UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-3706 --------------------------------------------- AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) CHARLES A. ETHERINGTON, 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 816-531-5575 ---------------------------- Date of fiscal year end: 08-31 ------------------------------------------------------- Date of reporting period: 08-31-2007 -------------------------------------------------------
ITEM 1. REPORTS TO STOCKHOLDERS. [front cover] AMERICAN CENTURY INVESTMENTS Annual Report August 31, 2007 [photo of autumn] California Tax-Free Money Market Fund California Limited-Term Tax-Free Fund California Tax-Free Bond Fund California Long-Term Tax-Free Fund [american century investments logo and text logo] OUR MESSAGE TO YOU We have the privilege of providing you with the annual report for the American Century® California Tax-Free Money Market, California Limited-Term Tax-Free, California Tax-Free Bond, and California Long-Term Tax-Free funds for the 12 months ended August 31, 2007, to help you monitor your investment. 2007 has been an eventful year for the financial markets and for us. While the markets experienced subprime-related turbulence, we've been working to secure a smooth executive leadership transition. In our semiannual report, we announced the promotion of former international equity chief investment officer (CIO) Enrique Chang to overall CIO, effective January 1, 2007. One of Enrique's immediate challenges was to hire a new international equity CIO, which he accomplished in May when Mark On joined us from AXA Rosenberg. Enrique also hired Steve Lurito from MUUS Asset Management LLC in July to fill our vacant U.S. growth equity CIO position. We also announced the promotion of Jonathan Thomas to chief executive officer, effective March 1. In June, Jonathan hired Barry Fink, who came to us from Morgan Stanley, as chief operating officer. This completed our leadership transition, and helped make it possible for my son, Jim Stowers III, to step down from the American Century Companies, Inc. (ACC) board of directors at the end of July to focus on his new business ventures. I remain co-chair of the ACC board with Richard Brown, who has been on the board since 1998 and also co-chairs the Stowers Institute for Medical Research board. Jim's recent departure, after he relinquished his executive leadership and investment management responsibilities in early 2005, reflects his comfort with the firm's direction and new leadership. As with Jim before them, we've been energized by the skills and experience brought to the leadership team by Jonathan, Enrique, Barry, Mark, and Steve. They've already had a positive impact on the development and management of the products and services we take pride in delivering to you. [photo of James E. Stowers, Jr.] /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AND CO-CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. TABLE OF CONTENTS Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . 2 U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . . . . . . 2 CALIFORNIA TAX-FREE MONEY MARKET Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 4 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 6 CALIFORNIA LIMITED-TERM TAX-FREE Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 13 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 15 CALIFORNIA TAX-FREE BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 21 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 23 CALIFORNIA LONG-TERM TAX-FREE Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 33 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 35 Shareholder Fee Examples. . . . . . . . . . . . . . . . . . . . . . . 41 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . 43 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . 44 Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . 45 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 47 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 52 Report of Independent Registered Public Accounting Firm . . . . . . . 56 OTHER INFORMATION Proxy Voting Results. . . . . . . . . . . . . . . . . . . . . . . . . 57 Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Approval of Management Agreements for California Tax-Free Money Market, California Limited-Term Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free . . . . . 61 Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 66 Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 67 The opinions expressed in the Market Perspective and each of the Portfolio Commentaries reflect those of the portfolio management team as of the date of the report, and do not necessarily represent the opinions of American Century or any other person in the American Century organization. Any such opinions are subject to change at any time based upon market or other conditions and American Century disclaims any responsibility to update such opinions. These opinions may not be relied upon as investment advice and, because investment decisions made by American Century funds are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of any American Century fund. Security examples are used for representational purposes only and are not intended as recommendations to purchase or sell securities. Performance information for comparative indices and securities is provided to American Century by third party vendors. To the best of American Century's knowledge, such information is accurate at the time of printing. MARKET PERSPECTIVE [photo of Chief Investment Officer] By David MacEwen, Chief Investment Officer, Fixed Income MODEST GROWTH, INFLATION, BOND RETURNS U.S. bonds produced positive returns during the 12 months ended August 31, 2007. But the ride was bumpy, as waves from the bursting housing and subprime mortgage/credit bubbles spread to the broader economy and financial markets. In this environment, bond market volatility surged to the highest level in years as investors generally avoided riskier corporate and asset-backed securities in favor of the highest-quality government bonds. As for the U.S. economy, growth moderated during the period, with the economy expanding at an approximately 2% average annual rate over the last four complete calendar quarters. Inflation also slowed, as the trailing 12-month percentage change in core consumer prices (without volatile food and energy prices) finished August at 2.1%, down from 2.9% in September 2006. In that environment, the Federal Reserve held its short-term rate target steady at 5.25%. MUNICIPALS TRAILED TAXABLE BONDS It's typical for the broad investment-grade municipal market to underperform the investment-grade taxable market when Treasurys rally, as happened during the period. The effects of the housing and credit crunches and resulting flight to safe-haven Treasury bonds were felt most keenly in the municipal market in July and August, the worst two-month period for 10-year municipal bonds relative to Treasurys since September and October of 2001. The sharp increase in longer-term municipal yields in recent months meant the municipal yield curve steepened (the difference in yield between short- and long-term bonds increased) after holding a relatively flat shape for much of the period. High-yield municipals slightly outperformed investment-grade municipals for the 12 months as yield-seeking investors embraced high-yield bonds as a result of the relatively flat shape of the curve. But high-yield securities were hit hardest of all municipal investments in July and August as credit quality concerns affected all sectors of the market. That ended a string of gains that lasted more than a year and a half, according to Lehman Brothers. U.S. Fixed-Income Total Returns For the 12 months ended August 31, 2007 LEHMAN BROTHERS MUNICIPAL MARKET INDICES Municipal Bond 2.30% 3-Year Municipal Bond 3.57% 5-Year General Obligation (GO) 3.44% Long-Term Municipal Bond (22+ years) 0.36% Non-Investment-Grade (High-Yield) 2.71% TAXABLE MARKET RETURNS Lehman Brothers U.S. Aggregate Index 5.26% Lehman Brothers U.S. Treasury Index 6.02% 3-Month Treasury Bill 5.36% 10-Year Treasury Note 5.78% - ------ 2 PERFORMANCE California Tax-Free Money Market Total Returns as of August 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date CALIFORNIA TAX-FREE MONEY MARKET 3.16% 1.74% 2.16% 3.14% 11/9/83 LIPPER CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS AVERAGE RETURNS(1) 3.04% 1.64% 2.05% 3.26%(2) -- Fund's Lipper Ranking as of 8/31/07(1) 21 of 62 22 of 56 8 of 37 2 of 2(2) -- Fund's Lipper Ranking as of 9/30/07(1) 21 of 62 22 of 56 8 of 38 2 of 2(2) -- (1) Data provided by Lipper Inc. - A Reuters Company. © 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (2) Since 11/30/83, the date nearest the fund's inception for which data are available. Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. The 7-day current yield more closely reflects the current earnings of the fund than the total return. - ------ 3 PORTFOLIO COMMENTARY California Tax-Free Money Market Lead Portfolio Manager: Todd Pardula Macro Strategy Team Representative: Steven Permut PERFORMANCE SUMMARY California Tax-Free Money Market returned 3.16% for the 12 months ended August 31, 2007, outpacing the 3.04% average return of the 62 funds in Lipper Inc.'s California tax-exempt money market funds category. The fund maintained its solid performance run, finishing the period ranked among the top 34% of the Lipper peer group. This performance is particularly noteworthy, because, unlike many of our peers, we do not own any securities subject to the federal alternative minimum tax (AMT). AMT securities typically offer higher yields. MUNI YIELDS INCREASED AS TREASURY YIELDS DECLINED The Federal Reserve (the Fed) left its fed funds rate target unchanged at 5.25% throughout the reporting period. Economic growth slowed, but inflation remained the Fed's primary motivator for most of the 12 months and this focus generally tempered the market's expectations for a rate cut. Despite the Fed's decision to hold short-term rates steady, Treasury yields experienced high volatility. The three-month Treasury bill yield, a standard money market benchmark, declined from 5.19% on February 20, 2007, to 4.01% on August 31, 2007. Yields began their descent when surprisingly strong federal tax receipts in April led to reduced Treasury bill issuance. But the bulk of the decline occurred late in the fiscal year, when subprime-related liquidity concerns about asset-backed commercial paper sparked a flight to quality, with U.S. Treasury bills the primary beneficiary. Commentary from the Fed regarding the central bank's willingness to take action as needed reignited market expectations for interest rate cuts. Unlike their taxable counterparts, municipal money market yields increased modestly. California Tax-Free Money Market's yield jumped from 3.01% to 3.47%. Supply and demand factors generally accounted for the upward movement. Continued heavy issuance of TOB (tender option bond) securities throughout the 12 months combined with tax season and quarter-end pressure forced dealers to keep rates relatively high to attract buyers during the latter half of the period. In addition, yields remained "artificially" high at the end of August, as securities dealers, concerned about the taxable market's liquidity issues, worked to deplete their inventories. Yields as of August 31, 2007 7-Day Current Yield 3.47% 7-Day Effective Yield 3.53% 7-Day Tax-Equivalent Current Yields* 31.98% Tax Bracket 5.10% 34.70% Tax Bracket 5.31% 39.23% Tax Bracket 5.71% 41.05% Tax Bracket 5.89% *The tax brackets indicated are for combined state and federal income tax. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. - ------ 4 California Tax-Free Money Market PORTFOLIO STRATEGY Overall, we continued to emphasize floating-rate notes, which afforded us the flexibility to capture seasonal rate spikes while maintaining liquidity. Our emphasis on floating-rate securities accounted for the fund's outperformance during the period. The portfolio started the reporting period with a weighted average maturity of 33 days. After selling our longest-maturity security in early February, to take advantage of higher yields on floating-rate notes, the portfolio's average maturity declined to 18 days. Then, primarily during June, when most California notes come to market, we purchased several one-year notes, which helped push the portfolio's weighted average maturity to 31 days at the end of the period. For the entire 12-month period, the portfolio's weighted average maturity averaged 25 days. OUTLOOK The 12-month period ended on a volatile note, with investors shunning riskier assets in favor of high-quality securities. In response to the turmoil in the credit markets, the Fed and other central banks injected liquidity into the monetary system. In addition, the Fed announced a heightened focus on economic growth and reduced the interest rate for bank borrowing at its discount window. The financial markets responded enthusiastically, interpreting the Fed's new tone as a precursor to an easing campaign. Going forward, Portfolio Manager Todd Pardula believes U.S. economic growth will weaken. "We expect short-term tax-exempt rates will decline, but at a somewhat slower pace than in the taxable market," he says. "Although we expect floating-rate securities to reset at lower yields, we also anticipate continued value in the market, as dealers offer pricing incentives to deplete their inventories. In addition, we look forward to the end of October, when the state of California will issue $7 billion of short-term debt. This action should alleviate the current shortage of California municipal paper." Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 8/31/07 2/28/07 A-1+ 73% 68% A-1 27% 32% Portfolio Composition by Maturity % of fund % of fund investments investments as of as of 8/31/07 2/28/07 1-30 days 91% 91% 31-90 days 2% -- 91-180 days -- 8% More than 180 days 7% 1% - ------ 5 SCHEDULE OF INVESTMENTS California Tax-Free Money Market AUGUST 31, 2007 Principal Amount Value Short-Term Municipal Securities -- 99.1% CALIFORNIA -- 99.1% $16,175,000 ABAG Finance Auth. for Nonprofit Corps. COP, (Lucile Salter Packard Children's Hospital at Stanford), VRDN, 3.90%, 9/5/07 (Ambac) (SBBPA: Bayerische Landesbank) $ 16,175,000 2,000,000 ABAG Finance Auth. for Nonprofit Corps. Multifamily Housing Rev., Series 2002 A, (The Arbors Apartments), VRDN, 3.91%, 9/5/07 (FNMA) (LOC: FNMA) 2,000,000 5,270,000 ABAG Finance Auth. for Nonprofit Corps. Rev., (Francis Parker School), VRDN, 3.95%, 9/6/07 (LOC: Bank of New York) 5,270,000 2,945,000 ABAG Finance Auth. for Nonprofit Corps. Rev., (Institute Defense Analyses), VRDN, 3.98%, 9/6/07 (Ambac) (SBBPA: Wachovia Bank N.A.) 2,945,000 5,000,000 ABAG Finance Auth. for Nonprofit Corps. Rev., (The Thacher School), VRDN, 3.99%, 9/6/07 (SBBPA: Keybank, N.A.) 5,000,000 5,000,000 ABAG Finance Auth. for Nonprofit Corps. Rev., Series 2006 A, (Elder Care Alliance of San Francisco), VRDN, 3.86%, 9/6/07 (LOC: Citibank N.A.) 5,000,000 8,126,714 ABN AMRO Leasetops Certificates Trust Rev., Series 2003-1, VRDN, 4.10%, 9/5/07 (Ambac) (SBBPA: ABN AMRO Bank N.V.) (Acquired 1/29/03, Cost $8,126,714)(1) 8,126,714 13,881,000 ABN AMRO Munitops Certificate Trust GO, Series 2006-78, VRDN, 4.01%, 9/6/07 (FGIC) (SBBPA: ABN AMRO Bank N.V.) (Acquired 12/21/06 - 8/1/07, Cost $13,881,000)(1) 13,881,000 5,000,000 ABN AMRO Munitops Certificate Trust GO, VRDN, 3.81%, 5/1/08 (CIFG-TCRS) (SBBPA: ABN AMRO Bank N.V.) 5,000,000 Principal Amount Value $ 1,900,000 ABN AMRO Munitops Certificate Trust Rev., Series 2003-17, VRDN, 3.97%, 9/6/07 (MBIA) (SBBPA: ABN AMRO Bank N.V.) $ 1,900,000 5,000,000 ABN AMRO Munitops Certificate Trust Rev., Series 2006-11, VRDN, 3.97%, 9/6/07 (MBIA) (SBBPA: ABN AMRO Bank N.V.) (Acquired 3/28/06, Cost $5,000,000)(1) 5,000,000 2,700,000 ABN AMRO Munitops Certificate Trust Rev., Series 2006-19, VRDN, 3.97%, 9/6/07 (MBIA) (SBBPA: ABN AMRO Bank N.V.) 2,700,000 4,325,000 Apple Valley COP, (Public Facilities Financing), VRDN, 3.96%, 9/6/07 (LOC: California State Teacher's Retirement) 4,325,000 10,635,000 Auburn Union School District COP, VRDN, 4.05%, 9/6/07 (FSA) (SBBPA: Dexia Credit Local) 10,635,000 2,300,000 Barstow Multifamily Housing Rev., (Desert Vista Apartments), VRDN, 3.89%, 9/5/07 (LOC: FHLB) 2,300,000 7,000,000 California Community College Financing Auth. Tax & Rev. Anticipation Notes, Series 2007 A, (Community College League), 4.50%, 6/30/08 (FSA) 7,046,382 750,000 California Department of Water Resources Power Supply Rev., Series 2002 B2, VRDN, 3.95%, 9/4/07 (LOC: BNP Paribas) 750,000 1,400,000 California Department of Water Resources Power Supply Rev., Series 2005 F2, VRDN, 3.83%, 9/4/07 (LOC: JPMorgan Chase Bank and Societe Generale) 1,400,000 2,400,000 California Economic Development Financing Auth. Rev., (Volk Enterprises Inc.), VRDN, 3.95%, 9/6/07 (LOC: JPMorgan Chase Bank) (Acquired 3/8/04 - 8/21/07, Cost $2,400,000)(1) 2,400,000 470,000 California Economic Recovery Rev., Series 2004 C16, VRDN, 3.86%, 9/5/07 (FSA) (SBBPA: Dexia Credit Local) 470,000 - ------ 6 California Tax-Free Money Market Principal Amount Value $ 7,805,000 California Educational Facilities Auth. Rev., Series 2002 B, (Art Center Design College), VRDN, 4.00%, 9/6/07 (LOC: Allied Irish Bank plc) $ 7,805,000 5,165,000 California Enterprise Development Auth. Rev., (Community Hospice Inc.), VRDN, 3.96%, 9/6/07 (LOC: Bank of New York) 5,165,000 5,000,000 California GO, Series 2003 C3, VRDN, 3.94%, 9/6/07 (LOC: Landesbank Hessen-Thuringen Girozentrale, Bank of America N.A. and Bank of Nova Scotia) 5,000,000 1,700,000 California GO, Series 2004 A3, (Daily Kindergarten University), VRDN, 3.96%, 9/4/07 (LOC: Citibank N.A. and California State Teacher's Retirement) 1,700,000 750,000 California GO, Series 2004 A9, (Weekly Kindergarten University), VRDN, 3.87%, 9/6/07 (LOC: Citibank N.A. and California State Teacher's Retirement) 750,000 830,000 California GO, Series 2005 A3, VRDN, 3.90%, 9/5/07 (LOC: Bank of America N.A.) 830,000 6,500,000 California Health Facilities Financing Auth. Rev., Series 2006 C, (Kaiser Permanente), VRDN, 3.90%, 9/5/07 6,500,000 4,000,000 California Infrastructure & Economic Development Bank Rev., (Academy of Motion Picture Arts and Sciences Obligated Group), VRDN, 3.96%, 9/6/07 (Ambac) (SBBPA: JPMorgan Chase Bank) 4,000,000 3,000,000 California Infrastructure & Economic Development Bank Rev., (Country Schools), VRDN, 3.96%, 9/6/07 (LOC: Bank of New York) 3,000,000 4,600,000 California Infrastructure & Economic Development Bank Rev., (Humane Society), VRDN, 3.98%, 9/6/07 (LOC: Comerica Bank) 4,600,000 2,830,000 California Infrastructure & Economic Development Bank Rev., (Rural Community Assistance), VRDN, 3.98%, 9/6/07 (LOC: Bank of the West) 2,830,000 Principal Amount Value $ 3,910,000 California Infrastructure & Economic Development Bank Rev., Series 2003 A, VRDN, 3.92%, 9/5/07 (LOC: Wells Fargo Bank, N.A.) $ 3,910,000 8,000,000 California School Cash Reserve Program Auth. COP, Series 2007 A, (2007-2008 TRANS), 4.25%, 7/1/08 (Ambac) (GIC: Citigroup Financial Products) 8,040,354 3,500,000 California State University Institute, 3.65%, 10/1/07 (LOC: State Street Bank & Trust Co. and JPMorgan Chase Bank) 3,500,000 3,000,000 California Statewide Communities Development Auth. Rev., (House Ear Institute), VRDN, 4.00%, 9/6/07 (LOC: City National Bank) 3,000,000 7,000,000 California Statewide Communities Development Auth. Rev., Series 2003 D, (Kaiser Permanente), VRDN, 3.87%, 9/5/07 7,000,000 12,500,000 California Statewide Communities Development Auth. Rev., Series 2004 M, (Kaiser Permanente), VRDN, 3.90%, 9/5/07 12,500,000 3,900,000 California Statewide Communities Development Auth. Rev., Series 2006 A, (National Center for International Schools), VRDN, 3.93%, 9/6/07 (LOC: Allied Irish Bank plc) 3,900,000 3,150,000 California Statewide Financing Auth. Rev., VRDN, 4.04%, 9/6/07 (LOC: Merrill Lynch Capital Services, Inc.) (Acquired 2/17/05 - 1/12/06, Cost $3,150,000)(1) 3,150,000 10,000,000 Chino Basin Regional Financing Auth. COP, (Inland Empire Utilities Agency), 3.67%, 9/12/07 (LOC: State Street Bank & Trust Co.) 10,000,000 3,350,000 City of Fremont COP, (Building & Equipment Financing), VRDN, 3.95%, 9/6/07 (LOC: KBC Bank N.V.) 3,350,000 300,000 City of Hanford Sewer System Rev., Series 1996 A, VRDN, 4.05%, 9/6/07 (LOC: Union Bank of California N.A.) 300,000 - ------ 7 California Tax-Free Money Market Principal Amount Value $ 5,900,000 City of Los Angeles Wastewater System Rev., Series 2006 C, VRDN, 3.95%, 9/6/07 (XLCA) (SBBPA: Bank of Nova Scotia) $ 5,900,000 6,590,000 City of Moreno Valley COP, (1997 City Hall Refinancing), VRDN, 3.96%, 9/6/07 (LOC: Union Bank of California N.A. and California State Teacher's Retirement System) 6,590,000 900,000 City of Novato Rev., (Nova- Ro III Senior Housing), VRDN, 3.88%, 9/6/07 (LOC: Bank of the West) 900,000 11,420,000 City of Reedley COP, VRDN, 3.93%, 9/6/07 (LOC: U.S. Bank N.A.) 11,420,000 4,700,000 City of San Jose Rev., Series 1985 B, (Foxchase), VRDN, 3.95%, 9/6/07 (LOC: FNMA) 4,700,000 5,915,000 City of Vallejo COP, (Golf Course Facilities Financing), VRDN, 4.18%, 9/6/07 (LOC: Union Bank of California N.A.) 5,915,000 23,540,000 City of Vallejo COP, VRDN, 4.13%, 9/6/07 (LOC: Union Bank of California N.A.) 23,540,000 5,800,000 City of Vallejo Rev., Series 2001 A, VRDN, 4.13%, 9/5/07 (LOC: JPMorgan Chase Bank) 5,800,000 9,500,000 City of Whittier Rev., (Whittier College), VRDN, 5.90%, 9/6/07 (RADIAN) (SBBPA: Bank of New York) 9,500,000 7,000,000 Coachella Valley Unified School District COP, VRDN, 3.99%, 9/6/07 (FSA) (SBBPA: Dexia Credit Local) 7,000,000 5,000,000 Delano COP, (Delano Regional Medical Center), VRDN, 3.95%, 9/6/07 (LOC: Comerica Bank) 5,000,000 3,700,000 Diamond Bar Public Financing Auth. Lease Rev., Series 2002 A, (Community/Senior Center), VRDN, 4.05%, 9/5/07 (LOC: Union Bank of California N.A.) 3,700,000 4,000,000 East Bay Municipal Wastewater, 3.63%, 9/11/07 (SBBPA: JPMorgan Chase Bank) 4,000,000 4,000,000 East Bay Municipal Wastewater, 3.63%, 9/14/07 (SBBPA: JPMorgan Chase Bank) 4,000,000 Principal Amount Value $ 5,795,000 El Monte COP, Series 2003 A, (Community Improvement), VRDN, 3.96%, 9/6/07 (LOC: California State Teacher's Retirement) $ 5,795,000 2,075,000 Golden State Tobacco Securitization Corp. Settlement Rev., (DB 195), VRDN, 4.04%, 9/6/07 (FGIC) (SBBPA: Deutsche Bank A.G.) 2,075,000 3,530,000 Golden State Tobacco Securitization Corp. Settlement Rev., (PA 1236), VRDN, 4.04%, 9/6/07 (LOC: Merrill Lynch Capital Services, Inc.) (Acquired 1/15/04, Cost $3,530,000)(1) 3,530,000 2,735,000 Golden State Tobacco Securitization Corp. Settlement Rev., (PA 1237), VRDN, 4.04%, 9/6/07 (LOC: Merrill Lynch Capital Services, Inc.) 2,735,000 5,000,000 Imperial Irrigation District COP, Series 2007 A, (Electric and Water System), 3.68%, 10/11/07 (LOC: Citibank N.A.) 5,000,000 34,620,000 Inland Valley Development Agency Tax Allocation Rev., VRDN, 4.13%, 9/5/07 (LOC: California State Teacher's Retirement) 34,620,000 4,145,000 JPMorgan Chase & Co. PUTTERs Trust GO, Series 2007-1710P, VRDN, 4.10%, 9/6/07 (FSA) (LIQ FAC: JPMorgan Chase Bank) (Acquired 6/28/07 - 8/2/07, Cost $4,145,000)(1) 4,145,000 13,573,543 Koch Certificates Trust Rev., Series 1999-2, VRDN, 4.00%, 9/6/07 (Ambac) (SBBPA: State Street Bank & Trust Co.) 13,573,543 13,020,000 Long Beach Unified School District COP, VRDN, 3.95%, 9/6/07 (Ambac) (SBBPA: Dexia Credit Local) 13,020,000 900,000 Los Angeles COP, Series 2006 A, (Notre Dame High School), VRDN, 3.95%, 9/6/07 (LOC: Allied Irish Bank plc) 900,000 14,000,000 Los Angeles Tax & Rev. Anticipation Notes GO, 4.50%, 6/30/08 14,093,947 5,000,000 Los Angeles Unified School District GO, Series 2007 H, (Election of 2004), 5.00%, 7/1/08 5,056,573 - ------ 8 California Tax-Free Money Market Principal Amount Value $ 2,185,000 Palm Desert Financing Auth. Tax Allocation Rev., (Housing Set-Aside), 4.00%, 10/1/07 (MBIA) $ 2,185,786 7,080,000 Puttable Floating Option Tax-Exempt Receipts, (California Statewide Communities Development Auth.), VRDN, 4.06%, 9/6/07 (GNMA) (LIQ FAC: Merrill Lynch Capital Services) (Acquired 3/29/07, Cost $7,080,000)(1) 7,080,000 2,400,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.04%, 9/5/07 (LOC: Dexia Credit Local) 2,400,000 13,990,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.03%, 9/6/07 (FSA) (LIQ FAC: Dexia Credit Local) (Acquired 5/16/07 - 5/30/07, Cost $13,990,000)(1) 13,990,000 8,000,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.03%, 9/6/07 (FSA) (LIQ FAC: Merrill Lynch Capital Services) (Acquired 8/13/07, Cost $8,000,000)(1) 8,000,000 5,000,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.04%, 9/6/07 (LOC: Dexia Credit Local) 5,000,000 4,330,000 San Bernardino County Multifamily Housing Auth. Rev., Series 1993 A, (Rialto Heritage), VRDN, 3.95%, 9/6/07 (LOC: FHLB) 4,330,000 4,685,000 San Diego County COP, (Friends of Chabad), VRDN, 4.00%, 9/6/07 (LOC: Comerica Bank) 4,685,000 4,000,000 San Diego County COP, VRDN, 3.93%, 9/6/07 (LOC: Comerica Bank) 4,000,000 7,560,000 San Francisco City & County Redevelopment Agency Community Facilities District No. 4 Rev., VRDN, 3.95%, 9/6/07 (LOC: Bank of America N.A.) 7,560,000 1,300,000 San Francisco City & County Redevelopment Agency Rev., (South Harbor), VRDN, 4.05%, 9/6/07 (LOC: Dexia Credit Local) 1,300,000 Principal Amount Value $26,055,000 San Mateo County Multifamily Housing Auth. Rev., VRDN, 4.12%, 9/6/07 (LOC: Merrill Lynch Capital Services, Inc.) (Acquired 11/21/06, Cost $26,055,000)(1) $ 26,055,000 4,050,000 Sequoia Union High School District GO, VRDN, 4.06%, 9/6/07 (FSA) (LIQ FAC: Merrill Lynch Capital Services) (Acquired 8/6/07, Cost $4,050,000)(1) 4,050,000 9,650,000 South Placer Wastewater Auth. Rev., Series 2000 B, VRDN, 3.95%, 9/6/07 (FGIC) (SBBPA: State Street Bank & Trust Co. and California State Teacher's Retirement) 9,650,000 500,000 Three Valleys Municipal Water District COP, (Miramar Water Treatment, Water Transmission and Hydroelectric Generating Facilities), VRDN, 3.94%, 9/5/07 (LOC: Wells Fargo Bank N.A) 500,000 2,975,000 Victor Valley Community College District COP, VRDN, 3.95%, 9/6/07 (LOC: BNP Paribas and Union Bank of California N.A.) 2,975,000 25,000,000 Victorville Joint Powers Financing Auth. Lease Rev., Series 2007 A, (Cogeneration Facility), VRDN, 3.96%, 9/6/07 (LOC: Fortis Bank SA N.V.) 25,000,000 4,995,000 Washington Unified School District COP, Series 2007-2059Z, (Yolo County PUTTERs), VRDN, 4.03%, 9/6/07 (Ambac) (LIQ FAC: JPMorgan Chase Bank) 4,995,000 8,045,000 Western Placer Unified School District COP, VRDN, 3.95%, 9/6/07 (LOC: Bank of America N.A.) 8,045,000 ------------ TOTAL INVESTMENT SECURITIES -- 99.1% 547,464,299 ------------ OTHER ASSETS AND LIABILITIES -- 0.9% 4,882,449 ------------ TOTAL NET ASSETS -- 100.0% $552,346,748 ============ - ------ 9 California Tax-Free Money Market Notes to Schedule of Investments Ambac = Ambac Assurance Corporation CIFG-TCRS = CDC IXIS Financial Guaranty North America -- Transferable Custodial Receipts COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FNMA = Federal National Mortgage Association FSA = Financial Security Assurance, Inc. GIC = Guaranteed Investment Contract GNMA = Government National Mortgage Association GO = General Obligation LIQ FAC = Liquidity Facilities LOC = Letter of Credit MBIA = MBIA Insurance Corporation PUTTERs = Puttable Tax-Exempt Receipts RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective August 31, 2007. XLCA = XL Capital Ltd. (1) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2007, was $99,407,714, which represented 18.0% of total net assets. None of the restricted securities are considered to be illiquid. See Notes to Financial Statements. - ------ 10 PERFORMANCE California Limited-Term Tax-Free Total Returns as of August 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date CALIFORNIA LIMITED- TERM TAX-FREE 2.40% 2.20% 3.58% 3.98% 6/1/92 LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX(1) 3.57% 2.51% 3.95% 4.42%(2) -- LIPPER CALIFORNIA SHORT-INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(1) 2.40% 2.26% 3.44% 4.04%(3) -- Fund's Lipper Ranking as of 8/31/07(1)(4) 13 of 20 7 of 11 4 of 8 2 of 2(3) -- (1) Data provided by Lipper Inc. - A Reuters Company. © 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (2) Since 5/31/92, the date nearest the fund's inception for which data are available. (3) Since 6/4/92, the date nearest the fund's inception for which data are available. (4) Lipper Rankings for 9/30/07 are not available for California Limited-Term Tax-Free. On September 3, 2007, the fund was acquired by California Tax-Free Bond. Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 11 California Limited-Term Tax-Free Growth of $10,000 Over 10 Years $10,000 investment made August 31, 1997
One-Year Returns Over 10 Years Periods ended August 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 California Limited-Term Tax-Free 5.40% 2.26% 5.44% 6.94% 4.91% 1.87% 2.75% 1.33% 2.68% 2.40% Lehman Brothers 3-Year Municipal Bond Index 5.76% 2.92% 4.72% 8.05% 5.71% 3.06% 2.83% 0.84% 2.27% 3.57% Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 12 PORTFOLIO COMMENTARY California Limited-Term Tax-Free Lead Portfolio Manager: Alan Kruss Macro Strategy Team Representative: Steven Permut This is the final report for California Limited-Term Tax-Free (Cal Limited-Term). The fund reorganized into American Century California Tax-Free Bond and on September 4, fund shareholders received Investor Class shares in California Tax-Free Bond, which has a similar strategy, objective, and expense ratio. PERFORMANCE SUMMARY Cal Limited-Term returned 2.40% for the 12 months ended August 31, 2007, matching the average return of the 20 California short-intermediate municipal debt funds tracked by Lipper Inc. By comparison, the Lehman Brothers 3-Year Municipal Bond Index returned 3.57%. Of course, portfolio returns and the Lipper average reflect operating expenses, while Lehman index returns do not. The portfolio underperformed the index because Cal Limited-Term had a lower average credit quality at a time when the highest-rated municipal bonds outperformed (see the Market Perspective on page 2). The fund's return was similar to that of its peers because we worked hard to increase Cal Limited-Term's yield while positioning for slower economic growth ahead. YIELD SUMMARY Cal Limited-Term's investment objectives were to seek safety of principal and high current income that is exempt from federal and California income taxes. As of August 31, 2007, the portfolio's 30-day SEC yield was 3.55%, which translated into attractive tax-equivalent yields above 5%, as shown in the table above. That compares with an average yield of 3.27% for the funds in our Lipper peer group. And we should point out that we achieved this yield without purchasing bonds subject to the alternative minimum tax (AMT). ADDING YIELD Total returns for short-term bond funds are derived primarily from their income component, rather than price changes. The funds in our peer group could hold higher-yielding airline, tobacco, and AMT bonds. That tended to put the portfolio at a disadvantage relative to its Lipper peers over time because, other things being equal, holding higher-yielding bonds improves return. Portfolio at a Glance As of As of 8/31/07 8/31/06 Weighted Average Maturity 3.4 yrs 3.9 yrs Average Duration (Modified) 3.5 yrs 3.3 yrs Yields as of August 31, 2007 30-Day SEC Yield 3.55% 30-Day Tax-Equivalent Yields* 31.98% Tax Bracket 5.22% 34.70% Tax Bracket 5.44% 39.23% Tax Bracket 5.84% 41.05% Tax Bracket 6.02% *The tax brackets indicated are for combined state and federal income tax. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. - ------ 13 California Limited-Term Tax-Free To overcome this yield gap, we worked hard to make relative value trades to take advantage of yield and credit imbalances between states and U.S. territories. One way we did that was by adding Puerto Rico debt -- these securities had very short maturities but yields comparable to those on the longest-term municipal bonds. These securities skewed the portfolio's overall credit quality downward because of their BBB rating. However, we felt they offered an excellent risk/reward profile because of their money market-like maturities and relatively high yields. POSITIONING FOR SLOWER GROWTH We also added yield by buying attractively valued securities from more defensive sectors of the economy. In addition, we broadened the portfolio's diversification and improved its credit quality (by buying higher-rated bonds) because of our concern over slower economic growth and tight credit spreads between bonds rated BBB and AAA. (The spread, or difference in yield, between BBB and AAA-rated bonds tightened to historically low levels during the period.) But despite our move up in credit quality, the portfolio still held more bonds rated A and below than the index. These securities underperformed when spreads widened sharply in July and August, one of the worst stretches for municipal bonds in many years. OUTLOOK "Going forward, shareholders in California Tax-Free Bond should expect we'll continue to focus on the same investment philosophy and process we used to manage Cal Limited-Term -- a repeatable, multi-layered investment process based on thorough credit analysis, security selection, and investment monitoring over time," said macro strategy team representative Steven Permut. "We think the housing downturn is far from over, and will continue to exert downward pressure on consumer spending and the economy," Permut added. "As a result, we'll continue to position the California Tax-Free Bond portfolio for slower economic growth. This means we're looking at trading up in credit quality and shifting into more defensive sectors when we think we can add these bonds at attractive relative values." Top Five Sectors as of August 31, 2007 % of fund investments General Obligation (GO) 24% Special Tax Revenue 11% Certificate of Participation (COPs)/Leases 11% Hospital Revenue 10% Electric Revenue 9% Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 8/31/07 2/28/07 AAA 68% 56% AA 4% 14% A 10% 8% BBB 18% 18% Not Rated -- 4% Ratings provided by independent research companies. These ratings are listed in Standard & Poor's format even if they were provided by other sources. - ------ 14 SCHEDULE OF INVESTMENTS California Limited Term Tax-Free AUGUST 31, 2007 Principal Amount Value Municipal Securities -- 96.1% CALIFORNIA -- 82.6% $3,000,000 California Department of Water Resources Power Supply Rev., Series 2002 A, 5.50%, 5/1/08(1) $ 3,036,360 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/10 207,784 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/11 209,984 195,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/12 206,324 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/13 212,598 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/14 212,960 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/15 213,190 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/16 211,776 200,000 California Educational Facilities Auth. Rev., (University of the Pacific), 5.00%, 11/1/17 210,502 4,275,000 California GO, 6.50%, 2/1/08 (Ambac)(1) 4,325,273 2,500,000 California GO, 4.50%, 10/1/08 (FSA)(1) 2,524,825 2,500,000 California GO, 5.00%, 12/1/09 (Ambac)(1) 2,577,326 3,000,000 California GO, 5.00%, 3/1/10 (XLCA)(1) 3,097,529 1,000,000 California GO, 5.50%, 3/1/11 (XLCA-ICR) 1,060,440 1,075,000 California Infrastructure & Economic Development Bank Rev., Series 2006 A, (California Science Center Phase II), 4.25%, 5/1/13 (FGIC) 1,100,402 1,605,000 California Mobilehome Park Financing Auth. Rev., Series 2006 A, (Union City Tropics), 3.80%, 12/15/11 1,596,895 1,450,000 California Public Works Board Lease Rev., Series 2005 A, (Department General Services - Butterfield), 5.00%, 6/1/15 1,542,046 Principal Amount Value $1,000,000 California State University Fresno Association Inc. Rev., (Auxiliary Organization Event Center), 5.00%, 7/1/12(2) $ 1,059,500 2,500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Valleycare Health System), 4.80%, 7/15/17 2,471,825 500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Valleycare Health System), 5.00%, 7/15/22 469,715 2,080,000 California Statewide Communities Development Auth. Rev., Series 2007 B, (Kaiser Permanente), VRDN, 4.37%, 10/1/07(1) 1,939,288 1,130,000 Carson Redevelopment Agency Residential Mortgage COP, (Area No. 1), 5.50%, 10/1/11 (MBIA) 1,208,829 895,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals), 5.125%, 2/1/08 900,621 1,245,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals), 5.125%, 2/1/09 1,271,506 860,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals), 5.25%, 2/1/10 900,790 675,000 Central California Joint Powers Health Financing Auth. COP, (Community Hospitals), 5.25%, 2/1/10 700,819 1,070,000 Chaffey Community College District GO, Series 2002 A, 4.25%, 7/1/11 (FSA) 1,093,690 1,610,000 Chaffey Community College District GO, Series 2007 C, (Election of 2002), 5.00%, 6/1/19 (MBIA)(1) 1,702,961 1,765,000 Chaffey Community College District GO, Series 2007 C, (Election of 2002), 5.00%, 6/1/20 (MBIA)(1) 1,857,415 2,065,000 Coast Community College District GO, Series 2006 B, (2002 Election), 5.00%, 8/1/17 (FSA) 2,209,405 500,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/17 497,485 - ------ 15 California Limited-Term Tax-Free Principal Amount Value $1,190,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/09 (Ambac) $ 1,228,104 825,000 Irvine Unified School District Financing Auth. Special Tax Rev., Series 2006 A, 4.50%, 9/1/13 820,933 635,000 Irvine Unified School District Financing Auth. Special Tax Rev., Series 2006 A, 4.75%, 9/1/16 625,412 110,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 3.80%, 2/1/10 108,425 120,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 4.00%, 2/1/11 118,751 125,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 4.30%, 2/1/13 124,399 750,000 Long Beach Bond Finance Auth. GO, Series 2002 A, (North Long Beach Redevelopment), 5.00%, 8/1/10 (Ambac) 776,805 2,315,000 Long Beach Bond Finance Auth. GO, Series 2002 A, (North Long Beach Redevelopment), 5.00%, 8/1/11 (Ambac)(1) 2,423,296 615,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 4.875%, 7/1/08 (ACA) 617,306 3,130,000 Los Angeles Department of Water & Power Rev., Series 2001 AA1, (Power Systems), 5.25%, 7/1/10 (MBIA)(1) 3,268,189 3,130,000 Los Angeles Municipal Improvement Corp. Lease Rev., Series 2007 B1, (Figueroa Plaza), 5.00%, 8/1/20 (FGIC)(1) 3,249,348 575,000 Lynwood Public Financing Auth. COP, 4.125%, 9/1/12 (Ambac) 586,379 1,550,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 4.00%, 9/1/09 (AGC) 1,559,626 1,255,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 4.00%, 9/1/11 (AGC) 1,268,642 Principal Amount Value $1,690,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 4.00%, 9/1/13 (AGC) $ 1,702,743 3,000,000 Oakland Joint Powers Financing Auth. Lease Rev., (Convention Centers), 5.25%, 10/1/08 (Ambac)(1) 3,051,569 1,225,000 Oceanside COP, Series 2003 A, 5.00%, 4/1/11 (Ambac) 1,277,736 650,000 Orange County Community Facilities District Special Tax Rev., Series 2005 A, (No. 04-1-Ladera Ranch), 3.50%, 8/15/10 632,275 760,000 Orange County Community Facilities District Special Tax Rev., Series 2005 A, (No. 04-1-Ladera Ranch), 3.80%, 8/15/11 741,897 825,000 Orange County Community Facilities District Special Tax Rev., Series 2005 A, (No. 04-1-Ladera Ranch), 3.90%, 8/15/12 801,966 700,000 Orange County Community Facilities District Special Tax Rev., Series 2005 A, (No. 04-1-Ladera Ranch), 4.10%, 8/15/13 683,319 1,135,000 Orange County Community Facilities District Special Tax Rev., Series 2005 A, (No. 04-1-Ladera Ranch), 4.25%, 8/15/14 1,114,865 275,000 Orange County Improvement Bond Act of 1915 Special Assessment, (Newport Coast Phase IV Assessment District No. 01-1), 4.30%, 9/2/14 266,219 325,000 Orange County Improvement Bond Act of 1915 Special Assessment, (Newport Coast Phase IV Assessment District No. 01-1), 4.45%, 9/2/15 315,686 250,000 Orange County Improvement Bond Act of 1915 Special Assessment, (Newport Coast Phase IV Assessment District No. 01-1), 4.55%, 9/2/16 241,678 1,230,000 Orange County Refunding Recovery Rev., Series 1995 A, 6.00%, 6/1/08 (MBIA) 1,252,263 1,170,000 Poway Unified School District Public Financing Auth. Rev., 5.00%, 9/15/19 (Ambac) 1,235,005 1,215,000 Poway Unified School District Public Financing Auth. Rev., 5.00%, 9/15/20 (Ambac) 1,276,139 - ------ 16 California Limited-Term Tax-Free Principal Amount Value $1,505,000 Rancho Mirage Joint Powers Financing Auth. Rev., Series 2007 A, (Eisenhower Medical Center), 5.00%, 7/1/15(1) $ 1,561,678 1,000,000 Riverside County COP, Series 2007 A, (Public Safety Communication and Refunding), 5.00%, 11/1/14 (Ambac)(1) 1,063,520 3,800,000 Sacramento County Sanitation District Financing Auth. Rev., Series 2000 A, 5.10%, 12/1/09(1) 3,915,709 2,500,000 Sacramento County Sanitation District Financing Auth. Rev., Series 2007 B, VRDN, 4.12%, 9/4/07 (FGIC)(1) 2,437,800 3,000,000 Sacramento Municipal Utility District Electric Rev., Series 2003 S, 5.00%, 11/15/11 (MBIA)(1) 3,165,389 1,005,000 San Bernardino County Redevelopment Agency Tax Allocation Rev., Series 2005 A, (San Sevaine), 5.00%, 9/1/15 (RADIAN) 1,012,045 820,000 Shasta Lake Public Finance Auth. Rev., 3.75%, 4/1/09 810,800 1,000,000 Shasta Lake Public Finance Auth. Rev., 4.00%, 4/1/12 979,060 1,530,000 Shasta Lake Public Finance Auth. Rev., 4.50%, 4/1/15 1,514,455 1,135,000 Solano County COP, 5.00%, 11/1/13 (MBIA) 1,205,211 2,000,000 South Orange County Public Financing Auth. Special Tax Rev., Series 2003 A, (Senior Lien), 5.00%, 9/1/12 (MBIA) 2,122,580 1,080,000 South Tahoe Joint Powers Financing Auth. Rev., Series 2005 A, 5.00%, 10/1/13 (Ambac) 1,146,150 1,195,000 South Tahoe Joint Powers Financing Auth. Rev., Series 2005 A, 5.00%, 10/1/15 (Ambac) 1,274,252 785,000 Turlock Health Facility COP, (Emanuel Medical Center Inc.), 4.25%, 10/15/09 784,576 820,000 Turlock Health Facility COP, (Emanuel Medical Center Inc.), 4.50%, 10/15/10 823,403 895,000 Turlock Health Facility COP, (Emanuel Medical Center Inc.), 5.00%, 10/15/12 915,182 985,000 Turlock Health Facility COP, (Emanuel Medical Center Inc.), 5.00%, 10/15/14 1,003,193 Principal Amount Value $2,175,000 Turlock Irrigation District Rev., Series 2003 A, 5.00%, 1/1/13 (MBIA)(1) $ 2,304,674 1,000,000 Val Verde Unified School District COP, 5.00%, 1/1/14 (FGIC)(2) 1,068,970 1,145,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 1,243,836 ------------ 102,551,521 ------------ GUAM -- 4.1% 5,000,000 Guam Government Limited Obligation Rev., Series 2001 A, 5.00%, 12/1/09 (FSA)(1) 5,145,150 ------------ NORTHERN MARIANA ISLANDS -- 1.2% 1,430,000 Northern Mariana Islands GO, Series 2000 A, 5.75%, 6/1/10 (ACA) 1,475,074 ------------ PUERTO RICO -- 6.0% 1,500,000 Children's Trust Fund Tobacco Settlement Rev., 5.00%, 7/1/08(2) 1,517,325 500,000 Puerto Rico Electric Power Auth. Rev., Series 1999 FF, 5.25%, 7/1/09 (MBIA)(2) 514,440 1,000,000 Puerto Rico Electric Power Auth. Rev., Series 1999 FF, 5.25%, 7/1/09 (MBIA) 1,029,060 1,750,000 Puerto Rico GO, Series 2004 A, 5.00%, 7/1/12 1,810,953 1,000,000 Puerto Rico GO, Series 2006 B, 5.00%, 12/1/15 1,051,460 1,500,000 Puerto Rico Infrastructure Financing Auth. Special Tax Rev., Series 2006 B, 4.50%, 7/1/11 1,531,950 ------------ 7,455,188 ------------ U.S. VIRGIN ISLANDS -- 2.2% 500,000 Virgin Islands Public Finance Auth. Rev., 5.00%, 10/1/14 515,000 500,000 Virgin Islands Public Finance Auth. Rev., 5.25%, 10/1/14 518,215 170,000 Virgin Islands Public Finance Auth. Rev., 5.25%, 10/1/15 176,921 1,500,000 Virgin Islands Public Finance Auth. Rev., Series 1998 C, (Senior Lien Fund), 5.50%, 10/1/07 1,501,620 ------------ 2,711,756 ------------ TOTAL MUNICIPAL SECURITIES (Cost $118,843,985) 119,338,689 ------------ - ------ 17 California Limited-Term Tax-Free Principal Amount Value Short-Term Municipal Securities -- 4.0% PUERTO RICO -- 4.0% $5,000,000 Government Development Bank of Puerto Rico Rev., 4.12%, 11/8/07 $ 4,997,400 (Cost $5,000,000) ------------ TOTAL INVESTMENT SECURITIES -- 100.1% (Cost $123,843,985) 124,336,089 ------------ OTHER ASSETS AND LIABILITIES -- (0.1)% (118,831) ------------ TOTAL NET ASSETS -- 100.0% $124,217,258 ============ Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 191 U.S. Treasury 2-Year Notes December 2007 $39,375,844 $ 47,320 ============ ============ Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 105 U.S. Treasury 10-Year Notes December 2007 $11,449,922 $(134,493) ============ ============ Notes to Schedule of Investments ACA = American Capital Access AGC = Assured Guaranty Corp. Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective August 31, 2007. XLCA = XL Capital Ltd. XLCA-ICR = XL Capital Ltd. - Insured Custodial Receipts (1) Security, or a portion thereof, has been segregated for futures contracts. (2) Escrowed to maturity in U.S. government securities or state and local government securities. See Notes to Financial Statements. - ------ 18 PERFORMANCE California Tax-Free Bond Total Returns as of August 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date CALIFORNIA TAX-FREE BOND 1.98% 2.98% 4.32% 5.84% 11/9/83 LEHMAN BROTHERS 5-YEAR GO INDEX 3.44% 3.17% 4.55% 6.36%(1) -- LIPPER CALIFORNIA INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 1.68% 2.70% 4.24% 5.84%(3) -- Fund's Lipper Ranking as of 8/31/07(2) 19 of 46 11 of 37 10 of 20 1 of 1(3) -- Fund's Lipper Ranking as of 9/30/07(2) 20 of 46 13 of 39 9 of 20 1 of 1(3) -- (1) Since 10/31/83, the date nearest the fund's inception for which data are available. (2) Data provided by Lipper Inc. - A Reuters Company. © 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 11/10/83, the date nearest the fund's inception for which data are available. Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 19 California Tax-Free Bond Growth of $10,000 Over 10 Years $10,000 investment made August 31, 1997
One-Year Returns Over 10 Years Periods ended August 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 California Tax-Free Bond 7.00% 0.74% 6.95% 8.22% 5.63% 1.91% 5.13% 3.36% 2.58% 1.98% Lehman Brothers 5-Year GO Index 6.81% 2.21% 5.33% 8.99% 6.56% 3.57% 4.58% 1.96% 2.32% 3.44% Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 20 PORTFOLIO COMMENTARY California Tax-Free Bond Lead Portfolio Manager: Alan Kruss Macro Strategy Team Representative: Steven Permut PERFORMANCE SUMMARY California Tax-Free Bond returned 1.98% for the 12 months ended August 31, 2007. By comparison, the Lehman Brothers 5-Year General Obligation Bond Index returned 3.44%, while the average return of the 46 California intermediate municipal debt funds tracked by Lipper Inc. was 1.68%. Longer term, the portfolio's average annual returns also exceeded those of its Lipper group average for the five- and 10-year periods ended August 31, 2007 (see page 19). DURATION POSITIONING MIXED We began the fiscal year with a slightly long duration in anticipation of benefiting from a seasonal supply and demand imbalance that typically makes for a strong technical period for municipal bonds. Having a longer duration helped performance as rates fell (and bond prices rose) for much of the second half of 2006. But with generally healthy economic growth and expectations of higher inflation in the market, we began to shorten the portfolio's duration at the end of 2006 to slightly short of what we believe is our peer group average. We lengthened the portfolio's duration (sensitivity to interest rate changes) again modestly in mid-2007 in line with the peer group in anticipation of the summer technical period for municipal bonds. Unfortunately, having a slightly longer duration detracted from performance as interest rates rose, particularly in July and August (see the Market Perspective on page 2). KEY CONTRIBUTORS The portfolio's performance benefited from a yield curve steepening bias we had in place using municipal bonds and two- and 10-year Treasury futures contracts. Both the Treasury and municipal yield curves (which graphically represent yields at different maturities) steepened during the period. In addition, we added yield and total return by building a position in Puerto Rico debt -- these securities had very short maturities but yields comparable to those on the longest-term municipal bonds. These securities skew the portfolio's overall credit quality down because of their BBB rating. However, we felt they offered an excellent risk/reward profile because of their money market-like maturities but yields comparable to even the longest-term municipal bonds. Portfolio at a Glance As of As of 8/31/07 8/31/06 Weighted Average Maturity 7.3 yrs 8.9 yrs Average Duration (Modified) 5.0 yrs 4.9 yrs Yields as of August 31, 2007 30-Day SEC Yield 3.80% 30-Day Tax-Equivalent Yields* 31.98% Tax Bracket 5.59% 34.70% Tax Bracket 5.82% 39.23% Tax Bracket 6.25% 41.05% Tax Bracket 6.45% *The tax brackets indicated are for combined state and federal income tax. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. - ------ 21 California Tax-Free Bond POSITIONING FOR SLOWER GROWTH As we've been saying for some time now, we broadened the portfolio's diversification and generally improved its credit quality (by buying higher-rated bonds) because of our concern over slower economic growth and tight credit spreads between most bonds rated BBB and AAA. (The spread, or difference in yield, between these BBB and AAA securities tightened to historically low levels during the period.) This meant that we were being compensated with less yield than in the past for taking on additional credit risk. But despite our move up in credit quality, the portfolio still held more bonds rated A and below than the index. These securities underperformed when credit spreads widened sharply in July and August, one of the worst stretches for municipal bonds in many years. OUTLOOK "We continue to focus on the fund's repeatable, multi-layered investment process based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," said macro strategy team representative Steven Permut. "We think the housing downturn is far from over, and will continue to exert downward pressure on consumer spending and the economy," Permut added. "As a result, we'll continue to position the portfolio for slower economic growth. This means we're looking at trading up in credit quality and shifting into more defensive sectors when we think we can add them at attractive relative values." Top Five Sectors as of August 31, 2007 % of fund investments General Obligation (GO) 22% Prerefunded 16% Certificate of Participation (COPs)/Leases 12% Tax Allocation/Tax Increment 9% Electric Revenue 8% Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 8/31/07 2/28/07 AAA 69% 62% AA 2% 15% A 7% 9% BBB 14% 13% Not Rated 8% 1% Ratings provided by independent research companies. These ratings are listed in Standard & Poor's format even if they were provided by other sources. - ------ 22 SCHEDULE OF INVESTMENTS California Tax-Free Bond AUGUST 31, 2007 Principal Amount Value Municipal Securities -- 94.9% CALIFORNIA -- 87.5% $ 5,565,000 Acalanes Union High School District GO, Series 2005 B, 5.25%, 8/1/24 (FSA)(1) $ 5,883,818 2,300,000 Alameda County COP, (Santa Rita Jail), 5.375%, 6/1/09 (MBIA)(2) 2,328,152 1,385,000 Alameda County COP, Series 2001 A, 5.375%, 12/1/15 (MBIA) 1,486,714 1,000,000 Antelope Valley Community College District GO, 5.00%, 8/1/18 (MBIA) 1,064,230 1,000,000 Antelope Valley Community College District GO, Series 2007 C, (Election of 2004), 5.00%, 8/1/24 (MBIA)(3) 1,033,540 2,000,000 Antelope Valley Community College District GO, Series 2007 C, (Election of 2004), 5.00%, 8/1/25 (MBIA)(3) 2,059,040 1,000,000 Antelope Valley Community College District GO, Series 2007 C, (Election of 2004), 5.00%, 8/1/26 (MBIA)(3) 1,027,120 1,050,000 Apple Valley Redevelopment Agency Tax Allocation Rev., (Redevelopment Project Area No. 2), 5.00%, 6/1/21 (Ambac) 1,088,892 3,650,000 Apple Valley Redevelopment Agency Tax Allocation Rev., (Redevelopment Project Area No. 2), 5.00%, 6/1/25 (Ambac) 3,741,761 1,240,000 Banning Financing Auth. Rev., (Electric System), 5.00%, 6/1/21 (XLCA) 1,282,966 1,305,000 Banning Financing Auth. Rev., (Electric System), 5.00%, 6/1/22 (XLCA) 1,343,993 3,925,000 Banning Utility Auth. Rev., (Refunding and Improvement Projects), 5.25%, 11/1/35 (FGIC)(1) 4,124,312 1,250,000 California Department of Water Resources Power Supply Rev., Series 2001 W, 5.50%, 12/1/17 1,335,175 7,000,000 California Department of Water Resources Power Supply Rev., Series 2002 A, 5.375%, 5/1/12, Prerefunded at 101% of Par (XLCA)(1)(2) 7,584,499 Principal Amount Value $ 3,750,000 California Department of Water Resources Power Supply Rev., Series 2002 A, 5.50%, 5/1/12 $ 4,027,538 1,300,000 California Department of Water Resources Power Supply Rev., Series 2002 B2, VRDN, 3.95%, 9/4/07 (LOC: BNP Paribas) 1,300,000 100,000 California Department of Water Resources Power Supply Rev., Series 2002 B5, VRDN, 3.85%, 9/4/07 (LOC: Bayerische Landesbank, Westdeutsche Landesbank AG) 100,000 1,100,000 California Economic Recovery Rev., Series 2004 C16, VRDN, 3.86%, 9/5/07 (FSA) (SBBPA: Dexia Credit Local) 1,100,000 1,255,000 California Educational Facilities Auth. Rev., (College Arts), 5.00%, 6/1/26 1,195,450 4,000,000 California Educational Facilities Auth. Rev., (Golden Gate University), 5.50%, 10/1/18(1) 4,060,320 1,045,000 California Educational Facilities Auth. Rev., (Scripps College), 5.25%, 8/1/16 1,086,466 1,605,000 California Educational Facilities Auth. Rev., Series 2000 B, (Pooled College & University Projects), 6.625%, 6/1/20 1,690,161 2,500,000 California Educational Facilities Auth. Rev., Series 2004 C, (Lutheran University), 5.00%, 10/1/24 2,480,050 495,000 California GO, 8.00%, 11/1/07 (FGIC) 498,560 4,480,000 California GO, 6.00%, 10/1/09 (Ambac)(1) 4,696,071 3,350,000 California GO, 5.75%, 4/1/10 (Ambac)(1) 3,527,751 7,650,000 California GO, 5.25%, 10/1/10, Prerefunded at 100% of Par (FGIC-TCRS)(1)(2) 8,025,300 5,000,000 California GO, 5.50%, 4/1/12 (MBIA)(1) 5,392,449 2,350,000 California GO, 5.25%, 10/1/14 (FGIC-TCRS) 2,455,351 7,590,000 California GO, 5.00%, 6/1/16(1) 8,003,048 5,000,000 California GO, 5.00%, 3/1/24(1) 5,116,449 - ------ 23 California Tax-Free Bond Principal Amount Value $ 2,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Kaiser Permanente), 5.25%, 6/1/11 (FSA) $ 2,062,720 835,000 California Housing Finance Agency Rev., Series 2000 D, (Multi-Family Housing), VRDN, 3.93%, 9/4/07 (GO of Agency) (SBBPA: Landesbank Hessen-Thuringen Girozentrale and California State Teacher's Retirement) 835,000 1,000,000 California Infrastructure & Economic Development Bank Rev., Series 2000 A, (Scripps Research Institute), 5.625%, 7/1/20 1,020,150 1,075,000 California Mobilehome Park Financing Auth. Rev., Series 2000 A, (Union City Tropics), 5.375%, 8/15/10 (ACA) 1,147,380 3,025,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.00%, 2/1/17(1) 3,039,097 2,590,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.00%, 2/1/19(1) 2,568,788 1,395,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.00%, 2/1/22 1,356,540 2,000,000 California Public Works Board Lease Rev., Series 2005 A, (Department General Services - Butterfield), 5.00%, 6/1/23 2,041,700 2,165,000 California Public Works Board Lease Rev., Series 2006 A, (Various California State University Projects), 5.00%, 10/1/11 2,271,107 1,000,000 California Public Works Board Lease Rev., Series 2006 F, (Department of Corrections and Rehabilitation - Monterey County State Prison), 5.25%, 11/1/18 (FGIC) 1,094,170 650,000 California Special Districts Association Finance Corp. COP, Series 2005 RR, 5.00%, 8/1/25 (XLCA) 680,011 Principal Amount Value $ 3,100,000 California State University Fresno Association Inc. Rev., (Auxiliary Organization Event Center), 5.25%, 7/1/12, Prerefunded at 101% of Par(1)(2) $ 3,344,559 1,500,000 California State University Fresno Association Inc. Rev., (Auxiliary Organization Event Center), 6.00%, 7/1/12, Prerefunded at 101% of Par(2) 1,667,760 1,250,000 California State University System Rev., Series 2002 A, 5.375%, 11/1/18 (Ambac) 1,332,738 3,230,000 California Statewide Communities Development Auth. Rev., Series 2000 B, (Brentwood School), 5.75%, 10/1/07 (FSA)(1) 3,299,671 1,695,000 California Statewide Communities Development Auth. Rev., Series 2002 B, 5.20%, 10/1/18 (FSA) 1,789,496 2,250,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (California Baptist University), 5.30%, 11/1/18 2,219,085 2,500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (California Baptist University), 5.40%, 11/1/27 2,435,400 5,000,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Front Porch Communities and Services), 5.125%, 4/1/37(1) 4,601,050 1,000,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Henry Mayo Newhall Memorial Hospital), 5.00%, 10/1/20 (California Mortgage Insurance) 1,016,200 2,500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Valleycare Health System), 4.80%, 7/15/17 2,471,825 500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Valleycare Health System), 5.00%, 7/15/22 469,715 3,330,000 California Statewide Communities Development Auth. Rev., Series 2007 B, (Kaiser Permanente), VRDN, 4.37%, 10/1/07(1) 3,104,726 - ------ 24 California Tax-Free Bond Principal Amount Value $ 1,000,000 Calleguas-Las Virgines Public Financing Auth. Rev., Series 2007 A, (Municipal Water District), 5.00%, 7/1/20 (FGIC) $ 1,053,570 1,000,000 Calleguas-Las Virgines Public Financing Auth. Rev., Series 2007 A, (Municipal Water District), 5.00%, 7/1/21 (FGIC) 1,048,310 1,000,000 Calleguas-Las Virgines Public Financing Auth. Rev., Series 2007 A, (Municipal Water District), 5.00%, 7/1/22 (FGIC) 1,043,840 3,115,000 Capistrano Unified School District Special Tax Rev., (Community Facilities District No. 87-1), 5.00%, 9/1/18 (Ambac)(1) 3,273,460 2,100,000 Castaic Lake Water Agency Rev., Series 2001 A, 5.375%, 8/1/17 (MBIA)(1) 2,221,989 2,075,000 Chabot Las Positas Community College District COP, 5.50%, 12/1/10 (FSA)(1)(2) 2,132,187 2,160,000 Chaffey Community College District GO, Series 2007 C, (Election of 2002), 5.00%, 6/1/21 (MBIA) 2,259,101 1,000,000 Chaffey Community College District GO, Series 2007 C, (Election of 2002), 5.00%, 6/1/22 (MBIA) 1,041,050 3,000,000 Chino Ontario Upland Water Facilities Auth. COP, Series 1997 A, (Agua de Lejos), 5.20%, 10/1/15 (FGIC)(1) 3,063,450 10,000,000 City of Whittier Rev., (Whittier College), VRDN, 5.90%, 9/6/07 (RADIAN) (SBBPA: Bank of New York)(1) 10,000,000 2,300,000 Eastern Municipal Water District COP, Series 2001 A, 5.25%, 7/1/13 (FGIC)(1) 2,425,787 1,020,000 El Segundo Unified School District GO, 5.375%, 9/1/12, Prerefunded at 100% of Par (FGIC)(2) 1,103,385 1,095,000 El Segundo Unified School District GO, 5.375%, 9/1/12, Prerefunded at 100% of Par (FGIC)(2) 1,184,516 1,000,000 Folsom Cordova Unified School District No. 2 Facilities Improvement GO, Series 2002 A, 5.375%, 10/1/15 (MBIA) 1,071,240 Principal Amount Value $ 1,225,000 Folsom Cordova Unified School District No. 2 Facilities Improvement GO, Series 2002 A, 5.375%, 10/1/16 (MBIA) $ 1,312,269 1,225,000 Folsom Public Financing Auth. Lease Rev., (City Hall & Community Center), 5.25%, 10/1/14 (FSA) 1,317,059 1,290,000 Folsom Public Financing Auth. Lease Rev., (City Hall & Community Center), 5.25%, 10/1/15 (FSA) 1,386,944 1,250,000 Foothill-De Anza Community College District GO, Series 2007 B, (Election of 2006), 5.00%, 8/1/17 (Ambac) 1,336,663 4,000,000 Foothill-De Anza Community College District GO, Series 2007 B, (Election of 2006), 5.00%, 8/1/27 (Ambac)(1) 4,105,280 1,150,000 Franklin-McKinley School District GO, Series 2005 A, (Election of 2004), 5.00%, 8/1/25 (FGIC) 1,189,054 2,550,000 Fremont Union High School District GO, Series 2000 B, 5.25%, 9/1/10, Prerefunded at 100% of Par(1)(2) 2,669,978 2,500,000 Glendora Unified School District GO, Series 2006 A, (Election of 2005), 5.25%, 8/1/30 (MBIA)(1) 2,633,550 2,500,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/15(1) 2,506,975 1,640,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/16 1,638,147 2,000,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/17 1,989,940 1,675,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/16 (Ambac) 1,771,095 790,000 Irvine Unified School District Financing Auth. Special Tax Rev., Series 2006 A, 5.00%, 9/1/20 777,036 2,715,000 Irvine Unified School District Special Tax Rev., (Community Facilities District No. 86-1), 5.50%, 11/1/10 (Ambac) 2,776,956 475,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 5.30%, 2/1/14 481,940 - ------ 25 California Tax-Free Bond Principal Amount Value $ 500,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 5.40%, 2/1/14 $ 505,100 2,030,000 Long Beach Bond Finance Auth. Lease Rev., (Plaza Parking Facility), 5.25%, 11/1/16 2,095,468 2,500,000 Los Altos School District GO, 5.00%, 8/1/19 (Ambac) 2,647,200 1,030,000 Los Angeles Community Redevelopment Agency Parking System Rev., (Cinerama Dome Public Package Project), 5.30%, 7/1/13 (ACA) 1,052,289 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev., Series 1993 A, 6.00%, 8/15/10 (MBIA-IBC) 1,230,202 3,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 2001 B, (Proposal A), 5.25%, 7/1/13 (FSA) 3,190,110 6,680,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 2001 B, (Proposal A), 5.25%, 7/1/16 (FSA)(1) 7,103,311 1,000,000 Los Angeles Municipal Improvement Corp. Lease Rev., Series 2007 A, (Capital Equipment), 5.00%, 8/1/14 (FGIC) 1,066,280 1,000,000 Los Angeles Municipal Improvement Corp. Lease Rev., Series 2007 B1, (Figueroa Plaza), 5.00%, 8/1/21 (FGIC) 1,033,300 3,500,000 Los Angeles Unified School District GO, 5.50%, 7/1/12 (MBIA)(1) 3,789,975 5,000,000 Los Angeles Unified School District GO, Series 2002 E, (Election of 1997), 5.00%, 7/1/11 (MBIA)(1) 5,252,899 2,500,000 Los Angeles Unified School District GO, Series 2003 F, (Election of 1997), 5.00%, 7/1/16 (FSA) 2,657,525 1,000,000 Los Banos Redevelopment Agency Tax Allocation Rev., (Los Banos Redevelopment Project), 5.00%, 9/1/36 (RADIAN) 902,560 Principal Amount Value $ 1,390,000 Los Gatos-Saratoga Joint Union High School District GO, Series 2002 C, (Election of 1998), 5.375%, 6/1/12, Prerefunded at 101% of Par (FSA)(2) $ 1,510,207 3,000,000 Metropolitan Water District of Southern California Rev., Series 1992 B, 8.00%, 7/1/08(1)(2) 3,107,550 2,920,000 Metropolitan Water District of Southern California Rev., Series 2001 A, 5.125%, 7/1/09(1)(2) 3,001,059 1,520,000 Mojave Unified School District No. 1 Facilities Improvement GO, 5.25%, 8/1/20 (FGIC) 1,606,427 4,670,000 Mount Diablo Unified School District No. 202 GO, (Election of 2002), 5.00%, 6/1/27 (MBIA)(1) 4,796,416 1,485,000 Mountain View COP, (Capital Projects), 5.25%, 8/1/18 1,556,295 1,745,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 4.00%, 9/1/12 (AGC) 1,764,876 1,085,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 4.00%, 9/1/14 (AGC) 1,087,105 4,900,000 Norco Redevelopment Agency Tax Allocation Rev., 5.00%, 3/1/26 (Ambac)(1) 5,005,986 4,565,000 Oceanside Community Development Commission Rev., (Downtown Redevelopment), 5.20%, 9/1/17 4,658,035 1,310,000 Oceanside COP, Series 2003 A, 5.00%, 4/1/12 (Ambac) 1,378,605 1,805,000 Orange County Public Financing Auth. Lease Rev., (Juvenile Justice Center Facility), 5.375%, 6/1/15 (Ambac) 1,947,866 1,000,000 Orange County Public Financing Auth. Lease Rev., (Juvenile Justice Center Facility), 5.375%, 6/1/16 (Ambac) 1,079,150 3,030,000 Orange County Public Financing Auth. Lease Rev., (Juvenile Justice Center Facility), 5.375%, 6/1/17 (Ambac)(1) 3,254,765 500,000 Palo Verde Community College District No. 2004-1 GO, 6.00%, 8/1/30 (RADIAN) 525,495 - ------ 26 California Tax-Free Bond Principal Amount Value $ 1,570,000 Paramount Unified School District GO, (Election of 2006), 5.25%, 8/1/25 (FSA) $ 1,669,114 1,760,000 Paramount Unified School District GO, (Election of 2006), 5.25%, 8/1/26 (FSA) 1,866,762 1,450,000 Perris Public Financing Auth. Tax Allocation Rev., 5.35%, 10/1/36 1,419,579 1,830,000 Pomona Public Financing Auth. Rev., Series 2001 AD, (Merged Redevelopment), 4.75%, 2/1/13 (MBIA) 1,886,529 1,720,000 Poway Redevelopment Agency Tax Allocation Rev., (Paguay), 5.25%, 6/15/26 (Ambac) 1,779,908 1,650,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 6-4), 5.125%, 9/1/35 1,565,504 1,000,000 Rancho Mirage Joint Powers Financing Auth. Rev., Series 2007 A, (Eisenhower Medical Center), 5.00%, 7/1/21 1,011,950 2,000,000 Riverside County COP, Series 2007 A, (Public Safety Communication and Refunding), 5.00%, 11/1/15 (Ambac) 2,133,460 8,000,000 Sacramento City Financing Auth. Lease Rev., Series 1993 A, 5.40%, 11/1/20 (Ambac)(1) 8,826,319 2,500,000 Sacramento City Financing Auth. Rev., 5.00%, 12/1/16 (FGIC)(1) 2,678,775 4,045,000 Sacramento City Financing Auth. Rev., Series 2002 A, (City Hall), 5.25%, 12/1/12, Prerefunded at 100% of Par (FSA)(1)(2) 4,366,497 1,245,000 Sacramento City Financing Auth. Rev., Series 2002 A, (City Hall), 5.25%, 12/1/15 (FSA) 1,333,843 1,430,000 Sacramento City Financing Auth. Tax Allocation Rev., Series 2005 A, 5.00%, 12/1/24 (FGIC) 1,471,270 2,500,000 Sacramento County Sanitation District Financing Auth. Rev., Series 2007 B, VRDN, 4.12%, 9/4/07 (FGIC) 2,437,800 3,650,000 Sacramento County Water Financing Auth. Rev., Series 2007 A, (Water Agency Zones 40 & 41 2007 Water System), 5.00%, 6/1/18 (FGIC) 3,902,836 Principal Amount Value $ 1,890,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA)(2) $ 1,896,880 3,105,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.70%, 7/1/17 (Ambac) 3,516,971 5,005,000 Sacramento Municipal Utility District Electric Rev., Series 2001 O, 5.25%, 8/15/11 (MBIA)(1) 5,311,605 1,695,000 San Buenaventura County COP, Series 2002 B, 5.50%, 1/1/15 (Ambac) 1,828,363 1,790,000 San Buenaventura County COP, Series 2002 B, 5.50%, 1/1/16 (Ambac) 1,931,589 1,280,000 San Diego Public Facilities Financing Auth. Tax Allocation Rev., Series 2007 B, (Southcrest and Central Imperial Redevelopment), 5.125%, 10/1/22 (RADIAN) 1,279,270 2,030,000 San Diego Redevelopment Agency Tax Allocation Rev., (Horton Plaza), 5.70%, 11/1/17 2,120,599 2,635,000 San Diego Redevelopment Agency Tax Allocation Rev., (Horton Plaza), 5.80%, 11/1/21 2,743,483 1,460,000 San Diego Redevelopment Agency Tax Allocation Rev., (North Park), 5.90%, 9/1/25 1,502,004 1,000,000 San Francisco City & County Airports Commission Rev., Series 2006-32F, (San Francisco International Airport), 5.25%, 5/1/19 (FGIC) 1,090,410 3,000,000 San Jose Redevelopment Agency Tax Allocation Rev., Series 2005 A, 5.00%, 8/1/25 (MBIA) 3,079,770 1,570,000 San Marcos Public Facilities Auth. Tax Allocation Rev., Series 2006 A (Project Area No. 3), 5.00%, 8/1/20 (Ambac) 1,641,749 2,455,000 San Marcos Public Facilities Auth. Tax Allocation Rev., Series 2006 A (Project Area No. 3), 5.00%, 8/1/25 (Ambac) 2,521,555 2,680,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 2,932,188 1,500,000 San Mateo Union High School District GO, 5.00%, 9/1/24 (FSA) 1,545,525 - ------ 27 California Tax-Free Bond Principal Amount Value $ 1,000,000 San Ramon Valley Unified School District GO, (Election of 2002), 5.00%, 8/1/21 (MBIA) $ 1,048,710 3,350,000 Santa Barbara County GO, 5.375%, 10/1/17 (Ambac) 3,611,300 2,075,000 Santa Clara Valley Water District COP, Series 2000 A, 5.20%, 2/1/09, Prerefunded at 102% of Par(2) 2,160,781 1,120,000 Santa Fe Springs Community Development Commission Tax Allocation Rev., Series 2002 A, 5.375%, 9/1/16 (MBIA) 1,182,944 1,250,000 Santa Monica-Malibu Unified School District GO, 5.25%, 8/1/13 1,350,900 1,265,000 Scotts Valley COP, 4.00%, 10/1/15 (FSA) 1,278,460 1,370,000 Scotts Valley COP, 4.25%, 10/1/18 (FSA) 1,389,399 2,780,000 Scotts Valley Redevelopment Agency Tax Allocation Rev., 5.00%, 8/1/29 (Ambac) 2,901,514 2,400,000 Shasta Lake Public Finance Auth. Rev., 5.00%, 4/1/19 2,421,000 2,130,000 Shasta Lake Public Finance Auth. Rev., 5.00%, 4/1/22 2,123,354 1,445,000 South Tahoe Joint Powers Financing Auth. Rev., Series 2005 A, 5.00%, 10/1/19 (Ambac) 1,505,184 1,310,000 South Tahoe Joint Powers Financing Auth. Rev., Series 2005 A, (Redevelopment Area No. 1), 5.00%, 10/1/17 (Ambac) 1,378,408 2,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/10 (GIC: PNC Bank) 2,152,760 5,000,000 Southern California Public Power Auth. Rev., Series 2002 A, (Southern Transmission), 5.25%, 7/1/17 (FSA)(1) 5,306,899 3,325,000 Southern California Public Power Auth. Rev., Series 2002 A, (Southern Transmission), 5.25%, 7/1/18 (FSA) 3,511,067 1,975,000 Southwestern Community College District GO, 5.625%, 8/1/11, Prerefunded at 101% of Par (Ambac)(2) 2,139,103 2,770,000 Stockton Community Facilities District GO, (No. 1 Weston Ranch), 5.40%, 9/1/09, Prerefunded at 102% of Par(2) 2,915,037 Principal Amount Value $ 325,000 Stockton Community Facilities District GO, (No. 1 Weston Ranch), 5.50%, 9/1/09, Prerefunded at 102% of Par(2) $ 342,638 2,700,000 Stockton Public Financing Auth. Rev., Series 2006 A, (Redevelopment), 5.00%, 9/1/25 (RADIAN) 2,567,700 570,000 Temecula Valley Unified School District Special Tax Rev., (Community Facilities District No. 2004-1 - Improvement Area A), 5.00%, 9/1/27 539,323 1,035,000 Turlock Health Facility COP, Series 2004 A, (Emanuel Medical Center, Inc.), 5.50%, 10/15/15 1,080,043 1,090,000 Turlock Health Facility COP, Series 2004 A, (Emanuel Medical Center, Inc.), 5.50%, 10/15/16 1,132,772 1,150,000 Turlock Health Facility COP, Series 2004 A, (Emanuel Medical Center, Inc.), 5.50%, 10/15/17 1,190,227 2,640,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 2,867,885 1,000,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 1,086,320 1,415,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 1,537,143 2,505,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 2,721,232 2,980,000 Val Verde Unified School District COP, 5.25%, 1/1/15, Prerefunded at 100% of Par (FGIC)(2) 3,237,234 3,000,000 Ventura County Public Financing COP, 4.75%, 8/15/11 (FSA) 3,058,560 1,000,000 Vista Unified School District GO, Series 2007 C, (Election of 2002), 5.00%, 8/1/25 (FSA) 1,040,820 1,500,000 West Sacramento Financing Auth. Special Tax Rev., Series 2006 A, 5.00%, 9/1/18 (XLCA) 1,587,885 1,500,000 West Sacramento Financing Auth. Special Tax Rev., Series 2006 A, 5.00%, 9/1/19 (XLCA) 1,571,520 - ------ 28 California Tax-Free Bond Principal Amount Value $ 1,500,000 West Sacramento Financing Auth. Special Tax Rev., Series 2006 A, 5.00%, 9/1/20 (XLCA) $ 1,557,480 ------------ 404,416,600 ------------ NORTHERN MARIANA ISLANDS -- 0.7% 40,000 Northern Mariana Islands GO, Series 2000 A, 5.50%, 6/1/08 (ACA) 40,320 1,445,000 Northern Mariana Islands GO, Series 2000 A, 5.50%, 6/1/08 (ACA)(2) 1,465,215 1,555,000 Northern Mariana Islands GO, Series 2000 A, 5.50%, 6/1/09 (ACA) 1,582,741 ------------ 3,088,276 ------------ PUERTO RICO -- 5.7% 3,700,000 Puerto Rico Electric Power Auth. Rev., Series 2002 II, 5.375%, 7/1/12, Prerefunded at 101% of Par (MBIA)(1)(2) 4,013,908 2,655,000 Puerto Rico Electric Power Auth. Rev., Series 2002 KK, 5.25%, 7/1/13 (FSA) 2,865,382 3,140,000 Puerto Rico Electric Power Auth. Rev., Series 2002 KK, 5.50%, 7/1/14 (FSA) 3,457,423 2,000,000 Puerto Rico GO, Series 2006 A, 5.25%, 7/1/26 2,058,960 1,500,000 Puerto Rico GO, Series 2006 B, 5.00%, 12/1/15 1,577,190 5,490,000 Puerto Rico GO, Series 2006 B, 5.25%, 7/1/17(1) 5,801,393 3,325,000 Puerto Rico Municipal Finance Agency GO, Series 2005 A, 5.25%, 8/1/25 3,419,131 3,090,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (Ambac) 3,233,561 ------------ 26,426,948 ------------ U.S. VIRGIN ISLANDS -- 1.0% 2,270,000 Virgin Islands Public Finance Auth. Rev., (Virgin Islands Gross Receipts Taxes Loan Note), 5.00%, 10/1/18 (FGIC) 2,419,661 1,050,000 Virgin Islands Public Finance Auth. Rev., Series 1998 A (Senior Lien), 5.50%, 10/1/13 1,075,998 500,000 Virgin Islands Public Finance Auth. Rev., Series 2004 A, (Virgin Islands Matching Fund Loan Note & Senior Lien), 5.25%, 10/1/22 507,655 Principal Amount Value $ 500,000 Virgin Islands Public Finance Auth. Rev., Series 2004 A, (Virgin Islands Matching Fund Loan Note & Senior Lien), 5.25%, 10/1/23 $ 505,575 ------------ 4,508,889 ------------ TOTAL MUNICIPAL SECURITIES (Cost $431,762,854) 438,440,713 ------------ Short-Term Municipal Securities -- 4.5% PUERTO RICO -- 4.5% 2,500,000 Government Development Bank of Puerto Rico Rev., 4.10%, 9/14/07 2,499,675 2,505,000 Government Development Bank of Puerto Rico Rev., 4.10%, 9/14/07 2,504,674 2,000,000 Government Development Bank of Puerto Rico Rev., 4.30%, 9/28/07 1,999,780 1,065,000 Government Development Bank of Puerto Rico Rev., 4.30%, 10/11/07 1,064,862 2,135,000 Government Development Bank of Puerto Rico Rev., 4.25%, 11/2/07 2,134,445 2,240,000 Government Development Bank of Puerto Rico Rev., 4.25%, 11/8/07 2,239,373 5,000,000 Government Development Bank of Puerto Rico Rev., 4.30%, 11/15/07 4,998,950 3,523,000 Government Development Bank of Puerto Rico Rev., 4.30%, 12/14/07 3,521,943 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $20,968,000) 20,963,702 ------------ TOTAL INVESTMENT SECURITIES -- 99.4% (Cost $452,730,854) 459,404,415 ------------ OTHER ASSETS AND LIABILITIES -- 0.6% 2,841,608 ------------ TOTAL NET ASSETS -- 100.0% $462,246,023 ============ - ------ 29 California Tax-Free Bond Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 654 U.S. Treasury 2-Year Notes December 2007 $134,826,187 $162,029 ============ ============ Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 361 U.S. Treasury 10-Year Notes December 2007 $39,365,922 $(450,551) ============ ============ Notes to Schedule of Investments ACA = American Capital Access AGC = Assured Guaranty Corporation Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FGIC-TCRS = Financial Guaranty Insurance Co. -- Transferable Custodial Receipts FSA = Financial Security Assurance, Inc. GIC = Guaranteed Investment Contract GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation MBIA-IBC = MBIA Insured Bond Certificates RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective August 31, 2007. XLCA = XL Capital Ltd. (1) Security, or a portion thereof, has been segregated for when-issued securities and/or futures contracts. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (3) When-issued security. See Notes to Financial Statements. - ------ 30 PERFORMANCE California Long-Term Tax-Free Total Returns as of August 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date CALIFORNIA LONG-TERM TAX-FREE 1.24% 3.60% 4.83% 6.93% 11/9/83 LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX 0.36% 5.29% 5.95% 8.62%(1) -- LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 0.66% 3.62% 4.52% 6.94%(3) -- Fund's Lipper Ranking as of 8/31/07(2) 41 of 116 50 of 97 21 of 71 1 of 1(3) -- Fund's Lipper Ranking as of 9/30/07(2) 43 of 117 54 of 97 21 of 71 1 of 1(3) -- (1) Since 10/31/83, the date nearest the fund's inception for which data are available. (2) Data provided by Lipper Inc. - A Reuters Company. © 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 11/10/83, the date nearest the fund's inception for which data are available. Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 31 California Long-Term Tax-Free Growth of $10,000 Over 10 Years $10,000 investment made August 31, 1997
One-Year Returns Over 10 Years Periods ended August 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 California Long-Term Tax-Free 9.25% -1.86% 7.79% 10.55% 5.14% 1.81% 6.83% 5.38% 2.89% 1.24% Lehman Brothers Long-Term Municipal Bond Index 10.51% -2.14% 7.34% 12.35% 5.62% 2.62% 9.24% 10.52% 4.08% 0.36% Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 32 PORTFOLIO COMMENTARY California Long-Term Tax-Free Lead Portfolio Manager: Dave MacEwen Macro Strategy Team Representative: Steven Permut PERFORMANCE SUMMARY California Long-Term Tax-Free (Cal Long-Term) returned 1.24% for the 12 months ended August 31, 2007. By comparison, the Lehman Brothers Long-Term Municipal Bond Index returned 0.36%, while the average return of the 116 California municipal debt funds tracked by Lipper Inc. was 0.66%. Of course, portfolio returns and the Lipper average reflect operating expenses, while Lehman index returns do not. The portfolio outperformed the index because Cal Long-Term had a lesser degree of price sensitivity to interest rate changes (shorter duration) at a time when municipal yields increased (see the Market Perspective on page 2). Our duration and yield curve positioning also helped explain the portfolio's outperformance compared with the Lipper group average. YIELD SUMMARY Cal Long-Term's investment objectives are to seek safety of principal and high current income that is exempt from federal and California income taxes. As of August 31, 2007, the portfolio's 30-day SEC yield was 4.17%, which translated into attractive tax-equivalent yields well above 6%, as shown in the accompanying table. That compares with an average yield of 3.55% for the funds in our Lipper peer group. And we should point out that we achieved this yield without purchasing bonds subject to the alternative minimum tax (AMT). DURATION POSITIONING HELPED We typically manage duration (which, as mentioned earlier, is a measure of a bond fund's price sensitivity to interest rate changes) conservatively, keeping it in a narrow band around that of our peer group average. Rather than make big bets on the direction of interest rates, we prefer instead to add value through security, credit, and curve exposure. That said, duration goes a long way toward explaining the portfolio's performance. We believe, for example, that both the fund and its peers have shorter durations on average than the Lehman Brothers Long-Term Municipal Bond Index; as a result, the portfolio and Lipper group outperformed the index, particularly in July and August, when municipal bond yields rose sharply. Relative to an estimated average of our peer group's durations, we believe we maintained a slightly longer-than-average duration early in 2007, which helped performance when the municipal market rallied. But we brought duration back to short to neutral relative to the peer estimated average in recent months, helping the fund's return finish slightly ahead of the peer group. Portfolio at a Glance As of As of 8/31/07 8/31/06 Weighted Average Maturity 13.9 yrs 15.9 yrs Average Duration (Modified) 7.4 yrs 5.8 yrs Yields as of August 31, 2007 30-Day SEC Yield 4.17% 30-Day Tax-Equivalent Yields* 31.98% Tax Bracket 6.13% 34.70% Tax Bracket 6.39% 39.23% Tax Bracket 6.86% 41.05% Tax Bracket 7.07% *The tax brackets indicated are for combined state and federal income tax. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. - ------ 33 California Long-Term Tax-Free CURVE EXPOSURE CONTRIBUTED The portfolio's performance benefited from a yield curve steepening bias we had in place using two- and 10-year Treasury futures contracts. The Treasury yield curve steepened sharply during the period, as the yield difference between two- and 10-year Treasurys increased from -5 (the curve was inverted) to +39 basis points (a basis point equals 0.01%) as the curve returned to a more normal, upward slope. Both the Treasury and municipal yield curves (graphic representations of yields at different maturities) steepened during the period. LOWER CREDIT QUALITY DETRACTED Another key factor for performance was an overweight position in higher-yielding, lower-rated bonds (below AAA). This helped performance for much of the fiscal year, as the credit spreads between bonds rated BBB and AAA tightened to historically low levels. (When credit spreads tighten, lower-rated bonds outperform; wider spreads mean they under perform.) But these securities limited our return when spreads widened sharply in July and August, one of the worst stretches for municipal bonds in many years. OUTLOOK "In our last report to shareholders in February, we talked about being on the lookout for slower economic growth. Six months later, we think the housing downturn is far from over, and will continue to exert downward pressure on consumer spending and the economy," says macro strategy team representative Steven Permut. "As a result, we'll continue to manage the portfolio's risk prudently, trading up in credit quality and diversifying into sectors insulated against slower economic growth, such as health care and higher education bonds, trading at what we think are attractive relative values. That's consistent with our well-established management strategy, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," concluded Permut. Top Five Sectors as of August 31, 2007 % of fund investments Certificate of Participation (COPs)/Leases 21% Prerefunded 14% Hospital Revenue 12% General Obligation (GO) 11% Water/Sewer/Gas Revenue 11% Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 8/31/07 2/28/07 AAA 55% 51% AA 8% 9% A 23% 20% BBB 14% 13% Not Rated -- 7% Ratings provided by independent research companies. These ratings are listed in Standard & Poor's format even if they were provided by other sources. - ------ 34 SCHEDULE OF INVESTMENTS California Long-Term Tax-Free AUGUST 31, 2007 Principal Amount Value Municipal Securities -- 98.8% CALIFORNIA -- 97.8% $ 1,300,000 ABN AMRO Munitops Certificate Trust Rev., Series 2006-19, VRDN, 3.97%, 9/6/07 (MBIA) (SBBPA: ABN AMRO Bank N.V.) $ 1,300,000 5,235,000 Antioch Public Financing Auth. Lease Rev., Series 2002 A, (Municipal Facilities), 5.50%, 1/1/32 (MBIA)(1) 5,444,295 4,730,000 Antioch Public Financing Auth. Lease Rev., Series 2002 B, (Municipal Facilities), 5.625%, 1/1/22 (MBIA)(1) 4,956,804 6,005,000 Antioch Public Financing Auth. Lease Rev., Series 2002 B, (Municipal Facilities), 5.625%, 1/1/27 (MBIA)(1) 6,268,199 1,395,000 Avenal Public Financing Auth. Rev., 5.00%, 9/1/25 1,410,122 720,000 Banning COP, (Wastewater System, Refunding & Improvement), 8.00%, 1/1/19 (Ambac) 832,975 4,135,000 Bell Community Redevelopment Agency Tax Allocation Rev., (Bell Redevelopment Project Area), 5.625%, 10/1/33 (RADIAN)(1) 4,171,843 1,205,000 Berryessa Union School District GO, Series 2001 B, (Election of 1999), 5.375%, 8/1/11, Prerefunded at 101% of Par (FSA)(2) 1,294,206 1,205,000 Berryessa Union School District GO, Series 2001 B, (Election of 1999), 5.375%, 8/1/11, Prerefunded at 101% of Par (FSA)(2) 1,294,206 3,500,000 Big Bear Lake Water Rev., 6.00%, 4/1/22 (MBIA)(1) 4,060,105 5,000,000 California County Tobacco Securitization Agency Rev., 5.25%, 6/1/46(1) 4,531,050 2,000,000 California Educational Facilities Auth. Rev., (University of Pacific), 5.25%, 11/1/34 2,020,060 8,570,000 California Educational Facilities Auth. Rev., (University of Southern California), 5.50%, 10/1/27(1) 8,896,174 Principal Amount Value $ 1,920,000 California Educational Facilities Auth. Rev., (Western University Health Sciences), 6.00%, 10/1/32 $ 1,989,907 1,220,000 California Educational Facilities Auth. Rev., Series 2004 C, (Lutheran University), 5.00%, 10/1/29 1,174,177 2,000,000 California Educational Facilities Auth. Rev., Series 2005 A, (University La Verne), 5.00%, 6/1/35 (GO of University) 1,859,700 5,000,000 California Educational Facilities Auth. Rev., Series 2007 A, (Claremont Graduate University), 5.00%, 3/1/42 4,840,400 3,000,000 California GO, 6.125%, 10/1/11 (Ambac) 3,283,380 13,185,000 California GO, 5.00%, 2/1/14(1) 14,105,016 10,000,000 California GO, 4.00%, 8/1/17(1) 9,801,500 8,000,000 California GO, 5.00%, 6/1/34(1) 8,033,680 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(3) 2,758,470 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23(1)(2) 6,000,800 6,500,000 California Health Facilities Financing Auth. Rev., Series 2007 A, (Sutter Health), 5.25%, 11/15/46(1) 6,623,500 1,000,000 California Infrastructure & Economic Development Bank Rev., (Performing Arts Center of Los Angeles County), 5.00%, 12/1/37 992,980 4,760,000 California Mobilehome Park Financing Auth. Rev., Series 2006 A, (Union City Tropics), 5.00%, 12/15/41(1) 4,230,831 3,000,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.25%, 2/1/46 2,841,600 4,000,000 California Public Works Board Lease Rev., Series 1993 A, (Department of Corrections), 5.00%, 12/1/19 (Ambac)(1) 4,231,360 2,400,000 California Public Works Board Lease Rev., Series 2003 C, (Department Corrections), 5.00%, 6/1/24 2,437,776 - ------ 35 California Long-Term Tax-Free Principal Amount Value $ 6,000,000 California Public Works Board Lease Rev., Series 2005 A, (Department of General Services - Butterfield), 5.25%, 6/1/30(1) $ 6,166,680 2,835,000 California Public Works Board Lease Rev., Series 2006 E, (University of California Research Project), 5.00%, 10/1/31 2,891,927 9,500,000 California Public Works Board Lease Rev., Series 2006 G, (California State University), 5.00%, 11/1/31(1) 9,579,325 2,590,000 California Public Works Board Lease Rev., Series 2006 G, (Physical Science Replacement Building, Wing A, Los Angeles Campus), 5.00%, 11/1/26 2,634,600 3,370,000 California Public Works Board Lease Rev., Series 2006 H, (Department of Corrections & Rehabilitation), 5.00%, 11/1/31(1) 3,398,140 9,815,000 California Statewide Communities Development Auth. Rev., Series 1998 A, (Sherman Oaks Project), 5.00%, 8/1/22 (Ambac)(1) 10,337,060 12,050,000 California Statewide Communities Development Auth. Rev., Series 2001 C, (Kaiser Permanente), 5.25%, 8/1/31(1) 12,164,715 1,000,000 California Statewide Communities Development Auth. Rev., Series 2005 A, (Thomas Jefferson School of Law), 4.875%, 10/1/35 889,290 10,000,000 California Statewide Communities Development Auth. Rev., Series 2006 B, (Kaiser Permanente), 5.25%, 3/1/45(1) 10,017,000 5,695,000 Capistrano Unified School District Special Tax Rev., (Community Facilities District No. 88-1), 6.50%, 9/1/14 (FSA)(1) 5,830,875 1,125,000 Carlsbad Unified School District GO, Series 2007 A, (Election of 2006), 5.25%, 8/1/32 (MBIA)(4) 1,182,566 1,520,000 Castaic Lake Water Agency COP, Series 1994 A, (Water System Improvement), 7.00%, 8/1/12 (MBIA) 1,735,688 Principal Amount Value $ 1,320,000 Coalinga Public Financing Auth. Local Obligation Rev., Series 1998 A, 6.375%, 9/15/21 (Ambac) $ 1,580,080 2,615,000 Concord Joint Powers Financing Auth. Lease Rev., (Concord Avenue Parking Structure), 5.125%, 3/1/23 2,661,102 2,580,000 Concord Joint Powers Financing Auth. Lease Rev., (Police Facilities), 5.25%, 8/1/13 2,700,976 2,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (Ambac) 2,339,326 5,500,000 Elk Grove Community Facilities District No. 2005-1 Special Tax Rev., (Laguna Ridge), 5.25%, 9/1/37 5,302,990 3,590,000 Fontana Redevelopment Agency Tax Allocation Rev., (Sierra Corridor), 5.50%, 9/1/34 3,660,938 2,000,000 Foothill-De Anza Community College District GO, Series 2007 A, (Election of 2006), 5.00%, 8/1/27 (Ambac) 2,052,640 2,225,000 Fresno Sewer Rev., Series 1993 A, 6.25%, 9/1/14 (Ambac) 2,482,321 1,500,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A1, 5.75%, 6/1/47 1,459,890 4,705,000 Hillsborough School District GO, Series 2006 B, (Election of 2002), 4.86%, 9/1/29(3) 1,583,421 5,010,000 Hillsborough School District GO, Series 2006 B, (Election of 2002), 4.87%, 9/1/30(3) 1,604,954 5,335,000 Hillsborough School District GO, Series 2006 B, (Election of 2002), 4.88%, 9/1/31(3) 1,619,333 5,000,000 Huntington Beach Union High School District GO, (Election of 2004), 5.00%, 8/1/31 (MBIA)(3) 1,527,500 9,350,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/29 (Ambac) 9,845,176 3,000,000 Independent Cities Lease Finance Auth. Rev., Series 2006 A, (San Juan Mobile Estates), 5.125%, 5/15/41 2,703,450 5,000,000 Irvine Unified School District Financing Auth. Special Tax Rev., Series 2006 A, 5.125%, 9/1/36 4,733,250 - ------ 36 California Long-Term Tax-Free Principal Amount Value $ 1,500,000 Jurupa Community Services District Special Tax Rev., Series 2006 A, (Community Facilities District No. 19 - Eastvale Area), 5.00%, 9/1/36 $ 1,362,720 1,815,000 Kern High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,180,595 1,340,000 Kern High School District GO, Series 1992 C, (Election of 1990), 6.25%, 8/1/13 (MBIA)(2) 1,519,506 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA)(2) 4,155,007 1,250,000 Lancaster Financing Auth. Rev., (Projects No. 5 & 6), 5.60%, 2/1/34 1,273,375 5,190,000 Lancaster Financing Auth. Tax Allocation Rev., (School District Projects), 5.00%, 2/1/37(1) 4,944,202 1,335,000 Little Lake City School District GO, Series 2000 A, 6.125%, 7/1/10, Prerefunded at 101% of Par (FSA)(2) 1,440,959 2,240,000 Lodi Unified School District COP, Series 2005 A, (Aspire), 5.00%, 8/1/32 (FGIC) 2,268,515 1,605,000 Long Beach Bond Finance Auth. Lease Rev., (Plaza Parking Facility), 5.25%, 11/1/21 1,641,899 5,000,000 Los Angeles Department of Water & Power Rev., Series 2007 A2, (Water System), 5.00%, 7/1/44 (Ambac) 5,110,000 8,000,000 Metropolitan Water District of Southern California Rev., 5.75%, 8/10/18 8,991,120 3,000,000 Metropolitan Water District of Southern California Rev., Series 2006 B, 4.375%, 7/1/37 2,747,640 9,095,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA)(1)(2) 10,648,881 1,065,000 Mountain View School District Santa Clara County GO, Series 2000 B, 6.125%, 7/1/10, Prerefunded at 101% of Par (FSA)(2) 1,148,027 1,000,000 New Haven Unified School District GO, 12.00%, 8/1/18 (FSA) 1,664,580 6,000,000 Northern Inyo County Local Hospital District GO, 5.60%, 8/1/35 6,251,580 Principal Amount Value $ 6,110,000 Oakland Redevelopment Agency Tax Allocation Rev., (Central District), 5.50%, 2/1/14 (Ambac) $ 6,447,333 1,680,000 Oceanside COP, Series 2003 A, 5.25%, 4/1/17 (Ambac) 1,765,210 4,650,000 Orange County Community Facilities District No. 2004-1 Special Tax Rev., Series 2005 A, (Ladera Ranch), 5.20%, 8/15/34 4,470,789 850,000 Orange County Improvement Bond Act of 1915 Special Assessment, 5.00%, 9/2/26 817,233 1,250,000 Orange County Improvement Bond Act of 1915 Special Assessment, 5.05%, 9/2/33 1,178,438 2,000,000 Orange County Improvement Bond Act of 1915 Special Assessment, (Newport Coast Phase IV Assessment District No. 01-1), 5.00%, 9/2/28 1,884,660 2,000,000 Orange County Improvement Bond Act of 1915 Special Assessment, (Newport Coast Phase IV Assessment District No. 01-1), 5.10%, 9/2/33 1,899,300 3,100,000 Oxnard School District GO, Series 2001 A, 5.75%, 8/1/22 (MBIA) 3,541,254 2,400,000 Pasadena COP, (Old Pasadena Parking Facility), 6.25%, 1/1/18 2,681,136 1,450,000 Perris Public Financing Auth. Tax Allocation Rev., 5.35%, 10/1/36 1,419,579 2,500,000 Pico Rivera Water Auth. Rev., Series 1999 A, (Water Systems), 5.50%, 5/1/29 (MBIA) 2,804,150 1,130,000 Pomona COP, Series 2002 AE, (Mission Promenade), 5.375%, 10/1/09 (Ambac) 1,180,714 1,000,000 Pomona Unified School District GO, Series 2000 A, 6.55%, 8/1/29 (MBIA) 1,253,760 1,000,000 Pomona Unified School District GO, Series 2001 A, 6.15%, 8/1/30 (MBIA) 1,174,470 1,110,000 Poway Redevelopment Agency COP, (Paguay Redevelopment), 5.375%, 12/15/20 (Ambac) 1,180,441 6,875,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 6-4), 5.125%, 9/1/35 6,522,931 - ------ 37 California Long-Term Tax-Free Principal Amount Value $ 2,500,000 Riverside County COP, Series 2005 A, (Family Law), 5.00%, 11/1/36 (FGIC) $ 2,530,750 1,580,000 Riverside Redevelopment Agency Rev., Series 2004 A, (Housing Set-Aside Tax Allocation), 5.00%, 8/1/28 (FGIC) 1,609,988 2,000,000 RNR School Financing Auth. Special Tax Rev., Series 2006 A, (Community Facilities District No. 92-1), 5.00%, 9/1/36 (Ambac) 2,026,760 1,500,000 Sacramento City Financing Auth. Lease Rev., Series 1993 A, 5.40%, 11/1/20 (Ambac) 1,654,935 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax Rev., Series 1997 A, 6.00%, 9/1/16 (FSA) 1,140,830 4,640,000 San Diego County COP, (Burnham Institute), 6.25%, 9/1/09, Prerefunded at 101% of Par(2) 4,915,198 10,400,000 San Diego County COP, Linked Security, ARC, YCC, 5.625%, 9/1/12 (Ambac)(1) 10,815,375 4,185,000 San Francisco City & County Redevelopment Financing Auth. Tax Allocation Rev., (Mission Bay North Project D), 5.00%, 8/1/35 4,068,239 2,715,000 San Marcos Public Facilities Auth. Rev., Series 2000 A, (Tax Increment Project Area 3), 6.75%, 10/1/10 3,012,293 3,535,000 San Mateo County Joint Powers Financing Auth. Lease Rev., Series 1993 A, (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,077,304 4,000,000 San Mateo County Joint Powers Financing Auth. Lease Rev., Series 1993 A, (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,617,200 3,355,000 Santa Barbara County Waterfront GO, 5.50%, 10/1/22 (Ambac) 3,592,534 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,400,380 2,470,000 Shasta Lake Public Finance Auth. Rev., 5.00%, 4/1/25 2,424,577 Principal Amount Value $ 2,500,000 South Coast Air Quality Management District Building Corp. Rev., (Installment Sale Headquarters), 6.00%, 8/1/11 (Ambac) $ 2,666,800 2,705,000 South Gate COP, Series 2002 A, 5.50%, 9/1/21 (Ambac) 2,898,949 2,000,000 South Gate Public Financing Auth. Tax Allocation Rev., (Redevelopment Project No. 1), 5.75%, 9/1/22 (XLCA) 2,175,740 2,000,000 South Orange County Public Financing Auth. Special Tax Rev., Series 1994 A, (Senior Lien), 7.00%, 9/1/11 (MBIA) 2,244,500 2,315,000 South Tahoe Joint Powers Financing Auth. Rev., Series 2005 A, 5.00%, 10/1/28 (Ambac) 2,357,272 7,315,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/12 (FSA)(1) 8,288,480 3,730,000 Southern California Public Power Auth. Rev., (Multiple Projects), 6.75%, 7/1/13 (FSA) 4,266,001 1,285,000 Stanton Redevelopment Agency Tax Allocation Rev., (Community Development), 5.45%, 12/1/17 (Ambac) 1,307,475 2,850,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 2,909,166 2,000,000 Taft Public Financing Auth. Lease Rev., Series 1997 A, (Community Correctional Facility Acquisition), 6.05%, 1/1/17 2,118,000 2,885,000 Torrance COP, Series 2005 B, (Refinancing & Public Improvement), 5.25%, 6/1/34 (Ambac) 2,970,108 1,215,000 Turlock Health Facility COP, (Emanuel Medical Center, Inc.), 5.50%, 10/15/18 1,252,058 1,285,000 Turlock Health Facility COP, (Emanuel Medical Center, Inc.), 5.50%, 10/15/19 1,318,770 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) 2,836,325 370,000 University of California Rev., Series 2004 A, (UCLA Medical Center), 5.50%, 5/15/24 (Ambac) 394,668 - ------ 38 California Long-Term Tax-Free Principal Amount Value $ 630,000 University of California Rev., Series 2004 A, (UCLA Medical Center), 5.50%, 5/15/24, Prerefunded at 101% of Par) (Ambac)(2) $ 672,002 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (Ambac)(2) 1,542,306 3,020,000 Watsonville Insured Hospital Rev., Series 1996 A, (Community Hospital), 6.20%, 7/1/12 (California Mortgage Insurance)(2) 3,223,276 3,880,000 Woodland COP, (Wastewater System Reference), 5.75%, 3/1/12 (Ambac) 4,065,619 ------------ 432,334,211 ------------ PUERTO RICO -- 1.0% 4,000,000 Puerto Rico Electric Power Auth. Rev., Series 2002 II, 5.375%, 7/1/12 (XLCA) 4,339,360 ------------ TOTAL MUNICIPAL SECURITIES (Cost $426,303,818) 436,673,571 ------------ Principal Amount Value Municipal Derivatives -- 0.2% CALIFORNIA -- 0.2% $ 1,000,000 San Diego County Water Auth. Rev. COP, (Registration Rites), Yield Curve Notes, Inverse Floater, 7.94%, 4/22/09 (FGIC)(5) $ 1,063,600 (Cost $1,010,984) ------------ Shares Temporary Cash Investments(6) 103,000 Federated California Municipal Cash Trust 103,000 (Cost $103,000) ------------ TOTAL INVESTMENT SECURITIES -- 99.0% (Cost $427,417,802) 437,840,171 ------------ OTHER ASSETS AND LIABILITIES -- 1.0% 4,218,127 ------------ TOTAL NET ASSETS -- 100.0% $442,058,298 ============ Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 625 U.S. Treasury 2-Year Notes December 2007 $128,847,656 $154,844 ============ ============ Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 346 U.S. Treasury 10-Year Notes December 2007 $ 37,730,219 $(435,136) ============ ============ Swap Agreements Expiration Unrealized Notional Amount Description of Agreement Date Gain (Loss) INTEREST RATE SWAP Receive semiannually a variable rate based on the weekly Bond Market Association Municipal Swap Index and pay semiannually a fixed rate equal to 4.008% with Morgan Stanley Capital $10,000,000 Services, Inc. October 2027 $58,516 ============ - ------ 39 California Long-Term Tax-Free Notes to Schedule of Investments Ambac = Ambac Assurance Corporation ARC = Auction Rate Certificate COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective August 31, 2007. XLCA = XL Capital Ltd. YCC = Yield Curve Certificate (1) Security, or a portion thereof, has been segregated for when-issued securities, futures contracts and/or swap agreements. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (3) Security is a zero-coupon municipal bond. The rate indicated is the yield to maturity at purchase. Zero-coupon securities are issued at a substantial discount from their value at maturity. (4) When-issued security. (5) Inverse floaters have interest rates that move inversely to market interest rates. Inverse floaters typically have durations longer than long-term bonds, which may cause their value to be more volatile than long-term bonds when interest rates change. Final maturity is indicated. (6) Category is less that 0.05% of total net assets. See Notes to Financial Statements. - ------ 40 SHAREHOLDER FEE EXAMPLES (UNAUDITED) Fund shareholders may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption/exchange fees; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in your fund and to compare these costs with the ongoing cost of investing in other mutual funds. The example is based on an investment of $1,000 made at the beginning of the period and held for the entire period from March 1, 2007 to August 31, 2007. ACTUAL EXPENSES The table provides information about actual account values and actual expenses for each class. You may use the information, together with the amount you invested, to estimate the expenses that you paid over the period. First, identify the share class you own. Then simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. 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), American Century may charge you a $12.50 semiannual account maintenance fee if the value of those shares is less than $10,000. We will redeem shares automatically in one of your accounts to pay the $12.50 fee. 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. PERSONAL ACCOUNTS include individual accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell Education Savings Accounts and 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. We will not charge the fee as long as you choose to manage your accounts exclusively online. If you are subject to the Account Maintenance Fee, your account value could be reduced by the fee amount. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table also provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio of each class of your fund and an assumed rate of return of 5% per year before expenses, which is not the actual return of a fund's share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption/exchange fees. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - ------ 41 Expenses Paid Beginning During Account Ending Period(1) Annualized Value Account Value 3/1/07 - Expense 3/1/07 8/31/07 8/31/07 Ratio(1) California Tax-Free Money Market Actual (after waiver)(2) $1,000 $1,016.20 $2.49 0.49% Actual (before waiver) $1,000 $1,016.20(3) $2.59 0.51% Hypothetical (after waiver)(2) $1,000 $1,022.74 $2.50 0.49% Hypothetical (before waiver) $1,000 $1,022.63 $2.60 0.51% California Limited-Term Tax-Free Actual $1,000 $1,008.30 $2.53 0.50% Hypothetical $1,000 $1,022.68 $2.55 0.50% California Tax-Free Bond Actual $1,000 $997.00 $2.47 0.49% Hypothetical $1,000 $1,022.74 $2.50 0.49% California Long-Term Tax-Free Actual $1,000 $981.80 $2.45 0.49% Hypothetical $1,000 $1,022.74 $2.50 0.49% (1) Expenses are equal to the fund's annualized expense ratio listed in the table above, multiplied by the average account value over the period, multiplied by 184, the number of days in the most recent fiscal half-year, divided by 365, to reflect the one-half year period. (2) During the six months ended August 31, 2007, the investment advisor voluntarily waived a portion of the class's management fee. (3) Ending account value assumes the return earned after waiver. The return would have been lower had fees not been waived and would have resulted in a lower ending account value. - ------ 42 STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2007 California California California California Tax-Free Limited-Term Tax-Free Long-Term Money Market Tax-Free Bond Tax-Free ASSETS Investment securities, at value (cost of $547,464,299, $123,843,985, $452,730,854 and $427,417,802, respectively) $547,464,299 $124,336,089 $459,404,415 $437,840,171 Cash 2,011,634 -- -- 554 Receivable for investments sold -- -- 3,298,190 1,042,756 Receivable for capital shares sold -- -- 1,244,113 -- Interest receivable 3,044,722 1,545,579 5,752,608 6,023,858 Unrealized appreciation on swap agreements -- -- -- 58,516 Prepaid portfolio insurance 37,849 -- -- -- ------------ ------------ ------------ ------------ 552,558,504 125,881,668 469,699,326 444,965,855 ------------ ------------ ------------ ------------ LIABILITIES Disbursements in excess of demand deposit cash -- 1,639,765 358,650 -- Payable for investments purchased -- -- 6,626,033 2,229,219 Payable for variation margin on futures contracts -- 24,645 83,799 79,689 Accrued management fees 211,756 -- 190,423 182,138 Dividends payable -- -- 194,398 416,511 ------------ ------------ ------------ ------------ 211,756 1,664,410 7,453,303 2,907,557 ------------ ------------ ------------ ------------ NET ASSETS $552,346,748 $124,217,258 $462,246,023 $442,058,298 ============ ============ ============ ============ CAPITAL SHARES Outstanding (unlimited number of shares authorized) 552,222,523 12,057,363 42,339,324 40,247,320 ============ ============ ============ ============ NET ASSET VALUE PER SHARE $1.00 $10.30 $10.92 $10.98 ============ ============ ============ ============ NET ASSETS CONSIST OF: Capital paid in $552,222,523 $125,570,410 $456,570,598 $431,806,599 Accumulated net investment loss -- -- -- (2,616) Accumulated undistributed net realized gain (loss) on investment transactions 124,225 (1,758,083) (709,614) 53,722 Net unrealized appreciation on investments -- 404,931 6,385,039 10,200,593 ------------ ------------ ------------ ------------ $552,346,748 $124,217,258 $462,246,023 $442,058,298 ============ ============ ============ ============ See Notes to Financial Statements. - ------ 43 STATEMENT OF OPERATIONS YEAR ENDED AUGUST 31, 2007 California California California California Tax-Free Limited-Term Tax-Free Long-Term Money Market Tax-Free Bond Tax-Free INVESTMENT INCOME (LOSS) INCOME: Interest $18,944,954 $6,065,480 $20,493,242 $22,277,517 ------------ ------------ ----------- ------------ EXPENSES: Management fees 2,569,128 702,519 2,185,454 2,174,114 Trustees' fees and expenses 23,394 7,606 23,460 20,107 Portfolio insurance 96,280 -- -- -- Other expenses 4,980 5,051 694 2,535 ------------ ------------ ----------- ------------ 2,693,782 715,176 2,209,608 2,196,756 ------------ ------------ ----------- ------------ Amount waived (95,201) -- -- -- ------------ ------------ ----------- ------------ 2,598,581 715,176 2,209,608 2,196,756 ------------ ------------ ----------- ------------ NET INVESTMENT INCOME (LOSS) 16,346,373 5,350,304 18,283,634 20,080,761 ------------ ------------ ----------- ------------ REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: Investment transactions 209,764 (225,731) (253,619) 422,325 Futures and swaps transactions -- 1,636 189,407 (361,921) ------------ ------------ ----------- ------------ 209,764 (224,095) (64,212) 60,404 ------------ ------------ ----------- ------------ CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: Investments -- (1,526,147) (9,442,745) (14,498,233) Futures and swaps -- (76,189) (295,297) 70,500 ------------ ------------ ----------- ------------ -- (1,602,336) (9,738,042) (14,427,733) ------------ ------------ ----------- ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) 209,764 (1,826,431) (9,802,254) (14,367,329) ------------ ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $16,556,137 $3,523,873 $ 8,481,380 $ 5,713,432 ============ ============ =========== ============ See Notes to Financial Statements. - ------ 44 STATEMENT OF CHANGES IN NET ASSETS YEARS ENDED AUGUST 31, 2007 AND AUGUST 31, 2006 California Tax-Free California Limited-Term Money Market Tax-Free Increase (Decrease) in Net Assets 2007 2006 2007 2006 OPERATIONS Net investment income (loss) $ 16,346,373 $ 14,604,752 $ 5,350,304 $ 5,785,200 Net realized gain (loss) 209,764 13,452 (224,095) 179,281 Change in net unrealized appreciation (depreciation) -- -- (1,602,336) (1,874,489) ------------- ------------- ------------ ------------ Net increase (decrease) in net assets resulting from operations 16,556,137 14,618,204 3,523,873 4,089,992 ------------- ------------- ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income (16,346,373) (14,639,943) (5,388,572) (5,785,200) ------------- ------------- ------------ ------------ CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 323,506,954 347,736,527 23,279,523 25,403,653 Proceeds from reinvestment of distributions 15,446,784 13,208,510 4,008,937 4,598,750 Payments for shares redeemed (316,829,559) (448,266,306) (54,614,210) (56,315,956) ------------- ------------- ------------ ------------ Net increase (decrease) in net assets from capital share transactions 22,124,179 (87,321,269) (27,325,750) (26,313,553) ------------- ------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS 22,333,943 (87,343,008) (29,190,449) (28,008,761) NET ASSETS Beginning of period 530,012,805 617,355,813 153,407,707 181,416,468 ------------- ------------- ------------ ------------ End of period $ 552,346,748 $ 530,012,805 $124,217,258 $153,407,707 ============= ============= ============ ============ Undistributed net investment income -- -- -- $38,268 ============= ============= ============ ============ TRANSACTIONS IN SHARES OF THE FUNDS Sold 323,506,954 347,736,527 2,238,841 2,435,151 Issued in reinvestment of distributions 15,446,784 13,208,510 385,453 441,405 Redeemed (316,829,559) (448,266,306) (5,265,007) (5,401,175) ------------- ------------- ------------ ------------ Net increase (decrease) in shares of the funds 22,124,179 (87,321,269) (2,640,713) (2,524,619) ============= ============= ============ ============ See Notes to Financial Statements. - ------ 45 YEARS ENDED AUGUST 31, 2007 AND AUGUST 31, 2006 California Long-Term California Tax-Free Bond Tax-Free Increase (Decrease) in Net Assets 2007 2006 2007 2006 OPERATIONS Net investment income (loss) $ 18,283,634 $ 17,836,106 $ 20,080,761 $ 20,270,416 Net realized gain (loss) (64,212) (575,500) 60,404 1,891,724 Change in net unrealized appreciation (depreciation) (9,738,042) (6,240,800) (14,427,733) (9,741,417) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations 8,481,380 11,019,806 5,713,432 12,420,723 ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income (18,283,634) (17,836,106) (20,079,843) (20,295,458) From net realized gains -- (94,332) (737,478) (9,266,373) ------------ ------------ ------------ ------------ Decrease in net assets from distributions (18,283,634) (17,930,438) (20,817,321) (29,561,831) ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 98,352,774 80,506,950 49,324,886 31,375,500 Proceeds from reinvestment of distributions 14,416,916 13,772,910 14,387,292 20,711,757 Payments for shares redeemed (72,773,764) (91,203,590) (52,549,731) (64,900,152) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from capital share transactions 39,995,926 3,076,270 11,162,447 (12,812,895) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS 30,193,672 (3,834,362) (3,941,442) (29,954,003) NET ASSETS Beginning of period 432,052,351 435,886,713 445,999,740 475,953,743 ------------ ------------ ------------ ------------ End of period $462,246,023 $432,052,351 $442,058,298 $445,999,740 ============ ============ ============ ============ Accumulated net investment loss -- -- $(2,616) $(918) ============ ============ ============ ============ TRANSACTIONS IN SHARES OF THE FUNDS Sold 8,865,796 7,245,872 4,361,210 2,752,233 Issued in reinvestment of distributions 1,299,357 1,239,909 1,272,217 1,826,737 Redeemed (6,573,731) (8,221,693) (4,653,351) (5,710,155) ------------ ------------ ------------ ------------ Net increase (decrease) in shares of the funds 3,591,422 264,088 980,076 (1,131,185) ============ ============ ============ ============ See Notes to Financial Statements. - ------ 46 NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2007 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. California Tax-Free Money Market Fund (Tax-Free Money Market), California Limited-Term Tax-Free Fund (Limited-Term), California Tax-Free Bond Fund (Tax-Free Bond) and California Long-Term Tax-Free Fund (Long-Term) (collectively, the funds) are four funds in a series issued by the trust. Tax-Free Money Market is diversified under Rule 2a-7 of the 1940 Act. Limited-Term, Tax-Free Bond and Long-Term are diversified under the 1940 Act. The funds' investment objectives are to seek safety of principal and high current income that is exempt from federal and California income taxes. Tax-Free Money Market, Limited-Term and Long-Term invest primarily in municipal obligations with maturities based on the maturity range described in that fund's name. Tax-Free Bond invests primarily in municipal obligations of all maturity ranges. The following is a summary of the funds' significant accounting policies. SECURITY VALUATIONS -- Securities of Tax-Free Money Market are valued at amortized cost, which approximates current market value. Securities of Limited-Term, Tax-Free Bond and Long-Term are valued at current market value as provided by a commercial pricing service or at the mean of the most recent bid and asked prices. Debt securities maturing within 60 days may be valued at cost, plus or minus any amortized discount or premium. If an event occurs after the value of a security was established but before the net asset value per share was determined that was likely to materially change the net asset value, that security would be valued as determined in accordance with procedures adopted by the Board of Trustees. If the funds determine that the market price of 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 as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such determination would materially impact a fund's net asset value. Certain other circumstances may cause the funds to use alternative procedures to value a security such as: a security has been declared in default; trading in a security has been halted during the trading day; or there is a foreign market holiday and no trading will commence. SECURITY TRANSACTIONS -- For financial reporting, security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. WHEN-ISSUED AND FORWARD COMMITMENTS -- The funds may engage in securities transactions on a when-issued or forward commitment basis. Under these arrangements, the securities' prices and yields are fixed on the date of the commitment, but payment and delivery are scheduled for a future date. During this period, securities are subject to market fluctuations. The funds will segregate cash, cash equivalents or other appropriate liquid securities on their records in amounts sufficient to meet the purchase price. FUTURES CONTRACTS -- Limited-Term, Tax-Free Bond and Long-Term may enter into futures contracts in order to manage the funds' exposure to changes in market conditions. One of the risks of entering into futures contracts is the possibility that the change in value of the contract may not correlate with the changes in value of the underlying securities. Upon entering into a futures contract, Limited-Term, Tax-Free Bond and Long-Term are required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by Limited-Term, Tax-Free Bond and Long-Term. The variation margin is equal to the daily change in the contract value and is recorded as unrealized gains and losses. Limited-Term, Tax-Free Bond and Long-Term recognize a realized gain or loss when the contract is closed or expires. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on futures and swaps transactions and unrealized appreciation (depreciation) on futures and swaps, respectively. SWAP AGREEMENTS -- Limited-Term, Tax-Free Bond and Long-Term may enter into swap agreements in order to 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 funds anticipate purchasing at a later date; or gain exposure to certain markets in the most economical way possible. A basic swap agreement is a contract in which two parties agree to exchange - ------ 47 the returns earned or realized on predetermined investments or instruments. Limited-Term, Tax-Free Bond and Long-Term will segregate cash, cash equivalents or other appropriate liquid securities on their records in amounts sufficient to meet requirements. Unrealized gains are reported as an asset and unrealized losses are reported as a liability on the Statement of Assets and Liabilities. Swap agreements are valued daily and changes in value, including the periodic amounts of interest to be paid or received on swaps, are recorded as unrealized appreciation (depreciation) on futures and swaps. Realized gain or loss is recorded upon receipt or payment of a periodic settlement or termination of swap agreements. The risks of entering into swap agreements include the possible lack of liquidity, failure of the counterparty to meet its obligations, and that there may be unfavorable changes in the underlying investments and instruments. INCOME TAX STATUS -- It is each fund's policy to distribute substantially all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under provisions of the Internal Revenue Code. The funds are no longer subject to examination by tax authorities for years prior to 2003. At this time, management has not identified any uncertain tax positions that would materially impact the financial statements. Accordingly, no provision has been made for federal or state income taxes. Interest and penalties associated with any federal or state income tax obligations, if any, are recorded as interest expense. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are declared daily and paid monthly. Distributions from net realized gains, if any, are generally declared and paid annually. Tax-Free Money Market does not expect to realize any long-term capital gains, and accordingly, does not expect to pay any capital gains distributions. INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business, the funds enter into contracts that provide general indemnifications. The funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. The risk of material loss from such claims is considered by management to be remote. USE OF ESTIMATES -- The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from these estimates. 2. FEES AND TRANSACTIONS WITH RELATED PARTIES MANAGEMENT FEES -- The trust has entered into a Management Agreement with American Century Investment Management, Inc., (ACIM) (the investment advisor), under which ACIM provides the funds with investment advisory and management services in exchange for a single, unified management fee (the fee). The Agreement provides that all expenses of the funds, except brokerage commissions, taxes, portfolio insurance, interest, fees and expenses of those trustees who are not considered "interested persons" as defined in the 1940 Act (including counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and accrued daily based on the daily net assets of each specific class of shares of each fund and paid monthly in arrears. The fee consists of (1) an Investment Category Fee based on the daily net assets of the funds and certain other accounts managed by the investment advisor that are in the same broad investment category as each fund and (2) a Complex Fee based on the assets of all the funds in the American Century family of funds. The rates for the Investment Category Fee range from 0.1570% to 0.2700% for Tax-Free Money Market and from 0.1625% to 0.2800% for Limited-Term, Tax-Free Bond, and Long-Term. The rates for the Complex Fee range from 0.2500% to 0.3100%. From August 1, 2006 to July 31, 2007, ACIM voluntarily agreed to waive 0.016% of its management fee for Tax-Free Money Market. Effective August 1, 2007, ACIM voluntarily agreed to waive 0.04% of its management fee for Tax-Free Money Market. The effective annual management fee for Tax-Free Money Market for the year ended August 31, 2007 was 0.49% before waiver and 0.47% after waiver. The effective annual management fee was 0.48% for Limited-Term, Tax-Free Bond and Long-Term for the year ended August 31, 2007. MONEY MARKET INSURANCE -- Tax-Free Money Market, along with other money market funds managed by ACIM, has entered into an insurance agreement with Ambac Assurance Corporation (Ambac). Ambac provides limited coverage for certain loss events including issuer defaults as to payment of principal or interest and insolvency of a credit enhancement provider. Tax-Free Money Market pays annual premiums to Ambac, which are amortized daily over one year. For the year ended August 31, 2007, the annualized ratio of money market insurance expense to average net assets was 0.02%. - ------ 48 RELATED PARTIES -- Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the distributor of the trust, American Century Investment Services, Inc., and the trust's transfer agent, American Century Services, LLC. Limited-Term, Tax-Free Bond and Long-Term have a bank line of credit agreement with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the funds and a wholly owned subsidiary of JPMorgan Chase & Co. (JPM). JPM is an equity investor in ACC. 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, for the year ended August 31, 2007, were as follows: Limited-Term Tax-Free Bond Long-Term Cost of purchases $34,281,361 $163,909,378 $114,987,645 Proceeds from sales $58,948,178 $161,852,090 $77,541,389 All investment transactions for Tax-Free Money Market were considered short-term during the year ended August 31, 2007. 4. BANK LINE OF CREDIT Limited-Term, Tax-Free Bond and Long-Term, along with certain other funds managed by ACIM or American Century Global Investment Management, Inc., have a $500,000,000 unsecured bank line of credit agreement with JPMCB. Limited-Term, Tax-Free Bond and Long-Term may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.40%. Limited-Term, Tax-Free Bond and Long-Term did not borrow from the line during the year ended August 31, 2007. 5. RISK FACTORS The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. Income may be subject to state and local taxes and, if applicable, the alternative minimum tax. 6. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended August 31, 2007 and August 31, 2006 were as follows: Tax-Free Money Market Limited-Term 2007 2006 2007 2006 DISTRIBUTIONS PAID FROM Exempt income $16,346,373 $14,639,943 $5,388,572 $5,785,200 Long-term capital gains -- -- -- -- Tax-Free Bond Long-Term 2007 2006 2007 2006 DISTRIBUTIONS PAID FROM Exempt income $18,281,473 $17,836,106 $20,076,962 $20,596,706 Taxable ordinary income $2,161 -- $5,497 -- Long-term capital gains -- $94,332 $734,862 $8,965,125 The book-basis character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements. - ------ 49 As of August 31, 2007, the components of distributable earnings on a tax-basis and the federal tax cost of investments were as follows: Tax-Free Money Market Limited-Term Tax-Free Bond Long-Term Federal tax cost of investments $547,464,299 $123,843,985 $452,730,854 $427,417,802 ============ ============ ============ ============ Gross tax appreciation of investments -- $1,093,877 $9,198,561 $17,340,166 Gross tax depreciation of investments -- (601,773) (2,525,000) (6,917,797) ------------ ------------ ------------ ------------ Net tax appreciation (depreciation) of investments -- $492,104 $6,673,561 $10,422,369 ============ ============ ============ ============ Net tax appreciation (depreciation) on derivatives -- -- (25) 58,517 ------------ ------------ ------------ ------------ Net tax appreciation (depreciation) -- $492,104 $6,673,536 $10,480,886 ============ ============ ============ ============ Undistributed taxable ordinary income -- -- -- $(2,616) Accumulated long-term gains $124,225 -- -- -- Accumulated capital losses -- $(1,633,013) $(425,614) $(226,571) Capital loss deferrals -- $(212,243) $(572,497) -- The cost of investments for federal income tax purposes was the same as the cost for financial statement purposes. The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the realization for tax purposes of unrealized gains (losses) for certain futures contracts. The accumulated capital losses listed above represent net capital loss carryovers that may be used to offset future realized capital gains for federal income tax purposes. The capital loss carryovers expire as follows: 2013 2014 2015 Limited-Term $(905,690) $(405,593) $(321,730) Tax-Free Bond -- -- $(425,614) Long-Term -- -- $(226,571) The capital loss deferrals represent net capital losses incurred in the ten-month period ended August 31, 2007. The funds have elected to treat such losses as having been incurred in the following fiscal year for federal income tax purposes. 7. SUBSEQUENT EVENTS On December 8, 2006, the Board of Trustees approved a plan of reorganization (the reorganization) pursuant to which Tax-Free Bond will acquire all of the assets of Limited-Term in exchange for shares of equal value of Tax-Free Bond and the assumption by Tax-Free Bond of certain of Limited-Term's ordinary course liabilities. The financial statements and performance history of Tax-Free Bond will be carried over in the post-reorganization. The reorganization was effective after the close of business on August 31, 2007. New shares in connection with the reorganization were issued by Tax-Free Bond on September 4, 2007. The acquisition was accomplished by a tax-free exchange of 11,372,787 shares of Tax-Free Bond for 12,057,363 outstanding shares of Limited-Term. The net assets of Limited-Term and Tax-Free Bond immediately before the acquisition were $124,217,258 and $462,246,023, respectively. Limited-Term's unrealized appreciation of $404,931 was combined with that of Tax-Free Bond. Immediately after the acquisition, the combined net assets were $586,463,281. - ------ 50 8. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. Management has concluded that the adoption of FIN 48 will not materially impact the financial statements. The FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157), in September 2006, which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands the required financial statement disclosures about fair value measurements. Management is currently evaluating the impact that adopting FAS 157 will have on the financial statement disclosures. 9. OTHER TAX INFORMATION (UNAUDITED) The following information is provided pursuant to provisions of the Internal Revenue Code. The funds hereby designate exempt interest and capital gain distributions for the fiscal year ended August 31, 2007, as follows: Tax-Free Money Tax-Free Market Limited-Term Bond Long-Term Exempt interest distributions $16,484,741 $5,519,717 $18,422,631 $20,199,778 Long-term capital gains -- -- -- $734,862 - ------ 51 FINANCIAL HIGHLIGHTS California Tax-Free Money Market For a Share Outstanding Throughout the Years Ended August 31 2007 2006 2005 2004 2003 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 (Loss) 0.03 0.03 0.02 0.01 0.01 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.03) (0.03) (0.02) (0.01) (0.01) -------- -------- -------- -------- -------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 ======== ======== ======== ======== ======== TOTAL RETURN(1) 3.16% 2.70% 1.54% 0.58% 0.73% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49%(2) 0.52%(2) 0.52% 0.52% 0.51% Ratio of Operating Expenses to Average Net Assets (Before Expense Waiver) 0.51% 0.52% 0.52% 0.52% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 3.12%(2) 2.64%(2) 1.53% 0.57% 0.76% Ratio of Net Investment Income (Loss) to Average Net Assets (Before Expense Waiver) 3.10% 2.64% 1.53% 0.57% 0.76% Net Assets, End of Period (in thousands) $552,347 $530,013 $617,356 $600,882 $621,747 (1) Total return assumes reinvestment of net investment income and capital gains distributions, if any. (2) Effective August 1, 2006, the investment advisor voluntarily agreed to waive a portion of its management fee. See Notes to Financial Statements. - ------ 52 California Limited-Term Tax-Free For a Share Outstanding Throughout the Years Ended August 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.44 $10.53 $10.71 $10.70 $10.82 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.39 0.37 0.32 0.28 0.30 Net Realized and Unrealized Gain (Loss) (0.14) (0.09) (0.18) 0.01 (0.10) -------- -------- -------- -------- -------- Total From Investment Operations 0.25 0.28 0.14 0.29 0.20 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.39) (0.37) (0.32) (0.28) (0.30) From Net Realized Gains -- -- -- --(1) (0.02) -------- -------- -------- -------- -------- Total Distributions (0.39) (0.37) (0.32) (0.28) (0.32) -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.30 $10.44 $10.53 $10.71 $10.70 ======== ======== ======== ======== ======== TOTAL RETURN(2) 2.40% 2.68% 1.33% 2.75% 1.87% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.49% 0.50% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 3.69% 3.50% 3.01% 2.59% 2.78% Portfolio Turnover Rate 27% 18% 78% 55% 34% Net Assets, End of Period (in thousands) $124,217 $153,408 $181,416 $219,949 $228,030 (1) Per-share amount was less than $0.005. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. See Notes to Financial Statements. - ------ 53 California Tax-Free Bond For a Share Outstanding Throughout the Years Ended August 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $11.15 $11.33 $11.41 $11.28 $11.55 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.45 0.46 0.46 0.44 0.45 Net Realized and Unrealized Gain (Loss) (0.23) (0.18) (0.08) 0.13 (0.23) -------- -------- -------- -------- -------- Total From Investment Operations 0.22 0.28 0.38 0.57 0.22 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.45) (0.46) (0.46) (0.44) (0.45) From Net Realized Gains -- --(1) -- -- (0.04) -------- -------- -------- -------- -------- Total Distributions (0.45) (0.46) (0.46) (0.44) (0.49) -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.92 $11.15 $11.33 $11.41 $11.28 ======== ======== ======== ======== ======== TOTAL RETURN(2) 1.98% 2.58% 3.36% 5.13% 1.91% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.49% 0.50% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 4.06% 4.13% 4.02% 3.87% 3.89% Portfolio Turnover Rate 41% 34% 34% 20% 25% Net Assets, End of Period (in thousands) $462,246 $432,052 $435,887 $418,655 $451,131 (1) Per-share amount was less than $0.005. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. See Notes to Financial Statements. - ------ 54 California Long-Term Tax-Free For a Share Outstanding Throughout the Years Ended August 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $11.36 $11.78 $11.69 $11.43 $11.75 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.51 0.51 0.52 0.51 0.53 Net Realized and Unrealized Gain (Loss) (0.36) (0.19) 0.09 0.26 (0.32) -------- -------- -------- -------- -------- Total From Investment Operations 0.15 0.32 0.61 0.77 0.21 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.51) (0.51) (0.52) (0.51) (0.53) From Net Realized Gains (0.02) (0.23) -- --(1) -- -------- -------- -------- -------- -------- Total Distributions (0.53) (0.74) (0.52) (0.51) (0.53) -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.98 $11.36 $11.78 $11.69 $11.43 ======== ======== ======== ======== ======== TOTAL RETURN(2) 1.24% 2.89% 5.38% 6.83% 1.81% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.49% 0.50% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 4.48% 4.46% 4.40% 4.39% 4.54% Portfolio Turnover Rate 18% 33% 36% 19% 23% Net Assets, End of Period (in thousands) $442,058 $446,000 $475,954 $468,891 $497,165 (1) Per-share amount was less than $0.005. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. See Notes to Financial Statements. - ------ 55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the California Tax-Free Money Market Fund, California Limited-Term Tax-Free Fund, California Tax-Free Bond Fund and California Long-Term Tax-Free Fund: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the California Tax-Free Money Market Fund, California Limited-Term Tax-Free Fund, California Tax-Free Bond Fund and California Long-Term Tax-Free Fund (four of the five funds in the American Century California Tax-Free and Municipal Funds, hereafter referred to as the "Funds") at August 31, 2007, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri October 15, 2007 - ------ 56 PROXY VOTING RESULTS A special meeting of shareholders was held on July 27, 2007, to vote on the following proposal. The proposal received the required number of votes of the American Century California Tax-Free and Municipal Funds and was adopted. A summary of voting results is listed below the proposal. PROPOSAL: To elect eight Trustees to the Board of Trustees of American Century California Tax-Free and Municipal Funds (the proposal was voted on by all shareholders of funds issued by American Century California Tax-Free and Municipal Funds): Jonathan S. Thomas For: 1,196,700,006 Withhold: 41,904,885 Abstain: 0 Broker Non-Vote: 0 John Freidenrich For: 1,197,510,256 Withhold: 41,094,636 Abstain: 0 Broker Non-Vote: 0 Ronald J. Gilson For: 1,198,244,848 Withhold: 40,360,044 Abstain: 0 Broker Non-Vote: 0 Kathryn A. Hall For: 1,198,026,073 Withhold: 40,578,819 Abstain: 0 Broker Non-Vote: 0 Peter F. Pervere For: 1,197,268,471 Withhold: 41,336,421 Abstain: 0 Broker Non-Vote: 0 Myron S. Scholes For: 1,196,432,024 Withhold: 42,172,868 Abstain: 0 Broker Non-Vote: 0 John B. Shoven For: 1,197,907,207 Withhold: 40,697,685 Abstain: 0 Broker Non-Vote: 0 Jeanne D. Wohlers For: 1,197,917,523 Withhold: 40,687,369 Abstain: 0 Broker Non-Vote: 0 - ------ 57 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 trustees and/or officers of, or ownership interest in, 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 investment 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, trustees 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 14 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. INTERESTED TRUSTEE JONATHAN S. THOMAS 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUNDS: Trustee and President (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive Officer, ACC (March 2007 to present); Chief Administrative Officer, ACC (February 2006 to February 2007); Executive Vice President, ACC (November 2005 to February 2007). Also serves as: President, Chief Executive Officer and Director, ACS; Executive Vice President, ACIM and ACGIM; Director, ACIM, ACGIM, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 109 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None INDEPENDENT TRUSTEES JOHN FREIDENRICH 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUNDS: Trustee (since 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 2006) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 58 RONALD J. GILSON 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUNDS: Trustee (since 1995) and Chairman of the Board (since 2005) 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: 43 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 (since 2001) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer and Chief Investment Officer, Hall Capital Partners, LLC (April 2002 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None PETER F. PERVERE 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUNDS: Trustee (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Vice President and Chief Financial Officer, Commerce One, Inc. (software and services provider) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Intraware, Inc. MYRON S. SCHOLES 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1941 POSITION(S) HELD WITH FUNDS: Trustee (since 1980) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Platinum Grove Asset Management, L.P., and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1996 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Dimensional Fund Advisors (investment advisor, 1982 to present); Director, Chicago Mercantile Exchange (2000 to present) JOHN B. SHOVEN 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUNDS: Trustee (since 2002) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1973 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present) JEANNE D. WOHLERS 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUNDS: Trustee (since 1984) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 59 OFFICERS MARYANNE ROEPKE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUNDS: Chief Compliance Officer (since 2006) and Senior Vice President (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995 to August 2006); Treasurer and Chief Financial Officer, various American Century funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS CHARLES A. ETHERINGTON 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUNDS: General Counsel (since 2007) and Senior Vice President (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (November 2005 to present); General Counsel, ACC (March 2007 to present). Also serves as: General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; and Senior Vice President, ACIM, ACGIM and ACS ROBERT LEACH 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUNDS: Vice President, Treasurer and Chief Financial Officer (all since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); and Controller, various American Century funds (1997 to September 2006) C. JEAN WADE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUNDS: Controller (since 1996) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) JON ZINDEL 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUNDS: Tax Officer (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer and Chief Accounting Officer, ACC (March 2007 to present); Vice President, ACC (October 2001 to present); Vice President, certain ACC subsidiaries (October 2001 to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006). Also serves as: Chief Financial Officer, Chief Accounting Officer and Senior Vice President, ACIM, ACGIM, ACS and other ACC subsidiaries; and Chief Accounting Officer and Senior Vice President, ACIS The SAI has additional information about the funds' trustees and is available without charge, upon request, by calling 1-800-345-2021. - ------ 60 APPROVAL OF MANAGEMENT AGREEMENTS California Tax-Free Money Market, California Limited-Term Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free Under Section 15(c) of the Investment Company Act, contracts for investment advisory services are required to be reviewed, evaluated and approved by a majority of a fund's independent directors or trustees (the "Directors") each year. At American Century, this process is referred to as the "15(c) Process." As a part of this process, the board reviews fund performance, shareholder services, audit and compliance information, and a variety of other reports from the advisor concerning fund operations. In addition to this annual review, the board of directors oversees and evaluates on a continuous basis at its quarterly meetings the nature and quality of significant services performed by the advisor, fund performance, audit and compliance information, and a variety of other reports relating to fund operations. The board, or committees of the board, also holds special meetings as needed. Under a Securities and Exchange Commission rule, each fund is required to disclose in its annual or semiannual report, as appropriate, the material factors and conclusions that formed the basis for the board's approval or renewal of any advisory agreements within the fund's most recently completed fiscal half-year period. ANNUAL CONTRACT REVIEW PROCESS As part of the annual 15(c) Process undertaken during the most recent fiscal half-year period, the Directors reviewed extensive data and information compiled by the advisor and certain independent providers of evaluative data (the "15(c) Providers") concerning California Tax-Free Money Market, California Limited-Term Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free (the "funds") and the services provided to the funds under the management agreements. The information considered and the discussions held at the meetings included, but were not limited to: * the nature, extent and quality of investment management, shareholder services and other services provided to the funds under the management agreements; * reports on the advisor's activities relating to the wide range of programs and services the advisor provides to the funds and their shareholders on a routine and non-routine basis; * data comparing the cost of owning the funds to the cost of owning similar funds; * data comparing the funds' performance to appropriate benchmarks and/or a peer group of other mutual funds with similar investment objectives and strategies; * financial data showing the profitability of the funds to the advisor and the overall profitability of the advisor; and * data comparing services provided and charges to other investment management clients of the advisor. In keeping with its practice, the funds' board of directors held two regularly scheduled meetings to review and discuss the information provided by the advisor and to complete its negotiations with the advisor regarding the renewal of the management agreements, including the setting of the applicable advisory fee. The board also had the benefit of the advice of its independent counsel throughout the period. - ------ 61 FACTORS CONSIDERED The Directors considered all of the information provided by the advisor, the 15(c) Providers, and the board's independent counsel, and evaluated such information for each fund for which the board has responsibility. The Directors did not identify any single factor as being all-important or controlling, and each Director may have attributed different levels of importance to different factors. In deciding to renew the agreement under the terms ultimately determined by the board to be appropriate, the Directors' decision was based on the following factors. NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management agreements, the advisor is responsible for providing or arranging for all services necessary for the operation of the funds. The board noted that under the management agreements, the advisor provides or arranges at its own expense a wide variety of services including: * fund construction and design * portfolio security selection * initial capitalization/funding * securities trading * custody of fund assets * daily valuation of the funds' portfolio * shareholder servicing and transfer agency, including shareholder confirmations, recordkeeping and communications * legal services * regulatory and portfolio compliance * financial reporting * marketing and distribution The Directors noted that many of these services have expanded over time both in terms of quantity and complexity in response to shareholder demands, competition in the industry and the changing regulatory environment. In performing their evaluation, the Directors considered information received in connection with the annual review, as well as information provided on an ongoing basis at their regularly scheduled board and committee meetings. INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services provided is quite complex and allows fund shareholders access to professional money management, instant diversification of their investments within an asset class, the opportunity to easily diversify among asset classes, and liquidity. In evaluating investment performance, the board expects the advisor to manage the funds in accordance with its investment objectives and approved strategies. In providing these services, the advisor utilizes teams of investment professionals (portfolio managers, analysts, research assistants, and securities traders) who require extensive information technology, research, training, compliance and other systems to conduct their business. - ------ 62 At each quarterly meeting the Directors review investment performance information for the funds, together with comparative information for appropriate benchmarks and peer groups of funds managed similarly to the funds. The Directors also review detailed performance information during the 15(c) Process. If performance concerns are identified, the Directors discuss with the advisor the reasons for such results (e.g., market conditions, security selection) and any efforts being undertaken to improve performance. Performance information presented to the Directors showed that California Tax-Free Money Market's performance for both the one- and three-year periods was above the median for its peer group. California Limited-Term Tax-Free and California Tax-Free Bond's performance was above the median of their peer groups for both the one- and three-year periods. California Long-Term Tax-Free's performance was above the median of its peer group for the one-year period and below for the three-year period. SHAREHOLDER AND OTHER SERVICES. The advisor provides the funds with a comprehensive package of transfer agency, shareholder, and other services. The Directors review reports and evaluations of such services at their regular quarterly meetings, including the annual meeting concerning contract review, and reports to the board. These reports include, but are not limited to, information regarding the operational efficiency and accuracy of the shareholder and transfer agency services provided, staffing levels, shareholder satisfaction (as measured by external as well as internal sources), technology support, new products and services offered to fund shareholders, securities trading activities, portfolio valuation services, auditing services, and legal and operational compliance activities. Certain aspects of shareholder and transfer agency service level efficiency and the quality of securities trading activities are measured by independent third party providers and are presented in comparison to other fund groups not managed by the advisor. COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor provides detailed information concerning its cost of providing various services to the funds, its profitability in managing the funds, its overall profitability, and its financial condition. The Directors have reviewed with the advisor the methodology used to prepare this financial information. This financial information regarding the advisor is considered in order to evaluate the advisor's financial condition, its ability to continue to provide services under the management agreements, and the reasonableness of the current management fee. ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment to providing quality services to shareholders and to conducting its business ethically. They noted that the advisor's practices generally meet or exceed industry best practices. ECONOMIES OF SCALE. The Directors review reports provided by the advisor on economies of scale for the complex as a whole and the year-over-year changes in revenue, costs, and profitability. The Directors concluded that economies of scale are difficult to measure and predict with precision, especially on a fund-by-fund basis. This analysis is also complicated by the additional services and content provided by the advisor and its reinvestment in its ability to provide and expand those services. Accordingly, the Directors also seek to evaluate economies of scale by reviewing other information, such as year-over-year profitability of the advisor generally, the profitability of its management of the funds specifically, the expenses incurred by the advisor in providing various functions to the funds, and the breakpoint fees of competitive funds not managed by the advisor. The Directors believe the advisor is appropriately sharing economies of scale through its competitive fee structure, fee breakpoints as the fund - ------ 63 complex and the funds increase in size, and through reinvestment in its business to provide shareholders additional content and services. In particular, separate breakpoint schedules based on the size of the entire fund complex and on the size of the funds reflect the complexity of assessing economies of scale. COMPARISON TO OTHER FUNDS' FEES. The funds pay the advisor a single, all-inclusive (or unified) management fee for providing all services necessary for the management and operation of the funds, other than brokerage expenses, taxes, interest, extraordinary expenses, and the fees and expenses of the funds' independent directors (including their independent legal counsel). Under the unified fee structure, the advisor is responsible for providing all investment advisory, custody, audit, administrative, compliance, recordkeeping, marketing and shareholder services, or arranging and supervising third parties to provide such services. By contrast, most other funds are charged a variety of fees, including an investment advisory fee, a transfer agency fee, an administrative fee, distribution charges and other expenses. Other than their investment advisory fees and Rule 12b-1 distribution fees, all other components of the total fees charged by these other funds may be increased without shareholder approval. The board believes the unified fee structure is a benefit to fund shareholders because it clearly discloses to shareholders the cost of owning fund shares, and, since the unified fee cannot be increased without a vote of fund shareholders, it shifts to the advisor the risk of increased costs of operating the funds and provides a direct incentive to minimize administrative inefficiencies. Part of the Directors' analysis of fee levels involves reviewing certain evaluative data compiled by an independent provider and comparing the funds' unified fee to the total expense ratio of other funds in the funds' peer group. The unified fee charged to shareholders of California Tax-Free Money Market was below the median of the total expense ratios of its peer group. The unified fee charged to shareholders of California Limited-Term Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free was in the lowest quartile of the total expense ratios of their peer groups. COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The Directors also requested and received information from the advisor concerning the nature of the services, fees, and profitability of its advisory services to advisory clients other than the funds. They observed that these varying types of client accounts require different services and involve different regulatory and entrepreneurial risks than the management of the funds. The Directors analyzed this information and concluded that the fees charged and services provided to the funds were reasonable by comparison. COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information from the advisor concerning collateral benefits it receives as a result of its relationship with the funds. They concluded that the advisor's primary business is managing mutual funds and it generally does not use fund or shareholder information to generate profits in other lines of business, and therefore does not derive any significant collateral benefits from them. The Directors noted that the advisor receives proprietary research from broker-dealers that execute fund portfolio transactions and concluded that this research is likely to benefit fund shareholders. The Directors also determined that the advisor is able to provide investment management services to certain clients other than the funds, at least in part, due to its existing infrastructure built to serve the fund complex. The Directors concluded, however, that the assets of those other clients are not material to the analysis and, in any event, are included with the assets of the funds to determine breakpoints in the funds' fee schedule, provided they are managed using the same investment team and strategy. - ------ 64 CONCLUSIONS OF THE DIRECTORS As a result of this process, the Directors, in the absence of particular circumstances and assisted by the advice of legal counsel that is independent of the advisor, taking into account all of the factors discussed above and the information provided by the advisor concluded that the investment management agreements between each of California Limited-Term Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free and the advisor are fair and reasonable in light of the services provided and should be renewed. The Directors negotiated a one-year waiver by the advisor of a portion of the management fee of California Tax-Free Money Market. These changes were proposed by the Directors based on their review of the fund's percentile rank in its peer group universe and the fact that the Directors seek as a general rule to have total expense ratios of fixed income and money market funds in the lowest 25th percentile of the fees of comparable funds. The advisor accepted the principle of the fee waiver based on the fact that the lower fee will result in increased competitiveness of the fund within its peer group universe. The fee waiver, effective August 1, 2007, will result in a lowering of the management fee of the fund by 0.04% below the current management fee. Based on these negotiations, the Directors concluded that the investment management agreement between the fund and the advisor is fair and reasonable in light of the services provided and should be renewed. - ------ 65 ADDITIONAL INFORMATION PROXY VOTING GUIDELINES American Century Investment Management, Inc., the funds' investment advisor, is responsible for exercising the voting rights associated with the securities purchased and/or held by the funds. A description of the policies and procedures the advisor uses in fulfilling this responsibility is available without charge, upon request, by calling 1-800-345-2021. It is also available on American Century's website at americancentury.com and on the Securities and Exchange Commission's website at sec.gov. Information regarding how the investment advisor voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the "About Us" page at americancentury.com. It is also available at sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The funds' Forms N-Q are available on the SEC's website at sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The funds also make their complete schedule of portfolio holdings for the most recent quarter of their fiscal year available on their website at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 66 INDEX DEFINITIONS The following indices are used to illustrate investment market, sector, or style performance or to serve as fund performance comparisons. They are not investment products available for purchase. The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of those securities included in the Lehman Brothers Municipal Bond Index that have maturities between two and four years. The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of investment-grade U.S. municipal securities, with maturities of four to six years, that are general obligations of a state or local government. The LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of those securities included in the Lehman Brothers Municipal Bond Index that have maturities greater than 22 years. The LEHMAN BROTHERS MUNICIPAL BOND INDEX is a market value-weighted index designed for the long-term tax-exempt bond market. The LEHMAN BROTHERS NON-INVESTMENT-GRADE MUNICIPAL BOND INDEX is composed of non-investment grade U.S. municipal securities with a remaining maturity of one year or more. The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable, registered with the Securities and Exchange Commission, and U.S. dollar- denominated. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included in the Lehman Brothers U.S. Aggregate Index that are public obligations of the U.S. Treasury with a remaining maturity of one year or more. - ------ 67 NOTES - ------ 68 [back cover] CONTACT US AMERICANCENTURY.COM AUTOMATED INFORMATION LINE: 1-800-345-8765 INVESTOR SERVICES REPRESENTATIVE: 1-800-345-2021 or 816-531-5575 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS: 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL PROFESSIONALS, INSURANCE COMPANIES: 1-800-345-6488 TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 or 816-444-3485 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT ADVISOR: American Century Investment Management, Inc. Kansas City, Missouri This report and the statements it contains are submitted for the general information of our shareholders. The report is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. American Century Investment Services, Inc., Distributor ©2007 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. 0710 SH-ANN-56706N
[front cover] AMERICAN CENTURY INVESTMENTS Annual Report August 31, 2007 [photo of autumn] California High-Yield Municipal Fund [american century investments logo and text logo] OUR MESSAGE TO YOU We have the privilege of providing you with the annual report for the American Century® California High-Yield Municipal Fund for the 12 months ended August 31, 2007, to help you monitor your investment. 2007 has been an eventful year for the financial markets and for us. While the markets experienced subprime-related turbulence, we've been working to secure a smooth executive leadership transition. In our semiannual report, we announced the promotion of former international equity chief investment officer (CIO) Enrique Chang to overall CIO, effective January 1, 2007. One of Enrique's immediate challenges was to hire a new international equity CIO, which he accomplished in May when Mark On joined us from AXA Rosenberg. Enrique also hired Steve Lurito from MUUS Asset Management LLC in July to fill our vacant U.S. growth equity CIO position. We also announced the promotion of Jonathan Thomas to chief executive officer, effective March 1. In June, Jonathan hired Barry Fink, who came to us from Morgan Stanley, as chief operating officer. This completed our leadership transition, and helped make it possible for my son, Jim Stowers III, to step down from the American Century Companies, Inc. (ACC) board of directors at the end of July to focus on his new business ventures. I remain co-chair of the ACC board with Richard Brown, who has been on the board since 1998 and also co-chairs the Stowers Institute for Medical Research board. Jim's recent departure, after he relinquished his executive leadership and investment management responsibilities in early 2005, reflects his comfort with the firm's direction and new leadership. As with Jim before them, we've been energized by the skills and experience brought to the leadership team by Jonathan, Enrique, Barry, Mark, and Steve. They've already had a positive impact on the development and management of the products and services we take pride in delivering to you. [photo of James E. Stowers, Jr.] /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AND CO-CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. TABLE OF CONTENTS Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . 2 U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . . . . . . 2 CALIFORNIA HIGH-YIELD MUNICIPAL Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . 5 Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . 5 Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Portfolio Composition by Credit Rating . . . . . . . . . . . . . . . 6 Top Five Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . 7 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . 9 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . 18 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . 19 Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . 20 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 21 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 25 Report of Independent Registered Public Accounting Firm . . . . . . . 29 OTHER INFORMATION Proxy Voting Results. . . . . . . . . . . . . . . . . . . . . . . . . 30 Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Approval of Management Agreement for California High-Yield Municipal. . . . . . . . . . . . . . . . . . . 34 Share Class Information . . . . . . . . . . . . . . . . . . . . . . . 38 Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 39 Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 40 The opinions expressed in the Market Perspective and the Portfolio Commentary reflect those of the portfolio management team as of the date of the report, and do not necessarily represent the opinions of American Century or any other person in the American Century organization. Any such opinions are subject to change at any time based upon market or other conditions and American Century disclaims any responsibility to update such opinions. These opinions may not be relied upon as investment advice and, because investment decisions made by American Century funds are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of any American Century fund. Security examples are used for representational purposes only and are not intended as recommendations to purchase or sell securities. Performance information for comparative indices and securities is provided to American Century by third party vendors. To the best of American Century's knowledge, such information is accurate at the time of printing. MARKET PERSPECTIVE By David MacEwen, Chief Investment Officer, Fixed Income MODEST GROWTH, INFLATION, BOND RETURNS U.S. bonds produced positive returns during the 12 months ended August 31, 2007. But the ride was bumpy, as waves from the bursting housing and subprime mortgage/credit bubbles spread to the broader economy and financial markets. In this environment, bond market volatility surged to the highest level in years as investors generally avoided riskier corporate and asset-backed securities in favor of the highest-quality government bonds. As for the U.S. economy, growth moderated during the period, with the economy expanding at an approximately 2% average annual rate over the last four complete calendar quarters. Inflation also slowed, as the trailing 12-month percentage change in core consumer prices (without volatile food and energy prices) finished August at 2.1%, down from 2.9% in September 2006. In that environment, the Federal Reserve held its short-term rate target steady at 5.25%. MUNICIPALS TRAILED TAXABLE BONDS It's typical for the broad investment-grade municipal market to underperform the investment-grade taxable market when Treasurys rally, as happened during the period. The effects of the housing and credit crunches and resulting flight to safe-haven Treasury bonds were felt most keenly in the municipal market in July and August, the worst two-month period for 10-year municipal bonds relative to Treasurys since September and October of 2001. The sharp increase in longer-term municipal yields in recent months meant the municipal yield curve steepened (the difference in yield between short- and long-term bonds increased) after holding a relatively flat shape for much of the period. High-yield municipals slightly outperformed investment-grade municipals for the 12 months as yield-seeking investors embraced high-yield bonds as a result of the relatively flat shape of the curve. But high-yield securities were hit hardest of all municipal investments in July and August as credit quality concerns affected all sectors of the market. That ended a string of gains that lasted more than a year and a half, according to Lehman Brothers. U.S. Fixed-Income Total Returns For the 12 months ended August 31, 2007 LEHMAN BROTHERS MUNICIPAL MARKET INDICES Municipal Bond 2.30% 3-Year Municipal Bond 3.57% 5-Year General Obligation (GO) 3.44% Long-Term Municipal Bond (22+ years) 0.36% Non-Investment-Grade (High-Yield) 2.71% TAXABLE MARKET RETURNS Lehman Brothers U.S. Aggregate Index 5.26% Lehman Brothers U.S. Treasury Index 6.02% 3-Month Treasury Bill 5.36% 10-Year Treasury Note 5.78% - ------ 2 PERFORMANCE California High-Yield Municipal Total Returns as of August 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date INVESTOR CLASS 1.22% 5.25% 5.78% 6.25% 12/30/86 LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX 0.36% 5.29% 5.95% 7.34%(1) -- LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 0.66% 3.62% 4.52% 5.93%(1) -- INVESTOR CLASS'S LIPPER RANKING as of 8/31/07(2) 42 of 116 2 of 97 1 of 71 4 of 23(1) -- as of 9/30/07(2) 61 of 117 3 of 97 1 of 71 4 of 23(1) -- A Class No sales charge* 0.97% -- -- 5.09% With sales charge* -3.55% -- -- 4.04% 1/31/03 B Class No sales charge* 0.22% -- -- 4.31% With sales charge* -3.78% -- -- 3.94% 1/31/03 C Class 0.22% -- -- 4.37% 1/31/03 *Sales charges include initial sales charges and contingent deferred sales charges (CDSCs), as applicable. A Class shares have a 4.50% maximum initial sales charge for fixed income funds and may be subject to a maximum CDSC of 1.00%. B Class shares redeemed within six years of purchase are subject to a CDSC that declines from 5.00% during the first year after purchase to 0.00% the sixth year after purchase. C Class shares redeemed within 12 months of purchase are subject to a maximum CDSC of 1.00%. Please see the Share Class Information page for more about the applicable sales charges for each share class. The SEC requires that mutual funds provide performance information net of maximum sales charges in all cases where charges could be applied. (1) Since 12/31/86, the date nearest the Investor Class's inception for which data are available. (2) Data provided by Lipper Inc. -- A Reuters Company. © 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance -- Performance data is total return, and is preliminary and subject to revision. Lipper Rankings -- Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting s ervices, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. In addition, the lower-rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Unless otherwise indicated, performance reflects Investor Class shares; performance for other share classes will vary due to differences in fee structure. For information about other share classes available, please consult the prospectus. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 3 California High-Yield Municipal Growth of $10,000 Over 10 Years $10,000 investment made August 31, 1997
One-Year Returns Over 10 Years Periods ended August 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Investor Class 9.35% 0.26% 6.70% 9.50% 6.07% 3.35% 8.48% 9.65% 3.80% 1.22% Lehman Brothers Long-Term Municipal Bond Index 10.51% -2.14% 7.34% 12.35% 5.62% 2.62% 9.24% 10.52% 4.08% 0.36% Data presented reflect past performance. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. To obtain performance data current to the most recent month end, please call 1-800-345-2021 or visit americancentury.com. As interest rates rise, bond values will decline. In addition, the lower-rated securities in which the fund invests are subject to greater credit risk, default risk and liquidity risk. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. Unless otherwise indicated, performance reflects Investor Class shares; performance for other share classes will vary due to differences in fee structure. For information about other share classes available, please consult the prospectus. Data assumes reinvestment of dividends and capital gains, and none of the charts reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns for the index are provided for comparison. The fund's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. - ------ 4 PORTFOLIO COMMENTARY California High-Yield Municipal Lead Portfolio Manager and Macro Strategy Team Representative: Steven Permut PERFORMANCE SUMMARY California High-Yield Municipal returned 1.22%* for the 12 months ended August 31, 2007. By comparison, the investment-grade Lehman Brothers Long-Term Municipal Bond Index returned 0.36%, while the average return of the 116 mostly investment-grade California municipal debt funds tracked by Lipper Inc. was 0.66%. Longer-term, the portfolio's average annual returns ranked in the top 5% of its Lipper group for the five- and 10-year periods ended August 31, 2007 (see page 3). The portfolio's absolute return and performance relative to the Lehman Index reflected the behavior of the municipal market as a whole, where high-yield bonds outperformed investment-grade securities (see the Market Perspective on page 2). Relative to the Lipper group, the portfolio also benefited from its shorter duration, credit upgrades to a number of our large, long-held positions, and some of our yield- curve and municipal-sector positioning decisions. RATE AND CURVE POSITIONING CONTRIBUTED We typically manage duration -- a measure of a bond fund's price sensitivity to interest rate changes --conservatively, keeping it in a narrow band around that of our peer group average. We maintained a neutral to short duration for much of the period, which helped as municipal yields rose overall, particularly in July and August. In addition, we maintained a yield-curve steepening bias using two-year and 10-year Treasury futures. The Treasury yield curve (a graphic representation of yields at different maturities) steepened during the period, benefiting performance. SECTOR ALLOCATIONS HELPED It helped performance relative to the Lipper group to have no exposure to airline-related bonds and a modest weight -- but solid performance -- in tobacco bonds. We had no exposure to airline bonds throughout the fiscal year - -- we don't like their greater volatility and exposure to risk factors that are not typical of most municipal investments. Looking at our tobacco exposure, we believe we had a slightly underweight position relative to our peers; however, the securities we did hold performed very well, as our California Golden State Tobacco bonds were prerefunded, meaning they were refinanced and saw their credit quality and value increase. Portfolio at a Glance As of As of 8/31/07 8/31/06 Weighted Average Maturity 15.7 yrs 18.3 yrs Average Duration (Modified) 7.9 yrs 5.6 yrs Yields as of August 31, 2007 30-DAY SEC YIELD Investor Class 4.41% A Class 3.97% B Class 3.40% C Class 3.40% INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) 31.98% Tax Bracket 6.48% 34.70% Tax Bracket 6.75% 39.23% Tax Bracket 7.26% 41.05% Tax Bracket 7.48% (1) The tax brackets indicated are for combined state and federal income tax. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. *All fund returns and yields referenced in this commentary are for Investor Class shares. - ------ 5 California High-Yield Municipal POSITIONING FOR SLOWER GROWTH As we've been saying for some time now, we've been broadening the portfolio's diversification and improving its credit quality because of our concern over slower economic growth. One way we did that was by increasing our holdings in BBB bonds and reducing our allocation to non-rated debt. We also increased our exposure to more defensive sectors, such as health care and higher education bonds, over the course of the year. At the same time, we reduced our position in land-secured bonds. Our land-secured bonds generally performed well, with many issues being prerefunded or receiving credit rating upgrades. However, they suffered during the broad sell-off in lower- and non-rated securities in July and August, one of the worst stretches for municipal bonds in many years. But it's worth mentioning that we think land-secured bonds remain attractive even with the potential of a continued housing market decline. That's because the portfolio's land-secured holdings are backed by special assessment taxes that don't fluctuate with property values, and tend to be seasoned deals that come in later stages of development. OUTLOOK "We think the housing downturn is far from over, and will continue to exert downward pressure on consumer spending and the economy," says portfolio manager Steven Permut. "While slower growth and inflation tend to be positive for bonds, the high-yield municipal market is likely to face credit concerns and suffer from its association with corporate high-yield bonds. We think that's unfortunate because the market and risks for municipal high-yield bonds are nothing like those of corporate bonds." "Nevertheless, we'll continue to manage the portfolio's risk prudently, diversifying into sectors insulated against slower economic growth, such as health care and higher education bonds, trading at what we think are attractive relative values. That's consistent with our well-established management strategy, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," concluded Permut. Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 8/31/07 2/28/07 AAA 30% 34% AA 4% 4% A 7% 4% BBB 14% 12% BB 1% -- Unrated 44% 46% Ratings provided by independent research companies. These ratings are listed in Standard & Poor's format even if they were provided by other sources. Top Five Sectors as of August 31, 2007 % of fund investments Land Secured 30% Prerefunded 14% Tax Allocation Revenue 8% General Obligation (GO) 7% Hospital Revenue 6% - ------ 6 SHAREHOLDER FEE EXAMPLE (UNAUDITED) Fund shareholders may incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption/exchange fees; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in your fund and to compare these costs with the ongoing cost of investing in other mutual funds. The example is based on an investment of $1,000 made at the beginning of the period and held for the entire period from March 1, 2007 to August 31, 2007. ACTUAL EXPENSES The table provides information about actual account values and actual expenses for each class. You may use the information, together with the amount you invested, to estimate the expenses that you paid over the period. First, identify the share class you own. Then simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. 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), American Century may charge you a $12.50 semiannual account maintenance fee if the value of those shares is less than $10,000. We will redeem shares automatically in one of your accounts to pay the $12.50 fee. 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. PERSONAL ACCOUNTS include individual accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell Education Savings Accounts and 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. We will not charge the fee as long as you choose to manage your accounts exclusively online. If you are subject to the Account Maintenance Fee, your account value could be reduced by the fee amount. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table also provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio of each class of your fund and an assumed rate of return of 5% per year before expenses, which is not the actual return of a fund's share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. - ------ 7 Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption/exchange fees. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Beginning Ending Expenses Paid Account Value Account Value During Period* Annualized 3/1/07 8/31/07 3/1/07 - 8/31/07 Expense Ratio* ACTUAL Investor Class $1,000 $979.40 $2.59 0.52% A Class $1,000 $978.20 $3.84 0.77% B Class $1,000 $974.50 $7.56 1.52% C Class $1,000 $974.50 $7.56 1.52% HYPOTHETICAL Investor Class $1,000 $1,022.58 $2.65 0.52% A Class $1,000 $1,021.32 $3.92 0.77% B Class $1,000 $1,017.54 $7.73 1.52% C Class $1,000 $1,017.54 $7.73 1.52% *Expenses are equal to the class's annualized expense ratio listed in the table above, multiplied by the average account value over the period, multiplied by 184, the number of days in the most recent fiscal half-year, divided by 365, to reflect the one-half year period. - ------ 8 SCHEDULE OF INVESTMENTS California High-Yield Municipal AUGUST 31, 2007 Principal Amount Value Municipal Securities -- 98.6% CALIFORNIA -- 95.2% $ 1,000,000 ABC Unified School District GO, Series 2000 B, 6.14%, 8/1/21 (FGIC)(1) $ 526,010 4,100,000 ABN AMRO Munitops Certificate Trust Rev., Series 2003-17, VRDN, 3.97%, 9/6/07 (MBIA) (SBBPA: ABN AMRO Bank N.V.) 4,100,000 2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facilities District No. 1), 7.00%, 8/1/19 2,040,660 1,200,000 Anaheim Public Financing Auth. Lease Rev., Series 1997 A, 6.00%, 9/1/24 (FSA) 1,392,924 2,000,000 Antelope Valley Community College District GO, Series 2007 B, (Election of 2004), 5.25%, 8/1/39 (MBIA)(2) 2,099,260 765,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Eskaton Gold River Lodge), 6.375%, 11/15/08, Prerefunded at 102% of Par(3) 792,838 3,000,000 Association of Bay Area Governments Finance Auth. for Nonprofit Corporations COP, (Eskaton Gold River Lodge), 6.375%, 11/15/08, Prerefunded at 102% of Par(3) 3,151,530 2,875,000 Beaumont Financing Auth. Local Agency Rev., Series 2004 D, 5.80%, 9/1/35 2,932,529 855,000 Beaumont Financing Auth. Local Agency Rev., Series 2005 C, 5.50%, 9/1/29 857,103 4,000,000 Beaumont Financing Auth. Local Agency Rev., Series 2005 C, 5.50%, 9/1/35 3,980,200 3,700,000 Beaumont Financing Auth. Local Agency Rev., Series 2006 A, 5.35%, 9/1/36 3,622,633 1,190,000 Berryessa Unified School District GO, Series 2000 A, 6.18%, 8/1/21 (FSA)(1) 625,952 1,220,000 Berryessa Unified School District GO, Series 2000 A, 6.05%, 8/1/22 (FSA)(1) 608,329 1,000,000 Berryessa Unified School District GO, Series 2000 A, 6.06%, 8/1/23 (FSA)(1) 472,220 Principal Amount Value $ 1,050,000 California Department of Water Resources Power Supply Rev., Series 2002 B2, VRDN, 3.95%, 9/4/07 (LOC: BNP Paribas) $ 1,050,000 1,850,000 California Department of Water Resources Power Supply Rev., Series 2005 F5, VRDN, 3.95%, 9/4/07 (LOC: Citibank N.A.)(4) 1,850,000 1,505,000 California Educational Facilities Auth. Rev., (Western University Health Sciences), 6.00%, 10/1/21(4) 1,573,462 2,500,000 California GO, 5.25%, 8/1/32 (FSA)(4) 2,753,200 2,200,000 California GO, Series 2005 A3, VRDN, 3.90%, 9/5/07 (LOC: Bank of America N.A.)(4) 2,200,000 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (Ambac)(1)(4) 3,295,120 2,500,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Kaiser Permanente), 5.50%, 6/1/22 (FSA)(3)(4) 2,580,025 5,000,000 California Health Facilities Financing Auth. Rev., Series 2007 A, (Sutter Health), 5.25%, 11/15/46(4) 5,095,000 1,050,000 California Housing Finance Agency Rev., Series 2000 D, (Multi-Family Housing), VRDN, 3.93%, 9/4/07 (GO of Agency) (SBBPA: Landesbank Hessen-Thuringen Girozentrale and California State Teacher's Retirement) 1,050,000 4,410,000 California Mobilehome Park Financing Auth. Rev., Series 2000 B, (Union City Tropics), 7.30%, 8/15/10 4,896,776 1,905,000 California Mobilehome Park Financing Auth. Rev., Series 2001 B, (Rancho Vallecitos - San Marcos), 6.75%, 11/15/36 1,989,411 6,345,000 California Mobilehome Park Financing Auth. Rev., Series 2003 B, (Palomar Estates E&W), 7.00%, 9/15/36(4) 6,730,966 4,760,000 California Mobilehome Park Financing Auth. Rev., Series 2006 A, (Union City Tropics), 5.00%, 12/15/41(4) 4,230,831 - ------ 9 California High-Yield Municipal Principal Amount Value $ 2,000,000 California Mobilehome Park Financing Auth. Rev., Series 2006 B, (Union City Tropics), 5.50%, 12/15/41 $ 1,790,180 10,000,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.25%, 2/1/46(4) 9,472,000 2,000,000 California Public Works Board Lease Rev., Series 1993 D, (Department of Corrections), 5.25%, 6/1/15 (FSA)(4) 2,146,040 6,000,000 California Public Works Board Lease Rev., Series 2005 A, (Department of General Services - Butterfield), 5.25%, 6/1/30(4) 6,166,680 1,340,000 California State and Local Government Financing Auth. Rev., Series 1997 B, (Marin Valley Mobile Country), 7.50%, 10/1/24 1,368,743 4,630,000 California State University Fresno Association Inc. Rev., (Auxiliary Organization Event Center), 6.00%, 7/1/12, Prerefunded at 101% of Par(3)(4) 5,147,819 2,455,000 California State University Fresno Association Inc. Rev., (Auxiliary Organization Event Center), 7.00%, 7/1/12, Prerefunded at 102% of Par(3)(4) 2,825,656 10,000,000 California State University Rev., Series 2005 C, (Systemwide Financing Program), 5.00%, 11/1/30 (MBIA)(4) 10,286,299 1,070,000 California Statewide Communities Development Auth. Rev., (Drew School), 5.30%, 10/1/37 1,010,904 1,960,000 California Statewide Communities Development Auth. Rev., (Thomas Jefferson School of Law), 7.75%, 10/1/11, Prerefunded at 101% of Par(3)(4) 2,239,241 4,000,000 California Statewide Communities Development Auth. Rev., Series 2001 C, (Kaiser Permanente), 5.25%, 8/1/31(4) 4,038,080 9,000,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (California Baptist University), 5.50%, 11/1/38 8,744,579 Principal Amount Value $10,000,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Front Porch Communities and Services), 5.125%, 4/1/37(4) $ 9,202,100 2,500,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Lancer Educational Student Housing), 5.625%, 6/1/33 2,425,375 2,000,000 California Statewide Communities Development Auth. Rev., Series 2007 A, (Valleycare Health System), 5.125%, 7/15/31 1,818,160 3,330,000 California Statewide Communities Development Auth. Rev., Series 2007 B, (Kaiser Permanente), VRDN, 4.37%, 10/1/07(4) 3,104,726 2,670,000 California Statewide Communities Development COP, (Sonoma County Indian Health), 6.40%, 9/1/29 2,746,469 990,000 California Statewide Communities Development COP, (Windward School), 6.90%, 9/1/08 999,900 6,250,000 Capistrano Unified School District No. 90-2 Community Facilities Special Tax Rev., 6.00%, 9/1/33 6,425,563 2,180,000 Capistrano Unified School District No. 98-2 Community Facilities Special Tax Rev., 5.00%, 9/1/23 (FGIC)(4) 2,251,809 1,000,000 Carmel Unified School District GO, 5.50%, 8/1/25 (MBIA) 1,047,250 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/23 (MBIA)(1) 507,637 1,075,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.00%, 8/1/24 (MBIA)(1) 478,698 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/25 (MBIA)(1) 456,568 1,085,000 Cathedral City Public Financing Auth. Rev., Series 2000 A, 6.05%, 8/1/26 (MBIA)(1) 431,841 9,795,000 Chino Hills COP, (Civic Center Interim Financing), 5.00%, 9/1/36(4) 9,625,643 - ------ 10 California High-Yield Municipal Principal Amount Value $ 1,700,000 Chino Valley Unified School District COP, Series 2001 A, 5.375%, 9/1/20 (FSA)(4) $ 1,805,859 2,140,000 Chula Vista Community Facilities District No. 01-1 Area A Special Tax Rev., 6.10%, 9/1/10, Prerefunded at 102% of Par(3) 2,316,422 2,175,000 Chula Vista Community Facilities District No. 01-1 Area B Special Tax Rev., (San Miguel), 5.45%, 9/1/36 2,145,355 3,600,000 Chula Vista Community Facilities District No. 06-1 Area A Special Tax Rev., (Eastlake Woods), 6.20%, 9/1/33 3,732,696 3,705,000 Chula Vista Community Facilities District No. 12-I Special Tax Rev., (McMillin Otay Ranch Village Seven), 5.25%, 9/1/36 3,548,241 2,670,000 Chula Vista Community Facilities District No. 13-I Special Tax Rev., (Otay Ranch Village Seven), 5.35%, 9/1/36 2,595,320 7,715,000 Chula Vista Community Facilities District No. 99-1 Special Tax Rev., (Otay Ranch Spa One), 7.625%, 9/1/09, Prerefunded at 102% of Par(3) 8,444,067 1,810,000 City of Lincoln Community Facilities District No. 2003-1 Special Tax Rev., (Lincoln Crossing), 6.00%, 9/1/13 2,045,626 5,000,000 City of Whittier Rev., (Whittier College), VRDN, 5.90%, 9/6/07 (RADIAN) (SBBPA: Bank of New York)(4) 5,000,000 1,780,000 Clovis Public Financing Auth. Lease Rev., (Corporate Yard), 5.375%, 3/1/20 (Ambac) 1,880,374 490,000 Corcoran COP, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $490,000)(5) 556,444 2,000,000 Corona Department of Water & Power COP, 5.00%, 9/1/35 (MBIA)(4) 2,025,660 1,150,000 Duarte Unified School District GO, Series 1999 B, 6.08%, 11/1/23 (FSA)(1) 536,694 2,355,000 Duarte Unified School District GO, Series 2006 E, (Election of 1998), 5.07%, 11/1/28 (FSA)(1) 831,386 2,800,000 El Dorado County Community Facilities District No. 1992-1 Special Tax Rev., 5.60%, 9/1/09 2,831,332 Principal Amount Value $ 2,500,000 El Dorado County Community Facilities District No. 2001-1 Special Tax Rev., 6.30%, 9/1/31 $ 2,608,675 4,500,000 El Dorado County Community Facilities District No. 2005-1 Special Tax Rev., 5.25%, 9/1/35 4,318,515 5,500,000 Elk Grove Community Facilities District No. 2005-1 Special Tax Rev., (Laguna Ridge), 5.25%, 9/1/37 5,302,990 1,000,000 Escondido Community Facilities District No. 2006-01 Special Tax Rev., (Eureka Ranch), 5.15%, 9/1/36 950,250 5,000,000 Fillmore Redevelopment Agency Tax Allocation Rev., Series 2006 A, (Central City Redevelopment), 5.375%, 5/1/31 4,920,650 4,225,000 Florin Resource Conservation District COP, Series 1999 A, (Elk Grove Water Works), 6.75%, 9/1/09, Prerefunded at 102% of Par(3) 4,557,001 2,450,000 Folsom Community Facilities District No. 7 Special Tax Rev., 5.75%, 9/1/14 2,532,443 1,640,000 Folsom Community Facilities District No. 10 Special Tax Rev., 7.00%, 9/1/09, Prerefunded at 102% of Par(3) 1,774,054 2,610,000 Folsom Community Facilities District No. 10 Special Tax Rev., 7.00%, 9/1/24 2,743,475 6,500,000 Folsom Community Facilities District No. 14 Special Tax Rev., 6.30%, 9/1/11 7,189,650 3,740,000 Folsom Public Financing Auth. Rev., Series 1997 A, 6.875%, 9/2/19 3,775,044 3,000,000 Foothill-De Anza Community College District GO, 6.16%, 8/1/21 (MBIA)(1)(4) 1,578,030 3,000,000 Fullerton Community Facilities District No. 1 Special Tax Rev., (Amerige Heights), 6.20%, 9/1/32 3,095,880 5,000,000 Fullerton Unified School District Community Facilities District No. 1 Special Tax Rev., 6.375%, 9/1/31(4) 5,237,900 2,630,000 Glendale Unified School District GO, Series 1999 C, 6.00%, 9/1/22 (FSA)(4) 2,760,658 - ------ 11 California High-Yield Municipal Principal Amount Value $ 5,005,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2003 A1, 6.75%, 6/1/13(4) $ 5,751,646 3,920,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2003 A1, 6.25%, 6/1/33(4) 4,295,418 8,000,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2005 A, 5.00%, 6/1/35 (FGIC)(4) 8,109,679 11,650,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2005 A, 5.00%, 6/1/38 (FGIC)(4) 11,772,208 20,500,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A1, 5.75%, 6/1/47(4) 19,951,829 3,190,000 Hawaiian Gardens COP, Series 2000 A, 8.00%, 6/1/10, Prerefunded at 102% of Par(3) 3,555,765 2,775,000 Hawaiian Gardens Redevelopment Agency Tax Allocation Rev., Series 2006 B, (Redevelopment Project No. 1), 5.40%, 12/1/25 2,710,259 2,670,000 Hemet Unified School District Special Tax Rev., (Community Facilities District No. 2005-2), 5.25%, 9/1/30 2,460,939 1,510,000 Hemet Unified School District Special Tax Rev., (Community Facilities District No. 2005-2), 5.25%, 9/1/35 1,369,600 5,000,000 Hesperia Public Financing Auth. Rev., Series 2007 A, (Redevelopment and Housing), 5.50%, 9/1/32 (XLCA)(2) 5,336,000 2,025,000 Hesperia Public Financing Auth. Rev., Series 2007 A, (Redevelopment and Housing), 5.50%, 9/1/37 (XLCA)(2) 2,153,912 2,000,000 Highland Special Tax Rev., (Community Facilities District No. 01-1), 6.45%, 9/1/28 2,059,240 3,345,000 Hillsborough School District GO, Series 2006 B, (Election of 2002), 4.84%, 9/1/28(1) 1,187,442 5,000,000 Huntington Beach Union High School District GO, (Election of 2004), 5.00%, 8/1/31 (MBIA)(1)(4) 1,527,500 5,000,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/29 (Ambac)(4) 5,264,800 Principal Amount Value $ 500,000 Independent Cities Lease Finance Auth. Rev., Series 2006 B, (San Juan Mobile Estates), 5.55%, 5/15/31 $ 457,600 1,150,000 Independent Cities Lease Finance Auth. Rev., Series 2006 B, (San Juan Mobile Estates), 5.85%, 5/15/41 1,076,216 1,970,000 Indio Redevelopment Agency Tax Allocation Rev., Series 2004 B, (Sub-Merged Project Area), 6.50%, 8/15/34 2,093,618 5,000,000 Irvine Unified School District Financing Auth. Special Tax Rev., Series 2005 A, 5.00%, 9/1/34 (Ambac)(4) 5,066,450 8,550,000 Kern Community College Safety, Repair and Improvement District GO, (Election of 2002), 4.56%, 11/1/30 (FSA)(1)(4) 2,691,455 1,000,000 Laguna Salada Union School District GO, Series 2000 C, 6.12%, 8/1/29 (FGIC)(1) 349,840 1,225,000 Lake Elsinore Community Facilities District No. 2004-3 Special Tax Rev., Series 2005 A, (Rosetta Canyon Improvement Area No. 1), 5.25%, 9/1/35 1,175,596 5,000,000 Lake Elsinore Community Facilities District No. 2004-3 Special Tax Rev., Series 2006 A, (Rosetta Canyon Improvement Area No. 2), 5.25%, 9/1/37 4,785,550 1,100,000 Lake Elsinore Community Facilities District No. 2005-1 Special Tax Rev., Series 2006 A, (Serenity), 5.35%, 9/1/36 1,076,999 5,000,000 Lake Elsinore Community Facilities District No. 2005-2 Special Tax Rev., Series 2005 A, (Alberhill Ranch Improvement Area A), 5.45%, 9/1/36 4,967,550 2,500,000 Lake Elsinore School Financing Auth. Rev., (Horsethief Canyon), 5.625%, 9/1/16 2,550,625 1,245,000 Lake Elsinore Unified School District Community Facilities District No. 2005-1 Special Tax Rev., (Improvement Area A), 5.40%, 9/1/35 1,221,221 1,310,000 Los Angeles Community Facilities District No. 3 Special Tax Rev., (Cascades Business Park and Golf Course), 6.40%, 9/1/22 1,339,174 - ------ 12 California High-Yield Municipal Principal Amount Value $11,000,000 Los Angeles Community Redevelopment Agency Auth. Lease Rev., (Vermont Manchester Social Services), 5.00%, 9/1/37 (Ambac) $11,068,383 5,000,000 Los Angeles Department of Water & Power Rev., Series 2006 A1, (Water System), 5.00%, 7/1/36 (Ambac)(4) 5,141,700 5,000,000 Los Angeles Department of Water & Power Rev., Series 2007 A2, (Water System), 5.00%, 7/1/44 (Ambac)(4) 5,110,000 5,455,000 Manteca Unified School District GO, (Election of 2004), 4.92%, 8/1/30 (MBIA)(1)(4) 1,759,074 2,100,000 Menifee Union School District Special Tax Rev., (Community Facilities District No. 2005-2), 5.375%, 9/1/36 2,063,670 1,970,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (Local Improvement District 18), 6.75%, 9/2/16 2,012,788 4,000,000 Moreno Valley Unified School District Special Tax Rev., (Community Facilities District No. 2002-1), 6.20%, 9/1/32 4,170,080 4,100,000 Murrieta Community Facilities District No. 2000-1 Special Tax Rev., (Greer Ranch), 6.375%, 9/1/30 4,299,342 1,920,000 Murrieta Community Facilities District No. 2000-2 Special Tax Rev., Series 2004 A, (The Oaks Improvement Area), 6.00%, 9/1/34 1,974,605 1,810,000 Murrieta Community Facilities District No. 2003-3 Special Tax Rev., (Creekside Village Improvement Area No. 1), 5.20%, 9/1/35 1,736,623 1,660,000 North City West School Facilities Financing Auth. Special Tax Rev., Series 2005 B, 5.25%, 9/1/25 (Ambac)(4) 1,792,169 3,500,000 Oceanside Community Development Commission Tax Allocation Rev., (Downtown Redevelopment), 5.70%, 9/1/25(4) 3,589,040 2,950,000 Oceanside Community Facilities District Special Tax Rev., Series 2002 A, (No. 2001-1 Morrow Hills Development), 6.20%, 9/1/32 3,060,271 Principal Amount Value $ 1,000,000 Oceanside Community Facilities District Special Tax Rev., Series 2004 A, (No. 2001-1 Morrow Hills Development), 5.50%, 9/1/29 $ 1,002,010 2,000,000 Orange County Community Facilities District No. 1999-1 Special Tax Rev., Series 1999 A, (Ladera Ranch), 6.50%, 8/15/09, Prerefunded at 102% of Par(3) 2,146,440 2,200,000 Orange County Community Facilities District No. 1999-1 Special Tax Rev., Series 1999 A, (Ladera Ranch), 6.70%, 8/15/09, Prerefunded at 102% of Par(3) 2,369,312 4,590,000 Orange County Community Facilities District No. 2000-1 Special Tax Rev., Series 2000 A, (Ladera Ranch), 6.25%, 8/15/08, Prerefunded at 100% of Par(3) 4,704,658 2,300,000 Orange County Community Facilities District No. 2004-1 Special Tax Rev., Series 2005 A, (Ladera Ranch), 5.20%, 8/15/34 2,211,358 3,000,000 Oxnard School District GO, Series 2001 A, 5.75%, 8/1/30 (MBIA)(4) 3,408,990 1,150,000 Pacifica COP, (Public Safety Building), 5.80%, 11/1/20 (MBIA) 1,221,139 10,000,000 Palmdale Water District COP, 5.00%, 10/1/34 (FGIC)(4) 10,118,499 2,580,000 Palomar Pomerado Health Care District COP, (Indian Health Council Inc.), 6.25%, 10/1/29(4) 2,635,135 1,390,000 Perris Community Facilities District No. 3 Special Tax Rev., Series 2005 A, (Improvement Area No. 2), 5.30%, 9/1/35 1,343,783 3,000,000 Perris Public Financing Auth. Special Tax Rev., Series 2004 A, 6.125%, 9/1/34 3,133,860 1,450,000 Perris Public Financing Auth. Tax Allocation Rev., 5.35%, 10/1/36 1,419,579 1,000,000 Perris Union High School District GO, Series 2000 A, 6.40%, 9/1/24 (FGIC)(1) 443,520 1,000,000 Perris Union High School District GO, Series 2000 A, 6.40%, 3/1/25 (FGIC)(1) 429,360 - ------ 13 California High-Yield Municipal Principal Amount Value $ 2,900,000 Pittsburg Redevelopment Agency Tax Allocation Rev., (Los Medanos Community Development), 6.20%, 8/1/25 (Ambac)(1) $ 1,199,179 2,640,000 Placer Union High School District GO, Series 2000 A, 6.20%, 8/1/16 (FGIC)(1)(4) 1,813,522 1,600,000 Placer Union High School District GO, Series 2000 A, 6.28%, 8/1/18 (FGIC)(1) 988,960 2,925,000 Placer Union High School District GO, Series 2000 A, 6.35%, 8/1/21 (FGIC)(1) 1,538,579 2,100,000 Placer Union High School District GO, Series 2000 A, 6.37%, 8/1/22 (FGIC)(1) 1,047,123 3,525,000 Placer Union High School District GO, Series 2000 A, 6.39%, 8/1/23 (FGIC)(1) 1,664,576 1,000,000 Placer Union High School District GO, Series 2000 A, 6.40%, 8/1/24 (FGIC)(1) 445,300 4,835,000 Pleasant Valley School District-Ventura County GO, Series 2002 A, 5.85%, 8/1/31 (MBIA)(4) 5,659,948 1,055,000 Pomona Public Financing Auth. Rev., Series 2006 AX, (Merged Redevelopment), 5.00%, 2/1/23 1,020,322 1,100,000 Pomona Public Financing Auth. Rev., Series 2006 AX, (Merged Redevelopment), 5.00%, 2/1/24 1,059,924 1,155,000 Pomona Public Financing Auth. Rev., Series 2006 AX, (Merged Redevelopment), 5.00%, 2/1/25 1,108,881 3,900,000 Pomona Public Financing Auth. Rev., Series 2006 AX, (Merged Redevelopment), 5.00%, 2/1/32(4) 3,637,078 2,800,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 6-4), 5.125%, 9/1/35 2,656,612 2,000,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 14, Improvement Area A), 5.25%, 9/1/36 1,847,800 2,500,000 Poway Unified School District Special Tax Rev., (Community Facilities District No. 14), 5.25%, 9/1/36 2,309,750 Principal Amount Value $ 3,000,000 Rancho Cordova Community Facilities District No. 2003-1 Special Tax Rev., (Sunridge Anatolia), 5.375%, 9/1/37 $ 2,862,690 2,000,000 Rancho Cordova Community Facilities District No. 2003-1 Special Tax Rev., (Sunridge Anatolia), 5.50%, 9/1/37 1,944,220 2,400,000 Rancho Cucamonga Community Facilities District No. 2004-01 Special Tax Rev., (Rancho Etiwanda Estates), 5.375%, 9/1/36 2,358,480 7,500,000 Rancho Mirage Joint Powers Financing Auth. Rev., Series 2007 A, (Eisenhower Medical Center), 5.00%, 7/1/38 7,292,700 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment), 7.125%, 7/1/08 1,835,582 1,485,000 Rialto Community Facilities District No. 2006-1 Special Tax Rev., (Elm Park), 5.35%, 9/1/36 1,453,949 1,000,000 Richmond Joint Powers Financing Auth. Rev., Series 1995 A, 5.25%, 5/15/13 1,002,120 1,700,000 Richmond Wastewater Rev., 6.18%, 8/1/23 (FGIC)(1) 806,531 2,905,000 Richmond Wastewater Rev., 6.20%, 8/1/26 (FGIC)(1) 1,169,088 2,365,000 Riverside County COP, 5.75%, 11/1/31 (MBIA)(4) 2,543,416 2,040,000 Riverside County Improvement Bond Act 1915 Special Assessment, (District No. 168 - Rivercrest), 6.70%, 9/2/26 2,130,617 2,000,000 Riverside Unified School District Special Tax Rev., (Community Facilities District No. 13, Improvement Area 1), 5.375%, 9/1/34 1,958,160 4,765,000 Riverside Unified School District Special Tax Rev., Series 2000 A, (Community Facilities District No. 7), 7.00%, 9/1/10 5,259,702 1,000,000 Riverside Unified School District Special Tax Rev., Series 2005 A, (Community Facilities District No. 15, Improvement Area No. 2), 5.25%, 9/1/30 970,770 - ------ 14 California High-Yield Municipal Principal Amount Value $ 1,000,000 Riverside Unified School District Special Tax Rev., Series 2007 A, (Community Facilities District No. 21, Improvement Area No. 2), 5.375%, 9/1/37 $ 968,190 4,315,000 Rohnert Park Finance Auth. Rev., Series 2001 A, (Las Casitas de Sonoma), 6.40%, 4/15/36 4,531,095 5,000,000 Romoland School District Special Tax Rev., (Community Facilities District No. 1, Improvement Area 1), 5.40%, 9/1/36 4,931,500 3,250,000 Roseville Special Tax Rev., (Fiddyment Ranch Community Facilities District No. 1), 5.25%, 9/1/36 3,135,178 1,600,000 Roseville Special Tax Rev., (Westpark Community Facilities District No. 1, Public Facilities), 5.25%, 9/1/37 1,542,688 635,000 Sacramento County Community Facilities District No. 1 Special Tax Rev., (Elliot Ranch), 5.60%, 9/1/07 635,000 645,000 Sacramento County Community Facilities District No. 1 Special Tax Rev., (Elliot Ranch), 5.70%, 9/1/08 650,947 1,500,000 Sacramento County Community Facilities District No. 1 Special Tax Rev., (Elliot Ranch), 6.30%, 9/1/21 1,529,790 4,035,000 Sacramento County Community Facilities District No. 2005-2 Special Tax Rev., Series 2007 A, (North Vineyard Station No. 1), 6.00%, 9/1/37(2) 4,072,727 4,000,000 Sacramento Municipal Utilities District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (Ambac)(4) 4,378,560 4,000,000 Sacramento Special Tax Rev., (North Natomas Community Facilities), 6.30%, 9/1/26 4,123,560 1,975,000 San Buenaventura COP, (Wastewater Revenue), 5.00%, 3/1/29 (MBIA)(4) 2,009,523 3,765,000 San Diego County Improvement Bond Act of 1915 Special Assessment (Reassessment District No. 97-1 - 4-S Ranch), 6.25%, 9/2/12 3,866,166 Principal Amount Value $ 1,250,000 San Francisco City and County Redevelopment Agency Lease Rev., (George R. Moscone), 7.05%, 7/1/13(1) $ 978,063 2,790,000 San Marcos Public Facilities Auth. Special Tax Rev., Series 2004 A, 5.45%, 9/1/24 2,810,004 5,000,000 San Marcos Public Facilities Auth. Special Tax Rev., Series 2004 A, 5.00%, 9/1/34 (FGIC)(4) 5,059,450 3,005,000 Santa Barbara County Rev., 5.50%, 9/1/22 (Ambac)(4) 3,215,170 2,875,000 Santa Monica Redevelopment Agency Tax Allocation Rev., Series 2006 A, (Earthquake Recovery Redevelopment), 5.00%, 7/1/28 (FGIC)(4) 2,941,815 2,000,000 Saugus Union School District Special Tax Rev., (Community Facilities District No. 2005-1), 5.30%, 9/1/36 1,915,840 7,755,000 Shasta Lake Public Finance Auth. Rev., (Electrical Enterprise), 6.25%, 4/1/13, Prerefunded at 102% of Par(3) 8,857,682 2,160,000 Soledad Improvement Bond Act of 1915 Special Assessment, (Diamond Ridge Assessment District No. 2002-01), 6.75%, 9/2/33 2,296,210 500,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/10 (FSA) 540,840 2,400,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/14 (MBIA)(1)(4) 1,824,816 1,250,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/15 (MBIA)(1) 906,788 4,195,000 Stockton Community Facilities District Special Tax Rev., (Spanos Park West No. 2001-1), 6.375%, 9/1/12, Prerefunded at 102% of Par(3) 4,749,118 5,000,000 Sunnyvale Special Tax Rev., (Community Facilities District No. 1), 7.75%, 8/1/32 5,282,300 2,690,000 Tahoe-Truckee Unified School District GO, Series 1999 A, (Improvement District No. 2), 6.19%, 8/1/22 (FGIC)(1) 1,341,315 2,220,000 Tahoe-Truckee Unified School District GO, Series 1999 A, (Improvement District No. 2), 6.19%, 8/1/23 (FGIC)(1) 1,048,328 - ------ 15 California High-Yield Municipal Principal Amount Value $ 5,000,000 Tustin Community Facilities District No. 06-1 Special Tax Rev., Series 2007 A, (Tustin Legace/Columbus Villages), 6.00%, 9/1/36(2) $ 5,141,950 1,300,000 Tustin Community Facilities District No. 07-1 Special Tax Rev., (Tustin Legace/Retail Center), 6.00%, 9/1/37(2) 1,326,936 2,000,000 Tustin Unified School District Special Tax Rev., (Community Facilities District No. 97-1), 6.375%, 9/1/08, Prerefunded at 102% of Par(3) 2,094,300 1,500,000 University of California Rev., Series 2003 A, 5.00%, 5/15/23 (Ambac) 1,540,305 2,500,000 Val Verde Unified School District Special Tax Rev., 5.40%, 9/1/30 2,475,650 2,600,000 Val Verde Unified School District Special Tax Rev., 5.45%, 9/1/36 2,583,126 2,500,000 West Basin Municipal Water District COP, Series 2003 A, 5.00%, 8/1/30 (MBIA)(4) 2,546,650 1,000,000 West Sacramento Special Tax Rev., (Community Facilities District No. 10), 6.20%, 9/1/09, Prerefunded at 102% of Par(3) 1,062,060 3,235,000 West Sacramento Special Tax Rev., (Community Facilities District No. 10), 6.75%, 9/1/09, Prerefunded at 102% of Par(3) 3,469,667 1,740,000 West Sacramento Special Tax Rev., (Community Facilities District No. 20), 5.30%, 9/1/35 1,682,145 2,080,000 Westlands Water District COP, Series 2005 A, 5.00%, 9/1/25 (MBIA)(4) 2,147,579 2,270,000 Yuba City Redevelopment Agency Tax Allocation Rev., 5.70%, 9/1/24 2,333,333 2,000,000 Yuba City Redevelopment Agency Tax Allocation Rev., 6.00%, 9/1/31 2,066,240 1,860,000 Yuba City Redevelopment Agency Tax Allocation Rev., 5.375%, 9/1/32 (RADIAN)(4) 1,818,727 Principal Amount Value $ 3,330,000 Yuba City Redevelopment Agency Tax Allocation Rev., 5.375%, 9/1/39 (RADIAN)(4) $ 3,204,692 2,895,000 Yuba City Unified School District GO, 6.05%, 9/1/24 (FGIC)(1) 1,283,990 1,500,000 Yuba City Unified School District GO, 6.05%, 3/1/25 (FGIC)(1) 644,040 ------------ 626,768,781 ------------ PUERTO RICO -- 3.1% 7,800,000 Puerto Rico Electric Power Auth. Rev., Series 2007 UU, VRDN, 4.29%, 10/1/07, resets quarterly at 67% of the 3-month LIBOR plus 0.70% with no caps(4) 7,532,304 3,000,000 Puerto Rico GO, Series 2006 A, 5.25%, 7/1/30(4) 3,068,940 10,000,000 Puerto Rico Sales Tax Financing Corp. Rev., Series 2007 A, VRDN, 4.52%, 11/1/07, resets quarterly at 67% of the 3-month LIBOR plus 0.93% with no caps(4) 10,000,000 ------------ 20,601,244 ------------ U.S. VIRGIN ISLANDS -- 0.3% 2,000,000 Virgin Islands Water & Power Auth. Electric System Rev., Series 2007 A, 5.00%, 7/1/31(4) 1,894,600 ------------ TOTAL MUNICIPAL SECURITIES (Cost $641,074,634) 649,264,625 ------------ Short-Term Municipal Securities -- 2.8% PUERTO RICO -- 2.8% 6,000,000 Government Development Bank of Puerto Rico Rev., 4.30%, 9/28/07 5,999,340 2,250,000 Government Development Bank of Puerto Rico Rev., 4.25%, 11/2/07 2,249,415 5,000,000 Government Development Bank of Puerto Rico Rev., 4.12%, 11/8/07 4,997,400 5,000,000 Government Development Bank of Puerto Rico Rev., 4.35%, 12/4/07 4,999,350 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $18,250,000) 18,245,505 ------------ - ------ 16 California High-Yield Municipal Shares Value Temporary Cash Investments -- 0.1% 578,000 Federated California Municipal Cash Trust 578,000 (Cost $578,000) ------------ TOTAL INVESTMENT SECURITIES -- 101.5% (Cost $659,902,634) 668,088,130 ------------ OTHER ASSETS AND LIABILITIES -- (1.5)% (9,718,941) ------------ TOTAL NET ASSETS -- 100.0% $658,369,189 ============ Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 930 U.S. Treasury 2-Year Notes December 2007 $191,725,313 $230,407 ============ ============ Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 514 U.S. Treasury 10-Year Notes December 2007 $56,050,094 $(630,473) ============ ============ Notes to Schedule of Investments Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation LIBOR = London Interbank Offered Rate LOC = Letter of Credit MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. resets = The frequency with which a security's coupon changes, based on current market conditions or an underlying index. The more frequently a security resets, the less risk the investor is taking that the coupon will vary significantly from current market rates. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective August 31, 2007. XLCA = XL Capital Ltd. (1) Security is a zero-coupon municipal bond. The rate indicated is the yield to maturity at purchase. Zero-coupon securities are issued at a substantial discount from their value at maturity. (2) When-issued security. (3) Escrowed to maturity in U.S. government securities or state and local government securities. (4) Security, or a portion thereof, has been segregated for when-issued securities and/or futures contracts. (5) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement and, unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at August 31, 2007, was $556,444, which represented 0.1% of total net assets. See Notes to Financial Statements. - ------ 17 STATEMENT OF ASSETS AND LIABILITIES AUGUST 31, 2007 ASSETS Investment securities, at value (cost of $659,902,634) $668,088,130 Cash 141,339 Receivable for capital shares sold 34,797 Interest receivable 11,253,324 ------------ 679,517,590 ------------ LIABILITIES Payable for investments purchased 19,840,499 Payable for capital shares redeemed 273,511 Payable for variation margin on futures contracts 118,909 Accrued management fees 286,935 Distribution fees payable 27,820 Service fees (and distribution fees -- A Class) payable 40,194 Dividends payable 560,533 ------------ 21,148,401 ------------ NET ASSETS $658,369,189 ============ NET ASSETS CONSIST OF: Capital paid in $653,034,909 Accumulated net realized loss on investment transactions (2,451,150) Net unrealized appreciation on investments 7,785,430 ------------ $658,369,189 ============ INVESTOR CLASS Net assets $467,476,500 Shares outstanding 47,212,243 Net asset value per share $9.90 A CLASS Net assets $147,313,518 Shares outstanding 14,877,747 Net asset value per share $9.90 Maximum offering price (net asset value divided by 0.955) $10.37 B CLASS Net assets $1,454,195 Shares outstanding 146,865 Net asset value per share $9.90 C CLASS Net assets $42,124,976 Shares outstanding 4,254,362 Net asset value per share $9.90 See Notes to Financial Statements. - ------ 18 STATEMENT OF OPERATIONS YEAR ENDED AUGUST 31, 2007 INVESTMENT INCOME (LOSS) INCOME: Interest $ 31,518,148 ------------ EXPENSES: Management fees 3,108,718 Distribution fees: B Class 10,222 C Class 282,842 Service fees: B Class 3,407 C Class 94,281 Service and distribution fees -- A Class 301,338 Trustees' fees and expenses 26,470 Other expenses 1,453 ------------ 3,828,731 ------------ NET INVESTMENT INCOME (LOSS) 27,689,417 ------------ REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: Investment transactions 264,675 Futures transactions 135,654 ------------ 400,329 ------------ CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: Investments (22,975,620) Futures (408,257) ------------ (23,383,877) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) (22,983,548) ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 4,705,869 ============ See Notes to Financial Statements. - ------ 19 STATEMENT OF CHANGES IN NET ASSETS YEARS ENDED AUGUST 31, 2007 AND AUGUST 31, 2006 Increase (Decrease) in Net Assets 2007 2006 OPERATIONS Net investment income (loss) $ 27,689,417 $ 22,426,057 Net realized gain (loss) 400,329 (944,038) Change in net unrealized appreciation (depreciation) (23,383,877) (3,154,981) ------------ ------------ Net increase (decrease) in net assets resulting from operations 4,705,869 18,327,038 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income: Investor Class (20,885,775) (18,559,723) A Class (5,359,920) (2,980,323) B Class (50,395) (46,349) C Class (1,393,327) (839,662) ------------ ------------ Decrease in net assets from distributions (27,689,417) (22,426,057) ------------ ------------ CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets from capital share transactions 152,328,607 97,324,569 ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS 129,345,059 93,225,550 NET ASSETS Beginning of period 529,024,130 435,798,580 ------------ ------------ End of period $658,369,189 $529,024,130 ============ ============ See Notes to Financial Statements. - ------ 20 NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2007 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. California High-Yield Municipal Fund (the fund) is one fund in a series issued by the trust. The fund is nondiversified under the 1940 Act. The fund's investment objective is to seek high current income that is exempt from federal and California income taxes. The fund pursues this objective by investing a portion of its assets in lower-rated and unrated municipal securities. The following is a summary of the fund's significant accounting policies. MULTIPLE CLASS -- The fund is authorized to issue the Investor Class, the A Class, the B Class and the C Class. The A Class may incur an initial sales charge. The A Class, B Class and C Class may be subject to a contingent deferred sales charge. The share classes differ principally in their respective sales charges and distribution and shareholder servicing expenses and arrangements. All shares of the fund represent an equal pro rata interest in the assets of the class to which such shares belong, and have identical voting, dividend, liquidation and other rights and the same terms and conditions, except for class specific expenses and exclusive rights to vote on matters affecting only individual classes. Income, non-class specific expenses, and realized and unrealized capital gains and losses of the fund are allocated to each class of shares based on their relative net assets. SECURITY VALUATIONS -- Debt securities maturing in greater than 60 days are valued at current market value as provided by a commercial pricing service or at the mean of the most recent bid and asked prices. Debt securities maturing within 60 days may be valued at cost, plus or minus any amortized discount or premium. If an event occurs after the value of a security was established but before the net asset value per share was determined that was likely to materially change the net asset value, that security would be valued as determined in accordance with procedures adopted by the Board of Trustees. If the fund determines that the market price of 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 as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such determination would materially impact a fund's net asset value. Certain other circumstances may cause the fund to use alternative procedures to value a security such as: a security has been declared in default; trading in a security has been halted during the trading day; or there is a foreign market holiday and no trading will commence. SECURITY TRANSACTIONS -- For financial reporting, security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. WHEN-ISSUED AND FORWARD COMMITMENTS -- The fund may engage in securities transactions on a when-issued or forward commitment basis. Under these arrangements, the securities' prices and yields are fixed on the date of the commitment, but payment and delivery are scheduled for a future date. During this period, securities are subject to market fluctuations. The fund will segregate cash, cash equivalents or other appropriate liquid securities on its records in amounts sufficient to meet the purchase price. FUTURES CONTRACTS -- The fund may enter into futures contracts in order to manage the fund's exposure to changes in market conditions. One of the risks of entering into futures contracts is the possibility that the change in value of the contract may not correlate with the changes in value of the underlying securities. Upon entering into a futures contract, the fund is required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by the fund. The variation margin is equal to the daily change in the contract value and is recorded as unrealized gains and losses. The fund recognizes a realized gain or loss when the contract is closed or expires. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on futures transactions and unrealized appreciation (depreciation) on futures, respectively. - ------ 21 INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under provisions of the Internal Revenue Code. The fund is no longer subject to examination by tax authorities for years prior to 2003. At this time, management has not identified any uncertain tax positions that would materially impact the financial statements. Accordingly, no provision has been made for federal or state income taxes. Interest and penalties associated with any federal or state income tax obligations, if any, are recorded as interest expense. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are declared daily and paid monthly. Distributions from net realized gains, if any, are generally declared and paid annually. INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the fund. In addition, in the normal course of business, the fund enters into contracts that provide general indemnifications. The fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the fund. The risk of material loss from such claims is considered by management to be remote. USE OF ESTIMATES -- The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from these estimates. 2. FEES AND TRANSACTIONS WITH RELATED PARTIES MANAGEMENT FEES -- The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) (the investment advisor), under which ACIM provides the fund with investment advisory and management services in exchange for a single, unified management fee (the fee) per class. The Agreement provides that all expenses of the fund, except brokerage commissions, taxes, interest, fees and expenses of those trustees who are not considered "interested persons" as defined in the 1940 Act (including counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and accrued daily based on the daily net assets of the specific class of shares of the fund and paid monthly in arrears. The fee consists of (1) an Investment Category Fee based on the daily net assets of the fund and certain other accounts managed by the investment advisor that are in the same broad investment category as the fund and (2) a Complex Fee based on the assets of all the funds in the American Century family of funds. The rates for the Investment Category Fee range from 0.1925% to 0.3100% and the rates for the Complex Fee range from 0.2500% to 0.3100%. For the year ended August 31, 2007, the effective annual management fee for the Investor Class, A Class, B Class and C Class was 0.51%. DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a separate Master Distribution and Individual Shareholder Services Plan for each of the A Class, B Class and C Class (collectively, the plans), pursuant to Rule 12b-1 of the 1940 Act. The plans provide that the A Class will pay American Century Investment Services, Inc. (ACIS) an annual distribution and service fee of 0.25%. The plans provide that the B Class and the C Class each will pay ACIS an annual distribution fee of 0.75% and service fee of 0.25%. The fees are computed and accrued daily based on each class's daily net assets and paid monthly in arrears. The distribution fee provides compensation for expenses incurred in connection with distributing shares of the classes including, but not limited to, payments to brokers, dealers, and financial institutions that have entered into sales agreements with respect to shares of the fund. The service fee provides compensation for individual shareholder services rendered by broker/dealers or other independent financial intermediaries. Fees incurred under the plans during the year ended August 31, 2007, are detailed in the Statement of Operations. RELATED PARTIES -- Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the distributor of the trust, ACIS, and the trust's transfer agent, American Century Services, LLC. The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the fund and a wholly owned subsidiary of JPMorgan Chase & Co. (JPM). JPM is an equity investor in ACC. - ------ 22 3. INVESTMENT TRANSACTIONS Purchases and sales of investment securities, excluding short-term investments, for the year ended August 31, 2007, were $228,936,381 and $95,130,297, respectively. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of the fund were as follows (unlimited number of shares authorized): Year ended August 31, 2007 Year ended August 31, 2006 Shares Amount Shares Amount INVESTOR CLASS Sold 11,802,861 $120,763,745 6,289,033 $ 64,031,626 Issued in reinvestment of distributions 1,492,505 15,250,725 1,331,569 13,540,526 Redeemed (5,709,704) (58,279,673) (4,436,367) (45,131,273) ------------ ------------ ------------ ------------ 7,585,662 77,734,797 3,184,235 32,440,879 ------------ ------------ ------------ ------------ A CLASS Sold 9,477,355 96,807,687 6,445,448 65,600,146 Issued in reinvestment of distributions 374,179 3,820,481 214,323 2,178,624 Redeemed (3,797,742) (38,634,857) (1,659,077) (16,887,862) ------------ ------------ ------------ ------------ 6,053,792 61,993,311 5,000,694 50,890,908 ------------ ------------ ------------ ------------ B CLASS Sold 25,417 260,030 19,771 201,349 Issued in reinvestment of distributions 2,101 21,463 2,102 21,376 Redeemed (3,920) (39,997) (10,418) (105,427) ------------ ------------ ------------ ------------ 23,598 241,496 11,455 117,298 ------------ ------------ ------------ ------------ C CLASS Sold 1,823,758 18,681,934 1,813,898 18,456,678 Issued in reinvestment of distributions 58,463 596,819 34,808 353,889 Redeemed (680,026) (6,919,750) (485,633) (4,935,083) ------------ ------------ ------------ ------------ 1,202,195 12,359,003 1,363,073 13,875,484 ------------ ------------ ------------ ------------ Net increase (decrease) 14,865,247 $152,328,607 9,559,457 $ 97,324,569 ============ ============ ============ ============ 5. BANK LINE OF CREDIT The fund, along with certain other funds managed by ACIM or American Century Global Investment Management, Inc., has a $500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.40%. The fund did not borrow from the line during the year ended August 31, 2007. 6. RISK FACTORS The fund concentrates its investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The fund invests primarily in lower-rated debt securities, which are subject to substantial risks including price volatility, liquidity risk, and default risk. Income may be subject to state and local taxes and, if applicable, the alternative minimum tax. - ------ 23 7. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended August 31, 2007 and August 31, 2006 were as follows: 2007 2006 DISTRIBUTIONS PAID FROM Exempt income $27,684,051 $22,426,057 Taxable ordinary income $5,366 -- Long-term capital gains -- -- The book-basis character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements. As of August 31, 2007, the components of distributable earnings on a tax-basis and the federal tax cost of investments were as follows: Federal tax cost of investments $659,902,634 ============ Gross tax appreciation of investments $ 18,854,241 Gross tax depreciation of investments (10,668,745) ------------ Net tax appreciation (depreciation) of investments $ 8,185,496 ============ Accumulated capital losses $(2,851,216) The cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. The accumulated capital losses listed above represent net capital loss carryovers that may be used to offset future realized capital gains for federal income tax purposes. The capital loss carryovers of $(994,256) and $(1,856,960) expire in 2009 and 2015, respectively. 8. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. Management has concluded that the adoption of FIN 48 will not materially impact the financial statements. The FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157), in September 2006, which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands the required financial statement disclosures about fair value measurements. Management is currently evaluating the impact that adopting FAS 157 will have on the financial statement disclosures. 9. OTHER TAX INFORMATION (UNAUDITED) The following information is provided pursuant to provisions of the Internal Revenue Code. The fund hereby designates $27,710,302 of exempt interest distributions for the fiscal year ended August 31, 2007. - ------ 24 FINANCIAL HIGHLIGHTS California High-Yield Municipal Investor Class For a Share Outstanding Throughout the Years Ended August 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.25 $10.36 $9.93 $9.65 $9.84 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.48 0.49 0.51 0.52 0.52 Net Realized and Unrealized Gain (Loss) (0.35) (0.11) 0.43 0.28 (0.19) -------- -------- -------- -------- -------- Total From Investment Operations 0.13 0.38 0.94 0.80 0.33 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.48) (0.49) (0.51) (0.52) (0.52) -------- -------- -------- -------- -------- Net Asset Value, End of Period $9.90 $10.25 $10.36 $9.93 $9.65 ======== ======== ======== ======== ======== TOTAL RETURN(1) 1.22% 3.80% 9.65% 8.48% 3.35% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.52% 0.52% 0.52% 0.53% 0.54% Ratio of Net Investment Income (Loss) to Average Net Assets 4.70% 4.80% 4.99% 5.30% 5.24% Portfolio Turnover Rate 17% 25% 13% 19% 30% Net Assets, End of Period (in thousands) $467,477 $406,063 $377,534 $332,434 $334,032 (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. See Notes to Financial Statements. - ------ 25 California High-Yield Municipal A Class For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.25 $10.36 $9.93 $9.65 $9.79 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.46 0.46 0.48 0.50 0.29 Net Realized and Unrealized Gain (Loss) (0.35) (0.11) 0.43 0.28 (0.14) ------- ------- ------- ------- ------- Total From Investment Operations 0.11 0.35 0.91 0.78 0.15 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.46) (0.46) (0.48) (0.50) (0.29) ------- ------- ------- ------- ------- Net Asset Value, End of Period $9.90 $10.25 $10.36 $9.93 $9.65 ======= ======= ======= ======= ======= TOTAL RETURN(2) 0.97% 3.54% 9.38% 8.21% 1.48% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.77% 0.77% 0.77% 0.78% 0.78%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 4.45% 4.55% 4.74% 5.05% 5.04%(3) Portfolio Turnover Rate 17% 25% 13% 19% 30%(4) Net Assets, End of Period (in thousands) $147,314 $90,421 $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. See Notes to Financial Statements. - ------ 26 California High-Yield Municipal B Class For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.25 $10.36 $9.93 $9.65 $9.79 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.38 0.39 0.40 0.42 0.25 Net Realized and Unrealized Gain (Loss) (0.35) (0.11) 0.43 0.28 (0.14) ------- ------- ------- ------- ------- Total From Investment Operations 0.03 0.28 0.83 0.70 0.11 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.38) (0.39) (0.40) (0.42) (0.25) ------- ------- ------- ------- ------- Net Asset Value, End of Period $9.90 $10.25 $10.36 $9.93 $9.65 ======= ======= ======= ======= ======= TOTAL RETURN(2) 0.22% 2.77% 8.57% 7.40% 1.05% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.52% 1.52% 1.52% 1.53% 1.53%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.70% 3.80% 3.99% 4.30% 4.43%(3) Portfolio Turnover Rate 17% 25% 13% 19% 30%(4) Net Assets, End of Period (in thousands) $1,454 $1,263 $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. See Notes to Financial Statements. - ------ 27 California High-Yield Municipal C Class For a Share Outstanding Throughout the Years Ended August 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.25 $10.36 $9.93 $9.65 $9.79 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.38 0.39 0.40 0.43 0.26 Net Realized and Unrealized Gain (Loss) (0.35) (0.11) 0.43 0.28 (0.14) ------- ------- ------- ------- ------- Total From Investment Operations 0.03 0.28 0.83 0.71 0.12 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.38) (0.39) (0.40) (0.43) (0.26) ------- ------- ------- ------- ------- Net Asset Value, End of Period $9.90 $10.25 $10.36 $9.93 $9.65 ======= ======= ======= ======= ======= TOTAL RETURN(2) 0.22% 2.76% 8.56% 7.49% 1.22% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.52% 1.52% 1.52% 1.48% 1.28%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.70% 3.80% 3.99% 4.35% 4.59%(3) Portfolio Turnover Rate 17% 25% 13% 19% 30%(4) Net Assets, End of Period (in thousands) $42,125 $31,276 $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. See Notes to Financial Statements. - ------ 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Trustees of the American Century California Tax-Free and Municipal Funds and Shareholders of the California High-Yield Municipal Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the California High-Yield Municipal Fund (one of the five funds in the American Century California Tax-Free and Municipal Funds, hereafter referred to as the "Fund") at August 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri October 15, 2007 - ------ 29 PROXY VOTING RESULTS A special meeting of shareholders was held on July 27, 2007, to vote on the following proposal. The proposal received the required number of votes of the American Century California Tax-Free and Municipal Funds and was adopted. A summary of voting results is listed below the proposal. PROPOSAL: To elect eight Trustees to the Board of Trustees of American Century California Tax-Free and Municipal Funds (the proposal was voted on by all shareholders of funds issued by American Century California Tax-Free and Municipal Funds): Jonathan S. Thomas For: 1,196,700,006 Withhold: 41,904,885 Abstain: 0 Broker Non-Vote: 0 John Freidenrich For: 1,197,510,256 Withhold: 41,094,636 Abstain: 0 Broker Non-Vote: 0 Ronald J. Gilson For: 1,198,244,848 Withhold: 40,360,044 Abstain: 0 Broker Non-Vote: 0 Kathryn A. Hall For: 1,198,026,073 Withhold: 40,578,819 Abstain: 0 Broker Non-Vote: 0 Peter F. Pervere For: 1,197,268,471 Withhold: 41,336,421 Abstain: 0 Broker Non-Vote: 0 Myron S. Scholes For: 1,196,432,024 Withhold: 42,172,868 Abstain: 0 Broker Non-Vote: 0 John B. Shoven For: 1,197,907,207 Withhold: 40,697,685 Abstain: 0 Broker Non-Vote: 0 Jeanne D. Wohlers For: 1,197,917,523 Withhold: 40,687,369 Abstain: 0 Broker Non-Vote: 0 - ------ 30 MANAGEMENT The individuals listed below serve as trustees or officers of the fund. 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 trustees and/or officers of, or ownership interest in, American Century Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries, including the fund's investment advisor, American Century Investment Management, Inc. (ACIM or the investment advisor); the fund's principal underwriter, American Century Investment Services, Inc. (ACIS); and the fund's 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, trustees 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 fund also serve in similar capacities for the other 14 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 fund. The listed officers are interested persons of the fund and are appointed or re-appointed on an annual basis. INTERESTED TRUSTEE JONATHAN S. THOMAS 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUND: Trustee and President (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive Officer, ACC (March 2007 to present); Chief Administrative Officer, ACC (February 2006 to February 2007); Executive Vice President, ACC (November 2005 to February 2007). Also serves as: President, Chief Executive Officer and Director, ACS; Executive Vice President, ACIM and ACGIM; Director, ACIM, ACGIM, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 109 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None INDEPENDENT TRUSTEES JOHN FREIDENRICH 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUND: Trustee (since 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 2006) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 31 RONALD J. GILSON 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUND: Trustee (since 1995) and Chairman of the Board (since 2005) 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: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None KATHRYN A. HALL 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: Trustee (since 2001) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer and Chief Investment Officer, Hall Capital Partners, LLC (April 2002 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None PETER F. PERVERE 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Trustee (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Vice President and Chief Financial Officer, Commerce One, Inc. (software and services provider) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Intraware, Inc. MYRON S. SCHOLES 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1941 POSITION(S) HELD WITH FUND: Trustee (since 1980) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Platinum Grove Asset Management, L.P., and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1996 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Dimensional Fund Advisors (investment advisor, 1982 to present); Director, Chicago Mercantile Exchange (2000 to present) JOHN B. SHOVEN 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Trustee (since 2002) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1973 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present) JEANNE D. WOHLERS 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUND: Trustee (since 1984) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 32 OFFICERS MARYANNE ROEPKE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUND: Chief Compliance Officer (since 2006) and Senior Vice President (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995 to August 2006); Treasurer and Chief Financial Officer, various American Century funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS CHARLES A. ETHERINGTON 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: General Counsel (since 2007) and Senior Vice President (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (November 2005 to present); General Counsel, ACC (March 2007 to present). Also serves as: General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; and Senior Vice President, ACIM, ACGIM and ACS ROBERT LEACH 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial Officer (all since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); and Controller, various American Century funds (1997 to September 2006) C. JEAN WADE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUND: Controller (since 1996) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) JON ZINDEL 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Tax Officer (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer and Chief Accounting Officer, ACC (March 2007 to present); Vice President, ACC (October 2001 to present); Vice President, certain ACC subsidiaries (October 2001 to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006). Also serves as: Chief Financial Officer, Chief Accounting Officer and Senior Vice President, ACIM, ACGIM, ACS and other ACC subsidiaries; and Chief Accounting Officer and Senior Vice President, ACIS The SAI has additional information about the fund's trustees and is available without charge, upon request, by calling 1-800-345-2021. - ------ 33 APPROVAL OF MANAGEMENT AGREEMENT California High-Yield Municipal Under Section 15(c) of the Investment Company Act, contracts for investment advisory services are required to be reviewed, evaluated and approved by a majority of a fund's independent directors or trustees (the "Directors") each year. At American Century, this process is referred to as the "15(c) Process." As a part of this process, the board reviews fund performance, shareholder services, audit and compliance information, and a variety of other reports from the advisor concerning fund operations. In addition to this annual review, the board of directors oversees and evaluates on a continuous basis at its quarterly meetings the nature and quality of significant services performed by the advisor, fund performance, audit and compliance information, and a variety of other reports relating to fund operations. The board, or committees of the board, also holds special meetings as needed. Under a Securities and Exchange Commission rule, each fund is required to disclose in its annual or semiannual report, as appropriate, the material factors and conclusions that formed the basis for the board's approval or renewal of any advisory agreements within the fund's most recently completed fiscal half-year period. ANNUAL CONTRACT REVIEW PROCESS As part of the annual 15(c) Process undertaken during the most recent fiscal half-year period, the Directors reviewed extensive data and information compiled by the advisor and certain independent providers of evaluative data (the "15(c) Providers") concerning California High-Yield Municipal (the "fund") and the services provided to the fund under the management agreement. The information considered and the discussions held at the meetings included, but were not limited to: * the nature, extent and quality of investment management, shareholder services and other services provided to the fund under the management agreement; * reports on the advisor's activities relating to the wide range of programs and services the advisor provides to the fund and its shareholders on a routine and non-routine basis; * data comparing the cost of owning the fund to the cost of owning a similar fund; * data comparing the fund's performance to appropriate benchmarks and/or a peer group of other mutual funds with similar investment objectives and strategies; * financial data showing the profitability of the fund to the advisor and the overall profitability of the advisor; and * data comparing services provided and charges to other investment management clients of the advisor. In keeping with its practice, the fund's board of directors held two regularly scheduled meetings to review and discuss the information provided by the advisor and to complete its negotiations with the advisor regarding the renewal of the management agreement, including the setting of the applicable advisory fee. The board also had the benefit of the advice of its independent counsel throughout the period. - ------ 34 FACTORS CONSIDERED The Directors considered all of the information provided by the advisor, the 15(c) Providers, and the board's independent counsel, and evaluated such information for each fund for which the board has responsibility. The Directors did not identify any single factor as being all-important or controlling, and each Director may have attributed different levels of importance to different factors. In deciding to renew the agreement under the terms ultimately determined by the board to be appropriate, the Directors' decision was based on the following factors. NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management agreement, the advisor is responsible for providing or arranging for all services necessary for the operation of the fund. The board noted that under the management agreement, the advisor provides or arranges at its own expense a wide variety of services including: * fund construction and design * portfolio security selection * initial capitalization/funding * securities trading * custody of fund assets * daily valuation of the fund's portfolio * shareholder servicing and transfer agency, including shareholder confirmations, recordkeeping and communications * legal services * regulatory and portfolio compliance * financial reporting * marketing and distribution The Directors noted that many of these services have expanded over time both in terms of quantity and complexity in response to shareholder demands, competition in the industry and the changing regulatory environment. In performing their evaluation, the Directors considered information received in connection with the annual review, as well as information provided on an ongoing basis at their regularly scheduled board and committee meetings. INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services provided is quite complex and allows fund shareholders access to professional money management, instant diversification of their investments within an asset class, the opportunity to easily diversify among asset classes, and liquidity. In evaluating investment performance, the board expects the advisor to manage the fund in accordance with its investment objectives and approved strategies. In providing these services, the advisor utilizes teams of investment professionals (portfolio managers, analysts, research assistants, and securities traders) who require extensive information technology, research, training, compliance and other systems to conduct their business. - ------ 35 At each quarterly meeting the Directors review investment performance information for the fund, together with comparative information for appropriate benchmarks and peer groups of funds managed similarly to the fund. The Directors also review detailed performance information during the 15(c) Process. If performance concerns are identified, the Directors discuss with the advisor the reasons for such results (e.g., market conditions, security selection) and any efforts being undertaken to improve performance. The fund's performance for both the one- and three-year periods was above the median for its peer group. SHAREHOLDER AND OTHER SERVICES. The advisor provides the fund with a comprehensive package of transfer agency, shareholder, and other services. The Directors review reports and evaluations of such services at their regular quarterly meetings, including the annual meeting concerning contract review, and reports to the board. These reports include, but are not limited to, information regarding the operational efficiency and accuracy of the shareholder and transfer agency services provided, staffing levels, shareholder satisfaction (as measured by external as well as internal sources), technology support, new products and services offered to fund shareholders, securities trading activities, portfolio valuation services, auditing services, and legal and operational compliance activities. Certain aspects of shareholder and transfer agency service level efficiency and the quality of securities trading activities are measured by independent third party providers and are presented in comparison to other fund groups not managed by the advisor. COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor provides detailed information concerning its cost of providing various services to the fund, its profitability in managing the fund, its overall profitability, and its financial condition. The Directors have reviewed with the advisor the methodology used to prepare this financial information. This financial information regarding the advisor is considered in order to evaluate the advisor's financial condition, its ability to continue to provide services under the management agreement, and the reasonableness of the current management fee. ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment to providing quality services to shareholders and to conducting its business ethically. They noted that the advisor's practices generally meet or exceed industry best practices. ECONOMIES OF SCALE. The Directors review reports provided by the advisor on economies of scale for the complex as a whole and the year-over-year changes in revenue, costs, and profitability. The Directors concluded that economies of scale are difficult to measure and predict with precision, especially on a fund-by-fund basis. This analysis is also complicated by the additional services and content provided by the advisor and its reinvestment in its ability to provide and expand those services. Accordingly, the Directors also seek to evaluate economies of scale by reviewing other information, such as year-over-year profitability of the advisor generally, the profitability of its management of the fund specifically, the expenses incurred by the advisor in providing various functions to the fund, and the breakpoint fees of competitive funds not managed by the advisor. The Directors believe the advisor is appropriately sharing economies of scale through its competitive fee structure, fee breakpoints as the fund complex and the fund increases in size, and through reinvestment in its business to provide shareholders additional content and services. In particular, separate breakpoint schedules based on the size of the entire fund complex and on the size of the fund reflect the complexity of assessing economies of scale. - ------ 36 COMPARISON TO OTHER FUNDS' FEES. The fund pays the advisor a single, all-inclusive (or unified) management fee for providing all services necessary for the management and operation of the fund, other than brokerage expenses, taxes, interest, extraordinary expenses, and the fees and expenses of the fund's independent directors (including their independent legal counsel). Under the unified fee structure, the advisor is responsible for providing all investment advisory, custody, audit, administrative, compliance, recordkeeping, marketing and shareholder services, or arranging and supervising third parties to provide such services. By contrast, most other funds are charged a variety of fees, including an investment advisory fee, a transfer agency fee, an administrative fee, distribution charges and other expenses. Other than their investment advisory fees and Rule 12b-1 distribution fees, all other components of the total fees charged by these other funds may be increased without shareholder approval. The board believes the unified fee structure is a benefit to fund shareholders because it clearly discloses to shareholders the cost of owning fund shares, and, since the unified fee cannot be increased without a vote of fund shareholders, it shifts to the advisor the risk of increased costs of operating the fund and provides a direct incentive to minimize administrative inefficiencies. Part of the Directors' analysis of fee levels involves reviewing certain evaluative data compiled by an independent provider and comparing the fund's unified fee to the total expense ratio of other funds in the fund's peer group. The unified fee charged to shareholders of the fund was in the lowest quartile of the total expense ratios of its peer group. COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The Directors also requested and received information from the advisor concerning the nature of the services, fees, and profitability of its advisory services to advisory clients other than the fund. They observed that these varying types of client accounts require different services and involve different regulatory and entrepreneurial risks than the management of the fund. The Directors analyzed this information and concluded that the fees charged and services provided to the fund were reasonable by comparison. COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information from the advisor concerning collateral benefits it receives as a result of its relationship with the fund. They concluded that the advisor's primary business is managing mutual funds and it generally does not use fund or shareholder information to generate profits in other lines of business, and therefore does not derive any significant collateral benefits from them. The Directors noted that the advisor receives proprietary research from broker-dealers that execute fund portfolio transactions and concluded that this research is likely to benefit fund shareholders. The Directors also determined that the advisor is able to provide investment management services to certain clients other than the fund, at least in part, due to its existing infrastructure built to serve the fund complex. The Directors concluded, however, that the assets of those other clients are not material to the analysis and, in any event, are included with the assets of the fund to determine breakpoints in the fund's fee schedule, provided they are managed using the same investment team and strategy. CONCLUSIONS OF THE DIRECTORS As a result of this process, the Directors, in the absence of particular circumstances and assisted by the advice of legal counsel that is independent of the advisor, taking into account all of the factors discussed above and the information provided by the advisor concluded that the investment management agreement between the fund and the advisor is fair and reasonable in light of the services provided and should be renewed. - ------ 37 SHARE CLASS INFORMATION Four classes of shares are authorized for sale by the fund: Investor Class, A Class, B Class, and C Class. The total expense ratios of A Class, B Class, and C Class shares are higher than that of Investor Class shares. The fund is available for purchase only through financial intermediaries by investors who seek advice from them. Shareholders who have open accounts may make additional investments and reinvest dividends and capital gains distributions as long as such accounts remain open. INVESTOR CLASS shares are available for purchase in two ways: 1) directly from American Century without any commissions or other fees; or 2) through certain financial intermediaries (such as banks, broker-dealers, insurance companies and investment advisors), which may require payment of a transaction fee to the financial intermediary. A CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. A Class shares are sold at their offering price, which is net asset value plus an initial sales charge that ranges from 4.50% to 0.00% for fixed-income funds, depending on the amount invested. The initial sales charge is deducted from the purchase amount before it is invested. A Class shares may be subject to a contingent deferred sales charge (CDSC). There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The prospectus contains information regarding reductions and waivers of sales charges for A Class shares. The unified management fee for A Class shares is the same as for Investor Class shares. A Class shares also are subject to a 0.25% annual Rule 12b-1 distribution and service fee. B CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. B Class shares redeemed within six years of purchase are subject to a CDSC that declines from 5.00% during the first year after purchase to 0.00% after the sixth year. There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The unified management fee for B Class shares is the same as for Investor Class shares. B Class shares also are subject to a 1.00% annual Rule 12b-1 distribution and service fee. B Class shares automatically convert to A Class shares (with lower expenses) eight years after their purchase date. C CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. C Class shares redeemed within 12 months of purchase are subject to a CDSC of 1.00%. There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The unified management fee for C Class shares is the same as for Investor Class shares. C Class shares also are subject to a Rule 12b-1 distribution and service fee of 1.00%. All classes of shares represent a pro rata interest in the fund and generally have the same rights and preferences. - ------ 38 ADDITIONAL INFORMATION PROXY VOTING GUIDELINES American Century Investment Management, Inc., the fund's investment advisor, is responsible for exercising the voting rights associated with the securities purchased and/or held by the fund. A description of the policies and procedures the advisor uses in fulfilling this responsibility is available without charge, upon request, by calling 1-800-345-2021. It is also available on American Century's website at americancentury.com and on the Securities and Exchange Commission's website at sec.gov. Information regarding how the investment advisor voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the "About Us" page at americancentury.com. It is also available at sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of portfolio holdings for the most recent quarter of its fiscal year available on its website at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 39 INDEX DEFINITIONS The following indices are used to illustrate investment market, sector, or style performance or to serve as fund performance comparisons. They are not investment products available for purchase. The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of those securities included in the Lehman Brothers Municipal Bond Index that are investment-grade and have maturities between two and four years. The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of investment-grade U.S. municipal securities, with maturities of four to six years, that are general obligations of a state or local government. The LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of those securities included in the Lehman Brothers Municipal Bond Index that have maturities greater than 22 years. The LEHMAN BROTHERS MUNICIPAL BOND INDEX is a market value-weighted index designed for the long-term tax-exempt bond market. The LEHMAN BROTHERS NON-INVESTMENT-GRADE MUNICIPAL BOND INDEX is composed of non-investment grade U.S. municipal securities with a remaining maturity of one year or more. The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable, registered with the Securities and Exchange Commission, and U.S. dollar- denominated. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included in the Lehman Brothers U.S. Aggregate Index that are public obligations of the U.S. Treasury with a remaining maturity of one year or more. - ------ 40 [back cover] CONTACT US AMERICANCENTURY.COM AUTOMATED INFORMATION LINE: 1-800-345-8765 INVESTOR SERVICES REPRESENTATIVE: 1-800-345-2021 or 816-531-5575 INVESTORS USING ADVISORS: 1-800-378-9878 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS: 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL PROFESSIONALS, INSURANCE COMPANIES: 1-800-345-6488 TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 or 816-444-3485 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT ADVISOR: American Century Investment Management, Inc. Kansas City, Missouri This report and the statements it contains are submitted for the general information of our shareholders. The report is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. American Century Investment Services, Inc., Distributor ©2007 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. 0710 SH-ANN-56705N ITEM 2. CODE OF ETHICS. a. The registrant has adopted a Code of Ethics for Senior Financial Officers that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. b. No response required. c. None. d. None. e. Not applicable. f. The registrant's Code of Ethics for Senior Financial Officers was filed as Exhibit 12 (a)(1) to American Century Asset Allocation Portfolios, Inc.'s Annual Certified Shareholder Report on Form N-CSR, File No. 811-21591, on September 29, 2005, and is incorporated herein by reference. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The registrant's board has determined that the registrant has at least one audit committee financial expert serving on its audit committee. (a)(2) Peter F. Pervere, Jeanne D. Wohlers and Ronald J. Gilson are the registrant's designated audit committee financial experts. They are "independent" as defined in Item 3 of Form N-CSR. (a)(3) Not applicable. (b) No response required. (c) No response required. (d) No response required. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were as follows: FY 2006: $88,961 FY 2007: $93,907 (b) Audit-Related Fees. The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were as follows: For services rendered to the registrant: FY 2006: $0 FY 2007: $0 Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were as follows: For services rendered to the registrant: FY 2006: $13,268 FY 2007: $0 For 2006, these services included review of federal and state income tax forms and federal excise tax forms. Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (d) All Other Fees. The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item were as follows: For services rendered to the registrant: FY 2006: $0 FY 2007: $0 Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (e)(1) In accordance with paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation S-X, before the accountant is engaged by the registrant to render audit or non-audit services, the engagement is approved by the registrant's audit committee. Pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, the registrant's audit committee also pre-approves its accountant's engagements for non-audit services with the registrant's investment adviser, its parent company, and any entity controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant. (e)(2) All services described in each of paragraphs (b) through (d) of this Item were pre-approved before the engagement by the registrant's audit committee pursuant to paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation S-X. Consequently, none of such services were required to be approved by the audit committee pursuant to paragraph (c)(7)(i)(C). (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than 50%. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant were as follows: FY 2006: $254,351 FY 2007: $96,897 (h) The registrant's investment adviser and accountant have notified the registrant's audit committee of all non-audit services that were rendered by the registrant's accountant to the registrant's investment adviser, its parent company, and any entity controlled by, or under common control with the investment adviser that provides services to the registrant, which services were not required to be pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. The notification provided to the registrant's audit committee included sufficient details regarding such services to allow the registrant's audit committee to consider the continuing independence of its principal accountant. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The schedule of investments is included as part of the report to stockholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the reporting period, there were no material changes to the procedures by which shareholders may recommend nominees to the registrant's board. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this report. (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant's second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Registrant's Code of Ethics for Senior Financial Officers, which is the subject of the disclosure required by Item 2 of Form N-CSR, was filed as Exhibit 12(a)(1) to American Century Asset Allocation Portfolios, Inc.'s Certified Shareholder Report on Form N-CSR, File No. 811-21591, on September 29, 2005. (a)(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are filed and attached hereto as Exhibit 99.302CERT. (a)(3) Not applicable. (b) A certification by the registrant's chief executive officer and chief financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is furnished and attached hereto as Exhibit 99.906CERT.SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Registrant: AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS By: /s/ Jonathan S. Thomas --------------------------------------- Name: Jonathan S. Thomas Title: President Date: October 30, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Jonathan S. Thomas --------------------------------------- Name: Jonathan S. Thomas Title: President (principal executive officer) Date: October 30, 2007 By: /s/ Robert J. Leach --------------------------------------- Name: Robert J. Leach Title: Vice President, Treasurer, and Chief Financial Officer (principal financial officer) Date: October 30, 2007