FILED UNDER RULE 497(c)
                                                  FILE NOS. 2-82734 AND 811-3706




January 1, 2006

American Century
Investments
prospectus

CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE MONEY MARKET FUND

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

American Century Investment
Services, Inc. Distributor

[american century investments logo and text logo]




TABLE OF CONTENTS

AN OVERVIEW OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . .  2
FUND PERFORMANCE HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . .  3
        California Limited-Term Tax-Free Fund,
        California Long-Term Tax-Free Fund
        and California Tax-Free Bond Fund . . . . . . . . . . . . . . . . . .  3
        California Tax-Free Money Market Fund . . . . . . . . . . . . . . . .  6
FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7
OBJECTIVES, STRATEGIES AND RISKS. . . . . . . . . . . . . . . . . . . . . . .  8
        California Limited-Term Tax-Free Fund,
        California Long-Term Tax-Free Fund
        and California Tax-Free Bond Fund . . . . . . . . . . . . . . . . . .  8
        California Tax-Free Money Market Fund . . . . . . . . . . . . . . . . 10
BASICS OF FIXED-INCOME INVESTING. . . . . . . . . . . . . . . . . . . . . . . 11
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTING DIRECTLY WITH AMERICAN CENTURY. . . . . . . . . . . . . . . . . . . 15
INVESTING THROUGH A FINANCIAL INTERMEDIARY. . . . . . . . . . . . . . . . . . 17
ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT . . . . . . . . . . . . . . . . 18
SHARE PRICE AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . 21
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

        [graphic of triangle]

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

American Century Investment Services, Inc., Distributor

©2006 American Century Proprietary Holdings, Inc. All rights reserved.

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




AN OVERVIEW OF THE FUNDS

WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?

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

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

The portfolio managers invest at least 80% 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 payments exempt from
federal and California 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.

        [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
--------------------------------------------------------------------------------
California Tax-Free    High-quality, very         California economic risk
Money Market           short-term debt            Lowest credit risk
                       securities                 Lowest interest rate risk
                                                  Lowest liquidity risk
--------------------------------------------------------------------------------
California             Quality debt securities    California economic risk
Limited-Term           with a weighted average    Moderate credit risk
Tax-Free               maturity of 1-5 years      Low interest rate risk
                                                  Moderate liquidity risk
--------------------------------------------------------------------------------
California             Quality debt securities    California economic risk
Tax-Free Bond          of all maturity ranges     Moderate credit risk
                                                  Moderate interest rate risk(1)
                                                  Moderate liquidity risk
--------------------------------------------------------------------------------
California             Quality debt securities    California economic risk
Long-Term              with a weighted            Moderate credit risk
Tax-Free               average maturity           High interest rate risk
                       of 10 or more years        Moderate liquidity risk
--------------------------------------------------------------------------------

(1)  THE INTEREST RATE RISK IS MODERATE UNDER NORMAL MARKET CONDITIONS.
     HOWEVER, BECAUSE THE FUND MAY INVEST IN SECURITIES OF ALL MATURITY RANGES,
     THE RISK MAY FLUCTUATE AS THE PORTFOLIO MANAGER REPOSITIONS THE FUND IN
     RESPONSE TO CHANGING MARKET CONDITIONS.

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

A more detailed description of the funds' investment strategies and risks may be
found under the heading OBJECTIVES, STRATEGIES AND RISKS, which begins on page
8.

        [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. ALTHOUGH A MONEY MARKET FUND SEEKS TO PRESERVE
        THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
        MONEY BY INVESTING IN IT.


------
2


FUND PERFORMANCE HISTORY

CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND
CALIFORNIA TAX-FREE BOND 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)

(1)  AS OF SEPTEMBER 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER,
     THE FUND'S YEAR-TO-DATE RETURN WAS 0.76%.

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)        -1.58% (2Q 2004)
--------------------------------------------------------------------------------


------
3


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

(1)  AS OF SEPTEMBER 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER,
     THE FUND'S YEAR-TO-DATE RETURN WAS 2.57%.

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)          -2.85% (1Q 1996)
--------------------------------------------------------------------------------

CALIFORNIA TAX-FREE BOND FUND - INVESTOR CLASS(1)

(1)  AS OF SEPTEMBER 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER,
     THE FUND'S YEAR-TO-DATE RETURN WAS 1.63%.

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

                                    HIGHEST                    LOWEST
--------------------------------------------------------------------------------
California Tax-Free Bond            5.25% (1Q 1995)            -2.18% (2Q 2004)
--------------------------------------------------------------------------------


------
4


Average Annual Total Returns

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

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

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

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                                               10
DECEMBER 31, 2004                            1 YEAR        5 YEARS        YEARS
--------------------------------------------------------------------------------
California Limited-Term Tax-Free
Return Before Taxes                          1.38%         4.41%          4.55%
Return After Taxes on Distributions          1.38%         4.38%          4.54%
Return After Taxes on Distributions
   and Sale of Fund Shares                   1.83%         4.25%          4.45%
Lehman Brothers 3-Year                       1.78%         4.78%          4.97%
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------
California Long-Term Tax-Free
Return Before Taxes                          4.10%         7.21%          6.87%
Return After Taxes on Distributions          4.10%         7.21%          6.79%
Return After Taxes on Distributions
   and Sale of Fund Shares                   4.21%         6.91%          6.64%
Lehman Brothers Long-Term                    6.27%         8.74%          8.07%
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------
California Tax-Free Bond(1)
Return Before Taxes                          2.80%         5.82%          5.83%
Return After Taxes on Distributions          2.80%         5.75%          5.72%
Return After Taxes on Distributions
   and Sale of Fund Shares                   3.19%         5.58%          5.63%
Lehman Brothers 5-Year                       2.95%         5.93%          5.87%
General Obligation Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------

(1)  PRIOR TO JANUARY 1, 2006, THE FUND WAS NAMED CALIFORNIA
     INTERMEDIATE-TERM TAX-FREE AND IT INVESTED IN SECURITIES WITH AN
     INTERMEDIATE TERM WEIGHTED AVERAGE MATURITY.


------
5


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)

(1)  AS OF SEPTEMBER 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER,
     THE FUND'S YEAR-TO-DATE RETURN WAS 1.33%.

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.

INVESTOR CLASS

FOR THE CALENDAR YEAR ENDED DECEMBER 31, 2004    1 YEAR    5 YEARS    10 YEARS
--------------------------------------------------------------------------------
California Tax-Free Money Market                  0.76%     1.58%      2.31%
--------------------------------------------------------------------------------

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 americancentury.com.


------
6


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 ELIGIBLE 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)

                                      DISTRIBUTION                TOTAL ANNUAL
                       MANAGEMENT     AND SERVICE      OTHER      FUND OPERATING
                       FEE(1)         (12B-1) FEES     EXPENSES   EXPENSES
--------------------------------------------------------------------------------
California
Limited-Term Tax-Free
  Investor Class       0.49%          None             0.00%(2)   0.49%
--------------------------------------------------------------------------------
California
Long-Term Tax-Free
  Investor Class       0.49%          None             0.00%(2)   0.49%
--------------------------------------------------------------------------------
California
Tax-Free Bond
  Investor Class       0.49%          None             0.00%(2)   0.49%
--------------------------------------------------------------------------------
California
Tax-Free Money Market
  Investor Class       0.49%          None             0.03%(3)   0.52%
--------------------------------------------------------------------------------

(1)  THE FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT FEE FOR
     ARRANGING ALL SERVICES NECESSARY FOR THE FUND TO OPERATE. THE FEE SHOWN IS
     BASED ON ASSETS DURING THE FUNDS' MOST RECENT FISCAL YEAR. THE FUNDS HAVE
     STEPPED FEE SCHEDULES. AS A RESULT, THE FUNDS' UNIFIED MANAGEMENT FEE RATES
     GENERALLY DECREASE AS FUND ASSETS INCREASE AND INCREASE AS FUND ASSETS
     DECREASE. FOR MORE INFORMATION ABOUT THE UNIFIED MANAGEMENT FEE, SEE The
     Investment Advisor UNDER Management.

(2)  OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF THE FUNDS'
     INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST, WERE
     LESS THAN 0.005% FOR THE MOST RECENT FISCAL YEAR.

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

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 LIMITED-TERM TAX-FREE
  Investor Class          $50           $157           $274           $615
--------------------------------------------------------------------------------
CALIFORNIA LONG-TERM TAX-FREE
  Investor Class          $50           $157           $274           $615
--------------------------------------------------------------------------------
CALIFORNIA TAX-FREE BOND
  Investor Class          $50           $157           $274           $615
--------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET
  Investor Class          $53           $167           $290           $652
--------------------------------------------------------------------------------


------
7


OBJECTIVES, STRATEGIES AND RISKS

CALIFORNIA LIMITED-TERM TAX-FREE FUND
CALIFORNIA LONG-TERM TAX-FREE FUND
CALIFORNIA TAX-FREE BOND 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 portfolio 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.

California Limited-Term Tax-Free will typically invest in California municipal
securities with maturities of one to ten years. Under normal market conditions,
the fund will maintain a weighted average maturity of one to five years.
California Long-Term Tax-Free will typically invest in California municipal
securities with maturities of seven or more years. Under normal market
conditions, the fund will maintain a weighted average maturity of ten or more
years. By contrast, California Tax-Free Bond may invest in California municipal
securities of all maturity ranges, and therefore its weighted average maturity
may fluctuate as the portfolio manager repositions the fund in response to
changing market conditions.

Although not historically part of the core strategy of these funds and unlikely
to occur in the future, the portfolio managers are permitted to invest up to 20%
of a fund's assets in quality debt securities with interest payments that are
subject to federal income tax, California income tax and/or the federal
alternative minimum tax.

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 objectives.


------
8


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.

When determining whether to sell a security, portfolio managers consider, among
other things, current and anticipated changes in interest rates, the credit
quality of a particular issuer, comparable alternatives, general market
conditions and any other factor deemed relevant by the portfolio managers.

A description of the policies and procedures with respect to the disclosure of
the funds' portfolio securities is available in the statement of additional
information.

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 a 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.

There is no guarantee that all of the funds' income will remain exempt from
federal or state income taxes. Income from municipal bonds held by a fund could
be declared taxable because of unfavorable changes in tax laws, adverse
interpretations by the Internal Revenue Service or state tax authorities, or
noncompliant conduct of a bond issuer.


------
9


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 at least 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.

When determining whether to sell a security, portfolio managers consider, among
other things, current and anticipated changes in interest rates, the credit
quality of a particular issuer, comparable alternatives, general market
conditions and any other factor deemed relevant by the portfolio managers.

A description of the policies and procedures with respect to the disclosure of
the fund's portfolio securities is available in the statement of additional
information.

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.

There is no guarantee that all of the fund's income will remain exempt from
federal or state income taxes. Income from municipal bonds held by a fund could
be declared taxable because of unfavorable changes in tax laws, adverse
interpretations by the Internal Revenue Service or state tax authorities, or
noncompliant conduct of a bond issuer.


------
10


BASICS OF FIXED-INCOME INVESTING

DEBT SECURITIES

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

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

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

                           AMOUNT OF       PERCENT OF   REMAINING   WEIGHTED
                           SECURITY OWNED  PORTFOLIO    MATURITY    MATURITY
--------------------------------------------------------------------------------
Debt Security A            $100,000        25%            4 years     1 year
--------------------------------------------------------------------------------
Debt Security B            $300,000        75%          12 years      9 years
--------------------------------------------------------------------------------
Weighted Average Maturity                                            10 years
--------------------------------------------------------------------------------

TYPES OF RISK

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

Interest Rate Risk

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

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

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


------
11


REMAINING MATURITY   CURRENT PRICE   PRICE AFTER 1% INCREASE   CHANGE IN PRICE
--------------------------------------------------------------------------------
1 year               $100.00         $99.06                    -0.94%
--------------------------------------------------------------------------------
3 years              $100.00         $97.38                    -2.62%
--------------------------------------------------------------------------------
10 years             $100.00         $93.20                    -6.80%
--------------------------------------------------------------------------------
30 years             $100.00         $88.69                    -11.31%
--------------------------------------------------------------------------------

Credit Risk

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

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

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

Debt securities rated in one of the highest four categories by a nationally
recognized securities rating organization are considered investment grade.
Although they are considered investment grade, an investment in these debt
securities still involves some credit risk because even 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.

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 RISK     CREDIT RISK     LIQUIDITY RISK
--------------------------------------------------------------------------------
California Tax-Free        Lowest                 Lowest          Lowest
Money Market
--------------------------------------------------------------------------------
California                 Low                    Moderate        Moderate
Limited-Term Tax-Free
--------------------------------------------------------------------------------
California                 Moderate(1)            Moderate        Moderate
Tax-Free Bond
--------------------------------------------------------------------------------
California                 High                   Moderate        Moderate
Long-Term Tax-Free
--------------------------------------------------------------------------------

(1)  THE INTEREST RATE RISK IS MODERATE UNDER NORMAL MARKET CONDITIONS.
     HOWEVER, BECAUSE THE FUND MAY INVEST IN SECURITIES OF ALL MATURITY RANGES,
     THE RISK MAY FLUCTUATE AS THE PORTFOLIO MANAGER REPOSITIONS THE FUND IN
     RESPONSE TO CHANGING MARKET CONDITIONS.

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.


------
12


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 three-fourths of the trustees are independent of the funds' advisor;
that is, they have never been employed by and have no financial interest in the
advisor or any of its affiliated companies (other than as shareholders of
American Century funds).

THE INVESTMENT ADVISOR

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

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

For the services it provides to the funds, the advisor receives a unified
management fee based on a percentage of the daily net assets of each specific
class of shares of the funds. The management fee is calculated daily and paid
monthly in arrears. Out of the funds' fee, the advisor pays 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 funds' management fee may be paid
by the funds' advisor to unaffiliated third parties who provide recordkeeping
and administrative services that would otherwise be performed by an affiliate of
the advisor.

The percentage rate used to calculate the management fee for each class of
shares of a fund is determined daily using a two-component formula that takes
into account (i) the daily net assets of the accounts managed by the advisor
that are in the same broad investment category as each of the funds (the
"Category Fee") and (ii) the assets of all funds in the American Century family
of funds (the "Complex Fee"). The statement of additional information contains
detailed information about the calculation of the management fee.


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, 2005                     INVESTOR CLASS
--------------------------------------------------------------------------------
California Limited-Term Tax-Free                                  0.49%
--------------------------------------------------------------------------------
California Long-Term Tax-Free                                     0.49%
--------------------------------------------------------------------------------
California Tax-Free Bond                                          0.49%
--------------------------------------------------------------------------------
California Tax-Free Money Market                                  0.49%
--------------------------------------------------------------------------------

A discussion regarding the basis for the Board of Trustees' approval of the
funds' investment advisory contract with the advisor is available in the funds'
report to shareholders dated August 31, 2005.


------
13


THE FUND MANAGEMENT TEAMS

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

California Limited-Term Tax-Free
California Tax-Free Bond

ROBERT J. MILLER

Mr. Miller, Vice President and Portfolio Manager, has been a member of the
California Limited-Term Tax-Free team since January 2003 and a member of the
California Tax-Free Bond team since April 2000. He joined American Century in
June 1998 and became a portfolio manager in February 2001. He has a bachelor's
degree in business administration-finance from San Jose State University and an
MBA from New York University.

California Long-Term Tax-Free

G. DAVID MACEWEN

Mr. MacEwen,  Chief Investment  Officer - Fixed Income, has been a member of the
team since  joining  American  Century in May 1991. In 2000, he was named senior
vice  president and senior  portfolio  manager and served in that capacity until
being  named to his  current  position in 2001.  He has a  bachelor's  degree in
economics  from Boston  University  and an MBA in finance from the University of
Delaware.

California Tax-Free Money Market

TODD PARDULA

Mr. Pardula, Vice President and Portfolio Manager, has been a member of the team
since  April 1994.  He joined  American  Century in  February  1990 and became a
portfolio  manager in April 1994.  He has a  bachelor's  degree in finance  from
Santa Clara University. He is a CFA charterholder.

The statement of additional information provides additional information about
the other accounts managed by the portfolio managers, if any, the structure of
their compensation, and their ownership of fund securities.

FUNDAMENTAL INVESTMENT POLICIES

Fundamental investment policies contained in the statement of additional
information and the investment objectives of the funds may not be changed
without shareholder approval. The Board of Trustees and/or the advisor may
change any other policies and investment strategies.


------
14


INVESTING DIRECTLY WITH AMERICAN CENTURY

SERVICES AUTOMATICALLY AVAILABLE TO YOU

Most accounts automatically will have access to the services listed under WAYS
TO MANAGE YOUR ACCOUNT 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). 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. If you want to add online and telephone
services later, you can complete an Investor Service Options form.

ACCOUNT MAINTENANCE FEE

If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
we may charge you a $12.50 semiannual account maintenance fee if the value of
those shares is less than $10,000. We will determine the amount of your total
eligible investments twice per year, generally the last Friday in October and
April. If the value of those investments is less than $10,000 at that time, we
will automatically redeem shares in one of your accounts to pay the $12.50 fee.
Please note that you may incur tax liability as a result of the redemption. In
determining your total eligible investment amount, we will include your
investments in all PERSONAL ACCOUNTS (including American Century Brokerage
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 americancentury.com/info/demo.

        [graphic of triangle]

        PERSONAL ACCOUNTS INCLUDE INDIVIDUAL ACCOUNTS, JOINT ACCOUNTS, UGMA/UTMA
        ACCOUNTS, PERSONAL TRUSTS, COVERDELL EDUCATION SAVINGS ACCOUNTS, IRAS
        (INCLUDING TRADITIONAL, ROTH, ROLLOVER, SEP-, SARSEP- AND SIMPLE-IRAS),
        AND CERTAIN OTHER RETIREMENT ACCOUNTS. 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.

WIRE PURCHASES

CURRENT INVESTORS: If you would like to make a wire purchase into an existing
account, your bank will need the following information. (To invest in a new
fund, please call us first to set up the new account.)

*  American Century's bank information: Commerce Bank N.A., Routing No.
   101000019, Account No. 2804918

*  Your American Century account number and fund name

*  Your name

*  The contribution year (for IRAs only)

NEW INVESTORS: To make a wire purchase into a new account, please complete an
application prior to wiring money.


------
15


WAYS TO MANAGE YOUR ACCOUNT

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

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.

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, Kansas City, Missouri - 8 a.m. to 5 p.m., Monday - Friday

* 4917 Town Center Drive, Leawood, Kansas - 8 a.m. to 5 p.m., Monday - Friday,
  8 a.m. to noon, Saturday

* 1665 Charleston Road, Mountain View, California - 8 a.m. to 5 p.m., Monday -
  Friday

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

Investor Services Representative: 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. The Automated Information Line
is available only to Investor Class shareholders.

MAKE ADDITIONAL INVESTMENTS: Call or use our Automated Information Line if you
have authorized us to invest from your bank account. The Automated Information
Line is available only to Investor Class shareholders.

SELL SHARES: Call a Service Representative.

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 Service 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 service, you can
purchase shares on a regular basis. You must invest at least $50 per month per
account.

SELL SHARES: You may sell shares automatically by establishing Check-A-Month or
Automatic Redemption plans.

See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.


------
16


INVESTING THROUGH A FINANCIAL INTERMEDIARY

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

*  minimum investment requirements

*  exchange policies

*  fund choices

*  cutoff time for investments

*  trading restrictions

Please contact your FINANCIAL INTERMEDIARY or plan sponsor for a complete
description of its policies. Copies of the funds' annual reports, semiannual
reports and statement of additional information are available from your
financial intermediary or plan sponsor.

        [graphic of triangle]

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

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

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 financial intermediary and are not
shared with American Century or the funds.

The funds have authorized certain financial intermediaries to accept orders on
each fund's behalf. American Century has selling agreements with these financial
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 financial 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 selling agreement, they will be priced at the net asset
value next determined after your request is received in the form required by the
financial intermediary.

See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.


------
17


ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT

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 plans.

LIMITATIONS ON SALE

As of the date of this prospectus the funds were registered for sale in the
following states: Arizona, California, Colorado, District of Columbia, Florida,
Hawaii, New Mexico, Nevada, New York (except California Limited-Term Tax-Free),
Oregon, Texas, Utah, Washington and the Virgin Islands.

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 the California Tax-Free Money Market Fund, 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. Please remember, if you request redemptions by wire, $10 will be
deducted from the amount redeemed. Your bank also may charge a fee.

In addition, we reserve the right to honor certain redemptions with securities,
rather than cash, as described in the next section.

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

If, during any 90-day period, you redeem fund shares worth more than $250,000
(or 1% of the value of a fund's assets if that amount is less than $250,000), we
reserve the right to pay part or all of the redemption proceeds in excess of
this amount in readily marketable securities instead of in cash. The portfolio
managers would select these securities from the fund's portfolio.

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

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


------
18


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. You also may incur 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.

*  You have chosen to conduct business in writing only and would like to
   redeem over $100,000.

*  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 EFT (ACH or
   wire) to a destination other than your personal bank account.

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

*  You change your address and request a redemption over $100,000 within 15
   days.

*  You change your bank information and request a redemption within 15 days.

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

MODIFYING OR CANCELING AN INVESTMENT

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

ABUSIVE TRADING PRACTICES

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

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

American Century uses a variety of techniques to monitor for and detect abusive
trading practices. These techniques may vary depending on the type of fund, the
class of shares or whether the shares are held directly or indirectly with
American Century. They may change from time to time as determined by American
Century in its sole discretion. To minimize harm to the


------
19


funds and their shareholders, we reserve the right to reject any purchase order
(including exchanges) from any shareholder we believe has a history of abusive
trading or whose trading, in our judgment, has been or may be disruptive to the
funds. In making this judgment, we may consider trading done in multiple
accounts under common ownership or control.

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

* within seven days of the purchase, or

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

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

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

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

YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS

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

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 us or your financial professional. For American Century
Brokerage accounts, please call 1-888-345-2071.

RIGHT TO CHANGE POLICIES

We reserve the right to change any stated investment requirement, including
those that relate to purchases, exchanges and redemptions. We also may alter,
add or discontinue any service or privilege. Changes may affect all investors or
only those in certain classes or groups. In addition, from time to time we may
waive a policy on a case-by-case basis, as the advisor deems appropriate.


------
20


SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

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

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

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

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

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

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

DISTRIBUTIONS

Federal tax laws require 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 should 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.


------
21


California Tax-Free Money Market Fund

California Tax-Free Money Market 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 elect
to have dividends and/or capital gains sent to another American Century account,
to your bank electronically, or to your home address or to another address by
check.

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 elect to have dividends and/or capital gains sent to another American
Century account, to your bank electronically, or to your home address or to
another address by check.

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.


------
22


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.

Taxability of Distributions

Fund distributions may consist of income, such as dividends and interest earned
by a fund from its investments, or capital gains generated by a fund from the
sale of its investment securities. Distributions of income are generally exempt
from regular federal income tax. However, if distributions are federally
taxable, such distributions may be designated as QUALIFIED DIVIDEND INCOME. If
so, and if you meet a minimum required holding period with respect to your
shares of the fund, such 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%
--------------------------------------------------------------------------------

If a fund's distributions exceed its income and capital gains realized during
the tax year, all or a portion of the distributions made by the fund in that tax
year will be considered a return of capital. A return of capital distribution is
generally not subject to tax, but will reduce your cost basis in the fund and
result in higher realized capital gains (or lower realized capital losses) upon
the sale of fund shares.


------
23


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.

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

Taxes on Transactions

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

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

Buying a Dividend

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

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

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


------
24


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 registered public accounting firm. Their Report of Independent
Registered Public Accounting Firm and the financial statements are included in
the funds' annual report, which is available upon request.


------
25


CALIFORNIA LIMITED-TERM TAX-FREE FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
---------------------------------------------------------------------------------------
                                       2005      2004      2003      2002      2001
---------------------------------------------------------------------------------------
PER-SHARE DATA
---------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period   $10.71    $10.70    $10.82    $10.69    $10.40
---------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------
   Net Investment Income               0.32      0.28      0.30      0.35      0.42
-------------------------------------
   Net Realized and                    (0.18)    0.01      (0.10)    0.16      0.29
   Unrealized Gain (Loss)
---------------------------------------------------------------------------------------
   Total From Investment Operations    0.14      0.29      0.20      0.51      0.71
---------------------------------------------------------------------------------------
Distributions
-------------------------------------
   From Net Investment Income          (0.32)    (0.28)    (0.30)    (0.35)    (0.42)
-------------------------------------
   From Net Realized Gains             -         -(1)      (0.02)    (0.03)    -
---------------------------------------------------------------------------------------
   Total Distributions                 (0.32)    (0.28)    (0.32)    (0.38)    (0.42)
---------------------------------------------------------------------------------------
Net Asset Value, End of Period         $10.53    $10.71    $10.70    $10.82    $10.69
=======================================================================================
   TOTAL RETURN(2)                     1.33%     2.75%     1.87%     4.91%     6.94%

RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                  0.49%     0.50%     0.51%     0.51%     0.51%
-------------------------------------
Ratio of Net Investment
Income to Average Net Assets           3.01%     2.59%     2.78%     3.30%     3.97%
-------------------------------------
Portfolio Turnover Rate                78%       55%       34%       50%       63%
-------------------------------------
Net Assets, End of Period
(in thousands)                         $181,416  $219,949  $228,030  $205,066  $163,929
---------------------------------------------------------------------------------------

(1)  PER-SHARE AMOUNT WAS LESS THAN $0.005.

(2)  TOTAL RETURN ASSUMES REINVESTMENT OF NET INVESTMENT INCOME AND CAPITAL
     GAINS DISTRIBUTIONS, IF ANY.


------
26


CALIFORNIA LONG-TERM TAX-FREE FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
--------------------------------------------------------------------------------------
                                      2005      2004      2003      2002      2001
--------------------------------------------------------------------------------------
PER-SHARE DATA
--------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period  $11.69    $11.43    $11.75    $11.70    $11.11
--------------------------------------------------------------------------------------
Income From Investment Operations
------------------------------------
   Net Investment Income              0.52      0.51      0.53      0.53      0.55
------------------------------------
   Net Realized and                   0.09      0.26      (0.32)    0.05      0.59
   Unrealized Gain (Loss)
--------------------------------------------------------------------------------------
   Total From Investment Operations   0.61      0.77      0.21      0.58      1.14
--------------------------------------------------------------------------------------
Distributions
------------------------------------
   From Net Investment Income         (0.52)    (0.51)    (0.53)    (0.53)    (0.55)
------------------------------------
   From Net Realized Gains            -         -(1)      -         -         -
--------------------------------------------------------------------------------------
   Total Distributions                (0.52)    (0.51)    (0.53)    (0.53)    (0.55)
--------------------------------------------------------------------------------------
Net Asset Value, End of Period        $11.78    $11.69    $11.43    $11.75    $11.70
======================================================================================
   TOTAL RETURN(2)                    5.38%     6.83%     1.81%     5.14%     10.55%

RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                 0.49%     0.50%     0.51%     0.51%     0.51%
------------------------------------
Ratio of Net Investment
Income to Average Net Assets          4.40%     4.39%     4.54%     4.58%     4.87%
------------------------------------
Portfolio Turnover Rate               36%       19%       23%       43%       31%
------------------------------------
Net Assets, End of Period
(in thousands)                        $475,954  $468,891  $497,165  $327,150  $331,090
--------------------------------------------------------------------------------------

(1)  PER-SHARE AMOUNT WAS LESS THAN $0.005.

(2)  TOTAL RETURN ASSUMES REINVESTMENT OF NET INVESTMENT INCOME AND CAPITAL
     GAINS DISTRIBUTIONS, IF ANY.


------
27


CALIFORNIA TAX-FREE BOND FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
---------------------------------------------------------------------------------------
                                      2005      2004       2003      2002      2001
---------------------------------------------------------------------------------------
PER-SHARE DATA
---------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period  $11.41    $11.28     $11.55    $11.47    $11.08
---------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------
   Net Investment Income              0.46      0.44       0.45      0.47      0.50
-------------------------------------
   Net Realized and                   (0.08)    0.13       (0.23)    0.15      0.39
   Unrealized Gain (Loss)
---------------------------------------------------------------------------------------
   Total From Investment Operations   0.38      0.57       0.22      0.62      0.89
---------------------------------------------------------------------------------------
Distributions
-------------------------------------
   From Net Investment Income         (0.46)    (0.44)     (0.45)    (0.47)    (0.50)
-------------------------------------
   From Net Realized Gains            -         -          (0.04)    (0.07)    -
---------------------------------------------------------------------------------------
   Total Distributions                (0.46)    (0.44)     (0.49)    (0.54)    (0.50)
---------------------------------------------------------------------------------------
Net Asset Value, End of Period        $11.33    $11.41     $11.28    $11.55    $11.47
=======================================================================================
   TOTAL RETURN(1)                    3.36%     5.13%      1.91%     5.63%     8.22%

RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                 0.49%     0.50%      0.51%     0.51%     0.51%
-------------------------------------
Ratio of Net Investment
Income to Average Net Assets          4.02%     3.87%      3.89%     4.13%     4.45%
-------------------------------------
Portfolio Turnover Rate               34%       20%        25%       41%       94%
-------------------------------------
Net Assets, End of Period
(in thousands)                        $435,887  $418,655   $451,131  $477,494  $449,975
---------------------------------------------------------------------------------------

(1)  TOTAL RETURN ASSUMES REINVESTMENT OF NET INVESTMENT INCOME AND CAPITAL
     GAINS DISTRIBUTIONS, IF ANY.


------
28


CALIFORNIA TAX-FREE MONEY MARKET FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
---------------------------------------------------------------------------------------
                                       2005      2004      2003      2002      2001
---------------------------------------------------------------------------------------
PER-SHARE DATA
---------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period   $1.00     $1.00     $1.00     $1.00     $1.00
---------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------
   Net Investment Income               0.02      0.01      0.01      0.01      0.03
---------------------------------------------------------------------------------------
Distributions
-------------------------------------
   From Net Investment Income          (0.02)    (0.01)    (0.01)    (0.01)    (0.03)
---------------------------------------------------------------------------------------
Net Asset Value, End of Period         $1.00     $1.00     $1.00     $1.00     $1.00
=======================================================================================
   TOTAL RETURN(1)                     1.54%     0.58%     0.73%     1.24%     2.86%

RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                  0.52%     0.52%     0.51%     0.51%     0.50%
-------------------------------------
Ratio of Net Investment
Income to Average Net Assets           1.53%     0.57%     0.76%     1.24%     2.84%
-------------------------------------
Net Assets, End of Period
(in thousands)                         $617,356  $600,882  $621,747  $528,188  $551,722
---------------------------------------------------------------------------------------

(1)  TOTAL RETURN ASSUMES REINVESTMENT OF NET INVESTMENT INCOME AND CAPITAL
     GAINS DISTRIBUTIONS, IF ANY.


------
29


MORE INFORMATION ABOUT THE FUNDS IS CONTAINED IN THESE DOCUMENTS

Annual and Semiannual Reports

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

Statement of Additional Information (SAI)

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

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

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 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.

FUND REFERENCE             FUND CODE          TICKER          NEWSPAPER LISTING
-------------------------------------------------------------------------------
California
Limited-Term Tax-Free Fund
  Investor Class           936                BCSTX           CaLtdTF
-------------------------------------------------------------------------------
California
Long-Term Tax-Free Fund
  Investor Class           932                BCLTX           CaLgTF
-------------------------------------------------------------------------------
California
Tax-Free Bond Fund
  Investor Class           931                BCITX           CaIntTF
-------------------------------------------------------------------------------
California
Tax-Free Money Market Fund
  Investor Class           930                BCTXX           AmC CATF
-------------------------------------------------------------------------------

Investment Company Act File No. 811-3706

AMERICAN CENTURY INVESTMENTS
americancentury.com

Self-Directed Retail Investors
P.O. Box 419200
Kansas City, Missouri 64141-6200
1-800-345-2021 or 816-531-5575

0601
SH-PRS-45854





January 1, 2006

American Century
Investments
prospectus

CALIFORNIA HIGH-YIELD MUNICIPAL FUND

THE FUND IS AVAILABLE FOR PURCHASE ONLY THROUGH FINANCIAL INTERMEDIARIES BY
INVESTORS WHO SEEK ADVICE FROM THEM.THE FUND IS CLOSED TO OTHER INVESTORS, BUT
THOSE WITH OPEN ACCOUNTS MAY MAKE ADDITIONAL INVESTMENTS AND REINVEST DIVIDENDS
AND CAPITAL GAINS DISTRIBUTIONSAS LONG AS SUCH ACCOUNTS REMAIN OPEN.

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

American Century Investment
Services, Inc., Distributor

[american century investments logo and text logo]




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 DIRECTLY WITH AMERICAN CENTURY. . . . . . . . . . . . . . . . . . . 13
INVESTING THROUGH A FINANCIAL INTERMEDIARY. . . . . . . . . . . . . . . . . . 15
ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT . . . . . . . . . . . . . . . . 20
SHARE PRICE AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . 23
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
MULTIPLE CLASS INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

        [graphic of triangle]

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

American Century Investment Services, Inc., Distributor

©2006 American Century Proprietary Holdings, Inc. All rights reserved.

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




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 taxes.

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

The portfolio managers 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
usually issue these securities for public projects, such as schools, roads, and
water and sewer systems.

*  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 may be
found under the heading OBJECTIVES, STRATEGIES AND RISKS, which begins on page
7.

        [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

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. The returns of the fund's other classes of shares will differ from those
shown in the chart, depending on the expenses and any applicable sales charges
of those classes.

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

(1)  AS OF SEPTEMBER 30, 2005, THE END OF THE MOST RECENT CALENDAR QUARTER,
     THE FUND'S YEAR-TO-DATE RETURN WAS 5.71%.

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)         -2.06% (4Q 1999)
--------------------------------------------------------------------------------

Average Annual Total Returns

The following table shows the average annual total returns of the fund's
Investor Class shares calculated three different ways. Additional tables show
the average annual total returns of the fund's other share classes calculated
before the impact of taxes. Returns assume the deduction of all sales loads,
charges and other fees associated with a particular class. Your actual returns
may vary depending on the circumstances of your investment.

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.

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

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


------
3


INVESTOR CLASS

FOR THE CALENDAR YEAR ENDED              1        5        10       LIFE OF
DECEMBER 31, 2004                        YEAR     YEARS    YEARS    CLASS(1)
--------------------------------------------------------------------------------
Return Before Taxes                      6.73%    7.82%    7.60%    N/A
Return After Taxes on Distributions      6.73%    7.82%    7.53%    N/A
Return After Taxes on Distributions
   and Sale of Fund Shares               6.24%    7.53%    7.36%    N/A
Lehman Brothers Long-Term                6.27%    8.74%    8.07%    N/A
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------

(1)  ONLY CLASSES WITH PERFORMANCE HISTORY FOR LESS THAN 10 YEARS SHOW
     RETURNS FOR LIFE OF CLASS.

A CLASS

FOR THE CALENDAR YEAR ENDED               1         5         10        LIFE OF
DECEMBER 31, 2004                         YEAR      YEARS     YEARS     CLASS(1)
--------------------------------------------------------------------------------
Return Before Taxes                       1.64%     N/A       N/A       3.98%(2)
Lehman Brothers Long-Term                 6.27%     N/A       N/A       6.78%
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------

(1)  THE INCEPTION DATE FOR THE A CLASS IS JANUARY 31, 2003.

(2)  CLASS RETURNS WOULD HAVE BEEN LOWER IF SERVICE AND DISTRIBUTION FEES
     HAD NOT BEEN VOLUNTARILY WAIVED FROM JANUARY 31, 2003 TO MARCH 10, 2003.

B CLASS

FOR THE CALENDAR YEAR ENDED              1        5        10       LIFE OF
DECEMBER 31, 2004                        YEAR     YEARS    YEARS    CLASS(1)
--------------------------------------------------------------------------------
Return Before Taxes                      1.67%    N/A      N/A      3.72%(2)
Lehman Brothers Long-Term                6.27%    N/A      N/A      6.78%
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
--------------------------------------------------------------------------------

(1)  THE INCEPTION DATE FOR THE B CLASS IS JANUARY 31, 2003.

(2)  CLASS RETURNS WOULD HAVE BEEN LOWER IF SERVICE AND DISTRIBUTION FEES
     HAD NOT BEEN VOLUNTARILY WAIVED FROM JANUARY 31, 2003 TO FEBRUARY 19, 2003.

C CLASS

FOR THE CALENDAR YEAR ENDED                                           LIFE OF
DECEMBER 31, 2004                      1 YEAR   5 YEARS   10 YEARS    CLASS(1)
-------------------------------------------------------------------------------
Return Before Taxes                    5.67%    N/A       N/A         5.86%(2)
Lehman Brothers Long-Term              6.27%    N/A       N/A         6.78%
Municipal Bond Index
   (reflects no deduction for fees,
   expenses and taxes)
-------------------------------------------------------------------------------

(1)  THE INCEPTION DATE FOR THE C CLASS IS JANUARY 31, 2003.

(2)  CLASS RETURNS WOULD HAVE BEEN LOWER IF SERVICE AND DISTRIBUTION FEES
     HAD NOT BEEN VOLUNTARILY WAIVED FROM JANUARY 31, 2003 TO MARCH 4, 2003.

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 or visit
americancentury.com.


------
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)
                                 INVESTOR      A          B           C
                                 CLASS         CLASS      CLASS       CLASS
--------------------------------------------------------------------------------
Maximum Sales                    None          4.50%      None        None
Charge (Load)
   Imposed on
   Purchases
   (as a percentage
   of offering price)
--------------------------------------------------------------------------------
Maximum Deferred                 None          None(1)    5.00%(2)    1.00%(3)
Sales Charge (Load)
   (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)
--------------------------------------------------------------------------------
Maximum Account                  $25(4)        None       None        None
Maintenance Fee
--------------------------------------------------------------------------------

(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 17, AND IS ELIMINATED AFTER SIX
     YEARS.

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

(4)  APPLIES ONLY TO INVESTORS WHOSE TOTAL ELIGIBLE INVESTMENTS WITH
     AMERICAN CENTURY ARE LESS THAN $10,000. SEE Account Maintenance Fee UNDER
     Investing Directly with American Century FOR MORE DETAILS.

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

                               DISTRIBUTION                    TOTAL ANNUAL
                MANAGEMENT     AND SERVICE       OTHER         FUND OPERATING
                FEE(1)         (12B-1) FEES(2)   EXPENSES(3)   EXPENSES
--------------------------------------------------------------------------------
  Investor       0.52%          None              0.00%         0.52%
  Class
--------------------------------------------------------------------------------
  A Class        0.52%          0.25%             0.00%         0.77%
--------------------------------------------------------------------------------
  B Class        0.52%          1.00%             0.00%         1.52%
--------------------------------------------------------------------------------
  C Class        0.52%          1.00%             0.00%         1.52%
--------------------------------------------------------------------------------

(1)  THE FUND PAYS THE ADVISOR A SINGLE, UNIFIED MANAGEMENT FEE FOR
     ARRANGING ALL SERVICES NECESSARY FOR THE FUND TO OPERATE. THE FEE SHOWN IS
     BASED ON ASSETS DURING THE FUND'S MOST RECENT FISCAL YEAR. THE FUND HAS A
     STEPPED FEE SCHEDULE. AS A RESULT, THE FUND'S UNIFIED MANAGEMENT FEE RATE
     GENERALLY DECREASES AS FUND ASSETS INCREASE AND INCREASES AS FUND ASSETS
     DECREASE. FOR MORE INFORMATION ABOUT THE UNIFIED MANAGEMENT FEE, SEE The
     Investment Advisor UNDER Management.

(2)  THE 12B-1 FEE IS DESIGNED TO PERMIT INVESTORS TO PURCHASE SHARES
     THROUGH BROKER-DEALERS, BANKS, INSURANCE COMPANIES AND OTHER FINANCIAL
     INTERMEDIARIES. THE FEE MAY BE USED TO COMPENSATE SUCH FINANCIAL
     INTERMEDIARIES FOR DISTRIBUTION AND INDIVIDUAL SHAREHOLDER SERVICES. FOR
     MORE INFORMATION, SEE Multiple Class Information AND Service, Distribution
     and Administrative Fees, PAGE 27.

(3)  OTHER EXPENSES, WHICH INCLUDE THE FEES AND EXPENSES OF THE FUND'S
     INDEPENDENT TRUSTEES AND THEIR LEGAL COUNSEL, AS WELL AS INTEREST, WERE
     LESS THAN 0.005% FOR THE MOST RECENT FISCAL YEAR..


------
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
--------------------------------------------------------------------------------
  Investor            $53             $167             $290             $652
  Class
--------------------------------------------------------------------------------
  A Class             $525            $685             $858             $1,358
--------------------------------------------------------------------------------
  B Class             $554            $778             $924             $1,600
--------------------------------------------------------------------------------
  C Class             $154            $478             $824             $1,800
--------------------------------------------------------------------------------

The table above reflects a deduction for charges payable upon redemption. You
would pay the following expenses if you did not redeem your shares and thus did
not incur such charges.

                      1 YEAR          3 YEARS          5 YEARS          10 YEARS
--------------------------------------------------------------------------------
  Investor            $53             $167             $290             $652
  Class
--------------------------------------------------------------------------------
  A Class             $525            $685             $858             $1,358
--------------------------------------------------------------------------------
  B Class             $154            $478             $824             $1,600
--------------------------------------------------------------------------------
  C Class             $154            $478             $824             $1,800
--------------------------------------------------------------------------------


------
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?

The portfolio 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 portfolio 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 portfolio managers seek to invest in securities that will result in a high
yield for the fund. To accomplish this, the portfolio 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
portfolio 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.

When determining whether to sell a security, portfolio managers consider, among
other things, current and anticipated changes in interest rates, the credit
quality of a particular issuer, comparable alternatives, general market
conditions and any other factor deemed relevant by the portfolio managers.

A description of the policies and procedures with respect to the disclosure of
the fund's portfolio securities is available in the statement of additional
information.


------
7


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 9 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.

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.

There is no guarantee that all of the fund's income will remain exempt from
federal or state income taxes. Income from municipal bonds held by a fund could
be declared taxable because of unfavorable changes in tax laws, adverse
interpretations by the Internal Revenue Service or state tax authorities, or
noncompliant conduct of a bond issuer.

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

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

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

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

                           AMOUNT OF       PERCENT OF   REMAINING   WEIGHTED
                           SECURITY OWNED  PORTFOLIO    MATURITY    MATURITY
--------------------------------------------------------------------------------
Debt Security A            $100,000        25%          4 years      1 year
--------------------------------------------------------------------------------
Debt Security B            $300,000        75%          12 years     9 years
--------------------------------------------------------------------------------
Weighted Average Maturity                                           10 years
--------------------------------------------------------------------------------

TYPES OF RISK

The basic types of risk the 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.

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.


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

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

Debt securities rated in one of the highest four categories by a nationally
recognized securities rating organization are considered investment grade.
Although they are considered investment grade, an investment in these debt
securities still involves some credit risk because even 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

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

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


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

THE INVESTMENT ADVISOR

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

The advisor is responsible for managing the investment 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 provides to the fund, the advisor receives a unified
management fee based on a percentage of the daily net assets of each specific
class of shares of the fund. The management fee is calculated daily and paid
monthly in arrears. Out of the fund's 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.

The percentage rate used to calculate the management fee for each class of
shares of the fund is determined daily using a two-component formula that takes
into account (i) the daily net assets of the accounts managed by the advisor
that are in the same broad investment category as the fund (the "Category Fee")
and (ii) the assets of all the funds in the American Century family of funds
(the "Complex Fee"). The statement of additional information contains detailed
information about the calculation of the management fee.

MANAGEMENT FEES PAID
BY THE FUND TO THE ADVISOR
AS A PERCENTAGE OF AVERAGE
NET ASSETS FOR THE MOST
RECENT FISCAL YEAR ENDED             INVESTOR       A          B          C
AUGUST 31, 2005                      CLASS          CLASS      CLASS      CLASS
--------------------------------------------------------------------------------
California High-Yield Municipal      0.52%          0.52%      0.52%      0.52%
--------------------------------------------------------------------------------

A discussion regarding the basis for the Board of Trustees' approval of the
fund's investment advisory contract with the advisor is available in the fund's
report to shareholders dated August 31, 2005.


------
11


THE FUND MANAGEMENT TEAM

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

STEVEN M. PERMUT

Mr. Permut, Senior Vice President and Senior Portfolio Manager, has been a
member of the team since joining American Century in June 1987. He became a
portfolio manager in June 1990. 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.

The statement of additional information provides additional information about
the other accounts managed by the portfolio manager, if any, the structure of
his compensation, and his ownership of fund securities.

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 and/or the advisor may change any
other policies and investment strategies.


------
12


INVESTING DIRECTLY WITH AMERICAN CENTURY

SERVICES AUTOMATICALLY AVAILABLE TO YOU

Most accounts automatically will have access to the services listed under WAYS
TO MANAGE YOUR ACCOUNT 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). 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. If you want to add online and telephone
services later, you can complete an Investor Service Options form.

ACCOUNT MAINTENANCE FEE

If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
we may charge you a $12.50 semiannual account maintenance fee if the value of
those shares is less than $10,000. We will determine the amount of your total
eligible investments twice per year, generally the last Friday in October and
April. If the value of those investments is less than $10,000 at that time, we
will automatically redeem shares in one of your accounts to pay the $12.50 fee.
Please note that you may incur tax liability as a result of the redemption. In
determining your total eligible investment amount, we will include your
investments in all PERSONAL ACCOUNTS (including American Century Brokerage
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 americancentury.com/info/demo.

        [graphic of triangle]

        PERSONAL ACCOUNTS INCLUDE INDIVIDUAL ACCOUNTS, JOINT ACCOUNTS, UGMA/UTMA
        ACCOUNTS, PERSONAL TRUSTS, COVERDELL EDUCATION SAVINGS ACCOUNTS, IRAS
        (INCLUDING TRADITIONAL, ROTH, ROLLOVER, SEP-, SARSEP- AND SIMPLE-IRAS),
        AND CERTAIN OTHER RETIREMENT ACCOUNTS. 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.

WIRE PURCHASES

CURRENT INVESTORS: If you would like to make a wire purchase into an existing
account, your bank will need the following information. (To invest in a new
fund, please call us first to set up the new account.)

*  American Century's bank information: Commerce Bank N.A., Routing No.
   101000019, Account No. 2804918

*  Your American Century account number and fund name

*  Your name

NEW INVESTORS: To make a wire purchase into a new account, please complete an
application prior to wiring money.


------
13


WAYS TO MANAGE YOUR ACCOUNT

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

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.

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, Kansas City, Missouri - 8 a.m. to 5 p.m., Monday - Friday

* 4917 Town Center Drive, Leawood, Kansas - 8 a.m. to 5 p.m., Monday - Friday,
  8 a.m. to noon, Saturday

* 1665 Charleston Road, Mountain View, California - 8 a.m. to 5 p.m.,
  Monday - Friday

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

Investor Services Representative: 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. The Automated Information Line
is available only to Investor Class shareholders.

MAKE ADDITIONAL INVESTMENTS: Call or use our Automated Information Line if you
have authorized us to invest from your bank account. The Automated Information
Line is available only to Investor Class shareholders.

SELL SHARES: Call a Service Representative.

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 Service 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 service, you can
purchase shares on a regular basis. You must invest at least $50 per month per
account.

SELL SHARES: You may sell shares automatically by establishing Check-A-Month or
Automatic Redemption plans.

See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.


------
14


INVESTING THROUGH A FINANCIAL INTERMEDIARY

The fund's A, B and C Classes are intended for purchase through FINANCIAL
INTERMEDIARIES that provide various administrative and distribution services.
This fund is not available for retirement plans.

        [graphic of triangle]

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

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 professional for the services provided to you. Your
financial professional can help you choose the option that is most appropriate.

The following chart provides a summary description of these classes.

A CLASS                                       B CLASS
--------------------------------------------------------------------------------
Initial sales charge(1)                       No initial sales charge
--------------------------------------------------------------------------------
Generally no contingent                       Contingent deferred sales charge
deferred sales charge(2)                      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                    Aggregate purchases limited
for long-term investors                       to amounts 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
--------------------------------------------------------------------------------
Aggregate purchases 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 CONTINGENT DEFERRED SALES CHARGE (CDSC) OF 1.00% WILL BE CHARGED ON
     CERTAIN PURCHASES OF $1,000,000 OR MORE THAT ARE REDEEMED WITHIN ONE YEAR
     OF PURCHASE.

CALCULATION OF SALES CHARGES

The information regarding sales charges provided herein is included free of
charge and in a clear and prominent format at americancentury.com in the
INVESTORS USING ADVISORS and INVESTMENT PROFESSIONALS portions of the Web site.
From the description of A, B or C Class shares, a hyperlink will take you
directly to this disclosure.


------
15


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 professional are:

                                                                  AMOUNT PAID
                                               SALES CHARGE       TO FINANCIAL
                            SALES CHARGE       AS A % OF          PROFESSIONAL
                            AS A % OF          NET AMOUNT         AS A % OF
PURCHASE AMOUNT             OFFERING PRICE     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 PROFESSIONALS.

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. No sales charge applies to
reinvested dividends.

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 professional must provide certain information, including the
account numbers of any accounts to be aggregated, 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 at each account's current market value 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

For purposes of aggregation, only investments made through individual-level
accounts, rather than accounts aggregated at the intermediary level, may be
included.

CONCURRENT PURCHASES. You may combine simultaneous purchases in A, B or C Class
shares of any two or more American Century Advisor Funds (funds that offer A, B
and C Class shares) 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.


------
16


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. Such purchases will be valued
at their historical cost for this purpose. 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 selling
   agreements with the advisor or distributor

*  Wrap accounts maintained for clients of certain financial intermediaries
   who have entered into selling 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. For sales of B Class shares, the amount paid to your financial
professional is 4.00% of the amount invested. If you redeem your shares within
six years of purchase date, you will pay a contingent deferred sales charge
(CDSC) as set forth below. The purpose of the CDSC is to permit the fund's
distributor to recoup all or a portion of the up-front payment made to your
financial professional. There is no CDSC on shares acquired through reinvestment
of dividends or capital gains.

REDEMPTION 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 (which carry a 1.00% 12b-1 fee) will automatically convert to A
Class shares (which carry a 0.25% 12b-1 fee) in the month of the eight-year
anniversary of the purchase date.


------
17


C Class

C Class shares are sold at their net asset value without an initial sales
charge. For sales of C Class shares, the amount paid to your financial
professional is 1.00% of the amount invested. 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 purpose
of the CDSC is to permit the fund's distributor to recoup all or a portion of
the up-front payment made to your financial professional.

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

CALCULATION OF CONTINGENT DEFERRED SALES CHARGE (CDSC)

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

CDSC WAIVERS

Any applicable CDSC 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 and C Class
   shares

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

*  tax-free returns of excess contributions to IRAs

*  redemptions due to death or post-purchase disability

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

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

*  if no broker was compensated for the sale

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 professional 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.


------
18


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.

EXCHANGES BETWEEN FUNDS (C CLASS)

You may exchange C Class shares of a fund for C Class shares of any other
American Century fund. You may not exchange from the C Class to any other class.
We will not charge a Contingent Deferred Sales Charge (CDSC) on the shares you
exchange, regardless of the length of time you have owned them. When you do
redeem shares that have been exchanged, the CDSC will be based on the date you
purchased the original shares.

BUYING AND SELLING SHARES

Your ability to purchase, exchange, redeem and transfer shares will be affected
by 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

*  trading restrictions

In addition, your financial intermediary may charge a transaction fee for the
purchase or sale of fund shares. Those charges are retained by the financial
intermediary and are not shared with American Century or the fund. Please
contact your financial intermediary or plan sponsor for a complete description
of its policies. Copies of the fund's annual report, semiannual report and
statement of additional information are available from your financial
intermediary or plan sponsor.

The fund has authorized certain financial intermediaries to accept orders on the
fund's behalf. American Century has selling agreements with these financial
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 financial 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 selling agreement, they will be priced at the net asset
value next determined after your request is received in the form required by the
financial intermediary.

See ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT for more information about
investing with us.


------
19


ADDITIONAL POLICIES AFFECTING YOUR INVESTMENT

MINIMUM INITIAL INVESTMENT AMOUNTS

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

LIMITATIONS ON SALE

As of the date of this prospectus, California High-Yield Municipal Fund is
registered for sale only in the following states: Arizona, California, Colorado,
Florida, Hawaii, New Mexico, Nevada, New York, Oregon, Texas, Utah, Washington
and the Virgin Islands.

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.

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

In addition, we reserve the right to honor certain redemptions with securities,
rather than cash, as described in the next section.

SPECIAL REQUIREMENTS FOR LARGE REDEMPTIONS

If, during any 90-day period, you redeem fund shares worth more than $250,000
(or 1% of the value of a fund's assets if that amount is less than $250,000), we
reserve the right to pay part or all of the redemption proceeds in excess of
this amount in readily marketable securities instead of in cash. The portfolio
managers would select these securities from the fund's portfolio.

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

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


------
20


REDEMPTION OF SHARES IN LOW-BALANCE ACCOUNTS

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

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.

*  You have chosen to conduct business in writing only and would like to
   redeem over $100,000.

*  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 EFT (ACH or
   wire) to a destination other than your personal bank account.

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

*  You change your address and request a redemption over $100,000 within 15
   days.

*  You change your bank information and request a redemption within 15 days.

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

MODIFYING OR CANCELING AN INVESTMENT

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

ABUSIVE TRADING PRACTICES

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

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

American Century uses a variety of techniques to monitor for and detect abusive
trading practices. These techniques may vary depending on the type of fund, the
class of shares or whether the shares are held directly or indirectly with
American Century. They may change from time to time as determined by American
Century in its sole discretion. To minimize harm


------
21


to the funds and their shareholders, we reserve the right to reject any purchase
order (including exchanges) from any shareholder we believe has a history of
abusive trading or whose trading, in our judgment, has been or may be disruptive
to the funds. In making this judgment, we may consider trading done in multiple
accounts under common ownership or control.

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

* within seven days of the purchase, or

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

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

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

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

YOUR RESPONSIBILITY FOR UNAUTHORIZED TRANSACTIONS

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

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 us or your financial professional. For American Century
Brokerage accounts, please call 1-888-345-2071.

RIGHT TO CHANGE POLICIES

We reserve the right to change any stated investment requirement, including
those that relate to purchases, exchanges and redemptions. We also may alter,
add or discontinue any service or privilege. Changes may affect all investors or
only those in certain classes or groups. In addition, from time to time we may
waive a policy on a case-by-case basis, as the advisor deems appropriate.


------
22


SHARE PRICE AND DISTRIBUTIONS

SHARE PRICE

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

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

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

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

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

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


------
23


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 should 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 automatically in additional shares
unless you elect to have dividends and/or capital gains sent to another American
Century account, to your bank electronically, or to your home address or to
another address by check.

        [graphic of triangle]

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

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.


------
24


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.

Taxability of Distributions

Fund distributions may consist of income, such as dividends and interest earned
by a fund from its investments, or capital gains generated by a fund from the
sale of its investment securities. Distributions of income are generally exempt
from regular federal income tax. However, if distributions are federally
taxable, such distributions may be designated as QUALIFIED DIVIDEND INCOME. If
so, and if you meet a minimum required holding period with respect to your
shares of the fund, such 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%
--------------------------------------------------------------------------------


------
25


If a fund's distributions exceed its income and capital gains realized during
the tax year, all or a portion of the distributions made by the fund in that tax
year will be considered a return of capital. A return of capital distribution is
generally not subject to tax, but will reduce your cost basis in the fund and
result in higher realized capital gains (or lower realized capital losses) upon
the sale of the fund shares.

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.

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

Taxes on Transactions

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

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

Buying a Dividend

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

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

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


------
26


MULTIPLE CLASS INFORMATION

American Century offers four classes of shares of the fund: A Class, B Class, C
Class and Investor Class.

The classes have different fees, expenses and/or minimum investment
requirements. The difference in the fee structures between the classes is the
result of their separate arrangements for shareholder and distribution services.
It is not the result of any difference in advisory or custodial fees or other
expenses related to the management of the fund's assets, which do not vary by
class. Different fees and expenses will affect performance.

Except as described herein, all classes of shares of a 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.

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

SERVICE, DISTRIBUTION AND ADMINISTRATIVE FEES

Investment Company Act Rule 12b-1 permits mutual funds that adopt a written plan
to pay certain expenses associated with the distribution of their shares out of
fund assets. Each class, except the Investor 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. The distributor may use
these fees to pay for certain ongoing shareholder and administrative services
and for distribution services, including past distribution services. The
distributor pays all or a portion of such fees to the financial intermediaries
that make the classes available. Because these fees are used to pay for services
that are not related to prospective sales of the fund, each class will continue
to make payments under its plan even if it is closed to new investors. Because
these fees are paid out of the fund's assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
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.


------
27


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 show the changes in
share price for this period in comparison to changes over the last five fiscal
years or less, if the share class is not five years old.

On a per-share basis, 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

The Financial Highlights have been audited by PricewaterhouseCoopers LLP,
independent registered public accounting firm. Their Report of Independent
Registered Public Accounting Firm and the financial statements are included in
the fund's annual report, which is available upon request.


------
28


CALIFORNIA HIGH-YIELD MUNICIPAL FUND
Investor Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
---------------------------------------------------------------------------------------
                                       2005      2004      2003      2002      2001
---------------------------------------------------------------------------------------
PER-SHARE DATA
---------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period   $9.93     $9.65     $9.84     $9.79     $9.44
---------------------------------------------------------------------------------------
Income From Investment Operations
-------------------------------------
   Net Investment Income               0.51      0.52      0.52      0.52      0.52
-------------------------------------
   Net Realized and                    0.43      0.28      (0.19)    0.05      0.35
   Unrealized Gain (Loss)
---------------------------------------------------------------------------------------
   Total From Investment Operations    0.94      0.80      0.33      0.57      0.87
---------------------------------------------------------------------------------------
Distributions
-------------------------------------
   From Net Investment Income          (0.51)    (0.52)    (0.52)    (0.52)    (0.52)
---------------------------------------------------------------------------------------
Net Asset Value, End of Period         $10.36    $9.93     $9.65     $9.84     $9.79
=======================================================================================
   TOTAL RETURN(1)                     9.65%     8.48%     3.35%     6.07%     9.50%

RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                  0.52%     0.53%     0.54%     0.54%     0.54%
-------------------------------------
Ratio of Net Investment
Income to Average Net Assets           4.99%     5.30%     5.24%     5.37%     5.45%
-------------------------------------
Portfolio Turnover Rate                13%       19%       30%       32%       47%
-------------------------------------
Net Assets, End of Period
(in thousands)                         $377,534  $332,434  $334,032  $373,061  $336,400
---------------------------------------------------------------------------------------

(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.


------
29


CALIFORNIA HIGH-YIELD MUNICIPAL FUND
A Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
--------------------------------------------------------------------------------
                                           2005          2004          2003(1)
--------------------------------------------------------------------------------
PER-SHARE DATA
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Period       $9.93         $9.65         $9.79
--------------------------------------------------------------------------------
Income From Investment Operations
----------------------------------------
   Net Investment Income                   0.48          0.50          0.29
----------------------------------------
   Net Realized and                        0.43          0.28          (0.14)
   Unrealized Gain (Loss)
--------------------------------------------------------------------------------
   Total From Investment Operations        0.91          0.78          0.15
--------------------------------------------------------------------------------
Distributions
----------------------------------------
   From Net Investment Income              (0.48)        (0.50)        (0.29)
--------------------------------------------------------------------------------
Net Asset Value, End of Period             $10.36        $9.93         $9.65
================================================================================
   TOTAL RETURN(2)                         9.38%         8.21%         1.48%

RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                      0.77%         0.78%         0.78%(3)
----------------------------------------
Ratio of Net Investment
Income to Average Net Assets               4.74%         5.05%         5.04%(3)
----------------------------------------
Portfolio Turnover Rate                    13%           19%           30%(4)
----------------------------------------
Net Assets, End of Period
(in thousands)                             $39,608       $11,499       $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.


------
30


CALIFORNIA HIGH-YIELD MUNICIPAL FUND
B Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
--------------------------------------------------------------------------------
                                            2005          2004          2003(1)
--------------------------------------------------------------------------------
PER-SHARE DATA
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Period        $9.93         $9.65         $9.79
--------------------------------------------------------------------------------
Income From Investment Operations
----------------------------------------
   Net Investment Income                    0.40          0.42          0.25
----------------------------------------
   Net Realized and                         0.43          0.28          (0.14)
   Unrealized Gain (Loss)
--------------------------------------------------------------------------------
   Total From Investment Operations         0.83          0.70          0.11
--------------------------------------------------------------------------------
Distributions
----------------------------------------
   From Net Investment Income               (0.40)        (0.42)        (0.25)
--------------------------------------------------------------------------------
Net Asset Value, End of Period              $10.36        $9.93         $9.65
================================================================================
   TOTAL RETURN(2)                          8.57%         7.40%         1.05%

RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                       1.52%         1.53%         1.53%(3)
----------------------------------------
Ratio of Net Investment
Income to Average Net Assets                3.99%         4.30%         4.43%(3)
----------------------------------------
Portfolio Turnover Rate                     13%           19%           30%(4)
----------------------------------------
Net Assets, End of Period
(in thousands)                              $1,158        $866          $352
--------------------------------------------------------------------------------

(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.


------
31


CALIFORNIA HIGH-YIELD MUNICIPAL FUND
C Class

FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
--------------------------------------------------------------------------------
                                           2005          2004         2003(1)
--------------------------------------------------------------------------------
PER-SHARE DATA
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Period       $9.93         $9.65        $9.79
--------------------------------------------------------------------------------
Income From Investment Operations
----------------------------------------
   Net Investment Income                   0.40          0.43         0.26
----------------------------------------
   Net Realized and                        0.43          0.28         (0.14)
   Unrealized Gain (Loss)
--------------------------------------------------------------------------------
   Total From Investment Operations        0.83          0.71         0.12
--------------------------------------------------------------------------------
Distributions
----------------------------------------
   From Net Investment Income              (0.40)        (0.43)       (0.26)
--------------------------------------------------------------------------------
Net Asset Value, End of Period             $10.36        $9.93        $9.65
================================================================================
   TOTAL RETURN(2)                         8.56%         7.49%        1.22%

RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets                      1.52%         1.48%        1.28%(3)
----------------------------------------
Ratio of Net Investment
Income to Average Net Assets               3.99%         4.35%        4.59%(3)
----------------------------------------
Portfolio Turnover Rate                    13%           19%          30%(4)
----------------------------------------
Net Assets, End of Period
(in thousands)                             $17,499       $7,416       $2,681
--------------------------------------------------------------------------------

(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.


------
32


NOTES


------
33


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, online at americancentury.com, by
contacting American Century at the address or telephone numbers listed below or
by contacting your financial intermediary.

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 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.

FUND REFERENCE                 FUND CODE        TICKER        NEWSPAPER LISTING
--------------------------------------------------------------------------------
California
High-Yield Municipal Fund
  Investor Class               933              BCHYX         CaHYMu
--------------------------------------------------------------------------------
  A Class                      133              CAYAX         CaHYMu
--------------------------------------------------------------------------------
  B Class                      333              CAYBX         CaHYMu
--------------------------------------------------------------------------------
  C Class                      433              CAYCX         CaHYMu
--------------------------------------------------------------------------------

Investment Company Act File No. 811-3706

AMERICAN CENTURY INVESTMENTS
americancentury.com
                                    Banks and Trust Companies, Broker-Dealers,
Self-Directed Retail Investors      Financial Professionals, Insurance Companies
P.O. Box 419200                     P.O. Box 419786
Kansas City, Missouri 64141-6200    Kansas City, Missouri 64141-6786
1-800-345-2021 or 816-531-5575      1-800-345-6488

0601
SH-PRS-45855





January 1, 2006

American Century Investments
STATEMENT OF ADDITIONAL INFORMATION


American Century California Tax-Free and Municipal Funds

California High-Yield Municipal Fund
California Limited-Term Tax-Free Fund
California Long-Term Tax-Free Fund
California Tax-Free Bond Fund
California Tax-Free Money Market Fund

THIS STATEMENT OF ADDITIONAL INFORMATION ADDS TO THE DISCUSSION IN THE FUNDS'
PROSPECTUSES DATED JANUARY 1, 2006, 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 AMERICANCENTURY.COM.

THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY REFERENCE CERTAIN
INFORMATION THAT APPEARS IN THE FUNDS' ANNUAL AND SEMIANNUAL REPORTS, WHICH ARE
DELIVERED TO ALL SHAREHOLDERS. YOU MAY OBTAIN A FREE COPY OF THE FUNDS' ANNUAL
OR SEMIANNUAL REPORTS BY CALLING 1-800-345-2021.

American Century Investment
Services, Inc., Distributor

[american century investments logo and text logo]




American Century Investment Services, Inc., Distributor

©2006 American Century Proprietary Holdings, Inc. All rights reserved.

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




TABLE OF CONTENTS

The Funds' History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  2
Fund Investment Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . .  2
        California High-Yield Municipal Fund. . . . . . . . . . . . . . . . .  3
        California Limited-Term Tax-Free Fund, California Long-Term
        Tax-Free Fund, and California Tax-Free Bond Fund. . . . . . . . . . .  4
        California Tax-Free Money Market Fund . . . . . . . . . . . . . . . .  4
Fund Investments and Risks. . . . . . . . . . . . . . . . . . . . . . . . . .  4
        Investment Strategies and Risks . . . . . . . . . . . . . . . . . . .  4
        Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . 27
        Fundamental Investment Policies . . . . . . . . . . . . . . . . . . . 28
        Temporary Defensive Measures. . . . . . . . . . . . . . . . . . . . . 30
        Portfolio Turnover. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
        The Board of Trustees . . . . . . . . . . . . . . . . . . . . . . . . 33
        Ownership of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . 36
        Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
        Proxy Voting Guidelines . . . . . . . . . . . . . . . . . . . . . . . 36
        Disclosure of Portfolio Holdings. . . . . . . . . . . . . . . . . . . 37
The Funds' Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . 41
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
        Investment Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . 42
        Portfolio Managers. . . . . . . . . . . . . . . . . . . . . . . . . . 45
        Transfer Agent and Administrator. . . . . . . . . . . . . . . . . . . 48
        Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
        Custodian Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
        Independent Registered Public Accounting Firm . . . . . . . . . . . . 48
Brokerage Allocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
        Regular Broker-Dealers. . . . . . . . . . . . . . . . . . . . . . . . 49
Information About Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . 49
        Multiple Class Structure. . . . . . . . . . . . . . . . . . . . . . . 50
        Buying and Selling Fund Shares. . . . . . . . . . . . . . . . . . . . 56
        Valuation of a Fund's Securities. . . . . . . . . . . . . . . . . . . 56
        Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 57
        Non-Money Market Funds. . . . . . . . . . . . . . . . . . . . . . . . 58
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
        Federal Income Tax. . . . . . . . . . . . . . . . . . . . . . . . . . 58
        Alternative Minimum Tax . . . . . . . . . . . . . . . . . . . . . . . 60
        State and Local Taxes . . . . . . . . . . . . . . . . . . . . . . . . 60
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Explanation of Fixed-Income Securities Ratings. . . . . . . . . . . . . . . . 61


------
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
--------------------------------------------------------------------------------
California High-Yield Municipal Fund
  Investor Class                             BCHYX                 12/30/1986
--------------------------------------------------------------------------------
  A Class                                    CAYAX                 01/31/2003
--------------------------------------------------------------------------------
  B Class                                    CAYBX                 01/31/2003
--------------------------------------------------------------------------------
  C Class                                    CAYCX                 01/31/2003
--------------------------------------------------------------------------------
California Limited-Term Tax-Free Fund
  Investor Class                             BCSTX                 06/01/1992
--------------------------------------------------------------------------------
California Long-Term Tax-Free Fund
  Investor Class                             BCLTX                 11/09/1983
--------------------------------------------------------------------------------
California Tax-Free Bond Fund
  Investor Class                             BCITX                 11/09/1983
--------------------------------------------------------------------------------
California Tax-Free Money Market Fund
  Investor Class                             BCTXX                 11/09/1983
--------------------------------------------------------------------------------

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 4. 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 Rule 2a-7, the fund must
comply with the definition of diversified under the rule.


------
2


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 60.

For an explanation of the securities ratings referred to in the prospectuses and
this statement of additional information, see EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS beginning on page 61.

CALIFORNIA HIGH-YIELD MUNICIPAL FUND

California High-Yield Municipal invests at least 80% of its assets in municipal
securities with income payments exempt from federal and California income taxes.
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 58.


------
3


CALIFORNIA LIMITED-TERM TAX-FREE FUNDCALIFORNIA LONG-TERM TAX-FREE FUND
CALIFORNIA TAX-FREE BOND FUND

California Limited-Term Tax-Free, California Long-Term Tax-Free and California
Tax-Free Bond 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 to be of a quality comparable to
   the securities listed above.

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.

FUND INVESTMENTS AND RISKS

INVESTMENT STRATEGIES AND RISKS

This section describes the investment vehicles and strategies that the portfolio
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.


------
4


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 July
1, 2005 population, over 36.5 million, representing approximately 12.5% of the
U. S. population has grown by nearly 11.3% since 1998. 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, 2004, the 5-county Los Angeles area accounted
for 49 percent of the state's population, with over 17 million residents, and
the 10-county San Francisco Bay Area represented 20 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. Although the Bay Area is still slow to recover from the most
recent downturn, the state as a whole has rebounded. The state has added 336,000
jobs between July 2003 and March 2005 compared with 367,000 jobs lost between
January 2001 and July 2003.

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.


------
5


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.

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 July 1, 2005, the state had outstanding approximately $47.5 billion in
aggregate principal amount of long-term general obligation bonds, and unused
voter authorizations for the future issuance of approximately $35.2 billion of
long-term general obligation bonds.


------
6


The California Economic Recovery Bond Act (proposition 57) was approved by the
voters in a statewide primary election on March 2, 2004. Proposition 57
authorizes the issuance of up to $15 billion in economic recovery bonds to
finance the negative general fund reserve balance as of June 30, 2004 and other
general fund obligations undertaken prior to June 30, 2004. In May 2004 the
state issued $10.9 billion in Economic Recovery Bonds resulting in the deposit
of net proceeds to the general fund of approximately $11.25 billion during the
2003-04 fiscal year (of which, for budgetary purposes, approximately $9.2
billion was applied to the 2003-04 fiscal year and approximately $2 billion will
be applied to offset fiscal year 2004-05 general fund expenditures). On June 18,
2003, the state issued $10.97 billion of 2003 Revenue Anticipation Warrants,
which matured and were paid in full on June 16, 2004.

State Finances

The state's principal sources of General Fund revenues for fiscal year 2004-05
were the California personal income tax (49% of total revenues), the sales tax
(32% of total revenues), and bank and corporations taxes (10% 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 few 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 faced its 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. Taxes on capital gains realizations and stock options,
which are largely linked to stock market performance, can add a significant
volatility to personal income tax receipts. Capital gains and stock option tax
receipts have accounted for as much as 24.7% and as little as 5.6% of general
fund revenues in the past ten years. The 2005-06 May Revision estimates that
capital gains and stock option tax receipts will account for 10.8% of general
fund revenues in each fiscal years 2004-05 and 2005-06.


------
7


The 2005-06 Governor's Budget released on January 10, 2005, after funding a $500
million reserve, closed an estimated $9.1 billion gap between resources and
expenditures primarily through the use of $1.7 billion of economic recovery
bonds, suspending the $1.3 billion transfer from the general fund of sales taxes
on fuels to transportation programs pursuant to proposition 42, not
appropriating $2.3 billion of the proposition 98 increase, and other spending
reductions. The 2005-06 May Revision, reflected an increase in general fund
revenues compared to January of about $3.7 billion due to economic growth and
about $3.9 billion in one-time revenues over the 2004-05 and 2005-06 time
periods due to the tax amnesty program. With the increased revenues, the May
Revision proposed to eliminate the use of economic recovery bonds, fully fund
transportation programs under proposition 42 and pay back 50% of the vehicle
license fee gap (subsequently increased to 100% at budget act) owed to local
governments, among other things.

Under the 2005 Budget Act, general fund revenues and transfers are projected to
increase 5.7%, from 79.9 billion in fiscal year 2004-05 to $84.5 billion in
fiscal year 2005-06. The revenue projections assume continued but moderating
growth in California's economy as reflected in several key indicators. The 2005
budget act contains general fund appropriations of $90 billion, compared to
$81.7 billion in 2004-05. The difference between revenues and expenditures in
fiscal 2005-06 is funded by using a part of the $7.5 billion fund balance at
June 30, 2005. The June 30, 2006 reserve is projected to be $1.302 billion,
compared to an estimated June 30, 2005 reserve of $6.857 billion. About $900
million of this reserve will be set aside for payment in fiscal year 2006-07 of
tax refunds and other adjustments related to the tax amnesty program implemented
in early 2005.

The 2005 budget act also includes special fund expenditures of $23.3 billion and
bond fund expenditures of $4 billion. The state expects to issue $3 billion in
revenue anticipation notes (RANs) to meet the state's short-term cash needs for
fiscal year 2005-06.

The 2005 budget act was substantially similar to the Governor's May revision
proposals. It contained the following components:

(1)  PROPOSITION 98-General fund expenditures are proposed to increase by
     $2.582 billion, or 7.6% to $36.6 billion. This reflects increases in the
     proposition 98 guaranteed funding level resulting from increases in general
     fund revenues in fiscal year 2005-06, adjusted for changes in local
     revenues. The budget act funds enrollment growth and the 4.23% cost of
     living increase. Per pupil spending under Proposition 98 is projected to be
     $7,402, compared to $7,023 in the previous year.

(2)  HIGHER EDUCATION-The 2005 budget act marks the first year of funding
     for the higher education compact under the administration. The compact was
     signed in spring 2004 with both UC and CSU to provide funding stability for
     enrollment growth and basic support over the next six fiscal years. The
     2005 budget act provides for total higher education funding of $17.8
     billion from all revenue sources, including $10.2 billion from the general
     fund. General fund support for both UC and CSU was increased by $134
     million (about 5%) compared to 2004-05 which assumes board approved fee
     increases.

(3)  HEALTH AND HUMAN SERVICES-The 2005 budget act increases general fund
     expenditures by $2.1 billion or 8.5% , to $27.1 billion for health and
     human services programs. This increase consists of higher Medi-Cal
     expenditures of $1.3 billion, Department of Development Services
     expenditures of $152 million, Department of Mental Health expenditures of
     $306 million, and Department of Social Services expenditures of $55
     million, among, other things.

(4)  RETIREMENT AND EMPLOYEE COMPENSATION-The 2005 budget act provides for
     full funding of the state's statutory obligations to the State Teachers
     Retirement System.

(5)  VEHICLE LICENSE FEE GAP LOAN REPAYMENT-The 2005 budget act fully
     repays the $1.2 billion that local governments lost between July and
     October 2003, when the vehicle license fee offset program was temporarily
     suspended.

(6)  TRANSPORTATION FUNDING-The Proposition 42 transfer is fully funded at
     an estimated $1.3 billion. The 2005 budget act includes a proposal to
     provide about $1 billion for transportation programs from the sale of
     future receipts of gaming revenues from new compacts with several Indian
     tribes.

------
8


(7)  FINANCIAL INSTRUMENTS-The 2005 budget act reflects the state's
     issuance of pension obligation bonds to fund approximately $525 million of
     the state's 2005-06 retirement obligation to the California Public
     Employees' Retirement System. The general fund will be responsible for all
     future bond redemption costs.

(8)  TAXES-The 2005 budget act contains no new taxes.

(9)  FUTURE BUDGET DEFICITS-The administration recognizes that, absent
     further corrective action, based on projected revenues and continuation of
     existing programs expenditures, the fiscal year 2006-07 budget will face a
     gap between revenues and expenditures.

In its May 13, 2005 "Overview of the 2005-06 May Revision," the Legislative
Analyst's Office ("LAO") found "sensible" the Governor's use of the estimated $4
billion of new funds generated by an improved economic outlook to reducing debt
and restoring Proposition 42 transportation funding. However, the LAO stated
that the basic fiscal picture for the state had not changed dramatically from
its earlier assessment; the LAO reiterated its forecasts of budget shortfalls of
about $4.1 billion in fiscal year 2006-07 (net of amnesty related tax refunds
and adjustments), $4 billion in fiscal year 2007-08 and then $3 billion for
fiscal year 2008-09.

Moreover the LAO continued to express caution about the reliability of certain
revenue and savings proposals incorporated in to the 2005-06 Governor's budget,
including (i) the impact of a recent state superior court decision that found
that last year's suspension of a $500 million payment to CalSTRS by the state to
be illegal and (ii) approximately $525 million of additional revenue from the
issuance of pension bonds (which are being challenged in court). The LAO also
projected that revenues during the second half of the fiscal year would be $600
million less than as projected in the 2005-06 May Revision, although the LAO
stated their forecast of revenues for the 2005-06 budget year is similar to the
Governor's revised estimate.

The state's credit ratings initially declined due to the budget crisis but have
since rebounded due to an uptrend in the economy and the state's liquidity
position. After reaching their lowest point in 2003, the ratings of the state's
general obligation bonds have been raised by all three rating agencies in 2004
and 2005. Standard and Poor's has raised the state's general obligation credit
rating from "BBB" to "A". Moody's has raised the rating from "Baa1" to "A2".
Fitch has raised the rating from "BBB" to "A". The most recent actions by
Moody's and Fitch both took place in July 2005.

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.


------
9


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.

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

Variable- and floating-rate instruments are issued by corporations, financial
institutions, states, municipalities, and government agencies and
instrumentalities. 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


------
10


rights that permit holders to demand payment of the unpaid principal plus
accrued interest, from the issuers or from financial intermediaries. The rate
adjustment mechanisms are designed to result in a market value for the VRDO or
FRDO that approximates par value. Although money market funds typically limit
their investments to securities with remaining maturities of 397 days or less,
they may invest in variable- and floating-rate instruments that have nominal (or
stated) maturities in excess of 397 days, provided that such instruments have
demand features and/or interest rate reset mechanisms consistent with regulatory
requirements for money market funds.

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
portfolio managers may buy securities with puts attached to keep a fund fully
invested in municipal securities while maintaining sufficient portfolio
liquidity to meet redemption requests or to facilitate management of the fund's
investments.

To ensure that the interest on municipal securities subject to puts is
tax-exempt to the funds, the advisor limits the funds' use of puts in accordance
with applicable interpretations and rulings of the Internal Revenue Service
(IRS).

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

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

Tender Option Bonds

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

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

There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, the
portfolio 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


------
11


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 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. For example, market rates of interest on debt securities at
the time of delivery may be higher or lower than those contracted for on the
when-issued security. Accordingly, the value of the security may decline prior
to delivery, which could result in a loss to the fund. While the fund will make
commitments to purchase or sell securities with the intention of actually
receiving or delivering them, it may sell the securities before the settlement
date if doing so is deemed advisable as a matter of investment strategy.

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

As an operating policy, no fund will commit more than 50% of its total assets to
when-issued or forward commitment agreements. If fluctuations in the value of
securities held cause more than 50% of a fund's total assets to be committed
under when-issued or forward commitment agreements, the portfolio 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.


------
12


Many leases and contracts include non-appropriation 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.

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.


------
13


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.

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


------
14


Under the Investment Company Act, a fund's investment in other investment
companies (including money market funds) currently is limited to

(a)  3% of the total voting stock of any one investment company;

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

(c)  10% of a fund's total assets in the aggregate.

For the non-money market funds, these investments may include investments in
money market funds managed by the advisor. Any investments in money market funds
must be consistent with the investment policies and restrictions of the fund
making the investment.

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. Generally, a derivative security is a financial
arrangement, the value of which is based on, or derived from, a traditional
security, asset, or market index.

Certain derivative securities may be described as structured investments. A
structured investment is a security whose value or performance is linked to an
underlying index or other security or asset class. Structured investments
include asset-backed securities (ABS), commercial and residential
mortgage-backed securities (CMBS and MBS), and collateralized mortgage
obligations (CMO), which are described more fully below. Structured investments
also include securities backed by other types of collateral. 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 depositary receipts
backed by, or representing interests in, those assets.

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. Because structured securities typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Structured securities are subject to such risks as the
inability or unwillingness of the issuers of the underlying securities to repay
principal and interest, and requests by the issuers of the underlying securities
to reschedule or restructure outstanding debt and to extend additional loan
amounts.

Some derivative securities, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.

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.

The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates.


------
15


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

*  the risk that the underlying security, interest rate, market index or
   other financial asset will not move in the direction the portfolio 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 counterparty will fail to perform its obligations.

A fund may not invest in a derivative security unless the reference index 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. A fund may not invest in a 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. The funds' Board of Trustees has reviewed the advisor's policy
regarding investments in derivative securities. That policy specifies factors
that must be considered in connection with a purchase of derivative securities
and provides that a fund may not invest in a derivative security if it would be
possible for a fund to lose more money than the notional value of the
investment. The policy also establishes a committee that must review certain
proposed purchases before the purchases can be made. The advisor will report on
fund activity in derivative securities to the Board of Trustees as necessary.

Swap Agreements

Each fund, other than money market funds, 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 cash flows 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.


------
16


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.

Inflation-Indexed Securities

The funds may purchase inflation-indexed securities issued by the U.S. Treasury,
U.S. government agencies and instrumentalities other than the U.S. Treasury, and
entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities.

Inflation-Indexed Treasury Securities

Inflation-indexed U.S. Treasury securities are U.S. Treasury securities with a
final value and interest payment stream linked to the inflation rate.
Inflation-indexed U.S. Treasury securities may be issued in either note or bond
form. Inflation-indexed U.S. Treasury notes have maturities of at least one
year, but not more than 10 years. Inflation-indexed U.S. Treasury bonds have
maturities of more than 10 years.

Inflation-indexed U.S. Treasury securities may be attractive to investors
seeking an investment backed by the full faith and credit of the U.S. government
that provides a return in excess of the rate of inflation. These securities were
first sold in the U.S. market in January 1997. Inflation-indexed U.S. Treasury
securities are auctioned and issued on a quarterly basis.

STRUCTURE AND INFLATION INDEX

The principal value of inflation-indexed U.S. Treasury securities will be
adjusted to reflect changes in the level of inflation. The index for measuring
the inflation rate for inflation-indexed U.S. Treasury securities is the
non-seasonally adjusted U.S. City Average All Items Consumer Price for All Urban
Consumers Index (Consumer Price Index) published monthly by the U.S. Department
of Labor's Bureau of Labor Statistics.

Semiannual coupon interest payments are made at a fixed percentage of the
inflation-indexed principal value. The coupon rate for the semiannual interest
rate of each issuance of inflation-indexed U.S. Treasury securities is
determined at the time the securities are sold to the public (i.e., by
competitive bids in the auction). The coupon rate will likely reflect real
yields available in the U.S. Treasury market; real yields are the prevailing
yields on U.S. Treasury securities with similar maturities, less then-prevailing
inflation expectations. While a reduction in inflation will cause a reduction in
the interest payment made on the securities, the repayment of principal at the
maturity of the security is guaranteed by the U.S. Treasury to be no less than
the original face or par amount of the security at the time of issuance.


------
17


INDEXING METHODOLOGY

The principal value of inflation-indexed U.S. Treasury securities will be
indexed, or adjusted, to account for changes in the Consumer Price Index.
Semiannual coupon interest payment amounts will be determined by multiplying the
inflation-indexed principal amount by one-half the stated rate of interest on
each interest payment date.

TAXATION

The taxation of inflation-indexed U.S. Treasury securities is similar to the
taxation of conventional bonds. Both interest payments and the difference
between original principal and the inflation-adjusted principal will be treated
as interest income subject to taxation. Interest payments are taxable when
received or accrued. The inflation adjustment to the principal is subject to tax
in the year the adjustment is made, not at maturity of the security when the
cash from the repayment of principal is received. If an upward adjustment has
been made (which typically should happen), investors in non-tax-deferred
accounts will pay taxes on this amount currently. Decreases in the indexed
principal can be deducted only from current or previous interest payments
reported as income.

Inflation-indexed U.S. Treasury securities therefore have a potential cash flow
mismatch to an investor, because investors must pay taxes on the
inflation-adjusted principal before the repayment of principal is received. It
is possible that, particularly for high income tax bracket investors,
inflation-indexed U.S. Treasury securities would not generate enough income in a
given year to cover the tax liability they could create. This is similar to the
current tax treatment for zero-coupon bonds and other discount securities. If
inflation-indexed U.S. Treasury securities are sold prior to maturity, capital
losses or gains are realized in the same manner as traditional bonds.

Investors in a fund will receive dividends that represent both the interest
payments and the principal adjustments of the inflation-indexed securities held
in the fund's portfolio. An investment in a fund may, therefore, be a means to
avoid the cash flow mismatch associated with a direct investment in
inflation-indexed securities. For more information about taxes and their effect
on you as an investor in the funds, see TAXES, page 58.

U.S. GOVERNMENT AGENCIES

A number of U.S. government agencies and instrumentalities other than the U.S.
Treasury may issue inflation-indexed securities. Some U.S. government agencies
have issued inflation-indexed securities whose design mirrors that of the
inflation-indexed U.S. Treasury securities described above.

OTHER ENTITIES

Entities other than the U.S. Treasury or U.S. government agencies and
instrumentalities may issue inflation-indexed securities.

SHARE PRICE VOLATILITY

Inflation-indexed securities are designed to offer a return linked to inflation,
thereby protecting future purchasing power of the money invested in them.
However, inflation-indexed securities provide this protected return only if held
to maturity. In addition, inflation-indexed securities may not trade at par
value. Real interest rates (the market rate of interest less the anticipated
rate of inflation) change over time as a result of many factors, such as what
investors are demanding as a true value for money. When real rates do change,
inflation-indexed securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of inflation-indexed securities and the
share price of a fund holding these securities will fall. Investors in the funds
should be prepared to accept not only this share price volatility but also the
possible adverse tax consequences it may cause.


------
18


An investment in securities featuring inflation-adjusted principal and/or
interest involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-adjusted
principal of the security and the value of the stripped components, will
decrease. If any of these possibilities are realized, a fund's net asset value
could be negatively affected.

Mortgage-Related Securities

To the extent permitted by its investment objectives and policies, each fund,
other than the money market funds, may invest in mortgage-related securities.

BACKGROUND

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

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

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

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

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

GNMA CERTIFICATES

The Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Affairs under
the Servicemen's Readjustment Act of 1944 (VA Loans), as amended, or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. GNMA has unlimited authority to
borrow from the U.S. Treasury in order to meet its obligations under this
guarantee.


------
19


GNMA certificates represent a pro rata interest in one or more pools of the
following types of mortgage loans: (a) fixed-rate level payment mortgage loans;
(b) fixed-rate graduated payment mortgage loans (GPMs); (c) fixed-rate growing
equity mortgage loans (GEMs); (d) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (e) mortgage loans on multifamily residential
properties under construction (CLCs); (f) mortgage loans on completed
multifamily projects (PLCs); (g) fixed-rate mortgage loans that use escrowed
funds to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); and (h) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.

FANNIE MAE CERTIFICATES

The Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors who would not ordinarily invest in mortgage loans directly and thereby
expands the total amount of funds available for housing. This money is used to
buy home mortgage loans from local lenders, replenishing the supply of capital
available for mortgage lending.

Fannie Mae certificates represent a pro rata interest in one or more pools of
FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.

Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.

FREDDIE MAC CERTIFICATES

The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.

Freddie Mac certificates represent a pro rata interest in a group of mortgage
loans (a Freddie Mac certificate group) purchased by Freddie Mac. The mortgage
loans underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between 10 and 30 years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.

Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest at the rate provided for by the certificate.
Freddie Mac also guarantees ultimate collection of all principal on the related
mortgage loans, without any offset or


------
20


deduction, but generally does not guarantee the timely repayment of principal.
Freddie Mac may remit principal at any time after default on an underlying
mortgage loan, but no later than 30 days following (a) foreclosure sale, (b)
payment of a claim by any mortgage insurer, or (c) the expiration of any right
of redemption, whichever occurs later, and in any event no later than one year
after demand has been made upon the mortgager for accelerated payment of
principal. Obligations guaranteed by Freddie Mac are not backed by the full
faith and credit pledge of the U.S. government.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

A CMO is a multiclass bond backed by a pool of mortgage pass-through
certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie
Mae or Freddie Mac pass-through certificates; (b) unsecured mortgage loans
insured by the Federal Housing Administration or guaranteed by the Department of
Veterans' Affairs; (c) unsecuritized conventional mortgages; or (d) any
combination thereof.

In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called tranches. Each CMO is a set of two or
more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.

As payments on the underlying mortgage loans are collected, the CMO issuer pays
the coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.

Some CMOs are structured so that the prepayment or market risks are transferred
from one tranche to another. Prepayment stability is improved in some tranches
if other tranches absorb more prepayment variability.

The final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.

As CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.

The existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche - known as a companion bond, support or
non-PAC bond - that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.

Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the LIBOR. Institutional investors with short-term liabilities,
such as commercial banks, often find floating-rate CMOs attractive investments.
Super floaters (which float a certain percentage above LIBOR) and inverse
floaters (which float inversely to LIBOR) are variations on the floater
structure that have highly variable cash flows.


------
21


STRIPPED MORTGAGE-BACKED SECURITIES

Stripped mortgage-backed securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.

The market values of IOs and POs are very sensitive to interest rate and
prepayment rate fluctuations. POs, for example, increase (or decrease) in value
as interest rates decline (or rise). The price behavior of these securities also
depends on whether the mortgage collateral was purchased at a premium or
discount to its par value. Prepayments on discount coupon POs generally are much
lower than prepayments on premium coupon POs. IOs may be used to hedge a fund's
other investments because prepayments cause the value of an IO strip to move in
the opposite direction from other mortgage-backed securities.

ADJUSTABLE-RATE MORTGAGE LOANS (ARMS)

ARMs eligible for inclusion in a mortgage pool generally will provide for a
fixed initial mortgage interest rate for a specified period of time, generally
for either the first three, six, 12, 24, 36, 60 or 84 scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes in an index.

ARMs have minimum and maximum rates beyond which the mortgage interest rate may
not vary over the lifetime of the loan. Certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. Negatively amortizing ARMs may provide
limitations on changes in the required monthly payment. Limitations on monthly
payments can result in monthly payments that are greater or less than the amount
necessary to amortize a negatively amortizing ARM by its maturity at the
interest rate in effect during any particular month.

There are two types of indices that provide the basis for ARM rate adjustments:
those based on market rates and those based on a calculated measure, such as a
cost-of-funds index or a moving average of mortgage rates. Commonly utilized
indices include the one-year, three-year and five-year constant maturity U.S.
Treasury rates (as reported by the Federal Reserve Board); the three-month
Treasury bill rate; the 180-day Treasury bill rate; rates on longer-term
Treasury securities; the Eleventh District Federal Home Loan Bank Cost of Funds
Index (EDCOFI); the National Median Cost of Funds Index; the one-month,
three-month, six-month or one-year London Interbank Offered Rate (LIBOR); or
six-month CD rates. Some indices, such as the one-year constant maturity
Treasury rate or three-month LIBOR, are highly correlated with changes in market
interest rates. Other indices, such as the EDCOFI, tend to lag behind changes in
market rates and be somewhat less volatile over short periods of time.

The EDCOFI reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in Arizona,
California and Nevada (the Federal Home Loan Bank Eleventh District) and who are
member institutions of the Federal Home Loan Bank of San Francisco (the FHLB of
San Francisco), as computed from statistics tabulated and published by the FHLB
of San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.

One-year and three-year Constant Maturity Treasury (CMT) rates are calculated by
the Federal Reserve Bank of New York, based on daily closing bid yields on
actively traded Treasury securities submitted by five leading broker-dealers.
The median bid yields are used to construct a daily yield curve.


------
22


The National Median Cost of Funds Index, similar to the EDCOFI, is calculated
monthly by the Federal Home Loan Bank Board (FHLBB) and represents the average
monthly interest expenses on liabilities of member institutions. A median,
rather than an arithmetic mean, is used to reduce the effect of extreme numbers.

LIBOR is the rate at which banks in London offer Eurodollars in trades between
banks. LIBOR has become a key rate in the U.S. domestic money market because it
is perceived to reflect the true global cost of money.

The portfolio managers may invest in ARMs whose periodic interest rate
adjustments are based on new indices as these indices become available.

Commercial Mortgage-Backed Securities (CMBS)

CMBS are securities created from a pool of commercial mortgage loans, such as
loans for hotels, shopping centers, office buildings, apartment buildings, and
the like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. They may be issued by
U.S. government agencies or by private issuers. The credit quality of CMBS
depends primarily on the quality of the underlying loans and on the structure of
the particular deal. Generally, deals are structured with senior and subordinate
classes. Multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and those of the underlying assets. Examples include classes having
characteristics such as floating interest rates or scheduled amortization of
principal. Rating agencies rate the individual classes of the deal based on the
degree of seniority or subordination of a particular class and other factors.
The value of these securities may change because of actual or perceived changes
in the creditworthiness of individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate and other factors.

CMBS may be partially stripped so that each investor class receives some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security (IO), and all of the principal is distributed to
holders of another type of security known as a principal-only security (PO). The
funds are permitted to invest in IO classes of CMBS. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The cash flows and yields on IO classes are extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets. In the cases of IOs, prepayments affect the amount of cash flows
provided to the investor. If the underlying mortgage assets experience greater
than anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. However, because commercial mortgages are often locked out
from prepayment, or have high prepayment penalties or a defeasance mechanism,
the prepayment risk associated with a CMBS IO class is generally less than that
of a residential IO.

Asset-Backed Securities (ABS)

ABS are structured like mortgage-backed securities, but instead of mortgage
loans or interest in mortgage loans, the underlying assets may include, for
example, such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, home equity
loans, student loans, small business loans, and receivables from credit card
agreements. The ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited. The value of an ABS
is affected by changes in the market's perception of the assets backing the
security, the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, the financial institution providing any credit
enhancement, and subordination levels.


------
23


Payments of principal and interest passed through to holders of ABS are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or a priority to
certain of the borrower's other securities. The degree of credit enhancement
varies, and generally applies to only a fraction of the asset-backed security's
par value until exhausted. If the credit enhancement of an ABS held by the fund
has been exhausted, and if any required payments of principal and interest are
not made with respect to the underlying loans, the fund may experience losses or
delays in receiving payment.

Some types of ABS may be less effective than other types of securities as a
means of "locking in" attractive long-term interest rates. One reason is the
need to reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in interest rates.
These prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.

The risks of investing in ABS are ultimately dependent upon the repayment of
loans by the individual or corporate borrowers. Although a fund would generally
have no recourse against the entity that originated the loans in the event of
default by a borrower, ABS typically are structured to mitigate this risk of
default.

Asset-backed securities are generally issued in more than one class, each with
different payment terms. Multiple class asset-backed securities may be used as a
method of providing credit support through creation of one or more classes whose
right to payments is made subordinate to the right to such payments of the
remaining class or classes. Multiple classes also may permit the issuance of
securities with payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying assets. Examples
include so-called strips (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with classes
having characteristics such as floating interest rates or scheduled amortization
of principal.

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.


------
24


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 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 portfolio 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 portfolio 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.


------
25


OPTIONS ON FUTURES

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

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

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS

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.

Municipal Bond Insurers

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

Ambac Financial Group, Inc. (AMBAC) is a Delaware-domiciled stock insurance
corporation. Ambac Assurance Corporation is a wholly owned subsidiary of AMBAC,
a publicly held company. Ambac Assurance Corporation's claims-paying ability is
rated Aaa/AAA/AAA by Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Corporation (S&P) and Fitch, Inc. (Fitch), respectively.

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

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

Financial Security Assurance Inc. (FSA) is a financial guaranty insurance
company operated in New York, which became a separately capitalized Dexia
subsidiary in 2000. FSA's claims-paying ability is rated Aaa/AAA/AAA by Moody's,
S&P and Fitch, respectively.

XL Capital Assurance Inc. (XLCA) was formed in 1999 as an indirect, wholly owned
New York-domiciled subsidiary of XL Capital Ltd. XLCA's claims-paying ability is
rated Aaa/AAA/AAA by Moody's, S&P and Fitch, respectively.

CDC IXIS Financial Guaranty North America (CIFG NA) is a U.S.-domiciled bond
insurance company, which is a wholly owned subsidiary of CIFG, a France
domiciled bond insurance company, CIFG is a subsidiary of CIFG Holding, which in
turn is owned by Caisse Nationale des Caisses d'Epargne et de Prevoyance (CNCE).
CNCE's capital is 65% owned by 34 regional French banks and 35% owned by Caisse
des Depots et Consignations (CDC), a financial institution that performs
public-interest missions on behalf of France's central, regional, and local
governments. CIFG NA is rated Aaa/AAA/AAA by Moody's, S&P, and Fitch,
respectively.


------
26


Radian Asset Assurance, Inc. (Radian) is the surviving entity and name for the
former Asset Guaranty. Radian is an operating subsidiary of Radian Group Inc., a
Delaware Corporation. Radian's claims-paying ability is rated Aa3/AA/AA.

American Capital Access (ACA) is a subsidiary of American Capital Access
Holdings, Inc. The parent company successfully recapitalized the company in 2004
which resulted in changes to both the ownership structure and the percentage
owned by each existing owner. Bear Stearns Merchant Banking, which is the
private equity arm of Bear Stearns, is now the lead investor. ACA is currently
rated single-A by S&P.

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 portfolio 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.

Other Investment Companies

Each fund may invest up to 10% of its total assets in other investment
companies, such as mutual funds, provided that the investment is consistent with
the fund's investment policies and restrictions. These investments may include
investments in money market funds


------
27


managed by the advisor. Under the Investment Company Act, a fund's investment in
such securities, subject to certain exceptions, currently is limited to:

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

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

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

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

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

FUNDAMENTAL INVESTMENT POLICIES

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

SUBJECT                    POLICY
--------------------------------------------------------------------------------
Senior Securities          A fund may not issue senior securities, except as
                           permitted under the Investment Company Act.
--------------------------------------------------------------------------------
Borrowing                  A fund may not borrow money, except for
                           temporary or emergency purposes (not for
                           leveraging or investment) in an amount not
                           exceeding 33-1/3% of the fund's total assets.
--------------------------------------------------------------------------------
Lending                    A fund may not lend any security or make any
                           other loan if, as a result, more than 33-1/3%
                           of the fund's total assets would be lent to other
                           parties, except (i) through the purchase of debt
                           securities in accordance with its investment
                           objective, policies and limitations or (ii) by
                           engaging in repurchase agreements with
                           respect to portfolio securities.
--------------------------------------------------------------------------------
Real Estate                A fund may not purchase or sell real estate
                           unless acquired as a result of ownership of
                           securities or other instruments. This policy shall
                           not prevent a fund from investing in securities
                           or other instruments backed by real estate or
                           securities of companies that deal in real estate
                           or are engaged in the real estate business.
--------------------------------------------------------------------------------
Concentration              A fund may not concentrate its investments in
                           securities of issuers in a particular industry
                           (other than securities issued or guaranteed by
                           the U.S. government or any of its agencies or
                           instrumentalities).
--------------------------------------------------------------------------------
Underwriting               A fund may not act as an underwriter of
                           securities issued by others, except to the extent
                           that the fund may be considered an underwriter
                           within the meaning of the Securities Act of
                           1933 in the disposition of restricted securities.
--------------------------------------------------------------------------------
Commodities                A fund may not purchase or sell physical
                           commodities unless acquired as a result of
                           ownership of securities or other instruments,
                           provided that this limitation shall not prohibit the
                           fund from purchasing or selling options and
                           futures contracts or from investing in securities
                           or other instruments backed by physical
                           commodities.
--------------------------------------------------------------------------------
Control                    A fund may not invest for purposes of
                           exercising control over management.
--------------------------------------------------------------------------------


------
28


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 American Century-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,

(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
Options                    sell futures contracts or call options. This
                           limitation does not apply to options attached to,
                           or acquired or traded together with, their
                           underlying securities, and does not apply to
                           securities that incorporate features similar to
                           options or futures contracts.
--------------------------------------------------------------------------------
Liquidity                  A fund may not purchase any security or enter
                           into a repurchase agreement if, as a result, more
                           than 15% of its net assets (10% for the money
                           market fund) would be invested in 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.
--------------------------------------------------------------------------------


------
29


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.

MANAGEMENT

The individuals listed below serve as trustees or officers of the funds. Each
trustee serves until his or her successor is duly elected and qualified or until
he or she retires. Effective March 2004, mandatory retirement age for
independent trustees is 73. However, the mandatory retirement age may be
extended for a period not to exceed two years with the approval of the remaining
independent trustees. Those listed as interested trustees are "interested"
primarily by virtue of their engagement as officers of American Century
Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries,
including the funds' investment advisor, American Century Investment Management,
Inc. (ACIM or the advisor); the funds' principal underwriter, American Century
Investment Services, Inc. (ACIS); and the funds' transfer agent, American
Century Services, LLC (ACS).

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

All persons named as officers of the funds also serve in similar capacities for
the other 13 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless
otherwise noted. Only officers with policy-making functions are listed. No
officer is compensated for his or her service as an officer of the funds. The
listed officers are interested persons of the funds and are appointed or
re-appointed on an annual basis.


------
30


INTERESTED TRUSTEES
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111

YEAR OF BIRTH: 1955

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 1997

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer and President, ACIS, ACGIM, ACIM and other ACC
subsidiaries; Executive Vice President, ACS; Director, ACC, ACGIM, ACIM, ACS,
ACIS and other ACC subsidiaries

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------

INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
ANTONIO CANOVA, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1961

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 2005

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer, BROCADE
COMMUNICATIONS SYSTEMS, INC. (May 2001 to December 2005); Vice President,
Administration, BROCADE COMMUNICATIONS SYSTEMS, INC. (November 2004 to
December 2005); Vice President, Finance, BROCADE COMMUNICATIONS SYSTEMS, INC.
(November 2000 to November 2004)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1937

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 2005

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, REGIS
MANAGEMENT COMPANY, LLC (April 2004 to present); Partner and Founder, BAY
PARTNERS (Venture capital firm, 1976 to present); Partner and Founder, WARE &
FREIDENRICH (1968 to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1946

POSITION(S) HELD WITH FUNDS: Trustee, Chairman of the Board

FIRST YEAR OF SERVICE: 1995

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, STANFORD LAW SCHOOL (1979 to present); Marc and Eva Stern
Professor of Law and Business, COLUMBIA UNIVERSITY SCHOOL OF LAW (1992 to
present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1957

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 2001

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, OFFIT HALL CAPITAL MANAGEMENT, LLC (April 2002 to
present); President and Managing Director, LAUREL MANAGEMENT COMPANY, L.L.C.
(1996 to April 2002)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1941

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 1980

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, OAK HILL PLATINUM
PARTNERS, and a Partner, OAK HILL CAPITAL MANAGEMENT (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, STANFORD GRADUATE SCHOOL OF BUSINESS (1981
to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, DIMENSIONAL FUND ADVISORS
(investment advisor, 1982 to present); Director, CHICAGO MERCANTILE EXCHANGE
(2000 to present)
--------------------------------------------------------------------------------


------
31


KENNETH E. SCOTT(1), 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1928

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 1971

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Ralph M. Parsons Professor of Law
and Business, STANFORD LAW SCHOOL (1972 to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
--------------------------------------------------------------------------------
JOHN B. SHOVEN, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1947

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 2002

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, STANFORD
UNIVERSITY (1977 to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, CADENCE DESIGN SYSTEMS (1992 to
present); Director, WATSON WYATT WORLDWIDE (2002 to present); Director,
PALMSOURCE INC. (2002 to present)
--------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043

YEAR OF BIRTH: 1945

POSITION(S) HELD WITH FUNDS: Trustee

FIRST YEAR OF SERVICE: 1984

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
WINDY HILL PRODUCTIONS, LP (educational software, 1994 to 1998)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 34

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, QUINTUS CORPORATION (automation
solutions, 1995 to present)
--------------------------------------------------------------------------------

OFFICERS
--------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111

YEAR OF BIRTH: 1955

POSITION(S) HELD WITH FUNDS: President

FIRST YEAR OF SERVICE: 2000

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: See entry above under "Interested
Trustees."

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1963

POSITION(S) HELD WITH FUNDS: Executive Vice President

FIRST YEAR OF SERVICE: 2005

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Managing Director, MORGAN STANLEY
(March 2000 to November 2005)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1956

POSITION(S) HELD WITH FUNDS: Senior Vice President, Treasurer and Chief
Financial Officer

FIRST YEAR OF SERVICE: 2000

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January
1995 to present). Also serves as: Senior Vice President, ACS; Assistant
Treasurer, ACGIM, ACIM, ACIS, ACS and other ACC subsidiaries

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------

(1)  MR. SCOTT WILL RETIRE FROM THE BOARD ON JANUARY 12, 2006.


------
32


DAVID C. TUCKER, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1958

POSITION(S) HELD WITH FUNDS: Senior Vice President and General Counsel

FIRST YEAR OF SERVICE: 1998

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACGIM, ACIM, ACIS, ACS and other ACC
subsidiaries

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
CHARLES C.S. PARK, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1967

POSITION(S) HELD WITH FUNDS: Vice President and Chief Compliance Officer

FIRST YEAR OF SERVICE: 2000

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACS, ACIM
AND ACGIM (March 2005 to present); Vice President, ACS (February 2000 to
present); Assistant General Counsel, ACS (January 1998 to March 2005)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1964

POSITION(S) HELD WITH FUNDS: Controller(2)

FIRST YEAR OF SERVICE: 1996

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Investment Accounting, ACS (June 1997 to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1966

POSITION(S) HELD WITH FUNDS: Controller

FIRST YEAR OF SERVICE: 1996

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller-Fund Accounting, ACS (June 1997 to present)

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------
JON ZINDEL, 4500 Main St., Kansas City, MO 64111

YEAR OF BIRTH: 1967

POSITION(S) HELD WITH FUNDS: Tax Officer

FIRST YEAR OF SERVICE: 1997

PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001
to present); Vice President, Corporate Tax, ACS (April 1998 to present); Vice
President, ACGIM, ACIM, ACIS and other ACC subsidiaries

NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: Not applicable

OTHER DIRECTORSHIPS HELD BY TRUSTEE: Not applicable
--------------------------------------------------------------------------------

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

THE BOARD OF TRUSTEES

The Board of Trustees oversees the management of the funds and meets at least
quarterly to review reports about fund operations. 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.


------
33


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.

--------------------------------------------------------------------------------
COMMITTEE: Audit and Compliance

MEMBERS: Kenneth E. Scott(1), Antonio Canova, Ronald J. Gilson, Jeanne D.
Wohlers

FUNCTION: The Audit and Compliance Committee approves the engagement of the
funds' independent registered public accounting firm, recommends approval of
such engagement to the independent trustees, and oversees the activities of the
funds' independent registered public accounting firm. The committee receives
reports from the advisor's Internal Audit Department, which is accountable to
the committee. The committee also receives reporting about compliance matters
affecting the funds.

NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
COMMITTEE: Corporate Governance

MEMBERS: Ronald J. Gilson, John Freidenrich, John B. Shoven

FUNCTION: The Corporate Governance Committee reviews board procedures and
committee structures. It also considers and recommends individuals for
nomination as trustees. The names of potential trustee candidates may be drawn
from a number of sources, including recommendations from members of the board,
management (in the case of interested trustees only) and shareholders.
Shareholders may submit trustee nominations to the Corporate Secretary, American
Century Funds, P.O. Box 410141, Kansas City, MO 64141. All such nominations will
be forwarded to the committee for consideration. The committee also may
recommend the creation of new committees, evaluate the membership structure of
new and existing committees, consider the frequency and duration of board and
committee meetings and otherwise evaluate the responsibilities, processes,
resources, performance and compensation of the board.

NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 2
--------------------------------------------------------------------------------
COMMITTEE: Portfolio

MEMBERS: Myron S. Scholes, John Freidenrich, Kathryn A. Hall, William M. Lyons
(ad hoc)

FUNCTION: The Portfolio Committee reviews quarterly 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.

NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------
COMMITTEE: Quality of Service

MEMBERS: John B. Shoven, Ronald J. Gilson, William M. Lyons (ad hoc)

FUNCTION: The Quality of Service Committee reviews the level and quality of
transfer agent and 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.

NUMBER OF MEETINGS HELD DURING LAST FISCAL YEAR: 5
--------------------------------------------------------------------------------

(1)  MR. SCOTT WILL RETIRE FROM THE BOARD ON JANUARY 12, 2006.



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


------
34


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, 2005
                                                       TOTAL COMPENSATION FROM
                             TOTAL COMPENSATION        THE AMERICAN CENTURY
NAME OF TRUSTEE              FROM THE FUNDS(1)         FAMILY OF FUNDS(2)
--------------------------------------------------------------------------------
Antonio Canova(3)            $627                      $40,750
--------------------------------------------------------------------------------
Albert A. Eisenstat(4)       $8,266                    $78,250
--------------------------------------------------------------------------------
John Freidenrich(5)          $1,219                    $76,540
--------------------------------------------------------------------------------
Ronald J. Gilson             $15,415                   $171,500
--------------------------------------------------------------------------------
Kathyrn A. Hall              $8,385                    $85,750
--------------------------------------------------------------------------------
Myron S. Scholes             $9,018                    $93,500
--------------------------------------------------------------------------------
Kenneth E. Scott(6)          $9,217                    $86,750
--------------------------------------------------------------------------------
John B. Shoven               $8,954                    $92,750
--------------------------------------------------------------------------------
Jeanne D. Wohlers            $8,922                    $92,250
--------------------------------------------------------------------------------

(1)  INCLUDES COMPENSATION PAID TO THE TRUSTEES FOR THE FISCAL YEAR ENDED
     AUGUST 31, 2005, AND ALSO INCLUDES AMOUNTS DEFERRED AT THE ELECTION OF THE
     TRUSTEES UNDER THE AMERICAN CENTURY MUTUAL FUNDS' INDEPENDENT DIRECTORS'
     DEFERRED COMPENSATION PLAN.

(2)  INCLUDES COMPENSATION PAID BY THE EIGHT INVESTMENT COMPANIES OF THE
     AMERICAN CENTURY FAMILY OF FUNDS SERVED BY THIS BOARD. THE TOTAL AMOUNT OF
     DEFERRED COMPENSATION INCLUDED IN THE PRECEDING TABLE IS AS FOLLOWS: MR.
     CANOVA, $40,750; MR. EISENSTAT, $78,250; MR. GILSON, $171,500; MS. HALL,
     $74,875; MR. SCHOLES, $93,500; MR. SCOTT, $86,750; MR. SHOVEN, $92,750; AND
     JEANNE WOHLERS, $48,300.

(3)  MR. CANOVA JOINED THE BOARD ON MARCH 1, 2005.

(4)  MR. EISENSTAT RETIRED FROM THE BOARD ON MAY 26, 2005.

(5)  MR. FREIDENRICH JOINED THE TRUST'S ADVISORY BOARD ON AUGUST 26, 2004.
     HE JOINED THE BOARD OF TRUSTEES ON MARCH 1, 2005.

(6)  MR. SCOTT WILL RETIRE FROM THE BOARD ON JANUARY 12, 2006.

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, 2005.


------
35


OWNERSHIP OF FUND SHARES

The trustees owned shares in the funds as of December 31, 2004, as shown in the
table below. Since Mr. Canova and Mr. Freidenrich were not members of the board
on December 31, 2004, they are not shown in the table below.

                                                NAME OF TRUSTEES
--------------------------------------------------------------------------------
                                  WILLIAM M.        RONALD J.        KATHRYN A.
                                  LYONS             GILSON           HALL
--------------------------------------------------------------------------------
Dollar Range of Equity
Securities in the Funds:
   California
    High-Yield Municipal          A                 C                A
--------------------------------------------------------------------------------
   California
   Limited-Term Tax-Free          A                 A                A
--------------------------------------------------------------------------------
   California
   Long-Term Tax-Free             A                 A                A
--------------------------------------------------------------------------------
   California
   Tax-Free Bond                  A                 C                A
--------------------------------------------------------------------------------
   California Tax-Free
   Money Market                   A                 C                A
--------------------------------------------------------------------------------
Aggregate Dollar Range of
Equity Securities in all
Registered Investment
Companies Overseen by
Trustee in Family of
Investment Companies              E                 E                D
--------------------------------------------------------------------------------

                                             NAME OF TRUSTEES
--------------------------------------------------------------------------------
                              MYRON S.    KENNETH E.    JOHN B.    JEANNE D.
                              SCHOLES     SCOTT(1)      SHOVEN     WOHLERS
--------------------------------------------------------------------------------
Dollar Range of Equity
Securities in the Funds:
   California
   High-Yield Municipal       A           A             A          A
--------------------------------------------------------------------------------
   California
   Limited-Term Tax-Free      A           E             A          A
--------------------------------------------------------------------------------
   California
   Long-Term Tax-Free         A           A             A          A
--------------------------------------------------------------------------------
   California
   Tax-Free Bond              A           E             A          A
--------------------------------------------------------------------------------
   California Tax-Free
   Money Market               B           B             A          E
--------------------------------------------------------------------------------
Aggregate Dollar Range of
Equity Securities in all
Registered Investment
Companies Overseen by
Trustee in Family of
Investment Companies          E           E             E          E
--------------------------------------------------------------------------------

RANGES: A-NONE, B-$1-$10,000, C-$10,001-$50,000, D-$50,001-$100,000, E-MORE THAN
$100,000

(1)  MR. SCOTT WILL RETIRE FROM THE BOARD ON JANUARY 12, 2006.


CODE OF ETHICS

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

PROXY VOTING GUIDELINES

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

The advisor and the board have agreed on certain significant contributors to
shareholder value with respect to a number of matters that are often the subject
of proxy solicitations for shareholder meetings. The Proxy Voting Guidelines
specifically address these


------
36


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 and information regarding how
the advisor voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 are available on the ABOUT US page at
americancentury.com. The advisor's proxy voting record also is available on the
SEC's website at sec.gov.

DISCLOSURE OF PORTFOLIO HOLDINGS

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

Distribution to the Public

Full portfolio holdings for each fund will be made available for distribution 30
days after the end of each calendar quarter, and will be posted on
americancentury.com at approximately the same time. This disclosure is in
addition to the portfolio disclosure in annual and semi-annual shareholder
reports, and on Form N-Q, which disclosures are filed with the Securities and
Exchange Commission within sixty days of each fiscal quarter end and also posted
on americancentury.com at the time the filings are made.


------
37


Top 10 holdings for each fund will be made available for distribution monthly 30
days after the end of each month, and will be posted on americancentury.com at
approximately the same time.

Certain portfolio characteristics determined to be sensitive and confidential
will be made available for distribution monthly 30 days after the end of each
month, and will be posted on americancentury.com at approximately the same time.
Characteristics not deemed confidential will be available for distribution at
any time. The advisor may make determinations of confidentiality on a
fund-by-fund basis, and may add or delete characteristics from those considered
confidential at any time.

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

Accelerated Disclosure

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

ONGOING ARRANGEMENTS

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

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

Those parties who have entered into non-disclosure agreements as of October 26,
2005 are as follows:

*  Aetna, Inc.
*  American Fidelity Assurance Co.
*  AUL/American United Life Insurance Company
*  Ameritas Life Insurance Corporation
*  Annuity Investors Life Insurance Company
*  Asset Services Company L.L.C.
*  Bell Globemedia Publishing
*  Bellwether Consulting, LLC
*  Bidart & Ross
*  Business Men's Assurance Co. of America
*  Callan Associates, Inc.
*  Cleary Gull Inc.


------
38


*  Commerce Bank, N.A.
*  Connecticut General Life Insurance Company
*  Defined Contribution Advisors, Inc.
*  EquiTrust Life Insurance Company
*  Farm Bureau Life Insurance Company
*  First MetLife Investors Insurance Company
*  Fund Evaluation Group, LLC
*  The Guardian Life Insurance & Annuity Company, Inc.
*  Hewitt Associates LLC
*  ICMA Retirement Corporation
*  ING Life Insurance Company & Annuity Co.
*  Investors Securities Services, Inc.
*  Iron Capital Advisors
*  J.P. Morgan Retirement Plan Services LLC
*  Jefferson National Life Insurance Company
*  Jefferson Pilot Financial
*  Jeffrey Slocum & Associates, Inc.
*  Kansas City Life Insurance Company
*  Kmotion, Inc.
*  The Lincoln National Life Insurance Company
*  Lipper Inc.
*  Manulife Financial
*  Massachusetts Mutual Life Insurance Company
*  Merrill Lynch
*  MetLife Investors Insurance Company
*  MetLife Investors Insurance Company of California
*  Midland National Life Insurance Company
*  Minnesota Life Insurance Company
*  Morgan Stanley DW, Inc.
*  Morningstar Associates LLC
*  Morningstar Investment Services, Inc.
*  National Life Insurance Company
*  Nationwide Financial
*  NT Global Advisors, Inc.
*  NYLIFE Distributors, LLC
*  Principal Life Insurance Company
*  Prudential Financial
*  Rocaton Investment Advisors, LLC
*  S&P Financial Communications
*  Scudder Distributors, Inc.
*  Security Benefit Life Insurance Co.
*  Smith Barney
*  SunTrust Bank
*  Symetra Life Insurance Company
*  Trusco Capital Management
*  Union Bank of California, N.A.
*  The Union Central Life Insurance Company
*  VALIC Financial Advisors
*  VALIC Retirement Services Company
*  Vestek Systems, Inc.
*  Wachovia Bank, N.A.
*  Wells Fargo Bank, N.A.

Once a party has executed a non-disclosure agreement, it may receive any or all
of the following data for funds in which its clients have investments or are
actively considering investment:


------
39


(1)  Full holdings quarterly as soon as reasonably available;
(2)  Full holdings monthly as soon as reasonably available;
(3)  Top 10 holdings monthly as soon as reasonably available; and
(4)  Portfolio characteristics monthly as soon as reasonably available.

The types, frequency and timing of disclosure to such parties vary. In most
situations, the information provided pursuant to a non-disclosure agreement is
limited to certain portfolio characteristics and/or top 10 holdings, which
information is provided on a monthly basis. In limited situations, and when
approved by a member of the Legal Department and responsible Chief Investment
Officer, full holdings may be provided.

SINGLE EVENT REQUESTS

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

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

SERVICE PROVIDERS

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

Additional Safeguards

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

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

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


------
40


THE FUNDS' PRINCIPAL SHAREHOLDERS

As of November 30, 2005, the following shareholders, beneficially or of record,
owned more than 5% of the outstanding shares of any class of the funds.

                                           PERCENTAGE OF         PERCENTAGE OF
                                           OUTSTANDING           OUTSTANDING
                                           SHARES OWNED          SHARES OWNED
                                           OF RECORD             BENEFICIALLY(1)
--------------------------------------------------------------------------------
California High-Yield Municipal
  Investor Class
--------------------------------------------------------------------------------
        Charles Schwab & Co.               25%                   0%
        San Francisco, CA
--------------------------------------------------------------------------------
  A Class
        Charles Schwab & Co. Inc.          52%                   0%
        San Francisco, CA

        MLPF&S Inc.                        10%                   0%
        Jacksonville, FL
--------------------------------------------------------------------------------
  B Class
        MLPF&S Inc.                        22%                   0%
        Jacksonville, FL

        Howard Tung and                    9%                    9%
        Rachel P. Tung
        Rcho Santa Fe, CA

        Pershing LLC                       8%                    0%
        Jersey City, NJ

        American Enterprise                7%                    0%
        Investment Svcs
        Minneapolis, MN
--------------------------------------------------------------------------------
  C Class
        MLPF&S Inc.                        47%                   0%
        Jacksonville, FL
--------------------------------------------------------------------------------
California Limited-Term Tax-Free
--------------------------------------------------------------------------------
  Investor Class
        Charles Schwab & Co.               27%                   0%
        San Francisco, CA

        National Financial                 10%                   0%
        Services Corp.
        New York, NY

        National Inv Svcs Corp             7%                    0%
        New York, NY
--------------------------------------------------------------------------------
California Long-Term Tax-Free
--------------------------------------------------------------------------------
  Investor Class
        Charles Schwab & Co.               9%                    0%
        San Francisco, CA
--------------------------------------------------------------------------------
California Tax-Free Bond
--------------------------------------------------------------------------------
  Investor Class
        Charles Schwab & Co.               22%                   0%
        San Francisco, CA
--------------------------------------------------------------------------------
California Tax-Free Money Market
--------------------------------------------------------------------------------
  Investor Class
        Morgan Guaranty Trust of NY        13%                   0%
        Newark, DE
--------------------------------------------------------------------------------

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

The funds are unaware of any other shareholders, beneficial or of record, who
own more than 5% of any class of a fund's outstanding shares. The funds are
unaware of any other shareholders, beneficial or of record, who own more than
25% of the voting securities of American Century California Tax-Free and
Municipal Funds. A shareholder owning of record


------
41


or beneficially more than 25% of the trust's outstanding shares may be
considered a controlling person. The vote of any such person could have a more
significant effect on matters presented at a shareholders' meeting than votes of
other shareholders. As of November 30, 2005, the officers and trustees of the
funds, as a group, owned less than 1% of any class of a 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, ACS and ACIS are wholly owned, directly or indirectly, by ACC. James E.
Stowers, Jr. controls ACC by virtue of his ownership of a majority of its voting
stock.

INVESTMENT ADVISOR

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

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

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

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

INVESTMENT CATEGORY FEE SCHEDULE FOR 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%
--------------------------------------------------------------------------------


------
42


INVESTMENT CATEGORY FEE SCHEDULE FOR CALIFORNIA LIMITED-TERM TAX-FREE,
CALIFORNIA LONG-TERM TAX-FREE AND CALIFORNIA TAX-FREE BOND
--------------------------------------------------------------------------------
CATEGORY ASSETS                                                         FEE RATE
--------------------------------------------------------------------------------
First $1 billion                                                        0.2800%
--------------------------------------------------------------------------------
Next $1 billion                                                         0.2280%
--------------------------------------------------------------------------------
Next $3 billion                                                         0.1980%
--------------------------------------------------------------------------------
Next $5 billion                                                         0.1780%
--------------------------------------------------------------------------------
Next $15 billion                                                        0.1650%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.1630%
--------------------------------------------------------------------------------
Thereafter                                                              0.1625%
--------------------------------------------------------------------------------

INVESTMENT CATEGORY FEE SCHEDULE FOR 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%
--------------------------------------------------------------------------------

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 billion                                                        0.2985%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2970%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2870%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2800%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2700%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2650%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2600%
--------------------------------------------------------------------------------
Next $25 billion                                                        0.2550%
--------------------------------------------------------------------------------
Thereafter                                                              0.2500%
--------------------------------------------------------------------------------

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

The management agreement between the Trust and the advisor shall continue in
effect until the earlier of the expiration of two years from the date of its
execution or until the first meeting of 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.


------
43


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.

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. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds 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, 2005, 2004, and 2003, are indicated in the following table.

UNIFIED MANAGEMENT FEES


FUND                       2005                 2004                 2003
--------------------------------------------------------------------------------
California High-Yield Municipal
  Investor Class           $1,809,906           $1,772,552           $1,920,220
--------------------------------------------------------------------------------
  A Class                  $108,357             $26,881              $1,751(1)
--------------------------------------------------------------------------------
  B Class                  $5,124               $3,777               $422(1)
--------------------------------------------------------------------------------
  C Class                  $56,894              $24,897              $3,840(1)
--------------------------------------------------------------------------------
California Limited-Term Tax-Free
  Investor Class           $984,740             $1,152,924           $1,151,762
--------------------------------------------------------------------------------
California Long-Term Tax-Free
  Investor Class           $2,300,100           $2,426,504           $2,687,720
--------------------------------------------------------------------------------
California Tax-Free Bond
  Investor Class           $2,065,496           $2,201,086           $2,384,424
--------------------------------------------------------------------------------
California Tax-Free Money Market
  Investor Class           $2,972,854           $3,097,755           $3,245,204
--------------------------------------------------------------------------------

(1)  JANUARY 31, 2003 (COMMENCEMENT OF SALE) THROUGH AUGUST 31, 2003.


------
44


PORTFOLIO MANAGERS

Other Accounts Managed

The portfolio managers also may be responsible for the day-to-day management of
other accounts, as indicated by the following table. None of these accounts has
an advisory fee based on the performance of the account.

OTHER ACCOUNTS MANAGED (AS OF AUGUST 31, 2005)
                                                                           OTHER
                                       REGISTERED                          ACCOUNTS
                                       INVESTMENT                          (E.G., SEPARATE
                                       COMPANIES                           ACCOUNTS AND
                                       (E.G., OTHER      OTHER POOLED      CORPORATE
                                       AMERICAN          INVESTMENT        ACCOUNTS,
                                       CENTURY FUNDS     VEHICLES (E.G.,   INCLUDING
                                       AND AMERICAN      COMMINGLED        INCUBATION
                                       CENTURY -         TRUSTS AND        STRATEGIES
                                       SUBADVISED        529 EDUCATION     AND CORPORATE
                                       FUNDS)            SAVINGS PLANS)    MONEY)
------------------------------------------------------------------------------------------
CALIFORNIA HIGH-YIELD MUNICIPAL
------------------------------------------------------------------------------------------
Steve Permut       Number of Other     1                 0                 0
                   Accounts Managed
------------------------------------------------------------------------------------------
                   Assets in Other     $190,805,341      N/A               N/A
                   Accounts Managed
------------------------------------------------------------------------------------------
CALIFORNIA LIMITED-TERM TAX-FREE
------------------------------------------------------------------------------------------
Robert J. Miller   Number of Other     1                 0                 0
                   Accounts Managed
------------------------------------------------------------------------------------------
                   Assets in Other     $434,638,279      N/A               N/A
                   Accounts Managed
------------------------------------------------------------------------------------------
CALIFORNIA LONG-TERM TAX-FREE
------------------------------------------------------------------------------------------
David MacEwen      Number of Other     5                 0                 0
                   Accounts Managed
------------------------------------------------------------------------------------------
                   Assets in Other     $1,810,132,827    N/A               N/A
                   Accounts Managed
------------------------------------------------------------------------------------------
CALIFORNIA TAX-FREE BOND(1)
------------------------------------------------------------------------------------------
Robert J. Miller   Number of Other     1                 0                 0
                   Accounts Managed
------------------------------------------------------------------------------------------
                   Assets in Other     $181,301,132      N/A               N/A
                   Accounts Managed
------------------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET
------------------------------------------------------------------------------------------
Todd Pardula       Number of Other     0                 0                 0
                   Accounts Managed
------------------------------------------------------------------------------------------
                   Assets in Other     N/A               N/A               N/A
                   Accounts Managed
------------------------------------------------------------------------------------------

Potential Conflicts of Interest

Certain conflicts of interest may arise in connection with the management of
multiple portfolios. Potential conflicts include, for example, conflicts among
investment strategies and conflicts in the allocation of investment
opportunities. American Century has adopted policies and procedures that are
designed to minimize the effects of these conflicts.

Responsibility for managing American Century client portfolios is organized
according to investment discipline. Investment disciplines include, for example,
quantitative equity, small- and mid-cap growth, large-cap growth, value,
international, fixed income, asset allocation, and sector funds. Within each
discipline are one or more portfolio teams responsible for managing specific
client portfolios. Generally, client portfolios with similar strategies are
managed by the same team using the same objective, approach, and philosophy.
Accordingly, portfolio holdings, position sizes, and industry and sector
exposures tend to be similar across similar portfolios, which minimizes the
potential for conflicts of interest.


------
45


For each investment strategy, one portfolio is generally designated as the
"policy portfolio." Other portfolios with similar investment objectives,
guidelines and restrictions, if any, are referred to as "tracking portfolios."
When managing policy and tracking portfolios, a portfolio team typically
purchases and sells securities across all portfolios that the team manages.
American Century's trading systems include various order entry programs that
assist in the management of multiple portfolios, such as the ability to purchase
or sell the same relative amount of one security across several funds. In some
cases a tracking portfolio may have additional restrictions or limitations that
cause it to be managed separately from the policy portfolio. Portfolio managers
make purchase and sale decisions for such portfolios alongside the policy
portfolio to the extent the overlap is appropriate, and separately, if the
overlap is not.

American Century may aggregate orders to purchase or sell the same security for
multiple portfolios when it believes such aggregation is consistent with its
duty to seek best execution on behalf of its clients. Orders of certain client
portfolios may, by investment restriction or otherwise, be determined not
available for aggregation. American Century has adopted policies and procedures
to minimize the risk that a client portfolio could be systematically advantaged
or disadvantaged in connection with the aggregation of orders. To the extent
equity trades are aggregated, shares purchased or sold are generally allocated
to the participating portfolios pro rata based on order size. Because initial
public offerings (IPOs) are usually available in limited supply and in amounts
too small to permit across-the-board pro rata allocations, American Century has
adopted special procedures designed to promote a fair and equitable allocation
of IPO securities among clients over time. Fixed income securities transactions
are not executed through a centralized trading desk. Instead, portfolio teams
are responsible for executing trades with broker/dealers in a predominantly
dealer marketplace. Trade allocation decisions are made by the portfolio manager
at the time of trade execution and orders entered on the fixed income order
management system.

Finally, investment of American Century's corporate assets in proprietary
accounts may raise additional conflicts of interest. To mitigate these potential
conflicts of interest, American Century has adopted policies and procedures
intended to provide that trading in proprietary accounts is performed in a
manner that does not give improper advantage to American Century to the
detriment of client portfolios.

Compensation

American Century portfolio manager compensation is structured to align the
interests of portfolio managers with those of the shareholders whose assets they
manage. It includes the components described below, each of which is determined
with reference to a number of factors such as overall performance, market
competition, and internal equity. Compensation is not directly tied to the value
of assets held in client portfolios.

BASE SALARY

Portfolio managers receive base pay in the form of a fixed annual salary.

BONUS

A significant portion of portfolio manager compensation takes the form of an
annual incentive bonus tied to performance. Bonus payments are determined by a
combination of factors. One factor is fund investment performance. For policy
portfolios, such as the funds described in this statement of additional
information, investment performance is measured by a combination of one- and
three-year pre-tax performance relative to a pre-established,
internally-customized peer group and/or market benchmark. Custom peer groups are
constructed using all the funds in appropriate Lipper or Morningstar categories
as a starting point. Funds are then eliminated from the peer group based on a
standardized methodology designed to result in a final peer group that more
closely represents the fund's true peers based on internal investment mandates
and that is more stable (i.e., has less peer turnover) over the long-term. In
cases where a portfolio manager has responsibility for more than one policy
portfolio, the performance of each is assigned a percentage weight commensurate
with the portfolio manager's level of responsibility.


------
46


A second factor in the bonus calculation relates to the performance of all
American Century funds managed according to a particular investment style, such
as U.S. growth or value. Performance is measured for each product individually
as described above and then combined to create an overall composite for the
product group. These composites may measure one-year performance (equal
weighted) or a combination of one- and three-year performance (asset weighted)
depending on the portfolio manager's responsibilities and products managed. This
feature is designed to encourage effective teamwork among portfolio management
teams in achieving long-term investment success for similarly styled portfolios.

A portion of some portfolio managers' bonuses may be tied to individual
performance goals, such as research projects and the development of new
products.

Finally, portfolio manager bonuses may occasionally be affected by
extraordinarily positive or negative financial performance by American Century
Companies, Inc. (ACC), the advisor's privately-held parent company. This feature
has been designed to maintain investment performance as the primary component of
portfolio manager bonuses while also providing a link to the advisor's ability
to pay.

RESTRICTED STOCK PLANS

Portfolio managers are eligible for grants of restricted stock of ACC. These
grants are discretionary, and eligibility and availability can vary from year to
year. The size of an individual's grant is determined by individual and product
performance as well as other product-specific considerations. Grants can
appreciate/depreciate in value based on the performance of the ACC stock during
the restriction period (generally three years).

DEFERRED COMPENSATION PLANS

Portfolio managers are eligible for grants of deferred compensation. These
grants are used in very limited situations, primarily for retention purposes.
Grants are fixed and can appreciate/depreciate in value based on the performance
of the American Century mutual funds in which the portfolio manager chooses to
invest them.

Ownership of Securities

The following table indicates the dollar range of securities of each fund
beneficially owned by the fund's portfolio managers as of August 31, 2005, the
fund's most recent fiscal year end.


                                                AGGREGATE DOLLAR RANGE
OWNERSHIP OF SECURITIES                         OF SECURITIES IN FUND
--------------------------------------------------------------------------------
California High-Yield Municipal
          Steve Permut                          F
--------------------------------------------------------------------------------
California Limited-Term Tax-Free Fund
          Robert Miller                         C
--------------------------------------------------------------------------------
California Long-Term Tax-Free
          David MacEwen                         C
--------------------------------------------------------------------------------
California Tax-Free Bond Fund(1)
          Robert Miller(2)                      A
--------------------------------------------------------------------------------
California Tax-Free Money Market
          Todd Pardula                          C
--------------------------------------------------------------------------------

RANGES: A - NONE; B - $1-$10,000; C - $10,001-$50,000; D - $50,001-$100,000; E -
$100,001-$500,000; F - $500,001-$1,000,000; G - MORE THAN $1,000,000.

(1)  FORMERLY KNOWN AS CALIFORNIA INTERMEDIATE-TERM TAX-FREE FUND.

(2)  AMERICAN CENTURY HAS ADOPTED A POLICY THAT, WITH LIMITED EXCEPTIONS,
     REQUIRES ITS PORTFOLIO MANAGERS TO MAINTAIN INVESTMENTS IN THE POLICY
     PORTFOLIOS THEY OVERSEE. HOWEVER, BECAUSE THIS PORTFOLIO MANAGER SERVES ON
     AN INVESTMENT TEAM THAT OVERSEES A NUMBER OF FUNDS IN THE SAME BROAD
     INVESTMENT CATEGORY, THE PORTFOLIO MANAGER IS NOT REQUIRED TO INVEST IN
     EACH SUCH FUND.


------
47


TRANSFER AGENT AND ADMINISTRATOR

American Century Services, LLC, 4500 Main Street, Kansas City, Missouri 64111,
serves as transfer agent and dividend-paying agent for the funds. It provides
physical facilities, computer hardware and software, and personnel for the
day-to-day administration of the funds and the advisor. The advisor pays ACS's
costs for serving as transfer agent and dividend-paying agent for the funds out
of the advisor's unified management fee. For a description of this fee and the
terms of its payment, see the above discussion under the caption INVESTMENT
ADVISOR on page 42.

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. The advisor pays
ACIS's costs for serving as principal underwriter of the funds' shares out of
the advisor's unified management fee. For a description of this fee and the
terms of its payments, see the above discussion under the caption INVESTMENT
ADVISOR on page 42. ACIS does not earn commissions for distributing the funds'
shares.

Certain financial intermediaries unaffiliated with the distributor or the funds
may perform various administrative and shareholder services for their clients
who are invested in the funds. These services may include assisting with fund
purchases, redemptions and exchanges, distributing information about the funds
and their performance, preparing and distributing client account statements, and
other administrative and shareholder services that 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.

CUSTODIAN BANKS

JPMorgan Chase Bank, 4 Metro Tech Center, Brooklyn, New York, 11245, and
Commerce Bank, N.A., 1000 Walnut, Kansas City, Missouri 64105, each serves as
custodian of the funds' assets. The custodians take no part in determining the
investment policies of the funds or 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 REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP serves as the independent registered public
accounting firm of the funds. The address of PricewaterhouseCoopers LLP is 1055
Broadway, 10th floor, Kansas City, Missouri 64105. As the independent registered
public accounting firm of the funds, PricewaterhouseCoopers 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.


------
48


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, 2005, 2004 and 2003, the funds did not pay any brokerage commissions.

REGULAR BROKER-DEALERS

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

INFORMATION ABOUT FUND SHARES

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

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


------
49


bonding, and errors and omissions insurance) for the protection of the Trust,
its shareholders, trustees, officers, employees and agents to cover possible
tort and other liabilities. Thus, the risk of a shareholder incurring financial
loss as a result of shareholder liability is limited to circumstances in which
both inadequate insurance exists and the Trust is unable to meet its
obligations.

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

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

MULTIPLE CLASS STRUCTURE

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

The Investor Class of most funds is made available to investors directly without
any load or commission, for a single unified management fee. It is also
available through some financial intermediaries. The Investor Class of those
funds which have A and B Classes is not available directly at no load. The A, B
and C Classes also are made available through financial intermediaries, for
purchase by individual investors who receive advisory and personal services from
the intermediary. The 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
Trustees and approved by its shareholders. Pursuant to such rule, the Board of
Trustees and initial shareholder of the funds' A, B and C Classes have approved
and entered into the A Class Plan, B Class Plan and C Class Plan, respectively.
The plans are described below.

In adopting the plans, the Board of Trustees (including a majority of trustees
who are not interested persons of the funds [as defined in the Investment
Company Act], hereafter referred to as the independent trustees) determined that
there was a reasonable likelihood that the plans would benefit the funds and the
shareholders of the affected class. Some of the anticipated benefits include
improved name recognition of the funds generally; and growing assets in existing
funds, which helps retain and attract investment management talent, provides a
better environment for improving fund performance, and can lower the total
expense ratio for funds with stepped-fee schedules. Pursuant to Rule 12b-1,
information with respect to revenues and expenses under the plans is presented
to the Board of Trustees quarterly for its consideration in connection with its
deliberations as to the continuance of the plans. Continuance of the plans must
be approved by the Board of Trustees (including a majority of the independent
trustees) annually. The plans may be amended by a vote of the Board of Trustees
(including a majority of the independent trustees), except that the plans may
not be amended to materially increase the amount to be spent for distribution
without majority approval of the shareholders of the affected class. The plans
terminate automatically in the event of an assignment and may be terminated upon
a vote of a majority of the independent trustees or by vote of a majority of the
outstanding voting securities of the affected class.


------
50


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 persons purchasing through broker-dealers, banks, insurance
companies and other financial intermediaries that provide various
administrative, shareholder and distribution services. The funds' distributor
enters into contracts with various banks, broker-dealers, insurance companies
and other financial intermediaries, with respect to the sale of the funds'
shares and/or the use of the funds' shares in various investment products or in
connection with various financial services.

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

To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
Board of Trustees has adopted the A Class Plan. Pursuant to the A Class Plan,
the A Class pays the funds' distributor 0.25% annually of the average daily net
asset value of the A Class shares. The distributor may use these fees to pay for
certain ongoing shareholder and administrative services (as described below) and
for distribution services, including past distribution services (as described
below). This payment is fixed at 0.25% and is not based on expenses incurred by
the distributor. During the fiscal year ended August 31, 2005, the aggregate
amount of fees paid under the A Class Plan was:

        California High Yield Municipal        $52,244

The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the A Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.

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

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

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

(c)  conducting proprietary research about investment choices and the
     market in general;

(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;

(c)  compensation to, and expenses (including overhead and telephone
     expenses) of, the distributor;


------
51


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

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

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

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

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

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

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

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

(l)  profit on the foregoing;

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

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

B Class Plan

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

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

To enable the funds' shares to be made available through such plans and
financial intermediaries, and to compensate them for such services, the funds'
Board of Trustees has adopted the B Class Plan. Pursuant to the B Class Plan,
the B Class pays the funds' distributor 1.00% annually of the average daily net
asset value of the funds' B Class shares, 0.25% of which is paid for certain
ongoing individual shareholder and administrative services (as described below)
and 0.75% of which is paid for distribution services, including past
distribution services (as described below). This payment is fixed at 1.00% and
is not based on expenses incurred by the distributor. During the fiscal year
ended August 31, 2005, the aggregate amount of fees paid under the B Class Plan
was:

        California High-Yield Municipal      $9,873

The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the B Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.

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


------
52


(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;

(c)  conducting proprietary research about investment choices and the
     market in general;

(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;

(c)  compensation to, and expenses (including overhead and telephone
     expenses) of, the distributor;

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

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

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

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

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

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

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

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

(l)  profit on the foregoing;

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

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

C Class Plan

As described in the prospectus, the C Class shares of the funds are made
available 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.


------
53


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

        California High-Yield Municipal       $109,681

The distributor then makes these payments to the financial intermediaries
(including underwriters and broker-dealers, who may use some of the proceeds to
compensate sales personnel) who offer the C Class shares for the services
described below. No portion of these payments is used by the distributor to pay
for advertising, printing costs or interest expenses.

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

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

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

(c)  conducting proprietary research about investment choices and the
     market in general;

(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 C Class shares, which services
may include but are not limited to:

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

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

(c)  compensating and paying expenses (including overhead and telephone
     expenses) of, the distributor;

(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;


------
54


(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 of sales seminars and payments in the form
     of transactional and compensation or promotional incentives;

(l)  profit on the foregoing;

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

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

Sales Charges

The sales charges applicable to the A, B and C Classes of the funds are
described in the prospectuses for those classes in the section titled INVESTING
THROUGH A FINANCIAL INTERMEDIARY. Shares of the A Class are subject to an
initial sales charge, which declines as the amount of the purchase increases
pursuant to the schedule set forth in the prospectus. This charge may be waived
in the following situations:

*  Qualified retirement plan purchases

*  Certain individual retirement account rollovers

*  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

*  Purchases by current and retired employees of American Century and their
   immediate family members (spouses and children under age 21) and trusts or
   qualified retirement plans established by those persons

*  Purchases by certain other investors that American Century deems
   appropriate, including but not limited to current or retired directors,
   trustees and officers of funds managed by the advisor, employees of those
   persons and trusts and qualified retirement plans established by those
   persons

There are several ways to reduce the sales charges applicable to a purchase of A
Class shares. These methods are described in the relevant prospectuses. You or
your financial advisor must indicate at the time of purchase that you intend to
take advantage of one of these reductions.

Shares of the A, B and C Classes are subject to a contingent deferred sales
charge (CDSC) upon redemption of the shares in certain circumstances. The
specific charges and when they apply are described in the relevant prospectuses.
The CDSC may be waived for certain redemptions by some shareholders, as
described in the prospectuses.

An investor may terminate his relationship with an intermediary at any time. If
the investor does not establish a relationship with a new intermediary and
transfer any accounts to that new intermediary, such accounts may be exchanged
to the Investor Class of the fund, if such class is available. The investor will
be the shareholder of record of such accounts. In this situation, any applicable
CDSCs will be charged when the exchange is made.


------
55


The aggregate CDSCs paid to the distributor in the fiscal year ended August 31,
2005, were:

        California High-Yield Municipal
        A Class        $10,000
        B Class        $1,461
        C Class        $2,256

Dealer Concessions

The funds' distributor expects to pay sales commissions to the financial
intermediaries who sell A, B and/or C Class shares of the funds at the time of
such sales. Payments for A Class shares will be as follows:

PURCHASE AMOUNT                                                DEALER CONCESSION
--------------------------------------------------------------------------------
Less than $50,000                                              4.00%
--------------------------------------------------------------------------------
$50,000 - $99,999                                              4.00%
--------------------------------------------------------------------------------
$100,000 - $249,999                                            3.00%
--------------------------------------------------------------------------------
$250,000 - $499,999                                            2.00%
--------------------------------------------------------------------------------
$500,000 - $999,999                                            1.75%
--------------------------------------------------------------------------------
$1,000,000 - $3,999,999                                        1.00%
--------------------------------------------------------------------------------
$4,000,000 - $9,999,999                                        0.50%
--------------------------------------------------------------------------------
Greater than $10,000,000                                       0.25%
--------------------------------------------------------------------------------

No concession will be paid on purchases by qualified retirement plans. Payments
will equal 4.00% of the purchase price of B Class shares and 1.00% of the
purchase price of the C Class shares sold by the intermediary. The distributor
will retain the 12b-1 fee paid by the C Class of funds for the first 12 months
after the shares are purchased. This fee is intended in part to permit the
distributor to recoup a portion of on-going sales commissions to dealers plus
financing costs, if any. Beginning with the first day of the 13th month, the
distributor will make the C Class distribution and individual shareholder
services fee payments described above to the financial intermediaries involved
on a quarterly basis. In addition, B and C Class purchases and A Class purchases
greater than $1,000,000 are subject to a CDSC as described in the prospectuses.

From time to time, the distributor may provide additional concessions to
dealers, including but not limited to payment assistance for conferences and
seminars, provision of sales or training programs for dealer employees and/or
the public (including, in some cases, payment for travel expenses for registered
representatives and other dealer employees who participate), advertising and
sales campaigns about a fund or funds, and assistance in financing
dealer-sponsored events. Other concessions may be offered as well, and all such
concessions will be consistent with applicable law, including the then-current
rules of the National Association of Securities Dealers, Inc. Such concessions
will not change the price paid by investors for shares of the funds.

BUYING AND SELLING FUND SHARES

Information about buying, selling, exchanging and, if applicable, converting
fund shares is contained in the funds' prospectuses. The prospectuses are
available to investors without charge and may be obtained by calling us.

VALUATION OF A FUND'S SECURITIES

All classes of the funds except the A Class are offered at their net asset
value, as described below. The A Class shares of the funds are offered at their
public offering price, which is the net asset value plus the appropriate sales
charge. This calculation may be expressed as a formula:

Offering Price = Net Asset Value/(1 - Sales Charge as a % of Offering Price)


------
56


For example, if the net asset value of a fund's A Class shares is $5.00, the
public offering price would be $5.00/(1-4.50%)=$5.24.

Each fund's net asset value per share (NAV) is calculated as of the close of
regular trading on the New York Stock Exchange (NYSE) on each day the NYSE is
open. The NYSE usually closes at 4 p.m. Eastern time. The NYSE typically
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Although the funds expect the same holidays
to be observed in the future, the NYSE may modify its holiday schedule at any
time.

A fund's NAV is the current value of a fund's assets, minus any liabilities,
divided by the number of shares outstanding. Expenses and interest earned on
portfolio securities are accrued daily.

MONEY MARKET FUND

Securities held by the money market fund are valued at amortized cost. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument's market
value. Consequently, the instrument's amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the fund's
yields. During periods of declining interest rates, for example, the daily yield
on fund shares computed as described above may be higher than that of a fund
with identical investments priced at market value. The converse would apply in a
period of rising interest rates.

As required by Rule 2a-7, the Board of Trustees has adopted procedures designed
to stabilize, to the extent reasonably possible, a money market fund's price per
share as computed for the purposes of sales and redemptions at $1.00. While the
day-to-day operation of the money market fund has been delegated to the
portfolio managers, the quality requirements established by the procedures limit
investments to certain instruments that the Board of Trustees has determined
present minimal credit risks and that have been rated in one of the two highest
rating categories as determined by a rating agency or, in the case of unrated
securities, of comparable quality. The procedures require review of the money
market fund's portfolio holdings at such intervals as are reasonable in light of
current market conditions to determine whether the money market fund's net asset
value calculated by using available market quotations deviates from the
per-share value based on amortized cost. The procedures also prescribe the
action to be taken by the advisor if such deviation should exceed 0.25%.

Actions the advisor and the Board of Trustees may consider under these
circumstances include (i) selling portfolio securities prior to maturity, (ii)
withholding dividends or distributions from capital, (iii) authorizing a
one-time dividend adjustment, (iv) discounting share purchases and initiating
redemptions in kind, or (v) valuing portfolio securities at market price for
purposes of calculating NAV.

The fund has obtained private insurance that partially protects the money market
fund against default of principal or interest payments on the instruments it
holds, and against bankruptcy by issuers and credit enhancers of these
instruments. Although the fund will be charged premiums by an insurance company
for coverage of specified types of losses related to default or bankruptcy on
certain securities, the fund may incur losses regardless of the insurance. The
insurance does not guarantee or insure that the fund will be able to maintain a
stable net asset value of $1.00 per share.


------
57


NON-MONEY MARKET FUNDS

Securities held by the non-money market funds normally are priced by an
independent pricing service, provided that such prices are believed by the
advisor to reflect the fair market value of portfolio securities. Information
about how the fair market value of a security is determined is contained in the
funds' prospectuses.

Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services generally take into account institutional
trading activity, trading in similar groups of securities, and any developments
related to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by the advisor under the general
supervision of the Board of Trustees. There are a number of pricing services
available, and the advisor, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part.

Securities not priced by a pricing service are valued at the mean between the
most recently quoted bid and asked prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference, between bid and asked prices for certain municipal bonds
may differ substantially among dealers.

Debt securities maturing within 60 days of the valuation date may be valued at
cost, plus or minus any amortized discount or premium, unless the trustees
determine that this would not result in fair valuation of a given security.
Other assets and securities for which quotations are not readily available are
valued in good faith at their fair value using methods approved by the Board of
Trustees.

TAXES

FEDERAL INCOME TAX

Each fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By so
qualifying, each fund should be exempt from federal and state income taxes to
the extent that it distributes substantially all of its net investment income
and net realized capital gains (if any) to investors. If a fund fails to qualify
as a regulated investment company, it will be liable for taxes, significantly
reducing its distributions to investors and eliminating investors' ability to
treat distributions received from the fund in the same manner in which they were
realized by the fund.

Certain bonds purchased by the funds may be treated as bonds that were
originally issued at a discount. Original issue discount represents interest for
federal income tax purposes and can generally be defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Original issue discount, although no cash is actually received by a
fund until the maturity of the bond, is treated for federal income tax purposes
as income earned by a fund over the term of the bond, and therefore is subject
to the distribution requirements of the Code. The annual amount of income earned
on such a bond by a fund generally is determined on the basis of a constant
yield to maturity that takes into account the semiannual compounding of accrued
interest. Original issue discount on an obligation with interest exempt from
federal income tax will constitute tax-exempt interest income to the fund.

In addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable). Generally, market discount
accrues on a daily basis for each day the bond is held by a fund. Market


------
58


discount is calculated on a straight line basis over the time remaining to the
bond's maturity. In the case of any debt security having a fixed maturity date
of not more than one year from date of issue, the gain realized on disposition
generally will be treated as a short-term capital gain.

As of August 31, 2005, the funds in the table below had the following capital
loss carryover, which expire in the years and amounts listed. When a fund has a
capital loss carryover, it does not make capital gains distributions until the
loss has been offset or expired.

FUND               2009             2010     2011     2012          2013
--------------------------------------------------------------------------------
California
High-Yield
Municipal          ($1,907,441)     -        -        -             -
--------------------------------------------------------------------------------
California
Limited-Term
Tax-Free           -                -        -        -             ($905,690)
--------------------------------------------------------------------------------
California
Long-Term
Tax-Free           -                -        -        -             -
--------------------------------------------------------------------------------
California
Tax-Free
Bond               -                -        -        ($67,644)     -
--------------------------------------------------------------------------------
California
Tax-Free
Money Market       -                -        -        -             -
--------------------------------------------------------------------------------

Interest on certain types of industrial development bonds (small issues and
obligations issued to finance certain exempt facilities that may be leased to or
used by persons other than the issuer) is not exempt from federal income tax
when received by "substantial users" or persons related to substantial users as
defined in the Code. The term "substantial user" includes any "non-exempt
person" who regularly uses in trade or business part of a facility financed from
the proceeds of industrial development bonds. The funds may invest periodically
in industrial development bonds and, therefore, may not be appropriate
investments for entities that are substantial users of facilities financed by
industrial development bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he or his immediate family (spouse, brothers, sisters,
ancestors and lineal descendants) owns directly or indirectly in aggregate more
than 50% of the equity value of the substantial user.

Under the Code, any distribution of a fund's net realized long-term capital
gains that is designated by the fund as a capital gains dividend is taxable to
you as long-term capital gains, regardless of the length of time you have held
your shares in the fund. If you purchase shares in the fund and sell them at a
loss within six months, your loss on the sale of those shares will be treated as
a long-term capital loss to the extent of any long-term capital gains dividend
you received on those shares. Any such loss will be disallowed to the extent of
any tax-exempt dividend income you received on those shares. In addition,
although highly unlikely, the Internal Revenue Service may determine that a bond
issued as tax-exempt should in fact be taxable. If a fund were to hold such a
bond, it might have to distribute taxable income or reclassify as taxable income
previously distributed as tax-free.

If you have not complied with certain provisions of the Internal Revenue Code
and Regulations, either American Century or your financial intermediary is
required by federal law to withhold and remit the applicable federal withholding
rate of reportable payments (which may include taxable dividends, capital gains
distributions and redemption proceeds) to the IRS. Those regulations require you
to certify that the Social Security number or tax identification number you
provide is correct and that you are not subject to withholding for previous
under-reporting to the IRS. You will be asked to make the appropriate
certification on your account application. Payments reported by us to the IRS
that omit your Social Security number or tax identification number will subject
us to a non-refundable penalty of $50, which will be charged against your
account if you fail to provide the certification by the time the report is
filed.

A redemption of shares of a fund (including a redemption made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
you generally will recognize gain or loss in an amount equal to the difference
between the basis of the shares


------
59


and the amount received. 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 Code, resulting in a
postponement of the recognition of such loss for federal income tax purposes.

ALTERNATIVE MINIMUM TAX

While the interest on bonds issued to finance essential state and local
government operations is generally exempt from regular federal income tax,
interest on certain "private activity" bonds issued after August 7, 1986, while
exempt from regular federal income tax, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states.

California High-Yield Municipal may invest in private activity bonds. The
interest on private activity bonds could subject a shareholder to, or increase
liability under, the federal alternative minimum tax, depending on the
shareholder's tax situation. The interest on California private activity bonds
is not subject to the California alternative minimum tax when it is earned
(either directly or through investment in a mutual fund) by a California
taxpayer. However, if either fund were to invest in private activity securities
of non-California issuers (due to a limited supply of appropriate California
municipal obligations, for example), the interest on those securities would be
included in California alternative minimum taxable income.

All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's "adjusted current earnings."

In addition, a deductible environmental tax of 0.12% is imposed on a
corporation's modified alternative minimum taxable income in excess of $2
million. The environmental tax will be imposed even if the corporation is not
required to pay an alternative minimum tax. To the extent that exempt-interest
dividends paid by a fund are included in alternative minimum taxable income,
corporate shareholders may be subject to the environmental tax.

The Trust will inform California High-Yield Municipal fund shareholders annually
of the amount of distributions derived from interest payments on private
activity bonds.

STATE AND LOCAL TAXES

California law concerning the payment of exempt-interest dividends is similar to
federal law. Assuming each fund qualifies to pay exempt-interest dividends under
federal and California law, and to the extent that dividends are derived from
interest on tax-exempt bonds of California state or local governments, such
dividends also will be exempt from California personal income tax. The Trust
will inform shareholders annually as to the amount of distributions from each
fund that constitutes exempt-interest dividends and dividends exempt from
California personal income tax. The funds' dividends are not exempt from
California state franchise or corporate income taxes.

The funds' dividends may not qualify for exemption under income or other tax
laws of state or local taxing authorities outside California. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the funds in this regard.

The information above is only a summary of some of the tax considerations
affecting the funds and their shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.


------
60


FINANCIAL STATEMENTS

The financial statements for the fiscal year ended August 31, 2005 have been
audited by PricewaterhouseCoopers LLP, independent registered public accounting
firm. Their Report of Independent Registered Public Accounting Firm and the
financial statements included in the funds' annual reports for the fiscal year
ended August 31, 2005 are incorporated herein by reference.

EXPLANATION OF FIXED-INCOME
SECURITIES RATINGS

As described in the prospectuses, the funds will invest in fixed-income
securities. Those investments, however, are subject to certain credit quality
restrictions, as noted in the prospectuses. The following is a summary of the
rating categories referenced in the prospectus disclosure.

RATINGS OF CORPORATE DEBT SECURITIES
--------------------------------------------------------------------------------
STANDARD & POOR'S
--------------------------------------------------------------------------------
AAA   This is the highest rating assigned by S&P to a debt obligation. It
      indicates an extremely strong capacity to pay interest and repay
      principal.
--------------------------------------------------------------------------------
AA    Debt rated in this category is considered to have a very strong
      capacity to pay interest and repay principal. It differs from the
      highest-rated obligations only in small degree.
--------------------------------------------------------------------------------
A     Debt rated A has a strong capacity to pay interest and repay
      principal, although it is somewhat more susceptible to the
      adverse effects of changes in circumstances and economic
      conditions than debt in higher-rated categories.
--------------------------------------------------------------------------------
BBB   Debt rated in this category is regarded as having an adequate
      capacity to pay interest and repay principal. While it normally exhibits
      adequate protection parameters, adverse economic conditions or
      changing circumstances are more likely to lead to a weakened
      capacity to pay interest and repay principal for debt in this category
      than in higher-rated categories. Debt rated below BBB is regarded
      as having significant speculative characteristics.
--------------------------------------------------------------------------------
BB    Debt rated in this category has less near-term vulnerability to
      default than other speculative issues. However, it faces major
      ongoing uncertainties or exposure to adverse business, financial, or
      economic conditions that could lead to inadequate capacity to meet
      timely interest and principal payments. The BB rating also is used
      for debt subordinated to senior debt that is assigned an actual or
      implied BBB rating.
--------------------------------------------------------------------------------
B     Debt rated in this category is more vulnerable to nonpayment than
      obligations rated BB, but currently has the capacity to pay interest
      and repay principal. Adverse business, financial, or economic
      conditions will likely impair the obligor's capacity or willingness to
      pay interest and repay principal.
--------------------------------------------------------------------------------
CCC   Debt rated in this category is currently vulnerable to nonpayment
      and is dependent upon favorable business, financial, and economic
      conditions to meet timely payment of interest and repayment of
      principal. In the event of adverse business, financial, or economic
      conditions, it is not likely to have the capacity to pay interest and
      repay principal. The CCC rating category is also used for debt
      subordinated to senior debt that is assigned an actual or implied
      B or B- rating.
--------------------------------------------------------------------------------
CC    Debt rated in this category is currently highly vulnerable to
      nonpayment. This rating category is also applied to debt
      subordinated to senior debt that is assigned an actual or implied
      CCC rating.
--------------------------------------------------------------------------------
C     The rating C typically is applied to debt subordinated to senior
      debt, and is currently highly vulnerable to nonpayment of interest
      and principal. This rating may be used to cover a situation where a
      bankruptcy petition has been filed or similar action taken, but debt
      service payments are being continued.
--------------------------------------------------------------------------------
D     Debt rated in this category is in default. This rating is used when
      interest payments or principal repayments are not made on the
      date due even if the applicable grace period has not expired,
      unless S&P believes that such payments will be made during such
      grace period. It also will be used upon the filing of a bankruptcy
      petition or the taking of a similar action if debt service payments
      are jeopardized.
--------------------------------------------------------------------------------


------
61


MOODY'S INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
Aaa        This is the highest rating assigned by Moody's to a debt
           obligation. It indicates an extremely strong capacity to pay
           interest and repay principal.
--------------------------------------------------------------------------------
Aa         Debt rated in this category is considered to have a very strong
           capacity to pay interest and repay principal and differs from Aaa
           issues only in a small degree. Together with Aaa debt, it
           comprises what are generally known as high-grade bonds.
--------------------------------------------------------------------------------
A          Debt rated in this category possesses many favorable investment
           attributes and is to be considered as upper-medium-grade debt.
           Although capacity to pay interest and repay principal are
           considered adequate, it is somewhat more susceptible to the
           adverse effects of changes in circumstances and economic
           conditions than debt in higher-rated categories.
--------------------------------------------------------------------------------
Baa        Debt rated in this category is considered as medium-grade debt
           having an adequate capacity to pay interest and repay principal.
           While it normally exhibits adequate protection parameters,
           adverse economic conditions or changing circumstances are
           more likely to lead to a weakened capacity to pay interest and
           repay principal for debt in this category than in higher-rated
           categories. Debt rated below Baa is regarded as having
           significant speculative characteristics.
--------------------------------------------------------------------------------
Ba         Debt rated Ba has less near-term vulnerability to default than
           other speculative issues. However, it faces major ongoing
           uncertainties or exposure to adverse business, financial or
           economic conditions that could lead to inadequate capacity to
           meet timely interest and principal payments. Often the protection
           of interest and principal payments may be very moderate.
--------------------------------------------------------------------------------
B          Debt rated B has a greater vulnerability to default, but currently
           has the capacity to meet financial commitments. Assurance of
           interest and principal payments or of maintenance of other terms
           of the contract over any long period of time may be small. The B
           rating category is also used for debt subordinated to senior debt
           that is assigned an actual or implied Ba or Ba3 rating.
--------------------------------------------------------------------------------
Caa        Debt rated Caa is of poor standing, has a currently identifiable
           vulnerability to default, and is dependent upon favorable
           business, financial and economic conditions to meet timely
           payment of interest and repayment of principal. In the event of
           adverse business, financial or economic conditions, it is not likely
           to have the capacity to pay interest and repay principal. Such
           issues may be in default or there may be present elements of
           danger with respect to principal or interest. The Caa rating is
           also used for debt subordinated to senior debt that is assigned
           an actual or implied B or B3 rating.
--------------------------------------------------------------------------------
Ca         Debt rated in this category represent obligations that are
           speculative in a high degree. Such debt is often in default or
           has other marked shortcomings.
--------------------------------------------------------------------------------
C          This is the lowest rating assigned by Moody's, and debt rated C
           can be regarded as having extremely poor prospects of attaining
           investment standing.
--------------------------------------------------------------------------------

FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
AAA          Debt rated in this category has the lowest expectation of credit
             risk. Capacity for timely payment of financial commitments is
             exceptionally strong and highly unlikely to be adversely affected
             by foreseeable events.
--------------------------------------------------------------------------------
AA           Debt rated in this category has a very low expectation of credit
             risk. Capacity for timely payment of financial commitments is
             very strong and not significantly vulnerable to foreseeable events.
--------------------------------------------------------------------------------
A            Debt rated in this category has a low expectation of credit risk.
             Capacity for timely payment of financial commitments is strong,
             but may be more vulnerable to changes in circumstances or in
             economic conditions than debt rated in higher categories.
--------------------------------------------------------------------------------
BBB          Debt rated in this category currently has a low expectation of
             credit risk and an adequate capacity for timely payment of
             financial commitments. However, adverse changes in
             circumstances and in economic conditions are more likely to
             impair this capacity. This is the lowest investment grade category.
--------------------------------------------------------------------------------
BB           Debt rated in this category has a possibility of developing credit
             risk, particularly as the result of adverse economic change over
             time. However, business or financial alternatives may be
             available to allow financial commitments to be met. Securities
             rated in this category are not investment grade.
--------------------------------------------------------------------------------


------
62


FITCH INVESTORS SERVICE, INC.
--------------------------------------------------------------------------------
B                     Debt rated in this category has significant credit risk,
                      but a limited margin of safety remains. Financial
                      commitments currently are being met, but capacity for
                      continued debt service payments is contingent upon a
                      sustained, favorable business and economic
                      environment.
--------------------------------------------------------------------------------
CCC, CC, C            Debt rated in these categories has a real possibility for
                      default. Capacity for meeting financial commitments
                      depends solely upon sustained, favorable business or
                      economic developments. A CC rating indicates that
                      default of some kind appears probable; a C rating
                      signals imminent default.
--------------------------------------------------------------------------------
DDD, DD, D            The ratings of obligations in these categories are
                      based on their prospects for achieving partial or full
                      recovery in a reorganization or liquidation of the
                      obligor. While expected recovery values are highly
                      speculative and cannot be estimated with any
                      precision, the following serve as general guidelines.
                      DDD obligations have the highest potential for
                      recovery, around 90%-100% of outstanding amounts
                      and accrued interest. DD indicates potential
                      recoveries in the range of 50%-90% and D the
                      lowest recovery potential, i.e., below 50%.

                      Entities rated in these categories have defaulted on
                      some or all of their obligations. Entities rated DDD
                      have the highest prospect for resumption of
                      performance or continued operation with or without
                      a formal reorganization process. Entities rated DD and
                      D are generally undergoing a formal reorganization or
                      liquidation process; those rated DD are likely to
                      satisfy a higher portion of their outstanding
                      obligations, while entities rated D have a poor
                      prospect of repaying all obligations.
--------------------------------------------------------------------------------

To provide more detailed indications of credit quality, the Standard & Poor's
ratings from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within these major rating categories. Similarly,
Moody's adds numerical modifiers (1, 2, 3) to designate relative standing within
its major bond rating categories. Fitch, Inc. also rates bonds and uses a
ratings system that is substantially similar to that used by Standard & Poor's.

COMMERCIAL PAPER RATINGS
--------------------------------------------------------------------------------
S&P        MOODY'S             DESCRIPTION
--------------------------------------------------------------------------------
A-1            Prime-1             This indicates that the degree of safety
               (P-1)               regarding timely payment is strong.
                                   Standard & Poor's rates those issues
                                   determined to possess extremely strong
                                   safety characteristics as A-1+.
--------------------------------------------------------------------------------
A-2            Prime-2             Capacity for timely payment on
               (P-2)               commercial paper is satisfactory, but the
                                   relative degree of safety is not as high
                                   as for issues designated A-1. Earnings
                                   trends and coverage ratios, while sound,
                                   will be more subject to variation.
                                   Capitalization characteristics, while still
                                   appropriated, may be more affected by
                                   external conditions. Ample alternate
                                   liquidity is maintained.
--------------------------------------------------------------------------------
A-3            Prime-3             Satisfactory capacity for timely repayment.
               (P-3)               Issues that carry this rating are somewhat
                                   more vulnerable to the adverse changes
                                   in circumstances than obligations
                                   carrying the higher designations.
--------------------------------------------------------------------------------

NOTE RATINGS
--------------------------------------------------------------------------------
S&P        MOODY'S            DESCRIPTION
--------------------------------------------------------------------------------
SP-1           MIG-1;             Notes are of the highest quality
               VMIG-1             enjoying strong protection from
                                  established cash flows of funds for
                                  their servicing or from established and
                                  broad-based access to the market for
                                  refinancing, or both.
--------------------------------------------------------------------------------
SP-2           MIG-2;             Notes are of high quality with margins
               VMIG-2             of protection ample, although not so
                                  large as in the preceding group.
--------------------------------------------------------------------------------
SP-3           MIG-3;             Notes are of favorable quality with all
               VMIG-3             security elements accounted for, but
                                  lacking the undeniable strength of the
                                  preceding grades. Market access for
                                  refinancing, in particular, is likely to be
                                  less well-established.
--------------------------------------------------------------------------------
SP-4           MIG-4;             Notes are of adequate quality, carrying
               VMIG-4             specific risk but having protection and
                                  not distinctly or predominantly speculative.
--------------------------------------------------------------------------------


------
63


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.

You can receive a free copy of the annual and semiannual reports, and ask any
questions about the funds, by contacting us at the address or one of the
telephone numbers listed below.

If you own or are considering purchasing fund shares through

*  a bank or trust company

*  a broker-dealer

*  an insurance company

*  another financial intermediary

you can receive the annual and semiannual reports directly from them.

You also can get information about the funds from the Securities and Exchange
Commission (SEC).

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

ON THE INTERNET      * EDGAR database at sec.gov
                     * By email request at publicinfo@sec.gov

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

(Investment Company Act File No. 811-3706)

AMERICAN CENTURY INVESTMENTS
americancentury.com
                                   Banks and Trust Companies, Broker-Dealers,
Self-Directed Retail Investors     Financial Professionals, Insurance Companies
P.O. Box 419200                    P.O. Box 419786
Kansas City, Missouri 64141-6200   Kansas City, Missouri 64141-6786
1-800-345-2021 or 816-531-5575     1-800-345-6488

SH-SAI-47719 0601