FORM N-1A

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P+b6GO1xyYoXm/PVKCXZLAgQs6cQUFlj44wbWyNhXOFwCnfl3Gc8ugdfUqrtjVpv lZl7yCd1N9nnhhMHf4sqaA== 0000717316-03-000025.txt : 20031230 0000717316-03-000025.hdr.sgml : 20031230 20031230142845 ACCESSION NUMBER: 0000717316-03-000025 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20031230 EFFECTIVENESS DATE: 20031230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CENTURY CALIFORNIA TAX FREE & MUNICIPAL FUNDS CENTRAL INDEX KEY: 0000717316 IRS NUMBER: 946562826 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-82734 FILM NUMBER: 031077387 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / DATE OF NAME CHANGE: 19960815 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CENTURY CALIFORNIA TAX FREE & MUNICIPAL FUNDS CENTRAL INDEX KEY: 0000717316 IRS NUMBER: 946562826 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03706 FILM NUMBER: 031077388 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / DATE OF NAME CHANGE: 19960815 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 485BPOS 1 pea36-2003.htm POST-EFFECTIVE AMEND. NO. 36 FORM N-1A

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 36 [X]

and/or

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

Amendment No. 40 [X]

(Check appropriate box or boxes.)

AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
-----------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

4500 Main Street, Kansas City, MO 64141-6200
------------------------------------------------------------------
(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 64141-6200
-----------------------------------------------------------------
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering: January 1, 2004

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

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

If appropriate, check the following box:

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

Your
American Century
prospectus

INVESTOR CLASS

California Tax-Free Money Market Fund

California Limited-Term Tax-Free Fund

California Intermediate-Term Tax-Free Fund

California Long-Term Tax-Free Fund

JANUARY 1, 2004

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

American Century
Investment Services, Inc.

[graphic of american century logo and text logo (reg. sm)]

American Century
Investments

P.O. Box 419200
Kansas City, MO
64141-6200

Dear Investor,

At American Century, we're committed to helping investors make the most of their
financial opportunities. That's why we focus on achieving superior results and
building long-term relationships with investors like you.

We believe our relationship with you begins with an easy-to-read prospectus that
provides you with the information you need to make informed and confident
decisions about your investments.

We understand you may have questions about investing after you read through the
Prospectus. Our Web site, www.americancentury.com, offers information that could
answer many of your questions. Or, an Investor Relations Representative will be
happy to help weekdays, 7 a.m. to 7 p.m., and Saturdays, 9 a.m. to 2 p.m.
Central time. Our representatives can be reached by calling 1-800-345-2021.
Thank you for considering American Century.

Sincerely,

/s/Donna Byers

Donna Byers
Senior Vice President
Direct Sales and Services
American Century Services Corporation

Table of Contents

AN OVERVIEW OF THE FUNDS................................................... 2

FUND PERFORMANCE HISTORY................................................... 4

California Tax-Free Money Market Fund................................. 4

California Limited-Term Tax-Free Fund

California Intermediate-Term Tax-Free Fund

California Long-Term Tax-Free Fund.................................... 5

FEES AND EXPENSES.......................................................... 8

OBJECTIVES, STRATEGIES AND RISKS........................................... 10

California Tax-Free Money Market Fund................................. 10

California Limited-Term Tax-Free Fund

California Intermediate-Term Tax-Free Fund

California Long-Term Tax-Free Fund.................................... 11

BASICS OF FIXED-INCOME INVESTING........................................... 13

MANAGEMENT................................................................. 16

INVESTING WITH AMERICAN CENTURY............................................ 19

SHARE PRICE AND DISTRIBUTIONS.............................................. 25

TAXES...................................................................... 27

FINANCIAL HIGHLIGHTS....................................................... 29

[graphic of triangle]

This symbol is used throughout the book to highlight DEFINITIONS of
key investment terms and to provide other helpful information.

AN OVERVIEW OF THE FUNDS

WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?

These conservatively managed funds seek income that is exempt from federal and
California income tax. They also attempt to protect the value of your
investments.

WHAT ARE THE FUNDS' PRIMARY INVESTMENT STRATEGIES AND PRINCIPAL RISKS?

The fund managers invest most of the funds' assets in DEBT SECURITIES issued by
cities, counties and other municipalities in California and U.S. territories,
such as Puerto Rico, that have interest exempt from California and federal
income taxes. Each of the funds invests in different types of these municipal
debt securities and has different risks. The following chart shows the
differences among the funds' primary investments and principal risks. It is
designed to help you compare these funds with each other; it should not be used
to compare these funds with other mutual funds. A more detailed description of
the funds' investment strategies and risks begins on page 10.

[graphic of triangle]

DEBT SECURITIES include fixed-income investments such as notes, bonds,
commercial paper and U.S. Treasury securities. Very short-term debt
securities (those with maturities shorter than 397 days) are called
money market instruments.

Fund Primary Investments Principal Risks
--------------------------------------------------------------------------------
Lower Income California Tax-Free High-quality, very California economic risk
More Liquid Money Market short-term debt securities Lowest credit risk
Shorter Term Lowest interest rate risk
Lowest liquidity risk
--------------------------------------------------------------------------------
California Limited-Term Quality debt securities California economic risk
Tax-Free with a weighted average Moderate credit risk
maturity of 1-5 years Low interest rate risk
[graphic Moderate liquidity risk
of --------------------------------------------------------------------------------
vertical California Intermediate- Quality debt securities California economic risk
arrow] Term Tax-Free with a weighted average Moderate credit risk
maturity of 5-10 years Moderate interest rate risk
Moderate liquidity risk
--------------------------------------------------------------------------------
California Long-Term Quality debt securities California economic risk
Higher Income Tax-Free with a weighted Moderate credit risk
Less Liquid average maturity High interest rate risk
Longer Term of 10 or more years Moderate liquidity risk
--------------------------------------------------------------------------------

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.

- ------
2

WHO MAY WANT TO INVEST IN THE FUNDS?

The funds may be a good investment if you are

* a California resident or taxpayer
* seeking current tax-free income
* comfortable with risk based on California's economy
* comfortable with the funds' other investment risks
* seeking diversification by investing in a fixed-income mutual fund

WHO MAY NOT WANT TO INVEST IN THE FUNDS?

The funds may not be a good investment if you are

* investing in an IRA or other tax-advantaged retirement plan
* investing for long-term growth
* looking for the added security of FDIC insurance

[graphic of triangle]

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.

- ------
3

FUND PERFORMANCE HISTORY

CALIFORNIA TAX-FREE MONEY MARKET FUND

Annual Total Returns

The following bar chart shows the performance of the fund's Investor Class
shares for each of the last 10 calendar years. It indicates the volatility of
the fund's historical returns from year to year. Account fees are not reflected
in the chart below. If they had been included, returns would be lower than those
shown.

CALIFORNIA TAX-FREE MONEY MARKET FUND - INVESTOR CLASS(1)

[data from bar chart]

2002 1.06%
2001 2.20%
2000 3.30%
1999 2.66%
1998 2.95%
1997 3.19%
1996 3.07%
1995 3.41%
1994 2.42%
1993 2.03%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 0.45%.

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

Highest Lowest
- --------------------------------------------------------------------------------
California Tax-Free Money Market 0.89% (2Q 2000) 0.10% (3Q 2003)
- --------------------------------------------------------------------------------

Average Annual Total Returns

The following table shows the average annual total returns of the fund's
Investor Class shares for the periods indicated.

For the calendar year ended December 31, 2002 1 5 10 Life of
year years years Fund (1)
- --------------------------------------------------------------------------------
California Tax-Free Money Market
Investor Class 1.06% 2.43% 2.63% 3.48%
- --------------------------------------------------------------------------------

(1) The inception date for the fund is November 9, 1983.

- ------
4

CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND

Annual Total Returns

The following bar charts show the performance of the funds' Investor Class
shares for each of the last 10 calendar years or for each full calendar year in
the life of a fund if less than 10 years. They indicate the volatility of the
funds' historical returns from year to year. Account fees are not reflected in
the charts below. If they had been included, returns would be lower than those
shown.

CALIFORNIA LIMITED-TERM TAX-FREE FUND -- INVESTOR CLASS(1)

[data from bar chart]

2002 6.37%
2001 4.95%
2000 7.03%
1999 1.13%
1998 4.91%
1997 5.34%
1996 3.93%
1995 8.32%
1994 -0.61%
1993 5.92%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 2.24%.

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

Highest Lowest
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free 3.09% (3Q 2002) -1.35% (1Q 1994)
- --------------------------------------------------------------------------------

- ------
5

CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND -- INVESTOR CLASS(1)

[data from bar chart]

2002 8.80%
2001 4.35%
2000 10.14%
1999 -1.09%
1998 5.59%
1997 7.45%
1998 4.25%
1995 13.52%
1994 -3.72%
1993 10.69%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 2.51%.

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

Highest Lowest
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free 5.25% (1Q 1995) -3.98% (1Q 1994)
- --------------------------------------------------------------------------------

CALIFORNIA LONG-TERM TAX-FREE FUND -- INVESTOR CLASS(1)

[data from bar chart]

2002 8.69%
2001 4.23%
2000 14.92%
1999 -5.22%
1998 6.31%
1997 9.74%
1996 3.59%
1995 19.80%
1994 -6.51%
1993 13.74%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 2.95%.

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

Highest Lowest
- --------------------------------------------------------------------------------
California Long-Term Tax-Free 7.13% (1Q 1995) -5.71% (1Q 1994)
- --------------------------------------------------------------------------------

Average Annual Total Returns

The following table shows the average annual total returns of the funds'
Investor Class shares calculated three different ways.

- ------
6

adjusted by the effect of taxes on distributions made by the fund during the
periods shown. Return After Taxes on Distributions and Sale of Fund Shares is
further adjusted to reflect the tax impact on any change in the value of fund
shares as if they had been sold on the last day of the period.

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

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

INVESTOR CLASS

For the calendar year ended December 31, 2002 1 5 10 Life of
year years years Fund(1)
- -----------------------------------------------------------------------------------------
California Limited-Term Tax-Free
Return Before Taxes 6.37% 4.86% 4.70% 4.83%
Return After Taxes on Distributions 6.32% 4.83% 4.67% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 5.17% 4.64% 4.55% N/A
Lehman Brothers 3-Year Municipal Bond Index 6.72% 5.33% 5.22% 5.36%
(reflects no deduction for fees, expenses and taxes)
- -----------------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
Return Before Taxes 8.80% 5.48% 5.87% 6.61%
Return After Taxes on Distributions 8.68% 5.35% 5.74% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 7.05% 5.23% 5.62% N/A
Lehman Brothers 5-Year General Obligation Index 9.00% 5.80% 5.85% 7.20%(2)
(reflects no deduction for fees, expenses and taxes)
- -----------------------------------------------------------------------------------------
California Long-Term Tax-Free
Return Before Taxes 8.69% 5.58% 6.63% 7.80%
Return After Taxes on Distributions 8.69% 5.52% 6.41% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 7.16% 5.42% 6.30% N/A
Lehman Brothers Long-Term Municipal Bond Index 10.43% 6.11% 7.23% 9.50%(2)
(reflects no deduction for fees, expenses and taxes)
- -----------------------------------------------------------------------------------------
(1) The inception dates for the funds are: California Limited-Term Tax-Free,
June 1, 1992 and California Intermediate-Term Tax-Free and California
Long-Term Tax-Free, November 9, 1983. Only funds with performance history
for less than 10 years show after-tax returns for the life of fund.

(2) Since October 31, 1983, the date closest to the fund's inception for which
data is available.

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

For current performance information, including yields, please call us at
1-800-345-2021 or visit us at www.americancentury.com.

- ------
7

FEES AND EXPENSES

There are no sales loads, fees or other charges

* to buy fund shares directly from American Century
* to reinvest dividends in additional shares
* to exchange into the same class of shares of other American Century funds
* to redeem your shares other than a $10 fee to redeem by wire

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- --------------------------------------------------------------------------------
Investor Class
Maximum Account Maintenance Fee $25(1)
- --------------------------------------------------------------------------------
(1) Applies only to investors whose total investments with American Century are
less than $10,000. See Account Maintenance Fee under Investing with
American Century for more details.

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

Total
Annual
Distribution Fund
Management and Service Other Operating
Fee(1) (12b-1) Fees Expenses(2) Expenses
- --------------------------------------------------------------------------------------
California Tax-Free Money Market
Investor Class 0.49% None 0.02% 0.51%
- --------------------------------------------------------------------------------------
California Limited-Term Tax-Free
Investor Class 0.50% None 0.01% 0.51%
- --------------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
Investor Class 0.50% None 0.01% 0.51%
- --------------------------------------------------------------------------------------
California Long-Term Tax-Free
Investor Class 0.50% None 0.01% 0.51%
- --------------------------------------------------------------------------------------
(1) Based on assets of all classes of a particular fund during the funds' most
recent fiscal year. The funds have stepped fee schedules. As a result, the
funds' management fee rates generally decrease as fund assets increase and
increase as fund assets decrease.

(2) Other expenses include fees and expenses of the funds' independent trustees
and their legal counsel, interest and, for money market funds, portfolio
insurance.

- ------
8

EXAMPLE

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

* invest $10,000 in the fund
* redeem all of your shares at the end of the periods shown below
* earn a 5% return each year
* incur the same operating expenses as shown above

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

1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
California Tax-Free Money Market
Investor Class $52 $163 $285 $640
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free
Investor Class $52 $163 $285 $640
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
Investor Class $52 $163 $285 $640
- --------------------------------------------------------------------------------
California Long-Term Tax-Free
Investor Class $52 $163 $285 $640
- --------------------------------------------------------------------------------

- ------
9

OBJECTIVES, STRATEGIES AND RISKS

CALIFORNIA TAX-FREE MONEY MARKET FUND

WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?

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

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVES?

The fund's assets are invested in HIGH-QUALITY, very short-term debt securities
of which 80% must have interest payments exempt from federal and California
income taxes. Cities, counties and other MUNICIPALITIES in California and U.S.
territories, such as Puerto Rico, usually issue these securities for public
projects, such as schools and roads. Income from these securities is exempt from
regular federal income tax, state tax and the alternative minimum tax.

[graphic of triangle]

A HIGH-QUALITY debt security is one that has been rated by an
independent rating agency in its top two credit quality categories or
determined by the advisor to be of comparable quality. The details of
the fund's credit quality standards are described in the Statement of
Additional Information.

[graphic of triangle]

MUNICIPALITIES include states, cities, counties, incorporated
townships, the District of Columbia and U.S. territories and
possessions. They can issue private activity bonds and public purpose
bonds.

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?

Because high-quality, very short-term debt securities are among the safest
securities available, the interest they pay is among the lowest for
income-paying securities. Accordingly, the yield on this fund will likely be
lower than the yield on funds that invest in longer-term or lower-quality
securities.

Because the fund invests in California municipal securities, it will be
sensitive to events that affect California's economy. It may be riskier than
funds that invest in a larger universe of securities.

- ------
10

CALIFORNIA LIMITED-TERM TAX-FREE FUND

CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND

CALIFORNIA LONG-TERM TAX-FREE FUND

WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?

These funds seek safety of principal and high current income that is exempt from
federal and California income taxes.

HOW DO THE FUNDS PURSUE THEIR INVESTMENT OBJECTIVES?

The fund managers buy QUALITY debt securities, and will invest at least 80% of
the funds' assets in debt securities with interest payments exempt from federal
and California income taxes. Cities, counties and other MUNICIPALITIES in
California and U.S. territories, such as Puerto Rico, usually issue these
securities for public projects, such as schools and roads.

[graphic of triangle]

A QUALITY debt security is one that has been rated by an independent
rating agency in the top four credit quality categories or determined
by the advisor to be of comparable credit quality. The details of the
funds' credit quality standards are described in the Statement of
Additional Information.

[graphic of triangle]

MUNICIPALITIES include states, cities, counties, incorporated
townships, the District of Columbia and U.S. territories and
possessions. They can issue private activity bonds and public purpose
bonds.

The funds 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 funds may purchase securities in advance to generate
additional income.

The funds 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 investment are in keeping with the funds'
investment objective.

In the event of exceptional market or economic conditions, the funds may, as a
temporary defensive measure, invest all or a substantial portion of their assets
in cash or cash-equivalent securities. To the extent the funds assume a
defensive position, they will not be pursuing their investment objectives and
may generate taxable income. The funds generally limit their purchase of debt
securities to investment-grade obligations.

- ------
11

WHAT ARE THE DIFFERENCES BETWEEN THE FUNDS?

The funds differ in the maturity of the debt securities they purchase. This
difference is shown in the chart below.

Typical Maturity Weighted
of Investments Average Maturity
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free 1-10 years 1-5 years
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free 4 or more years 5-10 years
- --------------------------------------------------------------------------------
California Long-Term Tax-Free 7 or more years 10 or more years
- --------------------------------------------------------------------------------

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?

Because the funds have different WEIGHTED AVERAGE MATURITIES, each fund will
respond differently to changes in interest rates. Funds with longer weighted
average maturities are generally more sensitive to interest rate changes. When
interest rates rise, the funds' share values will decline, but the share values
of funds with longer weighted average maturities generally will decline further.

[graphic of triangle]

WEIGHTED AVERAGE MATURITY is described in more detail under Basics of
Fixed-Income Investing.

Because the funds invest in California municipal securities, they will be
sensitive to events that affect California's economy. They may be riskier than
funds that invest in a larger universe of securities.

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 the 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.

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.

- ------
12

BASICS OF FIXED-INCOME INVESTING

DEBT SECURITIES

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

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

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

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

* evaluating current economic conditions and assessing the risk of inflation

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

WEIGHTED AVERAGE MATURITY

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

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

Amount of Percent of Remaining Weighted
Security Owned Portfolio Maturity Maturity
- --------------------------------------------------------------------------------
Debt Security A $100,000 25% 4 years 1 year
- --------------------------------------------------------------------------------
Debt Security B $300,000 75% 12 years 9 years
- --------------------------------------------------------------------------------
Weighted Average Maturity 10 years
- --------------------------------------------------------------------------------

TYPES OF RISK

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

Interest Rate Risk

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

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

- ------
13

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

Remaining Maturity Current Price Price After 1% Increase Change in Price
- -------------------------------------------------------------------------------
1 year $100.00 $99.06 -0.94%
- -------------------------------------------------------------------------------
3 years $100.00 $97.38 -2.62%
- -------------------------------------------------------------------------------
10 years $100.00 $93.20 -6.80%
- -------------------------------------------------------------------------------
30 years $100.00 $88.69 -11.31%
- -------------------------------------------------------------------------------

Credit Risk

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

Credit quality may be lower when the issuer has any of the following: a high
debt level, a short operating history, a difficult, competitive environment or a
less stable cash flow.

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

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

Liquidity Risk

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

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14

A COMPARISON OF BASIC RISK FACTORS

The following chart depicts the basic risks of investing in the funds. It is
designed to help you compare these funds with each other; it shouldn't be used
to compare these funds with other mutual funds.

Interest
Rate Credit Liquidity
Risk Risk Risk
- --------------------------------------------------------------------------------
California Tax-Free Money Market Lowest Lowest Lowest
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free Low Moderate Moderate
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free Moderate Moderate Moderate
- --------------------------------------------------------------------------------
California Long-Term Tax-Free High Moderate Moderate
- --------------------------------------------------------------------------------

The funds engage in a variety of investment techniques as they pursue their
investment objectives. Each technique has its own characteristics and may pose
some level of risk to the funds. If you would like to learn more about these
techniques, please review the Statement of Additional Information before making
an investment.

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15

MANAGEMENT

WHO MANAGES THE FUNDS?

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

THE BOARD OF TRUSTEES

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

THE INVESTMENT ADVISOR

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

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

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

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

Management Fees Paid by the Funds to the Advisor
as a Percentage of Average Net Assets for the
Most Recent Fiscal Year Ended August 31, 2003 Investor Class
- --------------------------------------------------------------------------------
California Tax-Free Money Market 0.49%
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free 0.50%
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free 0.50%
- --------------------------------------------------------------------------------
California Long-Term Tax-Free 0.50%
- --------------------------------------------------------------------------------

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16

THE FUND MANAGEMENT TEAMS

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

California Limited-Term Tax-Free
California Intermediate-Term Tax-Free
California Long-Term Tax-Free

The funds are managed by the Municipal Bond Team, whose members are identified
below.

G. DAVID MACEWEN

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

STEVEN M. PERMUT

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

ROBERT J. MILLER

Mr. Miller, Vice President and Portfolio Manager, has been a member of the team
since April 2000. He joined American Century in June 1998 as a Senior Municipal
Analyst. He has a bachelor's degree in business administration-finance from San
Jose State University and an MBA from New York University.

KENNETH M. SALINGER

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

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17

California Tax-Free Money Market

The funds are managed by the Money Market Team, whose members are identified
below.

G. DAVID MACEWEN

Mr. MacEwen, Chief Investment Officer - Fixed Income and Senior Vice President,
supervises the American Century Money Market team. He has been a member of the
team since July 2001. He joined American Century in May 1991 as a Municipal
Portfolio Manager. He has a bachelor's degree in economics from Boston
University and an MBA in finance from the University of Delaware.

STEVEN M. PERMUT

DENISE TABACCO

Ms. Tabacco, Vice President and Senior Portfolio Manager, has been a member of
the team since January 1996. She joined American Century in 1988, becoming a
member of its investment management department in 1991. She has a bachelor's
degree in accounting from San Diego State University and an MBA in finance from
Golden Gate University- San Francisco.

ALAN KRUSS

Mr. Kruss, Portfolio Manager, has been a member of the team since November 2001.
He joined American Century in 1997 as an Investment Administrator. He has a
bachelor's degree in finance from San Francisco State University.

TODD PARDULA

Mr. Pardula, Vice President and Portfolio Manager, has been a member of the team
since May 1994. He joined American Century in February 1990 as an Investor
Services Representative. He also was an Associate Municipal Credit Analyst for
two years. He has a bachelor's degree in finance from Santa Clara University. He
is a CFA charterholder.

LYNN PASCHEN

Ms. Paschen, Portfolio Manager, joined the team in October 2000 as a
Fixed-Income Trader and was promoted to Portfolio Manager in February 2003. She
joined American Century in 1998 as a Senior Fund Accountant. She has a
bachelor's degree in finance from the University of Iowa and a master's degree
from Golden Gate University- San Francisco.

Code of Ethics

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

FUNDAMENTAL INVESTMENT POLICIES

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

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18

INVESTING WITH AMERICAN CENTURY

SERVICES AUTOMATICALLY AVAILABLE TO YOU

Most accounts automatically will have access to the services listed below when
the account is opened. If you do not want these services, see Conducting
Business in Writing. If you have questions about the services that apply to your
account type, please call us.

CONDUCTING BUSINESS IN WRITING

If you prefer to conduct business in writing only, you can indicate this on the
account application. If you choose this option, you must provide written
instructions to invest, exchange and redeem. All account owners must sign
transaction instructions (with signatures guaranteed for redemptions in excess
of $100,000). If you want to add services later, you can complete an Investor
Service Options form. By choosing this option, you are not eligible to enroll
for exclusive online account management to waive the account maintenance fee.
See Account Maintenance Fee in this section.

A NOTE ABOUT MAILINGS TO SHAREHOLDERS

To reduce the amount of mail you receive from us, we may deliver a single copy
of certain investor documents (such as shareholder reports and prospectuses) to
investors who share an address, even if accounts are registered under different
names. If you prefer to receive multiple copies of these documents individually
addressed, please call 1-800-345-2021. If you invest in American Century mutual
funds through a financial intermediary, please contact them directly. For
American Century Brokerage accounts, please call 1-888-345-2071.

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.

WAYS TO MANAGE YOUR ACCOUNT

- --------------------------------------------------------------------------------
ONLINE
- --------------------------------------------------------------------------------

www.americancentury.com

OPEN AN ACCOUNT

If you are a current or new investor, you can open an account by completing and
submitting our online application. Current investors also can open an account by
exchanging shares from another American Century account.

EXCHANGE SHARES

Exchange shares from another American Century account.

MAKE ADDITIONAL INVESTMENTS

Make an additional investment into an established American Century account if
you have authorized us to invest from your bank account.

SELL SHARES*

Redeem shares and proceeds will be electronically transferred to your authorized
bank account.

* Online redemptions up to $25,000 per day.

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19

- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------

Investor Relations
1-800-345-2021

Business, Not-For-Profit and
Employer-Sponsored Retirement Plans
1-800-345-3533

Automated Information Line
1-800-345-8765

OPEN AN ACCOUNT

If you are a current investor, you can open an account by exchanging shares from
another American Century account.

EXCHANGE SHARES

Call or use our Automated Information Line if you have authorized us to accept
telephone instructions.

MAKE ADDITIONAL INVESTMENTS

Call or use our Automated Information Line if you have authorized us to invest
from your bank account.

SELL SHARES

Call a Representative.

- --------------------------------------------------------------------------------
BY WIRE
- --------------------------------------------------------------------------------

Please remember, if you request redemptions by wire, $10 will be deducted from
the amount redeemed. Your bank also may charge a fee.

OPEN AN ACCOUNT

Call to set up your account or mail a completed application to the address
provided in the By Mail or Fax section. Give your bank the following information
to wire money.

* Our bank information
Commerce Bank N.A.
Routing No. 101000019
Account No. Please call for the appropriate account number

* The fund name
* Your American Century account number, if known*
* Your name
* The contribution year (for IRAs only)
* For additional investments only

MAKE ADDITIONAL INVESTMENTS

Follow the By Wire - Open an account instructions.

SELL SHARES

You can receive redemption proceeds by wire or electronic transfer.

EXCHANGE SHARES

Not available.

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20

- --------------------------------------------------------------------------------
BY MAIL OR FAX
- --------------------------------------------------------------------------------

P.O. Box 419200
Kansas City, MO 64141-6200

Fax
816-340-7962

OPEN AN ACCOUNT

Send a signed, completed application and check or money order payable to
American Century Investments.

EXCHANGE SHARES

Send written instructions to exchange your shares from one American Century
account to another.

MAKE ADDITIONAL INVESTMENTS

Send your check or money order for at least $50 with an investment slip or $250
without an investment slip. If you don't have an investment slip, include your
name, address and account number on your check or money order.

SELL SHARES

Send written instructions or a redemption form to sell shares. Call a
Representative to request a form.

- --------------------------------------------------------------------------------
AUTOMATICALLY
- --------------------------------------------------------------------------------

OPEN AN ACCOUNT

Not available.

EXCHANGE SHARES

Send written instructions to set up an automatic exchange of your shares from
one American Century account to another.

MAKE ADDITIONAL INVESTMENTS

With the automatic investment privilege, you can purchase shares on a regular
basis. You must invest at least $600 per year per account.

SELL SHARES

If you have at least $10,000 in your account, you may sell shares automatically
by establishing Check-A-Month or Automatic Redemption plans.

- --------------------------------------------------------------------------------
IN PERSON
- --------------------------------------------------------------------------------

If you prefer to handle your transactions in person, visit one of our Investor
Centers and a representative can help you open an account, make additional
investments, and sell or exchange shares.

4500 Main Street 4917 Town Center Drive
Kansas City, Missouri Leawood, Kansas
8 a.m. to 5:30 p.m., Monday - Friday 8 a.m. to 6 p.m., Monday - Friday
8 a.m. to noon,
Saturday

1665 Charleston Road 10350 Park Meadows Drive
Mountain View, California Littleton, Colorado
8 a.m. to 5 p.m., Monday - Friday 8:30 a.m. to 5:30 p.m., Monday - Friday

- ------
21

MINIMUM INITIAL INVESTMENT AMOUNTS

To open an account, the minimum investment for California Tax-Free Money Market
is $2,500. The minimum for all other funds is $5,000. These funds are not
available for retirement accounts.

ACCOUNT MAINTENANCE FEE

We charge a $12.50 semiannual account maintenance fee to investors whose total
investments with American Century are less than $10,000. We will determine the
amount of your total investments twice per year, generally the last Friday in
October and April. If your total investments are less than $10,000 at that time,
we will redeem shares automatically in one of your accounts to pay the $12.50
fee. Please note that you may incur a tax liability as a result of the
redemption. In determining your total investment amount, we will include your
investments in American Century funds held in all PERSONAL ACCOUNTS and IRAs
including SEP-, SARSEP- and SIMPLE-IRAs (but no other retirement plan accounts)
registered under your Social Security number. We will not charge the fee as long
as you choose to manage your accounts exclusively online. You may enroll for
exclusive online account management on our Web site. To find out more about
exclusive online account management, visit www.americancentury.com/info/demo.

[graphic of triangle]

PERSONAL ACCOUNTS include individual accounts, joint accounts,
UGMA/UTMA accounts, personal trusts, Coverdell Education Savings
Accounts and traditional, Roth and Rollover IRAs. If you have only
business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee, but
you may be subject to other fees.

REDEMPTIONS

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

[graphic of triangle]

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 delay delivery of redemption proceeds--up
to seven days--or to honor certain redemptions with securities, rather than
cash, as described in the next section.

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22

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

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

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

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

REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS

If your account balance falls below the minimum initial investment amount for
any reason other than as a result of market fluctuation, we will notify you and
give you 90 days to meet the minimum. If you do not meet the deadline, American
Century reserves the right to redeem the shares in the account and send the
proceeds to your address of record. Please note that you may incur a tax
liability as a result of the 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:

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

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

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

MODIFYING OR CANCELING AN INVESTMENT

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

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23

ABUSIVE TRADING PRACTICES

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

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

INVESTING THROUGH FINANCIAL INTERMEDIARIES

If you do business with us through a financial intermediary, your ability to
purchase, exchange and redeem shares will depend on the policies of that entity.
Some policy differences may include

* minimum investment requirements
* exchange policies
* fund choices
* cutoff time for investments

Please contact your FINANCIAL INTERMEDIARY for a complete description of its
policies. Copies of the funds' annual reports, semiannual reports and Statement
of Additional Information are available from your intermediary.

[graphic of triangle]

FINANCIAL INTERMEDIARIES include banks, broker-dealers, insurance
companies and investment advisors.

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, American Century will pay the
service provider a fee for performing those services.

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 funds.

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

The funds have authorized certain financial intermediaries to accept orders on
each 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.

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.

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24

SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

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

If the advisor determines that the current market price of a security owned by a
non-money market fund is not readily available, the advisor may determine its
fair value in accordance with procedures adopted by the fund's board.
Circumstances that may cause the advisor to determine the fair value of a
security held by the fund include, but are not limited to:

* an event occurs after the close of the foreign exchange on which a portfolio
security principally trades, but before the close of the Exchange, that is
likely to have changed the value of the security

* a debt security has been declared in default

* trading in a security has been halted during the trading day

* the demand for the security (as reflected by its trading volume) is
insufficient for quoted prices to be reliable

If such circumstances occur, the advisor may determine the security's fair value
if the fair value determination would materially impact the fund's net asset
value. While fair value determinations involve judgments that are inherently
subjective, these determinations are made in good faith in accordance with
procedures adopted by a fund's board.

The portfolio securities of the money market funds are valued at amortized cost.
This means that the securities are initially valued at their cost when
purchased. After the initial purchase, the difference between the purchase price
and the known value at maturity will be reduced at a constant rate until
maturity. This valuation will be used regardless of the impact of interest rates
on the market value of the security. The board has adopted procedures to ensure
that this type of pricing is fair to the funds' shareholders.

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

[graphic of triangle]

GOOD ORDER means that your instructions have been received in the form
required by American Century. This may include, for example,
providing the fund name and account number, the amount of the
transaction and all required signatures.

DISTRIBUTIONS

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

[graphic of triangle]

CAPITAL GAINS are increases in the values of capital assets, such as
stock, from the time the assets are purchased.

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25

Money Market Funds

A money market fund declares distributions from net income daily. These
distributions are paid on the last business day of each month. Distributions are
reinvested automatically in additional shares unless you choose another option.

Except as described in the next paragraph, you will begin to participate in fund
distributions the next business day after your purchase is effective. If you
redeem shares, you will receive the distribution declared for the day you
redeem.

You will begin to participate in fund distributions on the day your instructions
to purchase are received if you

* notify us of your purchase prior to 11 a.m. Central time AND

* pay for your purchase by bank wire transfer prior to 3 p.m. Central time on
the same day.

Also, we will wire your redemption proceeds to you by the end of the business
day if you request your redemption before 11 a.m. Central time.

Other Funds

Each fund pays distributions from net income monthly, and generally pays capital
gain distributions, if any, once a year, usually in December. A fund may make
more frequent distributions, if necessary, to comply with Internal Revenue Code
provisions. Distributions are reinvested automatically in additional shares
unless you choose another option.

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.

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26

TAXES

Tax-Exempt Income

Most of the income that the funds receive from municipal securities is exempt
from California and regular federal income taxes. However, corporate
shareholders should be aware that distributions are subject to California's
corporate franchise tax.

Taxable Income

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

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

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

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

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

[graphic of triangle]

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 distribution 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. American Century or your financial
intermediary will inform you of the tax status of fund distributions for each
calendar year in an annual tax mailing (Form 1099-DIV).

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

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27

Taxes on Transactions

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

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

Buying a Dividend

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

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

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

- ------
28

FINANCIAL HIGHLIGHTS

UNDERSTANDING THE FINANCIAL HIGHLIGHTS

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

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

* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to investors
* share price at the end of the period

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

* TOTAL RETURN - the overall percentage of return of the fund, assuming the
reinvestment of all distributions

* EXPENSE RATIO - the operating expenses of the fund as a percentage of average
net assets

* NET INCOME RATIO - the net investment income of the fund as a percentage of
average net assets

* 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 accountants. Their Independent Accountants' Report and the financial
statements are included in the funds' Annual Report, which is available upon
request.

- ------
29

CALIFORNIA TAX-FREE MONEY MARKET FUND
Investor Class

RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.51% 0.51% 0.50% 0.49% 0.50%
- ---------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.76% 1.24% 2.84% 3.07% 2.59%
- ---------------------------------------------------------
Net Assets, End of Period (in thousands) $621,747 $528,188 $551,722 $640,476 $558,175
- --------------------------------------------------------------------------------------------------------------

(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any.

- ------
30

CALIFORNIA LIMITED-TERM TAX-FREE FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.82 $10.69 $10.40 $10.27 $10.43
- ---------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------
Net Investment Income 0.30 0.35 0.42 0.41 0.39
- ---------------------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.10) 0.16 0.29 0.13 (0.16)
- ---------------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.20 0.51 0.71 0.54 0.23
- ---------------------------------------------------------------------------------------------------------------
Distributions
- ---------------------------------------------------------
From Net Investment Income (0.30) (0.35) (0.42) (0.41) (0.39)
- ---------------------------------------------------------
From Net Realized Gains (0.02) (0.03) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.32) (0.38) (0.42) (0.41) (0.39)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.70 $10.82 $10.69 $10.40 $10.27
===============================================================================================================
TOTAL RETURN(1) 1.87% 4.91% 6.94% 5.44% 2.26%

RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.51% 0.51% 0.51% 0.51% 0.51%
- ---------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 2.78% 3.30% 3.97% 4.05% 3.78%
- ---------------------------------------------------------
Portfolio Turnover Rate 34% 50% 63% 97% 57%
- ---------------------------------------------------------
Net Assets, End of Period (in thousands) $228,030 $205,066 $163,929 $142,205 $141,549
- ---------------------------------------------------------------------------------------------------------------

(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any.

- ------
31

CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.55 $11.47 $11.08 $10.85 $11.37
- --------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------------------------------
Net Investment Income 0.45 0.47 0.50 0.50 0.49
- ---------------------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.23) 0.15 0.39 0.23 (0.41)
- --------------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.22 0.62 0.89 0.73 0.08
- --------------------------------------------------------------------------------------------------------------
Distributions
- ---------------------------------------------------------
From Net Investment Income (0.45) (0.47) (0.50) (0.50) (0.49)
- ---------------------------------------------------------
From Net Realized Gains (0.04) (0.07) -- -- (0.11)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.49) (0.54) (0.50) (0.50) (0.60)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.28 $11.55 $11.47 $11.08 $10.85
==============================================================================================================
TOTAL RETURN(1) 1.91% 5.63% 8.22% 6.95% 0.74%

RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.51% 0.51% 0.51% 0.51% 0.51%
- ---------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 3.89% 4.13% 4.45% 4.64% 4.41%
- ---------------------------------------------------------
Portfolio Turnover Rate 25% 41% 94% 73% 54%
- ---------------------------------------------------------
Net Assets, End of Period (in thousands) $451,131 $477,494 $449,975 $444,571 $459,859
- --------------------------------------------------------------------------------------------------------------

(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any.

- ------
32

CALIFORNIA LONG-TERM TAX-FREE FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.75 $11.70 $11.11 $10.86 $11.72
- ---------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------------------------------
Net Investment Income 0.53 0.53 0.55 0.56 0.57
- ---------------------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.32) 0.05 0.59 0.25 (0.76)
- ---------------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.21 0.58 1.14 0.81 (0.19)
- ---------------------------------------------------------------------------------------------------------------
Distributions
- ---------------------------------------------------------
From Net Investment Income (0.53) (0.53) (0.55) (0.56) (0.57)
- ---------------------------------------------------------
From Net Realized Gains -- -- -- -- (0.10)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.53) (0.53) (0.55) (0.56) (0.67)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.43 $11.75 $11.70 $11.11 $10.86
===============================================================================================================
TOTAL RETURN(1) 1.81% 5.14% 10.55% 7.79% (1.85)%

RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.51% 0.51% 0.51% 0.51% 0.51%
- ---------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.54% 4.58% 4.87% 5.24% 4.94%
- ---------------------------------------------------------
Portfolio Turnover Rate 23% 43% 31% 24% 52%
- ---------------------------------------------------------
Net Assets, End of Period (in thousands) $497,165 $327,150 $331,090 $303,480 $332,627
- ---------------------------------------------------------------------------------------------------------------

(1) Total return assumes reinvestment of net investment income and
capital gains distributions, if any.

- ------
33

MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS

ANNUAL AND SEMIANNUAL REPORTS

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

Statement of Additional Information (SAI)

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

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

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

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

On the Internet * EDGAR database at www.sec.gov
* 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.

Newspaper
Fund Reference Fund Code Ticker Listing
- --------------------------------------------------------------------------------
California Tax-Free Money Market
Investor Class 930 BCTXX AmC CATF
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free
Investor Class 936 BCSTX CaLtdTF
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
Investor Class 931 BCITX CaIntTF
- --------------------------------------------------------------------------------
California Long-Term Tax-Free
Investor Class 932 BCLTX CaLgTF
- --------------------------------------------------------------------------------

Investment Company Act File No. 811-0816

AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575
www.americancentury.com

0401
SH-PRS-35868

Your
American Century
prospectus

INVESTOR CLASS

California High-Yield Municipal Fund

JANUARY 1, 2004

EFFECTIVE JANUARY 30, 2003, CALIFORNIA HIGH-YIELD MUNICIPAL CLOSED TO NEW RETAIL
INVESTORS, BUT IS AVAILABLE THROUGH FINANCIAL INTERMEDIARIES. ANY SHAREHOLDER
WITH AN OPEN ACCOUNT AS OF JANUARY 30, 2003 MAY MAKE ADDITIONAL INVESTMENTS AND
REINVEST DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS AS LONG AS SUCH ACCOUNT
REMAINS OPEN.

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

American Century
Investment Services, Inc.

[graphic of american century logo and text logo (reg. sm)]

American Century
Investments

P.O. Box 419200
Kansas City, MO
64141-6200

Dear Investor,

We believe our relationship with you begins with an easy-to-read prospectus that
provides you with the information you need to make informed and confident
decisions about your investments.

Sincerely,

/s/Donna Byers

Donna Byers
Senior Vice President
Direct Sales and Services
American Century Services Corporation

Table of Contents

AN OVERVIEW OF THE FUND.................................................... 2

FUND PERFORMANCE HISTORY................................................... 3

FEES AND EXPENSES.......................................................... 5

OBJECTIVES, STRATEGIES AND RISKS........................................... 6

BASICS OF FIXED-INCOME INVESTING........................................... 8

MANAGEMENT................................................................. 10

INVESTING WITH AMERICAN CENTURY............................................ 12

SHARE PRICE AND DISTRIBUTIONS.............................................. 18

TAXES...................................................................... 19

MULTIPLE CLASS INFORMATION................................................. 21

FINANCIAL HIGHLIGHTS....................................................... 22

[graphic of triangle]

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?

This fund seeks high current income that is exempt from federal and California
income tax.

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

The fund managers invest most of the fund's assets in high-yield municipal
securities, including junk and private activity bonds, issued by cities,
counties and other California municipalities, and U.S. territories.

* INTEREST RATE RISK - Generally, when interest rates rise, the value of the
fund's fixed-income securities will decline. The opposite is true when
interest rates decline.

* CREDIT RISK - The value of the fund's fixed-income securities will be
affected adversely by any erosion in the ability of the issuers of these
securities to make interest and principal payments as they become due.

* LIQUIDITY RISK - The market for lower-quality debt securities, including junk
bonds, is generally less liquid than the market for higher-quality debt
securities, and at times it may become difficult to sell the lower-quality
debt securities.

* PRINCIPAL LOSS - It is possible to lose money by investing in the fund.

A more detailed description of the fund's investment strategies and risks begins
on page 6.

WHO MAY WANT TO INVEST IN THE FUND?

The fund may be a good investment if you are

* a California resident or taxpayer
* seeking current tax-free income
* comfortable with risk based on California's economy
* comfortable with the fund's other investment risks
* seeking diversification by investing in a fixed-income mutual fund

WHO MAY NOT WANT TO INVEST IN THE FUND?

The fund may not be a good investment if you are

* investing in an IRA or other tax-advantaged retirement plan
* investing for long-term growth
* looking for the added security of FDIC insurance

[graphic of triangle]

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

- ------
2

FUND PERFORMANCE HISTORY

Annual Total Returns

CALIFORNIA HIGH-YIELD MUNICIPAL FUND - INVESTOR CLASS(1)

[data from bar chart]

2002 9.10%
2001 5.02%
2000 12.7%
1999 -3.31%
1998 6.73%
1997 10.50%
1996 5.89%
1995 18.29%
1994 -5.36%
1993 13.18%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 3.80%.

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

Highest Lowest
- --------------------------------------------------------------------------------
California High-Yield Municipal 7.18% (1Q 1995) -4.54% (1Q 1994)
- --------------------------------------------------------------------------------

- ------
3

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
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 period 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.

The benchmark is an unmanaged index that has no operating costs and is included
in the table for performance comparison.

INVESTOR CLASS

1 5 10 Life of
For the calendar year ended December 31, 2002 year years years Class(1)
- --------------------------------------------------------------------------------
California High-Yield Municipal
Return Before Taxes 9.10% 5.91% 7.05% 6.57%
Return After Taxes on Distributions 9.10% 5.84% 6.94% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 7.73% 5.78% 6.80% N/A
Lehman Brothers Long-Term Municipal Bond Index 10.43% 6.11% 7.23% 8.00%
(reflects no deduction for fees,
expenses and taxes)
- --------------------------------------------------------------------------------
(1) The inception date for the Investor Class is December 30, 1986. Only a fund
with performance history for less than 10 years shows after-tax returns for
life of fund.

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
a fund will perform in the future.

For current performance information, including yields, please call us at
1-800-345-2021 or visit us at www.americancentury.com.

- ------
4

FEES AND EXPENSES

There are no sales loads, fees or other charges

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

(1) Applies only to investors whose total investments with American Century are
less than $10,000. See Account Maintenance Fee under Investing with
American Century for more details.

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

EXAMPLE

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

* invest $10,000 in the fund
* redeem all of your shares at the end of the periods shown below
* earn a 5% return each year
* incur the same operating expenses as shown above

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

1 year 3 years 5 years 10 years
- ------------------------------------------------------------------------------
California High-Yield Municipal
Investor Class $55 $173 $301 $676
- ------------------------------------------------------------------------------

- ------
5

OBJECTIVES, STRATEGIES AND RISKS

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The fund seeks high current income that is exempt from federal and California
income taxes.

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVE?

The fund managers must invest at least 80% of the fund's assets in MUNICIPAL
SECURITIES with income payments exempt from federal and California income taxes.
Cities, counties and other municipalities in California and U.S. territories,
such as Puerto Rico, usually issue these securities for public projects, such as
schools, roads and water and sewer systems.

[graphic of triangle]

MUNICIPAL SECURITIES are a debt obligation issued by or on behalf of a
state, its political subdivisions, agencies or instrumentalities, the
District of Columbia or a U.S. territory or possession.

The fund managers also may buy long- and intermediate-term debt securities with
income 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 athletic stadiums, airports and apartment
buildings.

The fund managers seek to invest in securities that will result in a high yield
for the fund. To accomplish this, the fund managers buy investment-grade
securities, securities rated below investment grade, including so-called junk
bonds and bonds that are in technical or monetary default, or unrated securities
determined by the advisor to be of similar quality. The issuers of these
securities often have short financial histories or questionable credit or have
had and may continue to have problems making interest and principal payments.

Although California High-Yield Municipal invests primarily for income, it also
employs techniques designed to realize capital appreciation. For example, the
fund managers may select bonds with maturities and coupon rates that position
the fund for potential capital appreciation for a variety of reasons, including
their view on the direction of future interest-rate movements and the potential
for a credit upgrade.

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.

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.

- ------
6

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?

The fund's investments often have high credit risk, which helps the fund pursue
a higher yield than more conservatively managed bond funds. Issuers of
high-yield securities are more vulnerable to real or perceived economic changes
(such as an economic downturn or a prolonged period of rising interest rates),
political changes or adverse developments specific to the issuer. These factors
may be more likely to cause an issuer of low-quality bonds to default on its
obligation to pay the interest and principal due under its securities.

The fund may invest in securities rated below investment grade or that are
unrated, including bonds that are in technical or monetary default. By
definition, the issuers of many of these securities have had and may continue to
have problems making interest and principal payments.

The market for lower-quality debt securities is generally less liquid than the
market for higher-quality securities. Adverse publicity and investor
perceptions, as well as new and proposed laws, also may have a greater negative
impact on the market for lower-quality securities.

Because the fund typically invests in intermediate-term and long-term bonds, the
fund's interest rate risk is higher than for funds with shorter weighted average
maturities, such as money market and short-term bond funds. See the discussion
on page 8 for more information about the effects of changing interest rates on
the fund's portfolio.

The fund is NONDIVERSIFIED. As such, it may hold large positions in a small
number of securities. If so, a price change in any one of those securities may
have a greater impact on the fund's share price than would be the case in a
diversified fund.

[graphic of triangle]

A NONDIVERSIFIED fund may invest a greater percentage of its assets in
a smaller number of securities than a diversified fund.

Some or all of the fund's income may be subject to the federal alternative
minimum tax.

Because the fund invests primarily in municipal securities, it will be sensitive
to events that affect California's economy. California High-Yield Municipal 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.

- ------
7

BASICS OF FIXED-INCOME INVESTING

DEBT SECURITIES

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

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

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

* evaluating current economic conditions and assessing the risk of inflation

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

WEIGHTED AVERAGE MATURITY

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 fund faces 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.

- ------
8

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:

Credit Risk

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.

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 a 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.

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, please review the Statement of Additional Information before making
an investment.

Liquidity Risk

- ------
9

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 two-thirds of the trustees are independent of the fund's advisor; that
is, they are not employed by and have no financial interest in the advisor.

THE INVESTMENT ADVISOR

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

The advisor is responsible for managing the investment portfolio 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 provided to the fund during the most recent fiscal year, the
advisor received a unified management fee of 0.53% of the average net assets of
the Investor Class shares of the fund. The rate of the management fee for the
fund is determined daily on a class-by-class basis using a two-step formula that
takes into account the fund's strategy (money market, bond or equity) and the
total amount of mutual fund assets the advisor manages. The management fee is
paid monthly in arrears.

The Statement of Additional Information contains detailed information about the
calculation of the management fee. Out of that fee, the advisor paid all
expenses of managing and operating the fund except brokerage expenses, taxes,
interest, fees and expenses of the independent trustees (including legal counsel
fees), and extraordinary expenses. A portion of the 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.

- ------
10

THE FUND MANAGEMENT TEAM

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

The fund is managed by the Municipal Bond Team, whose members are identified
below.

G. DAVID MACEWEN

STEVEN M. PERMUT

ROBERT J. MILLER

KENNETH M. SALINGER

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 fund.
Among other provisions, the Code of Ethics prohibits portfolio managers and
other investment personnel from buying securities in an initial public offering
or profiting from the purchase and sale of the same security within 60 calendar
days. In addition, the Code of Ethics requires portfolio managers and other
employees with access to information about the purchase or sale of securities by
the fund to obtain approval before executing permitted personal trades.

FUNDAMENTAL INVESTMENT POLICIES

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

- ------
11

INVESTING WITH AMERICAN CENTURY

SERVICES AUTOMATICALLY AVAILABLE TO YOU

CONDUCTING BUSINESS IN WRITING

A NOTE ABOUT MAILINGS TO SHAREHOLDERS

YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS

WAYS TO MANAGE YOUR ACCOUNT

- --------------------------------------------------------------------------------
ONLINE
- --------------------------------------------------------------------------------

OPEN AN ACCOUNT

EXCHANGE SHARES

Exchange shares from another American Century account.

MAKE ADDITIONAL INVESTMENTS

Make an additional investment into an established American Century account if
you have authorized us to invest from your bank account.

SELL SHARES*

Redeem shares and proceeds will be electronically transferred to your authorized
bank account.

* Online redemptions up to $25,000 per day.

- ------
12

- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------

Investor Relations
1-800-345-2021

Business, Not-For-Profit and
Employer-Sponsored Retirement Plans
1-800-345-3533

Automated Information Line
1-800-345-8765

OPEN AN ACCOUNT

If you are a current investor, you can open an account by exchanging shares from
another American Century account.

EXCHANGE SHARES

Call or use our Automated Information Line if you have authorized us to accept
telephone instructions.

MAKE ADDITIONAL INVESTMENTS

Call or use our Automated Information Line if you have authorized us to invest
from your bank account.

SELL SHARES

Call a Representative.

- --------------------------------------------------------------------------------
BY WIRE
- --------------------------------------------------------------------------------

Please remember, if you request redemptions by wire, $10 will be deducted from
the amount redeemed. Your bank also may charge a fee.

OPEN AN ACCOUNT

Call to set up your account or mail a completed application to the address
provided in the By Mail or Fax section. Give your bank the following information
to wire money.

* Our bank information
Commerce Bank N.A.
Routing No. 101000019
Account No. Please call for the appropriate account number
* The fund name
* Your American Century account number, if known*
* Your name
* The contribution year (for IRAs only)
* For additional investments only

MAKE ADDITIONAL INVESTMENTS

Follow the By Wire -- Open an account instructions.

SELL SHARES

You can receive redemption proceeds by wire or electronic transfer.

EXCHANGE SHARES

Not available.

- ------
13

- --------------------------------------------------------------------------------
BY MAIL OR FAX
- --------------------------------------------------------------------------------

P.O. Box 419200
Kansas City, MO 64141-6200

Fax
816-340-7962

OPEN AN ACCOUNT

Send a signed, completed application and check or money order payable to
American Century Investments.

EXCHANGE SHARES

Send written instructions to exchange your shares from one American Century
account to another.

MAKE ADDITIONAL INVESTMENTS

SELL SHARES

Send written instructions or a redemption form to sell shares. Call a
Representative to request a form.

- --------------------------------------------------------------------------------
AUTOMATICALLY
- --------------------------------------------------------------------------------

OPEN AN ACCOUNT

Not available.

EXCHANGE SHARES

Send written instructions to set up an automatic exchange of your shares from
one American Century account to another.

MAKE ADDITIONAL INVESTMENTS

With the automatic investment privilege, you can purchase shares on a regular
basis. You must invest at least $600 per year per account.

SELL SHARES

If you have at least $10,000 in your account, you may sell shares automatically
by establishing Check-A-Month or Automatic Redemption plans.

- --------------------------------------------------------------------------------
IN PERSON
- --------------------------------------------------------------------------------

If you prefer to handle your transactions in person, visit one of our Investor
Centers and a representative can help you open an account, make additional
investments, and sell or exchange shares.

4500 Main Street 4917 Town Center Drive
Kansas City, Missouri Leawood, Kansas
8 a.m. to 5:30 p.m., Monday - Friday 8 a.m. to 6 p.m., Monday - Friday
8 a.m. to noon, Saturday

1665 Charleston Road 10350 Park Meadows Drive
Mountain View, California Littleton, Colorado
8 a.m. to 5 p.m., Monday - Friday 8:30 a.m. to 5:30 p.m., Monday - Friday

- ------
14

MINIMUM INITIAL INVESTMENT AMOUNTS

To open an account, the minimum investment is $5,000 for all accounts. This fund
is not available for retirement accounts.

ACCOUNT MAINTENANCE FEE

[graphic of triangle]

REDEMPTIONS

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

[graphic of triangle]

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

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15

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS

SIGNATURE GUARANTEES

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

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

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

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

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 a fund.

ABUSIVE TRADING PRACTICES

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

- ------
16

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

INVESTING THROUGH FINANCIAL INTERMEDIARIES

If you do business with us through a financial intermediary, your ability to
purchase, exchange and redeem shares will depend on the policies of that entity.
Some policy differences may include

* minimum investment requirements
* exchange policies
* fund choices
* cutoff time for investments

Please contact your FINANCIAL INTERMEDIARY 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.

[graphic of triangle]

FINANCIAL INTERMEDIARIES include banks, broker-dealers, insurance
companies and investment advisors.

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, American Century will pay the
service provider a fee for performing those services.

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

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.

RIGHT TO CHANGE POLICIES

- ------
17

SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

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

* a debt security has been declared in default

* trading in a security has been halted during the trading day

* the demand for the security (as reflected by its trading volume) is
insufficient for quoted prices to be reliable

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

[graphic of triangle]

GOOD ORDER means that your instructions have been received in the form
required by American Century. This may include, for example, providing
the fund name and account number, the amount of the transaction and
all required signatures.

DISTRIBUTIONS

Federal tax laws require 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 the fund, as well as CAPITAL GAINS realized
by the fund on the sale of its investment securities. The fund pays
distributions from net income monthly and generally pays distributions of
capital gains, if any, once a year, usually in December. The fund may make more
frequent distributions, if necessary, to comply with Internal Revenue Code
provisions. Distributions are reinvested automatically in additional shares
unless you choose another option.

[graphic of triangle]

CAPITAL GAINS are increases in the values of capital assets, such as
stock, from the time the assets are purchased.

- ------
18

TAXES

Tax-Exempt Income

Most of the income that the fund receives from municipal securities is exempt
from California and regular federal income taxes. However, corporate
shareholders should be aware that distributions are subject to California's
corporate franchise tax.

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

Taxable Income

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

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

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

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

[graphic of triangle]

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%
- -------------------------------------------------------------------------------

- ------
19

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

Buying a Dividend

The risk in buying a dividend is that the fund's portfolio may build up taxable
gains throughout the period covered by a distribution, as securities are sold at
a profit. The 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.

- ------
20

MULTIPLE CLASS INFORMATION

American Century offers four classes of shares of the fund through financial
intermediaries: Investor Class, A Class, B Class and C Class. The shares offered
by this Prospectus are Investor Class shares, which have no upfront or deferred
charges, commissions or 12b-1 fees.

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 and not the result of any difference
in amounts charged by the advisor for core investment advisory services.
Accordingly, the core investment advisory expenses do not vary by class.
Different fees and expenses will affect performance. For additional information
concerning the A, B or C Class shares, call us at 1-800-378-9878.

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

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

- ------
21

FINANCIAL HIGHLIGHTS

UNDERSTANDING THE FINANCIAL HIGHLIGHTS

The table on the next page itemizes what contributed to the changes in share
price during the most recently ended fiscal year. It also shows the changes in
share price for this period in comparison to changes over the last five fiscal
years.

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

* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to investors
* share price at the end of the period

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

* TOTAL RETURN - the overall percentage of return of the fund, assuming the
reinvestment of all distributions

* EXPENSE RATIO - the operating expenses of the fund as a percentage of average
net assets

* NET INCOME RATIO - the net investment income of the fund as a percentage of
average net assets

* PORTFOLIO TURNOVER - the percentage of the fund's investment portfolio that
is replaced during the period

- ------
23

CALIFORNIA HIGH-YIELD MUNICIPAL FUND
Investor Class

For a Share Outstanding Throughout the Years Ended August 31
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.84 $9.79 $9.44 $9.36 $9.93
- ---------------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------------------------------
Net Investment Income 0.52 0.52 0.52 0.52 0.49
- ---------------------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.19) 0.05 0.35 0.08 (0.46)
- ---------------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.33 0.57 0.87 0.60 0.03
- ---------------------------------------------------------------------------------------------------------------
Distributions
- ---------------------------------------------------------
From Net Investment Income (0.52) (0.52) (0.52) (0.52) (0.49)
- ---------------------------------------------------------
From Net Realized Gains -- -- -- -- (0.11)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.52) (0.52) (0.52) (0.60)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.65 $9.84 $9.79 $9.44 $9.36
===============================================================================================================
TOTAL RETURN(1) 3.35% 6.07% 9.50% 6.70% 0.26%

RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.54% 0.54% 0.54% 0.54% 0.54%
- ---------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.24% 5.37% 5.45% 5.64% 5.08%
- ---------------------------------------------------------
Portfolio Turnover Rate 30% 32% 47% 52% 59%
- ---------------------------------------------------------
Net Assets, End of Period (in thousands) $334,032 $373,061 $336,400 $318,197 $341,968
- ---------------------------------------------------------------------------------------------------------------

(1) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. The total return of the classes may not
precisely reflect the class expense differences because of the impact of
calculating the net asset values to two decimal places. If net asset values
were calculated to three decimal places, the total return differences would
more closely reflect the class expense differences. The calculation of net
asset values to two decimal places is made in accordance with SEC
guidelines and does not result in any gain or loss of value between one
class and another.

- ------
23

NOTES

- -----
24

NOTES

- ------
25

MORE INFORMATION ABOUT THE FUND IS CONTAINED IN THESE DOCUMENTS

Annual and Semiannual Reports

Annual and semiannual reports contain more information about the fund's
investments and the market conditions and investment strategies that
significantly affected the fund's performance during the most recent fiscal
period.

Statement of Additional Information (SAI)

The SAI contains a more detailed, legal description of the fund's 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 fund or your accounts, by contacting American Century at the
address or telephone numbers listed below.

You also can get information about the fund (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 * EDGAR database at www.sec.gov
* By email request at publicinfo@sec.gov

By mail SEC Public Reference Section
Washington, D.C. 20549-0102

Fund Reference Fund Code Ticker Newspaper Listing
- ----------------------------------------------------------------------------
California High-Yield Municipal
Investor Class 933 BCHYX CaHYMu
- ----------------------------------------------------------------------------

Investment Company Act File No. 811-0816

AMERICAN CENTURY INVESTMENTS
P.O. Box 419200
Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575
www.americancentury.com

0401
SH-PRS-35869

Your

American Century

prospectus

A CLASS

B CLASS

C CLASS

California High-Yield Municipal Fund

JANUARY 1, 2004

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

American Century
Investment Services, Inc.

[graphic of american century logo and text logo (reg. sm)]

American Century
Investments

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

Dear Investor,

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

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

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

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

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

Sincerely,

/s/Brian Jeter

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

Table of Contents

AN OVERVIEW OF THE FUND.................................................... 2

FUND PERFORMANCE HISTORY................................................... 3

FEES AND EXPENSES.......................................................... 5

OBJECTIVES, STRATEGIES AND RISKS........................................... 7

BASICS OF FIXED-INCOME INVESTING........................................... 9

MANAGEMENT................................................................. 11

INVESTING WITH AMERICAN CENTURY............................................ 13

SHARE PRICE AND DISTRIBUTIONS.............................................. 20

TAXES...................................................................... 21

MULTIPLE CLASS INFORMATION................................................. 23

FINANCIAL HIGHLIGHTS....................................................... 24

[graphic of triangle]

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?

This fund seeks high current income that is exempt from federal and California
income tax.

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

* INTEREST RATE RISK - Generally, when interest rates rise, the value of the
fund's fixed-income securities will decline. The opposite is true when
interest rates decline.

* PRINCIPAL LOSS - It is possible to lose money by investing in the fund.

A more detailed description of the fund's investment strategies and risks begins
on page 7.

WHO MAY WANT TO INVEST IN THE FUND?

The fund may be a good investment if you are

WHO MAY NOT WANT TO INVEST IN THE FUND?

The fund may not be a good investment if you are

* investing in an IRA or other tax-advantaged retirement plan
* investing for long-term growth
* looking for the added security of FDIC insurance

[graphic of triangle]

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

- ------
2

FUND PERFORMANCE HISTORY

When the A, B or C Class of the fund has investment results for a full calendar
year, this section will feature charts that show

* Annual Total Returns

* Highest and Lowest Quarterly Returns

* Average Annual Total Returns, including a comparison of these returns to a
benchmark index

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

Annual Total Returns

CALIFORNIA HIGH-YIELD MUNICIPAL FUND - INVESTOR CLASS(1)

[data from bar chart]

2002 9.10%
2001 5.02%
2000 12.7%
1999 -3.31%
1998 6.73%
1997 10.50%
1996 5.89%
1995 18.29%
1994 -5.36%
1993 13.18%

(1) As of September 30, 2003, the end of the most recent calendar quarter, the
fund's year-to-date return was 3.80%.

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

- ------
3

Average Annual Total Returns

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

Return Before Taxes shows the actual change in the value of fund shares over the
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 period 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.

The benchmark is an unmanaged index that has no operating costs and is included
in the table for performance comparison.

INVESTOR CLASS

1 5 10 Life of
For the calendar year ended December 31, 2002 year years years Class(1)
- --------------------------------------------------------------------------------
California High-Yield Municipal
Return Before Taxes 9.10% 5.91% 7.05% 6.57%
Return After Taxes on Distributions 9.10% 5.84% 6.94% N/A
Return After Taxes on Distributions
and Sale of Fund Shares 7.73% 5.78% 6.80% N/A
Lehman Brothers Long-Term Municipal Bond Index 10.43% 6.11% 7.23% 8.00%
(reflects no deduction for fees,
expenses and taxes)
- --------------------------------------------------------------------------------
(1) The inception date for the Investor Class is December 30, 1986. Only a
fund with performance history for less than 10 years shows after-tax
returns for life of fund.

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 fund will perform in the future.

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

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4

FEES AND EXPENSES

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

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

A Class B Class C Class
- -------------------------------------------------------------------------------
Maximum Sales Charge (Load) 4.50% None None
Imposed on Purchases
(as a percentage of offering price)
- -------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) None(1) 5.00%(2) 1.00%(3)
(as a percentage of the original offering
price for B Class shares or the lower
of the original offering price or redemption
proceeds for A and C Class shares)
- -------------------------------------------------------------------------------

(1) Investments of $1 million or more in A Class shares may be subject to a
contingent deferred sales charge of 1.00% if the shares are redeemed within
one year of the date of purchase.
(2) This charge is 5.00% during the first year after purchase, declines over
the next five years as shown on page 15, and is eliminated after six years.

(3) The charge is 1.00% during the first year after purchase and is eliminated
thereafter.

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

Total
Annual
Distribution Fund
Management and Service Other Operating
Fee(1) (12b-1) Fees(2) Expenses(3) Expenses
- --------------------------------------------------------------------------------
California High-Yield Municipal
A Class 0.53% 0.25% 0.01% 0.79%
- --------------------------------------------------------------------------------
B Class 0.53% 1.00% 0.01% 1.54%
- --------------------------------------------------------------------------------
C Class 0.53% 1.00% 0.01% 1.54%
- --------------------------------------------------------------------------------

(1) Based on assets of all classes of the fund during the 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 fund assets increase and
increases as fund assets decrease.

(2) The 12b-1 fee is designed to permit investors to purchase shares through
broker-dealers, banks, insurance companies and other financial
intermediaries. A portion of the fee is used to compensate such financial
intermediaries for ongoing recordkeeping and administrative services that
would otherwise be performed by an affiliate of the advisor, and a portion
is used to compensate them for distribution and other shareholder services.
For more information, see Service and Distribution Fees, page 23.

(3) Other expenses include the fees and expenses of the fund's independent
trustees and their legal counsel, as well as interest.

- ------
5

EXAMPLE

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

* invest $10,000 in the fund
* redeem all of your shares at the end of the periods shown below
* earn a 5% return each year
* incur the same operating expenses as shown above

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

1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------
California High-Yield Municipal
A Class $527 $691 $868 $1,381
- ----------------------------------------------------------------------------
B Class $556 $784 $935 $1,622
- ----------------------------------------------------------------------------
C Class $156 $484 $835 $1,821
- ----------------------------------------------------------------------------

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

1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------
California High-Yield Municipal
A Class $527 $691 $868 $1,381
- ----------------------------------------------------------------------------
B Class $156 $484 $835 $1,622
- ----------------------------------------------------------------------------
C Class $156 $484 $835 $1,821
- ----------------------------------------------------------------------------

- ------
6

OBJECTIVES, STRATEGIES AND RISKS

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The fund seeks high current income that is exempt from federal and California
income taxes.

HOW DOES THE FUND PURSUE ITS INVESTMENT OBJECTIVE?

[graphic of triangle]

MUNICIPAL SECURITIES are a debt obligation issued by or on behalf of a
state, its political subdivisions, agencies or instrumentalities, the
District of Columbia or a U.S. territory or possession.

WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?

- ------
7

Because the fund typically invests in intermediate-term and long-term bonds, the
fund's interest rate risk is higher than for funds with shorter weighted average
maturities, such as money market and short-term bond funds. See the discussion
on page 9 for more information about the effects of changing interest rates on
the fund's portfolio.

[graphic of triangle]

A NONDIVERSIFIED fund may invest a greater percentage of its assets in
a smaller number of securities than a diversified fund.

Some or all of the fund's income may be subject to the federal alternative
minimum tax.

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 the 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.

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.

- ------
8

BASICS OF FIXED-INCOME INVESTING

DEBT SECURITIES

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

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

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

* evaluating current economic conditions and assessing the risk of inflation

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

WEIGHTED AVERAGE MATURITY

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 fund faces 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.

- ------
9

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 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.

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 a 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 fund will not necessarily sell debt
securities if they are downgraded by a rating agency.

Liquidity Risk

- ------
10

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 INVESTMENT ADVISOR

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

The Statement of Additional Information contains detailed information about the
calculation of the management fee. Out of that fee, the advisor pays all
expenses of managing and operating the 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.

Management Fees Paid by the Funds to the Advisor
as a Percentage of Average Net Assets for the Most
Recent Fiscal Year Ended August 31, 2003 A Class B Class C Class
- -------------------------------------------------------------------------------
California High-Yield Municipal 0.53% 0.53% 0.53%
- -------------------------------------------------------------------------------

- ------
11

THE FUND MANAGEMENT TEAM

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

The fund is managed by the Municipal Bond Team, whose members are identified
below.

G. DAVID MACEWEN

STEVEN M. PERMUT

ROBERT J. MILLER

KENNETH M. SALINGER

Code of Ethics

FUNDAMENTAL INVESTMENT POLICIES

- ------
12

INVESTING WITH AMERICAN CENTURY

CHOOSING A SHARE CLASS

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

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

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

A Class B Class
- --------------------------------------------------------------------------------
Initial sales charge(1) No initial sales charge
- --------------------------------------------------------------------------------
Generally no CDSC(2) Contingent deferred sales charge
on redemptions within six years
- --------------------------------------------------------------------------------
12b-1 fee of 0.25% 12b-1 fee of 1.00%
- --------------------------------------------------------------------------------
No conversion feature Convert to A Class shares
eight years after purchase
- --------------------------------------------------------------------------------
Generally more appropriate Purchase orders limited to amounts
for long-term investors less than $100,000
- --------------------------------------------------------------------------------

C Class
- --------------------------------------------------------------------------------
No initial sales charge
- --------------------------------------------------------------------------------
Contingent deferred sales charge on redemptions within 12 months
- --------------------------------------------------------------------------------
12b-1 fee of 1.00%
- --------------------------------------------------------------------------------
No conversion feature
- --------------------------------------------------------------------------------
Purchase orders limited to amounts less than $1,000,000; generally more
appropriate for short-term investors
- --------------------------------------------------------------------------------

(1) The sales charge for A Class shares decreases depending on the size of your
investment, and may be waived for some purchases. There is no sales charge
for purchases of $1,000,000 or more.

(2) A CDSC of 1.00% will be charged on certain purchases of $1,000,000 or more
that are redeemed within one year of purchase.

MINIMUM INITIAL INVESTMENT AMOUNTS (FOR ALL CLASSES)

To open an account, the minimum investment is $5,000 for all accounts. This fund
is not available for retirement accounts.

- ------
13

CALCULATION OF SALES CHARGES

A Class

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

Sales Charge Sales Charge Amount paid to
as a % of as a % of Financial Advisor
Purchase Amount Offering Price Net Amount as a % of
Invested Offering Price
- --------------------------------------------------------------------------------
Less than $50,000 4.50% 4.71% 4.00%
- --------------------------------------------------------------------------------
$50,000 - $99,999 4.50% 4.71% 4.00%
- --------------------------------------------------------------------------------
$100,000 - $249,999 3.50% 3.63% 3.00%
- --------------------------------------------------------------------------------
$250,000 - $499,999 2.50% 2.56% 2.00%
- --------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 2.04% 1.75%
- --------------------------------------------------------------------------------
$1,000,000 - $3,999,999 0.00% 0.00% 1.00%(1)
- --------------------------------------------------------------------------------
$4,000,000 - $9,999,999 0.00% 0.00% 0.50%(1)
- --------------------------------------------------------------------------------
$10,000,000 or more 0.00% 0.00% 0.25%(1)
- --------------------------------------------------------------------------------
(1) For purchases over $1,000,000 by qualified retirement plans, no upfront
amount will be paid to financial advisors.

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

Reductions and Waivers of Sales Charges for A Class

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

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

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

* Certain trust accounts

* Solely controlled business accounts

* Single-participant retirement plans

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

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

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

- ------
14

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

Waivers for Certain Investors. The sales charge on A Class shares may be waived
for:

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

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

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

* qualified retirement plan purchases

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

* certain other investors as deemed appropriate by American Century

B Class

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

Redemptions During CDSC as a % of Original Purchase Price
- --------------------------------------------------------------------------------
1st year 5.00%
- --------------------------------------------------------------------------------
2nd year 4.00%
- --------------------------------------------------------------------------------
3rd year 3.00%
- --------------------------------------------------------------------------------
4th year 3.00%
- --------------------------------------------------------------------------------
5th year 2.00%
- --------------------------------------------------------------------------------
6th year 1.00%
- --------------------------------------------------------------------------------
After 6th year None
- --------------------------------------------------------------------------------

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

C Class

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

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

- ------
15

CALCULATION OF CONTINGENT DEFERRED SALES CHARGE (CDSC)

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

CDSC WAIVERS

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

* redemptions through systematic withdrawal plans not exceeding annually:

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

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

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

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

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

* tax-free returns of excess contributions to IRAs

* redemptions due to death or post-purchase disability

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

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

* if no broker was compensated for the sale

BUYING AND SELLING SHARES

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

* minimum investment requirements
* exchange policies
* fund choices
* cutoff time for investments

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

The fund has authorized certain FINANCIAL INTERMEDIARIES to accept orders on the
fund's behalf. American Century has contracts with these intermediaries
requiring them to track the time investment orders are received and to comply
with procedures relating to the transmission of orders. Orders must be received
by the intermediary on the 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.

[graphic of triangle]

FINANCIAL INTERMEDIARIES include banks, broker-dealers, insurance
companies and investment advisors.

- ------
16

REINSTATEMENT PRIVILEGE

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

EXCHANGING SHARES

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

* The exchange is for a minimum of $100

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

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

MODIFYING OR CANCELING AN INVESTMENT

ABUSIVE TRADING PRACTICES

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

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

YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS

- ------
17

REDEMPTIONS

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

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

[graphic of triangle]

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

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS

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

- ------
18

SIGNATURE GUARANTEES

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

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

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

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

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

RIGHT TO CHANGE POLICIES

- ------
19

SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

* a debt security has been declared in default

* trading in a security has been halted during the trading day

* the demand for the security (as reflected by its trading volume) is
insufficient for quoted prices to be reliable

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

[graphic of triangle]

GOOD ORDER means that your instructions have been received in the form
required by American Century. This may include, for example, providing
the fund name and account number, the amount of the transaction and
all required signatures.

DISTRIBUTIONS

Federal tax laws require 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 the fund, as well as CAPITAL GAINS
realized by the fund on the sale of its investment securities. The fund pays
distributions from net income monthly and generally pays distributions of
capital gains, if any, once a year, usually in December. A fund may make more
frequent distributions, if necessary, to comply with Internal Revenue Code
provisions. Distributions are reinvested unless you elect to receive them in
cash.

[graphic of triangle]

CAPITAL GAINS are increases in the values of capital assets, such as
stock, from the time the assets are purchased.

- ------
20

TAXES

Tax-Exempt Income

Taxable Income

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

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

[graphic of triangle]

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:

- ------
21

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

Buying a Dividend

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.

- ------
22

MULTIPLE CLASS INFORMATION

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

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

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

Except as described herein, all classes of shares of the 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 such class; (d) each class may
have different exchange privileges; and (e) the B Class provides for automatic
conversion from that class into shares of the A Class of the same fund after
eight years.

Service and Distribution Fees

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

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

- ------
23

FINANCIAL HIGHLIGHTS

UNDERSTANDING THE FINANCIAL HIGHLIGHTS

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

On a per-share basis, the tables include as appropriate

* share price at the beginning of the period
* investment income and capital gains or losses
* distributions of income and capital gains paid to investors
* share price at the end of the period

The tables also include some key statistics for the period as appropriate

* TOTAL RETURN - the overall percentage of return of the fund, assuming the
reinvestment of all distributions

* EXPENSE RATIO - the operating expenses of the fund as a percentage of average
net assets

* NET INCOME RATIO - the net investment income of the fund as a percentage of
average net assets

* PORTFOLIO TURNOVER - the percentage of the fund's investment portfolio that
is replaced during the period

- ------
24

CALIFORNIA HIGH-YIELD MUNICIPAL FUND
A Class

For a Share Outstanding Throughout the Period Indicated
- ---------------------------------------------------------------------------
2003(1)
- ---------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.79
- ---------------------------------------------------------------------------
Income From Investment Operations
- ----------------------------------------------------------------
Net Investment Income 0.29
- ----------------------------------------------------------------
Net Realized and Unrealized Loss (0.14)
- ---------------------------------------------------------------------------
Total From Investment Operations 0.15
- ---------------------------------------------------------------------------
Distributions
- ----------------------------------------------------------------
From Net Investment Income (0.29)
- ---------------------------------------------------------------------------
Net Asset Value, End of Period $9.65
===========================================================================
TOTAL RETURN(2) 1.48%

RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.78%(3)
- ----------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 5.04%(3)
- ----------------------------------------------------------------

Portfolio Turnover Rate 30%(4)
- ----------------------------------------------------------------
Net Assets, End of Period (in thousands) $1,286
- ---------------------------------------------------------------------------

(1) January 31, 2003 (commencement of sale) through August 31, 2003.

(2) Total return assumes reinvestment of net investment income and capital
gains distributions, if any, and does not include any applicable sales
charges. Total returns for periods less than one year are not annualized.
The total return of the classes may not precisely reflect the class expense
differences because of the impact of calculating the net asset values to
two decimal places. If net asset values were calculated to three decimal
places, the total return differences would more closely reflect the class
expense differences. The calculation of net asset values to two decimal
places is made in accordance with SEC guidelines and does not result in any
gain or loss of value between one class and another.

(3) Annualized.

(4) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended August 31, 2003.

- -----
25

CALIFORNIA HIGH-YIELD MUNICIPAL FUND
B Class

For a Share Outstanding Throughout the Period Indicated
- ------------------------------------------------------------------------------
2003(1)
- ------------------------------------------------------------------------------
PER-SHARE DATA
- ------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.79
- ------------------------------------------------------------------------------
Income From Investment Operations
- ---------------------------------------------------------------------
Net Investment Income 0.25
- ---------------------------------------------------------------------
Net Realized and Unrealized Loss (0.14)
- ------------------------------------------------------------------------------
Total From Investment Operations 0.11
- ------------------------------------------------------------------------------
Distributions
- ---------------------------------------------------------------------
From Net Investment Income (0.25)
- ------------------------------------------------------------------------------
Net Asset Value, End of Period $9.65
==============================================================================
TOTAL RETURN(2) 1.05%

RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 1.53%(3)
- ---------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.43%(3)
- ---------------------------------------------------------------------
Portfolio Turnover Rate 30%(4)
- ---------------------------------------------------------------------
Net Assets, End of Period (in thousands) $352
- ------------------------------------------------------------------------------

(1) January 31, 2003 (commencement of sale) through August 31, 2003.

(3) Annualized.

(4) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended August 31, 2003.

- ------
26

CALIFORNIA HIGH-YIELD MUNICIPAL FUND
C Class

For a Share Outstanding Throughout the Period Indicated
- ------------------------------------------------------------------------------
2003(1)
- ------------------------------------------------------------------------------
PER-SHARE DATA
- ------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $9.79
- ------------------------------------------------------------------------------
Income From Investment Operations
- ----------------------------------------------------------------------
Net Investment Income 0.26
- ----------------------------------------------------------------------
Net Realized and Unrealized Loss (0.14)
- ------------------------------------------------------------------------------
Total From Investment Operations 0.12
- ------------------------------------------------------------------------------
Distributions
- ----------------------------------------------------------------------
From Net Investment Income (0.26)
- ------------------------------------------------------------------------------
Net Asset Value, End of Period $9.65
==============================================================================
TOTAL RETURN(2) 1.22%

RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 1.28%(3)
- ----------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.59%(3)
- ----------------------------------------------------------------------
Portfolio Turnover Rate 30%(4)
- ----------------------------------------------------------------------
Net Assets, End of Period (in thousands) $2,681
- ------------------------------------------------------------------------------

(1) January 31, 2003 (commencement of sale) through August 31, 2003.

(3) Annualized.

(4) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended August 31, 2003.

- ------
27

NOTES

- ------
28

NOTES

- ------
29

MORE INFORMATION ABOUT THE FUND IS CONTAINED IN THESE DOCUMENTS

ANNUAL AND SEMIANNUAL REPORTS

Statement of Additional Information (SAI)

You also can get information about the fund (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 * EDGAR database at www.sec.gov
* By email request at publicinfo@sec.gov

By mail SEC Public Reference Section
Washington, D.C. 20549-0102

Fund Reference Fund Code Ticker Newspaper Listing
- ------------------------------------------------------------------------------
California High-Yield Municipal
A Class 133 CAYAX CaHYMu
- ------------------------------------------------------------------------------
B Class 333 CAYBX CaHYMu
- ------------------------------------------------------------------------------
C Class 433 CAYCX CaHYMu
- ------------------------------------------------------------------------------

Investment Company Act File No. 811-0816

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

0401
SH-PRS-35870

American Century

statement of

additional information

JANUARY 1, 2004

American Century California Tax-Free
and Municipal Funds

California Tax-Free Money Market Fund

California Limited-Term Tax-Free Fund

California Intermediate-Term Tax-Free Fund

California Long-Term Tax-Free Fund

California High-Yield Municipal Fund

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

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

American Century
Investment Services, Inc.

[graphic of american century logo and text logo (reg. sm)]

Table of Contents

The Funds' History........................................................ 2

Fund Investment Guidelines................................................ 2
California Tax-Free Money Market Fund................................ 3
California Limited-Term Tax-Free Fund, California
Intermediate-Term Tax-Free Fund, California Long-Term
Tax-Free Fund........................................................ 4
California High-Yield Municipal Fund................................. 4

Fund Investments and Risks................................................ 5
Investment Strategies and Risks...................................... 5

Investment Policies.................................................. 20
Fundamental Investment Policies...................................... 21
Temporary Defensive Measures......................................... 22
Portfolio Turnover................................................... 22

Management................................................................ 23
The Board of Trustees................................................ 26
Ownership of Fund Shares............................................. 28
Code of Ethics....................................................... 28
Proxy Voting Guidelines.............................................. 29

The Funds' Principal Shareholders......................................... 30

Service Providers......................................................... 31
Investment Advisor................................................... 31
Transfer Agent and Administrator..................................... 34
Distributor.......................................................... 34

Other Service Providers................................................... 34
Custodian Banks...................................................... 34
Independent Accountants.............................................. 34

Brokerage Allocation...................................................... 35

Information About Fund Shares............................................. 35
Multiple Class Structure............................................. 36
Buying and Selling Fund Shares....................................... 42
Valuation of a Fund's Securities..................................... 42
Money Market Funds................................................... 42
Non-Money Market Funds............................................... 43

Taxes..................................................................... 44
Federal Income Tax................................................... 44
Alternative Minimum Tax.............................................. 45
State and Local Taxes................................................ 46

How Fund Performance Information Is Calculated............................ 46
Performance Comparisons.............................................. 49
Permissible Advertising Information.................................. 50
Multiple Class Performance Advertising............................... 50

Financial Statements...................................................... 50

Explanation of Fixed-Income Securities Ratings............................ 51

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1

THE FUNDS' HISTORY

American Century California Tax-Free and Municipal Funds is a registered
open-end management investment company that was organized as a Massachusetts
business trust on February 18, 1983. From then until January 1997, it was known
as Benham California Tax-Free and Municipal Funds. Throughout this Statement of
Additional Information, we refer to American Century California Tax-Free and
Municipal Funds as the Trust.

Each fund 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/Class Ticker Symbol Inception Date
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California Tax-Free Money Market Fund
Investor Class BCTXX 11/09/1983
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California Limited-Term Tax-Free Fund
Investor Class BCSTX 06/01/1992
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California Intermediate-Term Tax-Free Fund
Investor Class BCITX 11/09/1983
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California Long-Term Tax-Free Fund
Investor Class BCLTX 11/09/1983
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California High-Yield Municipal Fund
Investor Class BCHYX 12/30/1986
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A Class CAYAX 01/31/2003
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B Class CAYBX 01/31/2003
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C Class CAYCX 01/31/2003
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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 5. In the case of the funds' principal investment
strategies, these descriptions elaborate upon discussion contained in the
Prospectuses.

Each fund is diversified as defined in the Investment Company Act of 1940 (the
Investment Company Act), with the exception of California High-Yield Municipal
Fund which is non-diversified. Diversified means that, with respect to 75% of
its total assets, a 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. Nondiversified means that a fund may invest a
greater percentage of its assets in a smaller number of securities than a
diversified fund.

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.

California 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 the rule, the fund must be
diversified with regard to 100% of its assets other than U.S. government
securities. For purposes of Rule 2a-7, diversified means that with respect to
75% of its assets, a fund must not invest more than 5% of its assets in

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2

securities of any one issuer or more than 10% of its assets in securities
guaranteed by any one guarantor other than the U.S. government. The money market
fund also must not invest more than (a) the greater of 1% of its assets or $1
million in conduit securities of a single issuer rated in the second highest
credit quality category; and (b) 5% of its assets in conduit securities rated in
the second highest credit quality category. Conduit securities are issued by
state or municipalities, but ultimate responsibility for the payment of
principal and interest rests with a nongovernmental entity, such as a
corporation or project.

Each fund intends to remain fully invested in municipal obligations. As a
fundamental policy, each fund will invest at least 80% of its net assets in
California municipal obligations. A municipal obligation is a "California"
municipal obligation if its income is exempt from California state income taxes.
This includes obligations of the Commonwealth of Puerto Rico and its public
corporations (as well as other territories such as Guam and the Virgin Islands),
which are exempt from federal and California state income taxes.

The remaining 20% of net assets may be invested in

(1) municipal obligations issued in other states and

(2) U.S. government obligations.

For temporary defensive purposes, each fund may invest more than 20% of its net
assets in U.S. government obligations. For liquidity purposes, each fund may
invest up to 5% of its total assets in shares of money market funds; the
non-money market funds may invest in money market funds managed by the advisor.

Each fund will invest at least 80% of its net assets in obligations with
interest exempt from regular federal income tax. California High-Yield
Municipal, unlike the other funds, may invest substantially all of its assets in
securities that are subject to the alternative minimum tax. See Alternative
Minimum Tax, page 45.

For an explanation of the securities ratings referred to in the Prospectus and
this Statement of Additional Information, see Explanation of Fixed-Income
Securities Ratings beginning on page 51.

CALIFORNIA TAX-FREE MONEY MARKET FUND

California Tax-Free Money Market seeks to maintain a $1 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:

* 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),

* maintains a dollar-weighted average maturity of 90 days or less, and

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

To be considered high-quality, an obligation must be

* a U.S. government obligation, or

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

* an unrated obligation judged by the advisor, pursuant to guidelines
established by the Board of Trustees, to be of a quality comparable to the
securities listed above.

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3

CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND

California Limited-Term Tax-Free, California Intermediate-Term Tax-Free and
California Long-Term Tax-Free have identical policies governing the quality of
securities in which they may invest. The funds differ in their maturity criteria
as stated in the Prospectus.

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

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

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

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

CALIFORNIA HIGH-YIELD MUNICIPAL FUND

California High-Yield Municipal invests primarily in long- and intermediate-term
California municipal obligations. Although California 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 (e.g., 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 California High-Yield Municipal'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 rating. 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 the fund may invest in unrated securities. The fund may
invest up to 10% of its total assets in securities that are in technical or
monetary default.

California 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 (e.g., 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.

California 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. The fund is not limited in its
investments in securities that are subject to the AMT. Therefore, the fund is
better suited for investors who do not expect alternative minimum tax liability.
See Taxes, page 44.

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4

FUND INVESTMENTS AND RISKS

INVESTMENT STRATEGIES AND RISKS

This section describes the investment vehicles and strategies 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 strategy 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 California Municipal Securities

As noted in the Prospectus, the funds are susceptible to political, economic and
regulatory events that affect issuers of California municipal obligations. These
include possible adverse effects of California constitutional amendments,
legislative measures, voter initiatives and other matters described below.

The following information about risk factors is provided in view of the funds'
policies of concentrating their assets in California municipal securities. This
information is based on recent official statements relating to securities
offerings of California issuers, although 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.

Economic Overview

California's economy, the largest among the 50 states and one of the largest in
the world, has major components in high technology, trade, entertainment,
agriculture, manufacturing, tourism, construction and services. The state's 2002
population of approximately 35 million, representing approximately 12% of the
U.S. population, has grown by nearly 9% since 1997. California's population is
concentrated in metropolitan areas. As of the April 1, 2000 census, 97 percent
of California's population resided in the 25 Metropolitan Statistical Areas in
the state. As of July 1, 2000, the 5-county Los Angeles area accounted for 48
percent of the state's population, with over 16.0 million residents, and the
10-county San Francisco Bay Area represented 21 percent, with a population of
over 7.0 million.

After experiencing strong employment gains in the second half of the 1990's,
California's economy slipped into a recession in early 2001, losing
approximately 290,000 jobs between March 2001 and January 2002. The recession
was concentrated in the State's high-tech sector and, geographically, in the San
Francisco Bay area. Employment grew by approximately 79,000 jobs between January
2002 and May 2002 as the State began to recover. The recovery then stalled and
since then the economy has been sluggish, with unemployment ranging between 6.6%
and 6.9% and employment falling by about 14,000 between May 2002 and June 2003.

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5

Constitutional Limitations on Taxes

Many California issuers rely on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by voters in
1978 and commonly known as "Proposition 13." Proposition 13 limits to 1% of full
cash value the rate of ad valorem taxes on real property and restricts the
reassessment of property to 2% per year, except where new construction or
changes of ownership have occurred (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness. The U.S. Supreme Court has upheld
Proposition 13 against claims that it has unlawfully resulted in widely varying
tax liability on similarly situated properties.

Proposition 13 also requires voters of any governmental unit to give two-thirds
approval to levy any special tax. Subsequent court decisions, however, have
allowed non-voter approved general taxes so long as they are not dedicated to a
specific use. In response to these decisions, voters adopted an initiative in
1986 that imposed new limits on the ability of local government entities to
raise or levy general taxes without voter approval. Based upon a 1991
intermediate appellate court decision, it was believed that significant parts of
this initiative, known as Proposition 62, were unconstitutional. On September
28, 1995, the California Supreme Court rendered a decision in the case of Santa
Clara County Local Transportation Authority vs. Guardino that rejected the prior
decision and upheld Proposition 62, while striking down a 1/2-cent sales tax for
transportation purposes that was approved by a majority, but less than
two-thirds, vote. Proposition 62 does not apply to charter cities, but other
local governments may be constrained in raising any taxes without voter
approval.

On November 5, 1996, California voters approved Proposition 218. This
proposition adds Articles XIIIC and XIIID to the state Constitution, which
affects the ability of local governments, including charter cities, to levy and
collect both existing and future taxes, assessments, fees and charges.
Proposition 218 became effective on November 6, 1996, although application of
some of its provisions was deferred until July 1, 1997. This proposition could
negatively impact a local government's ability to make its debt service
payments, and thus could result in lower credit ratings.

Constitutional Limitations on Appropriations

The state and its local governments are subject to an annual appropriations
limit imposed by Article XIIIB of the California Constitution. This article was
enacted by voters in 1979 and was significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the state and
certain local governments from spending "appropriations subject to limitation"
in excess of an appropriations limit. The appropriations limit is adjusted
annually to reflect population changes and changes in the cost of living as well
as transfers of responsibility between government units. "Appropriations subject
to limitation" are authorizations to spend "proceeds of taxes" consisting of tax
revenues and certain other charges and fees to the extent that such proceeds
exceed the cost of providing the product or service. However, proceeds of taxes
exclude most state subventions to local governments.

"Excess revenues" under Article XIIIB are measured over a two-year cycle. Local
governments must return any excess revenues to taxpayers through tax rate
reductions. The state must refund 50% of any excess and pay the other 50% to
schools and community colleges. With the application of more liberal annual
adjustment factors since 1988 and depressed revenues since 1990 due to the
recession, few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may, by voter
approval, exceed their spending limits for a limited time.

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6

Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and
possible inconsistencies in their terms and the impossibility of predicting
future appropriations, population changes, changes in the cost of living or the
probability of continuing legal challenges, it is difficult to measure the full
impact of these Articles on the California municipal market or on the ability of
California issuers to pay debt service on their obligations.

Obligations of the State of California

As of August 1, 2003, the state had outstanding approximately $30.3 billion in
aggregate principal amount of long-term general obligation bonds, and unused
voter authorizations for the future issuance of approximately $24 billion of
long-term general obligation bonds. In September 2003 the state issued $2.3
billion in tobacco securitization bonds and proposes to issue $1.9 billion in
pension obligation bonds to make fiscal year 2003-04 contributions to the
California Public Employees' Retirement System. In addition, the State plans to
issue approximately $10.7 in billion fiscal recovery bonds in February and
April, 2004. California's short-term debt levels have increased over the past
few years. As of September 1, 2003, the state had $11 billion in outstanding
revenue anticipation warrants, which are supported by forward warrant purchase
agreements with seven financial institutions. The state also anticipates issuing
approximately $3 billion in revenue anticipation notes in fall 2003.

The state's principal sources of General Fund revenues for fiscal year 2002-03
were the California personal income tax (45% of total revenues), the sales tax
(32% of total revenues), and bank and corporations taxes (9% of total revenues).
Historically, the state has paid the principal of and interest on its general
obligation bonds, lease-purchase debt and short-term obligations when due.

Pressures on the state's budget in the late 1980s and early 1990s were caused by
a combination of external economic conditions and growth of the largest General
Fund expenditure programs--K-12 education, health, welfare and corrections--at
rates faster than the revenue base. The largest state expenditure program is
assistance to local public school districts. In 1988, Proposition 98 was
enacted; it essentially guarantees local school districts and community college
districts a minimum share of the state's General Fund revenues.

Expenditures pressures continue as the state's overall population and school age
population continue to grow, and as the state's corrections program responds to
a "Three Strikes" law enacted in 1994 (which requires mandatory life prison
terms for certain third-time felony offenders). In addition, the long-term
impact of federal welfare reform on the state's budget is uncertain, especially
in a weaker economic environment.

State finances have improved from fiscal year 1995 to fiscal year 2001, due
primarily to stronger-than-anticipated revenue and lower-than-anticipated social
spending. The state finished fiscal year 2000-01 with an estimated $6.6 billion
General Fund balance (on a budgetary basis), down from a balance of $8.5 billion
the prior year.

But over the past two years, California has suffered from a weakened fiscal
position as a result of dramatic revenue underperformance in fiscal 2002 and
fiscal 2003 stemming primarily from lower-than-expected personal income tax
receipts combined with continued expenditure pressures of the late 1980s and
early 1990s. California now faces the most serious fiscal challenge in its
history as it has experienced the most dramatic decline in revenues since World
War II. The decline in State revenues is attributable in large part to declines
in personal income tax receipts, principally due to reduced stock market related
income tax revenues, such as capital gains realizations and stock option income,
in a state that derives a large share of its revenue from a sharply progressive
personal income tax. The State estimates that stock market related personal
income tax revenue declined from $17.9 billion in fiscal year 2000-01 to $6.1
billion in fiscal year 2001-02, and to $5.0 billion in 2002-03, a total 72%
decline.

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7

The state faced a sizable $38.2 billion two-year budget gap and has adopted
various recurring and non-recurring actions to address the state's budget gap.
Expenditure reductions, increased federal funding, tobacco securitization bonds,
and the restructuring of general obligation debt are among the actions to help
alleviate the deficit. Under the 2003 Budget Act, General Fund revenues are
projected to increase 3%, from $70.9 billion in 2002-03 to $73.3 billion in
2003-04. The revenue projections incorporate a 4% increase in State tax
revenues. General Fund expenditures are estimated to drop 9% from $78.1 billion
in 2002-03 to $71.1 billion in 2003-04. The state, with the 2003-04 budget,
closed the projected $38.2 billion deficit with the aid of the proposed issuance
of approximately $10.7 billion of fiscal recovery bonds, and $1.9 billion of
pension obligation bonds. Both bond deals are presently being challenged in
court.

Other highlights related to closing the 2003-04 budget gap:

(1) Cut expenditures by $17.6 billion ($2.1 billion in 2002-03 and $15.5 billion
in 2003-04) through the following actions:

* Suspended VLF backfill ($4.2 billion).

* Reduced employee compensation and abolished 16,000 permanent positions
through collective bargaining ($585 million from the General Fund and a
total of $1.1 billion from all funds).

* Changed Medi-Cal accounting from accrual to cash basis ($930 million).

* Partially suspended the transfer of gasoline sales tax revenue to
Transportation Investment Fund [to be repaid with interest by June 30,
2009 ($856 million)].

* Transferred Community Redevelopment Agency funds to the Educational
Revenue Augmentation Fund ($135 million).

* Reduced K-12 Education programs by $3.1 billion, including program cuts
($1.2 billion), COLA eliminations ($800 million) and permanent
Proposition 98 deferrals ($1.087 billion).

* Reduced Higher Education Programs by $1.186 billion, including University
of California ($484 million), California State University ($409 million)
and California Community Colleges ($293 million), some of which will be
offset by higher fees.

* Deferred a loan repayment from Caltrans ($500 million).

* Deferred funding of mandate deficiencies and new mandate costs ($870
million) and reduced non-Proposition 98 mandates ($769 million).

* Eliminated equalization funding for revenue limits ($250 million).

(2) Shifted funds totaling $4.36 billion, including $2.2 billion of federal
money.

(3) Anticipated revenues totaling $4.47 billion, which includes $2.0 billion in
tobacco securitization bond proceeds.

In May 2003, the Governor stated that California faced an estimated two-year
budget shortfall of $38.2 billion. Although the 2003 Budget Act is balanced, the
State will face an estimated $7.9 billion deficit in fiscal year 2004-05, which
will have to be addressed by future legislation or other budget solutions. The
ability of the State to meet its current budget estimates depends in large part
on its ability to implement the borrowings contemplated by the 2003 Budget Act.
The State has made no assurances that such borrowings will not be delayed as a
result of litigation or for other reasons.

The state's credit ratings have declined due to the budget crisis. In December
2002, Fitch downgraded the State's general obligation credit rating to "A." In
July 2003, Standard & Poor's downgraded the State's general obligation credit
rating to "BBB" and in August 2003, Moody's Investors Services downgraded such
rating to "A3" with a negative outlook. In January 2001, these ratings were
"AA," "AA" and "Aa2," respectively.

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8

Obligations of Other Issuers in California

Property tax revenues received by local governments declined more than 50%
following the passage of Proposition 13 in 1978. Subsequently, the California
legislature enacted measures to provide for the redistribution of the state's
General Fund surplus to local agencies, the reallocation of certain state
revenues to local agencies, and the assumption of certain government functions
by the state to assist the state's municipalities. However, in response to the
fiscal crisis at the state level, the Legislature in 1992-93 and 1993-94
effectively reversed the post-Proposition 13 bailout aid and directed over $3
billion of city, county and special district property taxes to school districts,
which enabled the state to reduce its aid to schools by the same amount. Part of
this shortfall is to be covered by a 0.5% sales tax allocated to local
governments for public safety purposes. The 0.5% sales tax increase was imposed
by Proposition 172, which was approved by a majority of voters at the statewide
election on November 2, 1993.

Even with these cuts and property tax shifts, more than 70% of the state's
General Fund expenditures are for local government assistance. To the extent
that the state is constrained by its Article XIIIB appropriations limit, its
obligation to conform to Proposition 98, or other fiscal considerations, the
absolute level or rate of growth of state assistance to local governments may be
reduced. Any such reductions in state aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties.

On October 7, 2003, Governor Gray Davis was recalled by the voters of
California. At the same time, Arnold Schwarzenegger was voted in as the new
Governor of the state of California. Mr. Schwarzenegger assumed office in late
November 2003. The aforementioned recall highlights the state's highly
politicized environment which could have a negative impact on the state's budget
process resulting in structurally imbalanced budgets.

Municipal Notes

Municipal notes 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 365 days
or less 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 the State of California 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.

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9

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, towns,
school districts and regional districts to fund a variety of public projects,
including construction of and improvements to schools, highways, and water and
sewer systems. General obligation 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 seaport facilities 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 user 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

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. 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. 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

Each fund may invest in fixed-rate bonds subject to third-party puts and in
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
option 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 advisor expects 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

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10

will be reflected as unrealized depreciation on the underlying security for the
period the put is held. Any gain on the sale of the underlying security will be
reduced by the cost of the put.

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

Tender Option Bonds

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

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

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

The advisor also takes 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 advisor
monitors 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. 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

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11

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, a fund 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 forth
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.

California and its municipalities are the largest issuers of municipal lease
obligations in the United States.

Inverse Floaters

The funds (except the money market fund) may hold inverse floaters. An inverse
floater is a type of derivative 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.

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12

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:

* 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.

* 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 California 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, 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.

Lower-quality bonds generally are unsecured and often are subordinated to other
obligations of the issuer. These bonds may have call or buy-back features that
permit the issuer to call or repurchase the bond from the holder. Premature
disposition of a lower-quality bond due to a call or buy-back feature,
deterioration of the issuer's creditworthiness, or a default may make it
difficult for the advisor to manage the flow of income to the fund, which may
have a negative tax impact on shareholders.

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13

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 the fund to do so. Reduced
liquidity also may hinder the advisor's ability to obtain market quotations for
purposes of valuing the 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.

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:

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

* Commercial Paper

* Certificates of Deposit and Euro Dollar Certificates of Deposit

* Bankers' Acceptances

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

* Repurchase agreements

* 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

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.

If a fund invests in U.S. government securities, a portion of dividends paid to
shareholders will be taxable at the federal level, and may be taxable at the
state level, as ordinary income. However, the advisor intends to minimize such
investments and, when suitable short-term municipal securities are unavailable,
may allow the funds to hold cash to avoid generating taxable dividends.

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 corporation or trust, or the deposit of
financial assets with a custodian, and the issuance of securities or depository
receipts backed by, or representing interests in, those assets.

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14

Some structured investments are individually negotiated agreements or are traded
over the counter. Structured investments may be organized and operated to
restructure the investment characteristics of the underlying security. 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 and interest
rate provisions, 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 asset-backed securities, commercial and
residential mortgage-backed securities, and collateralized mortgage securities,
which are described more fully below. 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 equity securities, currencies, interest rates, indices, or other
financial or nonfinancial 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,
securities prices or currency exchange rates, 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:

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

* 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;

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

* 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

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15

invest in a derivative security if it would be possible for a fund to lose more
money than it had invested. The policy also establishes a committee that must
review certain proposed purchases before the purchases can be made. A fund may
not invest in a structured or derivative security if its credit, interest rate,
liquidity, counterparty and other risks associated with ownership of the
security are outside acceptable limits set forth in the fund's prospectus.

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.

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16

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 Municipal Bond Index that are consistent with the funds'
investment objectives. The funds also may engage in futures and options
transactions based on specific securities such as U.S. Treasury bonds or notes.

Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the Bond
Buyer Municipal Bond 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).

To initiate and maintain open positions in a futures contract, a fund would be
required to make a good faith margin deposit in cash or government securities
with a futures broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. 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.

Once a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional variation margin. Conversely, changes in the contract
value may reduce the required margin, resulting in a repayment of excess margin
to the contract holder. Variation margin payments are made to or from the
futures broker for as long as the contract remains open and do not constitute
margin transactions for purposes of the funds' investment restrictions.

Risks Related to Futures and Options Transactions

Futures and options prices can be volatile, and trading in these markets
involves certain risks. If the advisor applies a hedge at an inappropriate time
or judges 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

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17

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 advisor 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 it 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

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 assets on
its records in an amount sufficient to cover its obligations under the futures
contracts and options.

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18

Municipal Bond Insurers

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

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

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

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

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

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

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

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

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19

Restricted and Illiquid Securities

The funds may, from time to time, purchase restricted or illiquid securities
when they present attractive investment opportunities that otherwise meet the
funds' criteria for selection. "Restricted Securities" include securities that
cannot be sold to the public without registration under the Securities Act of
1933 or the availability of an exemption from registration (such as Rules 144 or
144A), or that are "not readily marketable" because they are subject to other
legal or contractual delays in or restrictions on resale. 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 has delegated the day-to-day function of determining the liquidity of
Rule 144A securities to the fund managers. The board retains the responsibility
to monitor the implementation of the guidelines and procedures it has adopted.

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

INVESTMENT POLICIES

Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the restrictions 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 restrictions.

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.

- ------
20

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 A fund may not issue senior securities, except as permitted
Securities 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 its 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,

- ------
21

(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) business credit and personal 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 The money market fund may not purchase or sell futures contracts or
Options 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 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 objectives 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.

- ------
22

MANAGEMENT

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

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

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

- ------
23

Number of
Portfolios
in Fund
Length Complex Other
Position(s) of Time Overseen Directorships
Held with Served Principal Occupation(s) by Held by
Name, Address (Age) Funds (years) During Past 5 Years Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------
Ronald J. Gilson Trustee 8 Charles J. Meyers Professor 35 None
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 Stanford Law School
(57) (1979 to present)
Mark and Eva Stern
Professor of Law and
Business, Columbia
University School of Law
(1992 to present)
Counsel, Marron, Reid &
Sheehy (a San Francisco
law firm, 1984 to present)
- --------------------------------------------------------------------------------------------------------------------
Kathryn A. Hall Trustee 2 President and Chief 35 Director, Princeton
1665 Charleston Road Investment Officer, University
Mountain View, CA 94043 Offit Hall Capital Investment Company
(46) Management, LLC (1997 to present)
(April 2002 to present) Director, Stanford
President and Managing Management Company
Director, Laurel Management (2001 to present)
Company, L.L.C. Director, UCSF
(1996 to April 2002) Foundation
(2000 to present)
Director,
San Francisco
Day School
(1999 to present)
- --------------------------------------------------------------------------------------------------------------------
Myron S. Scholes Trustee 23 Partner, Oak Hill Capital 35 Director, Dimensional
1665 Charleston Road Management, (1999 to present) Fund Advisors
Mountain View, CA 94043 Principal, Long-Term (investment advisor,
(62) Capital Management 1982 to present)
(investment advisor, Director, Smith
1993 to January 1999) Breeden Family
Frank E. Buck Professor of Funds
of Finance, Stanford (1992 to present)
Graduate School of Business
(1981 to present)
- --------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott Trustee 32 Ralph M. Parsons Professor 35 None
1665 Charleston Road of Law and Business,
Mountain View, CA 94043 Stanford Law School
(75) (1972 to present)
- --------------------------------------------------------------------------------------------------------------------
John B. Shoven Trustee 1 Professor of Economics, 35 Director, Cadence
1665 Charleston Road Stanford University Design Systems
Mountain View, CA 94043 (1977 to present) (1992 to present)
(56) Director, Watson
Wyatt Worldwide
(2002 to present)
Director,
Palmsource Inc.
(2002 to present)
- --------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers Trustee 19 Retired, Director and Partner, 35 Director, Indus
1665 Charleston Road Windy Hill Productions, LP International
Mountain View, CA 94043 (educational software, (software solutions,
(58) 1994 to 1998) January 1999
to present)
Director, Quintus
Corporation
(automation solutions,
1995 to present)
- --------------------------------------------------------------------------------------------------------------------

- ------
24

Number of
Portfolios
in Fund
Length Complex Other
Position(s) of Time Overseen Directorships
Held with Served Principal Occupation(s) by Held by
Name, Address (Age) Funds (years) During Past 5 Years Trustee Trustee
- -------------------------------------------------------------------------------------------------------------------
Officers
- -------------------------------------------------------------------------------------------------------------------
William M. Lyons President 3 See entry above under Not See entry above
4500 Main Street "Interested Trustees." applicable under "Interested
Kansas City, MO 64111 Trustees."
(48)
- -------------------------------------------------------------------------------------------------------------------
Robert T. Jackson Executive 3 Chief Administrative Officer, Not Not
4500 Main St. Vice ACC (August 1997 to present) applicable applicable
Kansas City, MO 64111 President Chief Financial Officer,
(57) ACC (May 1995 to October 2002)
President, ACSC
(January 1999 to present)
Executive Vice President,
ACC (May 1995 to present)
Also serves as: Executive
Vice President and Chief
Financial Officer, ACIM, ACIS
and other ACC subsidiaries,
and Treasurer, ACIM
- -------------------------------------------------------------------------------------------------------------------
Maryanne Roepke, CPA Senior Vice 3 Senior Vice President Not Not
4500 Main St. President, (April 1998 to present) applicable applicable
Kansas City, MO 64111 Treasurer and Assistant Treasurer, ACSC
(47) and Chief (September 1985 to present)
Accounting
Officer
- -------------------------------------------------------------------------------------------------------------------
David C. Tucker Senior Vice 5 Senior Vice President, ACIM, Not Not
4500 Main St. President ACIS, ACSC and other ACC applicable applicable
Kansas City, MO 64111 and subsidiaries
(45) General (June 1998 to present)
Counsel General Counsel, ACC,
ACIM, ACIS, ACSC and
other ACC subsidiaries
(June 1998 to present)
- -------------------------------------------------------------------------------------------------------------------
C. Jean Wade Controller 7 Vice President, ACSC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City, MO 64111 Controller-Fund Accounting,
(39) ACSC (June 1997 to present)
- -------------------------------------------------------------------------------------------------------------------
Robert Leach Controller 7 Vice President, ACSC Not Not
4500 Main St. (February 2000 to present) applicable applicable
Kansas City, MO 64111 Controller-Fund Accounting,
(37) ACSC (June 1997 to present)
- -------------------------------------------------------------------------------------------------------------------
Jon Zindel Tax Officer 6 Vice President, Corporate Tax, Not Not
4500 Main St. ACSC (April 1998 to present) applicable applicable
Kansas City, MO 64111 Vice President, ACIM, ACIS
(36) and other ACC subsidiaries
(April 1999 to present)
President, American Century
Employee Benefit Services, Inc.
(January 2000 to December 2000)
Treasurer, American Century Employee
Benefit Services, Inc.
(December 2000 to present)
Treasurer, American Century
Ventures, Inc.
(December 1999 to January 2001)
- -------------------------------------------------------------------------------------------------------------------

- ------
25

THE BOARD OF TRUSTEES

The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. Although the Board of
Trustees does not manage the funds, it has hired the advisor to do so. The
trustees, in carrying out their fiduciary duty under the Investment Company Act
of 1940, are responsible for approving new and existing management contracts
with the funds' advisor. In carrying out these responsibilities, the board
reviews material factors to evaluate such contracts, including (but not limited
to) assessment of information related to the advisor's performance and expense
ratios, estimates of income and indirect benefits (if any) accruing to the
advisor, the advisor's overall management and projected profitability, and
services provided to the funds and their investors.

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.

Committees

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

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

Nominating Kenneth E. Scott The Nominating Committee primarily considers 0
Ronald J. Gilson and recommends individuals for nomination as
Albert Eisenstat trustees. The names of potential trustee candidates
Myron S. Scholes are drawn from a number of sources, including
Jeanne D. Wohlers recommendations from members of the board,
management and shareholders. This committee
also reviews and makes recommendations to
the board with respect to the composition
of board committees and other board-related
matters, including its organization, size,
composition, responsibilities, functions
and compensation. The Nominating Committee
does not currently have a policy regarding whether
it will consider nominees recommended by shareholders.
- ---------------------------------------------------------------------------------------------------------------
Portfolio Myron S. Scholes The Portfolio Committee reviews quarterly 5
Ronald J. Gilson the investment activities and strategies used
to manage fund assets. The committee
regularly receives reports from portfolio
managers, credit analysts and other
investment personnel concerning the
funds' investments.
- ---------------------------------------------------------------------------------------------------------------
Quality Ronald J. Gilson The Quality of Service Committee reviews 4
of Myron S. Scholes the level and quality of transfer agent and
Service William M. Lyons administrative services provided to the
funds 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.
- ---------------------------------------------------------------------------------------------------------------

- ------
26

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 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 the board to
each trustee who is not an interested person as defined in the Investment
Company Act.

AGGREGATE TRUSTEE COMPENSATION FOR FISCAL YEAR ENDED AUGUST 31, 2003
- --------------------------------------------------------------------------------
Total Compensation Total Compensation from the
Name of Trustee from the Funds(1) American Century Family of Funds(2)
- --------------------------------------------------------------------------------
Albert Eisenstat $9,310 $81,250
- --------------------------------------------------------------------------------
Ronald J. Gilson $9,889 $87,000
- --------------------------------------------------------------------------------
Kathyrn A. Hall $9,386 $82,000
- --------------------------------------------------------------------------------
Myron S. Scholes $8,997 $78,000
- --------------------------------------------------------------------------------
Kenneth E. Scott $9,737 $85,500
- --------------------------------------------------------------------------------
Jeanne D. Wohlers $9,159 $79,750
- --------------------------------------------------------------------------------
John Shoven $7,054 $88,833
- --------------------------------------------------------------------------------

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

(2) Includes compensation paid by the eight investment company members of the
American Century family of funds served by this board. The total amount of
deferred compensation included in the preceding table is as follows: Mr.
Eisenstat, $81,250; Mr. Gilson, $87,000; Ms. Hall, $29,875; Mr. Scholes,
$49,000; Mr. Scott, $85,500 and Mr. Shoven, $59,750.

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 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 August 31, 2003.

- ------
27

OWNERSHIP OF FUND SHARES

The trustees owned shares in the funds as of December 31, 2002, as shown in the
table below:

NAME OF DIRECTORS
-----------------------------------------------
William M. Albert Ronald J. Myron S.
Lyons Eisenstat Gilson Scholes
- -----------------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Funds:
California Tax-Free Money Market A A C C
- -----------------------------------------------------------------------------------------------
California Limited-Term Tax-Free A A A A
- -----------------------------------------------------------------------------------------------
California Intermediate-Term Tax-Free A A C A
- -----------------------------------------------------------------------------------------------
California Long-Term Tax-Free A A A A
- -----------------------------------------------------------------------------------------------
California High-Yield Municipal A A C A
- -----------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Director in
Family of Investment Companies E E E E
- -----------------------------------------------------------------------------------------------

NAME OF DIRECTORS
-----------------------------------------------
Kenneth E. Jeanne D. Kathryn A. John B.
Scott Wohlers Hall Shoven
- -----------------------------------------------------------------------------------------------
Dollar Range of Equity Securities in the Funds:
California Tax-Free Money Market B E A A
- -----------------------------------------------------------------------------------------------
California Limited-Term Tax-Free E A A A
- -----------------------------------------------------------------------------------------------
California Intermediate-Term Tax-Free E A A A
- -----------------------------------------------------------------------------------------------
California Long-Term Tax-Free A A A A
- -----------------------------------------------------------------------------------------------
California High-Yield Municipal A A A A
- -----------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen by Director in
Family of Investment Companies E E A A
- -----------------------------------------------------------------------------------------------

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.

- ------
28

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:

* Election of Directors
* Ratification of Selection of Auditors
* Equity-Based Compensation Plans
* 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
* Shareholder Proposals Involving Social, Moral or Ethical Matters
* Anti-Greenmail Proposals
* Changes to Indemnification Provisions
* Non-Stock Incentive Plans
* Director Tenure
* Directors' Stock Options Plans
* Director 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 are available on the funds'
website at www.americancentury.com.

- ------
29

THE FUNDS' PRINCIPAL SHAREHOLDERS

As of December 2, 2003, the following shareholders were the record owners of
more than 5% of any class of a fund's outstanding shares:

Percentage of Outstanding Shares Owned
Of Record Beneficially(1)
- --------------------------------------------------------------------------------
California Tax-Free Money Market
- --------------------------------------------------------------------------------
Investor Class
Morgan Guaranty Trust of NY 11% 0%
Newark, DE
- --------------------------------------------------------------------------------
California Limited-Term Tax-Free
- --------------------------------------------------------------------------------
Investor Class
Charles Schwab & Co. 29% 0%
San Francisco, CA

Pershing LLC 17% 0%
Jersey City, NJ

National Financial Services Corp. 9% 0%
New York, NY
- --------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
- --------------------------------------------------------------------------------
Investor Class
Charles Schwab & Co. 17% 0%
San Francisco, CA
- --------------------------------------------------------------------------------
California Long-Term Tax-Free
- --------------------------------------------------------------------------------
Investor Class
Charles Schwab & Co. 8% 0%
San Francisco, CA
- --------------------------------------------------------------------------------
California High-Yield Municipal
- --------------------------------------------------------------------------------
Investor Class
Charles Schwab & Co. 26% 0%
San Francisco, CA
- --------------------------------------------------------------------------------
A Class
Charles Schwab & Co. 40% 0%
San Francisco, CA

MLPF&S Inc. 32% 0%
Jacksonville, FL

American Enterprise Investment Svcs 7% 0%
Minneapolis, MN
- --------------------------------------------------------------------------------
B Class
American Enterprise Investment Svcs 47% 0%
Minneapolis, MN

MLPF&S Inc. 28% 0%
Jacksonville, FL

Pershing LLC 7% 0%
Jersey City, NJ
- --------------------------------------------------------------------------------
C Class
MLPF&S Inc. 56% 0%
Jacksonville, FL

Citigroup Global Markets Inc. 41% 0%
New York, NY
- --------------------------------------------------------------------------------

(1) If shares are registered in an individual's name or in the name of an
intermediary for the benefit of a named individual, we report those
shares as being beneficially owned. Otherwise, American Century has no
information concerning beneficial ownership of fund shares.

The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of a fund's outstanding shares. The funds are unaware of any
other shareholders,

- ------
30

beneficial or of record, who own more than 25% of the voting securities of
American Century California Tax-Free and Municipal Funds. As of
December 2, 2003, the officers and trustees of the funds, as a group, own less
than 1% of any fund's 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, ACSC and ACIS are wholly owned by ACC. James E. Stowers, Jr., Chairman of
ACC, controls ACC by virtue of his ownership of a majority of its voting stock.

INVESTMENT ADVISOR

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

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

INVESTMENT CATEGORY FEE SCHEDULE FOR CALIFORNIA 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 CALIFORNIA LIMITED-TERM TAX-FREE,
CALIFORNIA INTERMEDIATE-TERM TAX-FREE AND CALIFORNIA LONG-TERM TAX-FREE
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------

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31

INVESTMENT CATEGORY FEE SCHEDULE FOR CALIFORNIA HIGH-YIELD MUNICIPAL
- --------------------------------------------------------------------------------
Category Assets Fee Rate
- --------------------------------------------------------------------------------
First $1 billion 0.3100%
Next $1 billion 0.2580%
Next $3 billion 0.2280%
Next $5 billion 0.2080%
Next $15 billion 0.1950%
Next $25 billion 0.1930%
Thereafter 0.1925%
- --------------------------------------------------------------------------------

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

COMPLEX FEE SCHEDULE
- --------------------------------------------------------------------------------
Complex Assets Fee Rate
- --------------------------------------------------------------------------------
First $2.5 billion 0.3100%
Next $7.5 billion 0.3000%
Next $15.0 billion 0.2985%
Next $25.0 billion 0.2970%
Next $50.0 billion 0.2960%
Next $100.0 billion 0.2950%
Next $100.0 billion 0.2940%
Next $200.0 billion 0.2930%
Next $250.0 billion 0.2920%
Next $500.0 billion 0.2910%
Thereafter 0.2900%
- --------------------------------------------------------------------------------

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

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

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

* 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 provides 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.

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32

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 policy of the advisor 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 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
August 31, 2003, 2002 and 2001, are indicated in the following table.

UNIFIED MANAGEMENT FEES
- -------------------------------------------------------------------------------
Fund 2003 2002 2001
- -------------------------------------------------------------------------------
California Tax-Free Money Market
Investor Class $3,245,204 $2,670,101 $2,958,588
- -------------------------------------------------------------------------------
California Municipal Money Market
Investor Class N/A(1) $900,329 $878,891
- -------------------------------------------------------------------------------
California Limited-Term Tax-Free
Investor Class $1,151,762 $893,389 $742,246
- -------------------------------------------------------------------------------
California Intermediate-Term Tax-Free
Investor Class $2,384,424 $2,291,824 $2,239,679
- -------------------------------------------------------------------------------
California Long-Term Tax-Free
Investor Class $2,687,720 $1,615,104 $1,601,861
- -------------------------------------------------------------------------------
California Insured Tax-Free
Investor Class N/A(2) $1,120,811 $1,044,086
- -------------------------------------------------------------------------------
California High-Yield Municipal
Investor Class $1,920,220 $1,799,729 $1,747,084
- -------------------------------------------------------------------------------
A Class $1,751(3) N/A N/A
- -------------------------------------------------------------------------------
B Class $422(3) N/A N/A
- -------------------------------------------------------------------------------
C Class $3,840(3) N/A N/A
- -------------------------------------------------------------------------------

(1) The fund was combined with the California Tax-Free Money Market fund in a
tax-free reorganization on September 3, 2002.

(2) The fund was combined with the California Long-Term Tax-Free fund in a
tax-free reorganization on September 3, 2002.

(3) January 31, 2003 (commencement of sale) through August 31, 2003.

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33

TRANSFER AGENT AND ADMINISTRATOR

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

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

DISTRIBUTOR

The funds' shares are distributed by American Century Investment Services, Inc.
(ACIS), a registered broker-dealer. ACIS 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 the distributor has no liability for unsold shares.

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

OTHER SERVICE PROVIDERS

CUSTODIAN BANKS

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

INDEPENDENT ACCOUNTANTS

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

- ------
34

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 markup (i.e.,
a spread between the bid and asked prices). During the fiscal years ended August
31, 2003, 2002 and 2001, the funds did not pay any brokerage commissions.

INFORMATION ABOUT FUND SHARES

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

Each fund votes separately on matters affecting that fund exclusively. Voting
rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., 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.

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35

MULTIPLE CLASS STRUCTURE

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

The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The A, B
and C Classes also are made available through financial intermediaries, for
purchase by individual investors who receive advisory and personal services from
the intermediary. The 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, 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. Pursuant to Rule 12b-1, information with
respect to revenues and expenses under the Plans is presented to the Board of
Trustees quarterly for its consideration in connection with its deliberations as
to the continuance of the Plans. Continuance of the Plans must be approved by
the Board of Trustees (including a majority of the independent trustees)
annually. The Plans may be amended by a vote of the Board of Trustees (including
a majority of the independent trustees), except that the Plans may not be
amended to materially increase the amount to be spent for distribution without
majority approval of the shareholders of the affected class. The Plans terminate
automatically in the event of an assignment and may be terminated upon a vote of
a majority of the independent trustees or by vote of a majority of the
outstanding voting securities of the affected class.

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

A Class Plan

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

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

- ------

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

California High Yield Municipal $827

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;

- ------
37

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

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

B Class Plan

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

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

To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
Board of Trustees has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the Advisor, as paying agent for the funds, a fee equal to
1.00% annually of the average daily net asset value of the B Class shares, 0.25%
of which is paid for individual shareholder services (as described below) and
0.75% of which is paid for distribution services (as described below). During
the fiscal year ended August 31, 2003, the aggregate amount of fees paid under
the B Class Plan was:

California High-Yield Municipal $796

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;

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38