fund's historical returns from year to year. The returns of
the fund's Advisor Class shares will differ from the returns shown in the chart,
depending on the expenses of that class.

TAX FREE BOND FUND - INVESTOR CLASS

2004 2.66%
-------------------------
2003 4.04%
-------------------------
2002 9.13%
-------------------------
2001 5.24%
-------------------------
2000 9.91%
-------------------------
1999 -0.95%
-------------------------
1998 5.81%
-------------------------
1997 7.44%
-------------------------
1996 3.94%
-------------------------
1995 11.93%
-------------------------

(1) AS OF JUNE 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER, TAX FREE
BOND'S INVESTOR CLASS YEAR-TO-DATE RETURN WAS X.XX%.

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

HIGHEST LOWEST
--------------------------------------------------------------------------------
Tax-Free Bond 4.51% (3Q 2002) -2.09% (2Q 2004)
--------------------------------------------------------------------------------

AVERAGE ANNUAL TOTAL RETURNS

The following table shows the average annual total returns of the fund's
Investor Class shares calculated three different ways. 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. After-tax
returns are shown only for Investor Class shares.

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 DECEMBER 31, 2004 1 YEAR 5 YEARS 10 YEARS

TAX-FREE BOND

Return Before Taxes 2.66% 6.16% 5.85%

Return After Taxes on Distributions 2.66% 6.07% 5.73%

Return After Taxes on Distributions
and Sale of Fund Shares 2.91% 5.84% 5.61%

Lehman Brothers Municipal 2.95% 5.93% 5.87%
5-Year General Obligation Index
(reflects no deduction for fees,
expenses or taxes)

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

There are no sales loads, fees or other charges

o to buy fund shares directly from American Century

o to reinvest dividends in additional shares

o to exchange into the same class of shares of other American Century funds

o to redeem your shares, other than a $10 fee to redeem by wire

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

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

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

TAX-FREE BOND

Advisor Class 0.25% 0.50%(3) 0.01% 0.76%

(1) BASED ON ASSETS DURING A FUND'S MOST RECENT FISCAL YEAR. THE FUND HAS A
STEPPED FEE SCHEDULE. AS A RESULT, THE FUND'S MANAGEMENT FEE RATE GENERALLY
DECREASES AS ASSETS INCREASES AND INCREASES AS ASSETS DECREASE.

(2) OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF THE FUND'S
INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST, ARE
EXPECTED TO BE LESS THAN 0.01% FOR THE CURRENT FISCAL YEAR.

(3) THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES THROUGH
BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
INTERMEDIARIES. HALF OF THE ADVISOR CLASS 12B-1 FEE (0.25%) IS FOR ONGOING
RECORDKEEPING AND ADMINISTRATIVE SERVICES PROVIDED BY FINANCIAL
INTERMEDIARIES, WHICH WOULD OTHERWISE BE PAID BY THE ADVISOR OUT OF THE
UNIFIED MANAGEMENT FEE. THE ADVISOR HAS REDUCED ITS UNIFIED MANAGEMENT FEE
FOR ADVISOR CLASS SHARES, BUT THE FEE FOR CORE INVESTMENT ADVISORY SERVICES
IS THE SAME FOR ALL CLASSES. FOR MORE INFORMATION, SEE SERVICE,
DISTRIBUTION AND ADMINISTRATIVE FEES, PAGE X.

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 . . .

o invest $10,000 in the fund

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

o earn a 5% return each year

o 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

TAX-FREE BOND

Advisor Class $78 $242 $422 $939

OBJECTIVES, STRATEGIES AND RISKS

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The fund seeks safety of principal and high current income that is exempt from
federal income tax.

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVES?

The portfolio managers buy QUALITY DEBT SECURITIES and will invest at least 80%
of the fund's assets in debt securities with interest payments exempt from
federal income tax. Cities, counties and other municipalities in the 50 states
and U.S. territories usually issue these securities for public projects, such as
schools and roads.

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.

The portfolio managers also may buy quality debt securities with interest
payments exempt from regular federal income tax, but not exempt from the federal
alternative minimum tax. Cities, counties and other municipalities usually issue
these securities (called private activity bonds) to fund for-profit private
projects, such as hospitals and athletic stadiums. No more than 20% of the
fund's assets may be invested in these securities.

The fund may purchase securities in a number of different ways to seek higher
rates of return. For example, by using when-issued and forward commitment
transactions, the fund may purchase securities in advance to generate additional
income.

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 objectives and may
generate taxable income.

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.

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

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
true when interest rates decline. Funds with longer weighted average maturities
are more sensitive to interest rate changes.

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, than issuers of higher-rated securities.

Because the fund invests primarily in municipal securities, it will be sensitive
to events that affect municipal markets. The fund may have a higher level of
risk than funds that invest in a larger universe of securities.

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 fund.

The portfolio managers monitor weighted average maturity and seek to adjust it
as appropriate, taking into account market conditions and other relevant
factors. Thus, under normal market conditions, potential income and potential
loss are moderate as compared to other funds, but may fluctuate as the portfolio
managers reposition the fund in response to changing market conditions.

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.

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 portfolio managers decide which debt securities to buy and sell by

o determining which debt securities help a fund meet its maturity
requirements

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

o evaluating current economic conditions and assessing the risk of inflation

o 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 portfolio
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 fund invests primarily in
debt securities, changes in interest rates will affect the fund's 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 portfolio 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 fund's 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.

The fund engages in a variety of investment techniques as it pursues its
investment objectives. Each technique has its own characteristics, and may pose
some level of risk to the fund. If you would like to learn more about these
techniques, you should review the statement of additional information before
making an investment.

MANAGEMENT

WHO MANAGES THE FUND?

The Board of Trustees, investment advisor and fund management team play key
roles in the management of the fund.

THE BOARD OF TRUSTEES

The Board of Trustees oversees the management of the fund and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the fund, it has hired an investment advisor to do so.
More than three-fourths of the trustees are independent of the fund's advisor;
that is, they have never been employed by and have no financial interest in the
advisor or any of its affiliated companies (other than as shareholders of
American Century funds).

THE INVESTMENT ADVISOR

The fund's investment advisor is American Century Investment Management, Inc.
(the advisor). 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 fund
and directing the purchase and sale of its investment securities. The advisor
also arranges for transfer agency, custody and all other services necessary for
the fund to operate.

For the services it provides to the fund, the advisor receives a unified
management fee based on a percentage of the daily net assets of each specific
class of shares of the fund. The percentage rate used to calculate the
management fee for each class of shares of a fund is determined daily using a
two-component formula that takes into account (i) the daily net assets of the
accounts managed by the advisor that are in the same broad investment category
as the fund (the "Category Fee") and (ii) the assets of all funds in the
American Century family of funds (the "Complex Fee"). The management fee is
calculated daily and paid monthly in arrears.

The statement of additional information contains detailed information about the
calculation of the management fee. Out of the 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 the fund's management fee may be
paid by the fund's advisor to unaffiliated third parties who provide
recordkeeping and administrative services that would otherwise be performed by
an affiliate of the advisor.

The Advisor Class of the fund was not in operation as of the fiscal year ended
May 31, 2005. The Advisor 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
-------------------------------------------------------------------
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%
-------------------------------------------------------------------

Complex Fee Schedule
-------------------------------------------------------------------
COMPLEX ASSETS FEE RATE FOR ADVISOR CLASS
-------------------------------------------------------------------
First $2.5 billion 0.0600%
-------------------------------------------------------------------
Next $7.5 billion 0.0500%
-------------------------------------------------------------------
Next $15 billion 0.0485%
-------------------------------------------------------------------
Next $25 billion 0.0470%
-------------------------------------------------------------------
Next $25 billion 0.0370%
-------------------------------------------------------------------
Next $25 billion 0.0300%
-------------------------------------------------------------------
Next $25 billion 0.0200%
-------------------------------------------------------------------
Next $25 billion 0.0150%
-------------------------------------------------------------------
Next $25 billion 0.0100%
-------------------------------------------------------------------
Next $25 billion 0.0050%
-------------------------------------------------------------------
Thereafter 0.0000%
-------------------------------------------------------------------

THE PORTFOLIO MANAGER

The advisor uses teams of portfolio managers and analysts to manage funds. These
teams are organized by broad investment categories, such as money markets and
taxable bonds. The individual listed below serves as the lead portfolio manager
for the fund. As such, he is ultimately responsible for security selection and
portfolio construction for the fund, as well as compliance with stated
investment objectives and cash flow monitoring. Other members of the investment
team provide research and analytical support but generally do not make
day-to-day investment decisions for the funds.

The portfolio manager who is primarily responsible for the day-to-day management
of the fund is identified below.

KENNETH M. SALINGER

Mr. Salinger, Vice President and Senior Portfolio Manager, has been a member of
the team since October 1996. In June 1997 he became a portfolio manager. 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. It also contains limits on short-term transactions in American
Century-managed funds. 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 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 and/or the advisor may
change any other policies and investment strategies.

INVESTING WITH AMERICAN CENTURY

ELIGIBILITY FOR ADVISOR CLASS SHARES

The Advisor Class shares are intended for purchase by participants in
employer-sponsored retirement or savings plans and for persons purchasing shares
through broker-dealers, banks, insurance companies and other financial
intermediaries that provide various administrative and distribution services.

MINIMUM INITIAL INVESTMENT AMOUNTS

To open an account, the minimum initial investment amounts are $2,000 for a
Coverdell Education Savings Account (CESA), and $2,500 for all other accounts.

INVESTING THROUGH FINANCIAL INTERMEDIARIES

If you do business with us through a financial intermediary or a retirement
plan, your ability to purchase, exchange, redeem and transfer shares will be
affected by the policies of that entity. Some policy differences may include

o minimum investment requirements

o exchange policies

o fund choices

o cutoff time for investments

o trading restrictions

Please contact your FINANCIAL 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.

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

Although fund share transactions may be made directly with American Century at
no charge, you also may purchase, redeem and exchange fund shares through
financial intermediaries that charge a transaction-based or other fee for their
services. Those charges are retained by the intermediary and are not shared with
American Century or the fund.

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.

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. The 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 the fund.

ABUSIVE TRADING PRACTICES

Short-term trading and other so-called market timing practices are not defined
or explicitly prohibited by any federal or state law. However, short-term
trading and other abusive trading practices may disrupt portfolio management
strategies and harm fund performance. If the cumulative amount of short-term
trading activity is significant relative to a fund's net assets, the fund may
incur trading costs that are higher than necessary as securities are first
purchased then quickly sold to meet the redemption request. In such case, the
fund's performance could be negatively impacted by the increased trading costs
created by short-term trading if the additional trading costs are significant.

Because of the potentially harmful effects of abusive trading practices, the
fund's Board of Trustees has approved American Century's abusive trading
policies and procedures, which are designed to reduce the frequency and effect
of these activities in our funds. These policies and procedures include
monitoring trading activity, imposing trading restrictions on certain accounts,
imposing redemption fees on certain funds, and using fair value pricing when
current market prices are not readily available. Although these efforts are
designed to discourage abusive trading practices, they cannot eliminate the
possibility that such activity will occur. American Century seeks to exercise
its judgment in implementing these tools to the best of its abilities in a
manner that it believes is consistent with shareholder interests.

American Century uses a variety of techniques to monitor for and detect abusive
trading practices. These techniques may vary depending on the type of fund, the
class of shares or whether the shares are held directly or indirectly with
American Century. They may change from time to time as determined by American
Century in its sole discretion. To minimize harm to the funds and their
shareholders, we reserve the right to reject any purchase order (including
exchanges) from any shareholder we believe has a history of abusive trading or
whose trading, in our judgment, has been or may be disruptive to the funds. In
making this judgment, we may consider trading done in multiple accounts under
common ownership or control.

Currently, for shares held directly with American Century, we may deem the sale
of all or a substantial portion of a shareholder's purchase of fund shares to be
abusive if the sale is made

o within seven days of the purchase, or

o within 30 days of the purchase, if it happens more than once per year.

To the extent practicable, we try to use the same approach for defining abusive
trading for shares held through financial intermediaries. American Century
reserves the right, in its sole discretion, to identify other trading practices
as abusive and to modify its monitoring and other practices as necessary to deal
with novel or unique abusive trading practices.

In addition, American Century reserves the right to accept purchases and
exchanges in excess of the trading restrictions discussed above if it believes
that such transactions would not be inconsistent with the best interests of fund
shareholders or this policy.

American Century's policies do not permit us to enter into arrangements with
fund shareholders that permit such shareholders to engage in frequent purchases
and redemptions of fund shares. Due to the complexity and subjectivity involved
in identifying abusive trading activity and the volume of shareholder
transactions American Century handles, there can be no assurance that American
Century's efforts will identify all trades or trading practices that may be
considered abusive. In addition, American Century's ability to monitor trades
that are placed by the individual shareholders within group, or omnibus,
accounts maintained by financial intermediaries is severely limited because
American Century generally does not have access to the underlying shareholder
account information. However, American Century monitors aggregate trades placed
in omnibus accounts and seeks to work with financial intermediaries to
discourage shareholders from engaging in abusive trading practices and to impose
restrictions on excessive trades. There may be limitations on the ability of
financial intermediaries to impose restrictions on the trading practices of
their clients. As a result, American Century's ability to monitor and discourage
abusive trading practices in omnibus accounts may be limited.

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

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 the 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 portfolio
managers would select these securities from the fund's portfolio.

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 the 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 you may incur tax liability
as a result of this redemption.

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:

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

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

o 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.

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. In addition, from time to time we may
waive a policy on a case-by-case basis, as the advisor deems appropriate.

SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

American Century will price the fund shares you purchase, exchange or redeem at
the net asset value (NAV) next determined after your order is received and
accepted by the fund's transfer agent, or other financial intermediary with the
authority to accept orders on the fund's behalf. We determine the NAV of each
fund as of the close of regular trading (usually 4 p.m. Eastern time) on the New
York Stock Exchange (NYSE) on each day the NYSE is open. On days when the NYSE
is closed (including certain U.S. national holidays), we do not calculate the
NAV. A fund's NAV is the current value of the fund's assets, minus any
liabilities, divided by the number of shares outstanding.

The fund values portfolio securities for which market quotations are readily
available at their market price. The fund may use pricing services to assist in
the determination of market value. Unlisted securities for which market
quotations are readily available are valued at the last quoted sale price or the
last quoted ask price, as applicable, except that debt obligations with 60 days
or less remaining until maturity may be valued at amortized cost.

If the fund determines that the market price for a portfolio security is not
readily available or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined in good faith by, or in accordance with procedures adopted by, the
fund's board or its designee (a process referred to as "fair valuing" the
security). Circumstances that may cause the fund to fair value a security
include, but are not limited to, a debt security has been declared in default or
trading in a security has been halted during the trading day.

If such circumstances occur, the fund will fair value the security if the fair
valuation would materially impact the fund's NAV. While fair value
determinations involve judgments that are inherently subjective, these
determinations are made in good faith in accordance with procedures adopted by
the fund's board.

The effect of using fair value determinations is that the fund's NAV will be
based, to some degree, on security valuations that the board or its designee
believes are fair rather than being solely determined by the market.

With respect to any portion of the fund's assets that are invested in one or
more open-end management investment companies that are registered with the SEC
(known as registered investment companies, or RICs), the fund's NAV will be
calculated based upon the NAVs of such RICs. These RICs are required by law to
explain the circumstances under which they will use fair value pricing and the
effects of using fair value pricing in their prospectuses.

DISTRIBUTIONS

Federal tax laws require the 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 fund will not be subject to state or federal
income tax on amounts distributed. The distributions generally consist of
dividends and interest received by a fund, as well as CAPITAL GAINS realized by
a fund on the sale of its investment securities.

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

The fund pays distributions of substantially all its income quarterly.
Distributions from realized capital gains are paid twice a year, usually in
March and December. It may make more frequent distributions, if necessary, to
comply with Internal Revenue Code provisions. Distributions may be taxable as
ordinary income, capital gains or a combination of the two. Capital gains are
taxed at different rates depending on the length of time the fund held the
securities that were sold.

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 that 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.

Participants in tax-deferred retirement plans must reinvest all distributions.
For investors investing through taxable accounts, we will reinvest distributions
unless you elect to have dividends and/or capital gains sent to another American
Century account, to your bank electronically, or to your home address or to
another person or address by check.

TAXES

The tax consequences of owning shares of the fund will vary depending on whether
you own them through a taxable or tax-deferred account. Tax consequences result
from distributions by the fund of dividend and interest income it has received
or capital gains it has generated through its investment activities. Tax
consequences also may result when investors sell fund shares after the net asset
value has increased or decreased.

TAX-DEFERRED ACCOUNTS

If you purchase fund shares through a tax-deferred account, such as an IRA or a
qualified employer-sponsored retirement or savings plan, income and capital
gains distributions usually will not be subject to current taxation but will
accumulate in your account under the plan on a tax-deferred basis. Likewise,
moving from one fund to another fund within a plan or tax-deferred account
generally will not cause you to be taxed. For information about the tax
consequences of making purchases or withdrawals through a tax-deferred account,
please consult your plan administrator, your summary plan description or a tax
advisor.

TAXABLE ACCOUNTS

If you own fund shares through a taxable account, you may be taxed on your
investments if the fund makes distributions or if you sell your fund shares.

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 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:

TAX RATE FOR 10% TAX RATE FOR
TYPE OF DISTRIBUTION AND 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.

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 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 a fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. The fund distributes 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 three classes of shares of the fund: Investor Class,
Institutional Class and Advisor Class. The shares offered by this prospectus are
Advisor Class shares and are offered primarily through employer-sponsored
retirement plans or through institutions like banks, broker-dealers and
insurance companies.

The other classes have different fees, expenses and/or minimum investment
requirements from the class 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. It is not the result of any
difference in advisory or custodial fees or other expenses related to the
management of the fund's assets, which do not vary by class. Different fees and
expenses will affect performance. For additional information concerning the
other classes of shares not offered by this prospectus, call us at

o 1-800-345-2021 for Investor Class shares

o 1-800-345-3533 for Institutional Class shares

You also can contact a sales representative or financial intermediary who offers
those classes of shares.

Except as described below, all classes of shares of the fund have identical
voting, dividend, liquidation and other rights, preferences, terms and
conditions. The only differences between 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 that class; (d) each class may
have different exchange privileges; and (e) the Institutional Class may provide
for automatic conversion from that class into shares of the Investor Class of
the same fund.

SERVICE, DISTRIBUTION AND ADMINISTRATIVE 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. The fund's Advisor Class shares have a 12b-1 Plan. Under the Plan,
the fund's Advisor Class pays an annual fee of 0.50% of Advisor Class average
net assets, half for certain ongoing shareholder and administrative services and
half for distribution services, including 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 Advisor Class shares
available. Because these fees are used to pay for services that are not related
to prospective sales of the fund, the Advisor Class will continue to make
payments under the plan even if it is closed to new investors. Because these
fees are paid out of the fund's assets on an ongoing basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges. For additional information about the Plan and its
terms, see MULTIPLE CLASS STRUCTURE - MASTER DISTRIBUTION AND SHAREHOLDER
SERVICES PLAN in the statement of additional information.

Certain financial intermediaries perform recordkeeping and administrative
services for their clients that would otherwise be performed by American
Century's transfer agent. In some circumstances, the advisor will pay such
service providers a fee for performing those services. Also, the advisor and the
fund's distributor may make payments for various additional services or other
expenses out of their profits or other available sources. Such payments may be
made for one or more of the following: (1) distribution services, which include
expenses incurred by intermediaries for their sales activities with respect to
the fund, such as preparing, printing and distributing sales literature and
advertising materials and compensating registered representatives or other
employees of such intermediary for their sales activities, (2) shareholder
services, such as providing individual and custom investment advisory services
to clients of the intermediary; and (3) marketing and promotional services,
including business planning assistance, educating personnel about the fund, and
sponsorship of sales meetings, which may include covering costs of providing
speakers, meals and other entertainment. The distributor may sponsor seminars
and conferences designed to educate intermediaries about the fund and may cover
the expenses associated with attendance at such meetings, including travel
costs. These payments and activities are intended to provide an incentive to
intermediaries to sell the fund by ensuring that they are educated about the
fund, and to help such intermediaries defray costs associated with offering the
fund. The amount of any payments described by this paragraph is determined by
the advisor or the distributor, and all such amounts are paid out of the
available assets of the advisor and distributor, and not by you or the fund. As
a result, the total expense ratio of the fund will not be affected by any such
payments.

PERFORMANCE INFORMATION OF OTHER CLASS

The following financial information is provided to show the performance of the
Tax-Free Bond Fund's Investor Class shares.

The table on the next page itemizes 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 or less, if the share class is not five years old.

On a per-share basis, each 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 registered public accounting firm. The fund's Report of Independent
Registered Public Accounting Firm and the financial statements are included in
the fund's annual report, which is available upon request.

Will insert AUDITED (May 31, 2005) Investor Class Financial
Highlights for Tax-Free Bond Fund

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, online at americancentury.com or 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 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

Tax-Free Bond

Advisor Class XXX XXX N/A

Investment Company Act File No. 811-4025

AMERICAN CENTURY INVESTMENTS
P.O. Box 419786
Kansas City, Missouri 64141-6786
1-800-378-9878

0507
SH-PRS-43934

American Century
Investments
statement of
additional information

JULY 29, 2005

American Century Municipal Trust
Arizona Municipal Bond Fund
Florida Municipal Bond Fund
High-Yield Municipal Fund
Tax-Free Bond Fund
Tax-Free Money Market Fund

THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUNDS'
PROSPECTUSES DATED OCTOBER 1, 2004 AND JULY 29, 2005, 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 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., Distributor

Table of Contents

THE FUNDS' HISTORY............................................................X

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

FUND INVESTMENTS AND RISKS....................................................X
Investment Strategies and Risks.........................................X
Investment Policies....................................................XX
Temporary Defensive Measures...........................................XX
Portfolio Turnover.....................................................XX

MANAGEMENT...................................................................XX
The Board of Trustees..................................................XX
Ownership of Fund Shares...............................................XX
Code of Ethics.........................................................XX
Proxy Voting Guidelines................................................XX
Disclosure of Portfolio Holdings.......................................XX

THE FUNDS' PRINCIPAL SHAREHOLDERS............................................XX

SERVICE PROVIDERS............................................................XX
Investment Advisor.....................................................XX
Transfer Agent and Administrator.......................................XX
Distributor............................................................XX

OTHER SERVICE PROVIDERS......................................................XX
Custodian Banks........................................................XX
Independent Registered Public Accounting Firm..........................XX

BROKERAGE ALLOCATION.........................................................XX
Regular Broker-Dealers.................................................XX

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

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

Federal Income Tax.....................................................XX
Alternative Minimum Tax................................................XX

FINANCIAL STATEMENTS.........................................................XX

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

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

Investor Class BEAMX 04/11/1994
--------------------------------------------------------------------------------
A Class ACZAX 02/27/2004
--------------------------------------------------------------------------------
B Class ACZBX 02/27/2004
--------------------------------------------------------------------------------
C Class ACZCX 02/27/2004
--------------------------------------------------------------------------------

FLORIDA MUNICIPAL BOND

Investor Class ACBFX 04/11/1994
--------------------------------------------------------------------------------
A Class ACFAX 02/27/2004
--------------------------------------------------------------------------------
B Class ACEBX 02/27/2004
--------------------------------------------------------------------------------
C Class ACCCX 02/27/2004
--------------------------------------------------------------------------------

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

TAX-FREE BOND

Investor Class TWTIX 03/02/1987
--------------------------------------------------------------------------------
Institutional Class N/A 04/15/2003
--------------------------------------------------------------------------------
Advisor Class N/A 07/29/2005
--------------------------------------------------------------------------------

TAX-FREE MONEY MARKET

Investor Class BNTXX 07/31/1984
--------------------------------------------------------------------------------

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.

Tax-Free Bond and Tax-Free Money Market are diversified as defined in the
Investment Company Act of 1940 (the Investment Company Act). Arizona Municipal
Bond, Florida Municipal Bond and High-Yield Municipal 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.

Tax-Free Money Market operates 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 Rule 2a-7, the fund must comply with the
definition of diversified under the rule.

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 53.

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 federal Alternative Minimum Tax (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.

FLORIDA MUNICIPAL BOND FUND

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

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 that are exempt from the Florida intangible
personal property tax and that have interest payments exempt from federal 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 income tax and Florida intangible personal
property tax. The fund may also invest in (1) obligations issued by other states
and their political subdivisions, and (2) U.S. government securities.

The 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,
the fund could incur additional costs or taxable income or gains.

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.

TAX-FREE BOND FUND
TAX-FREE MONEY MARKET FUND

Tax-Free Bond Fund and Tax-Free Money Market 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.

CREDIT QUALITY AND MATURITY GUIDELINES

TAX-FREE MONEY MARKET FUND

The fund seeks to maintain a $1.00 share price, although there is no guarantee
it will be able to do so. Shares of the fund are neither insured nor guaranteed
by the U.S. government.

The money market fund 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 fund, 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, the 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)

Arizona Municipal Bond, Florida Municipal Bond and Tax-Free 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 at least 80% of its assets in municipal securities
with interest payments exempt from federal income tax. The managers typically
buy long-term and intermediate-term municipal securities, but may purchase
municipal securities of any duration. 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 50.

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. Arizona's economy is among the fastest growing
economies in the nation and is showing signs of rebounding after a modest
slowdown. 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 $166.4 million
lower in fiscal 2003 to a level of $546.4 million. Revenue shortfalls combined
with expenditures requirements resulted in a deficit of approximately $371.9
million in fiscal 2003. The $967 million projected deficit in fiscal 2004 was
mitigated by higher than anticipated revenues. Preliminary revenues for the
fiscal 2004 year are $794.8 million greater than the original forecast. However,
higher than anticipated expenditures in fiscal 2004 will force a $293.6 million
estimated drawdown of the fund balance. Arizona's current debt ratings are "A1"
by Moody's and "AA-" by Standard & Poor's. Standard & Poor's currently
has a negative outlook on its rating.

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 Bond Fund is 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 fund's
policies of concentrating its 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 fund invests primarily in Florida municipal securities, it 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. For the
12 months ended June 2004, the state's employment was up approximately 2.3%.
Construction, health care and service sector jobs are growing while
manufacturing occupations are still contracting. Most of the growth in the state
is occurring in the southern metro areas while Jacksonville is growing more
slowly. Florida, with a 2003 per capita income at $30,446, 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 2005, the
Fund stands at nearly $1 billion, meeting the required minimum Fund level of 5%
of General Fund revenues. General Fund revenues and sales tax revenues are
budgeted to increase by 3.4% and 5.9% respectively, in fiscal year 2005. General
Fund spending is budgeted to increase by 13.4% in fiscal year 2005.

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.

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.

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, 2003, public sector debt issued by the
Commonwealth and its public corporations totaled $32.3 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 March 2004 was approximately 1.27 million, up 4.95% from
June 2003. The unemployment rate is still high, however, at 11.2% as of March
2004.

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 1999 and 2003, debt
increased approximately 31% while gross product rose approximately 23.7%.

The current ratio of tax-supported debt to aggregate personal income is
approximately 50%, about 16 times the average level of the 50 states, and nearly
five 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 43.5%
of the national average in 2003) and by the large absolute amount of debt.

The Commonwealth finished fiscal year 2003 with an operating loss of $171.2
million (approximately 2.3% of general fund revenues) which resulted in an
ending cash balance of $179 million. The Commonwealth is currently estimating
another operating loss for fiscal 2004 of $128.7 million and budgeting
break-even performance for the fiscal year 2005.

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. On June 7, 2004, Standard & Poor's affirmed their rating at
A- and kept the outlook negative.

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 (26% of the island's GDP).

A final risk factor with the Commonwealth is the large amount of unfunded
pension liabilities. The main public pension system is largely underfunded. The
funded ratio of the plan is 19% with a total unfunded liability of $8.5 billion.
A measure enacted by the legislature in 1990 is designed to address the solvency
of the plan 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 fund. 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 Tax-Free Money Market) 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 depositary 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 the notional value of the
investment. 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 Financial Group, Inc. (AMBAC) is a Delaware-domiciled stock insurance
corporation. Ambac Assurance Corporation is a wholly owned subsidiary of AMBAC,
a publicly held company. Ambac Assurance Corporation's claims-paying ability is
rated Aaa/AAA/AAA by Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Corporation (S&P) and Fitch, Inc. (Fitch), respectively.

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

MBIA Insurance Corporation (MBIA) is a monoline insurance company, which is a
wholly owned subsidiary of MBIA Inc. organized as a Connecticut corporation.
MBIA's claims-paying ability is 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 in 2000. FSA's claims-paying ability is 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. XLCA's claims-paying ability is
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.

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

Radian Asset Assurance Inc. (Radian) is the surviving entity and name for the
former Asset Guaranty. Radian is an operating subsidiary of Radian Group Inc., a
Delaware corporation. Radian's claims-paying ability is rated Aaa by Moody's and
AA by S&P and Fitch.

American Capital Access Holdings, Inc. is the parent company of ACA Financial
Guaranty Corp. (ACA). The parent of ACA is owned by several institutional
investors. Recently, S&P put ACA's rating on negative creditwatch. In August
2004, Fitch withdrew its rating based on ACA's decision to no longer provide
information necessary for Fitch to maintain its rating. S&P may restore its
previous A rating and stable outlook for ACA if certain capital transactions are
closed by ACA.

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.

OTHER INVESTMENT COMPANIES

Each fund may invest up to 10% of its total assets in other investment
companies, such as mutual funds, provided that the investment is consistent with
the fund's investment policies and restrictions. These investments may include
investments in money market funds managed by the advisor. Under the Investment
Company Act, a fund's investment in such securities, subject to certain
exceptions, currently is limited to:

o 3% of the total voting stock of any one investment company;

o 5% of the fund's total assets with respect to any one investment company;
and

o 10% of the fund's total assets in the aggregate.

Such purchases will be made in the open market where no commission or profit to
a sponsor or dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, a fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the management fee that each fund bears directly in connection with its own
operations.

Each fund may invest in exchange traded funds (ETFs), such as Standard & Poor's
Depositary Receipts (SPDRs) and the NASDAQ-100 index-tracking ETF (CUBES or
QQQQs), with the same percentage limitations as investments in registered
investment companies. ETFs are a type of index fund bought and sold on a
securities exchange. An ETF trades like common stock and represents a fixed
portfolio of securities designed to track the performance and dividend yield of
a particular domestic or foreign market index. A fund may purchase an ETF to
temporarily gain exposure to a portion of the U.S. or a foreign market while
awaiting purchase of underlying securities. The risks of owning an ETF generally
reflect the risks of owning the underlying securities they are designed to
track, although the lack of liquidity on an ETF could result in it being more
volatile. Additionally, ETFs have management fees, which increase their cost.

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 and Options A fund may enter into futures contracts and write
and buy 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 than the notional value of
the investment. The money market fund 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
fund) 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 the money market fund) is
listed in the Financial Highlights table in the prospectuses. Because of the
short-term nature of the money market fund's investments, portfolio turnover
rates are not generally used to evaluate their trading activities.

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. Effective March 2004, mandatory retirement age for
independent trustees is 73. However, the mandatory retirement age may be
extended for a period not to exceed two years with the approval of the remaining
independent trustees. The independent trustees have extended the mandatory
retirement age of Mr. Eisenstat to 75. Mr. Scott may serve until age 77 based on
an extension granted under retirement guidelines in effect prior to March 2004.
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, direct or indirect, 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, LLC (ACS LLC).

The other trustees (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly-owned, direct or indirect,
subsidiaries, including ACIM, ACIS and ACS LLC. The trustees serve in this
capacity for eight registered investment companies in the American Century
family of funds.

All persons named as officers of the funds also serve in similar capacities for
the other 13 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, except
as noted. 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.

-----------------------------------------------------------------------------------------------------------------------------
John Freidenrich Trustee Less than Member and Manager, REGIS 33 None
1665 Charleston Road one year MANAGEMENT COMPANY, LLC
Mountain View, CA 94043 (April 2004 to present)
(1937) Partner and Founder, BAY
PARTNERS (Venture capital
firm, 1976 to present)
Partner and Founder, WARE &
FREIDENRICH (1968 to present)

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

NUMBER OF
PORTFOLIOS
IN FUND
LENGTH COMPLEX OTHER
POSITION(S) OF TIME OVERSEEN DIRECTORSHIPS
NAME, ADDRESS HELD WITH SERVED PRINCIPAL OCCUPATION(S) BY HELD BY
(YEAR OF BIRTH) FUNDS (YEARS) DURING PAST 5 YEARS TRUSTEE TRUSTEE
----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------------------------------
Ronald J. Gilson Trustee, 9 Charles J. Meyers Professor 33 None
1665 Charleston Road Chairman of Law and Business,
Mountain View, CA 94043 STANFORD LAW SCHOOL
(1946) (1979 to present)
Marc and Eva Stern
Professor of Law and
Business, COLUMBIA
UNIVERSITY SCHOOL OF LAW
(1992 to present)
----------------------------------------------------------------------------------------------------------------------------
Kathryn A. Hall Trustee 3 Co-Chief Executive Officer and 33 None
1665 Charleston Road Chief Investment Officer,
Mountain View, CA 94043 OFFIT HALL CAPITAL
(1957) MANAGEMENT, LLC
(April 2002 to present)
President and Managing
Director, LAUREL MANAGEMENT
COMPANY, L.L.C.
(1996 to April 2002)
----------------------------------------------------------------------------------------------------------------------------
Myron S. Scholes Trustee 24 Chairman, OAK HILL PLATINUM 33 Director, DIMENSIONAL
1665 Charleston Road PARTNERS and a Partner, OAK FUND ADVISORS
Mountain View, CA 94043 HILL CAPITAL MANAGEMENT (investment advisor,
(1941) (1999 to present) 1982 to present)
Frank E. Buck Professor Director,
of Finance-Emeritus, STANFORD CHICAGO MERCANTILE
GRADUATE SCHOOL OF BUSINESS EXCHANGE (2000 to
(1981 to present) present)
----------------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott Trustee 33 Ralph M. Parsons Professor 33 None
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 STANFORD LAW SCHOOL
(1928) (1972 to present)
----------------------------------------------------------------------------------------------------------------------------
John B. Shoven Trustee 2 Professor of Economics, 33 Director, CADENCE
1665 Charleston Road STANFORD UNIVERSITY DESIGN SYSTEMS
Mountain View, CA 94043 (1977 to present) (1992 to present)
(1947) Director, WATSON
WYATT WORLDWIDE
(2002 to present)
Director, PALMSOURCE INC.
(2002 to present)
----------------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers Trustee 20 Retired, Director and Partner, 33 Director, QUINTUS
1665 Charleston Road WINDY HILL PRODUCTIONS, LP CORPORATION
Mountain View, CA 94043 (educational software, (automation solutions,
(1945) 1994 to 1998) 1995 to present)
----------------------------------------------------------------------------------------------------------------------------

NUMBER OF
PORTFOLIOS
IN FUND
LENGTH COMPLEX OTHER
POSITION(S) OF TIME OVERSEEN DIRECTORSHIPS
NAME, ADDRESS HELD WITH SERVED PRINCIPAL OCCUPATION(S) BY HELD BY
(YEAR OF BIRTH) FUNDS (YEARS) DURING PAST 5 YEARS TRUSTEE TRUSTEE
----------------------------------------------------------------------------------------------------------------------------
OFFICERS
----------------------------------------------------------------------------------------------------------------------------
William M. Lyons President 4 See entry above under 33 Not
4500 Main Street "Interested Trustees." applicable
Kansas City, MO 64111
(1955)
----------------------------------------------------------------------------------------------------------------------------
Robert T. Jackson Executive 4 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
(1946) (May 1995 to October 2002)
Executive Vice President, ACC
(May 1995 to present)
Also serves as: Chief Executive
Officer, Chief Financial Officer
and President, ACS LLC, Chief
Financial Officer and Executive
Vice President, ACGIM, ACIM,
ACIS and other ACC subsidiaries,
and Treasurer, ACGIM, ACIM and
other ACC subsidiaries, Director,
ACC and other ACC subsidiaries
---------------------------------------------------------------------------------------------------------------------------
Maryanne Roepke Senior Vice 4 Assistant Treasurer, ACC Not Not
4500 Main St. President, (January 1995 to present) applicable applicable
Kansas City, MO 64111 Treasurer Also serves as: Senior Vice
(1956) and Chief President, ACS LLC, Assistant
Accounting Treasurer, ACGIM, ACIM, ACIS and
Officer ACS LLC
---------------------------------------------------------------------------------------------------------------------------
David C. Tucker Senior Vice 6 Vice President, ACC Not Not
4500 Main St. President (February 2001 to present) applicable applicable
Kansas City, MO 64111 and General Counsel, ACC
(1958) General (June 1998 to present)
Counsel Also serves as: Senior Vice
President and General Counsel,
ACGIM, ACIM, ACIS, ACS LLC and
other ACC subsidiaries
---------------------------------------------------------------------------------------------------------------------------
Charles C.S. Park Vice President 4 Chief Compliance Officer, Not Not
4500 Main St. and ACS LLC, ACIM and ACGIM applicable applicable
Kansas City, MO 64111 Chief less (March 2005 to present)
(1967) Compliance than 1 Vice President, ACS LLC
Officer year (February 2000 to present)
Assistant General Counsel, ACS LLC
(January 1998 to March 2005)
---------------------------------------------------------------------------------------------------------------------------
C. Jean Wade Controller(1) 8 Vice President, ACS LLC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City, MO 64111 Controller-Investment Accounting,
(1964) ACS LLC (June 1997 to present)
---------------------------------------------------------------------------------------------------------------------------
Robert Leach Controller 8 Vice President, ACS LLC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City MO 64111 Controller-Investment Accounting,
(1966) ACS LLC (June 1997 to present)
---------------------------------------------------------------------------------------------------------------------------
Jon Zindel Tax Officer 7 Vice President, ACC Not Not
4500 Main Street (October 2001 to present); applicable applicable
Kansas City, MO 64111 Vice President, Corporate Tax,
(1967) ACS, LLC (April 1998 to present)
Also serves as: Vice President,
ACGIM, ACIM, ACIS and
other ACC subsidiaries

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

(1) MS. WADE SERVES IN A SIMILAR CAPACITY FOR SEVEN OTHER INVESTMENT COMPANIES
ADVISED BY ACIM.

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. The advisor provides the board with
monthly, quarterly, or annual analyses of its performance in the following
areas:

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

o Management of brokerage commissions and trading costs (equity funds only);

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 advisor and the fair market value of the services provided. To
assess these factors, the board reviews both the advisor'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 the advisor or its affiliates from its relationship with the funds
and intangible or "fall-out" benefits that accrue to the advisor and its
affiliates, if relevant, and the advisor'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. At the last review of the investment advisory
contract, the board considered the level of the advisor'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
the advisor's methodology in allocating costs to the management of each fund.
The board concluded that the cost allocation methodology employed by the advisor
has a reasonable basis and is appropriate in light of all of the circumstances.
They considered the profits realized by the advisor 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 the advisor'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 management fee structures are fair and reasonable and that
the investment management contracts, as described above, should be continued.

COMMITTEES

The board has five 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, 2005
--------------------------------------------------------------------------------------------------------
Audit Kenneth E. Scott The Audit Committee approves the 5
Antonio Canova engagement of the funds' independent
Albert Eisenstat registered public accounting firm,
Ronald J. Gilson recommends approval of such
Jeanne D. Wohlers engagement to the independent trustees,
and oversees the activities of the funds'
independent registered public accounting
firm. 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 funds.
--------------------------------------------------------------------------------------------------------
Corporate The Corporate Governance Committee reviews
Governance board procedures and committee structures. It
also considers and recommends individuals for
nomination as trustees. The names of potential
trustee candidates may be drawn from a number
of sources, including recommendations from
members of the board, management (in the case
of interested trustees only) and shareholders.
Shareholders may submit trustee nominations to
the Corporate Secretary, American Century
Funds, P.O. Box 410141, Kansas City, MO 64141.
All such nominations will be forwarded to the
committee for consideration. The committee
also may recommend the creation of new
committees, evaluate the membership structure
of new and existing committees, consider the
frequency and duration of board and committee
meetings and otherwise evaluate the
responsibilities, processes, resources,
performance and compensation of the board.
--------------------------------------------------------------------------------------------------------
Portfolio Myron S. Scholes The Portfolio Committee reviews quarterly 6
John Freidenrich the investment activities and strategies used
Kathryn A. Hall to manage fund assets. The committee
William M. Lyons (ad hoc) regularly receives reports from portfolio
managers,
credit analysts and other investment personnel
concerning the funds' investments.
--------------------------------------------------------------------------------------------------------
Quality John B. Shoven The Quality of Service Committee reviews 6
of Ronald J. Gilson the level and quality of transfer agent and
Service William M. Lyons (ad hoc) administrative services provided to the funds
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, 2005
--------------------------------------------------------------------------------
TOTAL COMPENSATION FROM
TOTAL COMPENSATION THE AMERICAN CENTURY
NAME OF TRUSTEE FROM THE FUNDS (1) FAMILY OF FUNDS (2)
--------------------------------------------------------------------------------
Albert A. Eisenstat XX XX
--------------------------------------------------------------------------------
John Freidenrich(3) XX XX
--------------------------------------------------------------------------------
Ronald J. Gilson XX XX
--------------------------------------------------------------------------------
Kathryn A. Hall XX XX
--------------------------------------------------------------------------------
Myron S. Scholes XX XX
--------------------------------------------------------------------------------
Kenneth E. Scott XX XX
--------------------------------------------------------------------------------
John B. Shoven XX XX
--------------------------------------------------------------------------------
Jeanne D. Wohlers XX XX
--------------------------------------------------------------------------------

(1) INCLUDES COMPENSATION PAID TO THE TRUSTEES DURING THE FISCAL YEAR ENDED MAY
31, 2005, 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 COMPANIES 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, $XXXXX; MR. SHOVEN, $XXXXX; MS. SCOTT, $XXXXX; MS. HALL, $XXXXX;
MR. GILSON, $XXXXX; AND MR. EISENSTAT, $XXXXX.

(3) MR. FREIDENRICH WAS PAID AS AN ADVISORY BOARD MEMBER.

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, 2005.

OWNERSHIP OF FUND SHARES

The trustees owned shares in the funds as of December 31, 2004, as shown in the
tables below. Because they were not trustees as of December 31, 2004, Mr. Canova
and Mr. Freidenrich are not included in the table.

NAME OF TRUSTEES
----------------------------------------------------------------------------------------
WILLIAM M. ALBERT RONALD J. MYRON S.
LYONS EISENSTAT GILSON SCHOLES
----------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Funds:
Arizona Municipal Bond A A A A
----------------------------------------------------------------------------------------
Florida Municipal Bond A A A A
----------------------------------------------------------------------------------------
High-Yield Municipal A A A A
----------------------------------------------------------------------------------------
Tax-Free Bond A A A A
----------------------------------------------------------------------------------------
Tax-Free Money Market C A A A
----------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity E E E E
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
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Dollar Range of Equity Securities in the Funds:
Arizona Municipal Bond A A A A
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Florida Municipal Bond A A A A
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High-Yield Municipal A A A A
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Tax-Free Bond A A A A
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Tax-Free Money Market A A A A
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Aggregate Dollar Range of Equity E E E D
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 trustees of the
funds.

A copy of the advisor's Proxy Voting Guidelines and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the "About Us" page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's Web site at sec.gov.

DISCLOSURE OF PORTFOLIO HOLDINGS

The advisor has adopted policies and procedures with respect to the disclosure
of fund portfolio holdings and characteristics, which are described below.

DISTRIBUTION TO THE PUBLIC

Full portfolio holdings are made available to the public quarterly with a lag of
30 days. These are posted on americancentury.com on the 31st day after the end
of each fiscal quarter. In addition, full portfolio holdings are transmitted to
fund shareholders twice each year in annual and semi-annual reports.

Top 10 holdings are made available to the public monthly with a lag of 30 days.
These holdings are posted monthly on americancentury.com. From time to time the
advisor may select additional portfolio characteristics for distribution to the
public with such frequencies and lag times as the advisor determines to be in
the best interests of shareholders.

So long as portfolio holdings are disclosed in accordance with the above
parameters, the advisor makes no distinction among different categories of
recipients, such as individual investors, institutional investors,
intermediaries that distribute the funds' shares, third-party service providers,
rating and ranking organizations, and fund affiliates. Because this information
is publicly available and widely disseminated, the advisor places no conditions
or restrictions on, and does not monitor, its use. Nor does the advisor require
special authorization for its disclosure.

ACCELERATED DISCLOSURE

The advisor recognizes that certain parties, in addition to the advisor and its
affiliates, may have legitimate needs for information about portfolio holdings
and characteristics prior to the times prescribed above. Such accelerated
disclosure is permitted under the circumstances described below.

ONGOING ARRANGEMENTS

Certain parties, such as investment consultants who provide regular analysis of
fund portfolios for their clients and intermediaries who pass through
information to fund shareholders, may have legitimate needs for accelerated
disclosure. These needs may include, for example, the preparation of reports for
customers who invest in the funds, the creation of analyses of fund
characteristics for intermediary or consultant clients, the reformatting of data
for distribution to the intermediary's or consultant's clients, and the review
of fund performance for ERISA fiduciary purposes.

In such cases, accelerated disclosure is permitted if the service provider
enters an appropriate non-disclosure agreement with the advisor in which it
agrees to treat the information confidentially until the public distribution
date and represents that the information will be used only for the legitimate
services provided to its clients (i.e., not for trading). Non-disclosure
agreements require the approval of an attorney in the advisor's Legal
Department. The advisor's Compliance Department receives quarterly reports
detailing which clients received accelerated disclosure, when they received it
and the purposes of such disclosure. Compliance personnel are required to
confirm that an appropriate non-disclosure agreement has been obtained from each
recipient identified in the reports.

Those parties who have entered into non-disclosure agreements as of May 4, 2005
are as follows:

American Fidelity Assurance Co.

American United Life Insurance Company

Ameritas Life Insurance Corporation

Annuity Investors Life Insurance Company

Asset Services Company L.L.C.

Bell Globemedia Publishing

Bellwether Consulting, LLC

Bidart & Ross

Business Men's Assurance Co. of America

Callan Associates, Inc.

Cleary Gull Inc.

Commerce Bank, N.A.

Connecticut General Life Insurance Company

Defined Contribution Advisors, Inc.

EquiTrust Life Insurance Company

Farm Bureau Life Insurance Company

First MetLife Investors Insurance Company

Fund Evaluation Group, LLC

The Guardian Life Insurance & Annuity Company, Inc.

Hewitt Associates LLC

ICMA Retirement Corporation

ING Insurance Company of America

Investors Securities Services, Inc.

Iron Capital Advisors

J.P. Morgan Retirement Plan Services LLC

Jefferson National Life Insurance Company

Jefferson Pilot Financial

Kansas City Life Insurance Company

Kmotion, Inc.

The Lincoln National Life Insurance Company

Lipper Inc.

Manulife Financial

Massachusetts Mutual Life Insurance Company

Merrill Lynch

MetLife Investors Insurance Company

MetLife Investors Insurance Company of California

Midland National Life Insurance Company

Minnesota Life Insurance Company

Morgan Stanley DW, Inc.

Morningstar Associates LLC

Morningstar Investment Services, Inc.

Mutual of America Life Insurance Company

National Life Insurance Company

Nationwide Financial

NT Global Advisors, Inc.

NYLIFE Distributors, LLC

Principal Life Insurance Company

Prudential Financial

S&P Financial Communications

Scotia McLeod

Scudder Distributors, Inc.

Security Benefit Life Insurance Co.

Smith Barney

SunTrust Bank

Symetra Life Insurance Company

Trusco Capital Management

Union Bank of California, N.A.

The Union Central Life Insurance Company

VALIC Financial Advisors

VALIC Retirement Services Company

Vestek Systems, Inc.

Wachovia Bank, N.A.

Wells Fargo Bank, N.A.

The types, frequency and timing of disclosure to such parties vary. Full
portfolio holdings are provided infrequently. When they are provided, it is
generally with a 30-day lag. (Vestek receives full holdings for certain funds on
a monthly basis as soon as the information is available, usually within one
business day.) Top ten holdings and other portfolio characteristics are
generally provided on a quarterly basis within 5-20 business days after the
quarter end. In some cases, such characteristics may be provided monthly within
5-10 business days after month end.

SINGLE EVENT REQUESTS

In certain circumstances, the advisor may provide fund holding information on an
accelerated basis outside of an ongoing arrangement with manager-level or higher
authorization. For example, from time to time the advisor may receive requests
for proposals (RFPs) from consultants or potential clients that request
information about a fund's holdings on an accelerated basis. As long as such
requests are on a one-time basis, and do not result in continued receipt of
data, such information may be provided in the RFP as of the most recent month
end regardless of lag time. Such information will be provided with a
confidentiality legend and only in cases where the advisor has reason to believe
that the data will be used only for legitimate purposes and not for trading.

In addition, the advisor occasionally may work with a transition manager to move
a large account into or out of a fund. To reduce the impact to the fund, such
transactions may be conducted on an in-kind basis using shares of portfolio
securities rather than cash. The advisor may provide accelerated holdings
disclosure to the transition manager with little or no lag time to facilitate
such transactions, but only if the transition manager enters into an appropriate
non-disclosure agreement.

SERVICE PROVIDERS

Various service providers to the funds and the funds' advisor must have access
to some or all of the funds' portfolio holdings information on an accelerated
basis from time to time in the ordinary course of providing services to the
funds. These service providers include the funds' custodian (daily, with no
lag), auditors (as needed) and brokers involved in the execution of fund trades
(as needed). Additional information about these service providers and their
relationships with the funds and the advisor are provided elsewhere in this
statement of additional information.

ADDITIONAL SAFEGUARDS

The advisor's policies and procedures include a number of safeguards designed to
control disclosure of portfolio holdings and characteristics so that such
disclosure is consistent with the best interests of fund shareholders. First,
the frequency with which this information is disclosed to the public, and the
length of time between the date of the information and the date on which the
information is disclosed, are selected to minimize the possibility of a third
party improperly benefiting from fund investment decisions to the detriment of
fund shareholders. Second, distribution of portfolio holdings information,
including compliance with the advisor's policies and the resolution of any
potential conflicts that may arise, is monitored quarterly. Finally, the funds'
Board of Trustees exercises oversight of disclosure of the funds' portfolio
securities. The board has received and reviewed a summary of the advisor's
policy and is informed on a quarterly basis of any changes to or violations of
such policy detected during the prior quarter.

Neither the advisor nor the funds receives any compensation from any party for
the distribution of portfolio holdings information.

The advisor reserves the right to change its policies and procedures with
respect to the distribution of portfolio holdings information at any time. There
is no guarantee that these policies and procedures will protect the funds from
the potential misuse of holdings information by individuals or firms in
possession of such information.

THE FUNDS' PRINCIPAL SHAREHOLDERS

As of July XX, 2005, the following shareholders, beneficial or of record, owned
more than 5% of the outstanding shares of any class of a fund. Because the
Advisor Class of Tax-Free Bond was not in operation as of July XX, 2005, it is
not included in the chart below.

PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
FUND/ SHARES OWNED SHARES OWNED
CLASS SHAREHOLDER OF RECORD BENEFICIALLY (1)
--------------------------------------------------------------------------------
ARIZONA MUNICIPAL BOND
--------------------------------------------------------------------------------
Investor

Charles Schwab & Co., Inc. XX XX
San Francisco, California
--------------------------------------------------------------------------------
A

Charles Schwab & Co., Inc. XX XX
San Francisco, California
American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota
--------------------------------------------------------------------------------
B

American Century Investment XX XX
Management, Inc.
Kansas City, Missouri
--------------------------------------------------------------------------------
C

American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota

MLPF&S, Inc. XX XX
Jacksonville, Florida
--------------------------------------------------------------------------------
FLORIDA MUNICIPAL BOND
--------------------------------------------------------------------------------
Investor

Charles Schwab & Co., Inc. XX XX
San Francisco, California
Morgan Guaranty Trust of New York XX XX
Newark, Delaware
--------------------------------------------------------------------------------
A

Charles Schwab & Co., Inc. XX XX
San Francisco, California
MLPF&S, Inc. XX XX
Jacksonville, Florida
American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota
--------------------------------------------------------------------------------
B

American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota
Edward Jones & Co. XX XX
Geraldine C. Hiebert XX XX
Maryland Heights, Missouri
American Century Investment XX XX
Management, Inc.
Kansas City, Missouri
--------------------------------------------------------------------------------

(1) IF SHARES ARE REGISTERED IN AN INDIVIDUAL'S NAME OR IN THE NAME OF AN
INTERMEDIARY FOR THE BENEFIT OF A NAMED PARTY, WE REPORT THOSE SHARES AS
BEING BENEFICIALLY OWNED. OTHERWISE, AMERICAN CENTURY HAS NO INFORMATION
CONCERNING BENEFICIAL OWNERSHIP OF FUND SHARES.

PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
FUND/ SHARES OWNED SHARES OWNED
CLASS SHAREHOLDER OF RECORD BENEFICIALLY (1)
--------------------------------------------------------------------------------
FLORIDA MUNICIPAL BOND
--------------------------------------------------------------------------------
C

MLPF&S, Inc. XX XX
Jacksonville, Florida

American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota
--------------------------------------------------------------------------------
HIGH-YIELD MUNICIPAL
--------------------------------------------------------------------------------
Investor

National Financial Services Corp. XX XX
New York, New York
Pershing LLC XX XX
Jersey City, New Jersey
E*Trade Clearing LLC XX XX
West Sacramento, California
--------------------------------------------------------------------------------
A

Charles Schwab & Co., Inc. XX XX
San Francisco, California
National Financial Services Corp. XX XX
New York, New York
MLPF&S, Inc. XX XX
Jacksonville, Florida
--------------------------------------------------------------------------------
B

MLPF&S, Inc. XX XX
Jacksonville, Florida
Citigroup Global Markets XX XX
New York, New York
American Enterprise Investment Svcs XX XX
Minneapolis, Minnesota
--------------------------------------------------------------------------------
C

MLPF&S, Inc. XX XX
Jacksonville, Florida
--------------------------------------------------------------------------------
TAX-FREE BOND
--------------------------------------------------------------------------------
Investor

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

MLPF&S, Inc. XX XX
Jacksonville, Florida
--------------------------------------------------------------------------------
Institutional

Charles Schwab & Co., Inc. XX XX
San Francisco, California
--------------------------------------------------------------------------------
TAX-FREE MONEY MARKET
--------------------------------------------------------------------------------
Investor

None
--------------------------------------------------------------------------------

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. A shareholder owning
of record or beneficially more than 25% of the corporation's outstanding shares
may be considered a controlling person. The vote of any such person could have a
more significant effect on matters presented at a shareholders' meeting than
votes of other shareholders. As of July XX, 2005, the officers and trustees of
the funds, as a group, owned XX% of the Investor Class of Tax-Free Money Market
and owned less than 1% of all other classes of the other funds' outstanding
shares.

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, ACS LLC and ACIS are wholly owned, directly or indirectly, by ACC. James
E. Stowers, Jr. controls ACC by virtue of his ownership of a majority of its
voting stock.

INVESTMENT ADVISOR

American Century Investment Management, Inc. (ACIM or the advisor) 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 the services provided to the funds, the advisor receives a daily fee based
on a percentage of the net assets of a fund. The annual rate at which this fee
is assessed is determined daily in a multi-step process. First, each of the
trust's funds is categorized according to the broad asset class in which it
invests (e.g., money market, bond or equity), and the assets of the funds in
each category are totaled ("Fund Category Assets"). Second, the assets are
totaled for certain other accounts managed by the advisor ("Other Account
Category Assets"). To be included, these accounts must have the same management
team and investment objective as a fund in the same category with the same board
of trustees as the trust. Together, the Fund Category Assets and the Other
Account Category Assets comprise the "Investment Category Assets." The
Investment Category Fee Rate is then calculated by applying a fund's Investment
Category Fee Schedule to the Investment Category Assets and dividing the result
by the Investment Category Assets.

Finally, a separate Complex Fee Schedule is applied to the assets of all of the
funds in the American Century family of funds (the "Complex Assets"), and the
Complex Fee Rate is calculated based on the resulting total. The Investment
Category Fee Rate and the Complex Fee Rate are then added to determine the
Management Fee Rate payable by a class of the fund to the advisor.

For purposes of determining the assets that comprise the Fund Category Assets,
Other Account Category Assets and Complex Assets, the assets of registered
investment companies managed by the advisor that invest primarily in the shares
of other registered investment companies shall not be included.

The schedules by which the unified management fee is determined are shown below.

INVESTMENT CATEGORY FEE SCHEDULE FOR TAX-FREE 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 ARIZONA MUNICIPAL BOND, FLORIDA MUNICIPAL BOND AND TAX-FREE
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 is determined according to the schedule below.

COMPLEX FEE SCHEDULE
--------------------------------------------------------------------------------
FEE RATE FOR
INVESTOR CLASS,
A CLASS, B CLASS FEE RATE FOR FEE RATE FOR
COMPLEX ASSETS AND C CLASS INSTITUTIONAL CLASS ADVISOR CLASS
--------------------------------------------------------------------------------
First $2.5 billion 0.3100% 0.1100% 0.0600%
--------------------------------------------------------------------------------
Next $7.5 billion 0.3000% 0.1000% 0.0500%
--------------------------------------------------------------------------------
Next $15 billion 0.2985% 0.0985% 0.0485%
--------------------------------------------------------------------------------
Next $25 billion 0.2970% 0.0970% 0.0470%
--------------------------------------------------------------------------------
Next $25 billion 0.2870% 0.0870% 0.0370%
--------------------------------------------------------------------------------
Next $25 billion 0.2800% 0.0800% 0.0300%
--------------------------------------------------------------------------------
Next $25 billion 0.2700% 0.0700% 0.0200%
--------------------------------------------------------------------------------
Next $25 billion 0.2650% 0.0650% 0.0150%
--------------------------------------------------------------------------------
Next $25 billion 0.2600% 0.0600% 0.0100%
--------------------------------------------------------------------------------
Next $25 billion 0.2550% 0.0550% 0.0050%
--------------------------------------------------------------------------------
Thereafter 0.2500% 0.0500% 0.0000%
--------------------------------------------------------------------------------

On each calendar day, each class of each fund accrues a management fee that is
equal to the class's Management Fee Rate times the net assets of the class
divided by 365 (366 in leap years). On the first business day of each month, the
funds pay a management fee to the advisor for the previous month. The fee for
the previous month is the sum of the calculated daily fees for each class of a
fund during the previous month.

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, 2005, 2004 and 2003, are indicated in the following table. As a new class,
information regarding the Advisor Class of Tax-Free Bond was not available as of
the fiscal year end.

UNIFIED MANAGEMENT FEES(1)
--------------------------------------------------------------------------------
FUND 2005 2004 2003
--------------------------------------------------------------------------------

ARIZONA MUNICIPAL BOND

Investor Class XX $335,094 $359,414
--------------------------------------------------------------------------------
A Class XX $645 N/A
--------------------------------------------------------------------------------
B Class XX $3 N/A
--------------------------------------------------------------------------------
C Class XX $6 N/A
--------------------------------------------------------------------------------

FLORIDA MUNICIPAL BOND

Investor Class XX $312,370 $321,620
--------------------------------------------------------------------------------
A Class XX $276 N/A
--------------------------------------------------------------------------------
B Class XX $11 N/A
--------------------------------------------------------------------------------
C Class XX $876 N/A
--------------------------------------------------------------------------------

HIGH-YIELD MUNICIPAL

Investor Class XX $341,035 $281,749
--------------------------------------------------------------------------------
A Class XX $92,917 $1,326
--------------------------------------------------------------------------------
B Class XX $11,257 $439
--------------------------------------------------------------------------------
C Class XX $30,890 $1,831
--------------------------------------------------------------------------------

TAX-FREE BOND

Investor Class XX $3,058,474 $2,611,101
--------------------------------------------------------------------------------
Institutional Class XX $21,345 $1,390
--------------------------------------------------------------------------------

TAX-FREE MONEY MARKET

Investor Class XX $1,300,357 $1,310,134
--------------------------------------------------------------------------------

(1) NET OF REIMBURSEMENTS OR WAIVERS.

TRANSFER AGENT AND ADMINISTRATOR

American Century Services, LLC, 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 ACS
LLC's costs for serving as transfer agent and dividend-paying agent for the
funds out of the advisor's unified management fee. For a description of this fee
and the terms of its payment, see the above discussion under the caption
INVESTMENT ADVISOR, on page 36.

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. The advisor
pays ACIS's costs for serving as principal underwriter of the funds' shares out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR, on page 36. ACIS does not earn commissions for distributing the funds'
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

JPMorgan Chase Bank, 4 Metro Tech Center, Brooklyn, New York 11245, 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 REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP is the independent registered public accounting firm
of the funds. The address of PricewaterhouseCoopers LLP is 1055 Broadway, 10th
floor, Kansas City, Missouri 64105. As the independent registered public
accounting firm 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, 2004, 2003 and 2002, the funds did not pay any brokerage commissions.

REGULAR BROKER-DEALERS

As of the end of its most recently completed fiscal year, none of the funds
owned securities of its regular brokers or dealers (as defined by Rule 10b-1
under the Investment Company Act of 1940) or of their parent companies.

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.

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 five classes of shares: Investor Class, Institutional
Class, A Class, B Class and C Class. Not all funds offer all five 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
Institutional Class is made available to institutional shareholders or through
financial intermediaries that do not require the same level of shareholder and
administrative services from the advisor as Investor Class shareholders. As a
result, the advisor is able to charge Institutional Class a lower total
management fee. 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 unified 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 and collectively, 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. Some of the anticipated benefits include
improved name recognition for the funds generally; and growing assets in
existing funds, which helps retain and attract investment management talent,
provides a better environment for improving fund performance, and can lower the
total expense ratio for funds with stepped-fee schedules. 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 prospectuses, 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 funds' distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.25% and is not based on expenses incurred by
the distributor. During the fiscal year ended May 31, 2005, the aggregate amount
of fees paid under the A Class Plan was:

Arizona Municipal Bond $XX
Florida Municipal Bond $XX
High-Yield Municipal $XX

The distributor then makes these payments to the financial intermediaries who
offer the A Class shares for the services described below. No portion of these
payments is used by the distributor to pay for advertising, printing costs or
interest expenses.

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 prospectuses, 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 funds' distributor 1.00% annually of the average daily net
asset value of the funds' B Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor. During the fiscal year
ended May 31, 2005, the aggregate amount of fees paid under the B Class Plan
was:

Arizona Municipal Bond $XX
Florida Municipal Bond $XX
High-Yield Municipal $XX

The distributor then makes these payments to the financial intermediaries who
offer the B Class shares for the services described below. No portion of these
payments is used by the distributor to pay for advertising, printing costs or
interest expenses.

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;