UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-4025 ---------------------------------------------- AMERICAN CENTURY MUNICIPAL TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) DAVID C. TUCKER, ESQ., 4500 MAIN STREET, 9TH FLOOR, 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: 5-31 -------------------------------------------------------- Date of reporting period: 5-31-2006 ------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. American Century Investments ANNUAL REPORT MAY 31, 2006 [photo of man and woman] Tax-Free Money Market Fund Tax-Free Bond Fund [american century investments logo and text logo] Table of Contents Our Message to You . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 U.S. Fixed-Income Total Returns . . . . . . . . . . . . . . . . . . . . . 2 TAX-FREE MONEY MARKET Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Portfolio Composition by Credit Rating . . . . . . . . . . . . . . . . . 5 Portfolio Composition by Maturity . . . . . . . . . . . . . . . . . . . . 5 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 6 TAX-FREE BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Portfolio Composition by Credit Rating . . . . . . . . . . . . . . . . . 12 Top Five States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Shareholder Fee Examples . . . . . . . . . . . . . . . . . . . . . . . . . 24 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . 26 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . 28 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 29 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Report of Independent Registered Public Accounting Firm . . . . . . . . . . 37 OTHER INFORMATION Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond . . . . . . . . . . . . . . . . . . 41 Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 47 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. Our Message to You [photo of James E. Stowers III and James E. Stowers, Jr.] JAMES E. STOWERS III WITH JAMES E. STOWERS, JR. We are pleased to provide you with the annual report for the American Century Tax-Free Money Market and Tax-Free Bond funds for the 12 months ended May 31, 2006. We hope you find this information helpful in monitoring your investment. Another useful resource we offer is our Web site, americancentury.com, where we post quarterly portfolio commentaries, the views of our senior investment officers, and other communications about investments, portfolio strategy, and the markets. Our Web site presents American Century's recently-announced strategic collaboration with Lance Armstrong and the Lance Armstrong Foundation (LAF). Our new campaign, featuring Lance, is designed to encourage investors to take a more active role in planning their financial futures and make every investment decision count. American Century's collaboration with Lance Armstrong and the LAF is a perfect fit. Like members of our family, Lance is a cancer survivor and shares our values of optimism, focus, and determination. In addition, Lance and our family have dedicated our success to improving lives, through the LAF and the Stowers Institute for Medical Research, respectively. To learn more about American Century's collaboration with Lance Armstrong and the LAF, please visit www.lanceface.com on the Web and click on the links to related sites. Besides the exciting new collaboration, we've enjoyed other good news -- in January, American Century was named, for the seventh consecutive year, one of FORTUNE magazine's 100 Best Companies to Work For in America. Fostering a positive work environment can benefit fund investors as well as our company -- it helps us continue to attract and retain talented people. As always, we deeply appreciate your investment with American Century Investments. Sincerely, /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AMERICAN CENTURY COMPANIES, INC. /s/James E. Stowers III James E. Stowers III CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. - ------ 1 Market Perspective [photo of David MacEwen] BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME ECONOMIC GROWTH PUSHED COMMODITY PRICES & INTEREST RATES HIGHER Strong economic growth abroad and resilient growth in the U.S. (despite a devastating 2005 hurricane season and record-high energy prices) helped push U.S. interest rates and Treasury yields to their highest levels since 2001-2002 during the 12 months ended May 31, 2006. The U.S. economy grew at a moderate rate of approximately 3.5% for the period, despite dipping below 2% in the fourth quarter of 2005. Robust overseas growth, particularly in emerging Asian markets such as China and India, helped push the Commodity Research Bureau index to a record high, fanning inflation fears and forcing global central banks to raise interest rates. TREASURY YIELDS INVERTED, INDICATING POSSIBLE ECONOMIC WEAKNESS AHEAD In the U.S., the Federal Reserve increased its overnight interest rate target eight times during the 12 months, raising it from 3% to 5%. That display of inflation-fighting discipline helped prevent long-term Treasury yields from rising as much as short-term yields, reducing or "flattening" the difference between these yields. On May 31, 2005, two- and 10-year Treasury yields were 3.58% and 3.98%, respectively, 0.40 percentage point apart. On May 31, 2006, the respective yields for two- and 10-year notes were 5.04% and 5.12%, just 0.08 percentage point apart. These yields also "inverted" temporarily during the first quarter of 2006 when the two-year yield rose higher than the 10-year. This phenomenon often precedes economic downturns. MUNICIPAL MARKET GENERALLY OUTPERFORMED TAXABLE MARKET Rising interest rates created challenging conditions for bonds, which, in general, had to rely on their interest income to help offset price declines. Under these conditions, the best performers were money market and high-yield securities. In addition, the municipal market generally outperformed the taxable - -- municipal yields didn't rise or flatten as much as Treasury yields. Reasons for municipal outperformance included strong demand from investors (including those who recognized that municipals typically outperform in bond bear markets), declining municipal supply growth (less issuance and refinancing as interest rates rose), and favorable economic growth (providing improved tax revenues and credit conditions for municipal debt). U.S. FIXED-INCOME TOTAL RETURNS For the 12 months ended May 31, 2006 - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL MARKET INDICES - -------------------------------------------------------------------------------- Municipal Bond 1.90% - -------------------------------------------------------------------------------- 3-Year Municipal Bond 1.59% - -------------------------------------------------------------------------------- 5-Year General Obligation (GO) 1.24% - -------------------------------------------------------------------------------- Long-Term Municipal Bond (22+ years) 3.20% - -------------------------------------------------------------------------------- Non-Investment-Grade (High-Yield) 7.20% - -------------------------------------------------------------------------------- TAXABLE MARKET RETURNS - -------------------------------------------------------------------------------- Lehman Bros. U.S. Aggregate Index -0.48% - -------------------------------------------------------------------------------- Lehman Bros. U.S. Treasury Index -1.39% - -------------------------------------------------------------------------------- 3-Month Treasury Bill 3.85% - -------------------------------------------------------------------------------- 10-Year Treasury Note -5.25% - -------------------------------------------------------------------------------- Source: Lehman Brothers Inc. - ------ 2 Tax-Free Money Market - Performance TOTAL RETURNS AS OF MAY 31, 2006 -------------------------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS(1) INCEPTION(1) DATE - ------------------------------------------------------------------------------- INVESTOR CLASS 2.51% 1.43% 2.39% 3.31% 7/31/84 - ------------------------------------------------------------------------------- AVERAGE RETURN OF LIPPER'S TAX-EXEMPT MONEY MARKET FUNDS(2) 2.16% 1.14% 2.12% 3.16%(3) -- - ------------------------------------------------------------------------------- Fund's Lipper Ranking as of 5/31/06(2) 9 of 115 8 of 95 6 of 80 5 of 28(3) -- - ------------------------------------------------------------------------------- Fund's Lipper Ranking as of 6/30/06(2) 9 of 115 8 of 96 6 of 79 5 of 28(3) -- - ------------------------------------------------------------------------------- (1) Fund returns and rankings would have been lower if management fees had not been waived from 8/1/97 to 7/31/98. Beginning on 8/1/98, management fees were phased in at a rate of 0.10% each month until 12/1/98. (2) Data provided by Lipper Inc. - A Reuters Company. (c) 2006 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 8/31/84, 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 Tax-Free Money Market - Portfolio Commentary PORTFOLIO MANAGER: TODD PARDULA MR. PARDULA, A MEMBER OF THE MUNICIPAL BOND INVESTMENT-MANAGEMENT TEAM WHO JOINED AMERICAN CENTURY INVESTMENTS IN 1990, REPLACED ALAN KRUSS AS TEAM LEADER FOR TAX-FREE MONEY MARKET WHEN MR. KRUSS' ROLE IN THE MANAGEMENT OF SEVERAL AMERICAN CENTURY MUNICIPAL BOND FUNDS WAS EXPANDED. PERFORMANCE SUMMARY Tax-Free Money Market returned 2.51% for the year ended May 31, 2006, outperforming the 2.16% average return of the 115 funds in Lipper's "Tax-Exempt Money Market Funds" category, and ranking the fund in the top 8% (#9 out of 115) of the Lipper peers. Tax-Free Money Market also ranks in the top 9% for the 5-year and 10-year periods ended May 31 (see the previous page for performance numbers.) MARKET PERSPECTIVE As the Federal Reserve pushed short-term U.S. interest rates up two percentage points over the course of the period, money market yields rose accordingly. Municipal money market yields also displayed their typical seasonal fluctuations--yields spiked in late December 2005 when money market supply increased as dealers tried to clear their inventory before year end. But yields fell again in early January as bond maturities and calls boosted demand for money market securities. A similar cycle played out in April and May of 2006, as investors withdrew funds from their money market accounts to pay taxes, causing demand for money markets to plummet and yields to spike. Overall, Tax-Free Money Market's 7-day current yield rose from 2.41% on May 31, 2005, to 3.02% on May 31, 2006. PORTFOLIO POSITIONING & STRATEGY Managers kept most of Tax-Free Money Market's assets in variable rate demand notes (VRDNs). These are short-term, floating-rate municipal notes with weekly yield resets (though some are daily or monthly). This benefits the fund when interest rates are rising, as they were during the fiscal year, or when demand for money-market securities falls, as it did in December and April. VRDNs can capture higher yields more quickly than other short-term securities, giving Tax-Free Money Market's yield a boost. As of May 31, 2006, VRDNs made up about 93% of the portfolio's holdings. The remainder was invested in municipal notes and bonds, municipal mandatory put bonds, and municipal commercial paper. YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 7-DAY CURRENT YIELD - -------------------------------------------------------------------------------- 3.02% - -------------------------------------------------------------------------------- 7-DAY EFFECTIVE YIELD - -------------------------------------------------------------------------------- 3.06% - -------------------------------------------------------------------------------- 7-DAY TAX-EQUIVALENT CURRENT YIELDS(1) - -------------------------------------------------------------------------------- 25.0% Tax Bracket 4.03% - -------------------------------------------------------------------------------- 28.0% Tax Bracket 4.19% - -------------------------------------------------------------------------------- 33.0% Tax Bracket 4.51% - -------------------------------------------------------------------------------- 35.0% Tax Bracket 4.65% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are for federal taxes only. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. (continued) - ------ 4 Tax-Free Money Market - Portfolio Commentary Tax-Free Money Market's weighted average maturity fell steadily between September 2005 and May 2006, ending the period at 11 days on May 31. Much of the decline resulted as the investment team steered clear of municipal notes, which didn't offer very attractive yields. These notes typically have a one-year maturity, and so push the fund's WAM higher--without them, the WAM tends to shorten significantly. HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY Tax-Free Money Market is designed to supply the "cash" component in a diversified investment portfolio, offering capital preservation and liquidity. Tax-Free Money Market provides federally tax-exempt current income by investing in high-quality, very short-term debt securities issued by cities, counties, and other municipalities. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- A-1+ 71% 68% - -------------------------------------------------------------------------------- A-1 29% 32% - -------------------------------------------------------------------------------- Ratings provided by independent research companies. These ratings are listed in Standard & Poor's format even if they were provided by other sources. PORTFOLIO COMPOSITION BY MATURITY - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- 1-30 days 95% 93% - -------------------------------------------------------------------------------- 31-90 days 1% -- - -------------------------------------------------------------------------------- 91-180 days 4% 1% - -------------------------------------------------------------------------------- More than 180 days -- 6% - -------------------------------------------------------------------------------- - ------ 5 Tax-Free Money Market - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 98.7% ALABAMA - 2.5% - -------------------------------------------------------------------------------- $1,500 Birmingham Public Park & Recreation Board Rev., (Children's Zoo), VRDN, 3.59%, 6/1/06 (LOC: AmSouth Bank) $ 1,500 - -------------------------------------------------------------------------------- 2,500 Birmingham Special Care Facilities Financing Auth. Rev., (United Cerebral Palsy Project), VRDN, 3.59%, 6/1/06 (LOC: AmSouth Bank) 2,500 - -------------------------------------------------------------------------------- 800 Mobile Industrial Development Board Rev., (Holnam Inc.), VRDN, 3.36%, 6/7/06 (LOC: Bayerische Landesbank) 800 - -------------------------------------------------------------------------------- 2,005 Tuscaloosa Health Care Auth. Rev., (Pine Valley), VRDN, 3.59%, 6/1/06 (LOC: AmSouth Bank) 2,005 - -------------------------------------------------------------------------------- 6,805 - -------------------------------------------------------------------------------- ARIZONA - 2.5% - -------------------------------------------------------------------------------- 6,750 Maricopa County Industrial Development Auth. Rev., (Michael Pylman Dairies), VRDN, 3.62%, 6/1/06 (LOC: LaSalle Bank N.A) 6,750 - -------------------------------------------------------------------------------- CALIFORNIA - 3.5% - -------------------------------------------------------------------------------- 1,387 Alameda County Industrial Development Auth. Rev., (Design Workshops), VRDN, 3.72%, 6/1/06 (LOC: Wells Fargo Bank N.A.) 1,387 - -------------------------------------------------------------------------------- 1,022 California Economic Development Financing Auth. Rev., (Wesflex Pipe Manufacturing), VRDN, 3.78%, 6/1/06 (LOC: Wells Fargo Bank N.A.) 1,022 - -------------------------------------------------------------------------------- 7,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.07%, 6/1/06 (LOC: Lloyds Bank plc) 7,000 - -------------------------------------------------------------------------------- 9,409 - -------------------------------------------------------------------------------- COLORADO - 4.1% - -------------------------------------------------------------------------------- 3,095 Arvada Water Enterprise Rev., VRDN, 3.80%, 6/1/06 (FSA) (SBBPA: Dexia Credit Local) 3,095 - -------------------------------------------------------------------------------- 2,200 Colorado Health Facilities Auth. Rev., (Boulder Community Hospital), VRDN, 3.35%, 6/7/06 (LOC: JPMorgan Chase Bank) 2,200 - -------------------------------------------------------------------------------- 5,800 Colorado Housing & Finance Auth. Rev., (Kroger Co.), VRDN, 3.57%, 6/1/06 (LOC: U.S. Bank Trust N.A.) 5,800 - -------------------------------------------------------------------------------- 11,095 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- FLORIDA - 4.8% - -------------------------------------------------------------------------------- $1,075 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 3.67%, 6/1/06 (RADIAN) (SBBPA: SunTrust Bank) $ 1,075 - -------------------------------------------------------------------------------- 4,930 Florida Housing Finance Agency Rev., VRDN, 3.60%, 6/1/06 (SBBPA: Merrill Lynch Capital Services) (Acquired 2/6/04 - 4/19/04, Cost $4,930)(1) 4,930 - -------------------------------------------------------------------------------- 4,300 Miami-Dade County Industrial Development Auth. Rev., (Palmer Trinity Private College), VRDN, 3.55%, 6/1/06 (LOC: Keybank N.A.) 4,300 - -------------------------------------------------------------------------------- 1,950 Pinellas County Health Facility Auth. Rev., (Pooled Hospital Loan Program), VRDN, 3.60%, 6/1/06 (Ambac) (SBBPA: Wachovia Bank N.A.) 1,950 - -------------------------------------------------------------------------------- 800 Seminole County Industrial Development Auth. Rev., VRDN, 3.67%, 6/1/06 (LOC: Bank of America N.A.) 800 - -------------------------------------------------------------------------------- 13,055 - -------------------------------------------------------------------------------- GEORGIA - 2.0% - -------------------------------------------------------------------------------- 5,495 Fulton County Development Auth. Rev., (Automatic Data Processing), VRDN, 3.65%, 6/15/06 5,495 - -------------------------------------------------------------------------------- HAWAII - 1.8% - -------------------------------------------------------------------------------- 3,000 Hawaii Pacific Health Rev., Series 2004 B, (Department Budget & Finance), VRDN, 3.30%, 6/7/06 (RADIAN) (SBBPA: Bank of Nova Scotia) 3,000 - -------------------------------------------------------------------------------- 2,000 Hawaii Pacific Health Rev., Series 2004 B2, (Department Budget & Finance), VRDN, 3.30%, 6/7/06 (RADIAN) (SBBPA: Bank of Nova Scotia) 2,000 - -------------------------------------------------------------------------------- 5,000 - -------------------------------------------------------------------------------- IDAHO - 1.1% - -------------------------------------------------------------------------------- 3,000 Lincoln County Industrial Development Corp. Rev., (Double A Dairy), VRDN, 3.62%, 6/1/06 (LOC: Bank of America N.A.) 3,000 - -------------------------------------------------------------------------------- ILLINOIS - 0.7% - -------------------------------------------------------------------------------- 1,900 City of Chicago GO, Series 2005 D, VRDN, 3.47%, 6/1/06 (FSA) (LOC: Dexia Credit Local) 1,900 - -------------------------------------------------------------------------------- INDIANA - 9.3% - -------------------------------------------------------------------------------- 2,800 Jasper County Industrial Development Rev., (Newberry Farms LLC), VRDN, 3.62%, 6/1/06 (LOC: Bank of the West) 2,800 - -------------------------------------------------------------------------------- 5,615 La Porte Industrial Development Rev., (KKO Realty), VRDN, 3.62%, 6/1/06 (LOC: Bank of New York 5,615 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 6 Tax-Free Money Market - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,565 Morgan County Rev., Series 2002 A, (Morgan Hospital & Medical Center), VRDN, 3.60%, 6/1/06 (LOC: Fifth Third Bank) $ 1,565 - -------------------------------------------------------------------------------- 11,815 Morgan County Rev., Series 2002 B, (Morgan Hospital & Medical Center), VRDN, 3.55%, 6/1/06 (LOC: Fifth Third Bank) 11,815 - -------------------------------------------------------------------------------- 3,625 Vincennes Economic Development Rev., (Grandview Care Inc.), VRDN, 3.70%, 6/1/06 (LOC: JPMorgan Chase Bank) 3,625 - -------------------------------------------------------------------------------- 25,420 - -------------------------------------------------------------------------------- KENTUCKY - 2.6% - -------------------------------------------------------------------------------- 5,000 Kentucky Asset Liability Commission Tax and Rev. Anticipation Notes, Series 2005 A, 4.00%, 6/28/06 5,005 - -------------------------------------------------------------------------------- 1,000 Murray Industrial Building Rev., (Kroger Co.), VRDN, 3.57%, 6/1/06 (LOC: U.S. Bank N.A.) 1,000 - -------------------------------------------------------------------------------- 1,000 Winchester Industrial Building Rev., (Kroger Co.), VRDN, 3.57%, 6/1/06 (LOC: U.S. Bank N.A.) 1,000 - -------------------------------------------------------------------------------- 7,005 - -------------------------------------------------------------------------------- LOUISIANA - 4.7% - -------------------------------------------------------------------------------- 2,800 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., (Trinity Episcopal School), VRDN, 3.32%, 6/7/06 (LOC: SunTrust Bank) 2,800 - -------------------------------------------------------------------------------- 10,000 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., Series 2006 A, VRDN, 3.57%, 6/1/06 (Ambac) (SBBPA: BNP Paribas) 10,000 - -------------------------------------------------------------------------------- 12,800 - -------------------------------------------------------------------------------- MARYLAND - 0.4% - -------------------------------------------------------------------------------- 1,000 Maryland Economic Development Corp. Rev., Series 2002 B, (Federation of American Societies), VRDN, 3.32%, 6/7/06 (LOC: SunTrust Bank) 1,000 - -------------------------------------------------------------------------------- MASSACHUSSETTS - 1.8% - -------------------------------------------------------------------------------- 5,000 Massachusetts Development Finance Agency Rev., (Wentworth Technology Institute), VRDN, 3.55%, 6/1/06 (RADIAN) (SBBPA: Bank of New York) 5,000 - -------------------------------------------------------------------------------- MINNESOTA - 4.9% - -------------------------------------------------------------------------------- 6,940 Dakota County Community Development Agency Rev., (Catholic Finance Corp.), VRDN, 3.35%, 6/7/06 (LOC: U.S. Bank N.A.) 6,940 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $6,500 East Grand Forks Rev., (American Crystal Sugar Co.), VRDN, 3.62%, 6/1/06 (LOC: Wachovia Bank N.A.) $ 6,500 - -------------------------------------------------------------------------------- 13,440 - -------------------------------------------------------------------------------- MISSISSIPPI - 0.9% - -------------------------------------------------------------------------------- 2,570 Mississippi Business Finance Corp. Rev., Series 2004 B, VRDN, 3.59%, 6/1/06 (LOC: Wells Fargo Bank N.A.) 2,570 - -------------------------------------------------------------------------------- MISSOURI - 6.9% - -------------------------------------------------------------------------------- 6,700 Jackson County Industrial Development Auth. Rev., (Linda Hall Library), VRDN, 3.59%, 6/1/06 (LOC: Commerce Bank N.A.) 6,700 - -------------------------------------------------------------------------------- 2,560 Kansas City Industrial Development Auth. Rev., (Plaza Manor Nursing), VRDN, 3.62%, 6/1/06 (LOC: Comerica Bank) 2,560 - -------------------------------------------------------------------------------- 9,400 Missouri State Health & Educational Facilities Auth. COP, (Pembroke Hill School), VRDN, 3.59%, 6/1/06 (LOC: Commerce Bank N.A.) 9,400 - -------------------------------------------------------------------------------- 18,660 - -------------------------------------------------------------------------------- NEVADA - 1.3% - -------------------------------------------------------------------------------- 3,600 Clark County Economic Development Rev., (Lutheran Secondary School Association), VRDN, 3.67%, 6/1/06 (LOC: Allied Irish Bank plc) 3,600 - -------------------------------------------------------------------------------- NORTH CAROLINA - 4.9% - -------------------------------------------------------------------------------- 1,480 North Carolina Medical Care Commission Retirement Facilities Rev., (Aldersgate), VRDN, 3.30%, 6/7/06 (LOC: Branch Banking & Trust) 1,480 - -------------------------------------------------------------------------------- 11,900 North Carolina Medical Care Commission Retirement Facilities Rev., Series 2001 C, (Village at Brookwood), VRDN, 3.30%, 6/7/06 (LOC: Branch Banking & Trust) 11,900 - -------------------------------------------------------------------------------- 13,380 - -------------------------------------------------------------------------------- OREGON - 4.8% - -------------------------------------------------------------------------------- 13,100 Port of Portland Public Grain Elevator Rev., (Columbia Grain Inc.), VRDN, 3.59%, 6/1/06 (LOC: Wachovia Bank N.A.) 13,100 - -------------------------------------------------------------------------------- SOUTH CAROLINA - 3.0% - -------------------------------------------------------------------------------- 8,150 South Carolina Jobs Economic Development Auth Rev., (Greenville Technical College), VRDN, 3.59%, 6/1/06 (LOC: SunTrust Bank) 8,150 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 7 Tax-Free Money Market - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- TENNESSEE - 7.0% - -------------------------------------------------------------------------------- $7,880 Bradley County Industrial Development Board Rev., (Kroger Co.), VRDN, 3.57%, 6/1/06 (LOC: U.S. Bank N.A.) $ 7,880 - -------------------------------------------------------------------------------- 700 Cookeville Industrial Development Board Rev., Series 2001 A, (Advocacy & Resources Project), VRDN, 3.59%, 6/1/06 (LOC: AmSouth Bank) 700 - -------------------------------------------------------------------------------- 2,300 Knox County Industrial Development Board Rev., (Kroger Co.), VRDN, 3.57%, 6/1/06 (LOC: U.S. Bank Trust N.A.) 2,300 - -------------------------------------------------------------------------------- 8,200 Shelby County Health Educational & Housing Facilities Board Rev., (Kings Daughter & Sons), VRDN, 3.59%, 6/1/06 (LOC: AmSouth Bank) 8,200 - -------------------------------------------------------------------------------- 19,080 - -------------------------------------------------------------------------------- TEXAS - 16.2% - -------------------------------------------------------------------------------- 10,000 Crawford Education Facilities Corp. Rev., (University Package System A), VRDN, 3.56%, 6/1/06 (LOC: BNP Paribas) 10,000 - -------------------------------------------------------------------------------- 5,500 Gulf Coast Industrial Development Auth. Rev., (Petrounited Term Inc.), VRDN, 3.56%, 6/1/06 (LOC: BNP Paribas) 5,500 - -------------------------------------------------------------------------------- 3,000 Hale County Industrial Development Corp. Rev., (Struikmans), VRDN, 3.62%, 6/1/06 (LOC: Bank of the West) 3,000 - -------------------------------------------------------------------------------- 4,000 Hale County Industrial Development Corp. Rev., (White River Ranch), VRDN, 3.62%, 6/1/06 (LOC: Wells Fargo Bank N.A.) 4,000 - -------------------------------------------------------------------------------- 2,470 Lubbock Health Facilities Development Corp. Rev., (Saint Joseph Health System), 5.00%, 7/1/06 (FSA) 2,474 - -------------------------------------------------------------------------------- 5,500 Muleshoe Economic Development Corp. Rev., (John Lyle & Grace Ajean), VRDN, 3.62%, 6/1/06 (LOC: Wells Fargo Bank N.A.) 5,500 - -------------------------------------------------------------------------------- 3,645 San Antonio Education Facilities Corp. Rev., Series 2004 A, (Phase 1 Dormitory), VRDN, 3.54%, 6/1/06 (LOC: Allied Irish Bank plc) 3,645 - -------------------------------------------------------------------------------- 10,000 Texas Tax & Rev. Anticipation Notes, 4.50%, 8/31/06 10,037 - -------------------------------------------------------------------------------- 44,156 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- VERMONT - 0.8% - -------------------------------------------------------------------------------- $2,190 Vermont Educational & Health Buildings Financing Agency Rev., Series 2004 B, (Landmark College), VRDN, 3.50%, 6/1/06 (RADIAN) (LOC: SunTrust Bank) $ 2,190 - -------------------------------------------------------------------------------- VIRGINIA - 3.3% - -------------------------------------------------------------------------------- 2,400 Bristol Industrial Development Auth. Rev., (Bristol Health Care Center Inc.), VRDN, 3.70%, 6/1/06 (LOC: Regions Bank) 2,400 - -------------------------------------------------------------------------------- 6,600 Suffolk Industrial Development Auth. Rev., (Lake Prince Center), VRDN, 3.43%, 6/7/06 (LOC: Branch Banking & Trust) 6,600 - -------------------------------------------------------------------------------- 9,000 - -------------------------------------------------------------------------------- WEST VIRGINIA - 1.5% - -------------------------------------------------------------------------------- 4,000 West Virginia Economic Development Auth. Rev., (Collins Hardwood Co.), VRDN, 3.62%, 6/1/06 (LOC: Bank of America N.A.) 4,000 - -------------------------------------------------------------------------------- WISCONSIN - 0.8% - -------------------------------------------------------------------------------- 2,125 Wisconsin Health & Educational Facilities Auth. Rev., Series 2006 A, (Marshfield Clinic), VRDN, 3.56%, 6/1/06 (LIQ FAC: Merrill Lynch Capital Services) 2,125 - -------------------------------------------------------------------------------- WYOMING - 0.6% - -------------------------------------------------------------------------------- 1,500 City of Gillette Rev., VRDN, 3.31%, 6/7/06 (LOC: Barclay's Bank plc) 1,500 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 98.7% 268,685 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- 1.3% 3,523 - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $272,208 ================================================================================ NOTES TO SCHEDULE OF INVESTMENTS Ambac = Ambac Assurance Corporation COP = Certificates of Participation FSA = Financial Security Assurance, Inc. GO = General Obligation LIQ FAC = Liquidity Facilities LOC = Letter of Credit RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. (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 May 31, 2006 was $4,930 (in thousands), which represented 1.8% of total net assets. See Notes to Financial Statements. - ------ 8 Tax-Free Bond - Performance TOTAL RETURNS AS OF MAY 31, 2006 ---------------------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE - -------------------------------------------------------------------------------- INVESTOR CLASS 1.87% 4.34% 5.05% 5.42% 3/2/87 - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 1.24% 4.06% 4.88% 5.56%(1) -- - -------------------------------------------------------------------------------- AVERAGE RETURN OF LIPPER'S INTERMEDIATE MUNICIPAL DEBT FUNDS(2) 1.03% 3.94% 4.71% 5.55%(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 5/31/06(2) 17 of 150 30 of 104 14 of 70 8 of 13(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 6/30/06(2) 18 of 149 31 of 106 15 of 70 9 of 13(3) -- - -------------------------------------------------------------------------------- Institutional Class 2.07% -- -- 3.17% 4/15/03 - -------------------------------------------------------------------------------- Advisor Class -- -- -- 1.51%(4) 7/29/05 - -------------------------------------------------------------------------------- (1) Since 2/28/87, the date nearest the Investor Class's inception for which data are available. (2) Data provided by Lipper Inc. - A Reuters Company. (c) 2006 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 3/31/87, the date nearest the Investor Class's inception for which data are available. (4) Total returns for periods less than one year are not annualized. 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. 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. (continued) - ------ 9 Tax-Free Bond - Performance GROWTH OF $10,000 OVER 10 YEARS $10,000 investment made May 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS Periods ended May 31 - -------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 - -------------------------------------------------------------------------------------------------- Investor Class 6.29% 7.60% 4.07% 0.44% 10.77% 6.45% 9.31% -0.79% 5.16% 1.87% - -------------------------------------------------------------------------------------------------- Lehman Brothers Municipal 5-Year GO Index 6.08% 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% - -------------------------------------------------------------------------------------------------- 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. 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. - ------ 10 Tax-Free Bond - Portfolio Commentary PORTFOLIO TEAM LEADER: ROBERT J. MILLER MR. MILLER, VICE PRESIDENT AND PORTFOLIO MANAGER, JOINED AMERICAN CENTURY INVESTMENTS IN JUNE 1998 AND BECAME A PORTFOLIO MANAGER IN FEBRUARY 2001. IN APRIL 2006 HE TOOK OVER THE TEAM-LEADER ROLE FOR TAX-FREE BOND FROM KENNETH SALINGER, WHO LEFT THE COMPANY TO PURSUE OTHER INTERESTS. PERFORMANCE SUMMARY Tax-Free Bond returned 1.87%* for the 12 months ended May 31, 2006, solidly outpacing the 1.03% average return of Lipper's Intermediate Municipal Debt Funds. The fund also outperformed the Lehman Brothers Municipal 5-Year GO Index, which returned 1.24%. Tax-Free Bond's long-term performance was also noteworthy: the fund ranked among the top 30% of its Lipper peer group for the trailing five and 10 years while returning more than Lehman's Municipal 5-Year GO Index. Although favorable by comparison, Tax-Free Bond's 12-month absolute return was modest, reflecting a myriad of obstacles faced by municipal bonds and the broader bond market that are detailed in the Market Perspective on page 2. The commentary below discusses the strategies that we employed for Tax-Free Bond in that environment. YIELD SUMMARY One of Tax-Free Bond's key investment objectives is to seek high current income exempt from federal income tax. Along those lines, the fund's 30-day SEC yield was 3.62% as of May 31, 2006, which translated into the attractive tax-equivalent yields shown in the table at bottom right on this page. By comparison, Tax-Free Bond's Lipper group average 30-day SEC yield was 3.38%. All else being equal, a higher yield can boost returns and performance. And it's worth noting that Tax-Free Bond achieved that yield advantage while steering clear of bonds subject to the Alternative Minimum Tax. PORTFOLIO STRATEGY & OUTLOOK The fundamentals of our repeatable, multi-layered investment approach remained central to our efforts, and one of our key strategies involved actively managing Tax-Free Bond's bond-maturity structure. In particular, we positioned the portfolio to benefit from a diminishing gap between the yields of short- and long-term municipal bonds. That meant employing a "barbell" bond maturity structure which tends to outperform in such a scenario. We achieved the barbell by overweighting short- and long-term municipal bonds, while comparatively underweighting intermediate-term securities. That structure paid off as the yield gap between two- and 30-year triple-A rated municipal bonds dropped from approximately 161 basis points (1.61%) to only 83 basis points over the 12 months. YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD - -------------------------------------------------------------------------------- Investor Class 3.62% - -------------------------------------------------------------------------------- Institutional Class 3.82% - -------------------------------------------------------------------------------- Advisor Class 3.38% - -------------------------------------------------------------------------------- INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) - -------------------------------------------------------------------------------- 25.0% Tax Bracket 4.83% - -------------------------------------------------------------------------------- 28.0% Tax Bracket 5.03% - -------------------------------------------------------------------------------- 33.0% Tax Bracket 5.40% - -------------------------------------------------------------------------------- 35.0% Tax Bracket 5.57% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are for federal taxes only. 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. (continued) - ------ 11 Tax-Free Bond - Portfolio Commentary Toward the end of the period, however, the municipal yield curve's flattening appeared to be largely over, a notion supported by how much yield spreads had already contracted, as well as by economic, market, and interest rate forecasts at that time. So we pared back short- and long-term bond holdings and generally invested the proceeds in intermediate-term securities, establishing a "curve-neutral" emphasis. Lastly, we conservatively managed the portfolio's interest rate sensitivity and closely monitored supply and demand developments within and between the various states. We also increased the portfolio's triple-B municipal bond holdings. These securities, which reside on the lowest credit rung of the investment-grade ladder, generally afforded higher yields than their like-maturity, higher-rated equivalents. In addition to boosting the portfolio's income stream, that meant a greater cushion against the backdrop of falling bond prices and rising yields. TAX-FREE BOND'S PLACE IN YOUR PORTFOLIO Tax-Free Bond is designed to be a core bond holding and seeks safety of principal and high current income by investing in debt securities issued by cities, counties and municipalities, and U.S. territories. Because municipal bonds typically don't move in lock-step with equities under various economic and market scenarios, Tax-Free Bond also potentially offers diversification benefits for investors. But it's important to keep in mind that even diversification does not insure against losses. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- AAA 73% 73% - -------------------------------------------------------------------------------- AA 3% 5% - -------------------------------------------------------------------------------- A 5% 8% - -------------------------------------------------------------------------------- BBB 19% 14% - -------------------------------------------------------------------------------- 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 STATES AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- % OF NET % OF NET ASSETS ASSETS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- Texas 10.8% 13.8% - -------------------------------------------------------------------------------- New Jersey 10.6% 4.8% - -------------------------------------------------------------------------------- Arizona 8.8% 7.7% - -------------------------------------------------------------------------------- Puerto Rico 7.9% 7.9% - -------------------------------------------------------------------------------- Washington 7.0% 6.7% - -------------------------------------------------------------------------------- - ------ 12 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 101.3% ALABAMA - 1.0% - -------------------------------------------------------------------------------- $ 865 Alabama Water Pollution Control Auth. GO, 5.75%, 8/15/18 (Ambac) $ 930 - -------------------------------------------------------------------------------- 190 East Central Industrial Development Auth. Rev., 5.25%, 9/1/08, Prerefunded at 100% of Par (Ambac)(1) 197 - -------------------------------------------------------------------------------- 810 East Central Industrial Development Auth. Rev., 5.25%, 9/1/13 (Ambac) 835 - -------------------------------------------------------------------------------- 840 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 931 - -------------------------------------------------------------------------------- 645 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 714 - -------------------------------------------------------------------------------- 1,035 Helena Utilities Board Rev., 5.75%, 4/1/20 (MBIA) 1,138 - -------------------------------------------------------------------------------- 790 Helena Utilities Board Rev., 5.75%, 4/1/22 (MBIA) 866 - -------------------------------------------------------------------------------- 1,250 Huntsville Health Care Auth. Rev., Series 2002 A, 3.80%, 6/1/06 (MBIA) 1,249 - -------------------------------------------------------------------------------- 6,860 - -------------------------------------------------------------------------------- ARIZONA - 8.7% - -------------------------------------------------------------------------------- 935 Arizona Board of Regents COP, Series 2006 A, (University of Arizona), 5.00%, 6/1/18 (Ambac) 989 - -------------------------------------------------------------------------------- 1,275 Arizona Health Facilities Auth. Rev., (Blood Systems Incorporated), 4.00%, 4/1/12 1,258 - -------------------------------------------------------------------------------- 1,175 Arizona Health Facilities Auth. Rev., (Blood Systems Incorporated), 4.50%, 4/1/16 1,161 - -------------------------------------------------------------------------------- 8,155 Arizona School Facilities Board Rev., (State School Improvement), 5.50%, 7/1/12, Prerefunded at 100% of Par(1)(2) 8,816 - -------------------------------------------------------------------------------- 1,000 Arizona Tourism & Sports Auth. Rev., (Baseball Training Facilities), 5.00%, 7/1/11 1,030 - -------------------------------------------------------------------------------- 1,000 Arizona Tourism & Sports Auth. Rev., (Baseball Training Facilities), 5.00%, 7/1/12 1,030 - -------------------------------------------------------------------------------- 2,000 Arizona Tourism & Sports Auth. Rev., Series 2003 A, (Multipurpose Stadium Facility), 5.25%, 7/1/17 (MBIA) 2,133 - -------------------------------------------------------------------------------- 2,925 Chandler Water & Sewer Rev., 4.50%, 7/1/06 (FSA) 2,927 - -------------------------------------------------------------------------------- 2,130 Energy Management Services LLC Rev., (Arizona State University - Main Campus), 4.50%, 7/1/12 (MBIA) 2,207 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $ 305 Gilbert Water Resource Municipal Property Corp. Rev., 4.25%, 10/1/06, Prerefunded at 100% of Par(1) $ 305 - -------------------------------------------------------------------------------- 1,625 Gilbert Water Resource Municipal Property Corp. Rev., 4.25%, 4/1/11 1,613 - -------------------------------------------------------------------------------- 3,000 Gilbert Water Resource Municipal Property Corp. Rev., (Development Fee & Sub-Lien), 4.90%, 4/1/19 3,006 - -------------------------------------------------------------------------------- 1,000 Glendale Water & Sewer Rev., 5.00%, 7/1/06 (FGIC) 1,001 - -------------------------------------------------------------------------------- 4,000 Maricopa County Community College District GO, Series 1997 B, 5.00%, 7/1/06, Prerefunded at 101% of Par(1) 4,045 - -------------------------------------------------------------------------------- 1,155 Maricopa County Gilbert Unified School District No. 41 GO, 5.75%, 7/1/11 (FSA) 1,261 - -------------------------------------------------------------------------------- 2,415 Maricopa County Saddle Mountain Unified School District No. 90 GO, Series 2003 A, 5.25%, 7/1/11 2,520 - -------------------------------------------------------------------------------- 2,000 Maricopa County Saddle Mountain Unified School District No. 90 GO, Series 2003 A, 5.25%, 7/1/12 2,094 - -------------------------------------------------------------------------------- 1,000 Mohave County Community College District Rev., (State Board of Directors), 6.00%, 3/1/20 (MBIA) 1,075 - -------------------------------------------------------------------------------- 2,155 Mohave County Industrial Development Auth. GO, Series 2004 A, (Mohave Prison), 5.00%, 4/1/14 (XLCA) 2,279 - -------------------------------------------------------------------------------- 1,200 Pima County Indian Oasis-Baboquivari Unified School District No. 40 GO, Series 2002 A, 4.60%, 7/1/13 (MBIA) 1,244 - -------------------------------------------------------------------------------- 2,600 Pima County Tucson Unified School District No. 1 GO, 4.625%, 7/1/13 (FSA) 2,700 - -------------------------------------------------------------------------------- 3,970 Pinal County COP, 5.00%, 12/1/25 4,035 - -------------------------------------------------------------------------------- 1,425 Pinal County COP, 5.00%, 12/1/26 1,447 - -------------------------------------------------------------------------------- 5,000 Salt River Project Agricultural Improvement & Power District Rev, Series 2002 C, (Salt River), 5.00%, 1/1/12 5,303 - -------------------------------------------------------------------------------- 3,085 South Tucson Municipal Property Corp. Rev., 5.50%, 6/1/24 3,193 - -------------------------------------------------------------------------------- 58,672 - -------------------------------------------------------------------------------- CALIFORNIA - 4.6% - -------------------------------------------------------------------------------- 2,000 California Health Facilities Financing Auth. Rev., Series 2006 A, (Kaiser Permanente), 5.25%, 4/1/39(3) 2,071 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 13 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,000 California Public Works Board Lease COP, Series 1994 A, (Various University of California Projects), 6.20%, 10/1/08 $ 1,008 - -------------------------------------------------------------------------------- 1,000 California Statewide Communities Development Auth. Rev., Series 2002 E, (Kaiser Permanente), 4.70%, 6/1/09 1,016 - -------------------------------------------------------------------------------- 1,075 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.00%, 10/1/12 (FSA) 1,148 - -------------------------------------------------------------------------------- 2,000 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.25%, 10/1/19 (FSA) 2,141 - -------------------------------------------------------------------------------- 3,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/29 (Ambac) 3,219 - -------------------------------------------------------------------------------- 5,000 Los Angeles Department of Water & Power Rev., Series 2001 AA3, (Power Systems), 5.25%, 7/1/24 5,006 - -------------------------------------------------------------------------------- 2,200 Manteca Unified School District GO, 5.25%, 8/1/14, Prerefunded at 100% of Par (FSA)(1) 2,405 - -------------------------------------------------------------------------------- 1,000 Plumas Unified School District GO, 5.25%, 8/1/20 (FSA) 1,098 - -------------------------------------------------------------------------------- 2,145 San Francisco Uptown Parking Corporation Rev., (Union Square), 5.50%, 7/1/15 (MBIA) 2,318 - -------------------------------------------------------------------------------- 1,000 San Francisco Uptown Parking Corporation Rev., (Union Square), 6.00%, 7/1/20 (MBIA) 1,113 - -------------------------------------------------------------------------------- 2,000 San Francisco Uptown Parking Corporation Rev., (Union Square), 6.00%, 7/1/31 (MBIA) 2,200 - -------------------------------------------------------------------------------- 1,575 San Marcos Public Facilities Auth. Tax Allocation Rev., Series 2006 A, 5.00%, 8/1/20 (Ambac) 1,659 - -------------------------------------------------------------------------------- 2,455 San Marcos Public Facilities Auth. Tax Allocation Rev., Series 2006 A, 5.00%, 8/1/25 (Ambac) 2,555 - -------------------------------------------------------------------------------- 2,055 Westlands Water District COP, Series 2005 A, 5.00%, 9/1/24 (MBIA) 2,125 - -------------------------------------------------------------------------------- 31,082 - -------------------------------------------------------------------------------- COLORADO - 2.3% - -------------------------------------------------------------------------------- 1,100 Arapahoe County Water & Wastewater Public Improvement District GO, Series 2002 B, 5.75%, 12/1/17 (MBIA) 1,211 - -------------------------------------------------------------------------------- 1,550 Colorado Educational & Cultural Facilities Auth. Rev., (Excel Academy Charter School), 5.50%, 12/1/33 (XLCA) 1,677 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $ 530 Colorado Educational & Cultural Facilities Auth. Rev., (University Facilities-Northwest Nazarene), 4.50%, 11/1/09 $ 532 - -------------------------------------------------------------------------------- 900 Colorado Educational & Cultural Facilities Auth. Rev., (University Facilities-Northwest Nazarene), 4.75%, 11/1/10 914 - -------------------------------------------------------------------------------- 800 Colorado Educational & Cultural Facilities Auth. Rev., (University Facilities-Northwest Nazarene), 4.60%, 11/1/16 782 - -------------------------------------------------------------------------------- 500 Colorado Health Facilities Auth. Rev., (Vail Valley Medical Center), 4.00%, 1/15/07 500 - -------------------------------------------------------------------------------- 335 Colorado Health Facilities Auth. Rev., (Vail Valley Medical Center), 4.50%, 1/15/09 339 - -------------------------------------------------------------------------------- 450 Colorado Water Resources & Power Development Auth. Rev., Series 2000 A, 6.25%, 9/1/10, Prerefunded at 100% of Par(1) 494 - -------------------------------------------------------------------------------- 50 Colorado Water Resources & Power Development Auth. Rev., Series 2000 A, 6.25%, 9/1/16 55 - -------------------------------------------------------------------------------- 1,430 Denver West Metropolitan District GO, 5.25%, 12/1/24 1,455 - -------------------------------------------------------------------------------- 1,000 Douglas & Elbert Counties School District No. Re-1 GO, Series 2002 B, 5.75%, 12/15/12, Prerefunded at 100% of Par (FSA/State Aid Withholding)(1) 1,109 - -------------------------------------------------------------------------------- 1,100 Eagle Bend Metropolitan District No. 2 GO, 5.25%, 12/1/23 (RADIAN) 1,147 - -------------------------------------------------------------------------------- 5,000 University of Colorado Regents COP, 6.00%, 12/1/22 (MBIA-IBC) 5,420 - -------------------------------------------------------------------------------- 15,635 - -------------------------------------------------------------------------------- CONNECTICUT - 0.7% - -------------------------------------------------------------------------------- 2,150 City of Bridgeport GO, Series 2004 A, 5.25%, 8/15/22, Prerefunded at 100% of Par (MBIA)(1) 2,338 - -------------------------------------------------------------------------------- 2,215 New Haven Air Rights Package Facility Rev., 5.00%, 12/1/10 (Ambac) 2,331 - -------------------------------------------------------------------------------- 4,669 - -------------------------------------------------------------------------------- DISTRICT OF COLUMBIA - 0.4% - -------------------------------------------------------------------------------- 1,385 District of Columbia GO, Series 1999 B, 5.50%, 6/1/09 (FSA) 1,453 - -------------------------------------------------------------------------------- 1,155 District of Columbia Rev., (Gonzaga College High School), 5.20%, 7/1/12 (FSA) 1,209 - -------------------------------------------------------------------------------- 2,662 - -------------------------------------------------------------------------------- FLORIDA - 3.0% - -------------------------------------------------------------------------------- 2,585 Greater Orlando Aviation Auth. Rev., Series 2003 A, 5.00%, 10/1/13 (FSA) 2,745 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 14 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $ 500 Highlands County Health Facilities Auth. Rev., Series 2005 A, (Adventist Health), 5.00%, 11/15/11 $ 520 - -------------------------------------------------------------------------------- 500 Highlands County Health Facilities Auth. Rev., Series 2005 B, (Adventist Health), 5.00%, 11/15/09 516 - -------------------------------------------------------------------------------- 500 Highlands County Health Facilities Auth. Rev., Series 2005 B, (Adventist Health), 5.00%, 11/15/10 518 - -------------------------------------------------------------------------------- 1,000 Highlands County Health Facilities Auth. Rev., Series 2005 B, (Adventist Health), 5.00%, 11/15/11 1,041 - -------------------------------------------------------------------------------- 2,500 JEA St. Johns River Power Park System Rev., Series 21, Issue 2, 5.00%, 10/1/11 (MBIA) 2,644 - -------------------------------------------------------------------------------- 2,500 JEA St. Johns River Power Park System Rev., Series 21, Issue 2, 5.00%, 10/1/12 (MBIA) 2,657 - -------------------------------------------------------------------------------- 1,500 Martin County Health Facilities Auth. Rev., Series 2002 A, (Martin Memorial Medical Center), 4.00%, 11/15/06 1,499 - -------------------------------------------------------------------------------- 5,000 Orange County Rev., 5.25%, 10/1/09, Prerefunded at 100% of Par (Ambac)(1) 5,242 - -------------------------------------------------------------------------------- 1,500 Orlando Utilities Commission Rev., Series 2005 A, 4.00%, 10/1/11 (MBIA) 1,518 - -------------------------------------------------------------------------------- 1,000 Orlando Utilities Commission Water & Electric Rev., Series 1989 D, 6.75%, 10/1/17(1) 1,182 - -------------------------------------------------------------------------------- 20,082 - -------------------------------------------------------------------------------- GEORGIA - 0.2% - -------------------------------------------------------------------------------- 255 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/09, Prerefunded at 100% of Par (MBIA-IBC)(1) 269 - -------------------------------------------------------------------------------- 20 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/11 (MBIA-IBC) 22 - -------------------------------------------------------------------------------- 110 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/12 (MBIA-IBC)(1) 123 - -------------------------------------------------------------------------------- 615 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/12 (MBIA-IBC) 673 - -------------------------------------------------------------------------------- 1,087 - -------------------------------------------------------------------------------- HAWAII - 0.1% - -------------------------------------------------------------------------------- 500 Maui County GO, Series 2000 A, 6.50%, 3/1/10, Prerefunded at 101% of Par (FGIC)(1) 553 - -------------------------------------------------------------------------------- IDAHO - 0.7% - -------------------------------------------------------------------------------- 1,000 Blaine County Hailey School District No. 61 GO, 5.00%, 7/30/10 (Ambac) 1,051 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $3,800 Idaho Tax Anticipation Notes GO, 4.00%, 6/30/06 $ 3,801 - -------------------------------------------------------------------------------- 4,852 - -------------------------------------------------------------------------------- ILLINOIS - 3.6% - -------------------------------------------------------------------------------- 2,000 Bedford Park GO, Series 2004 A, 5.25%, 12/15/20 (FSA) 2,140 - -------------------------------------------------------------------------------- 4,000 Chicago O'Hare International Airport Rev., Series 1993 A, (Senior Lien), 5.00%, 1/1/12 (MBIA-IBC) 4,220 - -------------------------------------------------------------------------------- 2,000 Illinois Dedicated Tax Rev., (Civic Center), 6.25%, 12/15/20 (Ambac) 2,346 - -------------------------------------------------------------------------------- 595 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.00%, 5/15/08 606 - -------------------------------------------------------------------------------- 655 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.125%, 5/15/10 677 - -------------------------------------------------------------------------------- 400 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.75%, 5/15/16 422 - -------------------------------------------------------------------------------- 1,140 Illinois Health Facilities Auth. Rev., Series 1992 C, (Evangelical Hospital), 6.75%, 4/15/12(1) 1,264 - -------------------------------------------------------------------------------- 1,000 Illinois Regional Transportation Auth. Rev., Series 1990 A, 7.20%, 11/1/20 (Ambac) 1,227 - -------------------------------------------------------------------------------- 930 Kane County Community Unit School District No. 304 GO, 6.20%, 1/1/24 (FSA) 1,070 - -------------------------------------------------------------------------------- 1,145 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (MBIA)(1) 1,270 - -------------------------------------------------------------------------------- 1,035 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (MBIA)(1) 1,148 - -------------------------------------------------------------------------------- 70 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/17 (MBIA) 77 - -------------------------------------------------------------------------------- 75 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/18 (MBIA) 83 - -------------------------------------------------------------------------------- 1,855 Peoria County School District No. 150 Peoria GO, Series 2005 A, 5.00%, 1/1/10 (FSA) 1,931 - -------------------------------------------------------------------------------- 1,000 Southwestern Illinois Development Auth. Rev., (Triad School District No. 2), 5.00%, 10/1/18 (MBIA/GO of District)(3) 1,057 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 15 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,250 Town of Cicero GO, Series 2005 A, 5.25%, 1/1/20 (XLCA) $ 1,328 - -------------------------------------------------------------------------------- 1,000 Town of Cicero GO, Series 2005 A, 5.25%, 1/1/21 (XLCA) 1,062 - -------------------------------------------------------------------------------- 1,000 University of Illinois COP, (Utility Infrastructure), 5.75%, 8/15/08 (MBIA) 1,042 - -------------------------------------------------------------------------------- 1,000 University of Illinois COP, Series 2006 A, (Academic Facilities), 5.00%, 3/15/16 (Ambac)(3) 1,060 - -------------------------------------------------------------------------------- 24,030 - -------------------------------------------------------------------------------- INDIANA - 3.5% - -------------------------------------------------------------------------------- 8,750 Hobart Building Corp. Rev., 6.50%, 1/15/29 (FGIC/State Aid Withholding)(2) 10,583 - -------------------------------------------------------------------------------- 1,520 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/17 (FSA) 1,616 - -------------------------------------------------------------------------------- 1,600 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/18 (FSA) 1,696 - -------------------------------------------------------------------------------- 1,680 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/19 (FSA) 1,775 - -------------------------------------------------------------------------------- 1,900 Indiana Health Facilities Financing Auth. Hospital Rev., (Holy Cross Health System Corp.), 5.375%, 12/1/12 (MBIA) 1,968 - -------------------------------------------------------------------------------- 780 Indiana Transportation Finance Auth. Rev., Series 1990 A, 7.25%, 6/1/15 927 - -------------------------------------------------------------------------------- 220 Indiana Transportation Finance Auth. Rev., Series 1990 A, 7.25%, 6/1/15(1) 248 - -------------------------------------------------------------------------------- 1,500 Mount Vernon of Hancock County Multi-School Building Corp. Rev., Series 2001 B, (First Mortgage), 5.75%, 7/15/11, Prerefunded at 100% of Par (Ambac)(1) 1,637 - -------------------------------------------------------------------------------- 1,650 Valparaiso Middle Schools Building Corp. Rev., (First Mortgage), 5.75%, 7/15/11, Prerefunded at 100% of Par (FGIC)(1) 1,796 - -------------------------------------------------------------------------------- 1,000 Zionsville Community Schools Building Corp. GO, (First Mortgage), 5.75%, 1/15/12 (FGIC/State Aid Withholding) 1,096 - -------------------------------------------------------------------------------- 23,342 - -------------------------------------------------------------------------------- IOWA - 0.5% - -------------------------------------------------------------------------------- 3,350 Coralville GO, Series 2005 K-2, 5.00%, 6/1/07 3,380 - -------------------------------------------------------------------------------- KANSAS - 0.4% - -------------------------------------------------------------------------------- 1,280 Wichita Hospital Facilities Rev., Series 2001 III, 5.25%, 11/15/13 1,337 - -------------------------------------------------------------------------------- 1,195 Wichita Hospital Facilities Rev., Series 2001 III, 5.50%, 11/15/16 1,252 - -------------------------------------------------------------------------------- 2,589 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- LOUISIANA - 0.5% - -------------------------------------------------------------------------------- $1,740 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., (Ascension Parish Library), 5.25%, 4/1/23 (Ambac) $ 1,842 - -------------------------------------------------------------------------------- 1,215 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., (Ascension Parish Library), 5.25%, 4/1/35 (Ambac) 1,271 - -------------------------------------------------------------------------------- 3,113 - -------------------------------------------------------------------------------- MASSACHUSETTS - 0.2% - -------------------------------------------------------------------------------- 1,000 Massachusetts Health & Educational Facilities Auth. Rev., Series 1992 F, 6.25%, 7/1/12 (Ambac) 1,071 - -------------------------------------------------------------------------------- MICHIGAN - 2.3% - -------------------------------------------------------------------------------- 3,500 Detroit GO, Series 2004 A-1, 5.25%, 4/1/23 (Ambac) 3,697 - -------------------------------------------------------------------------------- 1,485 Grand Valley State University Rev., 5.75%, 12/1/10, Prerefunded at 100% of Par (FGIC)(1) 1,608 - -------------------------------------------------------------------------------- 2,345 Michigan Higher Education Facilities Auth. Rev., (Limited Obligation - Hillsdale College), 5.00%, 3/1/26 2,387 - -------------------------------------------------------------------------------- 575 Taylor GO, 5.00%, 9/1/11 (MBIA) 608 - -------------------------------------------------------------------------------- 2,010 Wayne Charter County Airport Rev., Series 2002 C, 5.00%, 12/1/11 (FGIC) 2,120 - -------------------------------------------------------------------------------- 2,215 Wayne Charter County Airport Rev., Series 2002 C, 5.375%, 12/1/13 (FGIC) 2,388 - -------------------------------------------------------------------------------- 2,335 Wayne Charter County Airport Rev., Series 2002 C, 5.375%, 12/1/14 (FGIC) 2,504 - -------------------------------------------------------------------------------- 15,312 - -------------------------------------------------------------------------------- MINNESOTA - 0.2% - -------------------------------------------------------------------------------- 1,500 Minnesota Higher Education Facilities Auth. Rev., Series 2005-6G, (Saint John University), 5.00%, 10/1/12 1,588 - -------------------------------------------------------------------------------- MISSISSIPPI - 1.4% - -------------------------------------------------------------------------------- 1,000 Mississippi Development Bank Special Obligation Rev., Series 2006 A, (Municipal Energy Agency Power Supply), 5.00%, 3/1/17 (XLCA)(3) 1,051 - -------------------------------------------------------------------------------- 7,925 State of Mississippi GO, (Capital Improvement), 5.25%, 11/1/12, Prerefunded at 100% of Par (FGIC)(1)(2) 8,510 - -------------------------------------------------------------------------------- 9,561 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 16 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- MISSOURI - 1.9% - -------------------------------------------------------------------------------- $1,000 Camdenton Reorganized School District No. R-III GO, 5.25%, 3/1/22 (FSA) $ 1,073 - -------------------------------------------------------------------------------- 1,145 Jackson County Public Building Corp. COP, Series 2000 A, 6.00%, 11/1/18, Prerefunded at 101% of Par(1) 1,217 - -------------------------------------------------------------------------------- 1,425 Jackson County Public Building Corp. Rev., Series 2006 A, (Capital Improvements), 5.00%, 12/1/15 (MBIA) 1,518 - -------------------------------------------------------------------------------- 2,775 Missouri Development Finance Board COP, Series 2000 A, (Midtown Redevelopment), 5.75%, 4/1/22 (MBIA) 2,953 - -------------------------------------------------------------------------------- 2,650 Missouri Health & Educational Facilities Auth. Rev., Series 1998 A, (Park Lane Medical Center), 5.60%, 1/1/15 (MBIA) 2,835 - -------------------------------------------------------------------------------- 3,145 Missouri Joint Municipal Electric Utility Commission Rev., (Plum Point), 5.00%, 1/1/16 (MBIA) 3,356 - -------------------------------------------------------------------------------- 12,952 - -------------------------------------------------------------------------------- NEVADA - 1.2% - -------------------------------------------------------------------------------- 1,000 Clark County School District GO, Series 1997 B, (Building & Renovation), 5.25%, 6/15/07, Prerefunded at 101% of Par (FGIC)(1) 1,027 - -------------------------------------------------------------------------------- 3,295 Las Vegas Redevelopment Agency Tax Increment Rev., Series 2003 A, (Fremont Street), 4.50%, 6/15/10 3,319 - -------------------------------------------------------------------------------- 1,550 Reno Sales and Room Tax Rev., (ReTrac-Reno Transportation Rail Access Corridor), (Senior Lien), 5.50%, 6/1/12, Prerefunded at 100% of Par (Ambac) 1,686 - -------------------------------------------------------------------------------- 1,865 Reno Sales and Room Tax Rev., (ReTrac-Reno Transportation Rail Access Corridor), (Senior Lien), 5.50%, 6/1/12, Prerefunded at 100% of Par (Ambac) 2,028 - -------------------------------------------------------------------------------- 8,060 - -------------------------------------------------------------------------------- NEW HAMPSHIRE - 1.0% - -------------------------------------------------------------------------------- 1,660 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/11 1,698 - -------------------------------------------------------------------------------- 680 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/12 697 - -------------------------------------------------------------------------------- 1,030 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/13 1,049 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $3,000 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/18 $ 3,001 - -------------------------------------------------------------------------------- 6,445 - -------------------------------------------------------------------------------- NEW JERSEY - 10.6% - -------------------------------------------------------------------------------- 320 New Jersey Economic Development Auth. Rev., Series 2005 A, (Cranes Mill), 5.00%, 6/1/15 324 - -------------------------------------------------------------------------------- 33,200 New Jersey Tax & Rev. Anticipation Notes, Series 2005 A, 4.00%, 6/23/06 33,207 - -------------------------------------------------------------------------------- 4,235 New Jersey Transit Corporation COP, 5.00%, 10/1/12 (FSA) 4,479 - -------------------------------------------------------------------------------- 5,595 New Jersey Transit Corporation COP, 5.00%, 10/1/13 (FSA) 5,929 - -------------------------------------------------------------------------------- 7,400 New Jersey Transportation Trust Fund Auth. Rev., Series 2004 B, 5.25%, 12/15/12 (FGIC)(2) 7,957 - -------------------------------------------------------------------------------- 3,000 New Jersey Transportation Trust Fund Auth. Rev., Series 2006 A, 5.25%, 12/15/19(3) 3,237 - -------------------------------------------------------------------------------- 15,000 New Jersey Transportation Trust Fund Auth. Rev., Series 2006 A, 5.25%, 12/15/20(3) 16,216 - -------------------------------------------------------------------------------- 71,349 - -------------------------------------------------------------------------------- NEW MEXICO - 1.3% - -------------------------------------------------------------------------------- 6,675 Los Alamos County Inc. Rev., Series 2004 A, 5.00%, 7/1/11 (FSA)(2) 7,044 - -------------------------------------------------------------------------------- 1,415 San Juan County Gross Receipts Tax Rev., Series 2001 A, 5.75%, 9/15/21 (Ambac) 1,545 - -------------------------------------------------------------------------------- 8,589 - -------------------------------------------------------------------------------- NEW YORK - 3.9% - -------------------------------------------------------------------------------- 2,975 City of New York GO, Series 2002 B, 5.25%, 8/1/09 (CIFG) 3,108 - -------------------------------------------------------------------------------- 2,885 City of New York GO, Series 2002 C, 5.25%, 8/1/09 (CIFG) 3,014 - -------------------------------------------------------------------------------- 5,000 City of New York GO, Series 2003 I, 5.75%, 3/1/20 5,445 - -------------------------------------------------------------------------------- 1,375 City of New York GO, Series 2004 I, 5.00%, 8/1/08 1,413 - -------------------------------------------------------------------------------- 4,000 City of New York GO, Series 2006 J-1, 5.00%, 6/1/18(3) 4,191 - -------------------------------------------------------------------------------- 855 Monroe County Industrial Development Agency Rev., (Highland Hospital Rochester), 4.00%, 8/1/09 852 - -------------------------------------------------------------------------------- 890 Monroe County Industrial Development Agency Rev., (Highland Hospital Rochester), 4.00%, 8/1/10 884 - -------------------------------------------------------------------------------- 710 Monroe County Industrial Development Agency Rev., (Highland Hospital Rochester), 4.00%, 8/1/10 705 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 17 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $ 920 Monroe County Industrial Development Agency Rev., (Highland Hospital Rochester), 5.00%, 8/1/11 $ 950 - -------------------------------------------------------------------------------- 2,000 New York City Transitional Finance Auth. Rev., Series 2005 A1, 5.00%, 11/1/10 2,106 - -------------------------------------------------------------------------------- 1,440 New York Dormitory Auth. Rev., Series 1990 A, (UNIC Educational Facilities), 7.50%, 5/15/13 (MBIA-IBC) 1,741 - -------------------------------------------------------------------------------- 1,000 New York Dormitory Auth. Rev., Series 2005 F, 5.00%, 3/15/12 (FSA) 1,060 - -------------------------------------------------------------------------------- 1,000 Niagara Falls Bridge Commission Toll Rev., Series 1993 B, 5.25%, 10/1/15 (FGIC) 1,070 - -------------------------------------------------------------------------------- 26,539 - -------------------------------------------------------------------------------- NORTH CAROLINA - 2.1% - -------------------------------------------------------------------------------- 1,300 Charlotte Airport Rev., Series 2004 A, 5.25%, 7/1/24 (MBIA) 1,378 - -------------------------------------------------------------------------------- 1,195 City of Lincolnton Rev., (Combined Enterprise System), 4.00%, 5/1/12 (XLCA) 1,201 - -------------------------------------------------------------------------------- 1,000 North Carolina GO, 5.00%, 3/1/11 1,058 - -------------------------------------------------------------------------------- 4,150 North Carolina Medical Care Commission Rev., Series 2004 A, (Health Care Housing - ARC Projects), 5.50%, 10/1/24 4,348 - -------------------------------------------------------------------------------- 1,000 North Carolina Municipal Power Agency No. 1 Catawba Electric Rev., Series 1992, 6.00%, 1/1/10 (MBIA) 1,073 - -------------------------------------------------------------------------------- 2,000 North Carolina Municipal Power Agency No. 1 Catawba Electric Rev., Series 2003 A, 5.50%, 1/1/13 2,143 - -------------------------------------------------------------------------------- 1,100 University of North Carolina at Chapel Hill Rev., Series 2005 A, 5.00%, 2/1/08 1,121 - -------------------------------------------------------------------------------- 1,000 University of North Carolina at Chapel Hill Rev., Series 2005 A, 5.00%, 2/1/09 1,028 - -------------------------------------------------------------------------------- 1,000 University of North Carolina at Wilmington COP, (Student Housing), 5.00%, 6/1/37 (FGIC) 1,023 - -------------------------------------------------------------------------------- 14,373 - -------------------------------------------------------------------------------- NORTH DAKOTA - 0.3% - -------------------------------------------------------------------------------- 1,500 Grand Forks Health Care System Rev., (Altru Health System Obligation Group), 7.125%, 8/15/24 1,651 - -------------------------------------------------------------------------------- OHIO - 1.6% - -------------------------------------------------------------------------------- 500 Erie County Hospital Facilities Rev., Series 2002 A, (Firelands Regional Medical Center), 4.50%, 8/15/07 503 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,150 Mad River Local School District GO, (Classroom Facilities), 5.75%, 12/1/19, Prerefunded at 100% of Par (FGIC)(1) $ 1,274 - -------------------------------------------------------------------------------- 1,700 Milford Exempt Village School District GO, (School Improvement), 6.00%, 12/1/11 (FSA) 1,887 - -------------------------------------------------------------------------------- 1,005 Ohio GO, Series 2005 A, (Infrastructure Improvement), 5.00%, 9/1/11 1,064 - -------------------------------------------------------------------------------- 1,365 Ohio GO, Series 2005 A, (Infrastructure Improvement), 5.00%, 9/1/12 1,453 - -------------------------------------------------------------------------------- 750 Ohio Higher Educational Facility Commission Rev., Series 1990 B, (Case Western Reserve University), 6.50%, 10/1/20 897 - -------------------------------------------------------------------------------- 1,505 Summit County GO, 5.75%, 12/1/12, Prerefunded at 101% of Par (FGIC)(1) 1,674 - -------------------------------------------------------------------------------- 1,550 Tri Valley Local School District GO, 5.75%, 12/1/21 (FGIC) 1,690 - -------------------------------------------------------------------------------- 10,442 - -------------------------------------------------------------------------------- OKLAHOMA - 2.1% - -------------------------------------------------------------------------------- 1,000 Comanche County Hospital Auth. Rev., 5.00%, 7/1/11 (RADIAN) 1,044 - -------------------------------------------------------------------------------- 1,525 Comanche County Hospital Auth. Rev., 5.00%, 7/1/12 (RADIAN) 1,597 - -------------------------------------------------------------------------------- 1,730 Durant Community Facilities Auth. GO, 5.75%, 11/1/24 (XLCA) 1,920 - -------------------------------------------------------------------------------- 1,135 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/10 1,170 - -------------------------------------------------------------------------------- 750 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/11 777 - -------------------------------------------------------------------------------- 500 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/12 520 - -------------------------------------------------------------------------------- 1,640 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/13 1,698 - -------------------------------------------------------------------------------- 5,225 Tulsa County Industrial Auth. Rev., Series 2005 C, 5.00%, 5/15/10 (FSA) 5,469 - -------------------------------------------------------------------------------- 14,195 - -------------------------------------------------------------------------------- OREGON - 2.0% - -------------------------------------------------------------------------------- 1,325 City of Eugene GO, (Public Safety Park & Open Space), 4.00%, 6/1/12 (Ambac) 1,338 - -------------------------------------------------------------------------------- 1,000 City of Eugene GO, (Public Safety Park & Open Space), 4.00%, 6/1/13 (Ambac) 1,006 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 18 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,000 City of Eugene GO, (Public Safety Park & Open Space), 4.00%, 6/1/14 (Ambac) $ 1,001 - -------------------------------------------------------------------------------- 685 City of Eugene GO, (Public Safety Park & Open Space), 4.00%, 6/1/15 (Ambac) 682 - -------------------------------------------------------------------------------- 2,135 Clackamas County School District No. 108 GO, (Estacada), 5.50%, 6/15/23 (FSA) 2,421 - -------------------------------------------------------------------------------- 1,200 Clackamas County School District No. 108 GO, (Estacada), 5.50%, 6/15/24 (FSA) 1,366 - -------------------------------------------------------------------------------- 2,015 Clackamas County School Distrist No. 62 GO, 5.50%, 6/15/10 (School Bond Guarantee) 2,149 - -------------------------------------------------------------------------------- 400 Oregon State Facilities Auth. Rev., Series 2005 A, (Linfield College), 5.00%, 10/1/13 416 - -------------------------------------------------------------------------------- 925 Oregon State Facilities Auth. Rev., Series 2005 A, (Linfield College), 5.00%, 10/1/14 960 - -------------------------------------------------------------------------------- 2,115 Oregon State Facilities Auth. Rev., Series 2005 A, (Linfield College), 5.00%, 10/1/25 2,152 - -------------------------------------------------------------------------------- 13,491 - -------------------------------------------------------------------------------- PENNSYLVANIA - 4.3% - -------------------------------------------------------------------------------- 1,150 Central Dauphin School District GO, 7.00%, 2/1/27 (MBIA/State Aid Withholding) 1,408 - -------------------------------------------------------------------------------- 15,805 City of Pittsburgh GO, Series 2006 B, 5.25%, 9/1/16 (FSA)(3) 17,191 - -------------------------------------------------------------------------------- 1,000 Oxford Area School District GO, Series 2001 A, 5.50%, 2/15/12, Prerefunded at 100% of Par (FGIC/State Aid Withholding)(1) 1,086 - -------------------------------------------------------------------------------- 2,975 Philadelphia School District GO, Series 2002 A, 5.25%, 2/1/11 (FSA/State Aid Withholding) 3,161 - -------------------------------------------------------------------------------- 4,380 Philadelphia School District GO, Series 2002 A, 5.50%, 2/1/12, Prerefunded at 100% of Par (FSA/State Aid Withholding)(1) 4,753 - -------------------------------------------------------------------------------- 1,500 Pittsburgh School District GO, 5.25%, 9/1/09 (FSA) 1,569 - -------------------------------------------------------------------------------- 29,168 - -------------------------------------------------------------------------------- PUERTO RICO - 7.9% - -------------------------------------------------------------------------------- 11,000 Government Development Bank of Puerto Rico Rev., 3.90%, 8/4/06 (Acquired 2/23/06, Cost $11,000)(4) 10,987 - -------------------------------------------------------------------------------- 10,000 Government Development Bank of Puerto Rico Rev., 3.85%, 10/3/06 (Acquired 1/13/06, Cost $10,000)(4) 9,969 - -------------------------------------------------------------------------------- 14,000 Government Development Bank of Puerto Rico Rev., 3.85%, 10/5/06 (Acquired 1/20/06, Cost $14,000)(4) 13,955 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $12,000 Government Development Bank of Puerto Rico Rev., 3.87%, 10/6/06 (Acquired 1/24/06, Cost $12,000)(4) $ 11,962 - -------------------------------------------------------------------------------- 2,500 Puerto Rico Highway & Transportation Auth. Rev., 5.00%, 7/1/08 (CIFG) 2,563 - -------------------------------------------------------------------------------- 3,700 Puerto Rico Municipal Finance Agency GO, Series 2005 A, 5.00%, 8/1/11 3,835 - -------------------------------------------------------------------------------- 53,271 - -------------------------------------------------------------------------------- RHODE ISLAND - 0.7% - -------------------------------------------------------------------------------- 1,000 Cranston GO, 6.375%, 11/15/09, Prerefunded at 101% of Par (FGIC)(1) 1,096 - -------------------------------------------------------------------------------- 2,000 Rhode Island Depositors Economic Protection Corp. Special Obligation Rev., Series 1993 A, 6.25%, 8/1/16 (MBIA)(1) 2,345 - -------------------------------------------------------------------------------- 1,300 Rhode Island Depositors Economic Protection Corp. Special Obligation Rev., Series 1993 B, 6.00%, 8/1/17 (MBIA)(1) 1,371 - -------------------------------------------------------------------------------- 4,812 - -------------------------------------------------------------------------------- SOUTH CAROLINA - 3.2% - -------------------------------------------------------------------------------- 1,700 Florence Water & Sewer Rev., 7.50%, 3/1/18 (Ambac) 1,934 - -------------------------------------------------------------------------------- 2,300 Lancaster Educational Assistance Program Inc. Rev., (School District Lancaster County), 5.00%, 12/1/26 2,316 - -------------------------------------------------------------------------------- 3,500 Laurens County School District No. 55 Rev., 5.25%, 12/1/30 3,577 - -------------------------------------------------------------------------------- 875 Piedmont Municipal Power Agency Rev., 6.75%, 1/1/19 (FGIC) 1,070 - -------------------------------------------------------------------------------- 625 Piedmont Municipal Power Agency Rev., 6.75%, 1/1/19 (FGIC)(1) 774 - -------------------------------------------------------------------------------- 140 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC)(1) 166 - -------------------------------------------------------------------------------- 375 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC) 437 - -------------------------------------------------------------------------------- 485 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC)(1) 575 - -------------------------------------------------------------------------------- 3,115 Piedmont Municipal Power Agency Rev., Series 2002 A, 4.00%, 1/1/07 (FGIC) 3,116 - -------------------------------------------------------------------------------- 3,035 South Carolina Jobs Economic Development Auth. Hospital Facilities Rev., Series 2003 C, (Palmetto Health), 5.00%, 8/1/08 (ACA) 3,092 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 19 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $3,195 South Carolina Jobs Economic Development Auth. Hospital Facilities Rev., Series 2003 C, (Palmetto Health), 5.50%, 8/1/09 (ACA) $ 3,327 - -------------------------------------------------------------------------------- 1,095 Spartanburg County Health Services District Inc. Hospital Rev., 5.50%, 4/15/16 (FSA) 1,168 - -------------------------------------------------------------------------------- 21,552 - -------------------------------------------------------------------------------- TENNESSEE - 1.1% - -------------------------------------------------------------------------------- 4,460 Chattanooga Health Educational & Housing Facility Board Rev., Series 2005 A, (Campus Development Foundation, Inc. Phase I LLC), 5.00%, 10/1/15 4,498 - -------------------------------------------------------------------------------- 1,050 Clarksville Water, Sewer & Gas Rev., 4.25%, 2/1/07 (FSA) 1,055 - -------------------------------------------------------------------------------- 1,685 Clarksville Water, Sewer & Gas Rev., 4.85%, 2/1/15 (FSA) 1,751 - -------------------------------------------------------------------------------- 7,304 - -------------------------------------------------------------------------------- TEXAS - 10.8% - -------------------------------------------------------------------------------- 1,000 Canadian River Municipal Water Auth. Rev., (Conjunctive Use Groundwater), 5.00%, 2/15/19 (Ambac) 1,050 - -------------------------------------------------------------------------------- 2,035 Cash Special Utility District Rev., 5.25%, 9/1/24 (MBIA) 2,159 - -------------------------------------------------------------------------------- 2,390 City of Houston GO, Series 2006 B, 5.00%, 3/1/26 (Ambac) 2,482 - -------------------------------------------------------------------------------- 1,815 Clint Independent School District GO, 6.00%, 2/15/17 (PSF-GTD) 1,985 - -------------------------------------------------------------------------------- 1,500 Corpus Christi Independent School District GO, 5.00%, 8/15/11 (PSF-GTD) 1,525 - -------------------------------------------------------------------------------- 500 Corpus Christi Independent School District GO, 4.00%, 8/15/13 (PSF-GTD) 500 - -------------------------------------------------------------------------------- 1,000 Corpus Christi Utility System Rev., 5.50%, 7/15/07 (FSA) 1,020 - -------------------------------------------------------------------------------- 2,035 Del Valle Independent School District GO, (School Building), 5.00%, 6/15/27 (PSF-GTD) 2,094 - -------------------------------------------------------------------------------- 525 Denison Hospital Auth. Rev., (Texoma Medical Center), 5.90%, 8/15/07, Prerefunded at 102% of Par (ACA)(1) 535 - -------------------------------------------------------------------------------- 1,000 Denton Utility System Rev., Series 1996 A, 5.95%, 12/1/06, Prerefunded at 100% of Par (MBIA)(1) 1,012 - -------------------------------------------------------------------------------- 2,000 Donna Independent School District GO, 5.00%, 2/15/15 (PSF-GTD) 2,128 - -------------------------------------------------------------------------------- 1,115 Edcouch-Elsa Independent School District GO, 5.00%, 2/15/14 (PSF-GTD) 1,185 - -------------------------------------------------------------------------------- 2,370 Forney Independent School District GO, Series 2006 A, 5.25%, 8/15/31 (PSF-GTD) 2,495 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $ 540 Garza County Public Facility Corp. Rev., 4.50%, 10/1/06 $ 540 - -------------------------------------------------------------------------------- 380 Garza County Public Facility Corp. Rev., 4.50%, 10/1/07 381 - -------------------------------------------------------------------------------- 400 Garza County Public Facility Corp. Rev., 4.75%, 10/1/08 402 - -------------------------------------------------------------------------------- 420 Garza County Public Facility Corp. Rev., 4.75%, 10/1/09 424 - -------------------------------------------------------------------------------- 585 Garza County Public Facility Corp. Rev., 4.75%, 10/1/10 589 - -------------------------------------------------------------------------------- 610 Garza County Public Facility Corp. Rev., 5.00%, 10/1/11 622 - -------------------------------------------------------------------------------- 2,015 Garza County Public Facility Corp. Rev., 5.00%, 10/1/13 2,042 - -------------------------------------------------------------------------------- 1,115 Garza County Public Facility Corp. Rev., 5.25%, 10/1/14 1,147 - -------------------------------------------------------------------------------- 1,225 Garza County Public Facility Corp. Rev., 5.25%, 10/1/15 1,255 - -------------------------------------------------------------------------------- 1,145 Garza County Public Facility Corp. Rev., 5.25%, 10/1/16 1,170 - -------------------------------------------------------------------------------- 890 Harris County Housing Finance Corporation Rev., (Las Americas Apartments), 4.90%, 3/1/11 (FNMA) 905 - -------------------------------------------------------------------------------- 2,300 Hays Consolidated Independent School District GO, 5.20%, 8/15/11 (PSF-GTD)(1)(5) 1,871 - -------------------------------------------------------------------------------- 700 Hays Consolidated Independent School District GO, 5.20%, 8/15/11 (PSF-GTD)(1)(5) 570 - -------------------------------------------------------------------------------- 1,295 Hidalgo County GO, 5.50%, 8/15/19 (FGIC) 1,398 - -------------------------------------------------------------------------------- 1,750 Hidalgo County GO, 5.50%, 8/15/21 (FGIC) 1,878 - -------------------------------------------------------------------------------- 1,500 Houston Water & Sewer System Rev., Series 1997 C, (Junior Lien), 5.375%, 12/1/07, Prerefunded at 101% of Par (FGIC)(1) 1,552 - -------------------------------------------------------------------------------- 1,375 Kerrville Health Facilities Development Corp. Rev., (Sid Peterson Memorial Hospital), 5.00%, 8/15/11 1,408 - -------------------------------------------------------------------------------- 1,630 Live Oak GO, 5.25%, 8/1/22 (MBIA) 1,735 - -------------------------------------------------------------------------------- 1,000 Lubbock Health Facilities Development Corp. Rev., (Lutheran Retirement), 6.00%, 3/20/29 (GNMA) 1,073 - -------------------------------------------------------------------------------- 3,250 Mansfield Independent School District GO, 5.00%, 2/15/24 (PSF-GTD) 3,375 - -------------------------------------------------------------------------------- 1,740 Montgomery County GO, 5.50%, 3/1/24 (Ambac) 1,882 - -------------------------------------------------------------------------------- 550 Pasadena Independent School District GO, Series 2001 A, 6.05%, 2/15/16 (PSF-GTD) 627 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 20 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,500 Pearland Independent School District GO, 6.00%, 2/15/09, Prerefunded at 100% of Par (PSF-GTD)(1) $ 1,588 - -------------------------------------------------------------------------------- 2,000 San Antonio Electric and Gas Rev., 7.10%, 2/1/09 (FGIC)(1)(5) 1,806 - -------------------------------------------------------------------------------- 1,715 San Benito Consolidated Independent School District GO, 5.00%, 2/15/24 (PSF-GTD) 1,782 - -------------------------------------------------------------------------------- 1,800 San Benito Consolidated Independent School District GO, 5.00%, 2/15/25 (PSF-GTD) 1,863 - -------------------------------------------------------------------------------- 1,505 Seguin Independent School District GO, 5.25%, 4/1/23 (PSF-GTD) 1,605 - -------------------------------------------------------------------------------- 2,120 Southside Independent School District GO, Series 2004 A, 5.25%, 8/15/25 (PSF-GTD) 2,253 - -------------------------------------------------------------------------------- 2,345 Texas Municipal Power Agency COP, (Sub-Lien), 4.00%, 9/1/09 (FGIC) 2,352 - -------------------------------------------------------------------------------- 1,230 Texas Public Finance Auth. Building Rev., (Technical College), 6.25%, 8/1/09 (MBIA) 1,282 - -------------------------------------------------------------------------------- 1,000 Texas Technical University Rev., 5.00%, 8/15/08 (MBIA) 1,028 - -------------------------------------------------------------------------------- 1,000 Travis County Health Facilities Development Corp. Rev., Series 1999 A, (Ascension Health Credit), 5.875%, 11/15/09, Prerefunded at 101% of Par (Ambac)(1) 1,077 - -------------------------------------------------------------------------------- 1,000 Tyler Health Facilities Development Corp. Rev., (Mother Frances Hospital), 4.50%, 7/1/06 1,001 - -------------------------------------------------------------------------------- 2,000 Tyler Health Facilities Development Corp. Rev., (Mother Frances Hospital), 5.00%, 7/1/08 2,037 - -------------------------------------------------------------------------------- 1,265 West Oso Independent School District GO, 5.50%, 8/15/26 (PSF-GTD) 1,359 - -------------------------------------------------------------------------------- 4,340 Williamson County GO, 5.50%, 2/15/11, Prerefunded at 100% of Par (FSA)(1) 4,661 - -------------------------------------------------------------------------------- 72,710 - -------------------------------------------------------------------------------- U.S. VIRGIN ISLANDS - 0.3% - -------------------------------------------------------------------------------- 2,000 Virgin Islands Public Finance Auth. Rev., Series 1998 A, (Senior Lien), 5.20%, 10/1/09 2,067 - -------------------------------------------------------------------------------- UTAH - 1.5% - -------------------------------------------------------------------------------- 1,000 Salt Lake City Hospital Rev., Series 1988 A, (Intermountain Health Corporation), 8.125%, 5/15/15(1) 1,190 - -------------------------------------------------------------------------------- 1,495 Utah County Municipal Building Auth. Lease Rev., 5.00%, 11/1/09 (Ambac)(1) 1,558 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,915 Utah County Municipal Building Auth. Lease Rev., 5.25%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) $ 2,047 - -------------------------------------------------------------------------------- 1,820 Utah County Municipal Building Auth. Lease Rev., 5.25%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,946 - -------------------------------------------------------------------------------- 1,000 Utah County Municipal Building Auth. Lease Rev., 5.50%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,082 - -------------------------------------------------------------------------------- 1,130 West Valley City Municipal Building Auth. Lease Rev., Series 2002 A, 5.00%, 8/1/10 (Ambac) 1,182 - -------------------------------------------------------------------------------- 1,305 West Valley City Utility Sales Tax Rev., Series 2001 A, 5.50%, 7/15/16 (MBIA) 1,405 - -------------------------------------------------------------------------------- 10,410 - -------------------------------------------------------------------------------- VIRGINIA - 1.1% - -------------------------------------------------------------------------------- 3,650 Commonwealth of Virginia GO, 5.00%, 6/1/11, Prerefunded at 100% of Par(1) 3,865 - -------------------------------------------------------------------------------- 1,500 Fairfax County COP, 5.30%, 4/15/23 1,586 - -------------------------------------------------------------------------------- 1,000 Hampton Industrial Development Auth. Rev., Series 1994 A, (Sentara General Hospital), 6.50%, 11/1/06, Prerefunded at 100% of Par(1) 1,012 - -------------------------------------------------------------------------------- 1,115 Pittsylvania County GO, Series 2001 B, 5.75%, 3/1/18 (MBIA) 1,226 - -------------------------------------------------------------------------------- 7,689 - -------------------------------------------------------------------------------- WASHINGTON - 7.0% - -------------------------------------------------------------------------------- 1,000 Benton County Public Utility District No. 1 Rev., Series 2001 A, 5.625%, 11/1/19 (FSA) 1,080 - -------------------------------------------------------------------------------- 5,000 City of Tacoma Rev., Series 2001 A, 5.625%, 1/1/11, Prerefunded at 101% of Par (FSA)(1) 5,434 - -------------------------------------------------------------------------------- 1,000 Cowlitz County Kelso School District No. 458 GO, 5.75%, 12/1/18 (FSA) 1,093 - -------------------------------------------------------------------------------- 500 Energy Northwest Rev., 5.00%, 7/1/10 (MBIA) 523 - -------------------------------------------------------------------------------- 1,750 Energy Northwest Rev., 4.75%, 7/1/20 (MBIA) 1,782 - -------------------------------------------------------------------------------- 3,500 Energy Northwest Rev., Series 2002 A, (Columbia Generating), 5.75%, 7/1/18 (MBIA) 3,829 - -------------------------------------------------------------------------------- 10,000 Energy Northwest Rev., Series 2002 B, (Columbia Generating), 6.00%, 7/1/18 (Ambac)(2) 11,083 - -------------------------------------------------------------------------------- 2,000 King County GO, Series 1997 D, 5.75%, 12/1/07, Prerefunded at 102% of Par(1) 2,100 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 21 Tax-Free Bond - Schedule of Investments MAY 31, 2006 Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- $1,555 King County Lake Washington School District No. 414 GO, 5.75%, 12/1/15 $ 1,715 - -------------------------------------------------------------------------------- 1,000 Kitsap County School District No. 303 Bainbridge Island GO, 5.00%, 12/1/17 (MBIA/School Bond Guarantee) 1,059 - -------------------------------------------------------------------------------- 1,260 Mason County Shelton School District No. 309 GO, 5.625%, 12/1/17 (FGIC) 1,363 - -------------------------------------------------------------------------------- 1,000 Metropolitan Park District of Tacoma GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,109 - -------------------------------------------------------------------------------- 1,120 Metropolitan Park District of Tacoma GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,242 - -------------------------------------------------------------------------------- 2,815 Snohomish County Edmonds School District No. 15 GO, 5.00%, 12/1/17 (FGIC/School Bond Guarantee)(3) 2,992 - -------------------------------------------------------------------------------- 1,720 University of Washington Rev., (Student Facilities Fee), 5.875%, 6/1/10, Prerefunded at 101% of Par (FSA)(1) 1,872 - -------------------------------------------------------------------------------- 1,000 Washington GO, Series 1990 A, 6.75%, 2/1/15 1,147 - -------------------------------------------------------------------------------- 1,000 Washington Public Power Supply System Rev., Series 1996 A, (Nuclear Project No. 1), 5.75%, 7/1/12 (MBIA) 1,022 - -------------------------------------------------------------------------------- 4,570 Washington Public Power Supply System Rev., Series 1998 A, (Nuclear Project No. 2), 5.00%, 7/1/12 (FSA) 4,756 - -------------------------------------------------------------------------------- 1,500 Whitman County Pullman School District No. 267 GO, 5.625%, 12/1/16 (FSA) 1,633 - -------------------------------------------------------------------------------- 46,834 - -------------------------------------------------------------------------------- WISCONSIN - 1.1% - -------------------------------------------------------------------------------- 1,990 Wisconsin Clean Water Rev., 6.875%, 6/1/11 2,199 - -------------------------------------------------------------------------------- 2,590 Wisconsin Health & Educational Facilities Auth. Rev., (Aurora Medical Group), 6.00%, 11/15/10 (FSA) 2,812 - -------------------------------------------------------------------------------- 500 Wisconsin Health & Educational Facilities Auth. Rev., (Blood Center Southeastern), 5.50%, 6/1/24 521 - -------------------------------------------------------------------------------- 750 Wisconsin Health & Educational Facilities Auth. Rev., (Blood Center Southeastern), 5.75%, 6/1/34 796 - -------------------------------------------------------------------------------- 1,225 Wisconsin State Health & Educational Facilities Auth. Rev., (Wheaton Franciscan Services), 4.00%, 8/15/06 1,225 - -------------------------------------------------------------------------------- 7,553 - -------------------------------------------------------------------------------- TOTAL MUNICIPAL SECURITIES (Cost $670,678) 681,596 - -------------------------------------------------------------------------------- Principal Amount ($ IN THOUSANDS) Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 3.4% ALABAMA - 1.3% - -------------------------------------------------------------------------------- $8,900 Birmingham Baptist Medical Centers Special Care Facilities Financing Auth. Rev., Series 2000 C, (Baptist Health System), VRDN, 4.35%, 7/1/06, Prerefunded at 100% of Par(1) $ 8,906 - -------------------------------------------------------------------------------- ARIZONA - 0.1% - -------------------------------------------------------------------------------- 900 Pima County Industrial Development Auth. Rev., (Tucson Electric), VRDN, 3.30%, 6/7/06 (LOC: Bank of New York) 900 - -------------------------------------------------------------------------------- FLORIDA - 1.2% - -------------------------------------------------------------------------------- 500 Brevard County Health Facilities Auth. Rev., (Health First Inc.), VRDN, 3.59%, 6/1/06 (LOC: SunTrust Bank) 500 - -------------------------------------------------------------------------------- 3,540 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 3.67%, 6/1/06 (RADIAN) (SBBPA: SunTrust Bank) 3,540 - -------------------------------------------------------------------------------- 4,200 Sarasota County Public Hospital Board Rev., Series 2003 A, (Sarasota Memorial Hospital), VRDN, 3.62%, 6/1/06 (Ambac) 4,200 - -------------------------------------------------------------------------------- 8,240 - -------------------------------------------------------------------------------- NEW MEXICO - 0.3% - -------------------------------------------------------------------------------- 1,900 Farmington Pollution, VRDN, 3.55%, 6/1/06 (LOC: Barclays Bank plc) 1,900 - -------------------------------------------------------------------------------- NEW YORK - 0.3% - -------------------------------------------------------------------------------- 2,050 New York City Transitional Finance Auth. Rev., Series 2003-3, VRDN, 3.50%, 6/1/06 (SBBPA: Royal Bank of Canada) 2,050 - -------------------------------------------------------------------------------- TENNESSEE - 0.2% - -------------------------------------------------------------------------------- 1,200 Clarksville Public Building Authority Rev., (Tennessee Municipal Bond Fund), VRDN, 3.58%, 6/1/06 (LOC: Bank of America N.A.) 1,200 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $23,190) 23,196 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 104.7% (Cost $693,868) 704,792 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- (4.7)% (31,493) - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $673,299 ================================================================================ See Notes to Financial Statements. (continued) - ------ 22 Tax-Free Bond - Schedule of Investments MAY 31, 2006 NOTES TO SCHEDULE OF INVESTMENTS ACA = American Capital Access Ambac = Ambac Assurance Corporation CIFG = CDC IXIS Financial Guaranty North America COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FNMA = Federal National Mortgage Association FSA = Financial Security Assurance, Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation MBIA-IBC = MBIA Insured Bond Certificates PSF-GTD = Permanent School Fund - Guaranteed RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. XLCA = XL Capital Ltd. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated for a when-issued security. (3) When-issued security. (4) 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 May 31, 2006 was $46,873 (in thousands), which represented 7.0% of total net assets. (5) 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. See Notes to Financial Statements. - ------ 23 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 December 1, 2005 to May 31, 2006. 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. (continued) - ------ 24 Shareholder Fee Examples (Unaudited) 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. EXPENSES PAID BEGINNING ENDING DURING PERIOD* ANNUALIZED ACCOUNT VALUE ACCOUNT VALUE 12/1/05 - EXPENSE 12/1/05 5/31/06 5/31/06 RATIO* - -------------------------------------------------------------------------------- TAX-FREE MONEY MARKET SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,014.10 $2.61 0.52% - -------------------------------------------------------------------------------- HYPOTHETICAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,022.34 $2.62 0.52% - -------------------------------------------------------------------------------- TAX-FREE BOND SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,013.10 $2.46 0.49% - -------------------------------------------------------------------------------- Institutional Class $1,000 $1,014.10 $1.46 0.29% - -------------------------------------------------------------------------------- Advisor Class $1,000 $1,011.90 $3.71 0.74% - -------------------------------------------------------------------------------- HYPOTHETICAL - ------------------------------------------- Investor Class $1,000 $1,022.49 $2.47 0.49% - -------------------------------------------------------------------------------- Institutional Class $1,000 $1,023.49 $1.46 0.29% - -------------------------------------------------------------------------------- Advisor Class $1,000 $1,021.24 $3.73 0.74% - -------------------------------------------------------------------------------- *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 182, the number of days in the most recent fiscal half-year, divided by 365, to reflect the one-half year period. - ------ 25 Statement of Assets and Liabilities MAY 31, 2006 - -------------------------------------------------------------------------------- TAX-FREE TAX-FREE (AMOUNTS IN THOUSANDS EXCEPT AS NOTED) MONEY MARKET BOND - -------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------- Investment securities, at value (cost of $268,685 and $693,868, respectively) $268,685 $704,792 - -------------------------------------------------- Cash 1,725 -- - -------------------------------------------------- Receivable for investments sold -- 7,447 - -------------------------------------------------- Receivable for capital shares sold 180 598 - -------------------------------------------------- Interest receivable 1,705 10,410 - -------------------------------------------------- Prepaid portfolio insurance 35 -- - -------------------------------------------------------------------------------- 272,330 723,247 - -------------------------------------------------------------------------------- LIABILITIES - -------------------------------------------------------------------------------- Disbursements in excess of demand deposit cash -- 331 - -------------------------------------------------- Payable for investments purchased -- 48,859 - -------------------------------------------------- Accrued management fees 113 275 - -------------------------------------------------- Dividends payable 9 483 - -------------------------------------------------------------------------------- 122 49,948 - -------------------------------------------------------------------------------- Net Assets $272,208 $673,299 ================================================================================ NET ASSETS CONSIST OF: - -------------------------------------------------------------------------------- Capital paid in $272,255 $663,035 - -------------------------------------------------- Accumulated net realized loss on investment and futures transactions (47) (660) - -------------------------------------------------- Net unrealized appreciation on investments -- 10,924 - -------------------------------------------------------------------------------- $272,208 $673,299 ================================================================================ INVESTOR CLASS ($ AND SHARES IN FULL) - -------------------------------------------------------------------------------- Net assets $272,207,969 $665,457,958 - -------------------------------------------------- Shares outstanding 272,254,586 62,369,885 - -------------------------------------------------- Net asset value per share $1.00 $10.67 - -------------------------------------------------------------------------------- INSTITUTIONAL CLASS ($ AND SHARES IN FULL) - -------------------------------------------------------------------------------- Net assets N/A $7,815,478 - -------------------------------------------------- Shares outstanding N/A 732,504 - -------------------------------------------------- Net asset value per share N/A $10.67 - -------------------------------------------------------------------------------- ADVISOR CLASS ($ AND SHARES IN FULL) - -------------------------------------------------------------------------------- Net assets N/A $25,377 - -------------------------------------------------- Shares outstanding N/A 2,378 - -------------------------------------------------- Net asset value per share N/A $10.67 - -------------------------------------------------------------------------------- See Notes to Financial Statements. - ------ 26 Statement of Operations YEAR ENDED MAY 31, 2006 - -------------------------------------------------------------------------------- TAX-FREE (AMOUNTS IN THOUSANDS) MONEY MARKET TAX-FREE BOND - -------------------------------------------------------------------------------- INVESTMENT INCOME (LOSS) - -------------------------------------------------------------------------------- INCOME: - ----------------------------------------------- Interest $8,473 $27,274 - -------------------------------------------------------------------------------- EXPENSES: - ----------------------------------------------- Management fees 1,396 3,125 - ----------------------------------------------- Trustees' fees and expenses 17 39 - ----------------------------------------------- Portfolio insurance 49 -- - ----------------------------------------------- Other expenses 1 2 - -------------------------------------------------------------------------------- 1,463 3,166 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 7,010 24,108 - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) - -------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS) ON: - ----------------------------------------------- Investment transactions 12 343 - ----------------------------------------------- Futures transactions -- 844 - -------------------------------------------------------------------------------- 12 1,187 - -------------------------------------------------------------------------------- CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: - ----------------------------------------------- Investments -- (13,355) - ----------------------------------------------- Futures -- 271 - -------------------------------------------------------------------------------- -- (13,084) - -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) 12 (11,897) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $7,022 $12,211 ================================================================================ See Notes to Financial Statements. - ------ 27 Statement of Changes in Net Assets YEARS ENDED MAY 31, 2006 AND MAY 31, 2005 - -------------------------------------------------------------------------------- (AMOUNTS IN THOUSANDS) TAX-FREE MONEY MARKET TAX-FREE BOND - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 2006 2005 2006 2005 - -------------------------------------------------------------------------------- OPERATIONS - -------------------------------------------------------------------------------- Net investment income (loss) $ 7,010 $ 3,568 $ 24,108 $ 20,827 - ------------------------------------ Net realized gain (loss) 12 (1) 1,187 (374) - ------------------------------------ Change in net unrealized appreciation (depreciation) -- -- (13,084) 9,574 - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 7,022 3,567 12,211 30,027 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS - -------------------------------------------------------------------------------- From net investment income: - ------------------------------------ Investor Class (7,010) (3,568) (23,809) (20,531) - ------------------------------------ Institutional Class -- -- (328) (299) - ------------------------------------ Advisor Class -- -- (1) -- - ------------------------------------ From net realized gains: - ------------------------------------ Investor Class -- -- (451) -- - ------------------------------------ Institutional Class -- -- (6) -- - ------------------------------------ Advisor Class -- -- -- -- - -------------------------------------------------------------------------------- Decrease in net assets from distributions (7,010) (3,568) (24,595) (20,830) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS - -------------------------------------------------------------------------------- Net increase (decrease) in net assets from capital share transactions (12,655) 8,607 66,467 18,619 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS (12,643) 8,606 54,083 27,816 - -------------------------------------------------------------------------------- NET ASSETS - -------------------------------------------------------------------------------- Beginning of period 284,851 276,245 619,216 591,400 - -------------------------------------------------------------------------------- End of period $272,208 $284,851 $673,299 $619,216 ================================================================================ Undistributed net investment income -- -- -- $29 ================================================================================ See Notes to Financial Statements. - ------ 28 Notes to Financial Statements MAY 31, 2006 (AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century Municipal Trust (the trust), is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. Tax-Free Money Market Fund (Tax-Free Money Market) and Tax-Free Bond Fund (Tax-Free Bond) (collectively, the funds) are two funds in a series issued by the trust. The funds are diversified under the 1940 Act. The funds' investment objective is to seek safety of principal and high current income that is exempt from federal income tax. Tax-Free Money Market invests primarily in cash-equivalent, high-quality municipal obligations. Tax-Free Bond invests primarily in high-quality municipal obligations. The following is a summary of the funds' significant accounting policies. MULTIPLE CLASS -- Tax-Free Money Market is authorized to issue the Investor Class. Tax-Free Bond is authorized to issue the Investor Class, the Institutional Class and the Advisor Class. The share classes differ principally in their respective shareholder servicing and distribution expenses and arrangements. All shares of each 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 funds are allocated to each class of shares based on their relative net assets. The Advisor Class of Tax-Free Bond commenced operations on July 29, 2005. SECURITY VALUATIONS -- Securities of Tax-Free Money Market are valued at amortized cost, which approximates current market value. Securities of Tax-Free Bond 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 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 at its fair value as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such fair value determination would materially impact a fund's net asset value. Circumstances that may cause the fund to fair value a security include: an event occurred after the close of the exchange on which a portfolio security principally trades (but before the close of the New York Stock Exchange) that was likely to have changed the value of the security; a security has been declared in default; or trading in a security has been halted during the trading day. SECURITY TRANSACTIONS -- 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 -- Tax-Free Bond 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 funds 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 the funds. The variation margin is equal to the daily change in the contract value and is recorded as unrealized gains and losses. Tax-Free Bond recognizes a realized gain or loss when the contract is closed or expires. Net realized and unrealized gains and 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. 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. Accordingly, no provision has been made for federal or state income taxes. 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. (continued) - ------ 29 Notes to Financial Statements MAY 31, 2006 (AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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), under which ACIM provides the funds 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 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. The rates for the Investment Category Fee range from 0.1625% to 0.2800% for Tax-Free Bond. Rates for the Complex Fee range from 0.2500% to 0.3100% for the Investor Class. The Institutional Class and the Advisor Class are 0.2000% and 0.2500%, respectively, less at each point within the Complex Fee Range. The effective annual management fee for the Investor Class of Tax-Free Money Market and Tax-Free Bond for the year ended May 31, 2006 was 0.49% and 0.48%, respectively. The effective annual management fee for the Institutional Class and the Advisor Class of Tax-Free Bond for the year ended May 31, 2006 was 0.28% and 0.23%, respectively. DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a Master Distribution and Shareholder Services Plan (the plan) for the Advisor Class, pursuant to Rule 12b-1 of the 1940 Act. The plan provides that the Advisor Class will pay American Century Investment Services, Inc. (ACIS) an annual distribution fee equal to 0.25% and an annual service fee equal to 0.25%. The fees are computed and accrued daily based on the Advisor Class's daily net assets and paid monthly in arrears. The distribution fee provides compensation for expenses incurred by financial intermediaries in connection with distributing shares of the Advisor Class including, but not limited to, payments to brokers, dealers, and financial institutions that have entered into sales agreements with respect to shares of the funds. The service fee provides compensation for shareholder and administrative services rendered by ACIS, its affiliates or independent third party providers. Fees incurred under the plan during the year ended May 31, 2006, are detailed in the Statement of Operations. 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 May 31, 2006, the annualized ratio of money market insurance expense to average net assets was 0.02%. 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. Tax-Free Bond has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the funds and a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPM). JPM is an equity investor in ACC. (continued) - ------ 30 Notes to Financial Statements MAY 31, 2006 (AMOUNTS IN THOUSANDS) 3. INVESTMENT TRANSACTIONS Purchases and sales of investment securities for Tax-Free Bond, excluding short-term investments, for the year ended May 31, 2006 were $509,203 and $439,556, respectively. All investment transactions for Tax-Free Money Market were considered short-term during the year ended May 31, 2006. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of the funds were as follows (unlimited number of shares authorized): - ----------------------------------------------------------------------------- TAX-FREE MONEY MARKET TAX-FREE BOND - ----------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT - ----------------------------------------------------------------------------- INVESTOR CLASS - ----------------------------------------------------------------------------- YEAR ENDED MAY 31, 2006 - -------------------------------- Sold 215,988 $215,988 18,991 $204,384 - -------------------------------- Issued in reinvestment of distributions 6,881 6,881 1,750 18,842 - -------------------------------- Redeemed (235,524) (235,524) (14,501) (155,962) - ----------------------------------------------------------------------------- Net increase (decrease) (12,655) $(12,655) 6,240 $ 67,264 ============================================================================= YEAR ENDED MAY 31, 2005 - -------------------------------- Sold 189,979 $189,979 13,170 $142,894 - -------------------------------- Issued in reinvestment of distributions 3,493 3,493 1,443 15,658 - -------------------------------- Redeemed (184,865) (184,865) (13,004) (140,935) - ----------------------------------------------------------------------------- Net increase (decrease) 8,607 $ 8,607 1,609 $ 17,617 ============================================================================= INSTITUTIONAL CLASS - ----------------------------------------------------------------------------- YEAR ENDED MAY 31, 2006 - -------------------------------- Sold N/A N/A 9 $ 93 - -------------------------------- Issued in reinvestment of distributions 30 321 - -------------------------------- Redeemed (115) (1,237) - ----------------------------------------------------------------------------- Net increase (decrease) (76) $(823) ============================================================================= YEAR ENDED MAY 31, 2005 - -------------------------------- Sold N/A N/A 455 $4,953 - -------------------------------- Issued in reinvestment of distributions 27 298 - -------------------------------- Redeemed (393) (4,249) - ----------------------------------------------------------------------------- Net increase (decrease) 89 $1,002 ============================================================================= ADVISOR CLASS - ----------------------------------------------------------------------------- PERIOD ENDED MAY 31, 2006(1) - -------------------------------- Sold N/A N/A 2 $25 - -------------------------------- Issued in reinvestment of distributions -- 1 - ----------------------------------------------------------------------------- Net increase (decrease) 2 $26 ============================================================================= (1) July 29, 2005 (commencement of sale) through May 31, 2006. 5. BANK LINE OF CREDIT Tax-Free Bond, along with certain other funds managed by ACIM or American Century Global Investment Management, Inc., has a $500 million unsecured bank line of credit agreement with JPMCB. Tax-Free Bond may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.50%. Tax-Free Bond did not borrow from the line during the year ended May 31, 2006. (continued) - ------ 31 Notes to Financial Statements MAY 31, 2006 (AMOUNTS IN THOUSANDS) 6. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended May 31, 2006 and May 31, 2005 were as follows: - ------------------------------------------------------------------------------ TAX-FREE MONEY MARKET TAX-FREE BOND - ------------------------------------------------------------------------------ 2006 2005 2006 2005 - ------------------------------------------------------------------------------ DISTRIBUTIONS PAID FROM - ------------------------------------------------------------------------------ Ordinary income $7,010 $3,568 $24,138 $20,830 - ------------------------------------------------------------------------------ Long-term capital gains -- -- $457 -- - ------------------------------------------------------------------------------ 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 May 31, 2006, the components of distributable earnings on a tax-basis and the federal tax cost of investments were as follows: - -------------------------------------------------------------------------------- TAX-FREE MONEY MARKET TAX-FREE BOND - -------------------------------------------------------------------------------- Federal tax cost of investments $268,685 $693,869 ================================================================================ Gross tax appreciation of investments -- $12,769 - -------------------------------------------------- Gross tax depreciation of investments -- (1,846) - -------------------------------------------------------------------------------- Net tax appreciation (depreciation) of investments -- $10,923 ================================================================================ Accumulated capital losses $(47) -- - -------------------------------------------------- Capital loss deferrals -- $(659) ================================================================================ The difference between book-basis and tax-basis cost and unrealized appreciation (depreciation) is attributable primarily to the tax deferral of losses on wash sales. 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: 2009 2010 2011 2012 2013 - ---------------------------------------------------------------------- Tax-Free Money Market $(33) $(9) -- $(4) $(1) - ---------------------------------------------------------------------- The capital loss deferrals represent net capital losses incurred in the seven-month period ended May 31, 2006. The funds have elected to treat such losses as having been incurred in the following fiscal year for federal income tax purposes. 7. OTHER TAX INFORMATION (UNAUDITED) ($ IN FULL) The following information is provided pursuant to provisions of the Internal Revenue Code. The funds designate exempt interest and capital gain distributions for the fiscal year ended May 31, 2006, as follows: - -------------------------------------------------------------------------------- TAX-FREE MONEY MARKET TAX-FREE BOND - -------------------------------------------------------------------------------- Exempt interest distributions $7,008,068 $24,061,771 - ------------------------------------ Long-term capital gain -- $457,040 - -------------------------------------------------------------------------------- - ------ 32 Tax-Free Money Market - Financial Highlights For a Share Outstanding Throughout the Years Ended May 31 - ------------------------------------------------------------------------------- INVESTOR CLASS - ------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------- 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) 0.02 0.01 0.01 0.01 0.02 - ------------------------------------------------------------------------------- Distributions - --------------------------- From Net Investment Income (0.02) (0.01) (0.01) (0.01) (0.02) - ------------------------------------------------------------------------------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 =============================================================================== TOTAL RETURN(1) 2.51% 1.33% 0.64% 1.05% 1.64% - ------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.52% 0.51% 0.51% 0.51% 0.51% - --------------------------- Ratio of Net Investment Income (Loss) to Average Net Assets 2.47% 1.31% 0.65% 1.04% 1.62% - --------------------------- Net Assets, End of Period (in thousands) $272,208 $284,851 $276,245 $272,256 $250,035 - ------------------------------------------------------------------------------- (1) Total return assumes reinvestment of net investment income and capital gains distributions, if any. See Notes to Financial Statements. - ------ 33 Tax-Free Bond - Financial Highlights For a Share Outstanding Throughout the Years Ended May 31 - -------------------------------------------------------------------------------- INVESTOR CLASS - -------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.88 $10.71 $11.19 $10.63 $10.50 - -------------------------------------------------------------------------------- Income From Investment Operations - --------------------------- Net Investment Income (Loss) 0.40 0.38 0.37 0.39 0.44 - ---------------------------- Net Realized and Unrealized Gain (Loss) (0.20) 0.17 (0.45) 0.58 0.22 - -------------------------------------------------------------------------------- Total From Investment Operations 0.20 0.55 (0.08) 0.97 0.66 - -------------------------------------------------------------------------------- Distributions - --------------------------- From Net Investment Income (0.40) (0.38) (0.37) (0.39) (0.44) - ---------------------------- From Net Realized Gains (0.01) -- (0.03) (0.02) (0.09) - -------------------------------------------------------------------------------- Total Distributions (0.41) (0.38) (0.40) (0.41) (0.53) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.67 $10.88 $10.71 $11.19 $10.63 ================================================================================ TOTAL RETURN(1) 1.87% 5.16% (0.79)% 9.31% 6.45% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.49% 0.50% 0.51% 0.51% 0.51% - ---------------------------- Ratio of Net Investment Income (Loss) to Average Net Assets 3.73% 3.46% 3.34% 3.62% 4.14% - ---------------------------- Portfolio Turnover Rate 79% 77% 60% 57% 86% - ---------------------------- Net Assets, End of Period (in thousands) $665,458 $610,420 $583,689 $620,000 $382,447 - -------------------------------------------------------------------------------- (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 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. - ------ 34 Tax-Free Bond - Financial Highlights For a Share Outstanding Throughout the Years Ended May 31 (except as noted) - ----------------------------------------------------------------------------- INSTITUTIONAL CLASS - ----------------------------------------------------------------------------- 2006 2005 2004 2003(1) - ----------------------------------------------------------------------------- PER-SHARE DATA - ----------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.88 $10.71 $11.19 $10.90 - ----------------------------------------------------------------------------- Income From Investment Operations - -------------------------------------- Net Investment Income (Loss) 0.42 0.40 0.39 0.05 - -------------------------------------- Net Realized and Unrealized Gain (Loss) (0.20) 0.17 (0.45) 0.29 - ----------------------------------------------------------------------------- Total From Investment Operations 0.22 0.57 (0.06) 0.34 - ----------------------------------------------------------------------------- Distributions - -------------------------------------- From Net Investment Income (0.42) (0.40) (0.39) (0.05) - -------------------------------------- From Net Realized Gains (0.01) -- (0.03) -- - ----------------------------------------------------------------------------- Total Distributions (0.43) (0.40) (0.42) (0.05) - ----------------------------------------------------------------------------- Net Asset Value, End of Period $10.67 $10.88 $10.71 $11.19 ============================================================================= TOTAL RETURN(2) 2.07% 5.37% (0.60)% 3.14% - ----------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ----------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.29% 0.30% 0.31% 0.30%(3) - -------------------------------------- Ratio of Net Investment Income (Loss) to Average Net Assets 3.93% 3.66% 3.54% 3.68%(3) - -------------------------------------- Portfolio Turnover Rate 79% 77% 60% 57%(4) - -------------------------------------- Net Assets, End of Period (in thousands) $7,815 $8,796 $7,711 $7,609 - ----------------------------------------------------------------------------- (1) April 15, 2003 (commencement of sale) through May 31, 2003. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. 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 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 May 31, 2003. See Notes to Financial Statements. - ------ 35 Tax-Free Bond - Financial Highlights For a Share Outstanding Throughout the Period Indicated - -------------------------------------------------------------------------------- ADVISOR CLASS - -------------------------------------------------------------------------------- 2006(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.83 - -------------------------------------------------------------------------------- Income From Investment Operations - -------------------------------------------------------------- Net Investment Income (Loss) 0.31 - -------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) (0.15) - -------------------------------------------------------------------------------- Total From Investment Operations 0.16 - -------------------------------------------------------------------------------- Distributions - -------------------------------------------------------------- From Net Investment Income (0.31) - -------------------------------------------------------------- From Net Realized Gains (0.01) - -------------------------------------------------------------------------------- Total Distributions (0.32) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.67 ================================================================================ TOTAL RETURN(2) 1.51% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.74%(3) - -------------------------------------------------------------- Ratio of Net Investment Income (Loss) to Average Net Assets 3.52%(3) - -------------------------------------------------------------- Portfolio Turnover Rate 79%(4) - -------------------------------------------------------------- Net Assets, End of Period (in thousands) $25 - -------------------------------------------------------------------------------- (1) July 29, 2005 (commencement of sale) through May 31, 2006. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. 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 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 May 31, 2006. See Notes to Financial Statements. - ------ 36 Report of Independent Registered Public Accounting Firm To the Trustees of the American Century Municipal Trust and Shareholders of the Tax-Free Money Market Fund and Tax-Free Bond 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 Tax-Free Money Market Fund and Tax-Free Bond Fund (two of the six funds in the American Century Municipal Trust hereafter referred to as the "Funds") at May 31, 2006, 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 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 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 May 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri July 18, 2006 - ------ 37 Management The individuals listed below serve as trustees or officers of the funds. Each trustee serves until his or her successor is duly elected and qualified or until he or she retires. Effective March 2004, mandatory retirement age for independent trustees is 73. However, the mandatory retirement age may be extended for a period not to exceed two years with the approval of the remaining independent trustees. Those listed as interested trustees are "interested" primarily by virtue of their engagement as officers of American Century Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries, including the funds' investment advisor, American Century Investment Management, Inc. (ACIM); the funds' principal underwriter, American Century Investment Services, Inc. (ACIS); and the funds' transfer agent, American Century Services, LLC (ACS). The other trustees (more than three-fourths of the total number) are independent; that is, they have never been employees or officers of, and have no financial interest in, ACC or any of its wholly owned, direct or indirect, subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity for eight registered investment companies in the American Century family of funds. All persons named as officers of the funds also serve in similar capacities for the other 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. INDEPENDENT TRUSTEES - -------------------------------------------------------------------------------- JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 2005 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis Management Company, LLC (April 2004 to present); Partner and Founder, Bay Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware & Freidenrich (1968 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUND: Trustee, Chairman of the Board FIRST YEAR OF SERVICE: 1995 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law and Business, Stanford Law School (1979 to present); Marc and Eva Stern Professor of Law and Business, Columbia University School of Law (1992 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- (continued) - ------ 38 Management INDEPENDENT TRUSTEES (CONTINUED) - -------------------------------------------------------------------------------- KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 2001 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to present); President and Managing Director, Laurel Management Company, LLC (1996 to April 2002) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1941 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 1980 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Oak Hill Platinum Partners, and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1981 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 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 FIRST YEAR OF SERVICE: 2002 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1977 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present); Director, Watson Wyatt Worldwide (2002 to present); Director, Palmsource Inc. (2002 to present) - -------------------------------------------------------------------------------- JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 1984 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner, Windy Hill Productions, LP (educational software) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Quintus Corporation (automation solutions, 1995 to present) - -------------------------------------------------------------------------------- INTERESTED TRUSTEE - -------------------------------------------------------------------------------- WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1955 POSITION(S) HELD WITH FUND: Trustee, President FIRST YEAR OF SERVICE: 1997 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC (September 2000 to present); President, ACC (June 1997 to present). Also serves as: Chief Executive Officer and President, ACIM, ACGIM, ACIS and other ACC subsidiaries; Executive Vice President, ACS; Director, ACC, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- (continued) - ------ 39 Management OFFICERS - -------------------------------------------------------------------------------- JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUND: Executive Vice President FIRST YEAR OF SERVICE: 2005 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC (November 2005 to present); Chief Administrative Officer, ACC (February 2006 to present). Also serves as: President, ACS; Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) - -------------------------------------------------------------------------------- MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUND: Senior Vice President, Treasurer and Chief Financial Officer FIRST YEAR OF SERVICE: 2000 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January 1995 to present). Also serves as: Senior Vice President, ACS; Assistant Treasurer, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1958 POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel FIRST YEAR OF SERVICE: 1998 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001 to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior Vice President and General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- CHARLES C.S. PARK, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Vice President and Chief Compliance Officer FIRST YEAR OF SERVICE: 2000 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (March 2005 to present); Vice President, ACS (February 2000 to present); Assistant General Counsel, ACS (January 1998 to March 2005) - -------------------------------------------------------------------------------- ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUND: Controller FIRST YEAR OF SERVICE: 1996 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); Controller-Fund Accounting, ACS (June 1997 to present) - -------------------------------------------------------------------------------- C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUND: Controller(1) FIRST YEAR OF SERVICE: 1996 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); Controller-Fund Accounting, ACS (June 1997 to present) - -------------------------------------------------------------------------------- JON ZINDEL, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Tax Officer FIRST YEAR OF SERVICE: 1997 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001 to present); Vice President, Corporate Tax, ACS (April 1998 to present). Also serves as: Vice President, ACIM, ACGIM, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- (1) Ms. Wade serves in a similar capacity for seven other investment companies advised by ACIM. The SAI has additional information about the funds' trustees and is available without charge, upon request, by calling 1-800-345-2021. - ------ 40 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond 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 Tax-Free Money Market and Tax-Free Bond (the "funds") and the services provided to the funds 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 funds under the management agreement; * reports on the advisor's activities relating to the wide range of programs and services the advisor provides to the funds and its 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 and one special meeting 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 (continued) - ------ 41 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond the setting of the applicable advisory fee. The board also had the benefit of the advice of its independent counsel throughout the period. 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 funds. 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 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, (continued) - ------ 42 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond training, compliance and other systems to conduct their business. 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 comparing the funds' performance with that of similar funds not managed by the advisor. 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. Tax-Free Money Market's performance for both the one and three year periods was above the median for its peer group. Tax-Free Bond's performance was above the median for the one year period and at the median for the three year period during part of the past year. The board discussed Tax-Free Bond's performance with the advisor and was satisfied with the efforts being undertaken by the advisor. 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 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 and that the advisor was not implicated in the industry scandals of 2003 and 2004. (continued) - ------ 43 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond 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 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 the 15(c) Providers 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 the funds 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 (continued) - ------ 44 Approval of Management Agreement for Tax-Free Money Market and Tax-Free Bond and received information from the 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 the 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. CONCLUSIONS OF THE DIRECTORS As a result of this process, the independent 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 funds and the advisor is fair and reasonable in light of the services provided and should be renewed. - ------ 45 Share Class Information One class of shares is authorized for sale by Tax-Free Money Market: Investor Class. Three classes of shares are authorized for sale by Tax-Free Bond: Investor Class, Institutional Class and Advisor Class. The total expense ratio for Institutional Class shares is lower than that of Investor Class shares. The total expense ratio for Advisor Class shares is higher than that of Investor Class shares. 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. INSTITUTIONAL CLASS shares are available to large investors such as endowments, foundations, and retirement plans, and to financial intermediaries serving these investors. This class recognizes the relatively lower cost of serving institutional customers and others who invest at least $5 million ($3 million for endowments and foundations) in an American Century fund or at least $10 million in multiple funds. In recognition of the larger investments and account balances and comparatively lower transaction costs, the unified management fee of Institutional Class shares is 0.20% less than the unified management fee of Investor Class shares. ADVISOR CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, insurance companies, and financial advisors. Advisor Class shares are subject to a 0.50% annual Rule 12b-1 distribution and service fee. The total expense ratio of Advisor Class shares is 0.25% higher than the total expense ratio of Investor Class shares. All classes of shares represent a pro rata interest in the funds and generally have the same rights and preferences. - ------ 46 Additional Information 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 of 2-4 years. 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 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 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. 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 Web site at americancentury.com and on the Securities and Exchange Commission's Web site 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 Web site 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 Web site at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 47 Notes - ------ 48 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 MUNICIPAL TRUST 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. The American Century Investments logo, American Century and American Century Investments are service marks of American Century Proprietary Holdings, Inc. American Century Investment Services, Inc., Distributor ©2006 American Century Proprietary Holdings, Inc. All rights reserved. 0607 SH-ANN-50106N [front cover] American Century Investments ANNUAL REPORT [photo of man and woman] MAY 31, 2006 Arizona Municipal Bond Fund Florida Municipal Bond Fund Long-Term Tax-Free Fund High-Yield Municipal Fund [american century investments logo and text logo] Table of Contents Our Message to You . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 U.S. Fixed-Income Total Returns . . . . . . . . . . . . . . . . . . . . . . 2 ARIZONA MUNICIPAL BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 FLORIDA MUNICIPAL BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 LONG-TERM TAX-FREE Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 HIGH-YIELD MUNICIPAL Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Shareholder Fee Examples . . . . . . . . . . . . . . . . . . . . . . . . . . .34 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . 37 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . .41 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 44 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . 71 OTHER INFORMATION Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and High-Yield Municipal . . . . . . . . . . . . . . .75 Approval of Management Agreement for Long-Term Tax-Free . . . . . . . . . . . 80 Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .84 Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 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. Our Message to You [photo of James E. Stowers III and James E. Stowers, Jr.] JAMES E. STOWERS III WITH JAMES E. STOWERS, JR. We are pleased to provide you with the annual report for the American Century Arizona Municipal Bond, Florida Municipal Bond, Long-Term Tax-Free, and High-Yield Municipal funds for the period ended May 31, 2006. We hope you find this information helpful in monitoring your investment. Another useful resource we offer is our Web site, americancentury.com, where we post quarterly portfolio commentaries, the views of our senior investment officers, and other communications about investments, portfolio strategy, and the markets. Our Web site presents American Century's recently-announced strategic collaboration with Lance Armstrong and the Lance Armstrong Foundation (LAF). Our new campaign, featuring Lance, is designed to encourage investors to take a more active role in planning their financial futures and make every investment decision count. American Century's collaboration with Lance Armstrong and the LAF is a perfect fit. Like members of our family, Lance is a cancer survivor and shares our values of optimism, focus, and determination. In addition, Lance and our family have dedicated our success to improving lives, through the LAF and the Stowers Institute for Medical Research, respectively. To learn more about American Century's collaboration with Lance Armstrong and the LAF, please visit www.lanceface.com on the Web and click on the links to related sites. Besides the exciting new collaboration, we've enjoyed other good news--in January, American Century was named, for the seventh consecutive year, one of FORTUNE magazine's 100 Best Companies to Work For in America. Fostering a positive work environment can benefit fund investors as well as our company--it helps us continue to attract and retain talented people. As always, we deeply appreciate your investment with American Century Investments. Sincerely, /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AMERICAN CENTURY COMPANIES, INC. /s/James E. Stowers III James E. Stowers III CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. - ------ 1 Market Perspective [photo of David MacEwen] BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME ECONOMIC GROWTH PUSHED COMMODITY PRICES & INTEREST RATES HIGHER Strong economic growth abroad and resilient growth in the U.S. (despite a devastating 2005 hurricane season and record-high energy prices) helped push U.S. interest rates and Treasury yields to their highest levels since 2001-2002 during the 12 months ended May 31, 2006. The U.S. economy grew at a moderate rate of approximately 3.5% for the period, despite dipping below 2% in the fourth quarter of 2005. Robust overseas growth, particularly in emerging Asian markets such as China and India, helped push the Commodity Research Bureau index to a record high, fanning inflation fears and forcing global central banks to raise interest rates. TREASURY YIELDS INVERTED, INDICATING POSSIBLE ECONOMIC WEAKNESS AHEAD In the U.S., the Federal Reserve increased its overnight interest rate target eight times during the 12 months, raising it from 3% to 5%. That display of inflation-fighting discipline helped prevent long-term Treasury yields from rising as much as short-term yields, reducing or "flattening" the difference between these yields. On May 31, 2005, two- and 10-year Treasury yields were 3.58% and 3.98%, respectively, 0.40 percentage point apart. On May 31, 2006, the respective yields for two- and 10-year notes were 5.04% and 5.12%, just 0.08 percentage point apart. These yields also "inverted" temporarily during the first quarter of 2006 when the two-year yield rose higher than the 10-year. This phenomenon often precedes economic downturns. MUNICIPAL MARKET GENERALLY OUTPERFORMED TAXABLE MARKET Rising interest rates created challenging conditions for bonds, which, in general, had to rely on their interest income to help offset price declines. Under these conditions, the best performers were money market and high-yield securities. In addition, the municipal market generally outperformed the taxable--municipal yields didn't rise or flatten as much as Treasury yields. Reasons for municipal outperformance included strong demand from investors (including those who recognized that municipals typically outperform in bond bear markets), declining municipal supply growth (less issuance and refinancing as interest rates rose), and favorable economic growth (providing improved tax revenues and credit conditions for municipal debt). U.S. FIXED-INCOME TOTAL RETURNS For the 12 months ended May 31, 2006 - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL MARKET INDICES - -------------------------------------------------------------------------------- Municipal Bond 1.89% - -------------------------------------------------------------------------------- 3-Year Municipal Bond 1.59% - -------------------------------------------------------------------------------- 5-Year General Obligation (GO) 1.24% - -------------------------------------------------------------------------------- Long-Term Municipal Bond (22+ years) 3.20% - -------------------------------------------------------------------------------- Non-Investment-Grade (High-Yield) 7.20% - -------------------------------------------------------------------------------- TAXABLE MARKET RETURNS - -------------------------------------------------------------------------------- Lehman Brothers U.S. Aggregate Index -0.48% - -------------------------------------------------------------------------------- Lehman Brothers U.S. Treasury Index -1.39% - -------------------------------------------------------------------------------- 3-Month Treasury Bill 3.85% - -------------------------------------------------------------------------------- 10-Year Treasury Note -5.25% - -------------------------------------------------------------------------------- Source: Lehman Brothers Inc. - ------ 2 Arizona Municipal Bond - Performance TOTAL RETURNS AS OF MAY 31, 2006 -------------------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE - -------------------------------------------------------------------------------- INVESTOR CLASS 1.59% 4.30% 4.94% 5.24% 4/11/94 - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 1.24% 4.06% 4.88% 5.10%(1) -- - -------------------------------------------------------------------------------- LIPPER OTHER STATES INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 0.67% 3.69% 4.34% 4.56%(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 5/31/06(2) 5 of 119 11 of 95 8 of 66 5 of 45(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 6/30/06(2) 7 of 119 12 of 95 8 of 67 5 of 45(3) -- - -------------------------------------------------------------------------------- A Class 2/27/04 No sales charge* 1.34% -- -- 1.45% With sales charge* -3.25% -- -- -0.60% - -------------------------------------------------------------------------------- B Class 2/27/04 No sales charge* 0.61% -- -- 0.71% With sales charge* -3.39% -- -- -0.62% - -------------------------------------------------------------------------------- C Class 0.58% -- -- 0.69% 2/27/04 - -------------------------------------------------------------------------------- *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 pages 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 3/31/94, the date nearest the Investor Class's inception for which data are available. (2) Data provided by Lipper Inc. -- A Reuters Company. (c)2006 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 4/14/94, the date nearest the Investor Class'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. 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. (continued) - ------ 3 Arizona Municipal Bond - Performance GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made May 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS Periods ended May 31 - ---------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 - ---------------------------------------------------------------------------------------------------- Investor Class 5.77% 7.19% 4.51% 0.20% 10.57% 6.74% 9.36% -1.06% 5.21% 1.59% - ---------------------------------------------------------------------------------------------------- Lehman Brothers Municipal 5-Year GO Index 6.08% 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% - ---------------------------------------------------------------------------------------------------- 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. 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 Arizona Municipal Bond - Portfolio Commentary PORTFOLIO TEAM LEADER: ALAN KRUSS MR. KRUSS, VICE PRESIDENT AND PORTFOLIO MANAGER, JOINED AMERICAN CENTURY INVESTMENTS IN 1997 AND BECAME A PORTFOLIO MANAGER IN 2001. IN APRIL 2006, HE TOOK OVER ARIZONA MUNICIPAL BOND'S TEAM-LEADER ROLE FROM KENNETH SALINGER, WHO LEFT THE COMPANY TO PURSUE OTHER INTERESTS. PERFORMANCE SUMMARY Arizona Municipal Bond returned 1.59%* for the 12 months ended May 31, 2006, more than double the 0.67% average total return of Lipper's Other States Intermediate Municipal Debt Funds. In addition, Arizona Municipal Bond outperformed the Lehman Brothers Municipal 5-Year GO Index, which returned 1.24%. The fund's longer-term performance was also noteworthy: Arizona Municipal Bond ranked among the top 15% of its Lipper peer group for the trailing five and 10 years while returning more than Lehman's Municipal 5-Year GO Index. Although favorable by comparison, the fund's absolute 12-month return was modest, reflecting myriad obstacles faced by municipal bonds and the broader bond market that are detailed in the Market Perspective on page 2. The commentary below discusses the strategies that we employed for Arizona Municipal Bond in that environment. YIELD SUMMARY One of Arizona Municipal Bond's investment objectives is to seek high current income exempt from federal and Arizona income taxes. Along those lines, the fund's 30-day SEC yield was 3.65% as of May 31, 2006, which translated into the attractive tax-equivalent yields shown in the table at top right. By comparison, Arizona Municipal Bond's Lipper group average 30-day SEC yield was only 3.11%. All else being equal, a higher yield can boost returns and pave the way for better performance. It's also worth noting that Arizona Municipal Bond achieved that yield advantage while generally steering clear of bonds subject to the Alternative Minimum Tax. PORTFOLIO STRATEGY & OUTLOOK Within the framework of our repeatable, multi-layered investment approach, one of our main emphasized strategies involved actively managing Arizona Municipal Bond's bond-maturity PORTFOLIO AT A GLANCE - -------------------------------------------------------------------------------- AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- Weighted Average Maturity 8.3 yrs 7.9 yrs - -------------------------------------------------------------------------------- Average Duration (Modified) 4.4 yrs 4.1 yrs - -------------------------------------------------------------------------------- YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD - -------------------------------------------------------------------------------- Investor Class 3.65% - -------------------------------------------------------------------------------- A Class 3.25% - -------------------------------------------------------------------------------- B Class 2.65% - -------------------------------------------------------------------------------- C Class 2.65% - -------------------------------------------------------------------------------- INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) - -------------------------------------------------------------------------------- 28.54% Tax Bracket 5.11% - -------------------------------------------------------------------------------- 31.40% Tax Bracket 5.32% - -------------------------------------------------------------------------------- 36.38% Tax Bracket 5.73% - -------------------------------------------------------------------------------- 38.28% Tax Bracket 5.91% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are combined federal and state tax brackets. 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. (continued) - ------ 5 Arizona Municipal Bond - Portfolio Commentary structure. In particular, we positioned the portfolio to benefit from a diminishing gap between the yields of short- and long-term municipal bonds. In order to appropriately position the portfolio to take advantage of this forecast scenario, we employed a "barbell" bond-maturity structure. We achieved this structure by overweighting short- and long-term municipal bonds, while comparatively underweighting intermediate-term bonds. That paid off as the yield gap between two- and 30-year triple-A-rated municipal bonds dropped from approximately 161 basis points (1.61%) to only 83 basis points over the 12 months. However, the municipal yield curve's flattening lost momentum toward the end of the period. And when factored in with how much yield spreads had already contracted, as well as with the latest economic, market, and interest rate forecasts at that time, we decided that the time for a strategy shift was at hand. So we pared short- and long-term bond holdings and generally invested the proceeds in intermediate-term securities, establishing a "curve-neutral" bond-maturity structure. Lastly, while conservatively managing the portfolio's interest rate sensitivity, we increased triple-B municipal bond holdings. These securities generally afforded higher yields than their like-maturity, higher-rated equivalents, boosting the portfolio's income stream and providing a cushion against the backdrop of falling bond prices and rising yields. ARIZONA MUNICIPAL BOND'S PLACE IN YOUR PORTFOLIO Arizona Municipal Bond is designed to be a core bond holding and seeks safety of principal and high current income by investing in debt securities--issued by cities, counties and municipalities, and U.S. territories--with interest payments exempt from regular federal and Arizona income taxes. Because municipal bonds typically don't move in lock-step with equities, Arizona Municipal Bond also provides diversification benefits. But it's important to keep in mind that diversification does not insure against losses. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- AAA 70% 74% - -------------------------------------------------------------------------------- AA 8% 8% - -------------------------------------------------------------------------------- A 9% 11% - -------------------------------------------------------------------------------- BBB 13% 7% - -------------------------------------------------------------------------------- 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 MAY 31, 2006 - -------------------------------------------------------------------------------- % OF FUND INVESTMENTS - -------------------------------------------------------------------------------- General Obligation (GO) 28% - -------------------------------------------------------------------------------- Certificates of Participation (COPs)/Leases 16% - -------------------------------------------------------------------------------- Prerefunded 15% - -------------------------------------------------------------------------------- Water and Sewer Revenue 14% - -------------------------------------------------------------------------------- Industrial Development Revenue 10% - -------------------------------------------------------------------------------- - ------ 6 Arizona Municipal Bond - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 97.7% ARIZONA -- 89.8% - -------------------------------------------------------------------------------- $1,000,000 Arizona Health Facilities Auth. Rev., (Blood Systems Incorporated), 5.00%, 4/1/21 $ 1,014,170 - -------------------------------------------------------------------------------- 1,750,000 Arizona School Facilities Board Rev., (State School Improvement), 5.50%, 7/1/11, Prerefunded at 100% of Par(1) 1,891,750 - -------------------------------------------------------------------------------- 1,000,000 Arizona Student Loan Acquisition Auth. Rev., Series 1999 A1, (Guaranteed Student Loans), 5.65%, 5/1/14 1,052,860 - -------------------------------------------------------------------------------- 1,880,000 Arizona Tourism & Sports Auth. Tax Rev., (Baseball Training Facilities), 5.00%, 7/1/13 1,930,102 - -------------------------------------------------------------------------------- 1,000,000 Arizona University COP, Series 2006 A, 5.00%, 6/1/18 (Ambac) 1,057,660 - -------------------------------------------------------------------------------- 1,910,000 Energy Management Services LLC Rev., (Arizona State University - Main Campus), 4.50%, 7/1/11 (MBIA)(2) 1,976,130 - -------------------------------------------------------------------------------- 1,000,000 Gilbert Water Resource Municipal Property Corp. Rev., (Development Fee & Sub-Lien), 4.90%, 4/1/19 1,001,910 - -------------------------------------------------------------------------------- 460,000 Glendale Industrial Development Auth. Rev., Series 1998 A, (Midwestern University), 5.375%, 5/15/08, Prerefunded at 101% of Par(1) 479,168 - -------------------------------------------------------------------------------- 540,000 Glendale Industrial Development Auth. Rev., Series 1998 A, (Midwestern University), 5.375%, 5/15/28 552,274 - -------------------------------------------------------------------------------- 500,000 Glendale Industrial Development Auth. Rev., Series 2001 A, (Midwestern University), 5.75%, 5/15/21 532,195 - -------------------------------------------------------------------------------- 1,740,000 Greater Arizona Development Auth. Rev., Series 2005 A, 5.00%, 8/1/23 (MBIA) 1,814,611 - -------------------------------------------------------------------------------- 1,040,000 Maricopa County Kyrene Elementary School District No. 28 GO, Series 2001 B, 4.30%, 7/1/07 (MBIA)(3) 998,868 - -------------------------------------------------------------------------------- 1,615,000 Maricopa County Litchfield Elementary School District No. 79 GO, Series 2000 A, (Projects of 1998), 4.55%, 7/1/07 (FSA) 1,630,003 - -------------------------------------------------------------------------------- 1,000,000 Maricopa County Paradise Valley Unified School District No. 69 GO, Series 2006 A, (School Improvement), 4.50%, 7/1/19 (FSA) 1,010,880 - -------------------------------------------------------------------------------- 1,000,000 Maricopa County Peoria Unified School District No. 11 GO, (School Improvement), 5.00%, 7/1/24 (MBIA) 1,047,990 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Maricopa County Phoenix Elementary School District No. 1 GO, 5.50%, 7/1/07, Prerefunded at 101% of Par (MBIA)(1) $ 1,029,870 - -------------------------------------------------------------------------------- 1,445,000 Maricopa County Phoenix Union High School District No. 210 GO, 4.75%, 7/1/11 (FSA) 1,511,615 - -------------------------------------------------------------------------------- 1,955,000 Maricopa County Saddle Mountain Unified School District No. 90 GO, Series 2003 A, 5.00%, 7/1/10 2,013,434 - -------------------------------------------------------------------------------- 1,000,000 Maricopa County Scottsdale Elementary School District No. 48 GO, 6.60%, 7/1/12 1,148,720 - -------------------------------------------------------------------------------- 1,265,000 Mohave County Community College District COP, 5.75%, 3/1/14 (Ambac) 1,349,009 - -------------------------------------------------------------------------------- 1,150,000 Mohave County Community College District Rev., (State Board of Directors), 6.00%, 3/1/20 (MBIA) 1,236,446 - -------------------------------------------------------------------------------- 1,815,000 Navajo County Unified School District No. 20 Rev., Series 2006 A, 5.00%, 7/1/17 (MBIA)(4) 1,938,402 - -------------------------------------------------------------------------------- 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 5.00%, 7/1/21 (MBIA) 1,049,460 - -------------------------------------------------------------------------------- 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 6.50%, 7/1/06 1,002,380 - -------------------------------------------------------------------------------- 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 6.25%, 7/1/10, Prerefunded at 101% of Par (FGIC)(1) 1,103,790 - -------------------------------------------------------------------------------- 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 5.50%, 7/1/19 (FGIC) 1,079,970 - -------------------------------------------------------------------------------- 1,070,000 Phoenix GO, Series 1995 A, 6.25%, 7/1/17 1,271,107 - -------------------------------------------------------------------------------- 1,000,000 Phoenix GO, Series 1995 B, 5.25%, 7/1/06, Prerefunded at 102% of Par(1) 1,021,420 - -------------------------------------------------------------------------------- 285,000 Phoenix Industrial Development Auth. Single Family Mortgage Rev., Series 1998 A, 6.60%, 12/1/29 (GNMA/FNMA/FHLMC) 292,045 - -------------------------------------------------------------------------------- 1,710,000 Pima County Metropolitan Domestic Water Improvement District Rev., 5.25%, 7/1/18 (Ambac) 1,877,871 - -------------------------------------------------------------------------------- 1,800,000 Pima County Metropolitan Domestic Water Improvement District Rev., 5.25%, 7/1/19 (Ambac)(2) 1,982,015 - -------------------------------------------------------------------------------- 1,125,000 Pima County Unified School District No. 6 Marana GO, 5.50%, 7/1/15 (FGIC) 1,204,549 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 7 Arizona Municipal Bond - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $ 820,000 Pinal County COP, 4.75%, 6/1/13 (Ambac) $ 852,964 - -------------------------------------------------------------------------------- 1,000,000 Pinal County COP, 5.00%, 12/1/26 1,015,640 - -------------------------------------------------------------------------------- 1,100,000 Pinal County Unified School District No. 43 Apache Junction GO, Series 2005 A, (School Improvement), 5.00%, 7/1/23 (MBIA) 1,146,849 - -------------------------------------------------------------------------------- 775,000 Pinal County Unified School District No. 43 Apache Junction GO, Series 2006 B, (School Improvement), 5.00%, 7/1/24 (FGIC) 812,836 - -------------------------------------------------------------------------------- 1,600,000 Scottsdale GO, 6.25%, 7/1/09, Prerefunded at 100% of Par(1) 1,718,528 - -------------------------------------------------------------------------------- 1,000,000 Sedona COP, 5.75%, 7/1/09, Prerefunded at 101% of Par(1) 1,067,660 - -------------------------------------------------------------------------------- 1,645,000 University of Arizona COP, Series 2002 A, 5.50%, 6/1/17 (Ambac) 1,771,385 - -------------------------------------------------------------------------------- 500,000 University of Arizona COP, Series 2005 B, 5.00%, 6/1/24 (Ambac) 518,145 - -------------------------------------------------------------------------------- 1,725,000 University of Arizona COP, Series 2005 D, 5.00%, 6/1/12 (Ambac) 1,824,878 - -------------------------------------------------------------------------------- 50,831,559 - -------------------------------------------------------------------------------- PUERTO RICO -- 7.9% - -------------------------------------------------------------------------------- 2,420,000 Government Development Bank of Puerto Rico Rev., 3.85%, 10/5/06 (Acquired 1/20/06, Cost $2,420,000)(5) 2,412,329 - -------------------------------------------------------------------------------- 1,000,000 Government Development Bank of Puerto Rico Rev., 3.87%, 10/6/06 (Acquired 1/24/06, Cost $1,000,000)(5) 996,870 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Government Development Bank of Puerto Rico Rev., Series 2006 B, 5.00%, 12/1/16 $ 1,037,320 - -------------------------------------------------------------------------------- 4,446,519 - -------------------------------------------------------------------------------- TOTAL MUNICIPAL SECURITIES (Cost $53,820,763) 55,278,078 - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 4.1% ARIZONA -- 4.1% - -------------------------------------------------------------------------------- 1,015,000 Pima County Industrial Development Auth. Lease Rev., VRDN, 3.48%, 6/1/06 (SBBPA: Societe Generale) 1,015,000 - -------------------------------------------------------------------------------- 1,300,000 Pima County Industrial Development Auth. Rev., (Tucson Electric), VRDN, 3.30%, 6/7/06 (LOC: Bank of New York) 1,300,000 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $2,315,000) 2,315,000 - -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS -- 0.1% 60,000 Federated Arizona Municipal Cash Trust (Cost $60,000) 60,000 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 101.9% (Cost $56,195,763) 57,653,078 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- (1.9)% (1,083,497) - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $56,569,581 ================================================================================ SWAP AGREEMENTS Unrealized Notional Amount Description of Agreement Expiration Date Gain (Loss) - ---------------------------------------------------------------------------------------------------- INTEREST RATE - ---------------------------------------------------------------------------------------------------- $1,500,000 Receive semiannually a variable rate based October 2016 $622 on the weekly Bond Market Association =========== Index and pay semiannually a fixed rate equal to 4.137% with Morgan Stanley Capital Services, Inc. See Notes to Financial Statements. (continued) - ------ 8 Arizona Municipal Bond - Schedule of Investments MAY 31, 2006 NOTES TO SCHEDULE OF INVESTMENTS Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLMC = Federal Home Loan Mortgage Corporation FNMA = Federal National Mortgage Association FSA = Financial Security Assurance, Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated for when-issued securities and/or swap agreements. (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) 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 May 31, 2006 was $3,409,199, which represented 6.0% of total net assets. See Notes to Financial Statements. - ------ 9 Florida Municipal Bond - Performance TOTAL RETURNS AS OF MAY 31, 2006 -------------------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE - -------------------------------------------------------------------------------- INVESTOR CLASS 1.48% 4.12% 5.10% 5.31% 4/11/94 - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 1.24% 4.06% 4.88% 5.10%(1) -- - -------------------------------------------------------------------------------- LIPPER FLORIDA INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 0.87% 3.45% 4.14% 4.37%(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 5/31/06(2) 5 of 18 2 of 15 1 of 11 1 of 10(3) -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 6/30/06(2) 5 of 18 2 of 15 1 of 12 1 of 10(3) -- - -------------------------------------------------------------------------------- A Class 2/27/04 No sales charge* 1.23% -- -- 1.15% With sales charge* -3.33% -- -- -0.87% - -------------------------------------------------------------------------------- B Class 2/27/04 No sales charge* 0.47% -- -- 0.39% With sales charge* -3.53% -- -- -0.94% - -------------------------------------------------------------------------------- C Class 0.47% -- -- 0.40% 2/27/04 - -------------------------------------------------------------------------------- *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 pages 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 3/31/94, the date nearest the Investor Class's inception for which data are available. (2) Data provided by Lipper Inc. -- A Reuters Company. (c)2006 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 4/14/94, the date nearest the Investor Class'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. 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. (continued) - ------ 10 Florida Municipal Bond - Performance GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made May 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS Periods ended May 31 - ---------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 - ---------------------------------------------------------------------------------------------------- Investor Class 6.63% 8.20% 4.71% 0.49% 10.71% 5.98% 9.90% -1.30% 4.88% 1.48% - ---------------------------------------------------------------------------------------------------- Lehman Brothers Municipal 5-Year GO Index 6.08% 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% - ---------------------------------------------------------------------------------------------------- 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. 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. - ------ 11 Florida Municipal Bond - Portfolio Commentary PORTFOLIO TEAM LEADER: ALAN KRUSS MR. KRUSS, VICE PRESIDENT AND PORTFOLIO MANAGER, JOINED AMERICAN CENTURY INVESTMENTS IN 1997 AND BECAME A PORTFOLIO MANAGER IN 2001. IN APRIL 2006, HE TOOK OVER FLORIDA MUNICIPAL BOND'S TEAM-LEADER ROLE FROM KENNETH SALINGER, WHO LEFT THE COMPANY TO PURSUE OTHER INTERESTS. PERFORMANCE SUMMARY Florida Municipal Bond returned 1.48%* for the 12 months ended May 31, 2006, solidly outpacing the 0.87% average total return of Lipper's Florida Intermediate Municipal Debt Funds. In addition, Florida Municipal Bond outperformed the Lehman Brothers Municipal 5-Year GO Index, which returned 1.24%. And it's worth keeping in mind that fees do not reduce the return of the Lehman index. The fund's longer-term performance was also noteworthy: Florida Municipal Bond ranked among the top 15% of its Lipper peer group for the trailing five and 10 years while returning more than Lehman's Municipal 5-Year GO Index. Although favorable by comparison, the fund's absolute 12-month return was modest, reflecting myriad obstacles faced by municipal bonds and the broader bond market that are detailed in the Market Perspective on page 2. The commentary below discusses the strategies that we employed for Florida Municipal Bond in that environment. YIELD SUMMARY Seeking high current income exempt from federal income tax as well as the Florida intangible personal property tax is one of Florida Municipal Bond's primary investment objectives. Along those lines, the fund's 30-day SEC yield was 3.63% as of May 31, 2006. By comparison, Florida Municipal Bond's Lipper group average 30-day SEC yield was only 3.17% at the end of the 12 months. A higher yield can boost returns and pave the way for better performance, all else being equal. PORTFOLIO STRATEGY & OUTLOOK One of the main strategies that we emphasized within the framework of our repeatable, multi-layered investment approach involved actively managing Florida Municipal Bond's bond-maturity structure. In particular, we positioned the portfolio to benefit from a declining gap between the yields of short- and long-term municipal bonds. PORTFOLIO AT A GLANCE - -------------------------------------------------------------------------------- AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- Weighted Average Maturity 7.7 yrs 8.3 yrs - -------------------------------------------------------------------------------- Average Duration (Modified) 4.5 yrs 4.3 yrs - -------------------------------------------------------------------------------- YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD - -------------------------------------------------------------------------------- Investor Class 3.63% - -------------------------------------------------------------------------------- A Class 3.22% - -------------------------------------------------------------------------------- B Class 2.64% - -------------------------------------------------------------------------------- C Class 2.62% - -------------------------------------------------------------------------------- INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) - -------------------------------------------------------------------------------- 25.00% Tax Bracket 4.84% - -------------------------------------------------------------------------------- 28.00% Tax Bracket 5.04% - -------------------------------------------------------------------------------- 33.00% Tax Bracket 5.42% - -------------------------------------------------------------------------------- 35.00% Tax Bracket 5.58% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are for federal taxes only. 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. (continued) - ------ 12 Florida Municipal Bond - Portfolio Commentary That meant employing a "barbell" structure, which tends to outperform in such a scenario. We achieved this structure by overweighting short- and long-term municipal bonds, while comparatively underweighting intermediate-term bonds. That paid off as the yield gap between two- and 30-year triple-A-rated municipal bonds dropped almost in half over the 12 months. Toward the end of the period, however, the municipal yield curve's flattening appeared to be winding down. That notion was supported by economic, market, and interest rate forecasts at that time as well as by how much yield spreads had already contracted. So we pared short- and long-term bond holdings and generally invested the proceeds in intermediate-term securities. We also increased Florida Municipal Bond's triple-B municipal bond holdings. The triple-B bonds generally afforded higher yields than their like-maturity, higher-rated counterparts, boosting the portfolio's income stream and providing a cushion against the backdrop of rising bond yields. By the end of the period, we felt that the yield advantage of triple-B bonds over triple-A equivalents had contracted enough to merit holding onto our triple-B positions, but not actively expanding upon them. FLORIDA MUNICIPAL BOND'S PLACE IN YOUR PORTFOLIO Florida Municipal Bond is designed to be a core bond holding and seeks safety of principal and high current income by investing in debt securities--issued by cities, counties and municipalities, and U.S. territories--with interest payments exempt from federal income tax as well as the Florida intangible personal property tax. Because municipal bonds typically don't move in lock-step with equities, Florida Municipal Bond also provides diversification benefits. But it's important to keep in mind that diversification does not insure against losses. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- AAA 78% 84% - -------------------------------------------------------------------------------- AA 1% 1% - -------------------------------------------------------------------------------- A 2% 1% - -------------------------------------------------------------------------------- BBB 19% 14% - -------------------------------------------------------------------------------- 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 MAY 31, 2006 - -------------------------------------------------------------------------------- % OF FUND INVESTMENTS - -------------------------------------------------------------------------------- Water and Sewer Revenue 16% - -------------------------------------------------------------------------------- Prerefunded 16% - -------------------------------------------------------------------------------- Certificates of Participation (COPs)/Leases 9% - -------------------------------------------------------------------------------- Transportation Revenue 9% - -------------------------------------------------------------------------------- General Obligation (GO) 8% - -------------------------------------------------------------------------------- - ------ 13 Florida Municipal Bond - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 98.4% FLORIDA -- 91.5% - -------------------------------------------------------------------------------- $1,110,000 Broward County Airport Systems Rev., (Passenger Facility), (Conventional Lien H-1), 5.25%, 10/1/12 (Ambac) $ 1,146,622 - -------------------------------------------------------------------------------- 400,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.00%, 4/1/14 413,992 - -------------------------------------------------------------------------------- 500,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.50%, 4/1/15 529,115 - -------------------------------------------------------------------------------- 525,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.50%, 4/1/16 554,090 - -------------------------------------------------------------------------------- 500,000 Broward County School Board COP, Series 2002 B, 5.375%, 7/1/11, Prerefunded at 100% of Par (FSA)(1) 537,150 - -------------------------------------------------------------------------------- 1,000,000 Callaway/Bay County Wastewater System Rev., 5.00%, 9/1/23 (MBIA) 1,040,020 - -------------------------------------------------------------------------------- 650,000 City of Gulf Breeze Rev., Series 1985 B, VRDN, 4.50%, 12/1/19 (FGIC) 639,984 - -------------------------------------------------------------------------------- 1,475,000 Collier County School Board COP, 5.50%, 2/15/12 (FSA) 1,596,791 - -------------------------------------------------------------------------------- 720,000 Covington Park Community Development District Special Assessment, (Capital Improvement), 5.00%, 5/1/21 711,180 - -------------------------------------------------------------------------------- 1,150,000 Duval County School Board COP, 5.75%, 7/1/16 (FSA) 1,215,481 - -------------------------------------------------------------------------------- 1,010,000 Emerald Coast Utilities System Auth. Rev., 5.00%, 1/1/25 (FGIC) 1,047,027 - -------------------------------------------------------------------------------- 115,000 Escambia County Housing Finance Auth. Single Family Mortgage Rev., Series 1998 A, (Multi-County Program), 4.85%, 4/1/07 (GNMA/FNMA) 115,834 - -------------------------------------------------------------------------------- 2,320,000 Florida Division of Bond Finance GO, Series 1998 B, (Environmental Protection - Preservation), 5.25%, 7/1/10 (FSA)(2) 2,411,941 - -------------------------------------------------------------------------------- 215,000 Florida Housing Finance Corp. Rev., Series 1999-2, (Homeowner Mortgage), 4.60%, 1/1/21 (FSA) 215,290 - -------------------------------------------------------------------------------- 1,000,000 Florida Municipal Loan Council GO, Series 2002 C, 5.25%, 11/1/21 (MBIA) 1,064,510 - -------------------------------------------------------------------------------- 350,000 Gainesville Utilities System Rev., Series 1996 A, 5.75%, 10/1/09 372,232 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $ 675,000 Greater Orlando Aviation Auth. Rev., Series 1999 A, 5.25%, 10/1/09 (FGIC) $ 703,512 - -------------------------------------------------------------------------------- 635,000 Hollywood Community Redevelopment Agency Rev., (Beach), 4.50%, 3/1/07 637,254 - -------------------------------------------------------------------------------- 690,000 Hollywood Community Redevelopment Agency Rev., (Beach), 5.00%, 3/1/08 700,143 - -------------------------------------------------------------------------------- 1,235,000 Indian River County Rev., (Spring Training Facility), 5.25%, 4/1/15 (FGIC) 1,317,869 - -------------------------------------------------------------------------------- 330,000 Julington Creek Plantation Community Development District Assessment Rev., 3.65%, 5/1/09 (MBIA) 328,928 - -------------------------------------------------------------------------------- 350,000 Julington Creek Plantation Community Development District Assessment Rev., 3.85%, 5/1/10 (MBIA) 350,686 - -------------------------------------------------------------------------------- 625,000 Julington Creek Plantation Community Development District Assessment Rev., 4.00%, 5/1/11 (MBIA) 629,481 - -------------------------------------------------------------------------------- 850,000 Lee County Industrial Development Health Care Facilities Auth. Rev., Series 1999 A, (Shell Point Village), 5.50%, 11/15/09 874,106 - -------------------------------------------------------------------------------- 1,325,000 Martin County Health Facilities Auth. Rev., Series 2002 A, (Martin Memorial Medical Center), 4.25%, 11/15/07 1,322,350 - -------------------------------------------------------------------------------- 1,000,000 Miami Beach Stormwater Rev., 5.75%, 9/1/17 (FGIC) 1,083,010 - -------------------------------------------------------------------------------- 1,910,000 Miami Beach Water & Sewer Rev., 5.625%, 9/1/16 (Ambac) 2,060,201 - -------------------------------------------------------------------------------- 650,000 Miami Parking Facilities Rev., 5.25%, 10/1/15 (MBIA) 702,995 - -------------------------------------------------------------------------------- 1,000,000 Miami-Dade County School Board COP, Series 2001 C, 5.50%, 10/1/11, Prerefunded at 100% of Par (FSA)(1) 1,083,070 - -------------------------------------------------------------------------------- 1,000,000 Miami-Dade County School Board COP, Series 2001 C, 5.50%, 10/1/11, Prerefunded at 100% of Par (FSA)(1) 1,083,070 - -------------------------------------------------------------------------------- 1,875,000 Orange County School Board COP, Series 2002 A, 5.50%, 8/1/12, Prerefunded at 100% of Par (MBIA)(1) 2,044,575 - -------------------------------------------------------------------------------- 450,000 Orlando and Orange County Expressway Auth. Rev., 6.50%, 7/1/11 (FGIC) 505,778 - -------------------------------------------------------------------------------- 1,000,000 Palm Beach County Airport Systems Rev., 5.75%, 10/1/14 (MBIA) 1,115,040 - -------------------------------------------------------------------------------- 1,000,000 Palm Beach County School Board COP, Series 2002 A, 5.375%, 8/1/12, Prerefunded at 100% of Par (FSA)(1) 1,083,630 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 14 Florida Municipal Bond - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 Pasco County Solid Waste Disposal & Resource Recovery System Rev., 6.00%, 4/1/10 (Ambac) $ 2,120,659 - -------------------------------------------------------------------------------- 305,000 Pensacola Airport Rev., Series 1997 B, 5.40%, 10/1/07 (MBIA) 309,081 - -------------------------------------------------------------------------------- 300,000 Plantation Health Facilities Auth. Rev., (Covenant Village of Florida Inc.), 4.70%, 12/1/07 301,911 - -------------------------------------------------------------------------------- 1,015,000 St. Lucie County Public Improvement COP, Series 2000 A, (800 MHZ Radio System), 5.50%, 4/1/10 (MBIA)(1) 1,079,493 - -------------------------------------------------------------------------------- 1,000,000 Sumter County School Board COP, 5.50%, 1/1/21 (MBIA) 1,075,780 - -------------------------------------------------------------------------------- 1,000,000 Sunrise Utility System Rev., 5.20%, 10/1/22 (Ambac) 1,090,100 - -------------------------------------------------------------------------------- 1,000,000 Tampa Bay Water Utility System Rev., Series 1998 B, 5.125%, 10/1/08, Prerefunded at 101% of Par (FGIC)(1) 1,040,130 - -------------------------------------------------------------------------------- 400,000 Tampa Guaranteed Entitlement Rev., 6.00%, 10/1/18 (Ambac) 450,424 - -------------------------------------------------------------------------------- 1,000,000 Tampa Water & Sewer Rev., 6.00%, 10/1/17 (FSA) 1,162,600 - -------------------------------------------------------------------------------- 39,867,135 - -------------------------------------------------------------------------------- PUERTO RICO -- 6.9% - -------------------------------------------------------------------------------- 1,000,000 Government Development Bank of Puerto Rico Rev., 4.75%, 8/10/06 (Acquired 5/5/06, Cost $1,000,000)(3) 1,000,330 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Government Development Bank of Puerto Rico Rev., 3.85%, 10/5/06 (Acquired 1/20/06, Cost $1,000,000)(3) $ 996,830 - -------------------------------------------------------------------------------- 1,000,000 Government Development Bank of Puerto Rico Rev., Series 2006 B, 5.00%, 12/1/16 1,037,320 - -------------------------------------------------------------------------------- 3,034,480 - -------------------------------------------------------------------------------- TOTAL MUNICIPAL SECURITIES (Cost $41,631,639) 42,901,615 - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 0.6% TENNESSEE -- 0.6% - -------------------------------------------------------------------------------- 250,000 Clarksville Public Building Authority Rev., (Tennessee Municipal Bond Fund), VRDN, 3.58%, 6/1/06 (LOC: Bank of America N.A.) (Cost $250,000) 250,000 - -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS -- 0.1% 38,000 Federated Florida Municipal Cash Trust (Cost $38,000) 38,000 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 99.1% (Cost $41,919,639) 43,189,615 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- 0.9% 379,312 - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $43,568,927 ================================================================================ FUTURES CONTRACTS Expiration Underlying Face Unrealized Contracts Purchased Date Amount at Value Gain (Loss) - -------------------------------------------------------------------------------- 5 U.S. Treasury 10-Year Notes September 2006 $524,609 $(4,347) ================================ NOTES TO SCHEDULE OF INVESTMENTS Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FNMA = Federal National Mortgage Association FSA = Financial Security Assurance, Inc. GNMA = Government National Mortgage Association GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated for a futures contract. (3) 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 May 31, 2006 was $1,997,160, which represented 4.6% of total net assets. See Notes to Financial Statements. - ------ 15 Long-Term Tax-Free - Performance TOTAL RETURNS AS OF MAY 31, 2006 -------------------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 2 MONTHS(1) 1 YEAR 5 YEARS INCEPTION DATE - -------------------------------------------------------------------------------- A CLASS 3/31/97 No sales charge* 0.40% 1.18% 4.89% 5.80% With sales charge* -4.16% -3.33% 3.92% 5.27% - -------------------------------------------------------------------------------- LEHMAN BROTHERS MUNICIPAL BOND INDEX 0.41% 1.89% 5.27% 5.85% -- - -------------------------------------------------------------------------------- A Class's Lipper Ranking as of 5/31/06(2) -- 164 of 260 76 of 221 16 of 158 -- - -------------------------------------------------------------------------------- A Class's Lipper Ranking as of 6/30/06(2) -- 180 of 259 81 of 224 18 of 157 -- - -------------------------------------------------------------------------------- Investor Class(1) -- -- -- 0.42% 4/3/06 - -------------------------------------------------------------------------------- Institutional Class(1) -- -- -- 0.45% 4/3/06 - -------------------------------------------------------------------------------- B Class 3/31/97 No sales charge* 0.28% 0.49% 4.20% 5.10% With sales charge* -4.72% -3.51% 4.03% 5.10% - -------------------------------------------------------------------------------- C Class(1) 4/3/06 No sales charge* -- -- -- 0.26% With sales charge* -- -- -- -0.74% - -------------------------------------------------------------------------------- *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 pages 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) Total returns for periods less than one year are not annualized. (2) Data provided by Lipper Inc. -- A Reuters Company. (c)2006 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. 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. Unless otherwise indicated, performance reflects A 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. (continued) - ------ 16 Long-Term Tax-Free - Performance GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made March 31, 1997
ONE-YEAR RETURNS OVER 10 YEARS Periods ended May 31 - ---------------------------------------------------------------------------------------------------- 1997* 1998 1999 2000 2001 2002 2003 2004 2005 2006 - ---------------------------------------------------------------------------------------------------- A Class (no sales charge) 2.96% 9.61% 5.11% -1.09% 12.57% 7.21% 10.63% -0.81% 6.65% 1.18% - ---------------------------------------------------------------------------------------------------- Lehman Brothers Municipal Bond Index 2.35% 9.39% 4.67% -0.86% 12.14% 6.51% 10.36% -0.03% 7.96% 1.89% - ---------------------------------------------------------------------------------------------------- *From 3/31/97 (the class's inception date) to 5/31/97. Not annualized. Long-Term Tax-Free A Class's initial investment is $9,550 to reflect the maximum 4.50% initial sales charge. 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. Unless otherwise indicated, performance reflects A 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. - ------ 17 Long-Term Tax-Free - Portfolio Commentary PORTFOLIO TEAM LEADER: ROBERT MILLER FUND REORGANIZATION Effective March 31, 2006, American Century Investments reorganized 10 Mason Street funds to become part of the American Century fund family. Mason Street Municipal Bond was reorganized into American Century Long-Term Tax-Free, with investment objectives and policies similar to its predecessor. NEW MAY 31 & NOVEMBER 30 REPORTING PERIODS Instead of Mason Street Municipal Bond's March 31 fiscal year end, Long-Term Tax-Free will have a May 31 fiscal year end. Starting with this report, Long-Term Tax-Free's annual shareholder reports will be dated May 31 and the semiannuals will be dated November 30. This May 31, 2006, report will "bridge" the old Mason Street fiscal year and the new American Century fiscal year, covering just two months: April and May, 2006. For market and investment information about the 10-12 months that preceded this two-month "bridge" report, see the March 31, 2006, final annual report for the Mason Street Funds, pages 86-95, available at masonstreetfunds.com, and our Market Perspective on page 2 of this report. PERFORMANCE SUMMARY FOR THE TWO-MONTH "BRIDGE" PERIOD Long-Term Tax Free returned 0.40%* for the two months ended May 31, 2006, compared with 0.41% for the Lehman Brothers Municipal Bond Index. This short period was a microcosm of the longer trailing 12-month period (see page 2) as municipal yields rose and bond prices declined due to inflation concerns that affected the entire U.S. bond market. Taxable bonds generally suffered even more than municipal--the (taxable) Lehman Brothers U.S. Aggregate Index returned - -0.29%. PORTFOLIO STRATEGY As mentioned under the Fund Reorganization heading, Long-Term Tax-Free's investment objectives and policies are similar to Mason Street Municipal Bond's. We seek a high level of federal tax-free income through a diverse portfolio comprised primarily of long-term, investment-grade municipal bonds. PORTFOLIO AT A GLANCE - -------------------------------------------------------------------------------- AS OF 5/31/06 - -------------------------------------------------------------------------------- Weighted Average Maturity 13.7 yrs - -------------------------------------------------------------------------------- Average Duration (Modified) 5.4 yrs - -------------------------------------------------------------------------------- YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD - -------------------------------------------------------------------------------- Investor Class 3.67% - -------------------------------------------------------------------------------- Institutional Class 3.87% - -------------------------------------------------------------------------------- A Class 3.27% - -------------------------------------------------------------------------------- B Class 2.67% - -------------------------------------------------------------------------------- C Class 2.68% - -------------------------------------------------------------------------------- INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) - -------------------------------------------------------------------------------- 25.00% Tax Bracket 4.89% - -------------------------------------------------------------------------------- 28.00% Tax Bracket 5.10% - -------------------------------------------------------------------------------- 33.00% Tax Bracket 5.48% - -------------------------------------------------------------------------------- 35.00% Tax Bracket 5.65% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are for federal taxes only. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. *All fund returns and yields referenced in this commentary are for A Class shares and are not reduced by sales charges. A Class shares are subject to a maximum sales charge of 4.50%. Had the sales charge been applied, returns would be lower than those shown. Total returns for periods less than one year are not annualized. (continued) - ------ 18 Long-Term Tax-Free - Portfolio Commentary Our investment process uses a consistent, repeatable framework that seeks to identify the best relative value among national municipal securities. We actively apply a multi-step process, which includes yield curve/duration positioning, security selection, portfolio construction, and attribution analysis. Consistent with those objectives, policies, and our investment outlook, we made some portfolio adjustments following the fund's reorganization. We increased liquidity by selling remaining "odd lots" of securities in favor of bigger pieces of more liquid issues. We also sought to align the portfolio more closely with its peers (as measured by Lipper) in terms of its coupon structure, yield-curve positioning, and credit quality. We moved in that direction by selling prerefunded bonds and buying higher-yielding, lower-rated securities that still met our team's credit quality guidelines. Lower-quality, higher-yielding municipal securities generally outpaced their higher-quality, lower yielding counterparts during the reporting period and could continue to outperform as long as inflation remains a threat. Long-Term Tax-Free is still, however, a very high-quality portfolio, as shown in the accompanying credit rating table. HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY Long-Term Tax-Free is designed to provide an attractive level of federal tax-free current income and portfolio diversification benefits for high-net-worth individuals with investment portfolios subject to federal income tax. Municipal bonds typically behave differently than equity and taxable bond investments under various economic and market scenarios. Diversification does not insure against loss, however. The fund is best suited for investors who: 1) seek the highest income opportunity available from investment-grade municipal securities, 2) want current income that is exempt from federal income taxes, 3) need a high-quality fixed-income investment to diversify an equity-heavy portfolio, 4) need a high-quality municipal debt investment to diversify a taxable bond-heavy portfolio, and/or 5) can tolerate moderate share price fluctuation relative to bond funds. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND INVESTMENTS AS OF 5/31/06 - -------------------------------------------------------------------------------- AAA 73% - -------------------------------------------------------------------------------- AA 18% - -------------------------------------------------------------------------------- A 3% - -------------------------------------------------------------------------------- BBB 6% - -------------------------------------------------------------------------------- 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 MAY 31, 2006 - -------------------------------------------------------------------------------- % OF FUND INVESTMENTS - -------------------------------------------------------------------------------- General Obligation (GO) 46% - -------------------------------------------------------------------------------- Prerefunded 12% - -------------------------------------------------------------------------------- Hospital Revenue 10% - -------------------------------------------------------------------------------- Higher Education 5% - -------------------------------------------------------------------------------- Water and Sewer Revenue 5% - -------------------------------------------------------------------------------- - ------ 19 Long-Term Tax-Free - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 94.0% ALABAMA -- 3.1% - -------------------------------------------------------------------------------- $ 325,000 Alabama Water Pollution Control Auth. Rev., Series 2002 B, 5.25%, 8/15/11 (Ambac) $ 347,207 - -------------------------------------------------------------------------------- 430,000 City of Birmingham GO, Series 2001 A, 5.25%, 5/1/18 459,421 - -------------------------------------------------------------------------------- 20,000 Jefferson County Rev., Series 1997 D, 5.70%, 2/1/07, Prerefunded at 101% of Par (FGIC)(1) 20,464 - -------------------------------------------------------------------------------- 20,000 Jefferson County Rev., Series 1999 A, (Capital Improvement), 5.75%, 2/1/09, Prerefunded at 101% of Par (MBIA-IBC)(1) 21,229 - -------------------------------------------------------------------------------- 255,000 Jefferson County Rev., Series 2001 A, (Capital Improvement), 5.00%, 2/1/11, Prerefunded at 101% of Par (FGIC)(1) 269,706 - -------------------------------------------------------------------------------- 40,000 Jefferson County Rev., Series 2002 D, (Capital Improvement), 5.00%, 8/1/12, Prerefunded at 100% of Par (FGIC)(1) 42,529 - -------------------------------------------------------------------------------- 1,160,556 - -------------------------------------------------------------------------------- ARIZONA -- 7.7% - -------------------------------------------------------------------------------- 610,000 Arizona School Facilities Board Rev., (State School Improvement), 5.50%, 7/1/11, Prerefunded at 100% of Par(1) 659,410 - -------------------------------------------------------------------------------- 360,000 Arizona Transportation Board Rev., Series 2002 B, 5.25%, 7/1/17 383,573 - -------------------------------------------------------------------------------- 1,000,000 Arizona University COP, Series 2006 A, 5.00%, 6/1/18 (Ambac)(2) 1,057,659 - -------------------------------------------------------------------------------- 775,000 Pinal County Unified School District No. 43 Apache Junction GO, Series 2006 B, (School Improvement), 5.00%, 7/1/24 (FGIC) 812,836 - -------------------------------------------------------------------------------- 2,913,478 - -------------------------------------------------------------------------------- CALIFORNIA -- 4.2% - -------------------------------------------------------------------------------- 1,000,000 California Health Facilities Financing Auth. Rev., Series 2006 A, (Kaiser Permanente), 5.25%, 4/1/39(3) 1,035,670 - -------------------------------------------------------------------------------- 60,000 Foothill Eastern Transportation Corridor Agency Rev., Series 1995 A, (Senior Lien), 7.20%, 1/1/18(1)(4) 35,671 - -------------------------------------------------------------------------------- 190,000 Foothill Eastern Transportation Corridor Agency Rev., Series 1995 A, (Senior Lien), 7.25%, 1/1/20(1)(4) 101,762 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $ 355,000 Riverside Community College District GO, Series 2004 A, 5.50%, 8/1/14, Prerefunded at 100% of Par (MBIA)(1) $ 394,249 - -------------------------------------------------------------------------------- 5,000 Riverside Community College District GO, Series 2004 A, 5.50%, 8/1/29 (MBIA) 5,417 - -------------------------------------------------------------------------------- 1,572,769 - -------------------------------------------------------------------------------- CONNECTICUT -- 0.9% - -------------------------------------------------------------------------------- 325,000 Hartford Parking System Rev., Series 2000 A, 6.40%, 7/1/10, Prerefunded at 100% of Par(1) 356,090 - -------------------------------------------------------------------------------- GEORGIA -- 0.6% - -------------------------------------------------------------------------------- 70,000 City of Atlanta Rev., Series 2000 A, 5.50%, 1/1/10, Prerefunded at 101% of Par (FGIC)(1) 74,913 - -------------------------------------------------------------------------------- 15,000 City of Atlanta Rev., Series 2000 A, 5.60%, 1/1/10, Prerefunded at 101% of Par (FGIC)(1) 16,103 - -------------------------------------------------------------------------------- 40,000 Municipal Electric Auth. Rev., Series 1998 Y, 6.40%, 1/1/13 (Ambac) 44,588 - -------------------------------------------------------------------------------- 90,000 Municipal Electric Auth. Rev., Series 2002 A, 5.00%, 11/1/24 (MBIA) 91,225 - -------------------------------------------------------------------------------- 226,829 - -------------------------------------------------------------------------------- HAWAII -- 0.1% - -------------------------------------------------------------------------------- 25,000 Hawaii GO, Series 1998 CS, 5.00%, 4/1/07 (MBIA) 25,285 - -------------------------------------------------------------------------------- ILLINOIS -- 5.2% - -------------------------------------------------------------------------------- 35,000 Chicago Board of Education GO, Series 1999 A, (Chicago School Reform Board), 5.25%, 12/1/20 (FGIC) 38,421 - -------------------------------------------------------------------------------- 170,000 Chicago Public Building Commission Rev., Series 1990 A, 7.30%, 1/1/08 (MBIA)(1)(4) 160,487 - -------------------------------------------------------------------------------- 255,000 Cook County Community Consolidated School District No. 21-Wheeling GO, 4.80%, 12/1/09 (FSA)(1)(4) 222,908 - -------------------------------------------------------------------------------- 360,000 Illinois Finance Auth. Rev., Series 2004 A, (University of Chicago), 5.00%, 7/1/34 368,032 - -------------------------------------------------------------------------------- 575,000 Illinois Rev., 5.50%, 6/15/15 617,549 - -------------------------------------------------------------------------------- 420,000 Metropolitan Pier & Exposition Auth. Rev., Series 1998 A, 5.50%, 6/15/18 (FGIC)(1) 470,119 - -------------------------------------------------------------------------------- 70,000 University of Illinois Rev., Series 2000 A, (Auxiliary Facility System), 6.00%, 4/1/10, Prerefunded at 101% of Par (MBIA)(1) 76,270 - -------------------------------------------------------------------------------- 1,953,786 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 20 Long-Term Tax-Free - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- INDIANA -- 9.0% - -------------------------------------------------------------------------------- $1,250,000 Hobart Building Corp. Rev., 6.50%, 1/15/29 (FGIC/State Aid Withholding) $ 1,511,738 - -------------------------------------------------------------------------------- 1,765,000 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/20 (FSA)(2) 1,859,092 - -------------------------------------------------------------------------------- 35,000 Indiana Toll Finance Authority Rev., 6.00%, 7/1/15 35,468 - -------------------------------------------------------------------------------- 3,406,298 - -------------------------------------------------------------------------------- IOWA -- 1.0% - -------------------------------------------------------------------------------- 360,000 Iowa Finance Authority Rev., 5.875%, 2/15/10, Prerefunded at 101% of Par (Ambac)(1) 389,351 - -------------------------------------------------------------------------------- KANSAS -- 2.8% - -------------------------------------------------------------------------------- 595,000 Cowley County Unified School District No. 465 Winfield GO, 5.25%, 10/1/13 (MBIA) 641,951 - -------------------------------------------------------------------------------- 15,000 Kansas Department of Transportation Rev., (Highway Revenue Bonds), 5.00%, 9/1/09, Prerefunded at 100% of Par(1) 15,600 - -------------------------------------------------------------------------------- 20,000 Kansas Department of Transportation Rev., (Highway Revenue Bonds), 5.125%, 9/1/09, Prerefunded at 100% of Par(1) 20,888 - -------------------------------------------------------------------------------- 245,000 Kansas Development Finance Auth. Rev., (Water Pollution), 4.75%, 11/1/08, Prerefunded at 100% of Par(1) 251,299 - -------------------------------------------------------------------------------- 115,000 Kansas Development Finance Auth. Rev., (Water Pollution), 4.75%, 5/1/14 117,256 - -------------------------------------------------------------------------------- 1,046,994 - -------------------------------------------------------------------------------- LOUISIANA -- 0.3% - -------------------------------------------------------------------------------- 90,000 Louisiana Rev., Series 2002 A, (Gasoline & Fuels Tax), 5.375%, 6/1/16 (Ambac) 94,860 - -------------------------------------------------------------------------------- MICHIGAN -- 5.6% - -------------------------------------------------------------------------------- 60,000 Detroit Water Supply System Rev., Series 2001 A, (Senior Lien), 5.25%, 7/1/11, Prerefunded at 100% of Par (FGIC)(1) 64,114 - -------------------------------------------------------------------------------- 1,225,000 Rochester Community School District GO, (School Building & Site), 5.00%, 5/1/14 (FGIC) 1,306,695 - -------------------------------------------------------------------------------- 160,000 West Ottawa Public School District GO, Series 2002 A, (School Building & Site), 5.00%, 11/1/12 169,826 - -------------------------------------------------------------------------------- 575,000 West Ottawa Public School District GO, Series 2002 A, (School Building & Site), 5.00%, 5/1/22 595,447 - -------------------------------------------------------------------------------- 2,136,082 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- MISSISSIPPI -- 1.0% - -------------------------------------------------------------------------------- $ 360,000 Mississippi GO, Series 2003 D, 5.25%, 11/1/20 $ 397,062 - -------------------------------------------------------------------------------- MISSOURI -- 0.3% - -------------------------------------------------------------------------------- 120,000 Saline County Industrial Development Auth. Rev., (John Fitzgibbon Memorial Hospital Inc.), 6.50%, 12/1/28 123,731 - -------------------------------------------------------------------------------- NEW YORK -- 9.1% - -------------------------------------------------------------------------------- 360,000 City of New York GO, Series 1997 I, 6.00%, 4/15/07, Prerefunded at 101% of Par(1) 370,904 - -------------------------------------------------------------------------------- 1,500,000 City of New York GO, Series 2006 I, 5.00%, 4/1/23(2) 1,551,136 - -------------------------------------------------------------------------------- 360,000 Metropolitan Transportation Auth. Rev., Series 1997 A, 5.625%, 7/1/07, Prerefunded at 102% of Par (MBIA)(1) 373,115 - -------------------------------------------------------------------------------- 360,000 New York City Municipal Water Finance Auth. Rev., Series 1997 B, 5.75%, 6/15/29, Prerefunded at 101% of Par(1) 371,416 - -------------------------------------------------------------------------------- 360,000 New York City Transitional Finance Auth. Rev., Series 2003 E, 5.25%, 2/1/22 (MBIA) 381,974 - -------------------------------------------------------------------------------- 70,000 New York Dormitory Auth. Rev., Series 1997-1, (City University System), 5.125%, 1/1/08, Prerefunded at 102% of Par (MBIA)(1) 72,944 - -------------------------------------------------------------------------------- 325,000 New York Dormitory Auth. Rev., Series 1998 E, (Bronx/Lebanon Hospital), 5.125%, 2/15/08 332,244 - -------------------------------------------------------------------------------- 3,453,733 - -------------------------------------------------------------------------------- NORTH CAROLINA -- 8.5% - -------------------------------------------------------------------------------- 180,000 Eastern Municipal Power Agency Rev., Series 1988 A, 6.00%, 1/1/22, Prerefunded at 100% of Par(1) 213,691 - -------------------------------------------------------------------------------- 1,500,000 North Carolina Medical Care Commission Rev., Series 2004 A, (Health Care Housing - ARC Projects), 5.50%, 10/1/24 1,571,820 - -------------------------------------------------------------------------------- 55,000 North Carolina Municipal Power Agency No. 1 Catawba Rev., 6.50%, 1/1/10 (MBIA)(1) 60,112 - -------------------------------------------------------------------------------- 315,000 North Carolina Municipal Power Agency No. 1 Catawba Rev., 5.00%, 1/1/20(1) 340,839 - -------------------------------------------------------------------------------- 1,000,000 University of North Carolina at Wilmington COP, (Student Housing), 5.00%, 6/1/37 (FGIC) 1,023,320 - -------------------------------------------------------------------------------- 3,209,782 - -------------------------------------------------------------------------------- OHIO -- 2.9% - -------------------------------------------------------------------------------- 1,000,000 Columbus City School District GO, (School Facilities Construction & Improvement), 5.50%, 12/1/16 (FSA) 1,097,140 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 21 Long-Term Tax-Free - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000 Ohio Housing Finance Agency Rev., Series 2000 F, (Residential Housing), 5.625%, 9/1/16 (GNMA) $ 5,084 - -------------------------------------------------------------------------------- 1,102,224 - -------------------------------------------------------------------------------- OKLAHOMA -- 1.3% - -------------------------------------------------------------------------------- 450,000 Oklahoma City GO, 5.50%, 7/1/10, Prerefunded at 100% of Par(1) 480,159 - -------------------------------------------------------------------------------- PENNSYLVANIA -- 6.1% - -------------------------------------------------------------------------------- 1,000,000 Central Dauphin School District GO, 7.00%, 2/1/27 (MBIA/State Aid Withholding) 1,224,520 - -------------------------------------------------------------------------------- 1,000,000 City of Pittsburgh GO, Series 2006 B, 5.25%, 9/1/17 (FSA)(3) 1,084,230 - -------------------------------------------------------------------------------- 2,308,750 - -------------------------------------------------------------------------------- PUERTO RICO -- 4.0% - -------------------------------------------------------------------------------- 1,500,000 Government Development Bank of Puerto Rico Rev., 4.30%, 10/12/06 (Acquired 4/13/06, Cost $1,500,000)(5) 1,497,375 - -------------------------------------------------------------------------------- RHODE ISLAND -- 0.1% - -------------------------------------------------------------------------------- 45,000 Depositors Economic Protection Corp. Rev., Series 1993 A, 5.75%, 8/1/21 (FSA)(1) 52,185 - -------------------------------------------------------------------------------- TENNESSEE -- 3.6% - -------------------------------------------------------------------------------- 1,320,000 Rutherford County Consolidated Utility District Rev., 5.00%, 2/1/26 (FSA) 1,378,040 - -------------------------------------------------------------------------------- TEXAS -- 15.6% - -------------------------------------------------------------------------------- 1,435,000 Canutillo Independent School District GO, Series 2006 A, 5.00%, 8/15/31(2) 1,473,788 - -------------------------------------------------------------------------------- 490,000 Dallas Independent School District GO, 5.50%, 2/15/12, Prerefunded at 100% of Par(1) 531,944 - -------------------------------------------------------------------------------- 70,000 Dallas Independent School District GO, 5.50%, 2/15/17 75,249 - -------------------------------------------------------------------------------- 465,000 Harris County GO, Series 1995 A, (Toll Road), 5.80%, 8/15/09 (MBIA)(4) 410,590 - -------------------------------------------------------------------------------- 360,000 San Marcos Consolidated Independent School District GO, 5.25%, 8/1/22 384,012 - -------------------------------------------------------------------------------- 465,000 University of Texas Rev., Series 2002 A, 5.25%, 8/15/20 511,305 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $1,250,000 Wharton Independent School District GO, (School Building), 5.00%, 2/15/37 $ 1,276,900 - -------------------------------------------------------------------------------- 1,000,000 Winkler County GO, 5.25%, 2/15/25 (RADIAN)(3) 1,047,160 - -------------------------------------------------------------------------------- 110,000 Wylie Independent School District GO, 4.40%, 8/15/08(1)(4) 101,380 - -------------------------------------------------------------------------------- 105,000 Wylie Independent School District GO, 4.40%, 8/15/08(4) 96,540 - -------------------------------------------------------------------------------- 5,908,868 - -------------------------------------------------------------------------------- VIRGINIA -- 1.0% - -------------------------------------------------------------------------------- 360,000 Virginia Public School Auth. Rev., Series 2003 D, 5.25%, 8/1/19 396,950 - -------------------------------------------------------------------------------- TOTAL MUNICIPAL SECURITIES (Cost $35,251,255) 35,591,237 - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 6.1% FLORIDA -- 6.1% - -------------------------------------------------------------------------------- 1,300,000 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 3.67%, 6/1/06 (RADIAN)(2) 1,300,000 - -------------------------------------------------------------------------------- 995,000 Sarasota County Public Hospital Board Rev., Series 2003 A, (Sarasota Memorial Hospital), VRDN, 3.62%, 6/1/06 (Ambac) 995,000 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $2,295,000) 2,295,000 - -------------------------------------------------------------------------------- MUNICIPAL DERIVATIVES -- 1.2% TEXAS -- 1.2% - -------------------------------------------------------------------------------- 360,000 Texas GO, VRDN, Inverse Floater, 8.62%, 9/30/11(6) (Cost $422,157) 437,357 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 101.3% (Cost $37,968,412) 38,323,594 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- (1.3)% (483,687) - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $37,839,907 ================================================================================ FUTURES CONTRACTS Expiration Underlying Face Unrealized Contracts Purchased Date Amount at Value Gain (Loss) - -------------------------------------------------------------------------------- 27 U.S. Treasury 10-Year Notes September 2006 $2,832,891 $23,353 ================================ See Notes to Financial Statements. (continued) - ------ 22 Long-Term Tax-Free - Schedule of Investments MAY 31, 2006 NOTES TO SCHEDULE OF INVESTMENTS Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GNMA = Government National Mortgage Association GO = General Obligation MBIA = MBIA Insurance Corporation MBIA-IBC = MBIA Insured Bond Certificates RADIAN = Radian Asset Assurance, Inc. VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated for a futures contract and/or when issued securities. (3) When-issued security. (4) 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. (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 May 31, 2006 was $1,497,375, which represented 4.0% of total net assets. (6) 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. See Notes to Financial Statements. - ------ 23 High-Yield Municipal - Performance TOTAL RETURNS AS OF MAY 31, 2006 ---------------------- AVERAGE ANNUAL RETURNS - -------------------------------------------------------------------------------- SINCE INCEPTION 1 YEAR 5 YEARS INCEPTION DATE - -------------------------------------------------------------------------------- INVESTOR CLASS 4.91% 7.06% 6.02%(1) 3/31/98 - -------------------------------------------------------------------------------- LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX 3.20% 6.81% 6.10% -- - -------------------------------------------------------------------------------- LIPPER HIGH-YIELD MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 4.62% 5.88% 4.40% -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 5/31/06(2) 28 of 82 10 of 71 4 of 48 -- - -------------------------------------------------------------------------------- Investor Class's Lipper Ranking as of 6/30/06(2) 30 of 82 11 of 71 4 of 48 -- - -------------------------------------------------------------------------------- A Class 1/31/03 No sales charge* 4.65% -- 6.17% With sales charge* -0.02% -- 4.73% - -------------------------------------------------------------------------------- B Class 1/31/03 No sales charge* 3.87% -- 5.42% With sales charge* -0.13% -- 4.62% - -------------------------------------------------------------------------------- C Class 3.86% -- 5.41% 7/24/02 - -------------------------------------------------------------------------------- *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 pages 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) Investor Class returns and rankings would have been lower if management fees had not been waived from 3/31/98 to 4/30/99. Beginning on 5/1/99, management fees were phased in at a rate of 0.10% each month until 10/31/99. (2) Data provided by Lipper Inc. -- A Reuters Company. (c)2006 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. 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. (continued) - ------ 24 High-Yield Municipal - Performance GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made March 31, 1998
ONE-YEAR RETURNS OVER LIFE OF CLASS Periods ended May 31 - ---------------------------------------------------------------------------------------------------- 1998* 1999 2000 2001 2002 2003 2004 2005 2006 - ---------------------------------------------------------------------------------------------------- Investor Class 1.81%** 6.18%** -2.81% 9.13% 8.25% 9.40% 3.07% 9.84% 4.91% - ---------------------------------------------------------------------------------------------------- Lehman Brothers Long-Term Municipal Bond Index 1.41% 4.35% -4.45% 15.38% 6.64% 11.84% -0.26% 13.25% 3.20% - ---------------------------------------------------------------------------------------------------- * From 3/31/98 (the class's inception date) to 5/31/98. Not annualized. **Investor Class returns would have been lower if management fees had not been waived from 3/31/98 to 4/30/99. Beginning on 5/1/99, management fees were phased in at a rate of 0.10% each month until 10/31/99. 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. - ------ 25 High-Yield Municipal - Portfolio Commentary PORTFOLIO MANAGER: STEVEN PERMUT PERFORMANCE SUMMARY High-Yield Municipal returned 4.91%* for the 12 months ended May 31, 2006. This total return primarily reflected the fund's high yield. Portfolio price behavior was essentially flat during a period that was relatively favorable for the high-yield municipal sector but challenging for the U.S. bond market as a whole (see page 2 and the High-Yield Municipal Market Review below). The Lehman Brothers Long-Term Municipal Bond Index returned 3.20%, including a 1.65% price decline by the index's investment-grade municipal bonds. This was typical of most investment-grade U.S. bonds during the period. The average return of the fund's Lipper group (82 high-yield municipal debt funds tracked by Lipper Inc.) was 4.62%. High-Yield Municipal outperformed the Lipper group average for the one-year, five-year, and since-fund-inception periods ended May 31, 2006 (see page 24). HIGH-YIELD MUNICIPAL MARKET REVIEW High-yield municipal bonds generally outperformed both the broad taxable U.S. bond market and the investment-grade U.S. municipal market. The Lehman Brothers Non-Investment-Grade (High-Yield) Municipal Bond Index returned 7.20%, and municipal credit spreads approached eight-year lows. Much of this was attributable to the strong relative performance of corporate municipal bonds, particularly the airline sector. It's common for municipal bonds to outperform taxable U.S. government bonds when interest rates rise. That's because: 1) rising rates occur when the economy is growing, leading to higher tax revenues and improved municipal credit quality, 2) the Treasury market is often whipsawed by mortgage-backed securities investors who hedge their portfolios with Treasurys in falling rate periods (to maintain duration when mortgage refinancings spike), then abruptly sell Treasurys when the refinancing threat ends, 3) investors tend to exit the Treasury market as economic conditions improve and invest elsewhere, including in the municipal market, and 4) municipal issuance and refinancing tend to decline as yields rise, reducing supply growth. PORTFOLIO AT A GLANCE - -------------------------------------------------------------------------------- AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- Weighted Average Maturity 18.9 yrs 19.5 yrs - -------------------------------------------------------------------------------- Average Duration (Modified) 5.6 yrs 6.3 yrs - -------------------------------------------------------------------------------- YIELDS AS OF MAY 31, 2006 - -------------------------------------------------------------------------------- 30-DAY SEC YIELD - -------------------------------------------------------------------------------- Investor Class 4.49% - -------------------------------------------------------------------------------- A Class 4.05% - -------------------------------------------------------------------------------- B Class 3.49% - -------------------------------------------------------------------------------- C Class 3.49% - -------------------------------------------------------------------------------- INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1) - -------------------------------------------------------------------------------- 25.00% Tax Bracket 5.99% - -------------------------------------------------------------------------------- 28.00% Tax Bracket 6.24% - -------------------------------------------------------------------------------- 33.00% Tax Bracket 6.70% - -------------------------------------------------------------------------------- 35.00% Tax Bracket 6.91% - -------------------------------------------------------------------------------- (1) The tax brackets indicated are for federal taxes only. 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. (continued) - ------ 26 High-Yield Municipal - Portfolio Commentary High-yield municipal bonds often outperform their investment-grade municipal counterparts under these conditions because: 1) their high yields help cushion against price volatility, and 2) improving economic conditions are especially beneficial to high-yield municipal issuers. PORTFOLIO STRATEGY & OUTLOOK We remained focused on the foundations of our investment approach--thorough credit analysis, careful security selection, and diligent investment monitoring. There have been no defaults in the portfolio since inception in 1998. We continued to overweight two sectors: unrated bonds that met our credit quality criteria and land-secured bonds issued where we believe housing demand is greater than supply. Unrated bonds boosted the yield while land-secured bonds can appreciate as the economy grows and/or projects are developed and their credit risk diminishes. We view these strategies as essentially "all-weather"--we continue to find opportunities in these areas under most economic scenarios. We believe land-secured bonds provide lower volatility over the long run than corporate municipal bonds, such as airline and tobacco bonds. We think this holds true even with the potential of a housing market decline; the portfolio's land-secured bonds are backed by special assessment taxes that don't fluctuate with property values. Corporate municipal bonds, on the other hand, are subject to volatile corporate profits and greater litigation risk. Our high-yield municipal portfolios do not own airline bonds because of the sector's volatility and exposure to potential risk factors that are not typical of most municipal investments. HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY High-Yield Municipal is designed to provide high levels of federal tax-free current income (in exchange for higher credit risk), capital appreciation potential, and portfolio diversification benefits for high-net-worth individual investors with portfolios subject to federal income tax. The fund is best suited for investors who are accustomed to higher-risk securities and can tolerate share-price fluctuation. High-yield municipal bonds typically behave differently than equity, taxable, and investment-grade bond investments under various economic and market scenarios. Diversification does not insure against loss, however. PORTFOLIO COMPOSITION BY CREDIT RATING - -------------------------------------------------------------------------------- % OF FUND % OF FUND INVESTMENTS INVESTMENTS AS OF AS OF 5/31/06 11/30/05 - -------------------------------------------------------------------------------- AAA 12% 14% - -------------------------------------------------------------------------------- AA 1% -- - -------------------------------------------------------------------------------- BBB 12% 14% - -------------------------------------------------------------------------------- BB 4% 4% - -------------------------------------------------------------------------------- Unrated 71% 68% - -------------------------------------------------------------------------------- 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 MAY 31, 2006 - -------------------------------------------------------------------------------- % OF FUND INVESTMENTS - -------------------------------------------------------------------------------- Land Secured 54% - -------------------------------------------------------------------------------- Special Tax Revenue 7% - -------------------------------------------------------------------------------- Tax Allocation/Tax Increment 5% - -------------------------------------------------------------------------------- General Obligation (GO) 5% - -------------------------------------------------------------------------------- Hospital Revenue 5% - -------------------------------------------------------------------------------- - ------ 27 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES -- 98.1% ALASKA -- 0.2% - -------------------------------------------------------------------------------- $ 500,000 Anchorage Schools GO, Series 2000 A, 5.75%, 12/1/10, Prerefunded at 100% of Par (MBIA)(1) $ 541,391 - -------------------------------------------------------------------------------- ARIZONA -- 5.5% - -------------------------------------------------------------------------------- 600,000 Centerra Community Facilities District GO, 5.50%, 7/15/29 600,174 - -------------------------------------------------------------------------------- 2,000,000 Gilbert Water Resource Municipal Property Corp. Rev., (Development Fee & Sub-Lien), 4.90%, 4/1/19 2,003,820 - -------------------------------------------------------------------------------- 3,015,000 Pronghorn Ranch Community Facilities District GO, 6.40%, 7/15/29 3,117,781 - -------------------------------------------------------------------------------- 1,000,000 Quailwood Meadows Community Facilities District GO, 6.125%, 7/15/29 1,017,170 - -------------------------------------------------------------------------------- 1,043,000 Sundance Community Facilities Assessment District No. 2 Rev., 7.125%, 7/1/27 1,156,541 - -------------------------------------------------------------------------------- 928,000 Sundance Community Facilities Assessment District No. 3 Rev., 6.50%, 7/1/29 1,000,709 - -------------------------------------------------------------------------------- 1,000,000 Sundance Community Facilities District GO, 5.00%, 7/15/25 1,003,940 - -------------------------------------------------------------------------------- 395,000 Sundance Community Facilities District GO, 6.25%, 7/15/29 425,008 - -------------------------------------------------------------------------------- 550,000 Sundance Community Facilities District GO, 5.125%, 7/15/30 552,354 - -------------------------------------------------------------------------------- 1,500,000 Vistancia Community Facilities District GO, 5.50%, 7/15/20 1,500,435 - -------------------------------------------------------------------------------- 1,200,000 Vistancia Community Facilities District GO, 5.75%, 7/15/24 1,212,204 - -------------------------------------------------------------------------------- 13,590,136 - -------------------------------------------------------------------------------- ARKANSAS -- 0.4% - -------------------------------------------------------------------------------- 1,000,000 Pulaski County Public Facilities Board Rev., Series 2006 A, (Philander Smith College), 5.60%, 6/1/36 995,250 - -------------------------------------------------------------------------------- CALIFORNIA -- 15.6% - -------------------------------------------------------------------------------- 2,000,000 Beaumont Financing Auth. Local Agency Rev., Series 2003 A, 6.875%, 9/1/27 2,232,460 - -------------------------------------------------------------------------------- 1,490,000 Beaumont Financing Auth. Special Tax Rev., Series 2005 B, 5.40%, 9/1/35 1,527,965 - -------------------------------------------------------------------------------- 750,000 California Communities Development Auth. Rev., (Thomas Jefferson School of Law), 7.75%, 10/1/11, Prerefunded at 101% of Par(1) 883,995 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $2,000,000 California Mobilehome Park Financing Auth. Rev., Series 2003 B, (Palomar Estates E&W), 7.00%, 9/15/36(2) $ 2,172,360 - -------------------------------------------------------------------------------- 4,000,000 City of Vallejo COP, (Marine World Foundation), 7.00%, 2/1/17 4,132,640 - -------------------------------------------------------------------------------- 4,500,000 El Dorado Special Tax Rev., (Community Facility District No. 1), 5.25%, 9/1/35 4,526,190 - -------------------------------------------------------------------------------- 2,420,000 Golden State Tobacco Securitization Corp. Rev., Series 2003 A-1, 6.75%, 6/1/39 2,707,665 - -------------------------------------------------------------------------------- 500,000 Golden State Tobacco Securitization Corp. Rev., Series 2003 A1, 6.625%, 6/1/40 554,180 - -------------------------------------------------------------------------------- 910,000 Hawaiian Gardens COP, Series 2000 A, 8.00%, 6/1/23 961,451 - -------------------------------------------------------------------------------- 1,510,000 Hemet Unified School District Special Tax Rev., (Community Facilities District No. 2005-2), 5.25%, 9/1/35 1,518,109 - -------------------------------------------------------------------------------- 2,235,000 Independent Cities Lease Finance Auth. Rev., Series 2004 A, (Morgan Hill - Hacienda Various Projects), 5.90%, 11/15/34 2,347,890 - -------------------------------------------------------------------------------- 2,000,000 Indio Redevelopment Agency Tax Allocation Rev., Series 2004 B, (Sub-Merged Project Area), 6.50%, 8/15/34 2,180,740 - -------------------------------------------------------------------------------- 4,735,000 Moreno Valley Unified School District Special Tax Rev., (Community Facilities District No. 2004-6), 5.20%, 9/1/36 4,743,901 - -------------------------------------------------------------------------------- 250,000 Palm Springs Rev., (Palm Springs International Airport), 5.45%, 7/1/20 250,468 - -------------------------------------------------------------------------------- 530,000 Palm Springs Rev., (Palm Springs International Airport), 5.55%, 7/1/28 530,822 - -------------------------------------------------------------------------------- 1,390,000 Perris Community Facilities District No. 3, Series 2005 A, (Improvement Area No. 2), 5.30%, 9/1/35 1,404,804 - -------------------------------------------------------------------------------- 3,000,000 Perris Public Financing Auth. Special Tax Rev., Series 2003 A, 6.25%, 9/1/33 3,249,210 - -------------------------------------------------------------------------------- 1,000,000 Soledad Special Assessment, (Diamond Ridge Assessment District No. 02-01), 6.75%, 9/2/33 1,089,960 - -------------------------------------------------------------------------------- 1,590,000 Vallejo Multifamily Housing Rev., Series 1998 B, (Solano Affordable Housing), 8.25%, 4/1/39 (Acquired 12/12/02, Cost $1,721,000)(3) 1,782,326 - -------------------------------------------------------------------------------- 38,797,136 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 28 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- COLORADO -- 4.9% - -------------------------------------------------------------------------------- $3,000,000 Denver Health & Hospital Auth. Healthcare Rev., Series 2004 A, 6.25%, 12/1/33 $ 3,273,360 - -------------------------------------------------------------------------------- 640,000 Douglas County School District No. Re-1 GO, Series 2002 B, (Douglas & Elbert Counties), 5.75%, 12/15/12, Prerefunded at 100% of Par (FSA/State Aid Withholding)(1) 709,574 - -------------------------------------------------------------------------------- 3,000,000 One Horse Business Improvement District Rev., 6.00%, 6/1/24 3,105,660 - -------------------------------------------------------------------------------- 1,500,000 Plaza Metropolitan District No. 1 Rev., 8.00%, 12/1/25 1,649,115 - -------------------------------------------------------------------------------- 2,000,000 Todd Creek Farms Metropolitan District No. 1 Rev., 5.60%, 12/1/14 1,991,320 - -------------------------------------------------------------------------------- 1,500,000 Todd Creek Farms Metropolitan District No. 1 Rev., 6.125%, 12/1/19 1,517,820 - -------------------------------------------------------------------------------- 12,246,849 - -------------------------------------------------------------------------------- CONNECTICUT -- 0.4% - -------------------------------------------------------------------------------- 1,000,000 Connecticut Development Auth. Industrial Rev., (Afco Cargo BDL-LLC), 8.00%, 4/1/30 1,081,330 - -------------------------------------------------------------------------------- DISTRICT OF COLUMBIA -- 0.8% - -------------------------------------------------------------------------------- 1,000,000 District of Columbia COP, (Public Safety & Emergency), 5.50%, 1/1/19 (Ambac) 1,074,570 - -------------------------------------------------------------------------------- 750,000 Metropolitan Washington D.C. Airports Auth. General Rev., Series 2001 A, 5.50%, 10/1/18 (MBIA) 797,753 - -------------------------------------------------------------------------------- 1,872,323 - -------------------------------------------------------------------------------- FLORIDA -- 20.5% - -------------------------------------------------------------------------------- 2,800,000 Anthem Park Community Development District Rev., 5.80%, 5/1/36 2,877,392 - -------------------------------------------------------------------------------- 5,000,000 Arborwood Community Development District Special Assessment, 5.25%, 5/1/16 5,003,200 - -------------------------------------------------------------------------------- 1,500,000 Bartam Park Community Development Special Assessment, 5.30%, 5/1/35 1,505,100 - -------------------------------------------------------------------------------- 1,400,000 Baywinds Community Development District Special Assessment, Series 2006 B, 4.90%, 5/1/12 1,408,302 - -------------------------------------------------------------------------------- 2,800,000 Belmont Community Development District Special Assessment, Series 2006 B, 5.125%, 11/1/14(4) 2,799,888 - -------------------------------------------------------------------------------- 1,120,000 Cascades Groveland Community Development District Special Assessment, 5.30%, 5/1/36 1,124,659 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $2,725,000 Concorde Estates Community Development District Rev., Series 2004 B, 5.00%, 5/1/11 $ 2,738,434 - -------------------------------------------------------------------------------- 190,000 Covington Park Community Development District Rev., Series 2004 B, (Capital Improvement), 5.30%, 11/1/09 190,220 - -------------------------------------------------------------------------------- 980,000 Double Branch Community Development District Special Assessment, Series 2002 A, 6.70%, 5/1/34 1,063,280 - -------------------------------------------------------------------------------- 310,000 Double Branch Community Development District Special Assessment, Series 2003 C, 5.125%, 5/1/08 310,288 - -------------------------------------------------------------------------------- 4,535,000 Dupree Lakes Community Development District Rev., 5.00%, 11/1/10 4,544,614 - -------------------------------------------------------------------------------- 1,000,000 East Homestead Community Development District Special Assessment, Series 2006 B, 5.00%, 5/1/11(4) 1,004,930 - -------------------------------------------------------------------------------- 1,000,000 East Homestead Community Development District Special Assessment, 5.375%, 5/1/36 1,006,290 - -------------------------------------------------------------------------------- 520,000 Fleming Island Plantation Community Development District Special Assessment, Series 2000 B, 7.375%, 5/1/31 559,915 - -------------------------------------------------------------------------------- 690,000 Gateway Services Community Development District Special Assessment, Series 2003 B, (Sun City Center - Fort Meyers), 5.50%, 5/1/10 694,257 - -------------------------------------------------------------------------------- 55,000 Heritage Harbor South Community Development District Rev., Series 2002 B, 5.40%, 11/1/08 55,118 - -------------------------------------------------------------------------------- 2,000,000 Lake Ashton II Community Development District Rev., Series 2005 B, 4.875%, 11/1/10 1,999,600 - -------------------------------------------------------------------------------- 495,000 Middle Village Community Development District Special Assessment, Series 2004 B, 5.00%, 5/1/09 497,322 - -------------------------------------------------------------------------------- 1,500,000 Midtown Miami Community Development District Special Assessment, Series 2004 A, 6.25%, 5/1/37 1,628,925 - -------------------------------------------------------------------------------- 1,000,000 Orange County School Board COP, Series 2002 A, 5.50%, 8/1/12, Prerefunded at 100% of Par (MBIA)(1) 1,090,440 - -------------------------------------------------------------------------------- 1,300,000 Palm Glades Community Development District Special Assessment, Series 2006 A, 5.30%, 5/1/36 1,307,514 - -------------------------------------------------------------------------------- 100,000 Reunion East Community Development District Special Assessment Rev., Series 2002 B, 5.90%, 11/1/07 100,392 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 29 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $1,245,000 South-Dade Venture Community Development District Rev., 6.125%, 5/1/34 $ 1,317,621 - -------------------------------------------------------------------------------- 1,820,000 Sterling Hill Community Development District Special Assessment, Series 2003 B, 5.50%, 11/1/10 1,836,926 - -------------------------------------------------------------------------------- 380,000 Stoneybrook West Community Development District Special Assessment, Series 2000 A, 7.00%, 5/1/32 405,445 - -------------------------------------------------------------------------------- 5,500,000 Tisons Landing Community Development District Rev., Series 2005 B, 5.00%, 11/1/11 5,530,361 - -------------------------------------------------------------------------------- 950,000 Waterchase Community Development District Rev., Series 2001 A, 6.70%, 5/1/32 1,013,565 - -------------------------------------------------------------------------------- 3,500,000 Watergrass Community Development District Special Assessment, Series 2005 B, 4.875%, 11/1/10 3,490,235 - -------------------------------------------------------------------------------- 1,710,000 Waters Edge Community Development District Rev., 5.30%, 5/1/36 1,708,649 - -------------------------------------------------------------------------------- 2,000,000 Westchester Community Development District No. 1 Special Assessment, (Infrastructure), 6.125%, 5/1/35 2,100,300 - -------------------------------------------------------------------------------- 50,913,182 - -------------------------------------------------------------------------------- GEORGIA -- 1.0% - -------------------------------------------------------------------------------- 1,235,000 City of Atlanta Tax Allocation Rev., (Princeton Lakes Project), 5.50%, 1/1/31 1,241,793 - -------------------------------------------------------------------------------- 1,300,000 Gwinnett County Water & Sewer Auth. Rev., 4.00%, 8/1/14 1,302,821 - -------------------------------------------------------------------------------- 2,544,614 - -------------------------------------------------------------------------------- GUAM -- 1.1% - -------------------------------------------------------------------------------- 1,500,000 Guam Government Waterworks Auth. Rev., 6.00%, 7/1/25 1,597,650 - -------------------------------------------------------------------------------- 390,000 Guam International Airport Auth. Rev., Series 2003 A, 4.00%, 10/1/10 (MBIA) 393,849 - -------------------------------------------------------------------------------- 690,000 Guam International Airport Auth. Rev., Series 2003 A, 4.00%, 10/1/11 (MBIA) 696,410 - -------------------------------------------------------------------------------- 2,687,909 - -------------------------------------------------------------------------------- ILLINOIS -- 7.1% - -------------------------------------------------------------------------------- 1,325,000 Bedford Park Tax Allocation Rev., 5.125%, 12/30/18 1,306,225 - -------------------------------------------------------------------------------- 3,000,000 Chicago Park District GO, Series 2006 C, 5.00%, 1/1/12 (FGIC)(2) 3,170,970 - -------------------------------------------------------------------------------- 3,000,000 Chicago Tax Increment Allocation Rev., Series 2004 B, (Pilsen Redevelopment), (Junior Lien), 6.75%, 6/1/22 3,122,970 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $6,000,000 City of Yorkville Special Tax, Series 2006-105, (Bristol Bay), 5.875%, 3/1/36 $ 5,875,499 - -------------------------------------------------------------------------------- 3,350,000 Pingree Grove Special Service Area No. 7 Special Tax Rev., Series 2006-1, (Cambridge Lakes), 6.00%, 3/1/36 3,370,670 - -------------------------------------------------------------------------------- 1,000,000 Village of Bolingbrook Rev., 6.25%, 1/1/08(5) 921,660 - -------------------------------------------------------------------------------- 17,767,994 - -------------------------------------------------------------------------------- IOWA -- 0.8% - -------------------------------------------------------------------------------- 2,000,000 Tobacco Settlement Auth. Rev., Series 2005 C, 5.50%, 6/1/42 2,017,660 - -------------------------------------------------------------------------------- KENTUCKY -- 1.2% - -------------------------------------------------------------------------------- 3,000,000 Kentucky Asset Liability Commission Tax and Rev. Anticipation Notes, Series 2005 A, 4.00%, 6/28/06 3,000,810 - -------------------------------------------------------------------------------- MARYLAND -- 3.1% - -------------------------------------------------------------------------------- 1,250,000 Anne Arundel County Special Obligation Rev., (Arundel Mills), 7.10%, 7/1/09, Prerefunded at 102% of Par(1) 1,393,338 - -------------------------------------------------------------------------------- 1,000,000 Anne Arundel County Special Obligation Rev., (National Business Park), 7.375%, 7/1/10, Prerefunded at 102% of Par(1) 1,151,560 - -------------------------------------------------------------------------------- 1,000,000 Baltimore Rev., (North Locust Point), 5.50%, 9/1/34 1,008,880 - -------------------------------------------------------------------------------- 1,000,000 Maryland Industrial Development Financing Auth. Rev., Series 2005 A, (Our Lady of Good Counsel High School), 6.00%, 5/1/35 1,059,010 - -------------------------------------------------------------------------------- 1,224,000 Prince Georges County Rev., (Woodview Village Phase II - Subdistrict), 7.00%, 7/1/32 1,306,657 - -------------------------------------------------------------------------------- 1,810,000 Prince Georges County Special Obligation Rev., (National Harbor), 5.20%, 7/1/34 1,800,642 - -------------------------------------------------------------------------------- 7,720,087 - -------------------------------------------------------------------------------- MISSOURI -- 0.5% - -------------------------------------------------------------------------------- 860,000 Missouri Bottom Transportation Development District Hazelwood Rev., 7.20%, 5/1/33 943,996 - -------------------------------------------------------------------------------- 360,000 Missouri Housing Development Commission Mortgage Rev., Series 1998 B2, (Single Family), 6.40%, 9/1/29 366,739 - -------------------------------------------------------------------------------- 1,310,735 - -------------------------------------------------------------------------------- NEVADA -- 12.0% - -------------------------------------------------------------------------------- 1,085,000 Clark County Improvement District No. 121 Special Assessment, (Southern Highlands Area), 7.50%, 12/1/09, Prerefunded at 102% of Par(1) 1,223,923 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 30 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $3,000,000 Clark County Improvement District No. 142 Special Assessment, 5.50%, 8/1/12 $ 3,095,100 - -------------------------------------------------------------------------------- 2,405,000 Clark County Improvement District No. 151 Special Assessment, (Summerlin), 5.00%, 8/1/25 2,405,673 - -------------------------------------------------------------------------------- 685,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.25%, 2/1/12 706,434 - -------------------------------------------------------------------------------- 725,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.375%, 2/1/13 747,925 - -------------------------------------------------------------------------------- 695,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.40%, 2/1/14 717,018 - -------------------------------------------------------------------------------- 1,490,000 Henderson Local Improvement District No. T-14 Special Assessment, 5.25%, 3/1/13 1,537,918 - -------------------------------------------------------------------------------- 1,550,000 Henderson Local Improvement District No. T-15 Special Assessment, 6.10%, 3/1/24 1,602,561 - -------------------------------------------------------------------------------- 1,000,000 Henderson Local Improvement District No. T-16 Special Assessment, (The Falls at Lake Las Vegas), 5.00%, 3/1/20 1,001,710 - -------------------------------------------------------------------------------- 250,000 Henderson Local Improvement District No. T-17 Special Assessment, 5.00%, 9/1/18 248,285 - -------------------------------------------------------------------------------- 2,800,000 Henderson Local Improvement District No. T-17 Special Assessment, 5.00%, 9/1/25 2,801,008 - -------------------------------------------------------------------------------- 6,600,000 Henderson Local Improvement District No. T-18 Special Assessment, 5.30%, 9/1/35 6,624,617 - -------------------------------------------------------------------------------- 1,105,000 Henderson Redevelopment Agency Tax Allocation Rev., Series 2002 B, 7.10%, 10/1/22 1,193,533 - -------------------------------------------------------------------------------- 350,000 Henderson Redevelopment Agency Tax Allocation Rev., Series 2002 B, 7.20%, 10/1/25 379,435 - -------------------------------------------------------------------------------- 1,275,000 Las Vegas Improvement District No. 607 Special Assessment, 5.50%, 6/1/13 1,320,288 - -------------------------------------------------------------------------------- 490,000 Las Vegas Improvement District No. 808-Summerlin Area Special Assessment, 5.40%, 6/1/06 490,000 - -------------------------------------------------------------------------------- 495,000 Las Vegas Improvement District No. 808-Summerlin Area Special Assessment, 5.70%, 6/1/08 506,915 - -------------------------------------------------------------------------------- 1,155,000 North Las Vegas Improvement District No. 60-Aliante Special Assessment, 5.25%, 12/1/10 1,189,650 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $ 490,000 North Las Vegas Improvement District No. 60-Aliante Special Assessment, 5.60%, 12/1/12 $ 504,700 - -------------------------------------------------------------------------------- 740,000 Reno Special Assessment District No. 4 Rev., (Somersett Parkway), 5.20%, 12/1/10 762,651 - -------------------------------------------------------------------------------- 780,000 Reno Special Assessment District No. 4 Rev., (Somersett Parkway), 5.45%, 12/1/11 804,032 - -------------------------------------------------------------------------------- 29,863,376 - -------------------------------------------------------------------------------- NEW JERSEY -- 3.8% - -------------------------------------------------------------------------------- 1,000,000 New Jersey Economic Development Auth. COP, Series 1999 A, (Transportation Sublease), 6.00%, 5/1/09, Prerefunded at 100% of Par (FSA)(1) 1,064,000 - -------------------------------------------------------------------------------- 4,000,000 Tobacco Settlement Financing Corp. Rev., 6.00%, 6/1/37 4,197,760 - -------------------------------------------------------------------------------- 3,835,000 Tobacco Settlement Financing Corp. Rev., 6.125%, 6/1/42 4,049,185 - -------------------------------------------------------------------------------- 9,310,945 - -------------------------------------------------------------------------------- NEW MEXICO -- 1.0% - -------------------------------------------------------------------------------- 1,490,000 Cabezon Public Improvement District Special Tax Rev., 6.30%, 9/1/34 1,513,214 - -------------------------------------------------------------------------------- 1,000,000 Ventana West Public Improvement District Special Levy Rev., 6.875%, 8/1/33 1,053,430 - -------------------------------------------------------------------------------- 2,566,644 - -------------------------------------------------------------------------------- NEW YORK -- 0.5% - -------------------------------------------------------------------------------- 1,000,000 Onondaga County Industrial Development Auth. Rev., (Air Cargo), 7.25%, 1/1/32 1,082,470 - -------------------------------------------------------------------------------- NORTHERN MARIANA ISLANDS -- 0.9% - -------------------------------------------------------------------------------- 2,000,000 Northern Mariana Islands Commonwealth GO, Series 2003 A, 6.75%, 10/1/33 2,230,020 - -------------------------------------------------------------------------------- OHIO -- 2.2% - -------------------------------------------------------------------------------- 1,150,000 Hebron Waterworks Rev., 5.875%, 12/1/25 1,183,304 - -------------------------------------------------------------------------------- 745,000 Hebron Waterworks Rev., 6.125%, 12/1/29 775,545 - -------------------------------------------------------------------------------- 215,000 New Albany Plain Local School District GO, 5.50%, 6/1/12, Prerefunded at 100% of Par (FGIC)(1) 234,062 - -------------------------------------------------------------------------------- 285,000 New Albany Plain Local School District GO, 5.50%, 12/1/19 (FGIC) 307,526 - -------------------------------------------------------------------------------- 1,800,000 Pinnacle Community Infrastructure Financing Facilities Auth. Rev., Series 2004 A, 6.25%, 12/1/36 1,836,666 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 31 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- $1,100,000 Port of Greater Cincinnati Development Auth. Special Assessment, (Cooperative Public Parking Infrastructure), 6.40%, 2/15/34 $ 1,183,435 - -------------------------------------------------------------------------------- 5,520,538 - -------------------------------------------------------------------------------- OKLAHOMA -- 1.3% - -------------------------------------------------------------------------------- 2,500,000 Norman Regional Hospital Auth. Rev., 5.375%, 9/1/36 2,534,200 - -------------------------------------------------------------------------------- 750,000 Oklahoma City Industrial & Cultural Facilities Trust Rev., 6.75%, 1/1/23 798,638 - -------------------------------------------------------------------------------- 3,332,838 - -------------------------------------------------------------------------------- PENNSYLVANIA -- 3.4% - -------------------------------------------------------------------------------- 4,375,000 Allegheny County Redevelopment Auth. Tax Allocation, (Pittsburgh Mills), 5.10%, 7/1/14 4,492,293 - -------------------------------------------------------------------------------- 1,000,000 Allegheny County Redevelopment Auth. Tax Allocation, (Pittsburgh Mills), 5.60%, 7/1/23 1,048,230 - -------------------------------------------------------------------------------- 1,325,000 Chartiers Valley School District GO, Series 2004 A, 5.00%, 10/15/20 (FSA/State Aid Withholding) 1,387,196 - -------------------------------------------------------------------------------- 1,000,000 Langhorne Manor Boro Higher Education Auth. Rev., (Philadelphia Biblical University), 5.50%, 4/1/25 1,001,650 - -------------------------------------------------------------------------------- 530,000 New Morgan Municipal Auth. Office Rev., Series 1999 A, (Commonwealth Office), 5.375%, 6/1/08 526,126 - -------------------------------------------------------------------------------- 8,455,495 - -------------------------------------------------------------------------------- PUERTO RICO -- 0.7% - -------------------------------------------------------------------------------- 1,800,000 Government Development Bank of Puerto Rico Rev., 4.75%, 8/7/06 (Acquired 5/11/06, Cost $1,800,000)(3) 1,800,576 - -------------------------------------------------------------------------------- RHODE ISLAND -- 0.2% - -------------------------------------------------------------------------------- 500,000 Cranston GO, 6.375%, 11/15/09, Prerefunded at 101% of Par (FGIC)(1) 547,835 - -------------------------------------------------------------------------------- SOUTH CAROLINA -- 0.5% - -------------------------------------------------------------------------------- 1,250,000 Lancaster County Special Assessment, (Sun City Lakes Improvement), 5.45%, 12/1/37 1,252,938 - -------------------------------------------------------------------------------- TENNESSEE -- 2.1% - -------------------------------------------------------------------------------- 1,475,000 Chattanooga Health Educational & Housing Facility Board Rev., Series 2005 B, (Campus Development Foundation, Inc. Phase I LLC), 5.50%, 10/1/20 1,475,605 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- $3,565,000 Chattanooga Health Educational & Housing Facility Board Rev., Series 2005 B, (Campus Development Foundation, Inc. Phase I LLC), 6.00%, 10/1/35 $ 3,624,500 - -------------------------------------------------------------------------------- 5,100,105 - -------------------------------------------------------------------------------- TEXAS -- 1.7% - -------------------------------------------------------------------------------- 610,000 Abia Development Corp. Airport Facilities Rev., (Aero Austin L.P.), 6.75%, 1/1/11 615,722 - -------------------------------------------------------------------------------- 400,000 Bexar County Health Facilities Development Corp. Rev., (Army Retirement Residence), 6.125%, 7/1/22 423,976 - -------------------------------------------------------------------------------- 1,000,000 Bexar County Health Facilities Development Corp. Rev., (Army Retirement Residence), 6.30%, 7/1/32 1,060,720 - -------------------------------------------------------------------------------- 2,000,000 Pearland Development Auth. Tax Allocation Rev., 5.50%, 9/1/28 (RADIAN-IBC) 2,106,400 - -------------------------------------------------------------------------------- 4,206,818 - -------------------------------------------------------------------------------- UTAH -- 0.5% - -------------------------------------------------------------------------------- 1,235,000 West Valley City Rev., Series 2001 A, 5.50%, 7/15/15 (MBIA) 1,328,205 - -------------------------------------------------------------------------------- VIRGINIA -- 0.8% - -------------------------------------------------------------------------------- 2,000,000 Tobacco Settlement Financing Corp. Rev., 5.625%, 6/1/37 2,049,640 - -------------------------------------------------------------------------------- WASHINGTON -- 0.5% - -------------------------------------------------------------------------------- 860,000 Cowlitz County Kelso School District No. 458 GO, 5.75%, 12/1/18 (FSA) 939,816 - -------------------------------------------------------------------------------- 250,000 Port of Seattle Rev., Series 2000 B, 6.00%, 2/1/15 (MBIA) 279,368 - -------------------------------------------------------------------------------- 1,219,184 - -------------------------------------------------------------------------------- WISCONSIN -- 2.9% - -------------------------------------------------------------------------------- 3,200,000 Wisconsin GO, Series 2006-1, 5.00%, 5/1/10 (MBIA)(2) 3,347,328 - -------------------------------------------------------------------------------- 2,000,000 Wisconsin Health & Educational Facilities Auth. Rev., Series 2004 A, (Southwest Health Center), 6.25%, 4/1/34 2,033,180 - -------------------------------------------------------------------------------- 1,750,000 Wisconsin Health & Educational Facilities Auth. Rev., Series 2006 A, (Marshfield Clinic), 5.375%, 2/15/34 1,809,220 - -------------------------------------------------------------------------------- 7,189,728 - -------------------------------------------------------------------------------- TOTAL MUNICIPAL SECURITIES (Cost $237,443,122) 244,144,761 - -------------------------------------------------------------------------------- See Notes to Financial Statements. (continued) - ------ 32 High-Yield Municipal - Schedule of Investments MAY 31, 2006 Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES -- 1.5% ARIZONA -- 0.4% - -------------------------------------------------------------------------------- $1,000,000 Phoenix Industrial Development Auth. Rev., (Southwest Human Development), VRDN, 3.48%, 6/1/06 (LOC: Wells Fargo Bank N.A) $ 1,000,000 - -------------------------------------------------------------------------------- 100,000 Pima County Industrial Development Auth. Lease Rev. COP, VRDN, 3.48%, 6/1/06 (SBBPA: Societe Generale) 100,000 - -------------------------------------------------------------------------------- 1,100,000 - -------------------------------------------------------------------------------- FLORIDA -- 0.5% - -------------------------------------------------------------------------------- 650,000 Brevard County Health Facilities Auth. Rev., (Health First Inc.), VRDN, 3.59%, 6/1/06 (LOC: Suntrust Bank) 650,000 - -------------------------------------------------------------------------------- 200,000 Pinellas County Health Facilities Auth. Rev., (Hospital Facilities-Bayfront), VRDN, 3.59%, 6/1/06 200,000 - -------------------------------------------------------------------------------- 350,000 Pinellas County Health Facility Auth. Rev., (Pooled Hospital Loan Program), VRDN, 3.60%, 6/1/06 (Ambac) 350,000 - -------------------------------------------------------------------------------- 1,200,000 - -------------------------------------------------------------------------------- Principal Amount Value - -------------------------------------------------------------------------------- TENNESSEE -- 0.6% - -------------------------------------------------------------------------------- $ 450,000 Clarksville Public Building Authority Rev., VRDN, (Tennessee Municipal Bond Fund), 3.58%, 6/1/06 (LOC: Bank of America N.A.) $ 450,000 - -------------------------------------------------------------------------------- 1,050,000 Clarksville Public Building Authority Rev., VRDN, (Tennessee Municipal Bond Fund), 3.58%, 6/1/06 (LOC: Bank of America N.A.) 1,050,000 - -------------------------------------------------------------------------------- 1,500,000 - -------------------------------------------------------------------------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $3,800,000) 3,800,000 - -------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES -- 99.6% (Cost $241,243,122) 247,944,761 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -- 0.4% 962,011 - -------------------------------------------------------------------------------- TOTAL NET ASSETS -- 100.0% $248,906,772 ================================================================================ FUTURES CONTRACTS Expiration Underlying Face Unrealized Contracts Purchased Date Amount at Value Gain (Loss) - -------------------------------------------------------------------------------- 35 U.S. Treasury 10-Year Notes September 2006 $3,672,266 $19,062 ================================ 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 LOC = Letter of Credit MBIA = MBIA Insurance Corporation RADIAN-IBC = Radian Asset Assurance, Inc. -- Insured Bond Certificates SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2006. (1) Escrowed to maturity in U.S. government securities or state and local government securities. (2) Security, or a portion thereof, has been segregated for when-issued securities and/or futures contracts. (3) 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 May 31, 2006 was $3,582,902, which represented 1.4% of total net assets. (4) When-issued security. (5) Step-coupon security. These securities are issued with a zero-coupon and become interest bearing at a predetermined rate and date and are issued at a substantial discount from their value at maturity. Rate shown is effective May 31, 2006. See Notes to Financial Statements. - ------ 33 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 December 1, 2005 to May 31, 2006 (except as noted). 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. (continued) - ------ 34 Shareholder Fee Examples (Unaudited) 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. - -------------------------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD* ANNUALIZED ACCOUNT VALUE ACCOUNT VALUE 12/1/05 - EXPENSE 12/1/05 5/31/06 5/31/06 RATIO* - -------------------------------------------------------------------------------- ARIZONA MUNICIPAL BOND SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,011.70 $2.46 0.49% - -------------------------------------------------------------------------------- A Class $1,000 $1,010.40 $3.71 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,006.70 $7.45 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,006.70 $7.45 1.49% - -------------------------------------------------------------------------------- HYPOTHETICAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,022.49 $2.47 0.49% - -------------------------------------------------------------------------------- A Class $1,000 $1,021.24 $3.73 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,017.50 $7.49 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,017.50 $7.49 1.49% - -------------------------------------------------------------------------------- FLORIDA MUNICIPAL BOND SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,011.40 $2.46 0.49% - -------------------------------------------------------------------------------- A Class $1,000 $1,010.10 $3.71 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,006.40 $7.45 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,006.30 $7.45 1.49% - -------------------------------------------------------------------------------- HYPOTHETICAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,022.49 $2.47 0.49% - -------------------------------------------------------------------------------- A Class $1,000 $1,021.24 $3.73 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,017.50 $7.49 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,017.50 $7.49 1.49% - -------------------------------------------------------------------------------- *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 182, the number of days in the most recent fiscal half-year, divided by 365, to reflect the one-half year period. (continued) - ------ 35 Shareholder Fee Examples (Unaudited) - -------------------------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD(1) ANNUALIZED ACCOUNT VALUE ACCOUNT VALUE 12/1/05 - EXPENSE 12/1/05 5/31/06 5/31/06 RATIO* - -------------------------------------------------------------------------------- LONG-TERM TAX-FREE SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,004.20(2) $0.78(4) 0.49% - -------------------------------------------------------------------------------- Institutional Class $1,000 $1,004.50(2) $0.46(4) 0.29% - -------------------------------------------------------------------------------- A Class $1,000 $1,003.10(3) $1.24(5) 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,001.80(3) $2.49(5) 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,002.60(2) $2.37(4) 1.49% - -------------------------------------------------------------------------------- HYPOTHETICAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,022.49(6) $2.47(6) 0.49% - -------------------------------------------------------------------------------- Institutional Class $1,000 $1,023.49(6) $1.46(6) 0.29% - -------------------------------------------------------------------------------- A Class $1,000 $1,021.24 $3.73 0.74% - -------------------------------------------------------------------------------- B Class $1,000 $1,017.50 $7.49 1.49% - -------------------------------------------------------------------------------- C Class $1,000 $1,017.50(6) $7.49(6) 1.49% - -------------------------------------------------------------------------------- HIGH-YIELD MUNICIPAL SHAREHOLDER FEE EXAMPLE - -------------------------------------------------------------------------------- ACTUAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,028.00 $3.13 0.62% - -------------------------------------------------------------------------------- A Class $1,000 $1,026.70 $4.40 0.87% - -------------------------------------------------------------------------------- B Class $1,000 $1,022.90 $8.17 1.62% - -------------------------------------------------------------------------------- C Class $1,000 $1,022.80 $8.17 1.62% - -------------------------------------------------------------------------------- HYPOTHETICAL - -------------------------------------------------------------------------------- Investor Class $1,000 $1,021.84 $3.13 0.62% - -------------------------------------------------------------------------------- A Class $1,000 $1,020.59 $4.38 0.87% - -------------------------------------------------------------------------------- B Class $1,000 $1,016.85 $8.15 1.62% - -------------------------------------------------------------------------------- C Class $1,000 $1,016.85 $8.15 1.62% - -------------------------------------------------------------------------------- (1) 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 182, the number of days in the most recent fiscal half-year, divided by 365, to reflect the one-half year period. (2) Ending account value based on actual return from April 3, 2006 (commencement of sale) through May 31, 2006. (3) Ending account value based on actual return from April 1, 2006 through May 31, 2006. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (4) 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 58, the number of days in the period from April 3, 2006 (commencement of sale), through May 31, 2006, divided by 365, to reflect the period. Had the class been available for the full period, the expenses paid during the period would have been higher. (5) 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 61, the number of days in the period from April 1, 2006 through May 31, 2006, divided by 365, to reflect the period. Had the class been available for a full fiscal half-year period, the expenses paid during the period would have been higher. (6) Ending account value and expenses paid during period assumes the class had been available throughout the entire fiscal half-year period and are calculated using the class's annualized expense ratio listed in the table above. - ------ 36 Statement of Assets and Liabilities MAY 31, 2006 - ---------------------------------------------------------------------------------------------------- ARIZONA FLORIDA LONG-TERM HIGH-YIELD MUNICIPAL BOND MUNICIPAL BOND TAX-FREE MUNICIPAL - ---------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------- Investment securities, at value (cost of $56,195,763, $41,919,639, $37,968,412, and $241,243,122 respectively) $57,653,078 $43,189,615 $38,323,594 $247,944,761 - ----------------------------------- Cash -- -- 2,126,881 -- - ----------------------------------- Receivable for investments sold -- -- 341,936 -- - ----------------------------------- Receivable for capital shares sold 5,593 990 1,400 1,520,942 - ----------------------------------- Receivable for variation margin on futures contracts -- -- 8,016 10,391 - ----------------------------------- Unrealized appreciation on swap agreements 622 -- -- -- - ----------------------------------- Interest receivable 932,872 480,618 326,615 3,756,210 - ---------------------------------------------------------------------------------------------------- 58,592,165 43,671,223 41,128,442 253,232,304 - ---------------------------------------------------------------------------------------------------- LIABILITIES - ---------------------------------------------------------------------------------------------------- Disbursements in excess of demand deposit cash 16,879 37,538 -- 41,997 - ----------------------------------- Payable for investments purchased 1,935,626 -- 3,155,995 3,797,520 - ----------------------------------- Payable for capital shares redeemed -- -- 96,927 31,065 - ----------------------------------- Payable for variation margin on futures contracts -- 1,484 -- -- - ----------------------------------- Accrued management fees 23,260 18,005 12,881 128,126 - ----------------------------------- Distribution fees payable 270 1,034 1,327 21,588 - ----------------------------------- Service fees (and distribution fees -- A Class) payable 881 640 4,588 34,208 - ----------------------------------- Dividends payable 45,668 43,595 16,817 271,028 - ---------------------------------------------------------------------------------------------------- 2,022,584 102,296 3,288,535 4,325,532 - ---------------------------------------------------------------------------------------------------- NET ASSETS $56,569,581 $43,568,927 $37,839,907 $248,906,772 ==================================================================================================== See Notes to Financial Statements. (continued) - ------ 37 Statement of Assets and Liabilities MAY 31, 2006 - ---------------------------------------------------------------------------------------------------- ARIZONA FLORIDA LONG-TERM HIGH-YIELD MUNICIPAL BOND MUNICIPAL BOND TAX-FREE MUNICIPAL - ---------------------------------------------------------------------------------------------------- NET ASSETS CONSIST OF: - ---------------------------------------------------------------------------------------------------- Capital paid in $55,266,081 $42,676,051 $38,339,367 $244,675,909 - ----------------------------------- Undistributed net investment income -- -- 27,578 -- - ----------------------------------- Accumulated net realized loss on investment transactions (154,439) (372,743) (905,685) (2,489,838) - ----------------------------------- Net unrealized appreciation on investments 1,457,939 1,265,619 378,647 6,720,701 - ---------------------------------------------------------------------------------------------------- $56,569,581 $43,568,927 $37,839,907 $248,906,772 ==================================================================================================== INVESTOR CLASS - ---------------------------------------------------------------------------------------------------- Net assets $52,404,475 $40,604,339 $25,104 $84,896,115 - ----------------------------------- Shares outstanding 4,907,911 3,847,490 2,346 8,084,493 - ----------------------------------- Net asset value per share $10.68 $10.55 $10.70 $10.50 - ---------------------------------------------------------------------------------------------------- INSTITUTIONAL CLASS - ---------------------------------------------------------------------------------------------------- Net assets N/A N/A $16,456,283 N/A - ----------------------------------- Shares outstanding N/A N/A 1,537,936 N/A - ----------------------------------- Net asset value per share N/A N/A $10.70 N/A - ---------------------------------------------------------------------------------------------------- A CLASS - ---------------------------------------------------------------------------------------------------- Net assets $3,740,788 $1,380,175 $19,287,830 $129,680,884 - ----------------------------------- Shares outstanding 350,341 130,779 1,802,562 12,349,264 - ----------------------------------- Net asset value per share $10.68 $10.55 $10.70 $10.50 - ----------------------------------- Maximum offering price (net asset value divided by 0.955) $11.18 $11.05 $11.20 $10.99 - ---------------------------------------------------------------------------------------------------- B CLASS - ---------------------------------------------------------------------------------------------------- Net assets $42,022 $14,654 $2,045,625 $4,467,666 - ----------------------------------- Shares outstanding 3,936 1,389 191,196 425,447 - ----------------------------------- Net asset value per share $10.68 $10.55 $10.70 $10.50 - ---------------------------------------------------------------------------------------------------- C CLASS - ---------------------------------------------------------------------------------------------------- Net assets $382,296 $1,569,759 $25,065 $29,862,107 - ----------------------------------- Shares outstanding 35,804 148,743 2,342 2,843,708 - ----------------------------------- Net asset value per share $10.68 $10.55 $10.70 $10.50 - ---------------------------------------------------------------------------------------------------- See Notes to Financial Statements. - ------ 38 Statement of Operations YEAR ENDED MAY 31, 2006 - -------------------------------------------------------------------------------- ARIZONA FLORIDA MUNICIPAL BOND MUNICIPAL BOND - -------------------------------------------------------------------------------- INVESTMENT INCOME - -------------------------------------------------------------------------------- INCOME: - ------------------------------------------- Interest $ 2,539,864 $ 2,128,674 - -------------------------------------------------------------------------------- EXPENSES: - ------------------------------------------- Management fees 281,477 235,615 - ------------------------------------------- Distribution Fees: - ------------------------------------------- B Class 136 182 - ------------------------------------------- C Class 4,191 13,265 - ------------------------------------------- Service Fees: - ------------------------------------------- B Class 46 60 - ------------------------------------------- C Class 1,397 4,421 - ------------------------------------------- Service and distribution fees -- A Class 10,067 4,663 - ------------------------------------------- Trustees' fees and expenses 3,536 3,011 - ------------------------------------------- Other expenses 157 102 - -------------------------------------------------------------------------------- 301,007 261,319 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 2,238,857 1,867,355 - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) - -------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS) ON: - ------------------------------------------- Investment transactions (165,264) (24,461) - ------------------------------------------- Futures and swaps transactions 142,564 152,592 - -------------------------------------------------------------------------------- (22,700) 128,131 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON: - ------------------------------------------- Investments (1,317,941) (1,338,632) - ------------------------------------------- Futures and swaps 10,942 21,453 - -------------------------------------------------------------------------------- (1,306,999) (1,317,179) - -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) (1,329,699) (1,189,048) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 909,158 $ 678,307 ================================================================================ See Notes to Financial Statements. (continued) - ------ 39 Statement of Operations YEAR ENDED MAY 31, 2006 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- HIGH-YIELD LONG-TERM TAX-FREE MUNICIPAL - -------------------------------------------------------------------------------- MAY 31, 2006(1) MARCH 31, 2006(2) MAY 31, 2006 - -------------------------------------------------------------------------------- INVESTMENT INCOME - -------------------------------------------------------------------------------- INCOME: - ---------------------------- Interest $ 273,260 $ 4,045,250 $11,395,057 - -------------------------------------------------------------------------------- EXPENSES: - ---------------------------- Management fees 25,793 302,114 1,296,080 - ---------------------------- Distribution Fees: - ---------------------------- B Class 2,589 17,599 30,471 - ---------------------------- C Class 30 -- 178,282 - ---------------------------- Service Fees: - ---------------------------- B Class 863 -- 10,157 - ---------------------------- C Class 10 -- 59,427 - ---------------------------- Service and distribution fees -- A Class 8,721 26,584 271,915 - ---------------------------- Shareholder servicing fees (A Class and B Class) -- 251,261 -- - ---------------------------- Trustees' fees and expenses 174 235,958 12,385 - ---------------------------- Other expenses -- 5,032 1,456 - -------------------------------------------------------------------------------- 38,180 838,548 1,860,173 - -------------------------------------------------------------------------------- Amounts waived -- (4,529) -- - -------------------------------------------------------------------------------- 38,180 834,019 1,860,173 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 235,080 3,211,231 9,534,884 - -------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) - -------------------------------------------------------------------------------- NET REALIZED GAIN (LOSS) ON: - ---------------------------- Investment transactions 240,366 1,488,652 (260,700) - ---------------------------- Futures and swaps transactions (24,343) 46,106 396,618 - -------------------------------------------------------------------------------- 216,023 1,534,758 135,918 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON: - ---------------------------- Investments (322,473) (1,553,272) (189,863) - ---------------------------- Futures and swaps 23,353 (80,391) 50,022 - -------------------------------------------------------------------------------- (299,120) (1,633,663) (139,841) - -------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) (83,097) (98,905) (3,923) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 151,983 $ 3,112,326 $ 9,530,961 ================================================================================ (1) Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (2) Year ended March 31, 2006. See Notes to Financial Statements. - ------ 40 Statement of Changes in Net Assets YEARS ENDED MAY 31, 2006 AND MAY 31, 2005 - ---------------------------------------------------------------------------------------------------- ARIZONA MUNICIPAL BOND FLORIDA MUNICIPAL BOND - ---------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 2006 2005 2006 2005 - ---------------------------------------------------------------------------------------------------- OPERATIONS - ---------------------------------------------------------------------------------------------------- Net investment income $ 2,238,857 $ 2,278,480 $ 1,867,355 $ 2,157,343 - ------------------------------------- Net realized gain (loss) (22,700) 99,571 128,131 (205,313) - ------------------------------------- Change in net unrealized appreciation (depreciation) (1,306,999) 603,330 (1,317,179) 977,499 - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 909,158 2,981,381 678,307 2,929,529 - ---------------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS - ---------------------------------------------------------------------------------------------------- From net investment income: - ------------------------------------- Investor Class (2,116,841) (2,147,979) (1,747,251) (2,068,408) - ------------------------------------- A Class (149,814) (118,487) (68,050) (50,159) - ------------------------------------- B Class (564) (72) (702) (423) - ------------------------------------- C Class (16,490) (11,942) (51,352) (38,353) - ------------------------------------- From net realized gains: - ------------------------------------- Investor Class (107,409) (12,600) -- -- - ------------------------------------- A Class (8,242) (792) -- -- - ------------------------------------- B Class (5) (1) -- -- - ------------------------------------- C Class (1,271) (102) -- -- - ---------------------------------------------------------------------------------------------------- Decrease in net assets from distributions (2,400,636) (2,291,975) (1,867,355) (2,157,343) - ---------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from capital share transactions (133,483) (4,235,455) (8,645,069) (12,320,526) - ---------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS (1,624,961) (3,546,049) (9,834,117) (11,548,340) NET ASSETS - ---------------------------------------------------------------------------------------------------- Beginning of period 58,194,542 61,740,591 53,403,044 64,951,384 - ---------------------------------------------------------------------------------------------------- End of period $56,569,581 $58,194,542 $43,568,927 $ 53,403,044 ==================================================================================================== See Notes to Financial Statements. (continued) - ------ 41 Statement of Changes in Net Assets TWO MONTHS ENDED MAY 31, 2006 AND YEARS ENDED MARCH 31, 2006 AND MARCH 31, 2005 (AS NOTED) - ----------------------------------------------------------------------------------------------- LONG-TERM TAX-FREE - ----------------------------------------------------------------------------------------------- MAY 31, 2006(1) MARCH 31, 2006(2) MARCH 31, 2005(2) - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS - ----------------------------------------------------------------------------------------------- OPERATIONS - ----------------------------------------------------------------------------------------------- Net investment income $ 235,080 $ 3,211,231 $ 3,660,128 - ------------------------------------- Net realized gain (loss) 216,023 1,534,758 15,539 - ------------------------------------- Change in net unrealized appreciation (depreciation) (299,120) (1,633,663) (1,887,014) - ----------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 151,983 3,112,326 1,788,653 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS - ----------------------------------------------------------------------------------------------- From net investment income: - ------------------------------------- Investor Class (150) -- -- - ------------------------------------- Institutional Class (101,957) -- -- - ------------------------------------- A Class (123,267) (3,153,287) (3,598,718) - ------------------------------------- B Class (9,596) (58,352) (61,410) - ------------------------------------- C Class (111) -- -- - ------------------------------------- From net realized gains: - ------------------------------------- A Class -- -- (1,833,757) - ------------------------------------- B Class -- -- (40,890) - ----------------------------------------------------------------------------------------------- Decrease in net assets from distributions (235,081) (3,211,639) (5,534,775) - ----------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS - ----------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from capital share transactions (991,372) (86,867,934) 6,347,393 - ----------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS (1,074,470) (86,967,247) 2,601,271 NET ASSETS - ----------------------------------------------------------------------------------------------- Beginning of period 38,914,377 125,881,624 123,280,353 - ----------------------------------------------------------------------------------------------- End of period $37,839,907 $ 38,914,377 $125,881,624 =============================================================================================== Undistributed net investment income $27,578 $33,650 $34,250 =============================================================================================== (1) Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (2) Years ended March 31, 2006 and March 31, 2005. See Notes to Financial Statements. (continued) - ------ 42 Statement of Changes in Net Assets YEARS ENDED MAY 31, 2006 AND MAY 31, 2005 - -------------------------------------------------------------------------------- HIGH-YIELD MUNICIPAL - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS 2006 2005 - -------------------------------------------------------------------------------- OPERATIONS - -------------------------------------------------------------------------------- Net investment income $ 9,534,884 $ 5,964,223 - --------------------------------------------- Net realized gain (loss) 135,918 190,926 - --------------------------------------------- Change in net unrealized appreciation (depreciation) (139,841) 5,362,877 - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 9,530,961 11,518,026 - -------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS - -------------------------------------------------------------------------------- From net investment income: - --------------------------------------------- Investor Class (3,542,920) (2,901,842) - --------------------------------------------- A Class (4,950,399) (2,459,571) - --------------------------------------------- B Class (154,146) (121,581) - --------------------------------------------- C Class (898,478) (481,229) - -------------------------------------------------------------------------------- Decrease in net assets from distributions (9,545,943) (5,964,223) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS - -------------------------------------------------------------------------------- Net increase (decrease) in net assets from capital share transactions 86,282,597 58,412,524 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS 86,267,615 63,966,327 NET ASSETS - -------------------------------------------------------------------------------- Beginning of period 162,639,157 98,672,830 - -------------------------------------------------------------------------------- End of period $248,906,772 $162,639,157 ================================================================================ Undistributed net investment income -- $11,059 ================================================================================ See Notes to Financial Statements. - ------ 43 Notes to Financial Statements MAY 31, 2006 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century Municipal Trust (the trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. Arizona Municipal Bond Fund (Arizona Municipal), Florida Municipal Bond Fund (Florida Municipal), Long-Term Tax-Free Fund (Long-Term Tax-Free) and High-Yield Municipal Fund (High-Yield Municipal) (collectively, the funds) are four funds in a series issued by the trust (see Note 8). The funds are non-diversified under the 1940 Act. Arizona Municipal's investment objective is to seek safety of principal and high current income that is exempt from federal income tax and taxes imposed by the state of Arizona. Florida Municipal's investment objective is to seek safety of principal and high current income that is exempt from federal income tax and taxes imposed by the state of Florida. Arizona Municipal and Florida Municipal invest primarily in Arizona and Florida municipal obligations, respectively. Long-Term Tax-Free's investment objective is to seek high current income that is exempt from federal income taxes consistent with preservation of capital. Long-Term Tax-Free invests primarily in long-term investment-grade municipal obligations. High-Yield Municipal's investment objective is to seek high current income that is exempt from federal income taxes. Capital appreciation is a secondary objective. High-Yield Municipal invests primarily in long-term and intermediate-term municipal obligations. The following is a summary of the funds' significant accounting policies. MULTIPLE CLASS -- Arizona Municipal, Florida Municipal and High-Yield Municipal are authorized to issue the Investor Class, the A Class, the B Class and the C Class. Long-Term Tax-Free is authorized to issue the Investor Class, the Institutional 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 shareholder servicing and distribution 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. Sale of Long-Term Tax-Free's Investor Class, Institutional Class and C Class commenced on April 3, 2006. 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 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 at its fair value as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such fair value determination would materially impact a fund's net asset value. Circumstances that may cause the funds to fair value a security include: an event occurred after the close of the exchange on which a portfolio security principally trades (but before the close of the New York Stock Exchange) that was likely to have changed the value of the security; a security has been declared in default; or trading in a security has been halted during the trading day. SECURITY TRANSACTIONS -- 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 -- The funds 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, the funds 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 the funds. The variation margin is equal to the daily change in the contract value and is recorded (continued) - ------ 44 Notes to Financial Statements MAY 31, 2006 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) as unrealized gains and losses. The funds 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 swap transactions and unrealized appreciation (depreciation) on futures and swaps, respectively. SWAP AGREEMENTS -- The funds may enter into a swap agreement 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 the returns earned or realized on predetermined investments or instruments. Credit default swaps enable an investor to buy/sell protection against a credit event of a specific issuer. The seller of credit protection against a security or basket of securities receives an up-front or periodic payment to compensate against potential default events. The funds may enhance returns by selling protection or attempt to mitigate credit risk by buying protection. The funds 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. Accordingly, no provision has been made for federal or state income taxes. 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 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) per class. The Agreement provides that all expenses of the funds, 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 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 0.1625% to 0.2800% for Arizona Municipal Bond, Florida Municipal Bond and Long-Term Tax-Free, and from 0.2925% to 0.4100% for High-Yield Municipal. The rates for the Complex Fee range from 0.2500% to 0.3100%. (continued) - ------ 45 Notes to Financial Statements MAY 31, 2006 2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED) The Institutional Class is 0.2000% less at each point within the Complex Fee range. For the year ended May 31, 2006, the effective annual management fees for the Investor Class, A Class, B Class and C Class of Arizona Municipal Bond, Florida Municipal Bond and High-Yield Municipal were 0.48%, 0.48% and 0.61%, respectively. The effective annual management fee for the two months ended May 31, 2006 for the Investor Class, A Class, B Class and C Class of Long-Term Tax-Free was 0.49%. The effective annual management fee for the two months ended May 31, 2006 for the Institutional Class of Long-Term Tax-Free was 0.29%. 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 B Class and C Class will pay American Century Investment Services, Inc. (ACIS) the following annual distribution and service fees: - ---------------------------------------- B & C - ---------------------------------------- Distribution Fee 0.75% - ---------------------------------------- Service Fee 0.25% - ---------------------------------------- The plans provide that the A Class will pay ACIS an annual distribution 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 funds. 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 May 31, 2006, 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. Arizona Municipal, Florida Municipal, and High-Yield Municipal 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 J.P. Morgan Chase & Co. (JPM). JPM is an equity investor in ACC. 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, for the year ended May 31, 2006 (except as noted), were as follows: - -------------------------------------------------------------------------------- ARIZONA FLORIDA LONG-TERM HIGH-YIELD MUNICIPAL BOND MUNICIPAL BOND TAX-FREE(1) MUNICIPAL - -------------------------------------------------------------------------------- Purchases $22,295,020 $12,644,014 $21,574,888 $115,020,070 - -------------------------------------------------------------------------------- Proceeds from sales $24,745,660 $21,603,540 $22,750,266 $32,390,122 - -------------------------------------------------------------------------------- (1) Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (continued) - ------ 46 Notes to Financial Statements MAY 31, 2006 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of the funds were as follows (shares allocated at 300,000,000): - ------------------------------------------------------------------------------------------ ARIZONA MUNICIPAL BOND FLORIDA MUNICIPAL BOND - ------------------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------ INVESTOR CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006 - -------------------------- Sold 613,514 $ 6,636,684 246,633 $ 2,652,581 - -------------------------- Issued in reinvestment of distributions 163,985 1,772,268 117,890 1,258,818 - -------------------------- Redeemed (725,455) (7,834,221) (1,090,319) (11,653,420) - ------------------------------------------------------------------------------------------ Net increase (decrease) 52,044 $ 574,731 (725,796) $ (7,742,021) ========================================================================================== YEAR ENDED MAY 31, 2005 - ------------------------------------------------------------------------------------------ Sold 497,128 $ 5,453,127 606,561 $ 6,566,886 - -------------------------- Issued in reinvestment of distributions 154,557 1,693,720 120,932 1,308,172 - -------------------------- Redeemed (1,354,587) (14,829,390) (2,066,559) (22,321,798) - ------------------------------------------------------------------------------------------ Net increase (decrease) (702,902) $ (7,682,543) (1,339,066) $(14,446,740) ========================================================================================== A CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006 - -------------------------- Sold 47,873 $ 518,217 126,790 $ 1,355,237 - -------------------------- Issued in reinvestment of distributions 7,329 79,253 4,548 48,563 - -------------------------- Redeemed (94,635) (1,024,647) (195,259) (2,087,562) - ------------------------------------------------------------------------------------------ Net increase (decrease) (39,433) $ (427,177) (63,921) $ (683,762) ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold 372,585 $ 4,093,428 195,189 $2,118,110 - -------------------------- Issued in reinvestment of distributions 9,356 102,522 3,574 38,654 - -------------------------- Redeemed (132,782) (1,455,838) (75,286) (817,082) - ------------------------------------------------------------------------------------------ Net increase (decrease) 249,159 $ 2,740,112 123,477 $1,339,682 ========================================================================================== B CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006 - -------------------------- Sold 3,705 $40,065 930 $ 10,068 - -------------------------- Issued in reinvestment of distributions 7 81 64 682 - -------------------------- Redeemed (6) (69) (1,398) (14,902) - ------------------------------------------------------------------------------------------ Net increase (decrease) 3,706 $40,077 (404) $ (4,152) ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold -- -- 1,294 $ 13,963 - -------------------------- Issued in reinvestment of distributions 6 $72 29 316 - -------------------------- Redeemed -- -- (1,152) (12,511) - ------------------------------------------------------------------------------------------ Net increase (decrease) 6 $72 171 $ 1,768 ========================================================================================== (continued) - ------ 47 Notes to Financial Statements MAY 31, 2006 4. CAPITAL SHARE TRANSACTIONS (CONTINUED) - ------------------------------------------------------------------------------------------ ARIZONA MUNICIPAL BOND FLORIDA MUNICIPAL BOND - ------------------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------ C CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006 - -------------------------- Sold 6,550 $ 71,351 37,288 $ 398,765 - -------------------------- Issued in reinvestment of distributions 408 4,415 731 7,805 - -------------------------- Redeemed (36,753) (396,880) (58,234) (621,704) - ------------------------------------------------------------------------------------------ Net increase (decrease) (29,795) $(321,114) (20,215) $(215,134) ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold 64,215 $704,230 119,292 $1,291,031 - -------------------------- Issued in reinvestment of distributions 244 2,674 667 7,218 - -------------------------- Redeemed -- -- (47,607) (513,485) - ------------------------------------------------------------------------------------------ Net increase (decrease) 64,459 $706,904 72,352 $ 784,764 ========================================================================================== - ------------------------------------------------------------------------------------------ LONG-TERM TAX-FREE HIGH-YIELD MUNICIPAL - ------------------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------ INVESTOR CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006(1) - -------------------------- Sold 2,332 $25,011 3,090,565 $ 32,478,010 - -------------------------- Issued in reinvestment of distributions 14 150 203,441 2,138,238 - -------------------------- Redeemed -- -- (1,206,280) (12,677,908) - ------------------------------------------------------------------------------------------ Net increase (decrease) 2,346 $25,161 2,087,726 $ 21,938,340 ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold N/A 1,643,141 $ 16,916,130 - -------------------------- Issued in reinvestment of distributions 166,485 1,714,843 - -------------------------- Redeemed (1,225,232) (12,610,602) - ------------------------------------------------------------------------------------------ Net increase (decrease) 584,394 $ 6,020,371 ========================================================================================== INSTITUTIONAL CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006(1) - -------------------------- Sold 1,528,405 $16,397,564 N/A - -------------------------- Issued in reinvestment of distributions 9,531 101,943 - -------------------------- Redeemed -- -- - ------------------------------------------------------------------------------------------ Net increase (decrease) 1,537,936 $16,499,507 ========================================================================================== (1) April 3, 2006 (commencement of sale) through May 31, 2006 for Long-Term Tax-Free. (continued) - ------ 48 Notes to Financial Statements MAY 31, 2006 4. CAPITAL SHARE TRANSACTIONS (CONTINUED) - ------------------------------------------------------------------------------------------ LONG-TERM TAX-FREE HIGH-YIELD MUNICIPAL - ------------------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------ A CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006(1) - -------------------------- Sold 12,548 $ 136,284 7,491,063 $ 78,741,071 - -------------------------- Issued in reinvestment of distributions 8,047 86,066 393,167 4,132,250 - -------------------------- Redeemed (1,653,051) (17,732,706) (3,075,940) (32,326,114) - ------------------------------------------------------------------------------------------ Net increase (decrease) (1,632,456) $(17,510,356) 4,808,290 $ 50,547,207 ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold N/A 5,239,532 $ 54,036,738 - -------------------------- Issued in reinvestment of distributions 197,779 2,042,149 - -------------------------- Redeemed (1,216,527) (12,559,763) - ------------------------------------------------------------------------------------------ Net increase (decrease) 4,220,784 $ 43,519,124 ========================================================================================== YEAR ENDED MARCH 31, 2006 - -------------------------- Sold 477,920 $ 5,222,488 N/A - -------------------------- Issued in reinvestment of distributions 267,697 2,902,942 - -------------------------- Redeemed (8,803,698) (94,593,140) - ------------------------------------------------------------------------------------------ Net increase (decrease) (8,058,081) $(86,467,710) ========================================================================================== YEAR ENDED MARCH 31, 2005 - -------------------------- Sold 933,825 $10,196,270 N/A - -------------------------- Issued in reinvestment of distributions 472,842 5,132,916 - -------------------------- Redeemed (816,638) (8,868,046) - ------------------------------------------------------------------------------------------ Net increase (decrease) 590,029 $ 6,461,140 ========================================================================================== (1) April 1, 2006 through May 31, 2006. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (continued) - ------ 49 Notes to Financial Statements MAY 31, 2006 4. CAPITAL SHARE TRANSACTIONS (CONTINUED) - ------------------------------------------------------------------------------------------ LONG-TERM TAX-FREE HIGH-YIELD MUNICIPAL - ------------------------------------------------------------------------------------------ SHARES AMOUNT SHARES AMOUNT - ------------------------------------------------------------------------------------------ B CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006(1) - -------------------------- Sold 196 $ 2,093 123,399 $1,296,933 - -------------------------- Issued in reinvestment of distributions 762 8,145 4,831 50,768 - -------------------------- Redeemed (3,837) (41,044) (43,215) (454,221) - ------------------------------------------------------------------------------------------ Net increase (decrease) (2,879) $(30,806) 85,015 $ 893,480 ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold N/A 127,879 $1,316,273 - -------------------------- Issued in reinvestment of distributions 3,482 35,901 - -------------------------- Redeemed (44,038) (455,285) - ------------------------------------------------------------------------------------------ Net increase (decrease) 87,323 $ 896,889 ========================================================================================== YEAR ENDED MARCH 31, 2006 - -------------------------- Sold 11,759 $ 128,146 N/A - -------------------------- Issued in reinvestment of distributions 4,486 48,607 - -------------------------- Redeemed (53,456) (576,977) - ------------------------------------------------------------------------------------------ Net increase (decrease) (37,211) $(400,224) ========================================================================================== YEAR ENDED MARCH 31, 2005 - -------------------------- Sold 14,180 $ 155,044 N/A - -------------------------- Issued in reinvestment of distributions 7,998 86,790 - -------------------------- Redeemed (32,686) (355,581) - ------------------------------------------------------------------------------------------ Net increase (decrease) (10,508) $(113,747) ========================================================================================== C CLASS - ------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, 2006(2) - -------------------------- Sold 2,332 $25,011 1,499,384 $15,763,095 - -------------------------- Issued in reinvestment of distributions 10 111 28,473 299,249 - -------------------------- Redeemed -- -- (300,586) (3,158,774) - ------------------------------------------------------------------------------------------ Net increase (decrease) 2,342 $25,122 1,227,271 $12,903,570 ========================================================================================== YEAR ENDED MAY 31, 2005 - -------------------------- Sold N/A 893,109 $ 9,203,406 - -------------------------- Issued in reinvestment of distributions 12,105 125,038 - -------------------------- Redeemed (131,081) (1,352,304) - ------------------------------------------------------------------------------------------ Net increase (decrease) 774,133 $ 7,976,140 ========================================================================================== (1) April 1, 2006 through May 31, 2006. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (2) April 3, 2006 (commencement of sale) through May 31, 2006 for Long-Term Tax-Free. (continued) - ------ 50 Notes to Financial Statements MAY 31, 2006 5. BANK LINE OF CREDIT Arizona Municipal, Florida Municipal, and High-Yield Municipal, along with certain other funds managed by ACIM or American Century Global Investment Management, Inc. (ACGIM), have a $500,000,000 unsecured bank line of credit agreement with JPMCB. The funds may borrow money for temporary or emergency purposes to fund shareholder redemptions. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.50%. The funds did not borrow from the line during the year ended May 31, 2006. 6. RISK FACTORS Arizona Municipal Bond and Florida Municipal Bond concentrate their investments in a single state and therefore may have more exposure to credit risk related to the states of Arizona and Florida, respectively, than a fund with a broader geographical diversification. Income may be subject to state and local taxes and, if applicable, the alternative minimum tax. High-Yield Municipal may concentrate its investments in a certain states and therefore may have more exposure to credit risk related to those states of than a fund with a broader geographical diversification. High-Yield Municipal 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. 7. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended May 31, 2006 and May 31, 2005 (except as noted) were as follows: - -------------------------------------------------------------------------------------------- ARIZONA MUNICIPAL BOND FLORIDA MUNICIPAL BOND - -------------------------------------------------------------------------------------------- 2006 2005 2006 2005 - -------------------------------------------------------------------------------------------- DISTRIBUTIONS PAID FROM - -------------------------------------------------------------------------------------------- Ordinary income $2,283,709 $2,278,480 $1,867,355 $2,157,343 - -------------------------------------------------------------------------------------------- Long-term capital gains $116,927 $13,495 -- -- - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- LONG-TERM TAX-FREE HIGH-YIELD MUNICIPAL - --------------------------------------------------------------------------------------------------------- MAY 31, 2006(1) MARCH 31, 2006(2) MARCH 31, 2005(2) 2006 2005 - --------------------------------------------------------------------------------------------------------- DISTRIBUTIONS PAID FROM - --------------------------------------------------------------------------------------------------------- Ordinary income $235,081 $3,211,639 $5,470,612 $9,545,943 $5,964,223 - --------------------------------------------------------------------------------------------------------- Long-term capital gains -- -- $64,163 -- -- - --------------------------------------------------------------------------------------------------------- (1) Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). (2) Years ended March 31, 2006 and March 31, 2005. 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. (continued) - ------ 51 Notes to Financial Statements MAY 31, 2006 7. FEDERAL TAX INFORMATION (CONTINUED) As of May 31, 2006, the components of investments for federal income tax purposes were as follows: - ---------------------------------------------------------------------------------------------------- ARIZONA FLORIDA LONG-TERM HIGH-YIELD MUNICIPAL BOND MUNICIPAL BOND TAX-FREE MUNICIPAL - ---------------------------------------------------------------------------------------------------- Federal tax cost of investments $56,195,763 $41,919,649 $37,968,412 $241,243,122 ==================================================================================================== Gross tax appreciation of investments $1,557,983 $1,299,305 $ 412,928 $7,031,998 - ------------------------------- Gross tax depreciation of investments (100,668) (29,339) (57,746) (330,359) - ---------------------------------------------------------------------------------------------------- Net tax appreciation (depreciation) of investments $1,457,315 $1,269,966 $ 355,182 $6,701,639 ==================================================================================================== Net tax appreciation (depreciation) on derivatives 624 -- (191,366) -- - ---------------------------------------------------------------------------------------------------- Net tax appreciation (depreciation) $1,457,939 $1,269,966 $ 163,816 $6,701,639 ==================================================================================================== Undistributed exempt income -- -- $27,578 -- - ------------------------------- Accumulated capital losses -- $(295,636) $(690,854) $(2,437,926) - ------------------------------- Capital loss deferrals $(154,439) $(81,454) -- $(32,850) - ---------------------------------------------------------------------------------------------------- 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 expire as follows: - ---------------------------------------------------------------------------------------------------- 2008 2009 2010 2011 2012 2013 2014 - ---------------------------------------------------------------------------------------------------- Florida Municipal Bond -- -- -- -- -- $(295,636) -- - ---------------------------------------------------------------------------------------------------- Long-Term Tax-Free -- -- -- -- $(158,880) $(142,310) $(389,664) - ---------------------------------------------------------------------------------------------------- High-Yield Municipal $(178,014) $(1,090,034) $(323,643) -- $(145,918) $(700,317) -- - ---------------------------------------------------------------------------------------------------- The capital loss deferrals represent net capital losses incurred in the seven-month period ended May 31, 2006. The funds have elected to treat such losses as having been incurred in the following fiscal year for federal income tax purposes. 8. REORGANIZATION PLAN As of the close of business on March 31, 2006, Long-Term Tax-Free acquired all of the net assets of the Mason Street Municipal Bond Fund (Municipal Bond), one fund in a series issued by Mason Street Funds, Inc., pursuant to a plan of reorganization approved by the acquired funds' shareholders on March 15, 2006. In the post-reorganization, Long-Term Tax-Free is maintaining the financial statements and performance history of Municipal Bond. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31. Prior to the reorganization, Municipal Bond had A Class and B Class shares. At the close of business and as a result of the reorganization, A Class shares and B Class shares of the acquired fund were converted to A Class shares and B Class shares, respectively, of Long-Term Tax-Free. A Class and B Class net assets of Municipal Bond before the reorganization were $36,833,546 and $2,080,831, respectively. Immediately after the reorganization, A Class and B Class net assets of Long-Term Tax-Free were $36,833,546 and $2,080,831, respectively. (continued) - ------ 52 Notes to Financial Statements MAY 31, 2006 9. OTHER TAX INFORMATION (UNAUDITED) The following information is provided pursuant to provisions of the Internal Revenue Code. The funds designate exempt interest and capital gain distributions for the fiscal year ended May 31, 2006 (except as noted), as follows: - -------------------------------------------------------------------------------- ARIZONA FLORIDA LONG-TERM HIGH-YIELD MUNICIPAL BOND MUNICIPAL BOND TAX-FREE(1) MUNICIPAL - -------------------------------------------------------------------------------- Exempt interest dividends $2,193,188 $1,876,709 $218,259 $9,464,800 - -------------------------------------------------------------------------------- Long-term capital gains $135,581 -- -- -- - -------------------------------------------------------------------------------- (1) Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period (see Note 8). Arizona Municipal Bond hereby designates $67,552 of qualified short-term capital gains distributions for purposes of Internal Revenue Code Section 871 for the fiscal year ended May 31, 2006. - ------ 53 Arizona Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 - ---------------------------------------------------------------------------------------- INVESTOR CLASS - ---------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ---------------------------------------------------------------------------------------- PER-SHARE DATA - ---------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.96 $10.83 $11.40 $10.89 $10.69 - ---------------------------------------------------------------------------------------- Income From Investment Operations - ---------------------------- Net Investment Income 0.42(1) 0.42 0.41 0.41 0.44 - ---------------------------- Net Realized and Unrealized Gain (Loss) (0.25) 0.13 (0.53) 0.59 0.27 - ---------------------------------------------------------------------------------------- Total From Investment Operations 0.17 0.55 (0.12) 1.00 0.71 - ---------------------------------------------------------------------------------------- Distributions - ---------------------------- From Net Investment Income (0.43) (0.42) (0.41) (0.41) (0.44) - ---------------------------- From Net Realized Gains (0.02) --(2) (0.04) (0.08) (0.07) - ---------------------------------------------------------------------------------------- Total Distributions (0.45) (0.42) (0.45) (0.49) (0.51) - ---------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.68 $10.96 $10.83 $11.40 $10.89 ======================================================================================== TOTAL RETURN(3) 1.59% 5.21% (1.06)% 9.36% 6.74% RATIOS/SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.49% 0.50% 0.51% 0.51% 0.51% - ---------------------------- Ratio of Net Investment Income to Average Net Assets 3.89% 3.86% 3.70% 3.70% 4.04% - ---------------------------- Portfolio Turnover Rate 44% 48% 26% 50% 77% - ---------------------------- Net Assets, End of Period (in thousands) $52,404 $53,203 $60,203 $75,787 $66,327 - ---------------------------------------------------------------------------------------- (1) Computed using average shares outstanding throughout the period. (2) Per-share amount is less than $0.005. (3) 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. - ------ 54 Arizona Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- A CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.96 $10.83 $11.25 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.39(2) 0.40 0.10 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.25) 0.13 (0.42) - -------------------------------------------------------------------------------- Total From Investment Operations 0.14 0.53 (0.32) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.40) (0.40) (0.10) - ------------------------------------------ From Net Realized Gains (0.02) --(3) -- - -------------------------------------------------------------------------------- Total Distributions (0.42) (0.40) (0.10) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.68 $10.96 $10.83 ================================================================================ TOTAL RETURN(4) 1.34% 4.94% (2.87)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.74% 0.75% 0.76%(5) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 3.64% 3.61% 3.63%(5) - ------------------------------------------ Portfolio Turnover Rate 44% 48% 26%(6) - ------------------------------------------ Net Assets, End of Period (in thousands) $3,741 $4,271 $1,523 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (2) Computed using average shares outstanding throughout the period. (3) Per-share amount is less than $0.005. (4) 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. (5) Annualized. (6) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2004. See Notes to Financial Statements. - ------ 55 Arizona Municipal Bond - Financial High lights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- B CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.96 $10.83 $11.25 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.36(2) 0.32 0.08 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.30) 0.13 (0.42) - -------------------------------------------------------------------------------- Total From Investment Operations 0.06 0.45 (0.34) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.32) (0.32) (0.08) - ------------------------------------------ From Net Realized Gains (0.02) --(3) -- - -------------------------------------------------------------------------------- Total Distributions (0.34) (0.32) (0.08) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.68 $10.96 $10.83 ================================================================================ TOTAL RETURN(4) 0.61% 4.19% (3.06)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49% 1.50% 1.51%(5) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 2.89% 2.86% 2.88%(5) - ------------------------------------------ Portfolio Turnover Rate 44% 48% 26%(6) - ------------------------------------------ Net Assets, End of Period (in thousands) $42 $3 $2 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (2) Computed using average shares outstanding throughout the period. (3) Per-share amount is less than $0.005. (4) 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. (5) Annualized. (6) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2004. See Notes to Financial Statements. - ------ 56 Arizona Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- C CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.96 $10.83 $11.25 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.30(2) 0.31 0.08 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.24) 0.13 (0.42) - -------------------------------------------------------------------------------- Total From Investment Operations 0.06 0.44 (0.34) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.32) (0.31) (0.08) - ------------------------------------------ From Net Realized Gains (0.02) --(3) -- - -------------------------------------------------------------------------------- Total Distributions (0.34) (0.31) (0.08) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.68 $10.96 $10.83 ================================================================================ TOTAL RETURN(4) 0.58% 4.15% (3.06)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49% 1.50% 1.51%(5) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 2.89% 2.86% 2.88%(5) - ------------------------------------------ Portfolio Turnover Rate 44% 48% 26%(6) - ------------------------------------------ Net Assets, End of Period (in thousands) $382 $719 $12 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (2) Computed using average shares outstanding throughout the period. (3) Per-share amount is less than $0.005. (4) 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. (5) Annualized. (6) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2004. See Notes to Financial Statements. - ------ 57 Florida Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 - ---------------------------------------------------------------------------------------- INVESTOR CLASS - ---------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ---------------------------------------------------------------------------------------- PER-SHARE DATA - ---------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.81 $10.68 $11.29 $10.73 $10.67 - ---------------------------------------------------------------------------------------- Income From Investment Operations - ---------------------------- Net Investment Income 0.42 0.39 0.42 0.42 0.44 - ---------------------------- Net Realized and Unrealized Gain (Loss) (0.26) 0.13 (0.56) 0.62 0.19 - ---------------------------------------------------------------------------------------- Total From Investment Operations 0.16 0.52 (0.14) 1.04 0.63 - ---------------------------------------------------------------------------------------- Distributions - ---------------------------- From Net Investment Income (0.42) (0.39) (0.42) (0.42) (0.44) - ---------------------------- From Net Realized Gains -- -- (0.05) (0.06) (0.13) - ---------------------------------------------------------------------------------------- Total Distributions (0.42) (0.39) (0.47) (0.48) (0.57) - ---------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.55 $10.81 $10.68 $11.29 $10.73 ======================================================================================== TOTAL RETURN(1) 1.48% 4.88% (1.30)% 9.90% 5.98% RATIOS/SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.49% 0.50% 0.51% 0.51% 0.51% - ---------------------------- Ratio of Net Investment Income to Average Net Assets 3.90% 3.56% 3.82% 3.78% 4.03% - ---------------------------- Portfolio Turnover Rate 28% 44% 59% 45% 75% - ---------------------------- Net Assets, End of Period (in thousands) $40,604 $49,451 $63,142 $70,078 $54,565 - ---------------------------------------------------------------------------------------- (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. - ------ 58 Florida Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- A CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.81 $10.68 $11.11 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.39 0.36 0.09 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.26) 0.13 (0.43) - -------------------------------------------------------------------------------- Total From Investment Operations 0.13 0.49 (0.34) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.39) (0.36) (0.09) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.55 $10.81 $10.68 ================================================================================ TOTAL RETURN(2) 1.23% 4.62% (3.10)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.74% 0.75% 0.76%(3) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 3.65% 3.31% 3.34%(3) - ------------------------------------------ Portfolio Turnover Rate 28% 44% 59%(4) - ------------------------------------------ Net Assets, End of Period (in thousands) $1,380 $2,105 $761 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (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 May 31, 2004. See Notes to Financial Statements. - ------ 59 Florida Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- B CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.81 $10.68 $11.11 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.31 0.28 0.07 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.26) 0.13 (0.43) - -------------------------------------------------------------------------------- Total From Investment Operations 0.05 0.41 (0.36) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.31) (0.28) (0.07) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.55 $10.81 $10.68 ================================================================================ TOTAL RETURN(2) 0.47% 3.83% (3.28)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49% 1.50% 1.51%(3) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 2.90% 2.56% 2.59%(3) - ------------------------------------------ Portfolio Turnover Rate 28% 44% 59%(4) - ------------------------------------------ Net Assets, End of Period (in thousands) $15 $19 $17 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (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 May 31, 2004. See Notes to Financial Statements. - ------ 60 Florida Municipal Bond - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- C CLASS - -------------------------------------------------------------------------------- 2006 2005 2004(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.81 $10.68 $11.11 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------------------ Net Investment Income 0.31 0.28 0.07 - ------------------------------------------ Net Realized and Unrealized Gain (Loss) (0.26) 0.13 (0.43) - -------------------------------------------------------------------------------- Total From Investment Operations 0.05 0.41 (0.36) - -------------------------------------------------------------------------------- Distributions - ------------------------------------------ From Net Investment Income (0.31) (0.28) (0.07) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.55 $10.81 $10.68 ================================================================================ TOTAL RETURN(2) 0.47% 3.84% (3.28)% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49% 1.50% 1.51%(3) - ------------------------------------------ Ratio of Net Investment Income to Average Net Assets 2.90% 2.56% 2.59%(3) - ------------------------------------------ Portfolio Turnover Rate 28% 44% 59%(4) - ------------------------------------------ Net Assets, End of Period (in thousands) $1,570 $1,827 $1,032 - -------------------------------------------------------------------------------- (1) February 27, 2004 (commencement of sale) through May 31, 2004. (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 May 31, 2004. See Notes to Financial Statements. - ------ 61 Long-Term Tax-Free - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED - -------------------------------------------------------------------------------- INVESTOR CLASS - -------------------------------------------------------------------------------- 2006(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.72 - -------------------------------------------------------------------------------- Income From Investment Operations - ----------------------------------------------------------- Net Investment Income 0.06 - ----------------------------------------------------------- Net Realized and Unrealized Gain (Loss) (0.02) - -------------------------------------------------------------------------------- Total From Investment Operations 0.04 - -------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------- From Net Investment Income (0.06) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.70 ================================================================================ TOTAL RETURN(2) 0.42% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.49%(3) - ----------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.85%(3) - ----------------------------------------------------------- Portfolio Turnover Rate 62% - ----------------------------------------------------------- Net Assets, End of Period (in thousands) $25 - -------------------------------------------------------------------------------- (1) April 3, 2006 (commencement of sale) through May 31, 2006. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. 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. See Notes to Financial Statements. - ------ 62 Long-Term Tax-Free - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED - -------------------------------------------------------------------------------- INSTITUTIONAL CLASS - -------------------------------------------------------------------------------- 2006(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.72 - -------------------------------------------------------------------------------- Income From Investment Operations - ----------------------------------------------------------- Net Investment Income 0.07 - ----------------------------------------------------------- Net Realized and Unrealized Gain (Loss) (0.02) - -------------------------------------------------------------------------------- Total From Investment Operations 0.05 - -------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------- From Net Investment Income (0.07) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.70 ================================================================================ TOTAL RETURN(2) 0.45% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.29%(3) - ----------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 4.05%(3) - ----------------------------------------------------------- Portfolio Turnover Rate 62% - ----------------------------------------------------------- Net Assets, End of Period (in thousands) $16,456 - -------------------------------------------------------------------------------- (1) April 3, 2006 (commencement of sale) through May 31, 2006. (2) Total return assumes reinvestment of net investment income and capital gains distributions, if any. 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. See Notes to Financial Statements. - ------ 63 Long-Term Tax-Free - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - ---------------------------------------------------------------------------------------------------- A CLASS - ---------------------------------------------------------------------------------------------------- 2006(1) 2006 2005 2004 2003 2002 - ---------------------------------------------------------------------------------------------------- PER-SHARE DATA - ---------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.72 $10.74 $11.06 $10.98 $10.50 $10.70 - ---------------------------------------------------------------------------------------------------- Income From Investment Operations - -------------------------- Net Investment Income 0.06 0.35(2) 0.33(2) 0.33(2) 0.41(2) 0.44 - -------------------------- Net Realized and Unrealized Gain (Loss) (0.02) (0.03) (0.15) 0.24 0.61 0.01 - ---------------------------------------------------------------------------------------------------- Total From Investment Operations 0.04 0.32 0.18 0.57 1.02 0.45 - ---------------------------------------------------------------------------------------------------- Distributions - -------------------------- From Net Investment Income (0.06) (0.34) (0.33) (0.33) (0.42) (0.45) - -------------------------- From Net Realized Gains -- -- (0.17) (0.16) (0.12) (0.20) - ---------------------------------------------------------------------------------------------------- Total Distributions (0.06) (0.34) (0.50) (0.49) (0.54) (0.65) - ---------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.70 $10.72 $10.74 $11.06 $10.98 $10.50 ==================================================================================================== TOTAL RETURN(3) 0.40% 3.01% 1.63% 5.31% 9.88% 4.26% RATIOS/SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.74%(4) 0.82% 0.84% 0.85% 0.85% 0.85% - -------------------------- Ratio of Operating Expenses to Average Net Assets (Before Expense Waiver) 0.74%(4) 0.82% 0.84% 0.89% 0.93% 1.00% - -------------------------- Ratio of Net Investment Income to Average Net Assets 3.60%(4) 3.21% 3.01% 3.01% 3.78% 4.14% - -------------------------- Ratio of Net Investment Income to Average Net Assets (Before Expense Waiver) 3.60%(4) 3.21% 3.01% 2.97% 3.70% 3.99% - -------------------------- Portfolio Turnover Rate 62% 27% 43% 815%(5) 48% 173% - -------------------------- Net Assets, End of Period (in thousands) $19,288 $36,834 $123,399 $120,606 $107,770 $57,373 - ---------------------------------------------------------------------------------------------------- (1) April 1, 2006 through May 31, 2006. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period. For the years before May 31, 2006, Long-Term Tax-Free's fiscal year was March 31 (see Note 8). (2) Computed using average shares outstanding throughout the period. (3) 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. (4) Annualized. (5) Portfolio turnover rate includes the effect of using U.S. Treasuries in same day trades to manage interest rate risk. The rate would be 238% if this trading activity was excluded from the calculation. Long-Term Tax-Free's advisor intends to manage interest rate risk in the future through the use of futures contracts and other derivatives-related hedging strategies, many of which would not impact the portfolio turnover rate. See Notes to Financial Statements. - ------ 64 Long-Term Tax-Free - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - ---------------------------------------------------------------------------------------------------- B CLASS - ---------------------------------------------------------------------------------------------------- 2006(1) 2006 2005 2004 2003 2002 - ---------------------------------------------------------------------------------------------------- PER-SHARE DATA - ---------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.72 $10.73 $11.06 $10.98 $10.50 $10.70 - ---------------------------------------------------------------------------------------------------- Income From Investment Operations - -------------------------- Net Investment Income 0.05 0.27(2) 0.26(2) 0.26(2) 0.34(2) 0.37 - -------------------------- Net Realized and Unrealized Gain (Loss) (0.02) (0.01) (0.16) 0.24 0.61 --(3) - ---------------------------------------------------------------------------------------------------- Total From Investment Operations 0.03 0.26 0.10 0.50 0.95 0.37 - ---------------------------------------------------------------------------------------------------- Distributions - -------------------------- From Net Investment Income (0.05) (0.27) (0.26) (0.26) (0.35) (0.37) - -------------------------- From Net Realized Gains -- -- (0.17) (0.16) (0.12) (0.20) - ---------------------------------------------------------------------------------------------------- Total Distributions (0.05) (0.27) (0.43) (0.42) (0.47) (0.57) - ---------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.70 $10.72 $10.73 $11.06 $10.98 $10.50 ==================================================================================================== TOTAL RETURN(4) 0.28% 2.42% 0.89% 4.62% 9.16% 3.58% RATIOS/SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49%(5) 1.50% 1.50% 1.50% 1.50% 1.50% - -------------------------- Ratio of Operating Expenses to Average Net Assets (Before Expense Waiver) 1.49%(5) 1.54% 1.52% 1.54% 1.58% 1.65% - -------------------------- Ratio of Net Investment Income to Average Net Assets 2.85%(5) 2.49% 2.36% 2.39% 3.11% 3.49% - -------------------------- Ratio of Net Investment Income to Average Net Assets (Before Expense Waiver) 2.85%(5) 2.45% 2.34% 2.35% 3.03% 3.34% - -------------------------- Portfolio Turnover Rate 62% 27% 43% 815%(6) 48% 173% - -------------------------- Net Assets, End of Period (in thousands) $2,046 $2,081 $2,483 $2,674 $3,533 $1,429 - ---------------------------------------------------------------------------------------------------- (1) April 1, 2006 through May 31, 2006. Long-Term Tax-Free's fiscal year end was changed from March 31 to May 31, resulting in a two-month annual reporting period. For the years before May 31, 2006, Long-Term Tax-Free's fiscal year was March 31 (see Note 8). (2) Computed using average shares outstanding throughout the period. (3) Per-share amount is less than $0.005. (4) 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. (5) Annualized. (6) Portfolio turnover rate includes the effect of using U.S. Treasuries in same day trades to manage interest rate risk. The rate would be 238% if this trading activity was excluded from the calculation. Long-Term Tax-Free's advisor intends to manage interest rate risk in the future through the use of futures contracts and other derivatives-related hedging strategies, many of which would not impact the portfolio turnover rate. See Notes to Financial Statements. - ------ 65 Long-Term Tax-Free - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED - -------------------------------------------------------------------------------- C CLASS - -------------------------------------------------------------------------------- 2006(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.72 - -------------------------------------------------------------------------------- Income From Investment Operations - ----------------------------------------------------------- Net Investment Income 0.05 - ----------------------------------------------------------- Net Realized and Unrealized Gain (Loss) (0.02) - -------------------------------------------------------------------------------- Total From Investment Operations 0.03 - -------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------- From Net Investment Income (0.05) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.70 ================================================================================ TOTAL RETURN(2) 0.26% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.49%(3) - ----------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.85%(3) - ----------------------------------------------------------- Portfolio Turnover Rate 62% - ----------------------------------------------------------- Net Assets, End of Period (in thousands) $25 - -------------------------------------------------------------------------------- (1) April 3, 2006 (commencement of sale) through May 31, 2006. (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. See Notes to Financial Statements. - ------ 66 High-Yield Municipal - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 - ---------------------------------------------------------------------------------------- INVESTOR CLASS - ---------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ---------------------------------------------------------------------------------------- PER-SHARE DATA - ---------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.50 $10.04 $10.25 $9.87 $9.62 - ---------------------------------------------------------------------------------------- Income From Investment Operations - --------------------------- Net Investment Income 0.50 0.51 0.52 0.53 0.53 - --------------------------- Net Realized and Unrealized Gain (Loss) --(1) 0.46 (0.21) 0.38 0.25 - ---------------------------------------------------------------------------------------- Total From Investment Operations 0.50 0.97 0.31 0.91 0.78 - ---------------------------------------------------------------------------------------- Distributions - --------------------------- From Net Investment Income (0.50) (0.51) (0.52) (0.53) (0.53) - ---------------------------------------------------------------------------------------- Net Asset Value, End of Period $10.50 $10.50 $10.04 $10.25 $9.87 ======================================================================================== TOTAL RETURN(2) 4.91% 9.84% 3.07% 9.40% 8.25% RATIOS/SUPPLEMENTAL DATA - ---------------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.62% 0.63% 0.64% 0.64% 0.64% - --------------------------- Ratio of Net Investment Income to Average Net Assets 4.80% 4.92% 5.06% 5.22% 5.39% - --------------------------- Portfolio Turnover Rate 16% 30% 27% 43% 28% - --------------------------- Net Assets, End of Period (in thousands) $84,896 $62,945 $54,340 $53,621 $36,162 - ---------------------------------------------------------------------------------------- (1) Per-share amount is less than $0.005. (2) 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. - ------ 67 High-Yield Municipal - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- A CLASS - -------------------------------------------------------------------------------- 2006 2005 2004 2003(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.50 $10.04 $10.25 $10.06 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------ Net Investment Income 0.48 0.48 0.49 0.17 - ------------------------------ Net Realized and Unrealized Gain (Loss) --(2) 0.46 (0.21) 0.19 - -------------------------------------------------------------------------------- Total From Investment Operations 0.48 0.94 0.28 0.36 - -------------------------------------------------------------------------------- Distributions - ------------------------------ From Net Investment Income (0.48) (0.48) (0.49) (0.17) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.50 $10.50 $10.04 $10.25 ================================================================================ TOTAL RETURN(3) 4.65% 9.56% 2.81% 3.57% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 0.87% 0.88% 0.89% 0.88%(4) - ------------------------------ Ratio of Net Investment Income to Average Net Assets 4.55% 4.67% 4.81% 5.03%(4) - ------------------------------ Portfolio Turnover Rate 16% 30% 27% 43%(5) - ------------------------------ Net Assets, End of Period (in thousands) $129,681 $79,154 $33,335 $2,117 - -------------------------------------------------------------------------------- (1) January 31, 2003 (commencement of sale) through May 31, 2003. (2) Per-share amount is less than $0.005. (3) 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. (4) Annualized. (5) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2003. See Notes to Financial Statements. - ------ 68 High-Yield Municipal - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- B CLASS - -------------------------------------------------------------------------------- 2006 2005 2004 2003(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.50 $10.04 $10.25 $10.06 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------ Net Investment Income 0.40 0.40 0.42 0.15 - ------------------------------ Net Realized and Unrealized Gain (Loss) --(2) 0.46 (0.21) 0.19 - -------------------------------------------------------------------------------- Total From Investment Operations 0.40 0.86 0.21 0.34 - -------------------------------------------------------------------------------- Distributions - ------------------------------ From Net Investment Income (0.40) (0.40) (0.42) (0.15) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.50 $10.50 $10.04 $10.25 ================================================================================ TOTAL RETURN(3) 3.87% 8.75% 2.05% 3.44% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.62% 1.63% 1.64% 1.63%(4) - ------------------------------ Ratio of Net Investment Income to Average Net Assets 3.80% 3.92% 4.06% 4.35%(4) - ------------------------------ Portfolio Turnover Rate 16% 30% 27% 43%(5) - ------------------------------ Net Assets, End of Period (in thousands) $4,468 $3,573 $2,541 $708 - -------------------------------------------------------------------------------- (1) January 31, 2003 (commencement of sale) through May 31, 2003. (2) Per-share amount is less than $0.005. (3) 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. (4) Annualized. (5) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2004. See Notes to Financial Statements. - ------ 69 High-Yield Municipal - Financial Highlights FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MAY 31 (EXCEPT AS NOTED) - -------------------------------------------------------------------------------- C CLASS - -------------------------------------------------------------------------------- 2006 2005 2004 2003(1) - -------------------------------------------------------------------------------- PER-SHARE DATA - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $10.50 $10.04 $10.25 $10.03 - -------------------------------------------------------------------------------- Income From Investment Operations - ------------------------------ Net Investment Income 0.40 0.40 0.43 0.39 - ------------------------------ Net Realized and Unrealized Gain (Loss) --(2) 0.46 (0.21) 0.22 - -------------------------------------------------------------------------------- Total From Investment Operations 0.40 0.86 0.22 0.61 - -------------------------------------------------------------------------------- Distributions - ------------------------------ From Net Investment Income (0.40) (0.40) (0.43) (0.39) - -------------------------------------------------------------------------------- Net Asset Value, End of Period $10.50 $10.50 $10.04 $10.25 ================================================================================ TOTAL RETURN(3) 3.86% 8.74% 2.20% 6.15% RATIOS/SUPPLEMENTAL DATA - -------------------------------------------------------------------------------- Ratio of Operating Expenses to Average Net Assets 1.62% 1.63% 1.54% 1.39%(4) - ------------------------------ Ratio of Net Investment Income to Average Net Assets 3.80% 3.92% 4.16% 4.55%(4) - ------------------------------ Portfolio Turnover Rate 16% 30% 27% 43%(5) - ------------------------------ Net Assets, End of Period (in thousands) $29,862 $16,967 $8,457 $1,454 - -------------------------------------------------------------------------------- (1) July 24, 2002 (commencement of sale) through May 31, 2003. (2) Per-share amount is less than $0.005. (3) 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. (4) Annualized. (5) Portfolio turnover is calculated at the fund level. Percentage indicated was calculated for the year ended May 31, 2003. See Notes to Financial Statements. - ------ 70 Report of Independent Registered Public Accounting Firm To the Trustees of the American Century Municipal Trust and Shareholders of the Arizona Municipal Bond Fund, Florida Municipal Bond Fund, Long-Term Tax-Free Fund and High-Yield Municipal 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 Arizona Municipal Bond Fund, Florida Municipal Bond Fund, Long-Term Tax-Free Fund and High-Yield Municipal Fund (four of the six funds in the American Century Municipal Trust hereafter referred to as the "Funds") at May 31, 2006, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the 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 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 May 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri July 18, 2006 - ------ 71 Management The individuals listed below serve as trustees or officers of the funds. Each trustee serves until his or her successor is duly elected and qualified or until he or she retires. Effective March 2004, mandatory retirement age for independent trustees is 73. However, the mandatory retirement age may be extended for a period not to exceed two years with the approval of the remaining independent trustees. Those listed as interested trustees are "interested" primarily by virtue of their engagement as officers of American Century Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries, including the funds' investment advisor, American Century Investment Management, Inc. (ACIM); the funds' principal underwriter, American Century Investment Services, Inc. (ACIS); and the funds' transfer agent, American Century Services, LLC (ACS). The other trustees (more than three-fourths of the total number) are independent; that is, they have never been employees or officers of, and have no financial interest in, ACC or any of its wholly owned, direct or indirect, subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity for eight registered investment companies in the American Century family of funds. All persons named as officers of the funds also serve in similar capacities for the other 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. INDEPENDENT TRUSTEES - -------------------------------------------------------------------------------- JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 2005 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis Management Company, LLC (April 2004 to present); Partner and Founder, Bay Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware & Freidenrich (1968 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUND: Trustee, Chairman of the Board FIRST YEAR OF SERVICE: 1995 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law and Business, Stanford Law School (1979 to present); Marc and Eva Stern Professor of Law and Business, Columbia University School of Law (1992 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- (continued) - ------ 72 Management INDEPENDENT TRUSTEES (CONTINUED) - -------------------------------------------------------------------------------- KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 2001 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to present); President and Managing Director, Laurel Management Company, LLC (1996 to April 2002) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1941 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 1980 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Oak Hill Platinum Partners, and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1981 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 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 FIRST YEAR OF SERVICE: 2002 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1977 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present); Director, Watson Wyatt Worldwide (2002 to present); Director, Palmsource Inc. (2002 to present) - -------------------------------------------------------------------------------- JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUND: Trustee FIRST YEAR OF SERVICE: 1984 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner, Windy Hill Productions, LP (educational software) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Quintus Corporation (automation solutions, 1995 to present) - -------------------------------------------------------------------------------- INTERESTED TRUSTEE - -------------------------------------------------------------------------------- WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1955 POSITION(S) HELD WITH FUND: Trustee, President FIRST YEAR OF SERVICE: 1997 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC (September 2000 to present); President, ACC (June 1997 to present). Also serves as: Chief Executive Officer and President, ACIM, ACGIM, ACIS and other ACC subsidiaries; Executive Vice President, ACS; Director, ACC, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - -------------------------------------------------------------------------------- (continued) - ------ 73 Management OFFICERS - -------------------------------------------------------------------------------- JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUND: Executive Vice President FIRST YEAR OF SERVICE: 2005 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC (November 2005 to present); Chief Administrative Officer, ACC (February 2006 to present). Also serves as: President, ACS; Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) - -------------------------------------------------------------------------------- MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUND: Senior Vice President, Treasurer and Chief Financial Officer FIRST YEAR OF SERVICE: 2000 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Assistant Treasurer, ACC (January 1995 to present). Also serves as: Senior Vice President, ACS; Assistant Treasurer, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1958 POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel FIRST YEAR OF SERVICE: 1998 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001 to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior Vice President and General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- CHARLES C.S. PARK, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Vice President and Chief Compliance Officer FIRST YEAR OF SERVICE: 2000 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (March 2005 to present); Vice President, ACS (February 2000 to present); Assistant General Counsel, ACS (January 1998 to March 2005) - -------------------------------------------------------------------------------- ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUND: Controller FIRST YEAR OF SERVICE: 1996 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); Controller-Fund Accounting, ACS (June 1997 to present) - -------------------------------------------------------------------------------- C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUND: Controller(1) FIRST YEAR OF SERVICE: 1996 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present); Controller-Fund Accounting, ACS (June 1997 to present) - -------------------------------------------------------------------------------- JON ZINDEL, 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Tax Officer FIRST YEAR OF SERVICE: 1997 PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (October 2001 to present); Vice President, Corporate Tax, ACS (April 1998 to present). Also serves as: Vice President, ACIM, ACGIM, ACIS and other ACC subsidiaries - -------------------------------------------------------------------------------- (1) Ms. Wade serves in a similar capacity for seven other investment companies advised by ACIM. The SAI has additional information about the funds' trustees and is available without charge, upon request, by calling 1-800-345-2021. (continued) - ------ 74 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and 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 Arizona Municipal Bond, Florida Municipal Bond and High-Yield Municipal Bond (the "funds") and the services provided to the funds 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 funds under the management agreement; * reports on the advisor's activities relating to the wide range of programs and services the advisor provides to the funds and its shareholders on a routine and non-routine basis; * data comparing the cost of owning the funds to the cost of owning a 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 and one special meeting 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. (continued) - ------ 75 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and High-Yield Municipal 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 funds. 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 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. 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 comparing the funds' performance with that of similar funds not managed by the advisor. (continued) - ------ 76 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and High-Yield Municipal 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. Arizona Municipal Bond's performance was above the median of its peer group for the one year period and near the median for the three year period. Florida Municipal Bond's performance was above the median for the one year period and near the median for the three year period. High-Yield Municipal Bond's performance was above the median for the one year period and near the median for the three year period. The board discussed Arizona Municipal Bond's and High-Yield Municipal Bond's performance with the advisor and was satisfied with the efforts being undertaken by the advisor. 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 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 and that the advisor was not implicated in the industry scandals of 2003 and 2004. 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 rein- (continued) - ------ 77 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and High-Yield Municipal vestment 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 complex and the funds 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 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 the funds 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. (continued) - ------ 78 Approval of Management Agreements for Arizona Municipal Bond, Florida Municipal Bond, and High-Yield Municipal 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 the 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. CONCLUSIONS OF THE DIRECTORS As a result of this process, the independent 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 funds and the advisor is fair and reasonable in light of the services provided and should be renewed. - ------ 79 Approval of Management Agreement for 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 each year. 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 its board's approval or renewal of any advisory agreements within the fund's most recently completed fiscal half-year period. At a meeting held December 2, 2005, the board of directors unanimously approved the initial management agreement for Long-Term Tax-Free (the "fund"). In advance of the board's consideration, American Century Investment Management, Inc. (the "Advisor") provided information concerning the proposed fund. The information considered and the discussions held at the meeting included, but were not limited to: * the nature, extent, and quality of investment management, shareholder services, and other services to be provided to the fund under the management agreement; * the wide range of programs and services to be provided by the Advisor to the fund and its shareholders on a routine and non-routine basis; and * data comparing the cost of owning the Investor Class of the fund to the cost of owning similar funds. Consistent with the Advisor's business strategy for all of its funds, the Advisor proposed a unified management fee. Under the unified fee structure, the Advisor charges a single, all-inclusive fee for providing all services for the management and operation of the fund, except brokerage expenses, taxes, interest, the fees and expenses of the fund's independent directors (including their independent legal counsel), and extraordinary costs. Under the unified fee structure, the Advisor is responsible for providing all investment advisory, custody, audit, administrative, compliance, record keeping, marketing, and shareholder services, or arranging and supervising third parties who provide such services. By contrast, most other fund groups 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 other advisors charge to their shareholders may be increased without shareholder approval. The Advisor and the board believe that the unified fee structure is a benefit to fund shareholders because it clearly discloses 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. (continued) - ------ 80 Approval of Management Agreement for Long-Term Tax-Free The Advisor proposed to place the fund in a category fee schedule that, when combined with the fund's complex fee schedule, would result in an initial unified management fee for the fund of 0.49%. In evaluating the proposed fee, the board reviewed data comparing the total expense ratio of the fund's Investor Class to the total expense ratios of other funds in its applicable fund universe. The proposed fee level is in the lowest quartile of the total expense ratios of its peer group. The proposed fee also contains breakpoints that reduce fees as the overall fund complex and the fund increase in size. When considering the proposed fee, the board considered the entrepreneurial risk that the Advisor assumes in launching a new fund. In particular, they considered the effect of the unified management fee structure and the fact that the total expense ratio of the fund would require the Advisor to assume a substantial part of the start-up costs of the fund and imposes on the Advisor the risk that the fund will grow to a level that will become profitable at the proposed fee level. The board is aware that the Advisor is likely to lose money on the fund initially and the board will receive information in connection with the annual contract renewal process that will enable it to determine when, if ever, adjustments to one or more breakpoints may be appropriate. Finally, the board considered the position that the new fund would take in the line up of the American Century family of funds and benefits to shareholders of existing funds of the broadened product offering. Not specifically discussed, but important in the decision to approve the management agreement, is the directors' familiarity with the Advisor. The board of directors oversees and evaluates on a continuous basis the nature and quality of all services the Advisor performs for other funds within the American Century complex. As such, the directors have confidence in the Advisor's integrity and competence in providing services to funds. In their deliberations, the directors did not identify any single factor as being all important or controlling, and each director attributed different weights to various factors. However, based on their evaluation of all material factors and assisted by the advice of independent legal counsel, the board, including the independent directors, concluded that the overall arrangements between the fund and the Advisor, as provided in the management agreement, were fair and reasonable in light of the services to be performed and should be approved. - ------ 81 Share Class Information Four classes of shares are authorized for sale by Arizona Municipal Bond, Florida Municipal Bond and High-Yield Municipal: Investor Class, A Class, B Class, and C Class. Five classes of shares are authorized for sale by Long-Term Tax-Free: Investor Class, Institutional Class, A Class, B Class, and C Class. The total expense ratio of Institutional Class shares is lower than that of Investor Class shares. The total expense ratios of A Class, B Class, and C Class shares are higher than that of Investor Class. 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. INSTITUTIONAL CLASS shares are available to large investors such as endowments, foundations, and retirement plans, and to financial intermediaries serving these investors. This class recognizes the relatively lower cost of serving institutional customers and others who invest at least $5 million ($3 million for endowments and foundations) in an American Century fund or at least $10 million in multiple funds. In recognition of the larger investments and account balances and comparatively lower transaction costs, the unified management fee of Institutional Class shares is 0.20% less than the unified management fee of Investor Class shares. 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. (continued) - ------ 82 Share Class Information 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. - ------ 83 Additional Information RETIREMENT ACCOUNT INFORMATION As required by law, any distributions you receive from an IRA or certain 403(b), 457 and qualified plans [those not eligible for rollover to an IRA or to another qualified plan] are subject to federal income tax withholding, unless you elect not to have withholding apply. Tax will be withheld on the total amount withdrawn even though you may be receiving amounts that are not subject to withholding, such as nondeductible contributions. In such case, excess amounts of withholding could occur. You may adjust your withholding election so that a greater or lesser amount will be withheld. If you don't want us to withhold on this amount, you must notify us to not withhold the federal income tax. Even if you plan to roll over the amount you withdraw to another tax-deferred account, the withholding rate still applies to the withdrawn amount unless we have received notice not to withhold federal income tax prior to the withdrawal. You may notify us in writing or in certain situations by telephone or through other electronic means. You have the right to revoke your withholding election at any time and any election you make may remain in effect until revoked by filing a new election. Remember, even if you elect not to have income tax withheld, you are liable for paying income tax on the taxable portion of your withdrawal. If you elect not to have income tax withheld or you don't have enough income tax withheld, you may be responsible for payment of estimated tax. You may incur penalties under the estimated tax rules if your withholding and estimated tax payments are not sufficient. State tax will be withheld if, at the time of your distribution, your address is within one of the mandatory withholding states and you have federal income tax withheld. State taxes will be withheld from your distribution in accordance with the respective state rules. 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 Web site at americancentury.com and on the Securities and Exchange Commission's Web site 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 Web site 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 Web site at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 84 Index Definitions The following indices are used to illustrate investment market, sector, or style performance or to serve as a fund performance comparison. 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 of 2-4 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 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 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 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. - ------ 85 Notes - ------ 86 Notes - ------ 87 Notes - ------ 88 [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 MUNICIPAL TRUST 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. The American Century Investments logo, American Century and American Century Investments are service marks of American Century Proprietary Holdings, Inc. American Century Investment Services, Inc., Distributor 0607 (c)2006 American Century Proprietary Holdings, Inc. SH-ANN-50107N All rights reserved. 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) 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 2005: $69,555 FY 2006: $118,626 (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 2005: $0 FY 2006: $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 2005: $0 FY 2006: $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 2005: $15,677 FY 2006: $20,431 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 2005: $0 FY 2006: $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 2005: $0 FY 2006: $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 2005: $0 FY 2006: $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 2005: $170,677 FY 2006: $249,764 (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 MUNICIPAL TRUST /s/ William M. Lyons By: ------------------------------------ Name: William M. Lyons Title: President Date: July 28, 2006 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/ William M. Lyons ------------------------------------ Name: William M. Lyons Title: President (principal executive officer) Date: July 28, 2006 By: /s/ Maryanne L. Roepke ------------------------------------ Name: Maryanne L. Roepke Title: Sr. Vice President, Treasurer, and Chief Financial Officer (principal financial officer) Date: July 28, 2006