UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-4025 ---------------------------------------------- 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) CHARLES A. ETHERINGTON, 4500 MAIN STREET, KANSAS CITY, MISSOURI 64111 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 816-531-5575 ----------------------------- Date of fiscal year end: 05-31 -------------------------------------------------------- Date of reporting period: 05-31-2007 ------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. [front cover] AMERICAN CENTURY INVESTMENTS Annual Report May 31, 2007 [photo of summer] Tax-Free Money Market Fund Tax-Free Bond Fund [american century investments logo and text logo] OUR MESSAGE TO YOU We have the privilege of providing you with the annual report for the American Century(R) Tax-Free Money Market and Tax-Free Bond funds for the 12 months ended May 31, 2007. We've gathered this information to help you monitor your investment. Another resource is our website, americancentury.com, where we post company news, portfolio commentaries, investment views, and other communications about portfolio strategy, personal finance, government policy, and the markets. Speaking of company news, American Century Investments announced the following leadership changes. Chief Investment Officer Mark Mallon retired in the first quarter of 2007, after nearly a decade with us. Effective January 1, 2007, former International Equity CIO Enrique Chang became CIO with responsibilities for the entire investment management operation. Prior to joining us in 2006, Enrique worked at Munder Capital Management, serving the last four years as president and CIO. Before that, he held a series of senior investment management positions at Vantage Global Advisors, J. & W. Seligman and Co., and General Reinsurance Corp. In January 2007, President and Chief Executive Officer Bill Lyons announced his retirement after nearly 20 years at American Century Investments. Chief Financial Officer Jonathan Thomas was appointed president and CEO effective March 1, 2007. Since 2005, Jonathan has overseen our financial area, with additional responsibilities in purchasing, facilities, real estate, information technology, operations, and human resources. Before joining us, Jonathan was a managing director and global chief operating officer of Morgan Stanley's investment division, and worked in senior leadership roles for Bank of America, Boston Financial Services, and Fidelity Investments. We wish to thank Mark and Bill for their many years of distinguished service -- American Century Investments is a stronger company as a result of their hard work. And we firmly believe their roles in our firm have transitioned to two talented, committed, and experienced top executives. [photo of James E. Stowers, Jr.] /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AND CO-CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. TABLE OF CONTENTS Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . 2 U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . . . . . . 2 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . 12 Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Portfolio Composition by Credit Rating . . . . . . . . . . . . . 13 Top Five States & Territories. . . . . . . . . . . . . . . . . . 13 Schedule of Investments . . . . . . . . . . . . . . . . . . . . . 14 Shareholder Fee Examples. . . . . . . . . . . . . . . . . . . . . 28 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . 30 Statement of Operations . . . . . . . . . . . . . . . . . . . . . 31 Statement of Changes in Net Assets. . . . . . . . . . . . . . . . 32 Notes to Financial Statements . . . . . . . . . . . . . . . . . . 33 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . 39 Report of Independent Registered Public Accounting Firm . . . . . 43 OTHER INFORMATION Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Share Class Information . . . . . . . . . . . . . . . . . . . . . 47 Additional Information. . . . . . . . . . . . . . . . . . . . . . 48 Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . 49 The opinions expressed in the Market Perspective and each of the Portfolio Commentaries reflect those of the portfolio management team as of the date of the report, and do not necessarily represent the opinions of American Century or any other person in the American Century organization. Any such opinions are subject to change at any time based upon market or other conditions and American Century disclaims any responsibility to update such opinions. These opinions may not be relied upon as investment advice and, because investment decisions made by American Century funds are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of any American Century fund. Security examples are used for representational purposes only and are not intended as recommendations to purchase or sell securities. Performance information for comparative indices and securities is provided to American Century by third party vendors. To the best of American Century's knowledge, such information is accurate at the time of printing. MARKET PERSPECTIVE [Photo of Chief Investment Officer] By David MacEwen, Chief Investment Officer, Fixed Income FED PAUSE TRIGGERED BOND RALLY U.S. bonds mostly rallied during the 12 months ended May 31, 2007. The bulk of the rally came in the second half of 2006, following the last of the Federal Reserve's (the Fed's) 17 short-term interest rate increases from June 2004 to June 2006. The Fed's decision to hold rates steady beginning with its August 2006 meeting came in the face of falling energy prices and moderating economic growth and inflation expectations at that time. During the reporting period, U.S. gross domestic product (GDP) growth slowed to an annual rate below 2.5%, less than the 3-4% rate of the past several calendar years. Meanwhile, near-term inflation worries flared for about nine months as the trailing 12-month percentage change in core consumer prices (without volatile food and energy prices) lingered at five-year highs before finishing May at 2.2%. But forecasts of moderate GDP growth going forward limited longer-term inflation fears, and equity market volatility in the first quarter of 2007 helped push down yields. These competing factors meant the yield on the generic 10-year AAA municipal note spent the last half of the reporting period fluctuating in a narrow range between about 3.70% and 3.90%. BONDS BENEFITED, MUNICIPALS RALLIED Mixed economic reports, stock market volatility, and subprime mortgage woes boosted demand for Treasury bonds, driving yields down across the Treasury yield curve. The Treasury curve flattened, with little difference in yield between two- and 10-year notes. The municipal curve flattened as well, as short yields edged up while demand for longer-term notes and bonds pushed their yields lower. Though all sectors of the U.S. bond market posted gains, the broad investment-grade municipal market underperformed the broad investment-grade taxable market, which is typical when Treasurys rally. High-yield municipals outperformed investment-grade municipals for the 12 months--yield-seeking investors continued to embrace high-yield bonds as a result of the flat shape of the curve. By the end of May, high-yield municipal bonds had racked up 19 consecutive months of gains, according to Lehman Brothers. U.S. Fixed-Income Total Returns For the 12 months ended May 31, 2007 LEHMAN BROTHERS MUNICIPAL MARKET INDICES Municipal Bond 4.84% 3-Year Municipal Bond 3.58% 5-Year General Obligation (GO) 3.55% Long-Term Municipal Bond 6.28% Non-Investment-Grade (High-Yield) 8.95% TAXABLE MARKET RETURNS Lehman Brothers U.S. Aggregate Index 6.66% Lehman Brothers U.S. Treasury Index 5.86% 3-Month Treasury Bill 5.23% 10-Year Treasury Note 5.97% - ------ 2 PERFORMANCE Tax-Free Money Market Total Returns as of May 31, 2007 Average Annual Returns 10 Since Inception 1 year 5 years years(1) Inception(1) Date INVESTOR CLASS 3.26% 1.75% 2.42% 3.31% 7/31/84 AVERAGE RETURN OF LIPPER'S TAX-EXEMPT MONEY MARKET FUNDS(2) 2.95% 1.45% 2.11% 3.16%(3) -- Fund's Lipper Ranking(2) as of 5/31/07 13 of 112 5 of 92 5 of 75 5 of 27(3) -- as of 6/30/07 13 of 108 5 of 88 5 of 72 5 of 27(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) 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 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 ammericancentury.com. Investment income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax (AMT). Capital gains are not exempt from state and federal income tax. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. The 7-day current yield more closely reflects the current earnings of the fund than the total return. - ------ 3 PORTFOLIO COMMENTARY Tax-Free Money Market Portfolio Managers: Todd Pardula and Steven Permut PERFORMANCE SUMMARY Tax-Free Money Market returned 3.26% for the 12 months ended May 31, 2007, surpassing the 2.95% average return of the 112 funds in Lipper Inc.'s tax-exempt money market funds category. The fund's one-year return ranked in the top 12% of its Lipper group, and its performance rankings over longer time horizons are even better (see the previous page). HIGHER MUNICIPAL MONEY MARKET RATES Municipal money market rates rose during the one-year period; Tax-Free Money Market's seven-day current yield increased from 3.02% to 3.41%. Rates were relatively steady for much of the period, reflecting the Federal Reserve's (the Fed's) stable interest rate policy. After 17 short-term interest rate hikes between June 2004 and June 2006, the Fed held rates unchanged through the end of May 2007. Slowing economic activity during most of the period, driven primarily by a sharp downturn in the housing market, led to expectations of a rate cut, but the Fed stood pat as core inflation (excluding food and energy) remained above the Fed's 1-2% comfort level. Most of the increase in municipal money market rates occurred during the last two months of the reporting period. Yields spiked higher in mid-April, as they often do around tax time because many investors take money out of municipal money market funds to pay their taxes. However, rates remained at these higher levels through the end of the period thanks to an abundant supply of municipal money market securities resulting from higher tender option bond issuance. Over the past year, issuance of tender option bonds--a type of synthetic floating-rate security--has increased dramatically, which has helped temper seasonal fluctuations in municipal money market yields. PORTFOLIO STRATEGY Floating-rate municipal notes continued to comprise the bulk of the portfolio--in excess of 90% throughout the one-year period. This positioning, especially in a rising interest rate environment, helped the portfolio outperform its Lipper peer group over the last 12 months. Our ability to scour the market for floating-rate notes that offer the most attractive yields has also contributed to the fund's longer-term outperformance. Yields as of May 31, 2007 7-Day Current Yield 3.41% 7-Day Effective Yield 3.46% 7-Day Tax-Equivalent Current Yields(1) 25.00% Tax Bracket 4.55% 28.00% Tax Bracket 4.74% 33.00% Tax Bracket 5.09% 35.00% Tax Bracket 5.25% (1) The tax brackets indicated are for federal taxes only. Actual tax-equivalent yields may be lower, if alternative minimum tax is applicable. - ------ 4 Tax-Free Money Market Given our emphasis on floating-rate securities, the fund's weighted average maturity remained fairly short during the period. The average maturity was around 10 days at the start of the period, but we extended it notably on two occasions in 2006--investing in one-year tax and revenue anticipation notes issued by the Philadelphia School District in June, and adding one-year notes issued by the City of Milwaukee in December. These moves caused the average maturity to lengthen out to more than 30 days in mid-December. Since then, however, we allowed the average maturity to gradually decline, and it ended the period at 15 days. STARTING POINT FOR NEXT REPORTING PERIOD We expect the Fed to hold short-term interest rates steady through the end of 2007. The Fed is being pulled in two different directions--rising inflation figures suggest the need for higher rates, but the slumping housing market points toward lower rates. Consequently, the Fed will likely remain on hold in the coming months. Within the portfolio, we plan to maintain our current positioning, with a continued emphasis on floating-rate notes and a relatively short weighted average maturity. Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 A-1+ 80% 67% A-1 20% 33% Portfolio Composition by Maturity % of fund % of fund investments investments as of as of 5/31/07 11/30/06 1-30 days 96% 93% 31-90 days -- -- 91-180 day 1% -- More than 180 days 3% 7% - ------ 5 SCHEDULE OF INVESTMENTS Tax-Free Money Market MAY 31, 2007 Principal Amount ($ IN THOUSANDS) Value Municipal Securities -- 99.3% ALABAMA -- 0.3% $ 800 Mobile Industrial Development Board Rev., (Holnam Inc.), VRDN, 3.90%, 6/6/07 (LOC: Bayerische Landesbank) $ 800 -------- ARIZONA -- 2.4% 6,750 Maricopa County Industrial Development Auth. Rev., (Michael Pylman Dairies), VRDN, 3.92%, 6/7/07 (LOC: LaSalle Bank N.A) 6,750 -------- CALIFORNIA -- 3.8% 2,420 Alameda County Industrial Development Auth. Rev., (BAT Properties LLC), VRDN, 3.97%, 6/7/07 (LOC: Bank of the West) 2,420 954 California Economic Development Financing Auth. Rev., (Wesflex Pipe Manufacturing), VRDN, 4.10%, 6/7/07 (LOC: Wells Fargo Bank N.A.) 954 7,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 4.25%, 6/7/07 (LOC: Lloyds TSB Bank plc) (Acquired 6/8/05, Cost $7,000)(1) 7,000 -------- 10,374 -------- COLORADO -- 5.5% 2,985 Arvada Water Enterprise Rev., VRDN, 3.95%, 6/1/07 (FSA) (SBBPA: Dexia Public Finance Bank) 2,985 2,900 City of Thornton Industrial Development Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 2,900 2,100 Colorado Health Facilities Auth. Rev., (Boulder Community Hospital), VRDN, 3.90%, 6/6/07 (LOC: Bank One Colorado N.A.) 2,100 5,800 Colorado Housing & Finance Auth. Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 5,800 1,500 Hotchkiss Industrial Development Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 1,500 -------- 15,285 -------- Principal Amount ($ IN THOUSANDS) Value FLORIDA -- 5.8% $ 5,825 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 3.92%, 6/1/07 (RADIAN) (SBBPA: SunTrust Bank) $ 5,825 4,915 Florida Housing Finance Agency Rev., VRDN, 3.87%, 6/7/07 (SBBPA: Merrill Lynch Capital Services) (Acquired 2/6/04-4/19/04, Cost $4,915)(1) 4,915 4,300 Miami-Dade County Industrial Development Auth. Rev., (Palmer Trinity Private College), VRDN, 3.84%, 6/7/07 (LOC: Keybank N.A.) 4,300 700 Seminole County Industrial Development Auth. Rev., VRDN, 3.96%, 6/7/07 (LOC: Bank of America N.A.) 700 225 Sunshine State Governmental Financing Commission Rev., VRDN, 3.95%, 6/1/07 (Ambac) (SBBPA: Dexia Credit Local) 225 -------- 15,965 -------- GEORGIA -- 2.0% 5,495 Fulton County Development Auth. Rev., (Automatic Data Processing), VRDN, 3.80%, 6/15/07 5,495 -------- HAWAII -- 1.8% 3,000 Hawaii Pacific Health Rev., Series 2004 B, (Department Budget & Finance), VRDN, 3.85%, 6/6/07 (RADIAN) (SBBPA: Bank of Nova Scotia) 3,000 2,000 Hawaii Pacific Health Rev., Series 2004 B2, (Department Budget & Finance), VRDN, 3.85%, 6/6/07 (RADIAN) (SBBPA: Bank of Nova Scotia) 2,000 -------- 5,000 -------- IDAHO -- 1.1% 3,000 Lincoln County Industrial Development Corp. Rev., (Double A Dairy), VRDN, 3.92%, 6/7/07 (LOC: Northwest Farm Credit and Bank of America N.A.) 3,000 -------- - ------ 6 Tax-Free Money Market Principal Amount ($ IN THOUSANDS) Value INDIANA -- 9.6% $ 2,300 Indianapolis Local Public Improvement Bank Bonds Rev., Series 2005 G-3, (Waterworks), VRDN, 3.78%, 6/7/07 (MBIA) (SBBPA: Depfa Bank plc) $ 2,300 2,800 Jasper County Industrial Development Rev., (Newberry Farms LLC), VRDN, 3.92%, 6/7/07 (LOC: Farm Credit Services America and Bank of the West) 2,800 5,130 La Porte Industrial Development Rev., (KKO Realty), VRDN, 3.92%, 6/7/07 (LOC: Bank of New York) 5,130 1,515 Morgan County Rev., Series 2002 A, (Morgan Hospital & Medical Center), VRDN, 3.89%, 6/7/07 (LOC: Fifth Third Bank) 1,515 11,545 Morgan County Rev., Series 2002 B, (Morgan Hospital & Medical Center), VRDN, 3.84%, 6/7/07 (LOC: Fifth Third Bank) 11,545 3,250 Vincennes Economic Development Rev., (Grandview Care Inc.), VRDN, 4.08%, 6/7/07 (LOC: Bank One N.A.) 3,250 -------- 26,540 -------- KENTUCKY -- 0.7% 1,000 Murray Industrial Building Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 1,000 1,000 Winchester Industrial Building Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 1,000 -------- 2,000 -------- LOUISIANA -- 9.4% 13,000 Jefferson Sales Tax District Rev., VRDN, 3.86%, 6/7/07 (Ambac) (SBBPA: JPMorgan Chase Bank) 13,000 2,800 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., (Trinity Episcopal School), VRDN, 3.86%, 6/6/07 (LOC: Whitney National Bank and SunTrust Bank) 2,800 Principal Amount ($ IN THOUSANDS) Value $10,000 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., Series 2006 A, (Capital and Equipment Acquisition Program), VRDN, 3.86%, 6/7/07 (Ambac) (SBBPA: BNP Paribas) $ 10,000 -------- 25,800 -------- MARYLAND -- 0.3% 725 Maryland Economic Development Corp. Rev., Series 2002 B, (Federation of American Societies), VRDN, 3.86%, 6/6/07 (LOC: SunTrust Bank) 725 -------- MASSACHUSETTS -- 2.5% 4,900 Massachusetts Development Finance Agency Rev., (Wentworth Technology Institute), VRDN, 3.84%, 6/7/07 (RADIAN) (SBBPA: Bank of New York) 4,900 2,000 Massachusetts Development Finance Agency Rev., Series 2004 A, (Northfield Mount Hermon), VRDN, 3.84%, 6/7/07 (RADIAN) (SBBPA: Fleet National Bank) 2,000 -------- 6,900 -------- MICHIGAN -- 0.2% 600 Detroit Rev., Series 2006 A, (Sewage Disposal System), VRDN, 3.78%, 6/7/07 (FGIC) (SBBPA: Depfa Bank plc) 600 -------- MINNESOTA -- 4.6% 6,140 Dakota County Community Development Agency Rev., (Catholic Finance Corp.), VRDN, 3.90%, 6/6/07 (LOC: U.S. Bank N.A.) 6,140 6,500 East Grand Forks Rev., (American Crystal Sugar Co.), VRDN, 3.92%, 6/7/07 (LOC: Cobank ACB and Wachovia Bank N.A.) 6,500 -------- 12,640 -------- MISSISSIPPI -- 0.9% 2,570 Mississippi Business Finance Corp. Rev., Series 2004 B, VRDN, 3.88%, 6/7/07 (LOC: Wells Fargo Bank N.A.) 2,570 -------- - ------ 7 Tax-Free Money Market Principal Amount ($ IN THOUSANDS) Value MISSOURI -- 7.1% $ 6,700 Jackson County Industrial Development Auth. Rev., (Linda Hall Library), VRDN, 3.88%, 6/7/07 (LOC: Commerce Bank N.A.) $ 6,700 2,480 Kansas City Industrial Development Auth. Rev., (Plaza Manor Nursing), VRDN, 3.91%, 6/7/07 (LOC: First National Bank of Omaha and Comerica Bank) 2,480 1,060 Missouri Development Finance Board Rev., (J & J Enterprises), VRDN, 3.84%, 6/6/07 (LOC: Commerce Bank N.A.) 1,060 9,250 Missouri Health & Educational Facilities Auth. Rev., (Pembroke Hill School), VRDN, 3.88%, 6/7/07 (LOC: Commerce Bank N.A.) 9,250 -------- 19,490 -------- NEW YORK -- 0.7% 1,895 New York City Industrial Development Agency Civic Facility Rev., (1998 Peninsula Hospital Center), VRDN, 4.08%, 6/7/07 (LOC: JPMorgan Chase Bank) 1,895 -------- NORTH CAROLINA -- 0.5% 1,310 University of North Carolina System Pool Rev., Series 2006 A, 4.00%, 10/1/07 (MBIA) 1,312 -------- OHIO -- 0.5% 1,435 County of Hamilton Rev., Series 2006 A, (Sales Tax), 4.00%, 12/1/07 1,438 -------- PENNSYLVANIA -- 4.3% 5,750 Philadelphia School District Tax & Revenue Anticipation Notes GO, Series 2006 A, 4.50%, 6/29/07 (State Aid Withholding) (LOC: Bank of America N.A.) 5,753 6,000 Puttable Floating Option Tax-Exempt Receipts, VRDN, 3.84%, 6/7/07 (LIQ FAC: Merrill Lynch Capital Services) (Acquired 3/1/07, Cost $6,000)(1) 6,000 -------- 11,753 -------- Principal Amount ($ IN THOUSANDS) Value SOUTH CAROLINA -- 4.2% $ 3,500 BB&T Municipal Trust, VRDN, 3.85%, 6/7/07, (LOC: Branch Banking & Trust) (LIQ FAC: Branch Banking & Trust) (Acquired 5/24/07, Cost $3,500)(1) $ 3,500 8,150 South Carolina Jobs Economic Development Auth Rev., (Greenville Technical College), VRDN, 3.90%, 6/7/07 (LOC: SunTrust) 8,150 -------- 11,650 -------- TENNESSEE -- 4.8% 7,880 Bradley County Industrial Development Board Rev., (Kroger Co.), VRDN, 3.91%, 6/7/07 (LOC: U.S. Bank N.A.) 7,880 4,015 Memphis Health Educational & Housing Facility Board Rev., (Not-For-Profit Multifamily Housing Acquisition Program), VRDN, 3.98%, 6/7/07 (SBBPA: AIG SunAmerica Life Assurance Co.) 4,015 1,400 Sevier County Public Building Auth. Rev., (Local Government Public Improvement), VRDN, 3.92%, 6/1/07, (Ambac) (SBBPA: Depfa Bank plc) 1,400 -------- 13,295 -------- TEXAS -- 15.7% 13,700 Brazos Harbor Industrial Development Corp. Rev., (BASF Corporation), VRDN, 3.95%, 6/6/07 13,700 10,000 Crawford Education Facilities Corp. Rev., (University Package System A), VRDN, 3.85%, 6/7/07 (LOC: BNP Paribas) 10,000 5,500 Gulf Coast Industrial Development Auth. Rev., (Petrounited Term Inc.), VRDN, 3.86%, 6/7/07 (LOC: BNP Paribas) 5,500 3,000 Hale County Industrial Development Corp. Rev., (Struikmans), VRDN, 3.92%, 6/7/07 (LOC: Farm Credit Services America and Bank of the West) 3,000 4,000 Hale County Industrial Development Corp. Rev., (White River Ranch), VRDN, 3.92%, 6/7/07 (LOC: Wells Fargo Bank N.A.) 4,000 - ------ 8 Tax-Free Money Market Principal Amount ($ IN THOUSANDS) Value $ 5,380 Muleshoe Economic Development Corp. Rev., (John Lyle & Grace Ajean), VRDN, 3.92%, 6/7/07 (LOC: Wells Fargo Bank N.A.) $ 5,380 2,000 Upper Trinity Regional Water District, 3.65%, 6/18/07 (LOC: Bank of America N.A) 2,000 -------- 43,580 -------- VIRGINIA -- 0.8% 2,100 Bristol Industrial Development Auth. Rev., (Bristol Health Care Center Inc.), VRDN, 3.85%, 6/1/07 (LOC: Regions Bank) 2,100 -------- WASHINGTON -- 5.1% 14,000 Washington Health Care Facilities Auth. Rev., (Swedish Health Services), VRDN, 3.85%, 6/6/07 (LOC: Citibank N.A.) (Acquired 3/9/07, Cost $14,000)(1) 14,000 -------- WEST VIRGINIA -- 1.5% 4,000 West Virginia Economic Development Auth. Rev., (Collins Hardwood Co.), VRDN, 3.92%, 6/7/07 (LOC: Bank of America N.A. and American AG Credit) 4,000 -------- WISCONSIN -- 3.2% 7,000 City of Milwaukee GO, Series 2006 S11, 3.70%, 1/2/08 7,000 1,905 Wisconsin Health & Educational Facilities Auth. Rev., Series 2006 A, (Marshfield Clinic), VRDN, 3.85%, 6/7/07 (LIQ FAC: Merrill Lynch Capital Services) (Acquired 1/19/06, Cost $1,905)(1) 1,905 -------- 8,905 -------- Principal Amount ($ IN THOUSANDS) Value TOTAL INVESTMENT SECURITIES -- 99.3% $273,862 -------- OTHER ASSETS AND LIABILITIES -- 0.7% 1,871 -------- TOTAL NET ASSETS -- 100.0% $275,733 ======== Notes to Schedule of Investments Ambac = Ambac Assurance Corporation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation LIQ FAC = Liquidity Facilities LOC = Letter of Credit MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2007. (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, 2007 was $37,320 (in thousands), which represented 13.5% of total net assets. None of the restricted securities were considered illiquid. See Notes to Financial Statements. - ------ 9 PERFORMANCE Tax-Free Bond Total Returns as of May 31, 2007 Average Annual Returns 10 Since Inception 1 year 5 years years Inception Date INVESTOR CLASS 4.08% 3.87% 4.83% 5.36% 3/2/87 LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 3.55% 3.51% 4.63% 5.46%(1) -- AVERAGE RETURN OF LIPPER'S INTERMEDIATE MUNICIPAL DEBT FUNDS(2) 3.57% 3.49% 4.42% 5.55%(3) -- Investor Class's Lipper Ranking(2) as of 5/31/07 33 of 158 35 of 113 12 of 75 9 of 13(3) -- as of 6/30/07 25 of 158 34 of 112 13 of 74 10 of 13(3) -- Institutional Class 4.28% -- -- 3.44% 4/15/03 Advisor Class 3.82% -- -- 2.90% 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) 2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance - Performance data is total return, and is preliminary and subject to revision. Lipper Rankings - Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 3/31/87, 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. - ------ 10 Tax-Free Bond
Growth of $10,000 Over 10 Years $10,000 investment made May 31, 1997
One-Year Returns Over 10 Years Periods ended May 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Investor Class 7.60% 4.07% 0.44% 10.77% 6.45% 9.31% -0.79% 5.16% 1.87% 4.08% Lehman Brothers Municipal 5-Year GO Index 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% 3.55% 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 PORTFOLIO COMMENTARY Tax-Free Bond Lead Portfolio Managers: Robert Miller and Steven Permut PERFORMANCE SUMMARY Tax-Free Bond returned 4.08%* for the 12 months ended May 31, 2007. By comparison, the Lehman Brothers Municipal 5-Year GO Index returned 3.55%, while the average return of the 158 intermediate municipal debt funds tracked by Lipper Inc. was 3.57%. The portfolio's average annual returns exceeded those of its Lipper group average for the one-, five-, and 10-year periods ended May 31, 2007 (see page 10). The portfolio's absolute return reflected the positive performance of the municipal market as a whole (see the Market Perspective on page 2). Relative to the Lipper group, we believe the portfolio benefited from our duration (price sensitivity to interest rate changes), credit, and state allocation decisions. RATE POSITIONING HELPED We use a relative value approach to investing, looking for securities that we believe offer attractive risk and return characteristics. This means we often put our investment capital to work in bonds trading at attractive valuations or temporarily depressed levels. In regard to the portfolio's rate sensitivity, this approach led us to make modest, tactical adjustments to duration, lengthening it at the beginning of the fiscal year in anticipation of benefiting from a strong technical period for municipal bonds. Having a longer duration helped performance as rates fell (and bond prices rose) for much of the second half of 2006. But with generally healthy economic growth in 2007 and expectations of higher inflation in the market, bonds looked rich after the big rally. As a result, we began to shorten the portfolio's duration, ending the period slightly short of what we believe is our peer group average. GIVING CREDIT We also helped performance by taking an overweight position relative to the peer group in bonds rated BBB and A. The spread, or difference in yield, between these lower-rated bonds and AAA securities tightened to historically low levels during the period. When credit spreads narrow, lower-rated bonds outperform. But this means that we were being compensated with less yield than in the past for taking on additional credit risk. As a result, we've been paring back that overweight position in recent months. In their place we added bonds higher in quality or from sectors likely to hold up better in an economic slowdown. For example, we bought some hospital bonds--these securities aren't sensitive to economic cycles, and were trading at attractive levels because of a temporary increase in supply. Yields as of May 31, 2007 30-Day SEC Yield Investor Class 3.61% Institutional Class 3.82% Advisor Class 3.36% Investor Class 30-Day Tax-Equivalent Yields(1) 25.00% Tax Bracket 4.81% 28.00% Tax Bracket 5.01% 33.00% Tax Bracket 5.39% 35.00% Tax Bracket 5.55% (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 referenced in this commentary are for Investor Class shares. - ------ 12 Tax-Free Bond ADDING YIELD Another way we enhanced returns was by taking advantage of yield discrepancies between bonds issued by different states and U.S. territories. For example, we increased our holdings in Illinois and California municipal securities at attractive levels during stepped-up issuance in October and December, respectively. It also helped to maintain an underweight position in Florida bonds, whose performance was challenged by a large amount of supply at the same time the state eliminated its intangibles tax, reducing demand. It's also worth mentioning that we ended the reporting period with about 7% of assets in very short-term Puerto Rico commercial paper. These securities skew the portfolio's overall credit quality down because of their BBB rating. However, we felt they offered an excellent risk/reward profile because they have money market-like maturities but yields comparable to even the longest-term municipal bonds. STARTING POINT FOR NEXT REPORTING PERIOD "We continue to focus on the fund's repeatable, multi-layered investment process, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," says portfolio manager Robert Miller. "We're also working hard to position the portfolio for slower economic growth. This means we're looking at lengthening duration slightly, trading up in credit quality, and shifting into more defensive sectors, such as hospital bonds, when we think we can add them at attractive relative values." Portfolio Composition by Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 AAA 63% 66% AA 9% 10% A 7% 7% BBB 21% 17% Top Five States & Territories as of May 31, 2007 % of net % of net assets as of assets as of 5/31/07 11/30/06 Puerto Rico 9.2% 2.0% Washington 7.5% 8.7% Texas 7.0% 7.8% Arizona 6.5% 5.7% California 6.3% 4.7% - ------ 13 SCHEDULE OF INVESTMENTS Tax-Free Bond MAY 31, 2007 Principal Amount ($ IN THOUSANDS) Value Municipal Securities -- 93.0% ALABAMA -- 0.8% $ 865 Alabama Water Pollution Control Auth., 5.75%, 8/15/18 (Ambac) $ 919 190 East Central Industrial Development Auth. Rev., 5.25%, 9/1/08, Prerefunded at 100% of Par (Ambac)(1) 194 810 East Central Industrial Development Auth. Rev., 5.25%, 9/1/13 (Ambac) 825 645 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 703 840 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 916 1,035 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 1,124 790 Helena Utilities Board Rev., 5.75%, 4/1/12, Prerefunded at 101% of Par (MBIA)(1) 857 -------- 5,538 -------- ALASKA -- 0.2% 1,125 Borough of Aleutians East Rev., (Aleutian Pribilof Islands Inc.), 5.00%, 6/1/20 (ACA) 1,160 -------- ARIZONA -- 6.5% 935 Arizona Board of Regents COP, Series 2006 A, (University of Arizona), 5.00%, 6/1/18 (Ambac) 996 1,275 Arizona Health Facilities Auth. Rev., (Blood Systems Inc.), 4.00%, 4/1/12 1,260 1,175 Arizona Health Facilities Auth. Rev., (Blood Systems Inc., 4.50%, 4/1/16 1,173 3,000 Arizona Health Facilities Auth. Rev., Series 2007 A, (Banner Health), 5.00%, 1/1/17 3,174 5,000 Arizona Health Facilities Auth. Rev., Series 2007 A, (Banner Health), 5.00%, 1/1/25(2) 5,156 7,500 Arizona Health Facilities Auth. Rev., Series 2007 B, (Banner Health), VRDN, 4.40%, 7/2/07 7,500 1,000 Arizona Tourism & Sports Auth. Rev., (Baseball Training Facilities), 5.00%, 7/1/11 1,029 Principal Amount ($ IN THOUSANDS) Value $ 1,000 Arizona Tourism & Sports Auth. Rev., (Baseball Training Facilities), 5.00%, 7/1/12 $ 1,033 2,000 Arizona Tourism & Sports Auth. Rev., Series 2003 A, (Multipurpose Stadium Facility), 5.25%, 7/1/17 (MBIA) 2,128 2,130 Energy Management Services LLC Rev., (Arizona State University - Main Campus), 4.50%, 7/1/12 (MBIA) 2,195 1,155 Maricopa County Gilbert Unified School District No. 41 GO, 5.75%, 7/1/11 (FSA) 1,239 2,415 Maricopa County Saddle Mountain Unified School District No. 90 GO, Series 2003 A, 5.25%, 7/1/11 2,514 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%, 3/1/10, Prerefunded at 100% of Par (MBIA)(1) 1,056 2,155 Mohave County Industrial Development Auth., Series 2004 A, (Mohave Prison), 5.00%, 4/1/14 (XLCA) 2,278 1,200 Pima County Indian Oasis-Baboquivari Unified School District No. 40, Series 2002 A, 4.60%, 7/1/13 (MBIA) 1,240 2,600 Pima County Tucson Unified School District No. 1 GO, 4.625%, 7/1/13 (FSA)(2) 2,690 3,970 Pinal County COP, 5.00%, 12/1/25(2) 4,067 1,000 Queen Creek Improvement District No. 1 Special Tax Rev., 5.00%, 1/1/16 1,026 3,085 South Tucson Municipal Property Corp. Rev., 5.50%, 6/1/24(2) 3,200 -------- 47,048 -------- CALIFORNIA -- 6.3% 7,500 California GO, 5.00%, 6/1/26(2) 7,797 1,505 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.00%, 2/1/15 1,553 - ------ 14 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,000 California Municipal Finance Auth. COP, (Community Hospitals of Central California Obligated Group), 5.00%, 2/1/17 $ 1,029 1,000 California Public Works Board Lease, Series 1994 A, (Various University of California Projects), 6.20%, 10/1/08 1,002 1,000 California Statewide Communities Development Auth. Rev., Series 2002 E, (Kaiser Permanente), 4.70%, 6/1/09 1,016 230 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.00%, 10/1/12 (FSA)(1) 243 845 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.00%, 10/1/12 (FSA)(1) 894 430 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.25%, 10/1/13, Prerefunded at 101% of Par (FSA)(1) 468 1,570 California Statewide Communities Development Auth. Water & Waste Rev., Series 2004 A, (Pooled Financing Program), 5.25%, 10/1/19 (FSA) 1,691 3,000 Foothill-De Anza Community College District GO, Series 2007 A, (Election of 2006), 5.00%, 8/1/22 (Ambac)(2) 3,193 1,250 Foothill-De Anza Community College District GO, Series 2007 B, (Election of 2006), 5.00%, 8/1/17 (Ambac) 1,340 2,000 Foothill-De Anza Community College District GO, Series 2007 B, (Election of 2006), 5.00%, 8/1/22 (Ambac) 2,129 2,000 Foothill-De Anza Community College District GO, Series 2007 B, (Election of 2006), 5.00%, 8/1/27 (Ambac) 2,117 2,100 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/16 2,173 Principal Amount ($ IN THOUSANDS) Value $ 1,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 4.50%, 6/1/17 $ 992 2,500 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A-1, 5.00%, 6/1/17 2,580 1,070 Hesperia Unified School District COP, (2007 Capital Improvement), 5.00%, 2/1/17 (Ambac) 1,149 3,000 Imperial Irrigation District COP, (Water Systems), 5.50%, 7/1/29 (Ambac)(2) 3,189 2,200 Manteca Unified School District GO, 5.25%, 8/1/14, Prerefunded at 100% of Par (FSA)(1) 2,390 1,000 Plumas Unified School District GO, 5.25%, 8/1/20 (FSA) 1,107 2,145 San Francisco Uptown Parking Corporation Rev., (Union Square), 5.50%, 7/1/15 (MBIA) 2,299 1,000 San Francisco Uptown Parking Corporation Rev., (Union Square), 6.00%, 7/1/20 (MBIA) 1,093 2,000 San Francisco Uptown Parking Corporation Rev., (Union Square), 6.00%, 7/1/31 (MBIA) 2,171 1,575 San Marcos Public Facilities Auth. Tax Allocation Rev., Series 2006 A (Project Area No. 3), 5.00%, 8/1/20 (Ambac) 1,673 -------- 45,288 -------- COLORADO -- 2.4% 1,100 Arapahoe County Water & Wastewater Public Improvement District GO, Series 2002 B, 5.75%, 12/1/17 (MBIA) 1,194 900 Colorado Educational & Cultural Facilities Auth. Rev., (University Facilities-Northwest Nazarene), 4.75%, 11/1/10 913 800 Colorado Educational & Cultural Facilities Auth. Rev., (University Facilities-Northwest Nazarene), 4.60%, 11/1/16 788 1,000 Colorado Health Facilities Auth. Rev., (The Evangelical Lutheran Good Samaritan Society), 5.25%, 6/1/20 1,044 - ------ 15 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,300 Colorado Health Facilities Auth. Rev., (The Evangelical Lutheran Good Samaritan Society), 5.25%, 6/1/21 $ 1,354 450 Colorado Water Resources & Power Development Auth. Rev., Series 2000 A, 6.25%, 9/1/10, Prerefunded at 100% of Par(1) 483 50 Colorado Water Resources & Power Development Auth. Rev., Series 2000 A, 6.25%, 9/1/16 54 1,430 Denver West Metropolitan District GO, 5.25%, 12/1/24 1,471 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) 1,093 1,100 Eagle Bend Metropolitan District No. 2 GO, 5.25%, 12/1/23 (RADIAN) 1,151 1,020 El Paso County School District No 8 & Fountain-Fort Carson School District Finance Corp. COP, 4.25%, 12/15/13 (Ambac) 1,035 1,545 North Range Metropolitan District No. 1 GO, 5.00%, 12/15/24 (ACA) 1,595 5,000 University of Colorado Regents COP, 6.00%, 12/1/22 (MBIA-IBC)(2) 5,348 -------- 17,523 -------- CONNECTICUT -- 1.5% 2,150 City of Bridgeport GO, Series 2004 A, 5.25%, 8/15/14, Prerefunded at 100% of Par (MBIA)(1) 2,330 5,000 Connecticut GO, Series 2006 C, 5.00%, 6/1/14(2) 5,339 2,595 Connecticut GO, Series 2006 D, 5.00%, 11/1/15 2,792 -------- 10,461 -------- DISTRICT OF COLUMBIA -- 0.4% 1,385 District of Columbia GO, Series 1999 B, 5.50%, 6/1/09 (FSA) 1,430 1,155 District of Columbia Rev., (Gonzaga College High School), 5.20%, 7/1/12 (FSA) 1,198 -------- 2,628 -------- Principal Amount ($ IN THOUSANDS) Value FLORIDA -- 0.9% $ 225 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 4.00%, 6/1/07 (RADIAN) (SBBPA: SunTrust Bank) $ 225 1,000 Halifax Hospital Medical Center Rev., Series 2006 A, 5.25%, 6/1/16 1,049 3,495 Halifax Hospital Medical Center Rev., Series 2006 A, 5.25%, 6/1/17 3,657 1,000 Orlando Utilities Commission Water & Electric Rev., Series 1989 D, 6.75%, 10/1/17(1) 1,175 -------- 6,106 -------- GEORGIA -- 1.1% 5,000 Fulton County Development Auth. Rev., (Morehouse College), 5.00%, 12/1/27 (Ambac) 5,278 1,250 Fulton County Development Auth. Rev., Series 2001 A, (TUFF/Atlanta Housing, LLC Project at Georgia State University), 5.50%, 9/1/18 (Ambac) 1,347 255 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/09, Prerefunded at 100% of Par (MBIA-IBC/GO of Participants)(1) 262 20 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/11, Prerefunded at 100 of Par (MBIA-IBC)(1) 21 615 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/12 (MBIA-IBC) 657 110 Georgia Municipal Electric Power Auth. Rev., Series 1991 V, 6.50%, 1/1/12 (MBIA-IBC)(1) 120 -------- 7,685 -------- HAWAII -- 0.1% 500 Maui County GO, Series 2000 A, 6.50%, 3/1/10, Prerefunded at 101% of Par (FGIC)(1) 539 -------- IDAHO -- 0.1% 1,000 Blaine County Hailey School District No. 61 GO, 5.00%, 7/30/10 (School Bond Guarantee) 1,037 -------- - ------ 16 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value ILLINOIS -- 5.7% $ 2,000 Bedford Park GO, Series 2004 A, 5.25%, 12/15/20 (FSA) $ 2,149 4,000 Chicago O'Hare International Airport Rev., Series 1993 A, (Senior Lien), 5.00%, 1/1/12 (MBIA-IBC)(2) 4,174 1,015 City of Chicago Rev., Series 2006 A, 5.00%, 11/1/13 (Ambac) 1,076 3,310 City of Chicago Rev., Series 2006 A, 5.00%, 11/1/14 (Ambac)(2) 3,527 2,000 Illinois Dedicated Tax Rev., (Civic Center), 6.25%, 12/15/20 (Ambac) 2,356 595 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.00%, 5/15/08 601 655 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.125%, 5/15/10 672 400 Illinois Development Finance Auth. Rev., Series 2001 B, (Midwestern University), 5.75%, 5/15/11, Prerefunded at 101% of Par(1) 430 1,225 Illinois Finance Auth. Rev., (Newman Foundation at the University of Illinois), 5.00%, 2/1/27 (RADIAN) 1,261 1,775 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/09 1,796 1,000 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/10 1,016 2,785 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/11 2,836 3,535 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/13 3,619 4,095 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/15 4,197 1,140 Illinois Health Facilities Auth. Rev., Series 1992 C, (Evangelical Hospital), 6.75%, 4/15/12(1) 1,230 Principal Amount ($ IN THOUSANDS) Value $ 1,000 Illinois Regional Transportation Auth. Rev., Series 1990 A, 7.20%, 11/1/20 (Ambac) $ 1,222 930 Kane County Community Unit School District No. 304 GO, 6.20%, 1/1/24 (FSA) 1,063 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) 1,125 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) 1,245 70 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/17 (MBIA) 76 75 Ogle Lee & De Kalb Counties Township High School District No. 212 GO, 6.00%, 12/1/18 (MBIA) 81 1,000 Southwestern Illinois Development Auth. Rev., (Triad School District No. 2), 5.00%, 10/1/18 (MBIA/GO of District) 1,067 1,250 Town of Cicero GO, Series 2005 A, 5.25%, 1/1/20 (XLCA) 1,337 1,000 Town of Cicero GO, Series 2005 A, 5.25%, 1/1/21 (XLCA) 1,069 1,000 University of Illinois COP, (Utility Infrastructure), 5.75%, 8/15/08 (MBIA) 1,023 1,000 University of Illinois COP, Series 2006 A, (Academic Facilities), 5.00%, 3/15/16 (Ambac) 1,067 -------- 41,315 -------- INDIANA -- 2.9% 1,355 City of Anderson Rev., (Anderson University), 5.00%, 10/1/24 1,371 1,000 Hamilton Southeastern Consolidated School Building Corp. Rev., (Hamilton County), 4.00%, 1/15/15 (FSA/State Aid Withholding) 997 1,000 Hamilton Southeastern Consolidated School Building Corp. Rev., (Hamilton County), 5.00%, 1/15/16 (FSA/State Aid Withholding) 1,069 - ------ 17 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,000 Hamilton Southeastern Consolidated School Building Corp. Rev., (Hamilton County), 4.25%, 7/15/20 (FSA/State Aid Withholding) $ 992 1,405 Hammond Multi-School Building Corp. Rev., (First Mortgage), 5.00%, 7/15/14 (FGIC/State Aid Withholding) 1,493 1,520 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/17 (FSA) 1,629 1,600 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/18 (FSA) 1,710 1,680 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/19 (FSA) 1,790 1,075 Indiana Health & Educational Facilities Finance Auth. Rev., (Clarian Health Obligation Group B), 5.00%, 2/15/16 1,115 1,900 Indiana Health Facilities Financing Auth. Hospital Rev., (Holy Cross Health System Corp.), 5.375%, 12/1/12 (MBIA) 1,945 220 Indiana Transportation Finance Auth. Rev., Series 1990 A, 7.25%, 6/1/11, Prerefunded at 100% of Par(1) 241 780 Indiana Transportation Finance Auth. Rev., Series 1990 A, 7.25%, 6/1/15 911 1,435 Indianapolis Local Public Improvement Bond Bank Rev., Series 2002 A, 5.00%, 7/1/12 (MBIA) 1,509 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) 1,608 1,650 Valparaiso Middle Schools Building Corp. Rev., (First Mortgage), 5.75%, 7/15/11, Prerefunded at 100% of Par (FGIC)(1) 1,766 1,000 Zionsville Community Schools Building Corp., (First Mortgage), 5.75%, 1/15/12, Prerefunded at 100% of Par (FGIC/State Aid Withholding)(1) 1,079 -------- 21,225 -------- Principal Amount ($ IN THOUSANDS) Value IOWA -- 0.5% $ 1,485 Iowa Finance Auth. Rev., Series 2006 A, (Development Care Initiatives), 5.25%, 7/1/13 $ 1,534 1,690 Iowa Finance Auth. Rev., Series 2006 A, (Development Care Initiatives), 5.25%, 7/1/16 1,749 -------- 3,283 -------- KANSAS -- 0.4% 1,280 Wichita Hospital Facilities Rev., Series 2001 III, 5.25%, 11/15/13 1,338 1,195 Wichita Hospital Facilities Rev., Series 2001 III, 5.50%, 11/15/16(2) 1,259 -------- 2,597 -------- LOUISIANA -- 0.6% 1,740 Louisiana Local Government Environmental Facilities & Community Development Auth. Rev., (Ascension Parish Library), 5.25%, 4/1/23 (Ambac) 1,853 1,105 Louisiana Public Facilities Auth. Rev., Series 2006 A, (Black & Gold Facilities), 4.00%, 7/1/13 (CIFG) 1,109 1,205 Louisiana Public Facilities Auth. Rev., Series 2006 A, (Black & Gold Facilities), 5.00%, 7/1/15 (CIFG) 1,283 -------- 4,245 -------- MARYLAND -- 0.4% 2,000 Maryland Economic Development Corp. Student Housing Rev., Series 2007 A, (Towson University), 5.25%, 7/1/30 2,069 1,000 Maryland Economic Development Corp. Student Housing Rev., Series 2007 A, (Towson University), 5.25%, 7/1/37 1,030 -------- 3,099 -------- MASSACHUSETTS -- 0.5% 2,500 Massachusetts GO, Series 2006 D, 5.00%, 8/1/14 2,661 885 Massachusetts Health & Educational Facilities Auth. Rev., Series 1992 F, 6.25%, 7/1/12 (Ambac) 934 -------- 3,595 -------- - ------ 18 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value MICHIGAN -- 4.4% $ 3,500 Detroit GO, Series 2004 A-1, 5.25%, 4/1/23 (Ambac)(2) $ 3,724 1,485 Grand Valley State University Rev., 5.75%, 12/1/10, Prerefunded at 100% of Par (FGIC)(1) 1,576 1,265 Kalamazoo Public Schools GO, 4.00%, 5/1/13 (FSA) 1,273 1,250 Kalamazoo Public Schools GO, 5.00%, 5/1/15 (FSA) 1,337 1,545 Kalamazoo Public Schools GO, 5.25%, 5/1/16 (FSA) 1,690 5,000 Michigan Building Auth. Rev., Series 2003 I, (Facilities Program), 5.25%, 10/15/11 (FSA)(2) 5,284 2,345 Michigan Higher Education Facilities Auth. Rev., (Limited Obligation-Hillsdale College), 5.00%, 3/1/26 2,405 1,070 Pontiac City School District GO, 5.00%, 5/1/13 (XLCA) 1,132 1,110 Pontiac City School District GO, 5.00%, 5/1/14 (XLCA) 1,182 1,260 Pontiac City School District GO, 5.00%, 5/1/15 (XLCA) 1,348 1,425 Pontiac City School District GO, 5.00%, 5/1/16 (XLCA) 1,532 1,595 Pontiac City School District GO, 5.00%, 5/1/17 (XLCA) 1,708 575 Taylor GO, 5.00%, 9/1/11 (MBIA) 601 2,010 Wayne Charter County Airport Rev., Series 2002 C, 5.00%, 12/1/11 (FGIC) 2,099 2,215 Wayne Charter County Airport Rev., Series 2002 C, 5.375%, 12/1/13 (FGIC) 2,370 2,335 Wayne Charter County Airport Rev., Series 2002 C, 5.375%, 12/1/14 (FGIC) 2,493 -------- 31,754 -------- MINNESOTA -- 0.2% 1,500 Minnesota Higher Education Facilities Auth. Rev., Series 2005-6G, (Saint John University), 5.00%, 10/1/12 1,578 -------- MISSISSIPPI -- 1.9% 1,150 Harrison County School District, GO, 5.00%, 10/1/24 (FSA)(3) 1,236 1,565 Mississippi Development Bank Special Obligation Rev., Series 2006 A, (Biloxi, Mississippi), 5.00%, 11/1/15 (Ambac) 1,671 Principal Amount ($ IN THOUSANDS) Value $ 1,645 Mississippi Development Bank Special Obligation Rev., Series 2006 A, (Biloxi, Mississippi), 5.00%, 11/1/16 (Ambac) $ 1,763 1,000 Mississippi Development Bank Special Obligation Rev., Series 2006 A, (Municipal Energy Agency Power Supply), 5.00%, 3/1/17 (XLCA) 1,063 4,620 Mississippi Development Bank Special Obligation Rev., Series 2007 A, 5.00%, 7/1/19 (Ambac) 4,985 1,195 University of Southern Mississippi Rev., Series 2006 A, 5.00%, 3/1/17 (FSA) 1,274 1,940 University of Southern Mississippi Rev., Series 2006 A, 5.00%, 3/1/18 (FSA) 2,063 -------- 14,055 -------- MISSOURI -- 2.5% 1,425 Jackson County Public Building Corp. Rev., Series 2006 A, (Capital Improvements), 5.00%, 12/1/15 (MBIA) 1,523 1,100 Lee's Summit Industrial Development Auth. Senior Living Facilities Rev., Series 2007 A, (John Knox Village Obligated Group), 5.00%, 8/15/16 1,131 2,420 Lee's Summit Industrial Development Auth. Senior Living Facilities Rev., Series 2007 A, (John Knox Village Obligated Group), 5.00%, 8/15/17 2,487 2,775 Missouri Development Finance Board, Series 2000 A, (Midtown Redevelopment), 5.75%, 4/1/10, Prerefunded at 100% of Par (MBIA)(1)(2) 2,917 2,415 Missouri Health & Educational Facilities Auth. Rev., Series 1998 A, (Park Lane Medical Center), 5.60%, 1/1/15 (MBIA)(1) 2,536 3,145 Missouri Joint Municipal Electric Utility Commission Rev., (Plum Point), 5.00%, 1/1/16 (MBIA)(2) 3,374 3,030 Missouri State Highways & Transit Commission Rev., Series 2006 A, 5.00%, 5/1/13(2) 3,210 - ------ 19 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,000 St. Louis Municipal Finance Corp. Rev., Series 2006 A, (Carnahan Courthouse), 4.00%, 2/15/17 (Ambac) $ 993 -------- 18,171 -------- NEVADA -- 0.5% 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) 1,661 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)(1) 1,998 -------- 3,659 -------- NEW HAMPSHIRE -- 0.9% 1,660 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/11 1,700 680 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/12 698 1,030 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/13 1,059 3,000 New Hampshire Health & Education Facilities Auth. Rev., Series 2004 A, (Kendal at Hanover), 5.00%, 10/1/18(2) 3,045 -------- 6,502 -------- NEW JERSEY -- 5.5% 4,605 New Jersey Healthcare Facilities Auth. Rev., (AtlantiCare Regional Medical Center) 5.00%, 7/1/25(3) 4,746 4,235 New Jersey Transit Corporation COP, 5.00%, 10/1/12 (FSA)(2) 4,451 5,595 New Jersey Transit Corporation COP, 5.00%, 10/1/13 (FSA)(2) 5,915 7,400 New Jersey Transportation Trust Fund Auth. Rev., Series 2004 B, 5.25%, 12/15/12 (FGIC)(2) 7,896 15,000 New Jersey Transportation Trust Fund Auth. Rev., Series 2006 A, 5.25%, 12/15/20(2) 16,507 -------- 39,515 -------- Principal Amount ($ IN THOUSANDS) Value NEW MEXICO -- 1.5% $ 2,340 City of Clayton Rev., (Jail Project), 5.00%, 11/1/10 (CIFG) $ 2,415 6,675 Los Alamos County Inc. Rev., Series 2004 A, 5.00%, 7/1/11 (FSA)(2) 6,967 1,415 San Juan County Gross Receipts Tax Rev., Series 2001 A, 5.75%, 9/15/21 (Ambac) 1,528 -------- 10,910 -------- NEW YORK -- 3.9% 2,975 City of New York GO, Series 2002 B, 5.25%, 8/1/09 (CIFG)(2) 3,064 2,885 City of New York GO, Series 2002 C, 5.25%, 8/1/09 (CIFG)(2) 2,971 5,000 City of New York GO, Series 2003 I, 5.75%, 3/1/13, Prerefunded at 100% of Par(1)(2) 5,482 5,195 City of New York GO, Series 2004 D, 5.00%, 11/1/17 (FSA)(2) 5,534 4,000 City of New York GO, Series 2006 J1, 5.00%, 6/1/18(2) 4,236 2,000 New York City Transitional Finance Auth. Rev., Series 2005 A1, 5.00%, 11/1/10 2,077 1,440 New York Dormitory Auth. Rev., Series 1990 A, (UNIC Educational Facilities), 7.50%, 5/15/13 (MBIA-IBC) 1,706 1,000 New York Dormitory Auth. Rev., Series 2005 F, 5.00%, 3/15/12 (FSA) 1,050 1,125 New York Dormitory Auth. Rev., Series 2006 A, (Department of Education), 5.00%, 7/1/15 1,198 1,000 Niagara Falls Bridge Commission Toll Rev., Series 1993 B, 5.25%, 10/1/15 (FGIC) 1,061 -------- 28,379 -------- NORTH CAROLINA -- 1.5% 1,000 Charlotte Airport Rev., Series 2004 A, 5.25%, 7/1/24 (MBIA) 1,061 2,000 City of Raleigh Combined Enterprise System Rev., Series 2006 A, 5.00%, 3/1/17 2,147 - ------ 20 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 4,150 North Carolina Medical Care Commission Rev., Series 2004 A, (Health Care Housing - ARC Projects), 5.50%, 10/1/24 $ 4,425 1,000 North Carolina Municipal Power Agency No. 1 Catawba Electric Rev., 6.00%, 1/1/10 (MBIA) 1,053 2,000 North Carolina Municipal Power Agency No. 1 Catawba Electric Rev., Series 2003 A, 5.50%, 1/1/13 2,138 -------- 10,824 -------- NORTH DAKOTA -- 0.2% 1,500 Grand Forks Health Care System Rev., (Altru Health System Obligation Group), 7.125%, 8/15/24 1,637 -------- OHIO -- 2.0% 500 Erie County Hospital Facilities Rev., Series 2002 A, (Firelands Regional Medical Center), 4.50%, 8/15/07 500 1,150 Mad River Local School District GO, (Classroom Facilities), 5.75%, 12/1/12, Prerefunded at 100% of Par (FGIC)(1) 1,257 1,700 Milford Exempt Village School District GO, (School Improvement), 6.00%, 12/1/11, Prerefunded at 100% of Par (FSA)(1) 1,852 3,325 Milford Exempt Village School District GO, (School Improvement), 5.50%, 12/1/30 (FSA) 3,872 1,005 Ohio GO, Series 2005 A, (Infrastructure Improvement), 5.00%, 9/1/11 1,051 1,365 Ohio GO, Series 2005 A, (Infrastructure Improvement), 5.00%, 9/1/12 1,439 750 Ohio Higher Educational Facility Commission Rev., Series 1990 B, (Case Western Reserve University), 6.50%, 10/1/20 903 1,505 Summit County GO, 5.75%, 12/1/12, Prerefunded at 101% of Par (FGIC)(1) 1,654 1,550 Tri Valley Local School District GO, 5.75%, 6/1/12, Prerefunded at 100% of Par (FGIC)(1) 1,682 -------- 14,210 -------- Principal Amount ($ IN THOUSANDS) Value OKLAHOMA -- 2.9% $ 1,000 Comanche County Hospital Auth. Rev., 5.00%, 7/1/11 (RADIAN) $ 1,037 1,525 Comanche County Hospital Auth. Rev., 5.00%, 7/1/12 (RADIAN) 1,589 1,730 Durant Community Facilities Auth. GO, 5.75%, 11/1/24 (XLCA) 1,917 1,135 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/10 1,158 500 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/12 514 1,640 McClain County Economic Development Auth. Rev, (Newcastle Public Schools), 5.00%, 9/1/13 1,693 1,300 Oklahoma County Finance Auth. Rev., (Western Heights Public Schools), 4.00%, 9/1/10 (Assured Guaranty) 1,307 1,610 Pottawatomie County Facilities Auth. Rev., (Shawnee Public Schools), 5.00%, 9/1/13 1,664 1,730 Pottawatomie County Facilities Auth. Rev., (Shawnee Public Schools), 5.00%, 9/1/14 1,784 1,710 Pottawatomie County Facilities Auth. Rev., (Shawnee Public Schools), 5.00%, 9/1/15 1,758 1,130 Pottawatomie County Facilities Auth. Rev., (Shawnee Public Schools), 5.00%, 9/1/16 1,160 5,225 Tulsa County Industrial Auth. Rev., Series 2005 C, 5.00%, 5/15/10 (FSA)(2) 5,400 -------- 20,981 -------- OREGON -- 1.6% 1,000 City of Eugene GO, (Public Safety Park & Open Space), 4.00%, 6/1/14 (Ambac) 1,007 2,015 Clackamas County School Distrist No. 62 GO, 5.50%, 6/15/10 (School Bond Guarantee) 2,113 2,000 Cow Creek Band of Umpqua Tribe of Indians Rev., Series 2006 C, 5.625%, 10/1/26 (Acquired 6/9/06, Cost $2,000)(4) 2,034 - ------ 21 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 400 Oregon State Facilities Auth. Rev., Series 2005 A, (Linfield College), 5.00%, 10/1/13 $ 418 925 Oregon State Facilities Auth. Rev., Series 2005 A, (Linfield College), 5.00%, 10/1/14 970 4,750 Tri-County Metropolitan Transportation District Rev., (Payroll Tax & Grant Receipt), 4.00%, 5/1/14 (MBIA)(2) 4,752 -------- 11,294 -------- PENNSYLVANIA -- 5.5% 2,250 Allegheny County Industrial Development Auth. Rev., (Residential Resource Inc.), 4.75%, 9/1/14 2,278 2,500 Allegheny County Redevelopment Auth. Tax Allocation, (Pittsburgh Mills), 5.10%, 7/1/14 2,556 1,150 Central Dauphin School District GO, 7.00%, 2/1/16, Prerefunded at 100% of Par (MBIA/State Aid Withholding)(1) 1,401 15,805 City of Pittsburgh GO, Series 2006 B, 5.25%, 9/1/16 (FSA)(2) 17,270 1,500 City of Wilkes-Barre Finance Auth. Rev., (Wilkes University), 5.00%, 3/1/22 1,535 2,580 East Stroudsburg Area School District GO, 7.75%, 9/1/28 (FSA/State Aid Withholding) 3,291 5,000 Geisinger Auth. Health System Rev., VRDN, 4.36%, 8/1/07, resets quarterly at 67% of the 3-month LIBOR plus 0.77% with no caps 5,000 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) 1,069 1,000 Pennsylvania Higher Educational Facilities Auth. Rev., (Philadelphia University), 5.00%, 6/1/22 1,020 1,125 Pennsylvania Higher Educational Facilities Auth. Rev., (Philadelphia University), 5.00%, 6/1/30 1,140 2,975 Philadelphia School District GO, Series 2002 A, 5.25%, 2/1/11 (FSA/State Aid Withholding)(2) 3,114 -------- 39,674 -------- Principal Amount ($ IN THOUSANDS) Value PUERTO RICO -- 2.7% $ 1,450 Puerto Rico Electric Power Auth. Rev., Series 2007 UU, 5.00%, 7/1/26 (CIFG) $ 1,534 3,000 Puerto Rico GO, Series 2006 A, 5.25%, 7/1/26(2) 3,183 3,000 Puerto Rico GO, Series 2006 B, 5.25%, 7/1/17(2) 3,221 575 Puerto Rico Highway & Transportation Auth. Rev., Series 2007 CC, 5.00%, 7/1/14 606 4,830 Puerto Rico Highway & Transportation Auth. Rev., Series 2007 CC, 5.00%, 7/1/16(2) 5,132 2,000 Puerto Rico Infrastructure Financing Auth. Special Tax Rev., Series 2006 B, 5.00%, 7/1/13 2,093 3,700 Puerto Rico Municipal Finance Agency GO, Series 2005 A, 5.00%, 8/1/11(2) 3,832 -------- 19,601 -------- RHODE ISLAND -- 0.5% 1,000 Cranston GO, 6.375%, 11/15/09, Prerefunded at 101% of Par (FGIC)(1) 1,070 2,000 Rhode Island Depositors Economic Protection Corp. Special Obligation Rev., Series 1993 A, 6.25%, 8/1/16 (MBIA)(1) 2,342 -------- 3,412 -------- SOUTH CAROLINA -- 5.5% 2,200 Beaufort County School District GO, Series 2007 A, 5.00%, 3/1/25 (FSA) 2,335 2,310 Beaufort County School District GO, Series 2007 A, 5.00%, 3/1/26 (FSA) 2,448 2,430 Beaufort County School District GO, Series 2007 A, 5.00%, 3/1/27 (FSA) 2,569 2,455 Beaufort County School District GO, Series 2007 A, 5.00%, 3/1/28 (FSA) 2,594 2,685 Beaufort County School District GO, Series 2007 A, 5.00%, 3/1/29 (FSA) 2,837 5,455 Charleston Educational Excellence Finance Corp. Rev., (Charleston County School District), 5.00%, 12/1/19(2) 5,743 1,700 Florence Water & Sewer Rev., 7.50%, 3/1/18 (Ambac) 1,876 - ------ 22 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,060 Kershaw County Rev., (School Improvements), 5.00%, 12/1/17 (CIFG) $ 1,127 2,260 Kershaw County Rev., (School Improvements), 5.00%, 12/1/18 (CIFG) 2,398 2,000 Kershaw County Rev., (School Improvements), 5.00%, 12/1/19 (CIFG) 2,117 3,000 Kershaw County Rev., (School Improvements), 5.00%, 12/1/20 (CIFG)(2) 3,168 2,300 Lancaster Educational Assistance Program Inc. Rev., (School District Lancaster County), 5.00%, 12/1/26 2,361 3,500 Laurens County School District No. 55 Rev., 5.25%, 12/1/30(2) 3,679 875 Piedmont Municipal Power Agency Rev., 6.75%, 1/1/19 (FGIC) 1,072 625 Piedmont Municipal Power Agency Rev., 6.75%, 1/1/19 (FGIC)(1) 777 375 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC) 441 485 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC)(1) 574 140 Piedmont Municipal Power Agency Rev., Series 1991 A, 6.50%, 1/1/16 (FGIC)(1) 166 1,095 Spartanburg County Health Services District Inc. Hospital Rev., 5.50%, 4/15/16 (FSA) 1,164 -------- 39,446 -------- TENNESSEE -- 0.6% 4,105 Chattanooga Health Educational & Housing Facility Board Rev., Series 2005 A, (Campus Development Foundation, Inc. Phase I LLC), 5.00%, 10/1/15 4,196 -------- TEXAS -- 7.0% 1,000 Canadian River Municipal Water Auth. Rev., (Conjunctive Use Groundwater), 5.00%, 2/15/19 (Ambac) 1,061 2,035 Cash Special Utility District Rev., 5.25%, 9/1/24 (MBIA) 2,174 340 Clint Independent School District GO, (Unlimited Tax School Building and Refunding Bonds), 6.00%, 2/15/11, Prerefunded at 100% of Par (PSF-GTD)(1) 365 Principal Amount ($ IN THOUSANDS) Value $ 1,475 Clint Independent School District GO, (Unlimited Tax School Building and Refunding Bonds), 6.00%, 2/15/17 (PSF-GTD) $ 1,582 500 Corpus Christi Independent School District GO, 4.00%, 8/15/13 (PSF-GTD) 500 2,000 Donna Independent School District GO, 5.00%, 2/15/15 (PSF-GTD) 2,132 1,115 Edcouch-Elsa Independent School District GO, 5.00%, 2/15/14 (PSF-GTD) 1,183 380 Garza County Public Facility Corp. Rev., 4.50%, 10/1/07 380 400 Garza County Public Facility Corp. Rev., 4.75%, 10/1/08 402 420 Garza County Public Facility Corp. Rev., 4.75%, 10/1/09 423 585 Garza County Public Facility Corp. Rev., 4.75%, 10/1/10 589 610 Garza County Public Facility Corp. Rev., 5.00%, 10/1/11 621 2,015 Garza County Public Facility Corp. Rev., 5.00%, 10/1/13 2,057 1,115 Garza County Public Facility Corp. Rev., 5.25%, 10/1/14 1,163 1,225 Garza County Public Facility Corp. Rev., 5.25%, 10/1/15 1,279 1,145 Garza County Public Facility Corp. Rev., 5.25%, 10/1/16 1,197 1,000 Garza County Public Facility Corp. Rev., 5.50%, 10/1/16 1,064 1,000 Gregg County Health Facilities Development Corp. Rev., Series 2006 A, (Good Shepherd Medical Center), 5.00%, 10/1/16 1,031 735 Harris County Housing Finance Corporation Rev., (Las Americas Apartments), 4.90%, 3/1/11 (FNMA) 743 2,300 Hays Consolidated Independent School District GO, 5.20%, 8/15/11 (PSF-GTD)(5) 1,945 700 Hays Consolidated Independent School District GO, 5.20%, 8/15/11 (PSF-GTD)(1)(5) 594 1,750 Hidalgo County GO, 5.50%, 8/15/12, Prerefunded at 100% of Par (FGIC)(1) 1,882 1,295 Hidalgo County GO, 5.50%, 8/15/12, Prerefunded at 100% of Par (FGIC)(1) 1,393 - ------ 23 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 1,500 Houston Water & Sewer System Rev., Series 1997 C, (Junior Lien), 5.375%, 12/1/07, Prerefunded at 101% of Par (FGIC)(1) $ 1,527 1,375 Kerrville Health Facilities Development Corp. Rev., (Sid Peterson Memorial Hospital), 5.00%, 8/15/11 1,406 1,630 Live Oak GO, 5.25%, 8/1/22 (MBIA) 1,744 1,000 Lubbock Health Facilities Development Corp. Rev., (Lutheran Retirement), 6.00%, 3/20/29 (GNMA) 1,081 1,740 Montgomery County GO, 5.50%, 3/1/14 (Ambac) 1,901 550 Pasadena Independent School District GO, Series 2001 A, 6.05%, 2/15/16 (PSF-GTD) 631 1,500 Pearland Independent School District GO, 6.00%, 2/15/09, Prerefunded at 100% of Par (PSF-GTD)(1) 1,555 2,000 San Antonio Electric and Gas Rev., 7.10%, 2/1/09 (FGIC)(1)(5) 1,877 1,505 Seguin Independent School District GO, 5.25%, 4/1/23 (PSF-GTD) 1,612 2,120 Southside Independent School District GO, Series 2004 A, 5.25%, 8/15/25 (PSF-GTD) 2,272 1,000 Tarrant County Cultural Education Facilities Finance Corp. Retirement Facility Rev., (Air Force Village Obligated Group), 5.00%, 5/15/16 1,031 4,500 Tarrant County Cultural Education Facilities Finance Corp. Rev., Series 2007 A, (Texas Health Resources System), 5.00%, 2/15/24 4,629 950 Texas Public Finance Auth. Building Rev., (Technical College), 6.25%, 8/1/09 (MBIA) 977 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) 1,057 1,265 West Oso Independent School District GO, 5.50%, 8/15/26 (PSF-GTD) 1,358 -------- 50,418 -------- Principal Amount ($ IN THOUSANDS) Value U.S. VIRGIN ISLANDS -- 0.3% $ 2,000 Virgin Islands Public Finance Auth. Rev., Series 1998 A, (Senior Lien), 5.20%, 10/1/09 $ 2,050 -------- UTAH -- 1.4% 1,000 Salt Lake City Hospital Rev., Series 1988 A, (Intermountain Health Corp.), 8.125%, 5/15/15(1) 1,149 1,495 Utah County Municipal Building Auth. Lease Rev., 5.00%, 11/1/09 (Ambac)(1) 1,538 1,915 Utah County Municipal Building Auth. Lease Rev., 5.25%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) 2,019 1,820 Utah County Municipal Building Auth. Lease Rev., 5.25%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,919 1,000 Utah County Municipal Building Auth. Lease Rev., 5.50%, 11/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,065 1,130 West Valley City Municipal Building Auth. Lease Rev., Series 2002 A, 5.00%, 8/1/10 (Ambac) 1,169 1,305 West Valley City Utility Sales Tax Rev., Series 2001 A, 5.50%, 7/15/11, Prerefunded at 100% of Par (MBIA)(1) 1,386 -------- 10,245 -------- VIRGINIA -- 0.3% 1,500 Fairfax County COP, 5.30%, 4/15/23 1,586 1,115 Pittsylvania County GO, Series 2001 B, 5.75%, 3/1/18 (MBIA/State Aid Withholding) 1,207 -------- 2,793 -------- WASHINGTON -- 7.5% 1,000 Benton County Public Utility District No. 1 Rev., Series 2001 A, 5.625%, 11/1/19 (FSA) 1,067 4,750 City of Tacoma Electric System Rev., Series 2001 A, 5.625%, 1/1/11, Prerefunded at 101% of Par (FSA)(1)(2) 5,072 1,000 Cowlitz County Kelso School District No. 458 GO, 5.75%, 12/1/18 (FSA/School Bond Guarantee) 1,081 1,750 Energy Northwest Rev., 4.75%, 7/1/20 (MBIA) 1,800 - ------ 24 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $ 3,500 Energy Northwest Rev., Series 2002 A, (Columbia Generating), 5.75%, 7/1/18 (MBIA)(2) $ 3,787 10,000 Energy Northwest Rev., Series 2002 B, (Columbia Generating), 6.00%, 7/1/18 (Ambac)(2) 10,932 1,000 Grays Harbor County Public Utility District No. 1 Rev., 5.00%, 7/1/23 (FGIC) 1,054 1,555 King County Lake Washington School District No. 414 GO, 5.75%, 12/1/12, Prerefunded at 100% of Par(1) 1,698 1,000 King County Public Hospital District No. 2 GO, (Evergreen Healthcare), 5.00%, 12/1/14 (MBIA) 1,060 1,000 Kitsap County School District No. 303 Bainbridge Island GO, 5.00%, 12/1/17 (MBIA/School Bond Guarantee) 1,068 1,260 Mason County Shelton School District No. 309 GO, 5.625%, 12/1/11, Prerefunded at 100% of Par (FGIC/ School Bond Guarantee)(1) 1,351 1,120 Metropolitan Park District of Tacoma GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,218 1,000 Metropolitan Park District of Tacoma GO, 6.00%, 12/1/11, Prerefunded at 100% of Par (Ambac)(1) 1,088 6,715 Snohomish County Edmonds School District No. 15 GO, 5.00%, 12/1/17 (FGIC/School Bond Guarantee)(2) 7,170 1,720 University of Washington Rev., (Student Facilities Fee), 5.875%, 6/1/10, Prerefunded at 101% of Par (FSA)(1) 1,834 3,240 Washington Economic Development Finance Auth. Rev., Series 2006 J, (Washington Biomedical Research Properties II), 5.00%, 6/1/23 (MBIA)(2) 3,407 1,000 Washington GO, Series 1990 A, 6.75%, 2/1/15 1,139 4,570 Washington Public Power Supply System Rev., Series 1998 A, (Nuclear Project No. 2), 5.00%, 7/1/12 (FSA)(2) 4,717 Principal Amount ($ IN THOUSANDS) Value $ 1,500 Whitman County Pullman School District No. 267 GO, 5.625%, 12/1/16 (FSA/ School Bond Guarantee) $ 1,618 1,675 Yakima County School District No. 208 West Valley GO, 5.00%, 12/1/18 (MBIA/School Bond Guarantee) 1,789 -------- 53,950 -------- WISCONSIN -- 0.9% 1,990 Wisconsin Clean Water Rev., 6.875%, 6/1/11 2,157 2,590 Wisconsin Health & Educational Facilities Auth. Rev., (Aurora Medical Group), 6.00%, 11/15/10 (FSA) 2,765 500 Wisconsin Health & Educational Facilities Auth. Rev., (Blood Center Southeastern), 5.50%, 6/1/24 524 750 Wisconsin Health & Educational Facilities Auth. Rev., (Blood Center Southeastern), 5.75%, 6/1/34 807 -------- 6,253 -------- TOTAL MUNICIPAL SECURITIES (Cost $658,098) 669,879 -------- Short-Term Municipal Securities -- 6.5% PUERTO RICO -- 6.5% 1,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/7/07 1,000 1,678 Government Development Bank of Puerto Rico Rev., 4.10%, 6/7/07 1,678 5,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/12/07 4,999 3,513 Government Development Bank of Puerto Rico Rev., 4.05%, 6/21/07 3,513 2,500 Government Development Bank of Puerto Rico Rev., 4.05%, 6/22/07 2,500 2,071 Government Development Bank of Puerto Rico Rev., 4.10%, 7/12/07 2,070 1,000 Government Development Bank of Puerto Rico Rev., 4.10%, 7/20/07 1,000 4,313 Government Development Bank of Puerto Rico Rev., 4.05%, 7/30/07 4,311 2,200 Government Development Bank of Puerto Rico Rev., 4.10%, 8/9/07 2,199 - ------ 25 Tax-Free Bond Principal Amount ($ IN THOUSANDS) Value $10,000 Government Development Bank of Puerto Rico Rev., 4.10%, 8/17/07 $ 9,995 1,000 Government Development Bank of Puerto Rico Rev., 4.10%, 9/27/07 999 2,925 Government Development Bank of Puerto Rico Rev., 4.10%, 10/12/07 2,923 5,000 Government Development Bank of Puerto Rico Rev., 4.10%, 10/16/07 4,996 5,000 Government Development Bank of Puerto Rico Rev., 4.12%, 11/8/07 4,996 -------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $47,200) 47,179 -------- Principal Amount ($ IN THOUSANDS) Value TOTAL INVESTMENT SECURITIES -- 99.5% (Cost $705,298) $717,058 -------- OTHER ASSETS AND LIABILITIES -- 0.5% 3,899 -------- TOTAL NET ASSETS -- 100.0% $720,957 ======== Futures Contracts ($ IN THOUSANDS) Expiration Underlying Face Unrealized Gain Contracts Purchased Date Amount at Value (Loss) 667 U.S. Treasury September 2-Year Notes 2007 $135,933 $(115) ======== ======== ($ IN THOUSANDS) Expiration Underlying Face Unrealized Gain Contracts Sold Date Amount at Value (Loss) 268 U.S. Treasury September 10-Year Notes 2007 $28,509 $30 ======== ======== Swap Agreements Notional Expiration Unrealized Amount Description of Agreement Date Gain (Loss) INTEREST RATE SWAP ($ IN THOUSANDS) September $484 $25,000 Received semiannually a variable rate 2017 based on the weekly Bond Market Association Municipal Swap Index and pay semiannually a fixed rate equal to 3.601% with Morgan Stanley Capital Services, Inc. ==== - ------ 26 Tax-Free Bond 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 LIBOR = London Interbank Offered Rate MBIA = MBIA Insurance Corporation MBIA-IBC = MBIA Insured Bond Certificates PSF-GTD = Permanent School Fund - Guaranteed RADIAN = Radian Asset Assurance, Inc. resets = The frequency with which a security's coupon changes, based on current market conditions or an underlying index. The more frequently a security resets, the less risk the investor is taking that the coupon will vary significantly from current market rates. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2007. 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 futures contracts, swap agreements and/or when-issued securities. (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, 2007 was $2,034 (in thousands), which represented 0.3% 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. - ------ 27 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, 2006 to May 31, 2007. ACTUAL EXPENSES The table provides information about actual account values and actual expenses for each class. You may use the information, together with the amount you invested, to estimate the expenses that you paid over the period. First, identify the share class you own. Then simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. If you hold Investor Class shares of any American Century fund, or Institutional Class shares of the American Century Diversified Bond Fund, in an American Century account (i.e., not a financial intermediary or retirement plan account), American Century may charge you a $12.50 semiannual account maintenance fee if the value of those shares is less than $10,000. We will redeem shares automatically in one of your accounts to pay the $12.50 fee. In determining your total eligible investment amount, we will include your investments in all PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered under your Social Security number. PERSONAL ACCOUNTS include individual accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell Education Savings Accounts and IRAs (including traditional, Roth, Rollover, SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you have only business, business retirement, employer-sponsored or American Century Brokerage accounts, you are currently not subject to this fee. We will not charge the fee as long as you choose to manage your accounts exclusively online. If you are subject to the Account Maintenance Fee, your account value could be reduced by the fee amount. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table also provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio of each class of your fund and an assumed rate of return of 5% per year before expenses, which is not the actual return of a fund's share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption/exchange fees. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - ------ 28 Beginning Expenses Paid Account Ending During Period* Annualized Value Account Value 12/1/06 - Expense 12/1/06 5/31/07 5/31/07 Ratio* Tax-Free Money Market ACTUAL Investor Class $1,000 $1,016.40 $2.61 0.52% HYPOTHETICAL Investor Class $1,000 $1,022.34 $2.62 0.52% Tax-Free Bond ACTUAL Investor Class $1,000 $1,001.90 $2.45 0.49% Institutional Class $1,000 $1,002.90 $1.45 0.29% Advisor Class $1,000 $1,000.70 $3.69 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. - ------ 29 STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2007 Tax-Free (AMOUNTS IN THOUSANDS EXCEPT AS NOTED) Money Market Tax-Free Bond ASSETS Investment securities, at value (cost of $273,862 and $705,298, respectively) $273,862 $717,058 Cash 386 255 Unrealized appreciation on swap agreements -- 484 Interest receivable 1,576 9,870 Prepaid portfolio insurance 33 -- ------------ ------------ 275,857 727,667 ------------ ------------ LIABILITIES Payable for investments purchased -- 5,960 Payable for variation margin on futures contracts -- 43 Accrued management fees 112 293 Dividends payable 12 414 ------------ ------------ 124 6,710 ------------ ------------ NET ASSETS $275,733 $720,957 ============ ============ NET ASSETS CONSIST OF: Capital paid in $275,784 $711,960 Undistributed net investment income -- 25 Accumulated net realized loss on investment transactions (51) (3,187) Net unrealized appreciation on investments -- 12,159 ------------ ------------ $275,733 $720,957 ============ ============ INVESTOR CLASS ($ AND SHARES IN FULL) Net assets $275,733,057 $709,988,166 Shares outstanding 275,784,352 66,509,273 Net asset value per share $1.00 $10.68 INSTITUTIONAL CLASS ($ AND SHARES IN FULL) Net assets N/A $10,566,765 Shares outstanding N/A 989,858 Net asset value per share N/A $10.68 ADVISOR CLASS ($ AND SHARES IN FULL) Net assets N/A $402,187 Shares outstanding N/A 37,658 Net asset value per share N/A $10.68 See Notes to Financial Statements. - ------ 30 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2007 Tax-Free Tax-Free (AMOUNTS IN THOUSANDS) Money Market Bond INVESTMENT INCOME (LOSS) INCOME: Interest $10,211 $28,877 ------- ------- EXPENSES: Management fees 1,342 3,165 Distribution fees: Advisor Class -- 1 Service fees: Advisor Class -- 1 Trustees' fees and expenses 13 32 Portfolio insurance 53 -- Other expenses 2 1 ------- ------- 1,410 3,200 ------- ------- NET INVESTMENT INCOME (LOSS) 8,801 25,677 ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: Investment transactions (4) (990) Futures and swaps transactions -- (1,512) ------- ------- (4) (2,502) ------- ------- CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: Investments -- 836 Futures and swaps -- 399 ------- ------- -- 1,235 ------- ------- NET REALIZED AND UNREALIZED GAIN (LOSS) (4) (1,267) ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 8,797 $24,410 ======= ======= See Notes to Financial Statements. - ------ 31 STATEMENT OF CHANGES IN NET ASSETS YEARS ENDED MAY 31, 2007 AND MAY 31, 2006 Tax-Free Money (AMOUNTS IN THOUSANDS) Market Tax-Free Bond Increase (Decrease) in Net Assets 2007 2006 2007 2006 OPERATIONS Net investment income (loss) $ 8,801 $ 7,010 $ 25,677 $ 24,108 Net realized gain (loss) (4) 12 (2,502) 1,187 Change in net unrealized appreciation (depreciation) -- -- 1,235 (13,084) -------- -------- -------- -------- Net increase (decrease) in net assets resulting from operations 8,797 7,022 24,410 12,211 -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income: Investor Class (8,801) (7,010) (25,320) (23,809) Institutional Class -- -- (348) (328) Advisor Class -- -- (9) (1) From net realized gains: Investor Class -- -- -- (451) Institutional Class -- -- -- (6) -------- -------- -------- -------- Decrease in net assets from distributions (8,801) (7,010) (25,677) (24,595) -------- -------- -------- -------- CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets from capital share transactions 3,529 (12,655) 48,925 66,467 -------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS 3,525 (12,643) 47,658 54,083 NET ASSETS Beginning of period 272,208 284,851 673,299 619,216 -------- -------- -------- -------- End of period $275,733 $272,208 $720,957 $673,299 ======== ======== ======== ======== Undistributed net investment income -- -- $25 -- ======== ======== ======== ======== See Notes to Financial Statements. - ------ 32 NOTES TO FINANCIAL STATEMENTS MAY 31, 2007 (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. Tax-Free Money Market is diversified under Rule 2a-7 of the 1940 Act. Tax-Free Bond is 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 distribution and shareholder servicing 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 services or at the mean of the most recent bid and ask prices. Debt securities maturing in greater than 60 days are valued at current market value as provided by a commercial pricing service or at the mean of the most recent bid and asked prices. Debt securities maturing within 60 days may be valued at cost, plus or minus any amortized discount or premium. If an event occurs after the value of a security was established but before the net asset value per share was determined that was likely to materially change the net asset value, that security would be valued as determined in accordance with procedures adopted by the Board of Trustees. If the funds determine that the market price of a portfolio security is not readily available, or that the valuation methods mentioned above do not reflect the security's fair value, such security is valued as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such determination would materially impact a fund's net asset value. Certain other circumstances may cause the funds to use alternative procedures to value a security such as: a security has been declared in default; trading in a security has been halted during the trading day; or there is a foreign market holiday and no trading will commence. SECURITY TRANSACTIONS -- 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. - ------ 33 MAY 31, 2007 (AMOUNTS IN THOUSANDS) 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, Tax-Free Bond is required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by Tax-Free Bond. 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 or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on futures and swaps transactions and unrealized appreciation (depreciation) on futures and swaps, respectively. SWAP AGREEMENTS -- Tax-Free Bond may enter into swap agreements in order to attempt to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets; protect against currency fluctuations; attempt to manage duration to protect against any increase in the price of securities that Tax-Free Bond anticipates 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. Tax-Free Bond 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. Tax-Free Money Market does not expect to realize any long-term capital gains, and accordingly, does not expect to pay any capital gains distributions. INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business, the funds enter into contracts that provide general indemnifications. The funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. The risk of material loss from such claims is considered by management to be remote. USE OF ESTIMATES -- The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from these estimates. - ------ 34 MAY 31, 2007 (AMOUNTS IN THOUSANDS) 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, 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 is 0.2000% less and the Advisor Class is 0.2500% less at each point within the Complex Fee range. The effective annual management fee for each of the Investor Classes of Tax-Free Money Market and Tax-Free Bond for the year ended May 31, 2007 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, 2007 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, 2007, are detailed in the Statement of Operations. MONEY MARKET INSURANCE -- Tax-Free Money Market, along with other money market funds managed by ACIM, have 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, 2007, 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 JPMorgan Chase & Co. (JPM). JPM is an equity investor in ACC. 3. INVESTMENT TRANSACTIONS Purchases and sales of investment securities for Tax-Free Bond, excluding short-term investments, for the year ended May 31, 2007, were $334,590 and $271,751, respectively. All investment transactions for Tax-Free Money Market were considered short-term during the year ended May 31, 2007. - ------ 35 MAY 31, 2007 (AMOUNTS IN THOUSANDS) 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of the funds were as follows (unlimited number of shares authorized): Year ended May 31, 2007 Year ended May 31, 2006(1) Shares Amount Shares Amount Tax-Free Money Market INVESTOR CLASS Sold 219,384 $ 219,384 215,988 $ 215,988 Issued in reinvestment of distributions 8,653 8,653 6,881 6,881 Redeemed (224,508) (224,508) (235,524) (235,524) --------- --------- --------- --------- Net increase (decrease) 3,529 $ 3,529 (12,655) $(12,655) ========= ========= ========= ========= Tax-Free Bond INVESTOR CLASS Sold 23,605 $ 254,185 18,991 $ 204,384 Issued in reinvestment of distributions 1,862 20,025 1,750 18,842 Redeemed (21,328) (228,430) (14,501) (155,962) --------- --------- --------- --------- 4,139 45,780 6,240 67,264 --------- --------- --------- --------- INSTITUTIONAL CLASS Sold 342 3,693 9 93 Issued in reinvestment of distributions 31 329 30 321 Redeemed (116) (1,258) (115) (1,237) --------- --------- --------- --------- 257 2,764 (76) (823) --------- --------- --------- --------- ADVISOR CLASS Sold 35 372 2 25 Issued in reinvestment of distributions 1 9 -- 1 --------- --------- --------- --------- 36 381 2 26 --------- --------- --------- --------- Net increase (decrease) 4,432 $ 48,925 6,166 $ 66,467 ========= ========= ========= ========= (1) July 29, 2005 (commencement of sale) through May 31, 2006 for Tax-Free Bond's Advisor Class. 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 0.40%. Tax-Free Bond did not borrow from the line during the year ended May 31, 2007. - ------ 36 MAY 31, 2007 (AMOUNTS IN THOUSANDS) 6. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended May 31, 2007 and May 31, 2006 were as follows: Tax-Free Money Market Tax-Free Bond 2007 2006 2007 2006 DISTRIBUTIONS PAID FROM Ordinary income $8,801 $7,010 $25,677 $24,138 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, 2007, 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 $273,862 $705,298 ======== ======== Gross tax appreciation of investments -- $13,438 Gross tax depreciation of investments -- (1,678) -------- -------- Net tax appreciation (depreciation) of investments -- $11,760 ======== ======== Net tax appreciation (depreciation) on derivatives -- $484 -------- -------- Net tax appreciation (depreciation) -- $12,244 ======== ======== Undistributed taxable income -- $25 Accumulated capital losses $(48) $(2,477) Capital loss deferrals $(3) $(795) The cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the realization for tax purposes of unrealized gains for certain futures contracts. The accumulated capital losses listed above represent net capital loss carryovers that may be used to offset future realized capital gains for federal income tax purposes. The capital loss carryovers expire as follows: 2009 2010 2011 2012 2013 2014 2015 Tax-Free Money Market $(32) $(9) -- $(4) $(1) -- $(2) Tax-Free Bond -- -- -- -- -- -- $(2,477) The capital loss deferrals represent net capital losses incurred in the seven-month period ended May 31, 2007. The funds have elected to treat such losses as having been incurred in the following fiscal year for federal income tax purposes. - ------ 37 MAY 31, 2007 (AMOUNTS IN THOUSANDS) 7. OTHER TAX INFORMATION (UNAUDITED) ($ IN FULL) The following information is provided pursuant to provisions of the Internal Revenue Code. The funds designate exempt interest dividends for the fiscal year ended May 31, 2007, as follows: Tax-Free Money Market Tax-Free Bond Exempt interest dividends $8,797,104 $25,715,271 8. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. The FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157), in September 2006, which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands the required financial statement disclosures about fair value measurements. Management is currently evaluating the impact of adopting FIN 48 and FAS 157. 9. SUBSEQUENT EVENTS On December 8, 2006, the Board of Trustees of Arizona Municipal Bond Fund (Arizona Municipal) and Florida Municipal Bond Fund (Florida Municipal), two funds in a series issued by the trust, approved plans of reorganization (the reorganizations) pursuant to which Tax-Free Bond will acquire all of the assets of Arizona Municipal and Florida Municipal in exchange for shares of equal value of Tax-Free Bond and assumption by Tax-Free Bond of certain liabilities of Arizona Municipal and Florida Municipal. The financial statements and performance history of Tax-Free Bond will be carried over in the post-reorganization. The reorganizations are subject to approval by Arizona Municipal and Florida Municipal shareholders at a meeting expected to be held on July 27, 2007. The reorganizations are expected to be effective at the close of business on August 31, 2007. - ------ 38 FINANCIAL HIGHLIGHTS Tax-Free Money Market Investor Class For a Share Outstanding Throughout the Years Ended May 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.03 0.02 0.01 0.01 0.01 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.03) (0.02) (0.01) (0.01) (0.01) -------- -------- -------- -------- -------- Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 ======== ======== ======== ======== ======== TOTAL RETURN(1) 3.26% 2.51% 1.33% 0.64% 1.05% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.52% 0.52% 0.51% 0.51% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 3.22% 2.47% 1.31% 0.65% 1.04% Net Assets, End of Period (in thousands) $275,733 $272,208 $284,851 $276,245 $272,256 (1) Total return assumes reinvestment of net investment income and capital gains distributions, if any. See Notes to Financial Statements. - ------ 39 Tax-Free Bond Investor Class For a Share Outstanding Throughout the Years Ended May 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.67 $10.88 $10.71 $11.19 $10.63 -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income (Loss) 0.42 0.40 0.38 0.37 0.39 Net Realized and Unrealized Gain (Loss) 0.01 (0.20) 0.17 (0.45) 0.58 -------- -------- -------- -------- -------- Total From Investment Operations 0.43 0.20 0.55 (0.08) 0.97 -------- -------- -------- -------- -------- Distributions From Net Investment Income (0.42) (0.40) (0.38) (0.37) (0.39) From Net Realized Gains -- (0.01) -- (0.03) (0.02) -------- -------- -------- -------- -------- Total Distributions (0.42) (0.41) (0.38) (0.40) (0.41) -------- -------- -------- -------- -------- Net Asset Value, End of Period $10.68 $10.67 $10.88 $10.71 $11.19 ======== ======== ======== ======== ======== TOTAL RETURN(1) 4.08% 1.87% 5.16% (0.79)% 9.31% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.50% 0.51% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 3.91% 3.73% 3.46% 3.34% 3.62% Portfolio Turnover Rate 43% 79% 77% 60% 57% Net Assets, End of Period (in thousands) $709,988 $665,458 $610,420 $583,689 $620,000 (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. - ------ 40 Tax-Free Bond Institutional Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.67 $10.88 $10.71 $11.19 $10.90 ------ ------ ------ ------ ------ Income From Investment Operations Net Investment Income (Loss) 0.44 0.42 0.40 0.39 0.05 Net Realized and Unrealized Gain (Loss) 0.01 (0.20) 0.17 (0.45) 0.29 ------ ------ ------ ------ ------ Total From Investment Operations 0.45 0.22 0.57 (0.06) 0.34 ------ ------ ------ ------ ------ Distributions From Net Investment Income (0.44) (0.42) (0.40) (0.39) (0.05) From Net Realized Gains -- (0.01) -- (0.03) -- ------ ------ ------ ------ ------ Total Distributions (0.44) (0.43) (0.40) (0.42) (0.05) ------ ------ ------ ------ ------ Net Asset Value, End of Period $10.68 $10.67 $10.88 $10.71 $11.19 ====== ====== ====== ====== ====== TOTAL RETURN(2) 4.28% 2.07% 5.37% (0.60)% 3.14% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.29% 0.29% 0.30% 0.31% 0.30%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 4.11% 3.93% 3.66% 3.54% 3.68%(3) Portfolio Turnover Rate 43% 79% 77% 60% 57%(4) Net Assets, End of Period (in thousands) $10,567 $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. - ------ 41 Tax-Free Bond Advisor Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.67 $10.83 ------ ------ Income From Investment Operations Net Investment Income (Loss) 0.39 0.31 Net Realized and Unrealized Gain (Loss) 0.01 (0.15) ------ ------ Total From Investment Operations 0.40 0.16 ------ ------ Distributions From Net Investment Income (0.39) (0.31) From Net Realized Gains -- (0.01) ------ ------ Total Distributions (0.39) (0.32) ------ ------ Net Asset Value, End of Period $10.68 $10.67 ====== ====== TOTAL RETURN(2) 3.82% 1.51% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.74% 0.74%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.66% 3.52%(3) Portfolio Turnover Rate 43% 79%(4) Net Assets, End of Period (in thousands) $402 $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. - ------ 42 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 the 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, 2007, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the 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, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri July 17, 2007 - ------ 43 MANAGEMENT The individuals listed below serve as trustees or officers of the funds. Each trustee serves until his or her successor is duly elected and qualified or until he or she retires. Effective March 2004, mandatory retirement age for independent trustees is 73. However, the mandatory retirement age may be extended for a period not to exceed two years with the approval of the remaining independent trustees. Those listed as interested trustees are "interested" primarily by virtue of their engagement as trustees and/or officers of, or ownership interest in, American Century Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries, including the funds' investment advisor, American Century Investment Management, Inc. (ACIM); the funds' principal underwriter, American Century Investment Services, Inc. (ACIS); and the funds' transfer agent, American Century Services, LLC (ACS). The other trustees (more than three-fourths of the total number) are independent; that is, they have never been employees, trustees or officers of, and have no financial interest in, ACC or any of its wholly owned, direct or indirect, subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity for eight registered investment companies in the American Century family of funds. All persons named as officers of the funds also serve in similar capacities for the other 14 investment companies advised by ACIM or American Century Global Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless otherwise noted. Only officers with policy-making functions are listed. No officer is compensated for his or her service as an officer of the funds. The listed officers are interested persons of the funds and are appointed or re-appointed on an annual basis. INTERESTED TRUSTEE JONATHAN S. THOMAS 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUNDS: Advisory Board Member (since 2007) and President (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive Officer, ACC (March 2007 to present); Chief Administrative Officer, ACC (February 2006 to February 2007); Executive Vice President, ACC (November 2005 to February 2007). Also serves as: President, Chief Executive Officer and Director, ACS; Executive Vice President, ACIM and ACGIM; Director, ACIM, ACGIM, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 109 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None INDEPENDENT TRUSTEES JOHN FREIDENRICH 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUND: Trustee (since 2005) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis Management Company, LLC (April 2004 to present); Partner and Founder, Bay Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware & Freidenrich (1968 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 44 RONALD J. GILSON 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUND: Trustee (since 1995) and Chairman of the Board (since 2005) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law and Business, Stanford Law School (1979 to present); Marc and Eva Stern Professor of Law and Business, Columbia University School of Law (1992 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None KATHRYN A. HALL 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: Trustee (since 2001) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chairman and Co-Chief Executive Officer and Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None PETER F. PERVERE 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Advisory Board Member (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Vice President and Chief Financial Officer, Commerce One, Inc. (software and services provider) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Intraware, Inc. MYRON S. SCHOLES 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1941 POSITION(S) HELD WITH FUND: Trustee (since 1980) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Platinum Grove Asset Management, L.P., and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1996 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Dimensional Fund Advisors (investment advisor, 1982 to present); Director, Chicago Mercantile Exchange (2000 to present) JOHN B. SHOVEN 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Trustee (since 2002) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1973 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present) JEANNE D. WOHLERS 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUND: Trustee (since 1984) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner, Windy Hill Productions, LP (educational software) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 45 OFFICERS MARYANNE ROEPKE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUND: Chief Compliance Officer (since 2006) and Senior Vice President (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995 to August 2006); Treasurer and Chief Financial Officer, various American Century funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS CHARLES A. ETHERINGTON 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUNDS: General Counsel (since 2007) and Senior Vice President (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (November 2005 to present); General Counsel, ACC (March 2007 to present). Also serves as: General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; and Senior Vice President, ACIM, ACGIM and ACS ROBERT LEACH 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial Officer (all since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) and Controller, various American Century funds (1997 to September 2006) C. JEAN WADE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUND: Controller (since 1996) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) JON ZINDEL 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Tax Officer (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer and Chief Accounting Officer, ACC (March 2007 to present); Vice President, ACC (October 2001 to present); Vice President, certain ACC subsidiaries (October 2001 to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006). Also serves as: Chief Financial Officer, Chief Accounting Officer and Senior Vice President, ACIM, ACGIM, ACS and other ACC subsidiaries; and Chief Accounting Officer and Senior Vice President, ACIS The SAI has additional information about the funds' trustees and is available without charge, upon request, by calling 1-800-345-2021. - ------ 46 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. - ------ 47 ADDITIONAL INFORMATION PROXY VOTING GUIDELINES American Century Investment Management, Inc., the funds' investment advisor, is responsible for exercising the voting rights associated with the securities purchased and/or held by the funds. A description of the policies and procedures the advisor uses in fulfilling this responsibility is available without charge, upon request, by calling 1-800-345-2021. It is also available on American Century's website at americancentury.com and on the Securities and Exchange Commission's website at sec.gov. Information regarding how the investment advisor voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the "About Us" page at americancentury.com. It is also available at sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The funds' Forms N-Q are available on the SEC's website at sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The funds also make their complete schedule of portfolio holdings for the most recent quarter of their fiscal year available on their website at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 48 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. - ------ 49 NOTES - ------ 50 NOTES - ------ 51 NOTES - ------ 52 [back cover] CONTACT US AMERICANCENTURY.COM AUTOMATED INFORMATION LINE: 1-800-345-8765 INVESTOR SERVICES REPRESENTATIVE: 1-800-345-2021 or 816-531-5575 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS: 1-800-345-3533 BANKS AND TRUST COMPANIES, BROKER-DEALERS, FINANCIAL PROFESSIONALS, INSURANCE COMPANIES: 1-800-345-6488 TELECOMMUNICATIONS DEVICE FOR THE DEAF: 1-800-634-4113 or 816-444-3485 AMERICAN CENTURY 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. American Century Investment Services, Inc., Distributor (C)2007 American Century Proprietary Holdings, Inc. All rights reserved. The American Century Investments logo, American Century and American Century Investments are service marks of American Century Proprietary Holdings, Inc. 0707 SH-ANN-55128N [front cover] AMERICAN CENTURY INVESTMENTS Annual Report May 31, 2007 [photo of summer] Arizona Municipal Bond Fund Florida Municipal Bond Fund Long-Term Tax-Free Fund High-Yield Municipal Fund [american century investments logo and type logo] OUR MESSAGE TO YOU We have the privilege of providing 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 12 months ended May 31, 2007. We've gathered this information to help you monitor your investment. Another resource is our website, americancentury.com, where we post company news, portfolio commentaries, investment views, and other communications about portfolio strategy, personal finance, government policy, and the markets. Speaking of company news, American Century Investments announced the following leadership changes. Chief Investment Officer Mark Mallon retired in the first quarter of 2007, after nearly a decade with us. Effective January 1, 2007, former International Equity CIO Enrique Chang became CIO with responsibilities for the entire investment management operation. Prior to joining us in 2006, Enrique worked at Munder Capital Management, serving the last four years as president and CIO. Before that, he held a series of senior investment management positions at Vantage Global Advisors, J. & W. Seligman and Co., and General Reinsurance Corp. In January 2007, President and Chief Executive Officer Bill Lyons announced his retirement after nearly 20 years at American Century Investments. Chief Financial Officer Jonathan Thomas was appointed president and CEO effective March 1, 2007. Since 2005, Jonathan has overseen our financial area, with additional responsibilities in purchasing, facilities, real estate, information technology, operations, and human resources. Before joining us, Jonathan was a managing director and global chief operating officer of Morgan Stanley's investment division, and worked in senior leadership roles for Bank of America, Boston Financial Services, and Fidelity Investments. We wish to thank Mark and Bill for their many years of distinguished service - -- American Century Investments is a stronger company as a result of their hard work. And we firmly believe their roles in our firm have transitioned to two talented, committed, and experienced top executives. [photo of James E. Stowers, Jr. /s/James E. Stowers, Jr. James E. Stowers, Jr. FOUNDER AND CO-CHAIRMAN OF THE BOARD AMERICAN CENTURY COMPANIES, INC. TABLE OF CONTENTS Market Perspective. . . . . . . . . . . . . . . . . . . . . .. . . 2 U.S. Fixed-Income Total Returns. . . . . . . . . . . . . . .. . . 2 ARIZONA MUNICIPAL BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . .. . . 3 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . .. . . 5 Schedule of Investments . . . . . . . . . . . . . . . . . . .. . . 7 FLORIDA MUNICIPAL BOND Performance . . . . . . . . . . . . . . . . . . . . . . . . .. . . 9 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . .. . . 11 Schedule of Investments . . . . . . . . . . . . . . . . . . .. . . 13 LONG-TERM TAX-FREE Performance . . . . . . . . . . . . . . . . . . . . . . . . .. . . 15 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . .. . . 17 Schedule of Investments . . . . . . . . . . . . . . . . . . .. . . 19 HIGH-YIELD MUNICIPAL Performance . . . . . . . . . . . . . . . . . . . . . . . . .. . . 22 Portfolio Commentary. . . . . . . . . . . . . . . . . . . . .. . . 24 Schedule of Investments . . . . . . . . . . . . . . . . . . .. . . 26 Shareholder Fee Examples. . . . . . . . . . . . . . . . . . .. . . 33 FINANCIAL STATEMENTS Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . 36 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . 38 Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . 39 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 41 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 49 Report of Independent Registered Public Accounting Firm . . . . . . . 66 OTHER INFORMATION Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Share Class Information . . . . . . . . . . . . . . . . . . . . . . . 70 Additional Information. . . . . . . . . . . . . . . . . . . . . . . . 71 Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 72 The opinions expressed in the Market Perspective and each of the Portfolio Commentaries reflect those of the portfolio management team as of the date of the report, and do not necessarily represent the opinions of American Century or any other person in the American Century organization. Any such opinions are subject to change at any time based upon market or other conditions and American Century disclaims any responsibility to update such opinions. These opinions may not be relied upon as investment advice and, because investment decisions made by American Century funds are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of any American Century fund. Security examples are used for representational purposes only and are not intended as recommendations to purchase or sell securities. Performance information for comparative indices and securities is provided to American Century by third party vendors. To the best of American Century's knowledge, such information is accurate at the time of printing. MARKET PERSPECTIVE [photo of Chief Investment Officer] By David MacEwen, Chief Investment Officer, Fixed Income FED PAUSE TRIGGERED BOND RALLY U.S. bonds mostly rallied during the 12 months ended May 31, 2007. The bulk of the rally came in the second half of 2006, following the last of the Federal Reserve's (the Fed's) 17 short-term interest rate increases from June 2004 to June 2006. The Fed's decision to hold rates steady beginning with its August 2006 meeting came in the face of falling energy prices and moderating economic growth and inflation expectations at that time. During the reporting period, U.S. gross domestic product (GDP) growth slowed to an annual rate below 2.5%, less than the 3-4% rate of the past several calendar years. Meanwhile, near-term inflation worries flared for about nine months as the trailing 12-month percentage change in core consumer prices (without volatile food and energy prices) lingered at five-year highs before finishing May at 2.2%. But forecasts of moderate GDP growth going forward limited longer-term inflation fears, and equity market volatility in the first quarter of 2007 helped push down yields. These competing factors meant the yield on the generic 10-year AAA municipal note spent the last half of the reporting period fluctuating in a narrow range between about 3.70% and 3.90%. BONDS BENEFITED, MUNICIPALS RALLIED Mixed economic reports, stock market volatility, and subprime mortgage woes boosted demand for Treasury bonds, driving yields down across the Treasury yield curve. The Treasury curve flattened, with little difference in yield between two- and 10-year notes. The municipal curve flattened as well, as short yields edged up while demand for longer-term notes and bonds pushed their yields lower. Though all sectors of the U.S. bond market posted gains, the broad investment-grade municipal market underperformed the broad investment-grade taxable market, which is typical when Treasurys rally. High-yield municipals outperformed investment-grade municipals for the 12 months -- yield-seeking investors continued to embrace high-yield bonds as a result of the flat shape of the curve. By the end of May, high-yield municipal bonds had racked up 19 consecutive months of gains, according to Lehman Brothers. U.S. Fixed-Income Total Returns For the 12 months ended May 31, 2007 LEHMAN BROTHERS MUNICIPAL MARKET INDICES Municipal Bond 4.84% 3-Year Municipal Bond 3.58% 5-Year General Obligation (GO) 3.55% Long-Term Municipal Bond 6.28% Non-Investment-Grade (High-Yield) 8.95% TAXABLE MARKET RETURNS Lehman Brothers U.S. Aggregate Index 6.66% Lehman Brothers U.S. Treasury Index 5.86% 3-Month Treasury Bill 5.23% 10-Year Treasury Note 5.97% - ------ 2 PERFORMANCE Arizona Municipal Bond Total Returns as of May 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date INVESTOR CLASS 4.07% 3.77% 4.77% 5.15% 4/11/94 LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 3.55% 3.51% 4.63% 4.98%(1) -- LIPPER OTHER STATES INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 3.50% 3.30% 4.07% 4.49%(3) -- Investor Class's Lipper Ranking(2) as of 5/31/07 23 of 119 15 of 94 3 of 73 5 of 43(3) -- as of 6/30/07 13 of 118 14 of 93 3 of 72 5 of 42(3) -- A Class 2/27/04 No sales charge* 3.81% -- -- 2.16% With sales charge* -0.84% -- -- 0.73% B Class 2/27/04 No sales charge* 3.03% -- -- 1.42% With sales charge* -0.97% -- -- 0.52% C Class 3.03% -- -- 1.40% 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 page for more about the applicable sales charges for each share class. The SEC requires that mutual funds provide performance information net of maximum sales charges in all cases where charges could be applied. (1) Since 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. ©2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance -- Performance data is total return, and is preliminary and subject to revision. Lipper Rankings -- Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 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. - ------ 3 Arizona Municipal Bond
Growth of $10,000 Over 10 Years $10,000 investment made May 31, 1997
One-Year Returns Over 10 Years Periods ended May 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Investor Class 7.19% 4.51% 0.20% 10.57% 6.74% 9.36% -1.06% 5.21% 1.59% 4.07% Lehman Brothers Municipal 5-Year GO Index 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% 3.55% 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 PORTFOLIO COMMENTARY Arizona Municipal Bond Lead Portfolio Managers: Robert Miller and Steven Permut PERFORMANCE SUMMARY Arizona Municipal Bond returned 4.07%* for the 12 months ended May 31, 2007. By comparison, the Lehman Brothers Municipal 5-Year GO Index returned 3.55%, while the average return of the 119 other states intermediate municipal debt funds tracked by Lipper Inc. was 3.50%. The portfolio's average annual returns exceeded those of its Lipper group average for the one-, five-, and 10-year periods ended May 31, 2007 (see page 3). The portfolio's absolute return reflected the positive performance of the municipal market as a whole (see the Market Perspective on page 2). Relative to the Lipper group, we believe the portfolio benefited from our duration (price sensitivity to interest rate changes) and credit positioning, as well as holding a slice of higher-yielding Puerto Rico debt. RATE POSITIONING HELPED We use a relative value approach to investing, looking for securities that we believe offer attractive risk and return characteristics. This means we often put our investment capital to work in bonds trading at attractive valuations or temporarily depressed levels. In regard to the portfolio's rate sensitivity, this approach led us to make modest, tactical adjustments to duration, lengthening it at the beginning of the fiscal year in anticipation of benefiting from a strong technical period for municipal bonds. Having a longer duration helped performance as rates fell (and bond prices rose) for much of the second half of 2006. But with generally healthy economic growth in 2007 and expectations of higher inflation in the market, bonds looked rich after the big rally. As a result, we began to shorten the portfolio's duration, ending the period slightly short of what we believe is our peer group average. Portfolio at a Glance As of As of 5/31/07 5/31/06 Weighted Average Maturity 6.4 years 8.3 years Average Duration (Modified) 4.6 years 4.4 years Yields as of May 31, 2007 30-Day SEC Yield Investor Class 3.60% A Class 3.18% B Class 2.60% C Class 2.60% Investor Class 30-Day Tax-Equivalent Yields(1) 28.36% Tax Bracket 5.02% 31.45% Tax Bracket 5.25% 36.21% Tax Bracket 5.64% 38.11% Tax Bracket 5.81% (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 referenced in this commentary are for Investor Class shares. - ------ 5 GIVING CREDIT We also helped performance by taking an overweight position relative to the peer group in bonds rated BBB and A. The spread, or difference in yield, between these lower-rated bonds and AAA securities tightened to historically low levels during the period. When credit spreads narrow, lower-rated bonds outperform. But this means that we were being compensated with less yield than in the past for taking on additional credit risk. As a result, we've been paring back that overweight position in recent months. In its place we added bonds higher in quality or from sectors likely to hold up better in an economic slowdown. For example, we bought some hospital bonds -- these securities aren't sensitive to economic cycles, and were trading at attractive levels because of a temporary increase in supply. ADDING YIELD Another way we enhanced returns was by taking advantage of attractive yields on bonds issued by different states and U.S. territories. The portfolio ended the reporting period with about 6% of assets in very short-term Puerto Rico commercial paper. These securities skew the portfolio's overall credit quality downward because of their BBB rating. However, we felt they offered an excellent risk/reward profile because they have money market-like maturities but yields comparable to even the longest-term municipal bonds. STARTING POINT FOR NEXT REPORTING PERIOD "We continue to focus on the fund's repeatable, multi-layered investment process, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," says portfolio manager Robert Miller. "We're also working hard to position the portfolio for slower economic growth. This means we're looking at lengthening duration slightly, trading up in credit quality, and shifting into more defensive sectors, such as higher education and hospital bonds, when we think we can add them at attractive relative values." Portfolio Composition By Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 AAA 65% 71% AA 5% 4% A 8% 9% BBB 21% 16% BB 1% -- 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, 2007 % of fund investments General Obligation (GO) 35% Prerefunded 21% Water and Sewer Revenue 12% Certificates of Participation (COPs)/Leases 9% Higher Education 8% - ------ 6 SCHEDULE OF INVESTMENTS Arizona Municipal Bond MAY 31, 2007 Principal Amount Value Municipal Securities -- 91.6% ARIZONA -- 82.5% $1,505,000 Arizona Board of Regents COP, Series 2002 A, (University of Arizona), 5.50%, 6/1/12, Prerefunded at 100% of Par (Ambac)(1) $ 1,615,196 140,000 Arizona Board of Regents COP, Series 2002 A, (University of Arizona), 5.50%, 6/1/17 (Ambac) 149,471 1,000,000 Arizona Board of Regents COP, Series 2006 A, (University of Arizona), 5.00%, 6/1/18 (Ambac) 1,065,700 1,000,000 Arizona Health Facilities Auth. Rev., (Blood Systems Incorporated), 5.00%, 4/1/21 1,017,590 1,750,000 Arizona School Facilities Board Rev., (State School Improvement), 5.50%, 7/1/11, Prerefunded at 100% of Par(1) 1,858,430 1,880,000 Arizona Tourism & Sports Auth. Tax Rev., (Baseball Training Facilities), 5.00%, 7/1/13(2) 1,947,680 1,910,000 Energy Management Services LLC Rev., (Arizona State University - Main Campus), 4.50%, 7/1/11 (MBIA) 1,959,717 460,000 Glendale Industrial Development Auth. Rev., Series 1998 A, (Midwestern University), 5.38%, 5/15/08, Prerefunded at 101% of Par(1) 471,712 540,000 Glendale Industrial Development Auth. Rev., Series 1998 A, (Midwestern University), 5.38%, 5/15/28 550,093 500,000 Glendale Industrial Development Auth. Rev., Series 2001 A, (Midwestern University), 5.75%, 5/15/11 537,220 1,740,000 Greater Arizona Development Auth. Rev., Series 2005 A, 5.00%, 8/1/23 (MBIA)(2) 1,828,549 1,040,000 Maricopa County Kyrene Elementary School District No. 28 GO, Series 2001 B, 4.30%, 7/1/07 (MBIA)(3) 1,036,682 1,615,000 Maricopa County Litchfield Elementary School District No. 79 GO, Series 2000 A, (Projects of 1998), 4.55%, 7/1/07 (FSA)(2) 1,616,017 Principal Amount Value $1,000,000 Maricopa County Peoria Unified School District No. 11 GO, (School Improvement), 5.00%, 7/1/24 (MBIA) $ 1,057,930 1,000,000 Maricopa County Phoenix Elementary School District No. 1 GO, 5.50%, 7/1/07, Prerefunded at 101% of Par (MBIA)(1) 1,011,330 1,445,000 Maricopa County Phoenix Union High School District No. 210 GO, 4.75%, 7/1/11 (FSA) 1,496,153 1,955,000 Maricopa County Saddle Mountain Unified School District No. 90 GO, Series 2003 A, 5.00%, 7/1/10(2) 2,003,132 1,000,000 Maricopa County Scottsdale Elementary School District No. 48 GO, 6.60%, 7/1/12 1,126,070 1,265,000 Mohave County Community College District COP, 5.75%, 3/1/14 (Ambac) 1,326,656 1,150,000 Mohave County Community College District Rev., (State Board of Directors), 6.00%, 3/1/10, Prerefunded at 100% of Par (MBIA)(1) 1,214,619 1,815,000 Navajo County Unified School District No. 20 Rev., Series 2006 A, 5.00%, 7/1/17 (MBIA)(2) 1,954,174 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 6.25%, 7/1/10, Prerefunded at 101% of Par (FGIC)(1) 1,078,760 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 5.50%, 7/1/19 (FGIC) 1,070,480 1,000,000 Phoenix Civic Improvement Corp. Water System Rev., (Junior Lien), 5.00%, 7/1/21 (MBIA) 1,057,130 1,070,000 Phoenix GO, Series 1995 A, 6.25%, 7/1/17 1,269,095 1,710,000 Pima County Metropolitan Domestic Water Improvement District Rev., 5.25%, 7/1/18 (Ambac) 1,890,918 1,800,000 Pima County Metropolitan Domestic Water Improvement District Rev., 5.25%, 7/1/19 (Ambac)(2) 1,998,360 - ------ 7 Arizona Municipal Bond Principal Amount Value $1,125,000 Pima County Unified School District No. 6 Marana GO, 5.50%, 7/1/15 (FGIC) $ 1,188,281 820,000 Pinal County COP, 4.75%, 6/1/13 (Ambac) 851,201 1,000,000 Pinal County COP, 5.00%, 12/1/26 1,025,130 775,000 Pinal County Unified School District No. 43 Apache Junction GO, Series 2006 B, (School Improvement), 5.00%, 7/1/16 (FGIC) 836,272 1,000,000 Queen Creek Improvement District No. 1 Special Tax Rev., 5.00%, 1/1/11 1,033,040 1,600,000 Scottsdale GO, 6.25%, 7/1/09, Prerefunded at 100% of Par(1) 1,679,216 1,000,000 Sedona COP, 5.75%, 7/1/09, Prerefunded at 101% of Par(1) 1,048,220 725,000 Westpark Community Facility District GO, 5.25%, 7/15/31 731,496 43,601,720 PUERTO RICO -- 9.1% 1,000,000 Puerto Rico GO, Series 2006 B, 5.00%, 12/1/16 1,061,090 1,000,000 Puerto Rico GO, Series 2006 B, 5.25%, 7/1/17 1,073,500 Principal Amount Value $2,500,000 Puerto Rico GO, Series 2006 B, 5.25%, 7/1/22(2) $ 2,658,575 4,793,165 ----------- TOTAL MUNICIPAL SECURITIES (Cost $46,971,364) 48,394,885 ----------- Short-Term Municipal Securities -- 5.7% PUERTO RICO -- 5.7% 2,000,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/12/07 1,999,840 1,000,000 Government Development Bank of Puerto Rico Rev., 4.10%, 7/20/07 999,680 ----------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $3,000,000) 2,999,520 ----------- Temporary Cash Investments -- 1.0% 542,000 Federated Arizona Municipal Cash Trust 542,000 (Cost $542,000) ----------- TOTAL INVESTMENT SECURITIES -- 98.3% (Cost $50,513,364) 51,936,405 ----------- OTHER ASSETS AND LIABILITIES -- 1.7% 872,930 ----------- TOTAL NET ASSETS -- 100.0% $52,809,335 =========== Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 52 U.S. Treasury 2-Year Notes September 2007 $10,597,438 $(9,054) ============ ========= Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 19 U.S. Treasury 10-Year Notes September 2007 $2,021,125 $2,160 ============ ========= 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 MBIA = MBIA Insurance Corporation (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 futures contracts. (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. See Notes to Financial Statements. - ------ 8 PERFORMANCE Florida Municipal Bond Total Returns as of May 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date INVESTOR CLASS 3.87% 3.70% 4.82% 5.20% 4/11/94 LEHMAN BROTHERS MUNICIPAL 5-YEAR GO INDEX 3.55% 3.51% 4.63% 4.98%(1) -- LIPPER FLORIDA INTERMEDIATE MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 3.23% 3.44% 4.06% 4.24%(3) -- Investor Class's Lipper Ranking(2) as of 5/31/07 1 of 8 2 of 5 1 of 5 1 of 4(3) -- as of 6/30/07 2 of 8 2 of 5 1 of 5 1 of 4(3) -- A Class 2/27/04 No sales charge* 3.62% -- -- 1.90% With sales charge* -1.07% -- -- 0.48% B Class 2/27/04 No sales charge* 2.85% -- -- 1.14% With sales charge* -1.15% -- -- 0.23% C Class 2.85% -- -- 1.14% 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 page for more about the applicable sales charges for each share class. The SEC requires that mutual funds provide performance information net of maximum sales charges in all cases where charges could be applied. (1) Since 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. ©2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance -- Performance data is total return, and is preliminary and subject to revision. Lipper Rankings -- Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Since 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. - ------ 9 Florida Municipal Bond
Growth of $10,000 Over 10 Years $10,000 investment made May 31, 1997
One-Year Returns Over 10 Years Periods ended May 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Investor Class 8.20% 4.71% 0.49% 10.71% 5.98% 9.90% -1.30% 4.88% 1.48% 3.87% Lehman Brothers Municipal 5-Year GO Index 6.95% 4.90% 0.65% 10.17% 6.33% 8.72% -0.22% 4.47% 1.24% 3.55% 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 PORTFOLIO COMMENTARY Florida Municipal Bond Lead Portfolio Managers: Robert Miller and Steven Permut PERFORMANCE SUMMARY Florida Municipal Bond returned 3.87%* for the 12 months ended May 31, 2007. By comparison, the Lehman Brothers Municipal 5-Year GO Index returned 3.55%, while the average return of the eight Florida intermediate municipal debt funds tracked by Lipper Inc. was 3.23%. The portfolio's average annual returns exceeded those of its Lipper group average for the one-, five-, and 10-year periods ended May 31, 2007 (see page 9). The portfolio's absolute return reflected the positive performance of the municipal market as a whole (see the Market Perspective on page 2). Relative to the Lipper group, we believe the portfolio benefited from our non-Florida holdings, as well as duration (price sensitivity to interest rate changes) and credit allocation decisions. ADDING VALUE OUTSIDE OF FLORIDA A key way we enhanced returns was by taking advantage of yield discrepancies between bonds issued by different states and U.S. territories following the full repeal of Florida's Intangible Personal Property Tax, which took effect on January 1. We used these non-Florida bonds to increase the portfolio's yield and diversification, ending the period with about 60% of assets in Florida bonds. This positioning helped relative results, because Florida bond returns were limited by a large amount of supply at the same time the state eliminated its intangibles tax, reducing demand. We used this opportunity to build a position in very short-term Puerto Rico commercial paper. These securities skew the portfolio's overall credit quality downward because of their BBB rating; however, we felt they offered an excellent risk/reward profile because they have money market-like maturities but yields comparable to even the longest-term municipal bonds. Portfolio at a Glance As of As of 5/31/07 5/31/06 Weighted Average Maturity 6.3 years 7.7 years Average Duration (Modified) 4.9 years 4.5 years Yields as of May 31, 2007 30-Day SEC Yield Investor Class 3.61% A Class 3.21% B Class 2.60% C Class 2.61% Investor Class 30-Day Tax-Equivalent Yields(1) 25.00% Tax Bracket 4.81% 28.00% Tax Bracket 5.01% 33.00% Tax Bracket 5.39% 35.00% Tax Bracket 5.55% (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 referenced in this commentary are for Investor Class shares. - ------ 11 Florida Municipal Bond RATE POSITIONING HELPED We made modest, tactical adjustments to duration, lengthening it at the beginning of the fiscal year. Having a longer duration helped performance as rates fell (and bond prices rose) for much of the second half of 2006. But with generally healthy economic growth in 2007 and expectations of higher inflation in the market, bonds looked rich after the big rally. As a result, we began to shorten the portfolio's duration, ending the period slightly short of what we believe is our peer group average. GIVING CREDIT We also helped performance by taking an overweight position relative to the peer group in bonds rated BBB and A. The spread, or difference in yield, between these lower-rated bonds and AAA securities tightened to historically low levels during the period. When credit spreads narrow, lower-rated bonds outperform. But this means that we were being compensated with less yield than in the past for taking on additional credit risk. As a result, we've been paring back that overweight position in recent months. In its place we added bonds higher in quality or from sectors likely to hold up better in an economic slowdown. For example, we bought some hospital bonds -- these securities aren't sensitive to economic cycles, and were trading at attractive levels because of a temporary increase in supply. STARTING POINT FOR NEXT REPORTING PERIOD "We continue to focus on the fund's repeatable, multi-layered investment process, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," says portfolio manager Robert Miller. "We're also working hard to position the portfolio for slower economic growth. This means we're looking at lengthening duration slightly, trading up in credit quality, and shifting into more defensive sectors, such as hospital bonds, when we think we can add them at attractive relative values." Portfolio Composition By Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 AAA 59% 70% AA 1% 1% A 6% 5% BBB 34% 24% 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, 2007 % of fund investments Water and Sewer Revenue 15% Industrial Development Revenue 13% Prerefunded 12% Hospital Revenue 12% Certificates of Participation (COPs)/Leases 11% - ------ 12 SCHEDULE OF INVESTMENTS Florida Municipal Bond MAY 31, 2007 Principal Amount Value Municipal Securities -- 89.3% FLORIDA -- 60.0% $ 400,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.00%, 4/1/14 $ 416,284 500,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.50%, 4/1/15 532,580 525,000 Broward County Educational Facilities Auth. Rev., Series 2004 B, (Nova Southeastern), 5.50%, 4/1/16 558,254 525,000 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 4.00%, 6/1/07 (RADIAN) (SBBPA: SunTrust Bank) 525,000 1,475,000 Collier County School Board COP, 5.50%, 2/15/12 (FSA)(1) 1,572,408 1,150,000 Duval County School Board COP, 5.75%, 7/1/16 (FSA) 1,192,711 1,000,000 Florida Municipal Loan Council GO, Series 2002 C, 5.25%, 11/1/21 (MBIA) 1,061,240 1,000,000 Halifax Hospital Medical Center Rev., Series 2006 A, 5.25%, 6/1/18 1,043,340 1,235,000 Indian River County Rev., (Spring Training Facility), 5.25%, 4/1/15 (FGIC) 1,304,864 1,000,000 Lee County Industrial Development Auth. Healthcare Facilities Rev., (Shell Point Village/Alliance Community), 5.00%, 11/15/09 1,015,781 850,000 Lee County Industrial Development Auth. Healthcare Facilities Rev., Series 1999 A, (Shell Point Village), 5.50%, 11/15/09 884,060 1,000,000 Miami Beach Stormwater Rev., 5.75%, 9/1/17 (FGIC) 1,066,390 1,910,000 Miami Beach Water & Sewer Rev., 5.625%, 9/1/16 (Ambac)(1) 2,029,565 650,000 Miami Parking Facilities Rev., 5.25%, 10/1/15 (MBIA) 703,710 1,000,000 Miami-Dade County School Board COP, Series 2001 C, 5.50%, 10/1/11, Prerefunded at 100% of Par (FSA)(2) 1,065,010 Principal Amount Value $1,875,000 Orange County School Board COP, Series 2002 A, 5.50%, 8/1/12, Prerefunded at 100% of Par (MBIA)(1)(2) $ 2,016,318 450,000 Orlando and Orange County Expressway Auth. Rev., 6.50%, 7/1/11 (FGIC) 494,199 1,000,000 Sumter County School Board COP, 5.50%, 7/2/12 (MBIA) 1,074,330 1,000,000 Sunrise Utility System Rev., 5.20%, 10/1/22 (Ambac) 1,090,230 400,000 Tampa Guaranteed Entitlement Rev., 6.00%, 10/1/18 (Ambac)(1) 447,612 1,000,000 Tampa Water & Sewer Rev., 6.00%, 10/1/17 (FSA) 1,163,990 21,257,876 INDIANA -- 4.1% 1,350,000 Hamilton Southeastern Consolidated School Building Corp. Rev., (Hamilton County), 5.00%, 1/15/17 (FSA/State Aid Withholding)(1) 1,446,188 IOWA -- 5.8% 2,000,000 Iowa Finance Auth. Health Facilities Development Rev., Series 2006 A, (Care Initiatives), 5.25%, 7/1/14(1) 2,072,240 MASSACHUSSETTS -- 3.0% 1,050,000 Massachusetts Health & Educational Facilities Auth. Rev., Series 2007 E, (Milford Regional Medical Center), 5.00%, 7/15/17 1,076,366 OKLAHOMA -- 2.9% 1,000,000 Pottawatomie County Facilities Auth. Rev., (Shawnee Public Schools), 5.00%, 9/1/16 1,026,370 PUERTO RICO -- 6.0% 1,000,000 Puerto Rico GO, Series 2006 B, 5.00%, 12/1/16 1,061,090 1,000,000 Puerto Rico GO, Series 2006 B, 5.25%, 7/1/17 1,073,500 2,134,590 TEXAS -- 7.5% 1,000,000 City of Richardson GO, 5.25%, 2/15/18 (MBIA) 1,084,490 500,000 Tarrant County Cultural Education Facilities Finance Corp. Rev., Series 2007 A, (Texas Health Resources System), 5.00%, 2/15/24 514,495 - ------ 13 Florida Municipal Bond Principal Amount Value $1,000,000 Texas Public Finance Auth. Charter School Finance Corp. Rev., Series 2006 A, (KIPP, Inc.), 5.25%, 2/15/14 (ACA) $ 1,055,960 2,654,945 ----------- TOTAL MUNICIPAL SECURITIES (Cost $30,767,019) 31,668,575 ----------- Short-Term Municipal Securities -- 9.5% PUERTO RICO -- 9.5% 1,500,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/12/07 1,499,880 850,000 Government Development Bank of Puerto Rico Rev., 4.10%, 6/14/07 849,932 Principal Amount Value $ 500,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/22/07 $ 499,925 500,000 Government Development Bank of Puerto Rico Rev., 4.05%, 7/30/07 499,770 ----------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $3,350,000) 3,349,507 ----------- TOTAL INVESTMENT SECURITIES -- 98.8% (Cost $34,117,019) 35,018,082 ----------- OTHER ASSETS AND LIABILITIES -- 1.2% 420,685 ----------- TOTAL NET ASSETS -- 100.0% $35,438,767 =========== Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 35 U.S. Treasury 2-Year Notes September 2007 $7,132,891 $(6,094) =========== ========= Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 9 U.S. Treasury 10-Year Notes September 2007 $957,375 $1,023 =========== ========= Notes to Schedule of Investments ACA = American Capital Access Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2007. (1) Security, or a portion thereof, has been segregated for futures contracts. (2) Escrowed to maturity in U.S. government securities or state and local government securities. See Notes to Financial Statements. - ------ 14 PERFORMANCE Long-Term Tax-Free Total Returns as of May 31, 2007 Average Annual Returns Since Inception 1 year 5 years 10 years Inception Date A CLASS 3/31/97 No sales charge* With sales 4.58% 4.37%(1) 5.47%(1) 5.68%(1) charge* -0.09% 3.42%(1) 4.98%(1) 5.20%(1) LEHMAN BROTHERS MUNICIPAL BOND INDEX(2) 4.84% 4.94% 5.60% 5.75% -- LIPPER GENERAL MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 4.27% 4.33% 4.75% 4.91% -- A Class's Lipper Ranking(2) as of 5/31/07 77 of 243 95 of 215 19 of 137 15 of 136 -- as of 6/30/07 57 of 236 95 of 207 19 of 130 17 of 130 -- Investor Class 4.84% -- -- 4.54% 4/3/06 Institutional Class 5.05% -- -- 4.75% 4/3/06 B Class 3/31/97 No sales charge* With sales 3.80% 3.66%(1) 4.76%(1) 4.97%(1) charge* -0.20% 3.49%(1) 4.76%(1) 4.97%(1) C Class 3.80% -- -- 3.50% 4/3/06 *Sales charges include initial sales charges and contingent deferred sales charges (CDSCs), as applicable. A Class shares have a 4.50% maximum initial sales charge for fixed income funds and may be subject to a maximum CDSC of 1.00%. B Class shares redeemed within six years of purchase are subject to a CDSC that declines from 5.00% during the first year after purchase to 0.00% the sixth year after purchase. C Class shares redeemed within 12 months of purchase are subject to a maximum CDSC of 1.00%. Please see the Share Class Information page for more about the applicable sales charges for each share class. The SEC requires that mutual funds provide performance information net of maximum sales charges in all cases where charges could be applied. (1) Class returns may have been lower if fees had not been waived. (2) Data provided by Lipper Inc. - A Reuters Company. ©2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance -- Performance data is total return, and is preliminary and subject to revision. Lipper Rankings -- Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. 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 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. - ------ 15 Long-Term Tax-Free
Growth of $10,000 Over 10 Years $10,000 investment made May 31, 1997*
One-Year Returns Over 10 Years Periods ended May 31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 A Class** (no sales charge) 9.61% 5.12% -1.09% 12.57% 7.21% 10.64% -0.81% 6.66% 1.18% 4.58% Lehman Brothers Municipal Bond Index 9.39% 4.67% -0.86% 12.14% 6.51% 10.36% -0.03% 7.96% 1.89% 4.84% * Long-Term Tax-Free A Class's initial investment is $9,550 to reflect the maximum 4.50% initial sales charge. **Class returns may have been lower, along with ending value, if fees had not been waived. 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 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. - ------ 16 PORTFOLIO COMMENTARY Long-Term Tax-Free Lead Portfolio Managers: Robert Miller and Steven Permut PERFORMANCE SUMMARY Long-Term Tax-Free returned 4.58%* for the 12 months ended May 31, 2007. By comparison, the Lehman Brothers Municipal Bond Index returned 4.84%, while the average return of the 243 general municipal debt funds tracked by Lipper Inc. was 4.27%. The portfolio's average annual returns exceeded those of its Lipper group average for the one-, five-, and 10-year periods ended May 31, 2007 (see page 15). The portfolio's absolute return reflected the performance of the municipal market as a whole (see the Market Perspective on page 2). Relative to the benchmark, the portfolio underperformed because of its shorter duration (less price sensitivity to interest rate changes). Compared with the Lipper group, we believe the portfolio benefited from our duration, credit, and state allocation decisions. RATE POSITIONING A MIXED EFFECT After the reorganization of Mason Street Municipal Bond into Long-Term Tax-Free, we sold odd lots and other securities that didn't meet our investment criteria. Among the changes we made in conjunction with these trades were adjustments to duration, increasing it at the beginning of the fiscal year in anticipation of benefiting from a strong technical period for municipal bonds. Lengthening duration helped performance as rates fell (and bond prices rose) for much of the second half of 2006. However, we were lengthening the portfolio at a time when yields were low on an absolute basis, and the spread, or difference in yield, between AAA and lower-rated bonds was narrow. Now consider that the two components of a bond fund's total return are income and price changes. With yields low on an absolute basis and duration short relative to the index, this goes a long way toward explaining the portfolio's underperformance of the benchmark. Portfolio at a Glance As of As of 5/31/07 5/31/06 Weighted Average Maturity 11.8 years 13.7 years Average Duration (Modified) 5.7 years 5.4 years Yields as of May 31, 2007 30-Day SEC Yield Investor Class 3.88% Institutional Class 4.08% A Class 3.46% B Class 2.87% C Class 2.88% Investor Class 30-Day Tax-Equivalent Yields(1) 25.00% Tax Bracket 5.17% 28.00% Tax Bracket 5.39% 33.00% Tax Bracket 5.79% 35.00% Tax Bracket 5.97% (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 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. - ------ 17 Long-Term Tax-Free GIVING CREDIT We also helped performance by taking an overweight position relative to the peer group in bonds rated BBB and A. The spread, or difference in yield, between these lower-rated bonds and AAA securities tightened to historically low levels during the period. When credit spreads narrow, lower-rated bonds outperform. But this means that we were being compensated with less yield than in the past for taking on additional credit risk. As a result, we've been paring back that overweight position in recent months. In its place we added bonds higher in quality or from sectors likely to hold up better in an economic slowdown. For example, we bought some hospital bonds -- these securities aren't sensitive to economic cycles, and were trading at attractive levels because of a temporary increase in supply. ADDING YIELD Another way we enhanced returns was by taking advantage of yield discrepancies between bonds issued by different states and U.S. territories. For example, we increased our holdings in California municipal securities at attractive levels during stepped-up issuance in December. It also helped to have zero exposure to Florida bonds, whose performance was challenged by a large amount of supply at the same time the state eliminated its intangibles tax, reducing demand. It's also worth mentioning that we ended the reporting period with about 9% of assets in very short-term Puerto Rico commercial paper. These securities skew the portfolio's overall credit quality downward because of their BBB rating. However, we felt they offered an excellent risk/reward profile because they have money market-like maturities but yields comparable to even the longest-term municipal bonds. STARTING POINT FOR NEXT REPORTING PERIOD "We continue to focus on the fund's repeatable, multi-layered investment process, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," says portfolio manager Robert Miller. "We're also working hard to position the portfolio for slower economic growth. This means we're looking at lengthening duration slightly, trading up in credit quality, and shifting into more defensive sectors, such as hospital bonds, when we think we can add them at attractive relative values." Portfolio Composition By Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 AAA 37% 47% AA 14% 13% A 10% 9% BBB 30% 23% Unrated 9% 8% 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, 2007 % of fund investments General Obligation (GO) 30% Housing Revenue 13% Project Finance Revenue 9% Industrial Development Revenue 8% Special Tax Revenue 7% - ------ 18 SCHEDULE OF INVESTMENTS Long-Term Tax-Free MAY 31, 2007 Principal Amount Value Municipal Securities -- 89.5% ALASKA -- 3.4% $1,000,000 Aleutians East Borough Rev., (Aleutian Pribilof Islands Association, Inc.), 5.50%, 6/1/36 (ACA)(1) $ 1,063,440 ARIZONA -- 3.4% 1,000,000 Arizona Board of Regents COP, Series 2006 A, (University of Arizona), 5.00%, 6/1/18 (Ambac) 1,065,700 CALIFORNIA -- 16.7% 1,000,000 California GO, 5.00%, 6/1/16 1,059,390 1,000,000 Fillmore Redevelopment Agency Tax Allocation Rev., Series 2006 A, (Central City Redevelopment), 5.375%, 5/1/31 1,021,440 1,000,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A1, 5.75%, 6/1/47(1) 1,059,270 1,000,000 Jurupa Community Services District Special Tax Rev., Series 2006 A (Community Facilities District No. 17), 5.20%, 9/1/36 1,016,440 1,000,000 Murrieta Valley Unified School District Public Financing Auth. Special Tax Rev., Series 2006 A, 5.125%, 9/1/26 (AGC)(1) 1,064,310 5,220,850 COLORADO -- 7.2% 1,000,000 El Paso County School District No 8 & Fountain-Fort Carson School District Finance Corp. COP, 4.00%, 12/15/15 (Ambac) 997,550 1,200,000 Pinery West Metropolitan District No. 2 GO, 5.00%, 12/1/27 (RADIAN)(1) 1,247,220 2,244,770 GEORGIA -- 3.6% 1,000,000 Fulton County Development Auth. Rev., Series 2001 A, (TUFF/Atlanta Housing, LLC Project at Georgia State University), 5.50%, 9/1/18 (Ambac) 1,077,990 40,000 Municipal Electric Authority Rev., Series 1998 Y, 6.40%, 1/1/13 (Ambac) 43,945 1,121,935 Principal Amount Value ILLINOIS -- 3.2% $1,000,000 Illinois Finance Auth. Student Housing Rev., Series 2006 B, (Educational Advancement Fund, Inc.), 5.00%, 5/1/30 $ 1,010,060 INDIANA -- 3.4% 1,000,000 Indiana Bond Bank Rev., Series 2006 A, 5.00%, 8/1/20 (FSA)(1) 1,063,030 IOWA -- 4.2% 1,250,000 Iowa Finance Auth. Health Facilities Development Rev., Series 2006 A, (Care Initiatives), 5.50%, 7/1/21(1) 1,300,213 KANSAS -- 3.3% 1,000,000 City of Lawrence Rev., (Lawrence Memorial Hospital), 5.25%, 7/1/20 1,040,620 MICHIGAN -- 4.2% 1,225,000 Rochester Community School District GO, (School Building & Site), 5.00%, 5/1/14 (FGIC)(Q-SBLF)(1) 1,304,282 MINNESOTA -- 1.9% 600,000 Dakota County Community Development Agency Rev., (Catholic Finance Corp.), VRDN, 3.90%, 6/6/07 (LOC: U.S. Bank N.A.) 600,000 NEW YORK -- 6.8% 1,000,000 City of New York GO, Series 2006 A, 5.00%, 8/1/19 1,057,560 1,000,000 City of New York GO, Series 2006 I, 5.00%, 4/1/23 1,048,310 2,105,870 NORTH CAROLINA -- 3.6% 1,000,000 North Carolina Medical Care Commission Rev., Series 2004 A, (Health Care Housing - ARC Projects), 5.50%, 10/1/24 1,066,280 55,000 North Carolina Municipal Power Agency No. 1 Catawba Rev., 6.50%, 1/1/10 (MBIA)(1)(2) 58,612 1,124,892 PENNSYLVANIA -- 14.0% 1,000,000 Allegheny County Industrial Development Auth. Rev., (Residential Resources, Inc.), 4.50%, 9/1/11 1,001,280 - ------ 19 Long-Term Tax-Free Principal Amount Value $1,000,000 Central Dauphin School District GO, 7.00%, 2/1/16, Prerefunded at 100% of Par (MBIA/State Aid Withholding)(1)(2) $ 1,218,230 1,000,000 City of Philadelphia Gas Works Rev., Series 1998-7, (1998 General Ordinance), 5.00%, 10/1/27 (Ambac) 1,051,450 1,000,000 City of Pittsburgh GO, Series 2006 B, 5.25%, 9/1/17 (FSA) 1,088,690 4,359,650 SOUTH CAROLINA -- 3.3% 1,000,000 City of Myrtle Beach Tax Allocation Rev., Series 2006 A, (Myrtle Beach Air Force Base Redevelopment Project Area), 5.25%, 10/1/26 1,019,510 TENNESSEE -- 1.1% 350,000 Montgomery County Public Building Auth. Rev., (Tennessee County Loan Pool), VRDN, 3.90%, 6/1/07 (LOC: Bank of America N.A.) 350,000 TEXAS -- 6.2% 825,000 Garza County Public Facility Corp. Rev., 5.50%, 10/1/16(1) 877,874 1,000,000 Winkler County GO, 5.25%, 2/15/25 (RADIAN) 1,054,570 1,932,444 ----------- TOTAL MUNICIPAL SECURITIES (Cost $27,626,034) 27,927,266 ----------- Principal Amount Value Short-Term Municipal Securities -- 8.5% PUERTO RICO -- 8.5% $1,000,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/12/07 $ 999,919 500,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/22/07 499,925 320,000 Government Development Bank of Puerto Rico Rev., 4.10%, 7/20/07 319,898 825,000 Government Development Bank of Puerto Rico Rev., 4.10%, 10/12/07 824,300 ----------- TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $2,645,000) 2,644,042 ----------- Municipal Derivatives -- 1.4% TEXAS -- 1.4% 360,000 Texas GO, VRDN, Inverse Floater, 8.50%, 9/30/11(3) 422,968 (Cost $411,758) ----------- TOTAL INVESTMENT SECURITIES -- 99.4% (Cost $30,682,792) 30,994,276 ----------- OTHER ASSETS AND LIABILITIES -- 0.6% 201,883 ----------- TOTAL NET ASSETS -- 100.0% $31,196,159 =========== Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 31 U.S. Treasury 2-Year Notes September 2007 $6,317,703 $(5,398) =========== ========= Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 17 U.S. Treasury 10-Year Notes September 2007 $1,808,375 $1,933 =========== ========= Swap Agreements Notional Unrealized Amount Description of Agreement Expiration Date Gain (Loss) INTEREST RATE SWAP $1,500,000 Receive semiannually a variable rate based on the weekly Bond Market Association Municipal Swap Index and pay semiannually a fixed rate equal to 3.601% with Morgan Stanley Capital Services, Inc. September 2017 $29,022 ========= - ------ 20 Notes to Schedule of Investments ACA = American Capital Access AGC = Assured Guaranty Corp. Ambac = Ambac Assurance Corporation ARC = Auction Rate Certificate COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corporation Q-SBLF = Qualified State Bond Loan Fund RADIAN = Radian Asset Assurance, Inc. VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2007. (1) Security, or a portion thereof, has been segregated for futures contracts and/or swap agreements. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (3) 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. - ------ 21 PERFORMANCE High-Yield Municipal Total Returns as of May 31, 2007 Average Annual Returns Since Inception 1 year 5 years Inception Date INVESTOR CLASS 6.70% 6.75% 6.10%(1) 3/31/98 LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX 6.28% 6.74% 6.12% -- LIPPER HIGH-YIELD MUNICIPAL DEBT FUNDS AVERAGE RETURNS(2) 6.00% 6.08% 4.62% -- Investor Class's Lipper Ranking(2) as of 5/31/07 18 of 82 15 of 70 4 of 48(1) -- as of 6/30/07 7 of 82 15 of 70 4 of 48(1) -- A Class 1/31/03 No sales charge* 6.43% -- 6.23% With sales charge* 1.69% -- 5.12% B Class 1/31/03 No sales charge* 5.64% -- 5.47%(3) With sales charge* 1.64% -- 5.08%(3) C Class 5.64% -- 5.46% 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 page for more about the applicable sales charges for each share class. The SEC requires that mutual funds provide performance information net of maximum sales charges in all cases where charges could be applied. (1) 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. ©2007 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Lipper Fund Performance -- Performance data is total return, and is preliminary and subject to revision. Lipper Rankings -- Rankings are based only on the universe shown and are based on average annual total returns. This listing might not represent the complete universe of funds tracked by Lipper. The data contained herein has been obtained from company reports, financial reporting services, periodicals and other resources believed to be reliable. Although carefully verified, data on compilations is not guaranteed by Lipper and may be incomplete. No offer or solicitations to buy or sell any of the securities herein is being made by Lipper. (3) Class returns would have been lower if the class had not received partial reimbursements or waivers of its distribution and service fees. 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. - ------ 22 High-Yield Municipal
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 2007 Investor Class 1.81%** 6.18%** -2.81% 9.13% 8.25% 9.40% 3.07% 9.84% 4.91% 6.70% 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% 6.28% * From 3/31/98 (the Investor 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. - ------ 23 PORTFOLIO COMMENTARY High-Yield Municipal Lead Portfolio Manager: Steven Permut PERFORMANCE SUMMARY High-Yield Municipal returned 6.70%* for the 12 months ended May 31, 2007. By comparison, the investment-grade Lehman Brothers Long-Term Municipal Bond Index returned 6.28%, while the average return of the 82 high-yield municipal debt funds tracked by Lipper Inc. was 6.00%. The portfolio's average annual returns ranked in the top 25% of its Lipper group for the one- and five-year periods ended May 31, 2007, while its since-inception return ranked in the top 10% (see page 22). The portfolio's absolute return and performance relative to the Lehman Brothers Long-Term Municipal Bond Index reflected the behavior of the municipal market as a whole, where high-yield bonds outperformed investment-grade securities (see the Market Perspective on page 2). Relative to the Lipper group, we believe the portfolio benefited from credit upgrades to a number of our large, long-held positions, and some of our state and municipal sector allocation decisions. AIRLINES COME BACK TO EARTH In terms of our sector allocations, we believe some of the key contributions to performance relative to the Lipper group came from having no exposure to airline bonds, a modest weight -- but solid performance -- in tobacco bonds, and upgrades to some of our land-secured bonds. We had no exposure to airline bonds throughout the fiscal year -- we don't like their greater volatility and exposure to risk factors that are not typical of most municipal investments. This reporting period is a good example of those factors at work -- these securities performed very well in the second half of 2006 as merger speculation swirled around the industry. But these bonds have lagged so far in 2007 because some much-anticipated deals failed to materialize. As a result, our lack of airline exposure detracted from performance relative to the peer group in 2006, but helped during the last five months. In terms of our tobacco exposure, we believe we had a slightly underweight position relative to our peers; however, the securities we did hold performed very well, as our California Golden State Tobacco and New Jersey Tobacco Securitization Corporation bonds were prerefunded, meaning they were refinanced and saw their credit quality and value increase. Portfolio at a Glance As of As of 5/31/07 5/31/06 Weighted Average Maturity 17.0 years 18.9 years Average Duration (Modified) 5.4 years 5.6 years Yields as of May 31, 2007 30-Day SEC Yield Investor Class 4.28% A Class 3.85% B Class 3.27% C Class 3.27% Investor Class 30-Day Tax Equivalent Yields(1) 25.00% Tax Bracket 5.71% 28.00% Tax Bracket 5.94% 33.00% Tax Bracket 6.39% 35.00% Tax Bracket 6.58% (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 referenced in this commentary are for Investor Class shares. - ------ 24 High-Yield Municipal Among our land-secured bonds, we reduced our position and worked on diversifying the portfolio. It's worth mentioning that we think these bonds remain attractive even with the potential of a continued housing market decline. That's because the portfolio's land-secured bonds are backed by special assessment taxes that don't fluctuate with property values. Our land-secured bonds performed well, and late in 2006 two of our land-based holdings were prerefunded, while a third received a credit rating upgrade. POSITIONING FOR SLOWER GROWTH We also took steps to position the portfolio for slower economic growth by improving its credit profile and adding bonds in more defensive sectors. In terms of credit quality, we increased our exposure to BBB bonds over the course of the fiscal year from 12% to 19% of assets, mirroring a reduction in unrated bonds from 71% to 64%. Looking at our sector allocations, we trimmed our exposure to land-secured bonds, while increasing our exposure to hospital revenue bonds. We also reduced our holdings in Florida, whose bonds were challenged by a large amount of supply at the same time the state eliminated its intangibles tax, reducing demand. Add it all up, and Florida's bonds underperformed, so it helped to reduce exposure. STARTING POINT FOR NEXT REPORTING PERIOD "We continue to focus on the fund's well-established management strategy, based on thorough credit analysis, security selection, and investment monitoring over time. We think our track record versus our competition validates this steady, long-term approach to investing," says portfolio manager Steven Permut. "While we continue to see opportunity in non-rated and land-secured bonds, we're working hard to diversify the portfolio into sectors insulated against slower economic growth, such as health care and higher education bonds, trading at what we think are attractive relative values." Portfolio Composition By Credit Rating % of fund % of fund investments investments as of as of 5/31/07 11/30/06 AAA 11% 17% AA 1% 1% A 1% 1% BBB 19% 20% BB 4% 3% Unrated 64% 58% 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, 2007 % of fund investments Land Secured 39% Hospital Revenue 11% Project Finance Revenue 7% Prerefunded 7% Tax Allocation/Tax Increment 7% - ------ 25 SCHEDULE OF INVESTMENTS High-Yield Municipal MAY 31, 2007 Principal Amount Value Municipal Securities -- 99.2% ALABAMA -- 1.4% $4,150,000 Montgomery Medical Clinic Board Health Care Facility Rev., (Jackson Hospital & Clinic), 5.25%, 3/1/36(1) $ 4,232,793 ARIZONA -- 7.9% 2,500,000 Arizona Health Facilities Auth. Rev., Series 2007 B, (Banner Health), VRDN, 4.40%, 7/2/07(1) 2,500,000 590,000 Centerra Community Facilities District GO, 5.50%, 7/15/29 605,299 3,500,000 City of Surprise Municipal Property Corp. Wastewater Utility Rev., (Development Impact Fee and Sub-Lien), 4.90%, 4/1/32 3,465,525 2,000,000 Gilbert Water Resource Municipal Property Corp. Rev., (Development Fee & Sub-Lien), 4.90%, 4/1/19 2,024,520 900,000 Phoenix Industrial Development Auth. Rev., Series 2003 A, (Southwest Human Development), VRDN, 3.76%, 6/7/07 (LOC: Wells Fargo Bank N.A.)(1) 900,000 2,200,000 Pima County Industrial Development Auth. Rev., (Tucson Electric), VRDN, 3.80%, 6/6/07 (LOC: Bank of New York)(1) 2,200,000 3,015,000 Pronghorn Ranch Community Facilities District GO, 6.40%, 7/15/29(1) 3,260,421 1,120,000 Quailwood Meadows Community Facilities District GO, 6.00%, 7/15/22 1,183,941 2,000,000 Quailwood Meadows Community Facilities District GO, 6.125%, 7/15/29 2,113,060 941,000 Sundance Community Facilities Assessment District No. 2 Rev., 7.125%, 7/1/27 1,045,084 860,000 Sundance Community Facilities Assessment District No. 3 Rev., 6.50%, 7/1/29 935,843 395,000 Sundance Community Facilities District GO, 6.25%, 7/15/29 434,050 1,500,000 Vistancia Community Facilities District GO, 5.50%, 7/15/20 1,608,405 Principal Amount Value $1,200,000 Vistancia Community Facilities District GO, 5.75%, 7/15/24 $ 1,297,644 23,573,792 ARKANSAS -- 0.3% 1,000,000 Pulaski County Public Facilities Board Rev., Series 2006 A, (Philander Smith College), 5.60%, 6/1/36 1,005,220 CALIFORNIA -- 15.6% 2,000,000 Beaumont Financing Auth. Local Agency Rev., Series 2003 A, 6.875%, 9/1/13 2,340,200 1,490,000 Beaumont Financing Auth. Special Tax Rev., Series 2005 B, 5.40%, 9/1/35 1,553,206 2,000,000 California Mobilehome Park Financing Auth. Rev., Series 2003 B, (Palomar Estates E&W), 7.00%, 9/15/36(1) 2,200,620 735,000 California Statewide Communities Development Auth. Rev., (Thomas Jefferson School of Law), 7.75%, 10/1/11, Prerefunded at 101% of Par(2) 843,251 2,020,000 City of Lake Elsinore Community Facilities District No. 2006-2 Special Tax Rev., Series 2006 A, (Viscaya), 5.40%, 9/1/36 2,071,550 250,000 City of Palm Springs Rev., (Palm Springs International Airport), 5.45%, 7/1/20 256,195 530,000 City of Palm Springs Rev., (Palm Springs International Airport), 5.55%, 7/1/28 540,234 3,105,000 City of Tracy Community Facilities District No. 2006-01 Special Tax Rev., (NEI Phase II), 5.75%, 9/1/36 3,168,311 4,000,000 City of Vallejo COP, (Marine World Foundation), 7.00%, 2/1/17 4,134,400 4,000,000 Fillmore Redevelopment Agency Tax Allocation Rev., Series 2006 A, (Central City Redevelopment), 5.375%, 5/1/31 4,085,760 500,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2003 A1, 6.625%, 6/1/13(1) 572,410 2,420,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2003 A1, 6.75%, 6/1/13(1) 2,786,507 - ------ 26 High-Yield Municipal Principal Amount Value $7,000,000 Golden State Tobacco Securitization Corp. Settlement Rev., Series 2007 A1, 5.75%, 6/1/47(1) $ 7,414,883 885,000 Hawaiian Gardens COP, Series 2000 A, 8.00%, 6/1/10, Prerefunded at 102% of Par(2) 990,890 2,000,000 Hawaiian Gardens Redevelopment Agency Tax Allocation Rev., Series 2006 B, (Redevelopment Project No. 1), 5.40%, 12/1/25 2,026,440 2,235,000 Independent Cities Lease Finance Auth. Rev., Series 2004 A, (Morgan Hill - Hacienda Various Projects), 5.90%, 11/15/34 2,362,417 2,000,000 Indio Redevelopment Agency Tax Allocation Rev., Series 2004 B, (Sub-Merged Project Area), 6.50%, 8/15/34 2,186,420 680,000 Murrieta Valley Unified School District Special Tax Rev., (Community Facilities District No. 2002-4 - Improvement Area B), 5.45%, 9/1/38 694,015 3,000,000 Perris Public Financing Auth. Special Tax Rev., Series 2003 A, 6.25%, 9/1/33 3,258,990 1,000,000 Soledad Improvement Bond Act of 1915 Special Assessment, (Diamond Ridge Assessment District No. 2002-01), 6.75%, 9/2/33 1,087,630 1,580,000 Vallejo Multifamily Housing Rev., Series 1998 B, (Solano Affordable Housing), 8.25%, 4/1/39 (Acquired 12/12/02, Cost $1,710,176)(3) 1,789,698 46,364,027 COLORADO -- 11.3% 750,000 Colorado Health Facilities Auth. Rev., (The Evangelical Lutheran Good Samaritan Society), 5.25%, 6/1/31(1) 775,815 2,500,000 Colorado Health Facilities Auth. Rev., (The Evangelical Lutheran Good Samaritan Society), 5.25%, 6/1/36(1) 2,578,675 3,000,000 Denver Health & Hospital Auth. Healthcare Rev., Series 2004 A, 6.25%, 12/1/14(1) 3,428,850 10,000,000 Denver Health & Hospital Auth. Healthcare Rev., Series 2007 B, VRDN, 4.69%, 9/1/07, resets quarterly at 67% of the 3-month LIBOR plus 1.10% with no caps(1) 10,000,000 Principal Amount Value $ 800,000 Eagle County Air Terminal Corp. Rev., Series 2006 A, (Airport Terminal), 5.15%, 5/1/17 $ 814,335 475,000 Eagle County Air Terminal Corp. Rev., Series 2006 B, (Airport Terminal), 5.25%, 5/1/20 483,094 5,725,000 Granby Ranch Metropolitan District GO, 6.75%, 12/1/36 5,982,511 3,000,000 One Horse Business Improvement District Rev., 6.00%, 6/1/24(1) 3,169,740 1,500,000 Plaza Metropolitan District No. 1 Rev., 8.00%, 12/1/25 1,659,000 2,000,000 Todd Creek Farms Metropolitan District No. 1 Rev., 5.60%, 12/1/14 2,062,300 1,500,000 Todd Creek Farms Metropolitan District No. 1 Rev., 6.125%, 12/1/19 1,575,300 1,170,000 Walker Field Public Airport Auth. Rev., 5.00%, 12/1/22 1,183,829 33,713,449 CONNECTICUT -- 0.4% 1,000,000 Connecticut Development Auth. Industrial Rev., (Afco Cargo BDL-LLC), 8.00%, 4/1/30 1,078,560 DISTRICT OF COLUMBIA -- 0.6% 1,000,000 District of Columbia COP, (Public Safety & Emergency), 5.50%, 1/1/19 (Ambac)(1) 1,076,740 750,000 Metropolitan Washington D.C. Airports Auth. General Rev., Series 2001 A, 5.50%, 10/1/18 (MBIA)(1) 795,248 1,871,988 FLORIDA -- 11.9% 2,765,000 Anthem Park Community Development District Rev., 5.80%, 5/1/36 2,879,029 5,000,000 Arborwood Community Development District Special Assessment Rev., Series 2006 B, (Centex Homes), 5.25%, 5/1/16 4,990,949 1,470,000 Bartam Park Community Development Special Assessment, 5.30%, 5/1/35 1,478,747 2,800,000 Belmont Community Development District Special Assessment Rev., Series 2006 B, 5.125%, 11/1/14 2,788,604 - ------ 27 High-Yield Municipal Principal Amount Value $1,150,000 Broward County Health Facilities Auth. Rev., (John Knox Village), VRDN, 4.00%, 6/1/07 (RADIAN) (SBBPA: SunTrust Bank)(1) $ 1,150,000 1,100,000 Cascades at Groveland Community Development District Special Assessment Rev., 5.30%, 5/1/36 1,101,881 2,320,000 Concorde Estates Community Development District Rev., Series 2004 B, 5.00%, 5/1/11 2,319,907 140,000 Covington Park Community Development District Rev., Series 2004 B, (Capital Improvement), 5.30%, 11/1/09 140,106 970,000 Double Branch Community Development District Special Assessment, Series 2002 A, 6.70%, 5/1/34 1,071,753 50,000 Double Branch Community Development District Special Assessment, Series 2003 C, 5.125%, 5/1/08 50,005 2,660,000 Dupree Lakes Community Development District Rev., 5.00%, 11/1/10 2,660,213 985,000 East Homestead Community Development District Special Assessment Rev., 5.375%, 5/1/36 987,472 520,000 Fleming Island Plantation Community Development District Special Assessment, Series 2000 B, 7.375%, 5/1/10 574,668 590,000 Gateway Services Community Development District Special Assessment, Series 2003 B, (Sun City Center - Fort Meyers), 5.50%, 5/1/10 591,180 1,000,000 Hawks Point Community Development District Special Assessment, Series 2007 A, 5.30%, 5/1/39 990,070 240,000 Middle Village Community Development District Special Assessment, Series 2004 B, 5.00%, 5/1/09 240,046 2,500,000 Midtown Miami Community Development District Special Assessment, Series 2004 A, 6.25%, 5/1/37(1) 2,705,750 1,300,000 Palm Glades Community Development District Special Assessment, Series 2006 A, 5.30%, 5/1/36 1,302,223 Principal Amount Value $ 35,000 Reunion East Community Development District Special Assessment Rev., Series 2002 B, 5.90%, 11/1/07 $35,121 1,245,000 South-Dade Venture Community Development District Rev., 6.125%, 5/1/34 1,323,460 870,000 Sterling Hill Community Development District Special Assessment, Series 2003 B, 5.50%, 11/1/10 870,835 360,000 Stoneybrook West Community Development District Special Assessment, Series 2000 A, 7.00%, 5/1/32 383,270 935,000 Waterchase Community Development District Rev., Series 2001 A, 6.70%, 5/1/32 1,019,159 1,680,000 Waters Edge Community Development District Rev., 5.30%, 5/1/36 1,682,873 1,995,000 Westchester Community Development District No. 1 Special Assessment, (Infrastructure), 6.125%, 5/1/35 2,100,356 35,437,677 GEORGIA -- 1.0% 1,235,000 City of Atlanta Tax Allocation Rev., (Princeton Lakes), 5.50%, 1/1/31 1,258,193 1,800,000 Medical Center Hospital Auth. Rev., (Spring Harbor at Green Island), 5.25%, 7/1/37 1,820,574 3,078,767 GUAM -- 0.5% 1,500,000 Guam Government Waterworks Auth. Rev., 6.00%, 7/1/25 1,635,615 ILLINOIS -- 9.0% 1,325,000 Bedford Park Tax Allocation Rev., 5.125%, 12/30/18 1,342,384 3,000,000 Chicago Park District GO, Series 2006 C, 5.00%, 1/1/12 (FGIC)(1) 3,139,110 3,000,000 Chicago Tax Increment Allocation Rev., Series 2004 B, (Pilsen Redevelopment), (Junior Lien), 6.75%, 6/1/22(1) 3,266,460 6,000,000 City of Yorkville Special Service Area No. 2005-109 Special Tax Rev., (Bristol Bay I), 5.875%, 3/1/36 6,177,719 3,347,000 Pingree Grove Special Service Area No. 7 Special Tax Rev., Series 2006-1, (Cambridge Lakes), 6.00%, 3/1/36 3,476,997 - ------ 28 High-Yield Municipal Principal Amount Value $1,000,000 Village of Bolingbrook Rev., VRDN, 0.00%, 1/1/08(4) $ 996,640 5,000,000 Village of Hampshire Special Service Area No. 13 Special Tax Rev., (Tuscany Woods), 5.75%, 3/1/37 4,954,450 3,500,000 Volo Village Special Service Area No. 3 Special Tax Rev., Series 2006-1, (Symphony Meadows), 6.00%, 3/1/36 3,635,940 26,989,700 IOWA -- 1.4% 2,000,000 Iowa Finance Auth. Senior Living Facility Rev., Series 2007 A, (Deerfield Retirement Community, Inc.), 5.50%, 11/15/37 2,036,560 2,000,000 Tobacco Settlement Auth. Rev., Series 2005 C, 5.50%, 6/1/42 2,064,600 4,101,160 MARYLAND -- 2.3% 1,240,000 Anne Arundel County Special Obligation Rev., (Arundel Mills), 7.10%, 7/1/09, Prerefunded at 102% of Par(2) 1,342,994 1,000,000 Anne Arundel County Special Obligation Rev., (National Business Park), 7.375%, 7/1/10, Prerefunded at 102% of Par(2) 1,116,840 1,000,000 Baltimore Rev., (North Locust Point), 5.50%, 9/1/34 1,039,970 1,000,000 Maryland Health & Higher Educational Facilities Auth. Rev., Series 2007 A, (King Farm Presbyterian Retirement Community), 5.30%, 1/1/37 1,026,330 1,000,000 Maryland Industrial Development Financing Auth. Rev., Series 2005 A, (Our Lady of Good Counsel High School), 6.00%, 5/1/35 1,072,430 1,210,000 Prince Georges County Rev., (Woodview Village Phase II - Subdistrict), 7.00%, 7/1/12 1,395,518 6,994,082 MINNESOTA -- 3.3% 2,595,000 City of Redwood Falls Rev., (Redwood Area Hospital), 5.125%, 12/1/36 2,604,679 7,000,000 St. Paul Housing & Redevelopment Auth. Health Care Facilities Rev., (Healthpartners Obligated Group), 5.25%, 5/15/36(1) 7,180,810 9,785,489 Principal Amount Value MISSOURI -- 0.7% $ 355,000 Grindstone Plaza Transportation Development District Rev., Series 2006 A, 5.50%, 10/1/31 $ 359,494 500,000 Grindstone Plaza Transportation Development District Rev., Series 2006 A, 5.55%, 10/1/36 505,075 860,000 Missouri Bottom Transportation Development District Hazelwood Rev., 7.20%, 5/1/33 951,513 280,000 Missouri Housing Development Commission Mortgage Rev., Series 1998 B2, (Single Family), 6.40%, 9/1/29 288,940 2,105,022 MONTANA -- 0.3% 1,000,000 Flathead Municipal Airport Auth. Rev., Series 2007 A, (Glacier Park International Airport), 5.00%, 6/1/20 994,810 NEVADA -- 7.1% 1,085,000 Clark County Improvement District No. 121 Special Assessment, (Southern Highlands Area), 7.50%, 12/1/09, Prerefunded at 102% of Par(2) 1,190,191 2,995,000 Clark County Improvement District No. 142 Special Assessment, 5.50%, 8/1/12 3,088,233 670,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.25%, 2/1/12 686,790 705,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.375%, 2/1/13 726,707 685,000 Clark County Improvement Districts No. 108 & 124 Special Assessment, Series 2003 B, 5.40%, 2/1/14 706,071 1,350,000 Henderson Local Improvement District No. T-14 Special Assessment, 5.25%, 3/1/13 1,392,269 1,535,000 Henderson Local Improvement District No. T-15 Special Assessment, 6.10%, 3/1/24 1,584,888 250,000 Henderson Local Improvement District No. T-17 Special Assessment, 5.00%, 9/1/18 254,038 6,600,000 Henderson Local Improvement District No. T-18 Special Assessment, 5.30%, 9/1/35 6,672,533 - ------ 29 High-Yield Municipal Principal Amount Value $1,105,000 Henderson Redevelopment Agency Tax Allocation Rev., Series 2002 B, 7.10%, 10/1/22 $ 1,208,594 350,000 Henderson Redevelopment Agency Tax Allocation Rev., Series 2002 B, 7.20%, 10/1/25 382,662 1,275,000 Las Vegas Improvement District No. 607 Special Assessment, 5.50%, 6/1/13(1) 1,318,159 495,000 Las Vegas Improvement District No. 808-Summerlin Area Special Assessment, 5.70%, 6/1/08 500,559 720,000 Reno Special Assessment District No. 4 Rev., (Somersett Parkway), 5.20%, 12/1/10 736,927 760,000 Reno Special Assessment District No. 4 Rev., (Somersett Parkway), 5.45%, 12/1/11 783,264 21,231,885 NEW JERSEY -- 4.7% 1,300,000 New Jersey Economic Development Auth. Rev., (Seabrook Village, Inc. Facility), 5.25%, 11/15/36 1,316,393 5,000,000 New Jersey Economic Development Auth. Rev., Series 2006 A, (Gloucester Marine Terminal), 6.625%, 1/1/37 5,334,650 5,000,000 New Jersey Economic Development Auth. Rev., Series 2006 B, (Gloucester Marine Terminal), 6.875%, 1/1/37 5,348,600 2,000,000 New Jersey Economic Development Auth. Rev., Series 2006 C, (Gloucester Marine Terminal), 6.50%, 1/1/15 2,087,280 14,086,923 NEW MEXICO -- 1.2% 1,490,000 Cabezon Public Improvement District Special Tax Rev., 6.30%, 9/1/34 1,576,897 1,000,000 Mariposa East Public Improvement District GO, 6.00%, 9/1/32 1,039,080 1,000,000 Ventana West Public Improvement District Special Levy Rev., 6.875%, 8/1/33 1,077,680 3,693,657 NEW YORK -- 0.7% 1,000,000 Onondaga County Industrial Development Auth. Rev., (Air Cargo), 7.25%, 1/1/32(1) 1,080,940 Principal Amount Value $1,000,000 Seneca Nation Indians Capital Improvements Auth. Special Obligation Rev., Series 2007 A, 5.00%, 12/1/23 (Acquired 4/24/07, Cost $994,370)(3) $ 1,009,800 2,090,740 NORTHERN MARIANA ISLANDS -- 0.8% 2,000,000 Northern Mariana Islands GO, Series 2003 A, 6.75%, 10/1/33(1) 2,269,580 OHIO -- 1.8% 1,115,000 Hebron Waterworks Rev., 5.875%, 12/1/25(1) 1,176,403 745,000 Hebron Waterworks Rev., 6.125%, 12/1/29(1) 796,033 285,000 New Albany Plain Local School District GO, 5.50%, 12/1/19 (FGIC) 304,799 1,800,000 Pinnacle Community Infrastructure Financing Facilities Auth. Rev., Series 2004 A, 6.25%, 12/1/36 1,898,298 1,100,000 Port of Greater Cincinnati Development Auth. Special Assessment, (Cooperative Public Parking Infrastructure), 6.40%, 2/15/34 1,182,599 5,358,132 OKLAHOMA -- 1.1% 2,500,000 Norman Regional Hospital Auth. Rev., 5.375%, 9/1/36(1) 2,599,525 750,000 Oklahoma City Industrial & Cultural Facilities Trust Rev., 6.75%, 1/1/23(1) 804,038 3,403,563 OREGON -- 0.7% 2,000,000 Cow Creek Band of Umpqua Tribe of Indians Rev., Series 2006 C, 5.625%, 10/1/26 2,034,400 PENNSYLVANIA -- 4.3% 4,375,000 Allegheny County Redevelopment Auth. Tax Allocation, (Pittsburgh Mills), 5.10%, 7/1/14 4,473,655 1,500,000 Allegheny County Redevelopment Auth. Tax Allocation, (Pittsburgh Mills), 5.60%, 7/1/23 1,568,895 3,000,000 City of Wilkes-Barre Finance Auth. Rev., (Wilkes University), 5.00%, 3/1/37 3,039,060 1,000,000 Langhorne Manor Boro Higher Education Auth. Rev., (Philadelphia Biblical University), 5.50%, 4/1/25 1,027,110 - ------ 30 High-Yield Municipal Principal Amount Value $ 360,000 New Morgan Municipal Auth. Office Rev., Series 1999 A, (Commonwealth Office), 5.375%, 6/1/08 $ 359,302 1,125,000 Pennsylvania Higher Educational Facilties Auth. Rev., (Philadelphia University), 5.00%, 6/1/30(1) 1,140,030 1,250,000 Washington County Redevelopment Auth. Tax Allocation Rev., Series 2006 A, (Victory Centre Project - Tanger Outlet Development), 5.45%, 7/1/35 1,277,663 12,885,715 RHODE ISLAND -- 0.2% 500,000 Cranston GO, 6.375%, 11/15/09, Prerefunded at 101% of Par (FGIC)(1)(2) 535,010 SOUTH CAROLINA -- 0.8% 1,000,000 City of Myrtle Beach Tax Allocation Rev., Series 2006 A, (Myrtle Beach Air Force Base Redevelopment Project Area), 5.30%, 10/1/35 1,020,960 1,250,000 Lancaster County Special Assessment, (Sun City Lakes Improvement), 5.45%, 12/1/37 1,265,688 2,286,648 TENNESSEE -- 2.4% 1,410,000 Chattanooga Health Educational & Housing Facility Board Rev., Series 2005 B, (Campus Development Foundation, Inc. Phase I LLC), 5.50%, 10/1/20 1,452,258 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 3,779,078 2,000,000 Sullivan County Health, Educational & Housing Facilities Board Hospital Rev., Series 2006 C, (Wellmont Health System), 5.25%, 9/1/36 2,056,660 7,287,996 TEXAS -- 0.9% 505,000 Abia Development Corp. Airport Facilities Rev., (Aero Austin L.P.), 6.75%, 1/1/11 524,751 2,000,000 Pearland Development Auth. Tax Allocation Rev., 5.50%, 9/1/28 (RADIAN-IBC)(1) 2,146,960 2,671,711 Principal Amount Value VIRGINIA -- 0.7% $2,000,000 Tobacco Settlement Financing Corp. Rev., 5.625%, 6/1/15 $ 2,214,440 WASHINGTON -- 0.8% 860,000 Cowlitz County Kelso School District No. 458 GO, 5.75%, 12/1/18 (FSA) (School Bond Guarantee)(1) 929,411 250,000 Port of Seattle Rev., Series 2000 B, 6.00%, 2/1/15 (MBIA) 280,385 1,080,000 Terrace Heights Sewer District Rev., 5.00%, 1/1/33 1,087,830 2,297,626 WISCONSIN -- 3.1% 4,955,000 Badger Tobacco Asset Securitization Corp. Rev., 6.125%, 6/1/27(1) 5,315,377 2,000,000 Wisconsin Health & Educational Facilities Auth. Rev., Series 2004 A, (Southwest Health Center), 6.25%, 4/1/34 2,111,420 1,750,000 Wisconsin Health & Educational Facilities Auth. Rev., Series 2006 A, (Marshfield Clinic), 5.375%, 2/15/34 1,822,678 9,249,475 ------------ TOTAL MUNICIPAL SECURITIES (Cost $286,696,518) 296,559,652 ------------ Short-Term Municipal Securities -- 1.0% PUERTO RICO -- 1.0% 2,045,000 Government Development Bank of Puerto Rico Rev., 4.05%, 6/22/07 2,044,693 1,090,000 Government Development Bank of Puerto Rico Rev., 4.10%, 10/12/07 1,089,074 ------------ TOTAL SHORT-TERM MUNICIPAL SECURITIES (Cost $3,135,000) 3,133,767 ------------ TOTAL INVESTMENT SECURITIES -- 100.2% (Cost $289,831,518) 299,693,419 ------------ OTHER ASSETS AND LIABILITIES -- (0.2)% (740,127) ------------ TOTAL NET ASSETS -- 100.0% $298,953,292 ============ - ------ 31 Futures Contracts Underlying Face Unrealized Contracts Purchased Expiration Date Amount at Value Gain (Loss) 271 U.S. Treasury 2-Year Notes September 2007 $55,228,953 $(47,188) ============ ========== Underlying Face Unrealized Contracts Sold Expiration Date Amount at Value Gain (Loss) 250 U.S. Treasury 10-Year Notes September 2007 $26,593,750 $28,426 ============ ========== Notes to Schedule of Investments Ambac = Ambac Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance, Inc. GO = General Obligation LIBOR = London Interbank Offered Rate LOC = Letter of Credit MBIA = MBIA Insurance Corporation RADIAN = Radian Asset Assurance, Inc. RADIAN-IBC = Radian Asset Assurance, Inc. -- Insured Bond Certificates resets = The frequency with which a security's coupon changes, based on current market conditions or an underlying index. The more frequently a security resets, the less risk the investor is taking that the coupon will vary significantly from current market rates. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown is effective May 31, 2007. (1) Security, or a portion thereof, has been segregated for futures contracts. (2) Escrowed to maturity in U.S. government securities or state and local government securities. (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, 2007 was $2,799,498, which represented 0.9% of total net assets. (4) 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, 2007. See Notes to Financial Statements. - ------ 32 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, 2006 to May 31, 2007. ACTUAL EXPENSES The table provides information about actual account values and actual expenses for each class. You may use the information, together with the amount you invested, to estimate the expenses that you paid over the period. First, identify the share class you own. Then simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. If you hold Investor Class shares of any American Century fund, or Institutional Class shares of the American Century Diversified Bond Fund, in an American Century account (i.e., not a financial intermediary or retirement plan account), American Century may charge you a $12.50 semiannual account maintenance fee if the value of those shares is less than $10,000. We will redeem shares automatically in one of your accounts to pay the $12.50 fee. In determining your total eligible investment amount, we will include your investments in all PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered under your Social Security number. PERSONAL ACCOUNTS include individual accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell Education Savings Accounts and IRAs (including traditional, Roth, Rollover, SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you have only business, business retirement, employer-sponsored or American Century Brokerage accounts, you are currently not subject to this fee. We will not charge the fee as long as you choose to manage your accounts exclusively online. If you are subject to the Account Maintenance Fee, your account value could be reduced by the fee amount. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The table also provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio of each class of your fund and an assumed rate of return of 5% per year before expenses, which is not the actual return of a fund's share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption/exchange fees. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - ------ 33 Beginning Expenses Paid Account Ending During Period* Annualized Value Account Value 12/1/06 - Expense 12/1/06 5/31/07 5/31/07 Ratio* Arizona Municipal Bond ACTUAL Investor Class $1,000 $1,002.90 $2.45 0.49% A Class $1,000 $1,001.60 $3.69 0.74% B Class $1,000 $997.90 $7.42 1.49% C Class $1,000 $997.90 $7.42 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 ACTUAL Investor Class $1,000 $1,002.40 $2.45 0.49% A Class $1,000 $1,001.20 $3.69 0.74% B Class $1,000 $997.50 $7.42 1.49% C Class $1,000 $997.50 $7.42 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% Long-Term Tax-Free ACTUAL Investor Class $1,000 $1,000.70 $2.44 0.49% Institutional Class $1,000 $1,001.70 $1.45 0.29% A Class $1,000 $999.40 $3.69 0.74% B Class $1,000 $995.70 $7.41 1.49% C Class $1,000 $995.70 $7.41 1.49% HYPOTHETICAL Investor Class $1,000 $1,022.49 $2.47 0.49% Institutional Class $1,000 $1,023.49 $1.46 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 $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. - ------ 34 Expenses Paid Beginning Ending During Period* Account Value Account Value 12/1/06 - Annualized 12/1/06 5/31/07 5/31/07 Expense Ratio* High-Yield Municipal ACTUAL Investor Class $1,000 $1,017.50 $3.12 0.62% A Class $1,000 $1,016.30 $4.37 0.87% B Class $1,000 $1,012.50 $8.13 1.62% C Class $1,000 $1,012.50 $8.13 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% * 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. - ------ 35 STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2007 Arizona Florida Municipal Municipal Long-Term High-Yield Bond Bond Tax-Free Municipal ASSETS Investment securities, at value (cost of $50,513,364, $34,117,019, $30,682,792, and $289,831,518, respectively) $51,936,405 $35,018,082 $30,994,276 $299,693,419 Cash -- 21,596 -- 294,737 Receivable for capital shares sold -- -- 71,737 81,977 Unrealized appreciation on swap agreements -- -- 29,022 -- Interest receivable 950,790 456,152 378,234 4,473,471 ----------- ----------- ----------- ------------ 52,887,195 35,495,830 31,473,269 304,543,604 ----------- ----------- ----------- ------------ LIABILITIES Disbursements in excess of demand deposit cash 12,743 -- 220,876 -- Payable for investments purchased -- -- -- 4,995,213 Payable for capital shares redeemed -- -- 30,778 36,883 Payable for variation margin on futures contracts 3,569 2,829 1,498 1,777 Accrued management fees 21,968 14,737 10,048 154,150 Distribution fees payable 374 651 932 27,282 Service fees (and distribution fees -- A Class) payable 568 405 2,979 42,297 Dividends payable 38,638 38,441 9,999 332,710 ----------- ----------- ----------- ------------ 77,860 57,063 277,110 5,590,312 ----------- ----------- ----------- ------------ NET ASSETS $52,809,335 $35,438,767 $31,196,159 $298,953,292 =========== =========== =========== ============ See Notes to Financial Statements. - ------ 36 MAY 31, 2007 Arizona Florida Municipal Municipal Long-Term High-Yield Bond Bond Tax-Free Municipal NET ASSETS CONSIST OF: Capital paid in $51,538,519 $34,621,331 $31,387,219 $289,942,502 Undistributed net investment income -- -- 27,577 -- Accumulated net realized loss on investment transactions (145,331) (78,556) (555,678) (832,349) Net unrealized appreciation on investments 1,416,147 895,992 337,041 9,843,139 ----------- ----------- ----------- ------------ $52,809,335 $35,438,767 $31,196,159 $298,953,292 =========== =========== =========== ============ INVESTOR CLASS Net assets $50,211,499 $33,556,419 $222,093 $97,254,421 Shares outstanding 4,706,378 3,189,789 20,605 9,104,250 Net asset value per share $10.67 $10.52 $10.78 $10.68 INSTITUTIONAL CLASS Net assets N/A N/A $17,284,500 N/A Shares outstanding N/A N/A 1,603,633 N/A Net asset value per share N/A N/A $10.78 N/A A CLASS Net assets $2,012,855 $890,438 $12,232,567 $158,621,966 Shares outstanding 188,667 84,643 1,134,904 14,849,037 Net asset value per share $10.67 $10.52 $10.78 $10.68 Maximum offering price (net asset value divided by 0.955) $11.17 $11.02 $11.29 $11.18 B CLASS Net assets $42,067 $9,740 $1,415,688 $4,790,093 Shares outstanding 3,943 926 131,360 448,413 Net asset value per share $10.67 $10.52 $10.78 $10.68 C CLASS Net assets $542,914 $982,170 $41,311 $38,286,812 Shares outstanding 50,888 93,362 3,833 3,584,129 Net asset value per share $10.67 $10.52 $10.78 $10.68 See Notes to Financial Statements. - ------ 37 STATEMENT OF OPERATIONS YEAR ENDED MAY 31, 2007 Arizona Florida Municipal Municipal Long-Term High-Yield Bond Bond Tax-Free Municipal INVESTMENT INCOME (LOSS) INCOME: Interest $2,519,391 $1,816,032 $1,553,643 $15,258,899 ----------- ----------- ----------- ----------- EXPENSES: Management fees 267,079 192,197 133,740 1,731,500 Distribution fees: B Class 318 111 12,742 34,126 C Class 3,714 8,887 280 262,046 Service fees: B Class 106 37 4,248 11,375 C Class 1,238 2,963 93 87,349 Service and distribution fees -- A Class 5,883 2,707 39,277 364,702 Trustees' fees and expenses 2,677 1,953 1,699 13,429 Other expenses 133 65 2,084 4,265 ----------- ----------- ----------- ----------- 281,148 208,920 194,163 2,508,792 ----------- ----------- ----------- ----------- NET INVESTMENT INCOME (LOSS) 2,238,243 1,607,112 1,359,480 12,750,107 ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: Investment transactions 87,383 361,821 406,197 1,812,601 Futures and swaps transactions (78,275) (67,634) (56,190) (155,112) ----------- ----------- ----------- ----------- 9,108 294,187 350,007 1,657,489 ----------- ----------- ----------- ----------- CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: Investments (34,276) (368,903) (43,810) 3,160,262 Futures and swaps (7,516) (724) 2,204 (37,824) ----------- ----------- ----------- ----------- (41,792) (369,627) (41,606) 3,122,438 ----------- ----------- ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) (32,684) (75,440) 308,401 4,779,927 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,205,559 $1,531,672 $1,667,881 $17,530,034 =========== =========== =========== ============ See Notes to Financial Statements. - ------ 38 STATEMENT OF CHANGES IN NET ASSETS YEARS ENDED MAY 31, 2007 AND MAY 31, 2006 Arizona Municipal Bond Florida Municipal Bond Increase (Decrease) in Net Assets 2007 2006 2007 2006 OPERATIONS Net investment income (loss) $ 2,238,243 $ 2,238,857 $ 1,607,112 $ 1,867,355 Net realized gain (loss) 9,108 (22,700) 294,187 128,131 Change in net unrealized appreciation (depreciation) (41,792) (1,306,999) (369,627) (1,317,179) ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 2,205,559 909,158 1,531,672 678,307 ----------- ----------- ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income: Investor Class (2,131,677) (2,116,841) (1,528,370) (1,747,251) A Class (90,009) (149,814) (41,573) (68,050) B Class (1,307) (564) (460) (702) C Class (15,250) (16,490) (36,709) (51,352) From net realized gains: Investor Class -- (107,409) -- -- A Class -- (8,242) -- -- B Class -- (5) -- -- C Class -- (1,271) -- -- ----------- ----------- ----------- ----------- Decrease in net assets from distributions (2,238,243) (2,400,636) (1,607,112) (1,867,355) ----------- ----------- ----------- ----------- CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets from capital share transactions (3,727,562) (133,483) (8,054,720) (8,645,069) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS (3,760,246) (1,624,961) (8,130,160) (9,834,117) NET ASSETS Beginning of period 56,569,581 58,194,542 43,568,927 53,403,044 ----------- ----------- ----------- ----------- End of period $52,809,335 $56,569,581 $35,438,767 $43,568,927 =========== =========== =========== =========== See Notes to Financial Statements. - ------ 39 YEARS ENDED MAY 31, 2007, MAY 31, 2006 AND MARCH 31, 2006 (AS NOTED) Long-Term Tax-Free High-Yield Municipal Increase (Decrease) in Net May 31, March 31, Assets May 31, 2007 2006(1) 2006(2) May 31, 2007 May 31, 2006 OPERATIONS Net investment income (loss) $ 1,359,480 $ 235,080 $ 3,211,231 $ 12,750,107 $ 9,534,884 Net realized gain (loss) 350,007 216,023 1,534,758 1,657,489 135,918 Change in net unrealized appreciation (depreciation) (41,606) (299,120) (1,633,663) 3,122,438 (139,841) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations 1,667,881 151,983 3,112,326 17,530,034 9,530,961 ------------ ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income: Investor Class (5,831) (150) -- (4,616,008) (3,542,920) Institutional Class (712,795) (101,957) -- -- -- A Class (588,921) (123,267) (3,153,287) (6,636,230) (4,950,399) B Class (50,819) (9,596) (58,352) (172,636) (154,146) C Class (1,115) (111) -- (1,325,233) (898,478) ------------ ------------ ------------ ------------ ------------ Decrease in net assets from distributions (1,359,481) (235,081) (3,211,639) (12,750,107) (9,545,943) ------------ ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets from capital share transactions (6,952,148) (991,372) (86,867,934) 45,266,593 86,282,597 ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS (6,643,748) (1,074,470) (86,967,247) 50,046,520 86,267,615 NET ASSETS Beginning of period 37,839,907 38,914,377 125,881,624 248,906,772 162,639,157 ------------ ------------ ------------ ------------ ------------ End of period $31,196,159 $37,839,907 $38,914,377 $298,953,292 $248,906,772 ============ ============ ============ ============ ============ Undistributed net investment income $27,577 $27,578 $33,650 -- -- ============ ============ ============ ============ ============ (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 NOTES TO FINANCIAL STATEMENTS MAY 31, 2007 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 Bond), Florida Municipal Bond Fund (Florida Municipal Bond), 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). Arizona Municipal Bond, Florida Municipal Bond and High-Yield Municipal are non-diversified under the 1940 Act. Long-Term Tax-Free is diversified under the 1940 Act. Arizona Municipal Bond'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 Bond'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 Bond and Florida Municipal Bond 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 Bond, Florida Municipal Bond 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 distribution and shareholder servicing expenses and arrangements. All shares of the fund represent an equal pro rata interest in the assets of the class to which such shares belong, and have identical voting, dividend, liquidation and other rights and the same terms and conditions, except for class specific expenses and exclusive rights to vote on matters affecting only individual classes. Income, non-class specific expenses, and realized and unrealized capital gains and losses of the fund are allocated to each class of shares based on their relative net assets. 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 an event occurs after the value of a security was established but before the net asset value per share was determined that was likely to materially change the net asset value, that security would be valued as determined in accordance with procedures adopted by the Board of Trustees. If the funds determine that the market price of a portfolio security is not readily available, or that the valuation methods mentioned above do not reflect the security's fair value, such security is valued as determined by, or in accordance with procedures adopted by, the Board of Trustees or its designee if such determination would materially impact a fund's net asset value. Certain other circumstances may cause the funds to use alternative procedures to value a security such as: a security has been declared in default; trading in a security has been halted during the trading day; or there is a foreign market holiday and no trading will commence. SECURITY TRANSACTIONS -- 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. - ------ 41 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 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 swaps transactions and unrealized appreciation (depreciation) on futures and swaps, respectively. SWAP AGREEMENTS -- The funds may enter into swap agreements in order to attempt to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets; protect against currency fluctuations; attempt to manage duration to protect against any increase in the price of securities the funds anticipate purchasing at a later date; or gain exposure to certain markets in the most economical way possible. A basic swap agreement is a contract in which two parties agree to exchange the returns earned or realized on predetermined investments or instruments. 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 - ------ 42 Complex Fee (Investor Class, A Class, B Class and C Class) range from 0.2500% to 0.3100%. The Institutional Class is 0.2000% less at each point within the Complex Fee range. For the year ended May 31, 2007, the effective annual management fees for the Investor Class, A Class, B Class and C Class of Arizona Municipal Bond, Florida Municipal Bond, Long-Term Tax-Free and High-Yield Municipal were 0.48%, 0.48%, 0.48% and 0.61%, respectively. The effective annual management fee for the year ended May 31, 2007 for the Institutional Class of Long-Term Tax-Free was 0.28%. DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a separate Master Distribution and Individual Shareholder Services Plan for each of the A Class, B Class and C Class (collectively, the plans), pursuant to Rule 12b-1 of the 1940 Act. The plans provide that the A Class will pay American Century Investment Services, Inc. (ACIS) an annual distribution and service fee of 0.25%. The plans provide that the B Class and the C Class will pay ACIS an annual distribution fee of 0.75% and service fee of 0.25%. The fees are computed and accrued daily based on each class's daily net assets and paid monthly in arrears. The distribution fee provides compensation for expenses incurred in connection with distributing shares of the classes including, but not limited to, payments to brokers, dealers, and financial institutions that have entered into sales agreements with respect to shares of the 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, 2007, are detailed in the Statement of Operations. RELATED PARTIES -- Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the distributor of the trust, ACIS, and the trust's transfer agent, American Century Services, LLC. The funds have a bank line of credit agreement with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the funds and a wholly owned subsidiary of JPMorgan Chase & Co. (JPM). JPM is an equity investor in ACC. 3. INVESTMENT TRANSACTIONS Investment transactions, excluding short-term investments, for the year ended May 31, 2007, were as follows: Arizona Florida Long-Term High-Yield Municipal Bond Municipal Bond Tax-Free Municipal Purchases $7,503,205 $20,330,119 $31,733,081 $132,914,201 Proceeds from sales $10,926,220 $29,951,494 $39,128,018 $97,253,324 - ------ 43 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of the funds were as follows (unlimited number of shares authorized): Year ended May 31, 2007 Year ended May 31, 2006 Shares Amount Shares Amount Arizona Municipal Bond INVESTOR CLASS Sold 569,616 $ 6,128,723 613,514 $6,636,684 Issued in reinvestment of distributions 158,222 1,701,265 163,985 1,772,268 Redeemed (929,371) (9,989,623) (725,455) (7,834,221) --------- ------------ ----------- ------------- (201,533) (2,159,635) 52,044 574,731 --------- ------------ ----------- ------------- A CLASS Sold 64,851 700,857 47,873 518,217 Issued in reinvestment of distributions 3,803 40,844 7,329 79,253 Redeemed (230,328) (2,471,845) (94,635) (1,024,647) --------- ------------ ----------- ------------- (161,674) (1,730,144) (39,433) (427,177) --------- ------------ ----------- ------------- B CLASS Sold -- -- 3,705 40,065 Issued in reinvestment of distributions 7 80 7 81 Redeemed -- -- (6) (69) --------- ------------ ----------- ------------- 7 80 3,706 40,077 --------- ------------ ----------- ------------- C CLASS Sold 17,024 183,131 6,550 71,351 Issued in reinvestment of distributions 373 4,011 408 4,415 Redeemed (2,313) (25,005) (36,753) (396,880) --------- ------------ ----------- ------------- 15,084 162,137 (29,795) (321,114) --------- ------------ ----------- ------------- Net increase (decrease) (348,116) $(3,727,562) (13,478) $ (133,483) ========= ============ =========== ============= Florida Municipal Bond INVESTOR CLASS Sold 56,824 $ 603,549 246,633 $ 2,652,581 Issued in reinvestment of distributions 102,229 1,085,485 117,890 1,258,818 Redeemed (816,754) (8,663,818) (1,090,319) (11,653,420) --------- ------------ ----------- ------------- (657,701) (6,974,784) (725,796) (7,742,021) --------- ------------ ----------- ------------- A CLASS Sold 4,419 46,861 126,790 1,355,237 Issued in reinvestment of distributions 3,108 33,004 4,548 48,563 Redeemed (53,663) (569,461) (195,259) (2,087,562) --------- ------------ ----------- ------------- (46,136) (489,596) (63,921) (683,762) --------- ------------ ----------- ------------- B CLASS Sold 108 1,145 930 10,068 Issued in reinvestment of distributions 42 442 64 682 Redeemed (613) (6,521) (1,398) (14,902) --------- ------------ ----------- ------------- (463) (4,934) (404) (4,152) --------- ------------ ----------- ------------- C CLASS Sold 10,934 115,742 37,288 398,765 Issued in reinvestment of distributions 138 1,467 731 7,805 Redeemed (66,453) (702,615) (58,234) (621,704) (55,381) (585,406) (20,215) (215,134) --------- ------------ ----------- ------------- Net increase (decrease) (759,681) $(8,054,720) (810,336) $ (8,645,069) ========= ============ =========== ============= - ------ 44 Period ended May 31, Year ended May 31, 2007 2006(1) Year ended March 31, 2006 Shares Amount Shares Amount Shares Amount Long-Term Tax-Free INVESTOR CLASS N/A Sold 20,901 $ 226,301 2,332 $ 25,011 Issued in reinvestment of distributions 526 5,718 14 150 Redeemed (3,168) (34,547) -- -- --------- ------------ ----------- ------------ 18,259 197,472 2,346 25,161 --------- ------------ ----------- ------------ INSTITUTIONAL CLASS N/A Sold -- -- 1,528,405 16,397,564 Issued in reinvestment of distributions 65,697 712,471 9,531 101,943 --------- ------------ ----------- ------------ 65,697 712,471 1,537,936 16,499,507 --------- ------------ ----------- ------------ A CLASS Sold 96,442 1,049,120 12,548 136,284 477,920 $ 5,222,488 Issued in reinvestment of distributions 40,105 434,715 8,047 86,066 267,697 2,902,942 Redeemed (804,205) (8,715,672) (1,653,051) (17,732,706) (8,803,698) (94,593,140) --------- ------------ ----------- ------------ ----------- ------------- (667,658) (7,231,837) (1,632,456) (17,510,356) (8,058,081) (86,467,710) --------- ------------ ----------- ------------ ----------- ------------- B CLASS Sold 3,841 41,044 196 2,093 11,759 128,146 Issued in reinvestment of distributions 3,656 39,610 762 8,145 4,486 48,607 Redeemed (67,333) (727,027) (3,837) (41,044) (53,456) (576,977) --------- ------------ ----------- ------------ ----------- ------------- (59,836) (646,373) (2,879) (30,806) (37,211) (400,224) --------- ------------ ----------- ------------ ----------- ------------- C CLASS N/A Sold 1,388 15,004 2,332 25,011 Issued in reinvestment of distributions 103 1,115 10 111 1,491 16,119 2,342 25,122 --------- ------------ ----------- ------------ Net increase (decrease) (642,047) $(6,952,148) (92,711) $ (991,372) (8,095,292) $(86,867,934) ========= ============ =========== ============ =========== ============= (1) April 3, 2006 (commencement of sale) through May 31, 2006 for Investor Class, Institutional Class and C Class. April 1, 2006 through May 31, 2006 for A Class and B Class. 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). - ------ 45 Year ended May 31, 2007 Year ended May 31, 2006 Shares Amount Shares Amount High-Yield Municipal INVESTOR CLASS Sold 3,551,483 $ 37,619,683 3,090,565 $ 32,478,010 Issued in reinvestment of distributions 273,658 2,917,123 203,441 2,138,238 Redeemed (2,805,384) (29,932,323) (1,206,280) (12,677,908) ----------- ------------ ----------- ------------ 1,019,757 10,604,483 2,087,726 21,938,340 ----------- ------------ ----------- ------------ A CLASS Sold 6,497,555 69,268,767 7,491,063 78,741,071 Issued in reinvestment of distributions 530,236 5,653,892 393,167 4,132,250 Redeemed (4,528,018) (48,368,107) (3,075,940) (32,326,114) ----------- ------------ ----------- ------------ 2,499,773 26,554,552 4,808,290 50,547,207 ----------- ------------ ----------- ------------ B CLASS Sold 66,699 710,714 123,399 1,296,933 Issued in reinvestment of distributions 6,014 64,138 4,831 50,768 Redeemed (49,747) (528,051) (43,215) (454,221) ----------- ------------ ----------- ------------ 22,966 246,801 85,015 893,480 ----------- ------------ ----------- ------------ C CLASS Sold 1,203,132 12,795,715 1,499,384 15,763,095 Issued in reinvestment of distributions 43,904 468,377 28,473 299,249 Redeemed (506,615) (5,403,335) (300,586) (3,158,774) ----------- ------------ ----------- ------------ 740,421 7,860,757 1,227,271 12,903,570 ----------- ------------ ----------- ------------ Net increase (decrease) 4,282,917 $ 45,266,593 8,208,302 $ 86,282,597 =========== ============ =========== ============ 5. BANK LINE OF CREDIT Arizona Municipal Bond, Florida Municipal Bond 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. Long-Term Tax-Free entered into the agreement on December 13, 2006. 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 0.40%. The funds did not borrow from the line during the year ended May 31, 2007. 6. RISK FACTORS Income may be subject to state and local taxes and, if applicable, the alternative minimum tax. 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. Long-Term Tax-Free may invest primarily in lower-rated debt securities, which are subject to substantial risks including price volatility, liquidity risk, and default risk. High-Yield Municipal may concentrate its investments in certain states and therefore may have more exposure to credit risk related to those states 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. - ------ 46 7. FEDERAL TAX INFORMATION The tax character of distributions paid during the years ended May 31, 2007 and May 31, 2006 (except as noted) were as follows: Arizona Municipal Bond Florida Municipal Bond 2007 2006 2007 2006 DISTRIBUTIONS PAID FROM Ordinary income $2,238,243 $2,283,709 $1,607,112 $1,867,355 Long-term capital gains -- $116,927 -- -- Long-Term Tax-Free High-Yield Municipal May 31, March 31, May 31, 2007 2006(1) 2006 2007 2006 DISTRIBUTIONS PAID FROM Ordinary income $1,359,481 $235,081 $3,211,639 $12,750,107 $9,545,943 Long-term capital gains -- -- -- -- -- (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). 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. Certain distributions have been recharacterized between income, realized gain and capital for federal income tax purposes. As of May 31, 2007, the components of distributable earnings on a tax-basis and the federal tax cost of investments were as follows: Arizona Florida Municipal Municipal Long-Term High-Yield Bond Bond Tax-Free Municipal Federal tax cost of investments $50,513,364 $34,117,019 $30,682,792 $289,831,518 =========== =========== =========== ============ Gross tax appreciation of investments $1,429,791 $940,532 $344,247 $10,401,285 Gross tax depreciation of investments (6,750) (39,469) (32,763) (539,384) ----------- ----------- ----------- ------------ Net tax appreciation (depreciation) of investments $1,423,041 $901,063 $311,484 $ 9,861,901 =========== =========== =========== ============ Net tax appreciation (depreciation) on derivatives -- -- $29,022 -- ----------- ----------- ----------- ------------ Net tax appreciation (depreciation) $1,423,041 $901,063 $340,506 $ 9,861,901 =========== =========== =========== ============ Undistributed exempt income -- -- $27,577 -- Accumulated capital losses $(152,225) $(83,627) $(540,242) $(851,111) Capital loss deferrals -- -- $(18,901) -- The cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the realization for tax purposes of unrealized gains for certain futures contracts. The accumulated capital losses listed above represent net capital loss carryovers that may be used to offset future realized capital gains for federal income tax purposes. The capital loss carryovers expire as follows: 2010 2011 2012 2013 2014 2015 Arizona Municipal Bond -- -- -- -- -- $(152,225) Florida Municipal Bond -- -- -- $(83,627) -- -- Long-Term Tax-Free -- -- $(8,266) $(142,310) $(389,666) -- High-Yield Municipal $(4,877) -- $(145,918) $(700,316) -- -- The capital loss deferrals represent net capital losses incurred in the seven-month period ended May 31, 2007. The funds have elected to treat such losses as having been incurred in the following fiscal year for federal income tax purposes. - ------ 47 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. 9. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. The FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157), in September 2006, which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands the required financial statement disclosures about fair value measurements. Management is currently evaluating the impact of adopting FIN 48 and FAS 157. 10. SUBSEQUENT EVENTS On December 8, 2006, the Board of Trustees of Arizona Municipal Bond and Florida Municipal Bond approved plans of reorganization (the reorganizations) pursuant to which Tax-Free Bond Fund (Tax-Free Bond), a fund in a series issued by the trust, will acquire all of the assets of Arizona Municipal Bond and Florida Municipal Bond in exchange for shares of equal value of Tax-Free Bond and assumption by Tax-Free Bond of certain liabilities of Arizona Municipal Bond and Florida Municipal Bond. The financial statements and performance history of Tax-Free Bond will be carried over in the post-reorganization. The reorganizations are subject to approval by Arizona Municipal Bond and Florida Municipal Bond shareholders at a meeting expected to be held on July 27, 2007. The reorganizations are expected to be effective at the close of business on August 31, 2007. 11. OTHER TAX INFORMATION (UNAUDITED) The following information is provided pursuant to provisions of the Internal Revenue Code. The funds designate exempt interest dividends for the fiscal year ended May 31, 2007, as follows: Arizona Municipal Florida Long-Term High-Yield Bond Municipal Bond Tax-Free Municipal Exempt interest dividends $2,240,584 $1,612,267 $1,366,299 $12,688,426 - ------ 48 FINANCIAL HIGHLIGHTS Arizona Municipal Bond Investor Class For a Share Outstanding Throughout the Years Ended May 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.68 $10.96 $10.83 $11.40 $10.89 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.44 0.42(1) 0.42 0.41 0.41 Net Realized and Unrealized Gain (Loss) (0.01) (0.25) 0.13 (0.53) 0.59 ------- ------- ------- ------- ------- Total From Investment Operations 0.43 0.17 0.55 (0.12) 1.00 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.44) (0.43) (0.42) (0.41) (0.41) From Net Realized Gains -- (0.02) --(2) (0.04) (0.08) ------- ------- ------- ------- ------- Total Distributions (0.44) (0.45) (0.42) (0.45) (0.49) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.67 $10.68 $10.96 $10.83 $11.40 ======= ======= ======= ======= ======= TOTAL RETURN(3) 4.07% 1.59% 5.21% (1.06)% 9.36% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.50% 0.51% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 4.08% 3.89% 3.86% 3.70% 3.70% Portfolio Turnover Rate 15% 44% 48% 26% 50% Net Assets, End of Period (in thousands) $50,211 $52,404 $53,203 $60,203 $75,787 (1) Computed using average shares outstanding throughout the period. (2) Per-share amount was 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. - ------ 49 Arizona Municipal Bond A Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.68 $10.96 $10.83 $11.25 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.41 0.39(2) 0.40 0.10 Net Realized and Unrealized Gain (Loss) (0.01) (0.25) 0.13 (0.42) ------- ------- ------- ------- Total From Investment Operations 0.40 0.14 0.53 (0.32) ------- ------- ------- ------- Distributions From Net Investment Income (0.41) (0.40) (0.40) (0.10) From Net Realized Gains -- (0.02) --(3) -- ------- ------- ------- ------- Total Distributions (0.41) (0.42) (0.40) (0.10) ------- ------- ------- ------- Net Asset Value, End of Period $10.67 $10.68 $10.96 $10.83 ======= ======= ======= ======= TOTAL RETURN(4) 3.81% 1.34% 4.94% (2.87)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.74% 0.74% 0.75% 0.76%(5) Ratio of Net Investment Income (Loss) to Average Net Assets 3.83% 3.64% 3.61% 3.63%(5) Portfolio Turnover Rate 15% 44% 48% 26%(6) Net Assets, End of Period (in thousands) $2,013 $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 was 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. - ------ 50 Arizona Municipal Bond B Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.68 $10.96 $10.83 $11.25 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.33 0.36(2) 0.32 0.08 Net Realized and Unrealized Gain (Loss) (0.01) (0.30) 0.13 (0.42) ------- ------- ------- ------- Total From Investment Operations 0.32 0.06 0.45 (0.34) ------- ------- ------- ------- Distributions From Net Investment Income (0.33) (0.32) (0.32) (0.08) From Net Realized Gains -- (0.02) --(3) -- ------- ------- ------- ------- Total Distributions (0.33) (0.34) (0.32) (0.08) ------- ------- ------- ------- Net Asset Value, End of Period $10.67 $10.68 $10.96 $10.83 ======= ======= ======= ======= TOTAL RETURN(4) 3.03% 0.61% 4.19% (3.06)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49% 1.50% 1.51%(5) Ratio of Net Investment Income (Loss) to Average Net Assets 3.08% 2.89% 2.86% 2.88%(5) Portfolio Turnover Rate 15% 44% 48% 26%(6) Net Assets, End of Period (in thousands) $42 $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 was 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. - ------ 51 Arizona Municipal Bond C Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.68 $10.96 $10.83 $11.25 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.33 0.30(2) 0.31 0.08 Net Realized and Unrealized Gain (Loss) (0.01) (0.24) 0.13 (0.42) ------- ------- ------- ------- Total From Investment Operations 0.32 0.06 0.44 (0.34) ------- ------- ------- ------- Distributions From Net Investment Income (0.33) (0.32) (0.31) (0.08) From Net Realized Gains -- (0.02) --(3) -- ------- ------- ------- ------- Total Distributions (0.33) (0.34) (0.31) (0.08) ------- ------- ------- ------- Net Asset Value, End of Period $10.67 $10.68 $10.96 $10.83 ======= ======= ======= ======= TOTAL RETURN(4) 3.03% 0.58% 4.15% (3.06)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49% 1.50% 1.51%(5) Ratio of Net Investment Income (Loss) to Average Net Assets 3.08% 2.89% 2.86% 2.88%(5) Portfolio Turnover Rate 15% 44% 48% 26%(6) Net Assets, End of Period (in thousands) $543 $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 was 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. - ------ 52 Florida Municipal Bond Investor Class For a Share Outstanding Throughout the Years Ended May 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.55 $10.81 $10.68 $11.29 $10.73 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.43 0.42 0.39 0.42 0.42 Net Realized and Unrealized Gain (Loss) (0.03) (0.26) 0.13 (0.56) 0.62 ------- ------- ------- ------- ------- Total From Investment Operations 0.40 0.16 0.52 (0.14) 1.04 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.43) (0.42) (0.39) (0.42) (0.42) From Net Realized Gains -- -- -- (0.05) (0.06) ------- ------- ------- ------- ------- Total Distributions (0.43) (0.42) (0.39) (0.47) (0.48) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.52 $10.55 $10.81 $10.68 $11.29 ======= ======= ======= ======= ======= TOTAL RETURN(1) 3.87% 1.48% 4.88% (1.30)% 9.90% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49% 0.50% 0.51% 0.51% Ratio of Net Investment Income (Loss) to Average Net Assets 4.09% 3.90% 3.56% 3.82% 3.78% Portfolio Turnover Rate 54% 28% 44% 59% 45% Net Assets, End of Period (in thousands) $33,556 $40,604 $49,451 $63,142 $70,078 (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. - ------ 53 Florida Municipal Bond A Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.55 $10.81 $10.68 $11.11 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.41 0.39 0.36 0.09 Net Realized and Unrealized Gain (Loss) (0.03) (0.26) 0.13 (0.43) ------- ------- ------- ------- Total From Investment Operations 0.38 0.13 0.49 (0.34) ------- ------- ------- ------- Distributions From Net Investment Income (0.41) (0.39) (0.36) (0.09) ------- ------- ------- ------- Net Asset Value, End of Period $10.52 $10.55 $10.81 $10.68 ======= ======= ======= ======= TOTAL RETURN(2) 3.62% 1.23% 4.62% (3.10)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.74% 0.74% 0.75% 0.76%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.84% 3.65% 3.31% 3.34%(3) Portfolio Turnover Rate 54% 28% 44% 59%(4) Net Assets, End of Period (in thousands) $890 $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. - ------ 54 Florida Municipal Bond B Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.55 $10.81 $10.68 $11.11 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.33 0.31 0.28 0.07 Net Realized and Unrealized Gain (Loss) (0.03) (0.26) 0.13 (0.43) ------- ------- ------- ------- Total From Investment Operations 0.30 0.05 0.41 (0.36) ------- ------- ------- ------- Distributions From Net Investment Income (0.33) (0.31) (0.28) (0.07) ------- ------- ------- ------- Net Asset Value, End of Period $10.52 $10.55 $10.81 $10.68 ======= ======= ======= ======= TOTAL RETURN(2) 2.85% 0.47% 3.83% (3.28)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49% 1.50% 1.51%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.09% 2.90% 2.56% 2.59%(3) Portfolio Turnover Rate 54% 28% 44% 59%(4) Net Assets, End of Period (in thousands) $10 $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. - ------ 55 Florida Municipal Bond C Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.55 $10.81 $10.68 $11.11 ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.33 0.31 0.28 0.07 Net Realized and Unrealized Gain (Loss) (0.03) (0.26) 0.13 (0.43) ------- ------- ------- ------- Total From Investment Operations 0.30 0.05 0.41 (0.36) ------- ------- ------- ------- Distributions From Net Investment Income (0.33) (0.31) (0.28) (0.07) ------- ------- ------- ------- Net Asset Value, End of Period $10.52 $10.55 $10.81 $10.68 ======= ======= ======= ======= TOTAL RETURN(2) 2.85% 0.47% 3.84% (3.28)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49% 1.50% 1.51%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.09% 2.90% 2.56% 2.59%(3) Portfolio Turnover Rate 54% 28% 44% 59%(4) Net Assets, End of Period (in thousands) $982 $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. - ------ 56 Long-Term Tax-Free Investor Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.70 $10.72 ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.43 0.06 Net Realized and Unrealized Gain (Loss) 0.08 (0.02) ------- ------- Total From Investment Operations 0.51 0.04 ------- ------- Distributions From Net Investment Income (0.43) (0.06) ------- ------- Net Asset Value, End of Period $10.78 $10.70 ======= ======= TOTAL RETURN(2) 4.84% 0.42% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.49% 0.49%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 4.00% 3.85%(3) Portfolio Turnover Rate 101% 62% Net Assets, End of Period (in thousands) $222 $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. - ------ 57 Long-Term Tax-Free Institutional Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.70 $10.72 ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.45 0.07 Net Realized and Unrealized Gain (Loss) 0.08 (0.02) ------- ------- Total From Investment Operations 0.53 0.05 ------- ------- Distributions From Net Investment Income (0.45) (0.07) ------- ------- Net Asset Value, End of Period $10.78 $10.70 ======= ======= TOTAL RETURN(2) 5.05% 0.45% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.29% 0.29%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 4.20% 4.05%(3) Portfolio Turnover Rate 101% 62% Net Assets, End of Period (in thousands) $17,285 $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. - ------ 58 Long-Term Tax-Free A Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.70 $10.72 $10.74 $11.06 $10.98 $10.50 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.41 0.06 0.35(2) 0.33(2) 0.33(2) 0.41(2) Net Realized and Unrealized Gain (Loss) 0.08 (0.02) (0.03) (0.15) 0.24 0.61 ------- ------- ------- ------- ------- ------- Total From Investment Operations 0.49 0.04 0.32 0.18 0.57 1.02 ------- ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.41) (0.06) (0.34) (0.33) (0.33) (0.42) From Net Realized Gains -- -- -- (0.17) (0.16) (0.12) ------- ------- ------- ------- ------- ------- Total Distributions (0.41) (0.06) (0.34) (0.50) (0.49) (0.54) ------- ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.78 $10.70 $10.72 $10.74 $11.06 $10.98 ======= ======= ======= ======= ======= ======= TOTAL RETURN(3) 4.58% 0.40% 3.01% 1.63% 5.31% 9.88% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.74% 0.74%(4) 0.82% 0.84% 0.85% 0.85% Ratio of Operating Expenses to Average Net Assets (Before Expense Waiver) 0.74% 0.74%(4) 0.82% 0.84% 0.89% 0.93% Ratio of Net Investment Income (Loss) to Average Net Assets 3.75% 3.60%(4) 3.21% 3.01% 3.01% 3.78% Ratio of Net Investment Income (Loss) to Average Net Assets (Before Expense Waiver) 3.75% 3.60%(4) 3.21% 3.01% 2.97% 3.70% Portfolio Turnover Rate 101% 62% 27% 43% 815%(5) 48% Net Assets, End of Period (in thousands) $12,233 $19,288 $36,834 $123,399 $120,606 $107,770 (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. See Notes to Financial Statements. - ------ 59 Long-Term Tax-Free B Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.70 $10.72 $10.73 $11.06 $10.98 $10.50 ------- ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.32 0.05 0.27(2) 0.26(2) 0.26(2) 0.34(2) Net Realized and Unrealized Gain (Loss) 0.08 (0.02) (0.01) (0.16) 0.24 0.61 ------- ------- ------- ------- ------- ------- Total From Investment Operations 0.40 0.03 0.26 0.10 0.50 0.95 ------- ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.32) (0.05) (0.27) (0.26) (0.26) (0.35) From Net Realized Gains -- -- -- (0.17) (0.16) (0.12) ------- ------- ------- ------- ------- ------- Total Distributions (0.32) (0.05) (0.27) (0.43) (0.42) (0.47) ------- ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.78 $10.70 $10.72 $10.73 $11.06 $10.98 ======= ======= ======= ======= ======= ======= TOTAL RETURN(3) 3.80% 0.28% 2.42% 0.89% 4.62% 9.16% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49%(4) 1.50% 1.50% 1.50% 1.50% Ratio of Operating Expenses to Average Net Assets (Before Expense Waiver) 1.49% 1.49%(4) 1.54% 1.52% 1.54% 1.58% Ratio of Net Investment Income (Loss) to Average Net Assets 3.00% 2.85%(4) 2.49% 2.36% 2.39% 3.11% Ratio of Net Investment Income (Loss) to Average Net Assets (Before Expense Waiver) 3.00% 2.85%(4) 2.45% 2.34% 2.35% 3.03% Portfolio Turnover Rate 101% 62% 27% 43% 815%(5) 48% Net Assets, End of Period (in thousands) $1,416 $2,046 $2,081 $2,483 $2,674 $3,533 (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. See Notes to Financial Statements. - ------ 60 Long-Term Tax-Free C Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.70 $10.72 ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.32 0.05 Net Realized and Unrealized Gain (Loss) 0.08 (0.02) ------- ------- Total From Investment Operations 0.40 0.03 ------- ------- Distributions From Net Investment Income (0.32) (0.05) ------- ------- Net Asset Value, End of Period $10.78 $10.70 ======= ======= TOTAL RETURN(2) 3.80% 0.26% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.49% 1.49%(3) Ratio of Net Investment Income (Loss) to Average Net Assets 3.00% 2.85%(3) Portfolio Turnover Rate 101% 62% Net Assets, End of Period (in thousands) $41 $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. - ------ 61 High-Yield Municipal Investor Class For a Share Outstanding Throughout the Years Ended May 31 2007 2006 2005 2004 2003 PER-SHARE DATA Net Asset Value, Beginning of Period $10.50 $10.50 $10.04 $10.25 $9.87 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.51 0.50 0.51 0.52 0.53 Net Realized and Unrealized Gain (Loss) 0.18 --(1) 0.46 (0.21) 0.38 ------- ------- ------- ------- ------- Total From Investment Operations 0.69 0.50 0.97 0.31 0.91 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.51) (0.50) (0.51) (0.52) (0.53) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.68 $10.50 $10.50 $10.04 $10.25 ======= ======= ======= ======= ======= TOTAL RETURN(2) 6.70% 4.91% 9.84% 3.07% 9.40% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.62% 0.62% 0.63% 0.64% 0.64% Ratio of Net Investment Income (Loss) to Average Net Assets 4.80% 4.80% 4.92% 5.06% 5.22% Portfolio Turnover Rate 36% 16% 30% 27% 43% Net Assets, End of Period (in thousands) $97,254 $84,896 $62,945 $54,340 $53,621 (1) Per-share amount was 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. - ------ 62 High-Yield Municipal A Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.50 $10.50 $10.04 $10.25 $10.06 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.48 0.48 0.48 0.49 0.17 Net Realized and Unrealized Gain (Loss) 0.18 --(2) 0.46 (0.21) 0.19 ------- ------- ------- ------- ------- Total From Investment Operations 0.66 0.48 0.94 0.28 0.36 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.48) (0.48) (0.48) (0.49) (0.17) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.68 $10.50 $10.50 $10.04 $10.25 ======= ======= ======= ======= ======= TOTAL RETURN(3) 6.43% 4.65% 9.56% 2.81% 3.57% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 0.87% 0.87% 0.88% 0.89% 0.88%(4) Ratio of Net Investment Income (Loss) to Average Net Assets 4.55% 4.55% 4.67% 4.81% 5.03%(4) Portfolio Turnover Rate 36% 16% 30% 27% 43%(5) Net Assets, End of Period (in thousands) $158,622 $129,681 $79,154 $33,335 $2,117 (1) January 31, 2003 (commencement of sale) through May 31, 2003. (2) Per-share amount was 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. - ------ 63 High-Yield Municipal B Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.50 $10.50 $10.04 $10.25 $10.06 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.40 0.40 0.40 0.42 0.15 Net Realized and Unrealized Gain (Loss) 0.18 --(2) 0.46 (0.21) 0.19 ------- ------- ------- ------- ------- Total From Investment Operations 0.58 0.40 0.86 0.21 0.34 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.40) (0.40) (0.40) (0.42) (0.15) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.68 $10.50 $10.50 $10.04 $10.25 ======= ======= ======= ======= ======= TOTAL RETURN(3) 5.64% 3.87% 8.75% 2.05% 3.44% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.62% 1.62% 1.63% 1.64% 1.63%(4) Ratio of Net Investment Income (Loss) to Average Net Assets 3.80% 3.80% 3.92% 4.06% 4.35%(4) Portfolio Turnover Rate 36% 16% 30% 27% 43%(5) Net Assets, End of Period (in thousands) $4,790 $4,468 $3,573 $2,541 $708 (1) January 31, 2003 (commencement of sale) through May 31, 2003. (2) Per-share amount was 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. - ------ 64 High-Yield Municipal C Class For a Share Outstanding Throughout the Years Ended May 31 (except as noted) 2007 2006 2005 2004 2003(1) PER-SHARE DATA Net Asset Value, Beginning of Period $10.50 $10.50 $10.04 $10.25 $10.03 ------- ------- ------- ------- ------- Income From Investment Operations Net Investment Income (Loss) 0.40 0.40 0.40 0.43 0.39 Net Realized and Unrealized Gain (Loss) 0.18 --(2) 0.46 (0.21) 0.22 ------- ------- ------- ------- ------- Total From Investment Operations 0.58 0.40 0.86 0.22 0.61 ------- ------- ------- ------- ------- Distributions From Net Investment Income (0.40) (0.40) (0.40) (0.43) (0.39) ------- ------- ------- ------- ------- Net Asset Value, End of Period $10.68 $10.50 $10.50 $10.04 $10.25 ======= ======= ======= ======= ======= TOTAL RETURN(3) 5.64% 3.86% 8.74% 2.20% 6.15% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets 1.62% 1.62% 1.63% 1.54% 1.39%(4) Ratio of Net Investment Income (Loss) to Average Net Assets 3.80% 3.80% 3.92% 4.16% 4.55%(4) Portfolio Turnover Rate 36% 16% 30% 27% 43%(5) Net Assets, End of Period (in thousands) $38,287 $29,862 $16,967 $8,457 $1,454 (1) July 24, 2002 (commencement of sale) through May 31, 2003. (2) Per-share amount was 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. - ------ 65 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, 2007, the results of each of their operations for the year then ended, 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, 2007 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Kansas City, Missouri July 17, 2007 - ------ 66 MANAGEMENT The individuals listed below serve as trustees or officers of the funds. Each trustee serves until his or her successor is duly elected and qualified or until he or she retires. Effective March 2004, mandatory retirement age for independent trustees is 73. However, the mandatory retirement age may be extended for a period not to exceed two years with the approval of the remaining independent trustees. Those listed as interested trustees are "interested" primarily by virtue of their engagement as trustees and/or officers of, or ownership interest in, American Century Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries, including the funds' investment advisor, American Century Investment Management, Inc. (ACIM); the funds' principal underwriter, American Century Investment Services, Inc. (ACIS); and the funds' transfer agent, American Century Services, LLC (ACS). The other trustees (more than three-fourths of the total number) are independent; that is, they have never been employees, trustees or officers of, and have no financial interest in, ACC or any of its wholly owned, direct or indirect, subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity for eight registered investment companies in the American Century family of funds. All persons named as officers of the funds also serve in similar capacities for the other 14 investment companies advised by ACIM or American Century Global Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless otherwise noted. Only officers with policy-making functions are listed. No officer is compensated for his or her service as an officer of the funds. The listed officers are interested persons of the funds and are appointed or re-appointed on an annual basis. INTERESTED TRUSTEE JONATHAN S. THOMAS 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1963 POSITION(S) HELD WITH FUNDS: Advisory Board Member (since 2007) and President (since 2007) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive Officer, ACC (March 2007 to present); Chief Administrative Officer, ACC (February 2006 to February 2007); Executive Vice President, ACC (November 2005 to February 2007). Also serves as: President, Chief Executive Officer and Director, ACS; Executive Vice President, ACIM and ACGIM; Director, ACIM, ACGIM, ACIS and other ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November 2005) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 109 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None INDEPENDENT TRUSTEES JOHN FREIDENRICH 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1937 POSITION(S) HELD WITH FUND: Trustee (since 2005) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis Management Company, LLC (April 2004 to present); Partner and Founder, Bay Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware & Freidenrich (1968 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 67 RONALD J. GILSON 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1946 POSITION(S) HELD WITH FUND: Trustee (since 1995) and Chairman of the Board (since 2005) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law and Business, Stanford Law School (1979 to present); Marc and Eva Stern Professor of Law and Business, Columbia University School of Law (1992 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None KATHRYN A. HALL 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUND: Trustee (since 2001) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chairman and Co-Chief Executive Officer and Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None PETER F. PERVERE 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Advisory Board Member (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Vice President and Chief Financial Officer, Commerce One, Inc. (software and services provider) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Intraware, Inc. MYRON S. SCHOLES 1665 Charleston Road, Mountain View, CA 94043 Year of Birth: 1941 POSITION(S) HELD WITH FUND: Trustee (since 1980) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Platinum Grove Asset Management, L.P., and a Partner, Oak Hill Capital Management (1999 to present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1996 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Dimensional Fund Advisors (investment advisor, 1982 to present); Director, Chicago Mercantile Exchange (2000 to present) JOHN B. SHOVEN 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1947 POSITION(S) HELD WITH FUND: Trustee (since 2002) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford University (1973 to present) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to present) JEANNE D. WOHLERS 1665 Charleston Road, Mountain View, CA 94043 YEAR OF BIRTH: 1945 POSITION(S) HELD WITH FUND: Trustee (since 1984) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner, Windy Hill Productions, LP (educational software) NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 43 OTHER DIRECTORSHIPS HELD BY TRUSTEE: None - ------ 68 OFFICERS MARYANNE ROEPKE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1956 POSITION(S) HELD WITH FUND: Chief Compliance Officer (since 2006) and Senior Vice President (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM, ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995 to August 2006); Treasurer and Chief Financial Officer, various American Century funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS CHARLES A. ETHERINGTON 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1957 POSITION(S) HELD WITH FUNDS: General Counsel (since 2007) and Senior Vice President (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (November 2005 to present); General Counsel, ACC (March 2007 to present). Also serves as: General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; and Senior Vice President, ACIM, ACGIM and ACS ROBERT LEACH 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1966 POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial Officer (all since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) and Controller, various American Century funds (1997 to September 2006) C. JEAN WADE 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1964 POSITION(S) HELD WITH FUND: Controller (since 1996) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000 to present) JON ZINDEL 4500 Main Street, Kansas City, MO 64111 YEAR OF BIRTH: 1967 POSITION(S) HELD WITH FUND: Tax Officer (since 2000) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer and Chief Accounting Officer, ACC (March 2007 to present); Vice President, ACC (October 2001 to present); Vice President, certain ACC subsidiaries (October 2001 to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006). Also serves as: Chief Financial Officer, Chief Accounting Officer and Senior Vice President, ACIM, ACGIM, ACS and other ACC subsidiaries; and Chief Accounting Officer and Senior Vice President, ACIS The SAI has additional information about the funds' trustees and is available without charge, upon request, by calling 1-800-345-2021. - ------ 69 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 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. A CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. A Class shares are sold at their offering price, which is net asset value plus an initial sales charge that ranges from 4.50% to 0.00% for fixed-income funds, depending on the amount invested. The initial sales charge is deducted from the purchase amount before it is invested. A Class shares may be subject to a contingent deferred sales charge (CDSC). There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The prospectus contains information regarding reductions and waivers of sales charges for A Class shares. The unified management fee for A Class shares is the same as for Investor Class shares. A Class shares also are subject to a 0.25% annual Rule 12b-1 distribution and service fee. B CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. B Class shares redeemed within six years of purchase are subject to a CDSC that declines from 5.00% during the first year after purchase to 0.00% after the sixth year. There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The unified management fee for B Class shares is the same as for Investor Class shares. B Class shares also are subject to a 1.00% annual Rule 12b-1 distribution and service fee. B Class shares automatically convert to A Class shares (with lower expenses) eight years after their purchase date. C CLASS shares are sold primarily through institutions such as investment advisors, banks, broker-dealers, and insurance companies. C Class shares redeemed within 12 months of purchase are subject to a CDSC of 1.00%. There is no CDSC on shares acquired through reinvestment of dividends or capital gains. The unified management fee for C Class shares is the same as for Investor Class shares. C Class shares also are subject to a Rule 12b-1 distribution and service fee of 1.00%. All classes of shares represent a pro rata interest in the funds and generally have the same rights and preferences. - ------ 70 ADDITIONAL INFORMATION PROXY VOTING GUIDELINES American Century Investment Management, Inc., the funds' investment advisor, is responsible for exercising the voting rights associated with the securities purchased and/or held by the funds. A description of the policies and procedures the advisor uses in fulfilling this responsibility is available without charge, upon request, by calling 1-800-345-2021. It is also available on American Century's website at americancentury.com and on the Securities and Exchange Commission's website at sec.gov. Information regarding how the investment advisor voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the "About Us" page at americancentury.com. It is also available at sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. The funds' Forms N-Q are available on the SEC's website at sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The funds also make their complete schedule of portfolio holdings for the most recent quarter of their fiscal year available on their website at americancentury.com and, upon request, by calling 1-800-345-2021. - ------ 71 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 MUNICIPAL BOND INDEX is a market value-weighted index designed for the long-term tax-exempt bond market. The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of those securities included in the Lehman Brothers Municipal Bond Index that are investment-grade and have maturities between two and four years. The LEHMAN BROTHERS 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. - ------ 72 [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. American Century Investment Services, Inc., Distributor ©2007 American Century Proprietary Holdings, Inc. All rights reserved. The American Century Investments logo, American Century and American Century Investments are service marks of American Century Proprietary Holdings, Inc. 0707 SH-ANN-55129N 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 2006: $118,626 FY 2007: $119,367 (b) Audit-Related Fees. The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were as follows: For services rendered to the registrant: FY 2006: $0 FY 2007: $0 Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were as follows: For services rendered to the registrant: FY 2006: $20,431 FY 2007: $23,895 These services included review of federal and state income tax forms and federal excise tax forms. Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (d) All Other Fees. The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item were as follows: For services rendered to the registrant: FY 2006: $0 FY 2007: $0 Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X (relating to certain engagements for non-audit services with the registrant's investment adviser and its affiliates): FY 2006: $0 FY 2007: $0 (e)(1) In accordance with paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation S-X, before the accountant is engaged by the registrant to render audit or non-audit services, the engagement is approved by the registrant's audit committee. Pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, the registrant's audit committee also pre-approves its accountant's engagements for non-audit services with the registrant's investment adviser, its parent company, and any entity controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant. (e)(2) All services described in each of paragraphs (b) through (d) of this Item were pre-approved before the engagement by the registrant's audit committee pursuant to paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation S-X. Consequently, none of such services were required to be approved by the audit committee pursuant to paragraph (c)(7)(i)(C). (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than 50%. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant were as follows: FY 2006: $249,764 FY 2007: $162,542 (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/ Jonathan S. Thomas By: ---------------------------------------- Name: Jonathan S. Thomas Title: President Date: July 20, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Jonathan S. Thomas By: ---------------------------------------- Name: Jonathan S. Thomas Title: President (principal executive officer) Date: July 20, 2007 /s/ Robert J. Leach By: ---------------------------------------- Name: Robert J. Leach Title: Vice President, Treasurer, and Chief Financial Officer (principal financial officer) Date: July 20, 2007