AXP TAX-EXEMPT SERIES INC, 485BPOS, 2000-01-27

AXP TAX-EXEMPT SERIES INC
485BPOS, 2000-01-27

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. ___ [ ]

Post-Effective Amendment No. 46 (File No. 2-57328) [X]
--------

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 [ ]

Amendment No. 36 (File No. 811-2686) [X]
--------

AXP TAX-EXEMPT SERIES, INC.
(formerly IDS Tax-Exempt Bond Fund, Inc.)
AXP Intermediate Tax-Exempt Fund
AXP Tax-Exempt Bond Fund
IDS Tower 10
Minneapolis, Minnesota 55440-0010

Leslie L. Ogg - 901 Marquette Ave., Suite 2810,
Minneapolis, MN 55402-3268
(612) 330-9283

Approximate Date of Proposed Public Offering:

It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on Jan. 28, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

AXPSM Intermediate Tax-Exempt Fund

PROSPECTUS Jan. 28, 2000

American
Express(R)
Funds

AXP Intermediate Tax-Exempt Fund seeks to provide shareholders with a high level
of current income exempt from federal taxes.

Please note that this Fund:

o is not a bank deposit

o is not federally insured

o is not endorsed by any bank or government agency

o is not guaranteed to achieve its goal

Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal offense.

AMERICAN
EXPRESS(R)(logo)

<PAGE>

Table of Contents

TAKE A CLOSER LOOK AT:

The Fund 3p

Goal 3p

Investment Strategy 3p

Risks 5p

Past Performance 6p

Fees and Expenses 8p

Management 9p

Buying and Selling Shares 9p

Valuing Fund Shares 9p

Investment Options 10p

Purchasing Shares 11p

Transactions through Third Parties 14p

Sales Charges 14p

Exchanging/Selling Shares 18p

Distributions and Taxes 23p

Other Information 25p

Financial Highlights 26p

Appendix 28p

FUND INFORMATION KEY

Goal and Investment Strategy

The Fund's particular investment goal and the strategies it intends to use in
pursuing its goal.

Risks

The major risk factors associated with the Fund.

Fees and Expenses

The overall costs incurred by an investor in the Fund, including sales charges
and annual expenses.

Management

The individual or group designated by the investment manager to handle the
Fund's day-to-day management.

Financial Highlights

Tables showing the Fund's financial performance.

<PAGE>

The Fund

GOAL

AXP Intermediate Tax-Exempt Fund (the Fund) seeks to provide shareholders with a
high level of current income exempt from federal taxes. Because any investment
involves risk, achieving this goal cannot be guaranteed.

INVESTMENT STRATEGY

The Fund's assets primarily are invested in bonds and other debt obligations.
Under normal market conditions, the Fund will invest at least 80% of its net
assets in bonds and in other debt obligations issued by or on behalf of state or
local governmental units whose interest is exempt from federal income tax. These
investments will be (1) rated in the top four grades by Moody's Investors
Service, Inc., Standard & Poor's Corporation, Fitch Investors Services, Inc.,
(2) be of comparable rating given by other independent rating agencies, or (3)
they will be unrated bonds and other debt obligations that are believed to be of
investment grade quality. The Fund may invest up to 20% of its net assets in
bonds that are unrated, considered lower quality (junk bonds), or whose interest
is subject to the alternative minimum tax.

The selection of short to intermediate term municipal obligations that are
tax-exempt is the primary decision in building the investment portfolio.

In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses investments by:

o Considering opportunities and risks in municipal obligations given current
and expected interest rates.

o Identifying municipal obligations that:

-- are high or medium quality,

-- have similar qualities, in AEFC's opinion, even though they are not
rated or have been given a lower rating by a rating agency,

-- have short- or intermediate-term maturities,

-- have characteristics better than that of comparable investments.

o Identifying investments that contribute to portfolio diversification. AEFC
will weight certain sectors more heavily based on AEFC's expectations for
growth and expected market trends.

<PAGE>

In evaluating whether to sell a security, AEFC considers, among other factors,
whether:

-- the security is overvalued relative to alternative investments,

-- the issuer's credit rating declines or AEFC expects a decline (the
Fund may continue to own securities that are down-graded until AEFC
believes it is advantageous to sell),

-- political, economic, or other events could affect the issuer's
performance,

-- AEFC expects the issuer to call the security,

-- AEFC identifies a more attractive opportunity, and

-- the issuer or the security continues to meet the other standards
described above.

Although not a primary investment strategy, the Fund also may invest in
derivatives (such as futures, options and forward contracts) and other
instruments, such as money market securities and other short-term tax-exempt
securities.

During weak or declining markets, the Fund may invest more of its assets in
money market securities or certain taxable investments. Although the Fund
primarily will invest in these securities to avoid losses, this type of
investing also could prevent the Fund from achieving its investment objectives.
During these times, AEFC may make frequent securities trades that could result
in increased fees, expenses, and taxes. The Fund is not managed with respect to
tax efficiency.

For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.

<PAGE>

RISKS

Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:

Market Risk

Interest Rate Risk

Credit Risk

Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.

Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise bond prices
fall). In general, the longer the maturity of a bond, the higher its yield and
the greater its sensitivity to changes in interest rates.

Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note).

<PAGE>

PAST PERFORMANCE

The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:

o how the Fund's performance has varied for each full calendar year that the
Fund has existed, and

o how the Fund's average annual total returns compare to a recognized index.

How the Fund has performed in the past does not indicate how the Fund will
perform in the future.

Class A Performance (based on calendar years)

+5.01%

+4.61%

+0.99%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

During the period shown in the bar chart, the highest return for a calendar
quarter was +1.99% (quarter ending June 1997) and the lowest return for a
calendar quarter was -0.40% (quarter ending June 1999).

The 5% sales charge applicable to Class A shares of the Fund is not reflected in
the bar chart; if reflected, returns would be lower than those shown. The
performance of Class B and Class Y may vary from that shown above because of
differences in sales charges and fees.

The Fund's year to date return as of Dec. 31, 1999 was +0.99%.

<PAGE>

Average Annual Total Returns (as of Dec. 31, 1999)

1 year Since inception

Intermediate Tax-Exempt:

Class A -4.06% +2.04%(a)

Class B -3.64% +2.04%(a)

Class Y +1.18% +3.85%(a)

Lehman Brothers Municipal 3-year Bond Index +1.96% +4.11%(b)

Lipper Short/Intermediate Municipal Debt Index +0.71% +3.51%(b)

a Inception date was Nov. 13, 1996.

b Measurement period started Dec. 1, 1996.

For purposes of this calculation we assumed:

o a sales charge of 5% for Class A shares,

o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,

o no sales charge for Class Y shares, and

o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.

Lehman Brothers Municipal 3-year Bond Index, an unmanaged index, is made up of a
representative list of general obligation, revenue and pre-refunded bonds that
have an approximate maturity of 3 years. The index is frequently used as a
general performance measure of tax-exempt bonds with shorter maturities.
However, the securities used to create the index may not be representative of
the bonds held by the fund. The index reflects reinvestment of all distributions
and changes in market prices, but excludes brokerage commissions or other fees.

The Lipper Short/Intermediate Municipal Debt Index, an unmanaged index published
by Lipper Analytical Services, Inc., includes 10 funds that are generally
similar to the Fund, although some funds in the index may have somewhat
different investment policies or objectives.

<PAGE>

FEES AND EXPENSES

Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.

Shareholder Fees (fees paid directly from your investment)

Class A Class B Class Y

Maximum sales charge (load)
imposed on purchases(a)
(as a percentage of offering price) 5% none none

Maximum deferred sales charge (load)
imposed on sales (as a percentage of
offering price at time of purchase) none 5% none

Annual Fund operating expenses(b) (expenses that are deducted from Fund assets)

As a percentage of average daily
net assets: Class A Class B Class Y

Management fees 0.45% 0.45% 0.45%

Distribution (12b-1) fees 0.25% 1.00% 0.00%

Other expenses(c) 0.36% 0.37% 0.49%

Total 1.06% 1.82% 0.94%

a This charge may be reduced depending on your total investments in American
Express mutual funds. See "Sales Charges."

b Expense for Class A, Class B and Class Y are based on actual expenses for the
last fiscal year, restated to reflect current fees.

c Other expenses include an administrative services fee, a shareholder services
fee for Class Y, a transfer agency fee and other nonadvisory expenses.

<PAGE>

Example

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:

1 year 3 years 5 years 10 years

Class A(a) $603 $821 $1,056 $1,734

Class B(b) $585 $873 $1,086 $1,942(d)

Class B(c) $185 $573 $ 986 $1,942(d)

Class Y $ 96 $300 $ 521 $1,159

a Includes a 5% sales charge.

b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.

c Assumes you did not sell your Class B shares at the end of the period.

d Based on conversion of Class B shares to Class A shares in the ninth year of
ownership.

This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.

MANAGEMENT

Terry Fettig, senior portfolio manager, joined AEFC in 1986. He has managed this
Fund since November 1996. He also serves as portfolio manager of AXP Cash
Management Fund, AXP Tax-Free Money Fund, AXP Variable Portfolio -- Cash
Management Fund and IDS Life Series Fund, Money Market Portfolio.

Buying and Selling Shares

VALUING FUND SHARES

The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.

The NAV is the value of a single Fund share. The NAV usually changes daily, and
is calculated at the close of business of the New York Stock Exchange, normally
3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange
is open).

<PAGE>

Fund shares may be purchased through various third-party organizations,
including 401(k) plans, banks, brokers and investment advisers. Where authorized
by the Fund, orders will be priced at the NAV next computed after receipt by the
organization or their selected agent.

The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.

INVESTMENT OPTIONS

1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.

2. Class B shares are sold to the public with a CDSC and an annual
distribution (12b-1) fee.

3. Class Y shares are sold to qualifying institutional investors without a
sales charge or distribution fee. Please see the SAI for information on
eligibility to purchase Class Y shares.

Investment options summary:

Class A Maximum sales charge of 5%
Initial sales charge waived or reduced for certain purchases
Annual distribution fee of 0.25% of average daily net assets*
Lower annual expenses than Class B shares

Class B No initial sales charge
CDSC on shares sold in the first six years (maximum of 5% in
first year, reduced to 0% after year six)
CDSC waived in certain circumstances Shares convert to Class A
in ninth year of ownership Annual distribution fee of 1.00% of
average daily net assets* Higher annual expenses than Class A
shares

Class Y No initial sales charge
No annual distribution fee
Service fee of 0.10% of average daily net assets
Available only to certain qualifying institutional investors

* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act
of 1940 that allows it to pay distribution and servicing-related fees for
the sale of Class A and Class B shares. Because these fees are paid out of
the Fund's assets on an on-going basis, the fees may cost long-term
shareholders more than paying other types of sales charges imposed by some
mutual funds.

<PAGE>

Should you purchase Class A or Class B shares?

If your investments in American Express mutual funds total $250,000 or more,
Class A shares may be the better option. If you qualify for a waiver of the
sales charge, Class A shares will be the best option.

If you invest less than $250,000, consider how long you plan to hold your
shares. Class B shares have a higher annual distribution fee and a CDSC for six
years. To help you determine what is best for you, consult your financial
advisor.

Class B shares convert to Class A shares in the ninth calendar year of
ownership. Class B shares purchased through reinvested dividends and
distributions also will convert to Class A shares in the same proportion as the
other Class B shares.

PURCHASING SHARES

To purchase shares through a brokerage account or from entities other than
American Express Financial Advisors Inc., please consult your selling agent. The
following section explains how you can purchase shares from American Express
Financial Advisors (the Distributor).

If you do not have a mutual fund account, you need to establish one. Your
financial advisor will help you fill out and submit an application. Once your
account is set up, you can choose among several convenient ways to invest.

When you purchase shares for a new or existing account, your order will be
priced at the next NAV calculated after your order is accepted by the Fund. If
your application does not specify which class of shares you are purchasing, we
will assume you are investing in Class A shares.

Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.

If you do not provide the correct TIN, you could be subject to backup
withholding of 31% of taxable distributions and proceeds from certain sales and
exchanges. You also could be subject to further penalties, such as:

o a $50 penalty for each failure to supply your correct TIN,

o a civil penalty of $500 if you make a false statement that results in no
backup withholding, and

o criminal penalties for falsifying information.

You also could be subject to backup withholding, if the IRS notifies us to do
so, because you failed to report required interest or dividends on your tax
return.

<PAGE>

How to determine the correct TIN

For this type of account: Use the Social Security or Employer
` Identification number of:

Individual or joint account The individual or one of the owners
listed on the joint account

Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)

A revocable living trust The grantor-trustee (the person who puts
the money into the trust)

An irrevocable trust, pension
trust or estate The legal entity (not the personal
representative or trustee, unless no
legal entity is designated in the
account title)

Sole proprietorship The owner

Partnership The partnership

Corporate The corporation

Association, club or tax-exempt
organization The organization

For details on TIN requirements, contact your financial advisor to obtain a copy
of federal Form W-9, "Request for Taxpayer Identification Number and
Certification." You also may obtain the form on the Internet at
(http://www.irs.gov/prod/forms_pubs/).

Three ways to invest

1 By mail:

Once your account has been established, send your check with the account number
on it to:

American Express Funds
P.O. Box 74
Minneapolis, MN 55440-0074

Minimum amounts

Initial investment: $2,000
Additional investments: $100
Account balances: $300

If your account balance falls below $300, you will be asked to increase it to
$300 or establish a scheduled investment plan. If you do not do so within 30
days, your shares can be sold and the proceeds mailed to you.

<PAGE>

2 By scheduled investment plan:

Contact your financial advisor for assistance in setting up one of the following
scheduled plans:

o automatic payroll deduction,

o bank authorization,

o direct deposit of Social Security check, or

o other plan approved by the Fund.

Minimum amounts

Initial investment: $100

Additional investments: $100/mo.

Account balances: none (on active plans with monthly payments)

If your account balance is below $2,000, you must make payments at least
monthly.

3 By wire or electronic funds transfer:

If you have an established account, you may wire money to:

Norwest Bank Minnesota
Routing Transit No. 091000019

Give these instructions: Credit American Express Financial Advisors Account
#0000030015 for personal account # (your account number) for (your name). Please
remember that you need to provide all 10 digits.

If this information is not included, the order may be rejected, and all money
received by the Fund, less any costs the Fund or American Express Client Service
Corporation (AECSC) incurs, will be returned promptly.

Minimum amounts

Each wire investment: $1,000

<PAGE>

TRANSACTIONS THROUGH THIRD PARTIES

You may buy or sell shares through certain 401(k) plans, banks, broker-dealers,
financial advisors or other investment professionals. These organizations may
charge you a fee for this service and may have different policies. Some policy
differences may include different minimum investment amounts, exchange
privileges, fund choices and cutoff times for investments. The Fund and the
Distributor are not responsible for the failure of one of these organizations to
carry out its obligations to its customers. Some organizations may receive
compensation from the Distributor or its affiliates for shareholder
recordkeeping and similar services. Where authorized by the Fund, some
organizations may designate selected agents to accept purchase or sale orders on
the Fund's behalf. To buy or sell shares through third parties or determine if
there are policy differences, please consult your selling agent. For other
pertinent information related to buying or selling shares, please refer to the
appropriate section in the prospectus.

SALES CHARGES

Class A -- initial sales charge alternative

When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:

Total investment Sales charge as percentage of:(a)

Public offering price(b) Net amount invested

Up to $50,000 5.0% 5.26%

Next $50,000 4.5 4.71

Next $400,000 3.8 3.95

Next $500,000 2.0 2.04

$1,000,000 or more 0.0 0.00

a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.

b Offering price includes a 5% sales charge.

The sales charge on Class A shares may be lower than 5%, depending on the total
amount:

o you now are investing in this Fund,

o you have previously invested in this Fund, or

o you and your primary household group are investing or have invested in
other American Express mutual funds that have a sales charge. (The primary
household group consists of accounts in any ownership for spouses or
domestic partners and their unmarried children under 21. For purposes of
this policy, domestic partners are individuals who maintain a shared
primary residence and have joint property or other insurable interests.)
AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do
not have sales charges.

<PAGE>

Other Class A sales charge policies:

o IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
association of employers, employee organization or other similar group, may
be added together to reduce sales charges for all shares purchased through
that plan, and

o if you intend to invest $1 million over a period of 13 months, you can
reduce the sales charges in Class A by filing a letter of intent. For more
details, please see the SAI.

Waivers of the sales charge for Class A shares

Sales charges do not apply to:

o current or retired board members, officers or employees of the Fund or AEFC
or its subsidiaries, their spouses or domestic partners and unmarried
children under 21.

o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.

o investors who have a business relationship with a newly associated
financial advisor who joined the Distributor from another investment firm
provided that (1) the purchase is made within six months of the advisor's
appointment date with the Distributor, (2) the purchase is made with
proceeds of shares sold that were sponsored by the financial advisor's
previous broker-dealer, and (3) the proceeds are the result of a sale of an
equal or greater value where a sales load was assessed.

o qualified employee benefit plans offering participants daily access to
American Express mutual funds. Eligibility must be determined in advance.
For assistance, please contact your financial advisor. (Participants in
certain qualified plans where the initial sales charge is waived may be
subject to a deferred sales charge of up to 4%.)

o shareholders who have at least $1 million invested in American Express
mutual funds. If the investment is sold in the first year after purchase, a
CDSC of 1% will be charged. The CDSC will be waived only in the
circumstances described for waivers for Class B shares.

o purchases made within 90 days after a sale of shares (up to the amount
sold):

-- of American Express mutual funds in a qualified plan subject to a
deferred sales charge, or

-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or investment
servicing relationship.

Send the Fund a written request along with your payment, indicating the date and
the amount of the sale.

<PAGE>

o purchases made:

-- with dividend or capital gain distributions from this Fund or from the
same class of another American Express mutual fund that has a sales
charge,

-- through or under a wrap fee product or other investment product
sponsored by the Distributor or another authorized broker-dealer,
investment adviser, bank or investment professional,

-- within the University of Texas System ORP,

-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,

-- within the University of Massachusetts After-Tax Savings Program, or

-- through or under a subsidiary of AEFC offering Personal Trust
Services' Asset-Based pricing alternative.

Class B -- contingent deferred sales charge (CDSC) alternative A CDSC is based
on the sale amount and the number of calendar years -- including the year of
purchase -- between purchase and sale. The following table shows how CDSC
percentages on sales decline after a purchase:

If the sale is made during the: The CDSC percentage rate is:

First year 5%

Second year 4%

Third year 4%

Fourth year 3%

Fifth year 2%

Sixth year 1%

Seventh year 0%

If the amount you are selling causes the value of your investment in Class B
shares to fall below the cost of the shares you have purchased during the last
six years including the current year, the CDSC is based on the lower of the cost
of those shares purchased or market value.

<PAGE>

Example:

Assume you had invested $10,000 in Class B shares and that your investment had
appreciated in value to $12,000 after 15 months, including reinvested dividends
and capital gain distributions. You could sell up to $2,000 worth of shares
without paying a CDSC ($12,000 current value less $10,000 purchase amount). If
you sold $2,500 worth of shares, the CDSC would apply to the $500 representing
part of your original purchase price. The CDSC rate would be 4% because the sale
was made during the second year after the purchase.

Because the CDSC is imposed only on sales that reduce your total purchase
payments, you never have to pay a CDSC on any amount that represents
appreciation in the value of your shares, income earned by your shares, or
capital gains. In addition, the CDSC rate on your sale will be based on your
oldest purchase payment. The CDSC on the next amount sold will be based on the
next oldest purchase payment.

The CDSC on Class B shares will be waived on sales of shares:

o in the event of the shareholder's death,

o held in trust for an employee benefit plan, or

o held in IRAs or certain qualified plans if American Express Trust Company
is the custodian, such as Keogh plans, tax-sheltered custodial accounts or
corporate pension plans, provided that the shareholder is:

-- at least 591/2 years old AND

-- taking a retirement distribution (if the sale is part of a transfer to
an IRA or qualified plan, or a custodian-to-custodian transfer, the
CDSC will not be waived) OR

-- selling under an approved substantially equal periodic payment
arrangement.

<PAGE>

EXCHANGING/SELLING SHARES

Exchanges

You can exchange your Fund shares at no charge for shares of the same class of
any other publicly offered American Express mutual fund. Exchanges into AXP
Tax-Free Money Fund may only be made from Class A shares. For complete
information on the other funds, including fees and expenses, read that fund's
prospectus carefully. Your exchange will be priced at the next NAV calculated
after it is accepted by that fund.

You may make up to three exchanges (11/2 round trips) within any 30-day period.
These limits do not apply to scheduled exchange programs and certain employee
benefit plans. Exceptions may be allowed with pre-approval of the Fund.

Other exchange policies:

o Exchanges must be made into the same class of shares of the new fund.

o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.

o Once we receive your exchange request, you cannot cancel it.

o Shares of the new fund may not be used on the same day for another
exchange.

o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.

AECSC and the Fund reserve the right to reject any exchange, limit the amount,
or modify or discontinue the exchange privilege, to prevent abuse or adverse
effects on the Fund and its shareholders. For example, if exchanges are too
numerous or too large, they may disrupt the Fund's investment strategies or
increase its costs.

<PAGE>

Selling Shares

You can sell your shares at any time. The payment will be mailed within seven
days after accepting your request.

When you sell shares, the amount you receive may be more or less than the amount
you invested. Your sale price will be the next NAV calculated after your request
is accepted by the Fund, minus any applicable CDSC.

You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 90 days of the date your sale
request was received and include your account number. This privilege may be
limited or withdrawn at any time and may have tax consequences.

The Fund reserves the right to redeem in kind.

For more details and a description of other sales policies, please see the SAI.

<PAGE>

To sell or exchange shares held through a brokerage account or with entities
other than American Express Financial Advisors, please consult your selling
agent. The following section explains how you can exchange or sell shares held
with American Express Financial Advisors.

Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.

Important: If you request a sale of shares you recently purchased by a check or
money order that is not guaranteed, the Fund will wait for your check to clear.
It may take up to 10 days from the date of purchase before payment is made.
(Payment may be made earlier if your bank provides evidence satisfactory to the
Fund and AECSC that your check has cleared.)

Two ways to request an exchange or sale of shares

1 By letter:

Include in your letter:

o the name of the fund(s),

o the class of shares to be exchanged or sold,

o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),

o your social security number or employer identification number,

o the dollar amount or number of shares you want to exchange or sell,

o signature(s) of all registered account owners,

o for sales, indicate how you want your money delivered to you, and

o any paper certificates of shares you hold.

Regular mail:

American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534

Express mail:

American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402

<PAGE>

2 By telephone:

American Express Client Service Corporation
Telephone Transaction Service
800-437-3133

o The Fund and AECSC will use reasonable procedures to confirm authenticity
of telephone exchange or sale requests.

o Telephone exchange and sale privileges automatically apply to all accounts
except custodial, corporate or qualified retirement accounts. You may
request that these privileges NOT apply by writing AECSC. Each registered
owner must sign the request.

o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.

o Telephone privileges may be modified or discontinued at any time.

Minimum sale amount: $100 Maximum sale amount: $50,000

<PAGE>

Three ways to receive payment when you sell shares

1 By regular or express mail:

o Mailed to the address on record.

o Payable to names listed on the account.

NOTE: The express mail delivery charges you pay will vary depending on the
courier you select.

2 By wire or electronic funds transfer:

o Minimum wire: $1,000.

o Request that money be wired to your bank.

o Bank account must be in the same ownership as the American Express mutual
fund account.

NOTE: Pre-authorization required. For instructions, contact your financial
advisor or AECSC.

3 By scheduled payout plan:

o Minimum payment: $50.

o Contact your financial advisor or AECSC to set up regular payments on a
monthly, bimonthly, quarterly, semiannual or annual basis.

o Purchasing new shares while under a payout plan may be disadvantageous
because of the sales charges.

<PAGE>

Distributions and Taxes

As a shareholder you are entitled to your share of the Fund's net income and net
gains. The Fund distributes dividends and capital gains to qualify as a
regulated investment company and to avoid paying corporate income and excise
taxes.

DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS

The Fund's net investment income is distributed to you as dividends. Capital
gains are realized when a security is sold for a higher price than was paid for
it. Each realized capital gain or loss is long-term or short-term depending on
the length of time the Fund held the security. Realized capital gains and losses
offset each other. The Fund offsets any net realized capital gains by any
available capital loss carryovers. Net short-term capital gains are included in
net investment income. Net realized long-term capital gains, if any, are
distributed by the end of the calendar year as capital gain distributions.

REINVESTMENTS

Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:

o you request distributions in cash, or

o you direct the Fund to invest your distributions in the same class of any
publicly offered American Express mutual fund for which you have previously
opened an account.

We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.

If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.

<PAGE>

TAXES

Dividends distributed from interest earned on tax-exempt securities
(exempt-interest dividends) are exempt from federal income taxes but may be
subject to state and local taxes. Dividends distributed from capital gain
distributions and other income earned are not exempt from federal income taxes.
Distributions are taxable in the year the Fund declares them regardless of
whether you take them in cash or reinvest them.

Interest on certain private activity bonds is a preference item for purposes of
the individual and corporate alternative minimum taxes. To the extent the Fund
earns such income, it will flow through to its shareholders and may be taxable
to those shareholders who are subject to the alternative minimum tax.

Because interest on municipal bonds and notes is tax-exempt for federal income
tax purposes, any interest on money you borrow that is used directly or
indirectly to purchase Fund shares is not deductible on your federal income tax
return. You should consult a tax advisor regarding its deductibility for state
and local income tax purposes.

If you buy shares shortly before the record date of a distribution you may pay
taxes on money earned by the Fund before you were a shareholder. You will pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which may be taxable.

For tax purposes, an exchange is considered a sale and purchase and may result
in a gain or loss. A sale is a taxable transaction. If you sell shares for less
than their cost, the difference is a capital loss. If you sell shares for more
than their cost, the difference is a capital gain. Your gain may be short term
(for shares held for one year or less) or long term (for shares held for more
than one year).

If you buy Class A shares of this or another American Express mutual fund and
within 91 days exchange into this Fund, you may not include the sales charge in
your calculation of tax gain or loss on the sale of the first fund you
purchased. The sales charge may be included in the calculation of your tax gain
or loss on a subsequent sale of this Fund.

Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.

<PAGE>

Other Information

YEAR 2000

The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after Jan. 1, 2000. While Year 2000-related
computer problems could have a negative effect on the Fund, AEFC is working to
avoid such problems and to obtain assurances from service providers that they
are taking similar steps.

The companies, governments or international markets in which the Fund invests
also may be adversely affected by Year 2000 issues. To the extent a portfolio
holding is adversely affected by a Year 2000 processing issue, the Fund's return
could be adversely affected.

INVESTMENT MANAGER

The investment manager of the Fund is AEFC, located at IDS Tower 10,
Minneapolis, MN 55440-0010. The Fund pays AEFC a fee for managing its assets.
Under the Investment Management Services Agreement, the fee for the most recent
fiscal year was 0.45% of its average daily net assets. Under the agreement, the
Fund also pays taxes, brokerage commissions and nonadvisory expenses. AEFC is a
wholly-owned subsidiary of American Express Company, a financial services
company with headquarters at American Express Tower, World Financial Center, New
York, NY 10285.

<PAGE>

Financial Highlights

Fiscal period ended Nov. 30,

Per share income and capital changes(a)

Class A

1999 1998 1997 1996(b)

Net asset value, beginning of
period $5.14 $5.09 $5.04 $5.00

Income from investment operations:

Net investment income (loss) .19 .19 .18 --

Net gains (losses) (both realized
and unrealized) (.12) .05 .05 .04

Total from investment operations .07 .24 .23 .04

Less distributions:

Dividends from net investment
income (.19) (.19) (.18) --

Net asset value, end of period $5.02 $5.14 $5.09 $5.04

Ratios/supplemental data

Net assets, end of period
(in millions) $29 $21 $17 $2

Ratio of expenses to average
daily net assets(c) .90%d .92%d .93%d .90%(d,e)

Ratio of net investment income
(loss) to average daily net assets 3.78% 3.76% 3.60% 3.19%(e)

Portfolio turnover rate (excluding
short-term securities) 9% 7% 24% --

Total return(f) 1.44% 4.85% 4.44% .96%

a For a share outstanding throughout the period. Rounded to the nearest cent.

b Inception date was Nov. 13, 1996.

c Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.

d AEFC voluntarily limited total operating expenses, net of earnings credits,
for the Fund. Had AEFC not done so, the annual ratios of expenses would have
been 1.02%, 0.96%, 1.49% and 48.94% for Class A for the periods ended 1999,
1998, 1997, and 1996, respectively.

e Adjusted to an annual basis.

f Total return does not reflect payment of a sales charge.

<PAGE>

Fiscal period ended Nov. 30,

Per share income and capital changes(a)

Class B Class Y
<S> <C> <C> <C> <C> <C> <C> <C> <C>

1999 1998 1997 1996(b) 1999 1998 1997 1996(b)

Net asset value, beginning of period $5.14 $5.09 $5.04 $5.00 $5.13 $5.09 $5.04 $5.00

Income from investment operations:

Net investment income (loss) .15 .15 .14 -- .21 .19 .18 --

Net gains (losses) (both realized and
unrealized) (.12) .05 .05 .04 (.12) .05 .05 .04

Total from investment operations .03 .20 .19 .04 .09 .24 .23 .04

Less distributions:

Dividends from net investment income (.15) (.15) (.14) -- (.21) (.20) (.18) --

Net asset value, end of period $5.02 $5.14 $5.09 $5.04 $5.01 $5.13 $5.09 $5.04

Ratios/supplemental data

Net assets, end of period (in millions) $9 $7 $6 $-- $-- $-- $-- $--

Ratio of expenses to average daily
net assets(c) 1.65%(d) 1.67%(d) 1.68%(d) 1.66%(d,e) .80%(d) .78%(d) .80%(d) .73%(d,e)

Ratio of net investment income (loss)
to average daily net assets 3.02% 3.01% 2.87% 2.04%(e) 4.03% 3.83% 3.84% 2.32%(e)

Portfolio turnover rate (excluding
short-term securities) 9% 7% 24% --% 9% 7% 24 --

Total return(f) .69% 4.07% 3.67% .92% 1.59% 4.78% 4.57% .97%
</TABLE>

a For a share outstanding throughout the period. Rounded to the nearest cent.

b Inception date was Nov. 13, 1996.

c Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.

d AEFC voluntarily limited total operating expenses, net of earnings credits,
for the Fund. Had AEFC not done so, the annual ratios of expenses would have
been 1.78%, 1.71%, 2.17%, and 55.07% for Class B and 0.94%, 0.88%, 1.70% and
83.81% for Class Y for the periods ended 1999, 1998, 1997, and 1996,
respectively.

e Adjusted to an annual basis.

f Total return does not reflect payment of a sales charge.

The information in these tables has been audited by KPMG LLP, independent
auditors. The independent auditors' report and additional information about the
performance of the Fund are contained in the Fund's annual report which, if not
included with this prospectus, may be obtained without charge.

<PAGE>

APPENDIX

2000 federal tax-exempt and taxable equivalent yield calculation

These tables will help you determine your federal taxable yield equivalents for
given rates of tax-exempt income.

STEP 1: Calculating your marginal tax rate. Using your Taxable Income and
Adjusted Gross Income figures as guides, you can locate your Marginal Tax Rate
in the table below.

First, locate your Taxable Income in a filing status and income range in the
left-hand column. Then, locate your Adjusted Gross Income at the top of the
chart. At the point where your Taxable Income line meets your Adjusted Gross
Income column the percentage indicated is an approximation of your federal
Marginal Tax Rate. For example: Let's assume you are married filing jointly,
your taxable income is $138,000 and your adjusted gross income is $175,000.

Under Taxable Income married filing jointly status, $138,000 is in the
$105,950-$161,450 range. Under Adjusted Gross Income, $175,000 is in the
$128,950 to $193,400 column. The Taxable Income line and Adjusted Gross Income
column meet at 31.93%. This is the rate you'll use in Step 2.

<PAGE>

Adjusted gross income*

Taxable income** $0 $128,950 $193,400

to to to Over

$128,950(1) $193,400(2) $315,900(3) $315,900(2)
- --------------------------------------------------------------------------------
Married Filing
Jointly

$0 - $ 43,850 15.00%

43,850 -105,950 28.00 28.84%

105,950 -161,450 31.00 31.93 33.32%

161,450 -288,350 36.00 37.08 38.69 37.08%

288,350 + 39.60 42.56*** 40.79
- --------------------------------------------------------------------------------
Adjusted gross income*
- --------------------------------------------------------------------------------
Taxable income** $0 $128.950

to to Over

$128,950(1) $251,450(3) $251,450(2)

Single

$ 0 - $ 26,250 15.00%

26,250 -63,550 28.00

63,550 -132,600 31.00 32.62%

132,600 -288,350 36.00 37.89 37.08%

288,350 + 39.60 40.79

* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.

** Amount subject to federal income tax after itemized deductions (or standard
deduction) and personal exemptions.

*** This rate is applicable only in the limited case where your adjusted gross
income is less than $315,900 and your taxable income exceeds $288,350.

(1) No Phase-out -- Assumes no phase-out of itemized deductions or personal
exemptions.

(2) Itemized Deductions Phase-out-- Assumes a phase-out of itemized deductions
and no current phase-out of personal exemptions.

(3) Itemized Deductions and Personal Exemption Phase-outs -- Assumes a single
taxpayer has one personal exemption, joint taxpayers have two personal
exemptions, personal exemptions phase-out and itemized deductions continue
to phase-out. If these assumptions do not apply to you, it will be
necessary to construct your own personalized tax equivalency table.

<PAGE>

STEP 2: Determining your federal taxable yield equivalents. Using 31.93%, you
may determine that a tax-exempt yield of 4% is equivalent to earning a taxable
5.88% yield.

For these Tax-Exempt Rates:

3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%

Marginal Tax Rates Equal the Taxable Rates shown below:

15.00% 4.12 4.71 5.29 5.88 6.47 7.06 7.65 8.24

28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72

28.84% 4.92 5.62 6.32 7.03 7.73 8.43 9.13 9.84

31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14

31.93% 5.14 5.88 6.61 7.35 8.08 8.81 9.55 10.28

32.62% 5.19 5.94 6.68 7.42 8.16 8.90 9.65 10.39

33.32% 5.25 6.00 6.75 7.50 8.25 9.00 9.75 10.50

36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94

37.08% 5.56 6.36 7.15 7.95 8.74 9.54 10.33 11.13

37.89% 5.64 6.44 7.25 8.05 8.86 9.66 10.47 11.27

38.69% 5.71 6.52 7.34 8.16 8.97 9.79 10.60 11.42

39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59

40.79% 5.91 6.76 7.60 8.44 9.29 10.13 10.98 11.82

42.56% 6.09 6.96 7.83 8.70 9.58 10.45 11.32 12.19

<PAGE>

American
ExpressR)
Funds

This Fund, along with the other American Express mutual funds, is distributed by
American Express Financial Advisors Inc. and can be purchased from an American
Express financial advisor or from other authorized broker-dealers or third
parties. The Funds can be found under the "Amer Express" banner in most mutual
fund quotations.

Additional information about the Fund and its investments is available in the
Fund's Statement of Additional Information (SAI), annual and semiannual reports
to shareholders. In the Fund's annual report, you will find a discussion of
market conditions and investment strategies that significantly affected the Fund
during its last fiscal year. The SAI is incorporated by reference in this
prospectus. For a free copy of the SAI, the annual report or the semiannual
report contact your selling agent or American Express Client Service
Corporation.

American Express Client Service Corporation
P.O. Box 534,
Minneapolis, MN 55440-0534
800-862-7919 TTY: 800-846-4852
Web site address:
http://www.americanexpress.com/advisors

You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at (http://www.sec.gov). Copies of this
information may be obtained by writing and paying a duplicating fee to the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.

Investment Company Act File #811-2686

TICKER SYMBOL

Class A: INFAX Class B: N/A Class Y: N/AS-6355-99 F (1/00)

AMERICAN
EXPRESS(R)(logo)

<PAGE>

AXPSM

Tax-Exempt Bond Fund

PROSPECTUS
Jan. 28, 2000

American
Express
Funds

AXP Tax-Exempt Bond Fund seeks to provide shareholders with as much current
income exempt from federal income taxes as possible with only modest risk to the
shareholder's investments.

Please note that this Fund:

o is not a bank deposit

o is not federally insured

o is not endorsed by any bank or government agency

o is not guaranteed to achieve its goal

Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.

AMERICAN
EXPRESS (logo)

<PAGE>

Table of Contents

TAKE A CLOSER LOOK AT:

The Fund 3p

Goal 3p
Investment Strategy 3p
Risks 5p
Past Performance 6p
Fees and Expenses 8p
Management 9p

Buying and Selling Shares 9p
Valuing Fund Shares 9p
Investment Options 10p
Purchasing Shares 11p

Transactions through Third Parties 14p

Sales Charges 14p
Exchanging/Selling Shares 19p

Distributions and Taxes 24p

Other Information 26p

Financial Highlights 27p

Appendix 29p

FUND INFORMATION KEY

Goal and Investment Strategy
The Fund's particular investment goal and the strategies it intends to use in
pursuing its goal.

Risks
The major risk factors associated with the Fund.

Fees and Expenses
The overall costs incurred by an investor in the Fund, including sales charges
and annual expenses.

Management
The individual or group designated by the investment manager to handle the
Fund's day-to-day management.

Financial Highlights
Tables showing the Fund's financial performance.

<PAGE>

The Fund

GOAL

AXP Tax-Exempt Bond Fund (the Fund) seeks to provide shareholders with as much
current income exempt from federal income taxes as possible with only modest
risk to the shareholder's investments. Because any investment involves risk,
achieving this goal cannot be guaranteed.

INVESTMENT STRATEGY

The Fund's assets primarily are invested in bonds and other debt obligations.
Under normal market conditions, the Fund will invest at least 80% of its net
assets in bonds and other debt obligations issued by or on behalf of state or
local governmental units whose interest is exempt from federal income tax.
Investments will be (1) rated in the top four grades by Moody's Investors
Service, Inc., Standard & Poor's Corporation, or Fitch Investors Services, Inc.,
(2) of comparable rating given by other independent rating agencies, or (3)
unrated bonds and other debt obligations that are believed to be of investment
grade quality. This Fund does not intend to invest in debt obligations the
interest from which is subject to the alternative minimum tax.

The selection of high and medium quality debt obligations that are tax-exempt is
the primary decision in building the investment portfolio.

In pursuit of the Fund's goal, American Express Financial Corporation (AEFC),
the Fund's investment manager, chooses debt obligations by:

o Considering opportunities and risks in municipal bonds given current and
expected interest rates.

o Identifying municipal bonds that:

-- are high or medium quality,

-- have interest not subject to the alternative minimum tax,

-- have long-term maturities, and

-- have characteristics better than that of comparable bonds.

o Identifying bonds that contribute to portfolio diversification. AEFC will
weight certain sectors more heavily based on AEFC's expectations for growth
and for expected market trends.

<PAGE>

In evaluating whether to sell a security, AEFC considers, among other factors,
whether:

-- the security is overvalued relative to alternative investments,

-- the issuer's credit rating declines or AEFC expects a decline (the
Fund may continue to own securities that are down-graded until AEFC
believes it is advantageous to sell),

-- political, economic, or other events could affect the issuer's
performance,

-- AEFC expects the issuer to call the security,

-- AEFC identifies a more attractive opportunity, and

-- the issuer or the security continues to meet the other standards
described above.

Although not a primary investment strategy, the Fund also may invest in other
instruments, such as money market securities, short-term tax-exempt securities,
and derivatives (such as futures, options and forward contracts).

During weak or declining markets, the Fund may invest more of its assets in
money market securities or certain taxable investments. Although the Fund
primarily will invest in these securities to avoid losses, this type of
investing also could prevent the Fund from achieving its investment objective.
During these times, AEFC may make frequent securities trades that could result
in increased fees, expenses, and taxes.

For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.

<PAGE>

RISKS

Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:

Interest Rate Risk
Credit Risk
Call/Prepayment Risk

Interest Rate Risk

The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a bond, the higher its yield and
the greater its sensitivity to changes in interest rates.

Credit Risk

The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. Junk bonds have greater price fluctuations and are
more likely to experience a default than investment grade bonds.

Call/Prepayment Risk

The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
reinvestment risk, which is the risk that an investor will not be able to
reinvest income or principal at the same rate it currently is earning.

<PAGE>

PAST PERFORMANCE

The following bar chart and table indicate the risks and variability of
investing in the Fund by showing:

o how the Fund's performance has varied for each full calendar year shown on
the chart below, and

o how the Fund's average annual total returns compare to a recognized index.

How the Fund has performed in the past does not indicate how the Fund will
perform in the future.

Class A Performance (based on calendar years)

+18.78%
+12.93%
+10.06%
+9.95%
+6.76% +6.85%
+5.58%
+1.99%
________________________________________________________________________________
1990 1991 1992 1993 1995 1996 1997 1998 -4.43%
-7.37% 1999
1994

During the period shown in the bar chart, the highest return for a calendar
quarter was +7.63% (quarter ending March 1995) and the lowest return for a
calendar quarter was -6.89% (quarter ending March 1994).

The Fund's year to date return as of Dec. 31, 1999 was -4.43%.

<PAGE>

Average Annual Total Returns (as of Dec. 31, 1999)

1 year 5 years 10 years Since inception

Tax-Exempt Bond:

Class A -9.20% +5.01% +5.31% --%

Class B -8.78% --% --% +3.73%a

Class Y -4.26% --% --% +5.01%a

Lehman Brothers

Municipal Bond Index -2.06% +6.91% +6.89% +5.76%b

Lipper General

Municipal Debt Index -4.07% +6.14% +6.29% +4.95%b

a Inception date was March 20, 1995.
b Measurement period started April 1, 1995.

This table shows total returns from hypothetical investments in Class A, Class B
and Class Y shares of the Fund. These returns are compared to the indexes shown
for the same periods. The performance of Classes A, B and Y vary because of
differences in sales charges and fees. Past performance for Class Y for the
periods prior to March 20, 1995 may be calculated based on the performance of
Class A, adjusted to reflect differences in sales charges, although not for
other differences in expenses.

For purposes of this calculation we assumed:

o a sales charge of 5% for Class A shares,

o sales at the end of the period and deduction of the applicable contingent
deferred sales charge (CDSC) for Class B shares,

o no sales charge for Class Y shares, and

o no adjustments for taxes paid by an investor on the reinvested income and
capital gains.

Lehman Brothers Municipal Bond Index, an unmanaged index, is made up of a
representative list of general obligation, revenue, insured and pre-refunded
bonds. The index is frequently used as a general measure of tax-exempt bond
market performance. The index reflects reinvestment of all distributions and
changes in market prices, but excludes brokerage commissions or other fees.
However, the securities used to create the index may not be representative of
the bonds held in the Fund.

The Lipper General Municipal Debt Index, an unmanaged index published by Lipper
Analytical Services, Inc., includes 30 funds that are generally similar to the
Fund, although some funds in the index may have somewhat different investment
policies or objectives.

<PAGE>

FEES AND EXPENSES

Fund investors pay various expenses. The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Fund.

Shareholder Fees (fees paid directly from your investment)

Class A Class B Class Y

Maximum sales charge (load) imposed 5% none none
on purchasesa (as a percentage of
offering price)

Maximum deferred sales charge (load)
imposed on sales (as a percentage of
offering price at time of purchase) none 5% none

Annual Fund operating expensesb (expenses that are deducted from Fund assets)

As a percentage of average daily
net assets: Class A Class B Class Y

Management fees 0.45% 0.45% 0.45%

Distribution (12b-1) fees 0.25% 1.00% 0.00%

Other expensesc 0.12% 0.13% 0.22%

Total 0.82% 1.58% 0.67%

a This charge may be reduced depending on your total investments in American
Express mutual funds. See "Sales Charges."

b Expenses for Class A, Class B and Class Y are based on actual expenses for the
last fiscal year, restated to reflect current fees.

c Other expenses include an administrative services fee, a shareholder services
fee for Class Y, a transfer agency fee and other nonadvisory expenses.

<PAGE>

Example

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

Assume you invest $10,000 and the Fund earns a 5% annual return. The operating
expenses remain the same each year. If you hold your shares until the end of the
years shown, your costs would be:

1 year 3 years 5 years 10 years

Class Aa $580 $749 $933 $1,467

Class Bb $561 $799 $961 $1,678d

Class Bc $161 $499 $861 $1,678d

Class Y $68 $215 $374 $ 838

a Includes a 5% sales charge.

b Assumes you sold your Class B shares at the end of the period and incurred the
applicable CDSC.

c Assumes you did not sell your Class B shares at the end of the period.

d Based on conversion of Class B shares to Class A shares in the ninth year of
ownership.

This example does not represent actual expenses, past or future. Actual expenses
may be higher or lower than those shown.

MANAGEMENT

Terry Seierstad, senior portfolio manager, joined AEFC in 1982. He has managed
this Fund since 1993. He also manages the investments for IDS Property Casualty
Company.

Buying and Selling Shares

VALUING FUND SHARES

The public offering price for Class A is the net asset value (NAV) adjusted for
the sales charge. For Class B and Class Y, it is the NAV.

<PAGE>

INVESTMENT OPTIONS

1. Class A shares are sold to the public with a sales charge at the time of
purchase and an annual distribution (12b-1) fee.

2. Class B shares are sold to the public with a CDSC and an annual distribution
(12b-1) fee.

3. Class Y shares are sold to qualifying institutional investors without a sales
charge or distribution fee. Please see the SAI for information on eligibility to
purchase Class Y shares.

Investment options summary:

Class A Maximum sales charge of 5%

Initial sales charge waived or reduced for certain purchases

Annual distribution fee of 0.25% of average daily net
assets*

Lower annual expenses than Class B shares
- --------------------------------------------------------------------------------
Class B

No initial sales charge

CDSC on shares sold in the first six years (maximum of 5% in
first year, reduced to 0% after year six)

CDSC waived in certain circumstances

Shares convert to Class A in ninth year of ownership

Annual distribution fee of 1.00% of average daily net
assets*

Higher annual expenses than Class A shares
- --------------------------------------------------------------------------------
Class Y

No initial sales charge

No annual distribution fee

Service fee of 0.10% of average daily net assets

Available only to certain qualifying institutional investors
- --------------------------------------------------------------------------------
* The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 that allows it to pay distribution and servicing-related fees for the sale
of Class A and Class B shares. Because these fees are paid out of the Fund's
assets on an on-going basis, the fees may cost long-term shareholders more than
paying other types of sales charges imposed by some mutual funds.

<PAGE>

Should you purchase Class A or Class B shares?

PURCHASING SHARES

Important: When you open an account, you must provide your correct Taxpayer
Identification Number (TIN), which is either your Social Security or Employer
Identification number.

o a $50 penalty for each failure to supply your correct TIN,

o a civil penalty of $500 if you make a false statement that results in no
backup withholding, and

o criminal penalties for falsifying information.

You also could be subject to backup withholding, if the IRS notifies us to do
so, because you failed to report required interest or dividends on your tax
return.

<PAGE>

________________________________________________________________________________
How to determine the correct TIN
________________________________________________________________________________

For this type of account: Use the Social Security or Employer
Identification number of:

Individual or joint account The individual or one of the owners
listed on the joint account

Custodian account of a minor The minor
(Uniform Gifts/Transfers to Minors Act)

A revocable living trust The grantor-trustee
(the person who puts the money into the
trust)

An irrevocable trust, pension trust The legal entity (not the personal
or estate representative or trustee, unless no
legal entity is designated in the
account title)

Sole proprietorship The owner

Partnership The partnership

Corporate The corporation

Association, club or tax-exempt The organization
organization

Three ways to invest

1 By mail:

Once your account has been established, send your check with the account number
on it to:

American Express Funds
P.O. Box 74
Minneapolis, MN 55440-0074

Minimum amounts
Initial investment: $2,000
Additional investments: $100
Account balances: $300

<PAGE>

2 By scheduled investment plan:

Contact your financial advisor for assistance in setting up one of the following
scheduled plans:

o automatic payroll deduction,

o bank authorization,

o direct deposit of Social Security check, or

o other plan approved by the Fund.

Minimum amounts

Initial investment: $100

Additional investments: $100/mo.

Account balances: none (on active plans with monthly payments)

If your account balance is below $2,000, you must make payments at least
monthly.

3 By wire or electronic funds transfer:

If you have an established account, you may wire money to:

Norwest Bank Minnesota
Routing Transit No. 091000019

Minimum amounts

Each wire investment: $1,000

<PAGE>

TRANSACTIONS THROUGH THIRD PARTIES

SALES CHARGES

Class A -- initial sales charge alternative

When you purchase Class A shares, you pay a 5% sales charge on the first $50,000
of your total investment and less on investments after the first $50,000:

Total investment Sales charge as percentage of: a

Public offering priceb Net amount invested

Up to $50,000 5.0% 5.26%

Next $50,000 4.5 4.71

Next $400,000 3.8 3.95

Next $500,000 2.0 2.04

$1,000,000 or more 0.0 0.00

a To calculate the actual sales charge on an investment greater than $50,000 and
less than $1,000,000, you must total the amounts of all increments that apply.
b Offering price includes a 5% sales charge.
The sales charge on Class A shares may be lower than 5%, depending on the total
amount:

o you now are investing in this Fund,

o you have previously invested in this Fund, or

<PAGE>

Other Class A sales charge policies:

o if you intend to invest $1 million over a period of 13 months, you can
reduce the sales charges in Class A by filing a letter of intent. For more
details, please see the SAI.

Waivers of the sales charge for Class A shares

Sales charges do not apply to:

o current or retired board members, officers or employees of the Fund or AEFC
or its subsidiaries, their spouses or domestic partners and unmarried
children under 21.

o current or retired American Express financial advisors, their spouses or
domestic partners and unmarried children under 21.

<PAGE>

o purchases made within 90 days after a sale of shares (up to the amount
sold):

-- of American Express mutual funds in a qualified plan subject to a
deferred sales charge, or

-- in a qualified plan or account where American Express Trust Company
has a recordkeeping, trustee, investment management, or investment
servicing relationship.

Send the Fund a written request along with your payment, indicating the date and
the amount of the sale.

o purchases made:

-- with dividend or capital gain distributions from this Fund or from the
same class of another American Express mutual fund that has a sales
charge,

-- through or under a wrap fee product or other investment product
sponsored by the Distributor or another authorized broker-dealer,
investment adviser, bank or investment professional,

-- within the University of Texas System ORP,

-- within a segregated separate account offered by Nationwide Life
Insurance Company or Nationwide Life and Annuity Insurance Company,

-- within the University of Massachusetts After-Tax Savings Program, or

-- through or under a subsidiary of AEFC offering Personal Trust
Services' Asset-Based pricing alternative.

<PAGE>

Class B -- contingent deferred sales charge (CDSC) alternative

A CDSC is based on the sale amount and the number of calendar years -- including
the year of purchase -- between purchase and sale. The following table shows how
CDSC percentages on sales decline after a purchase:

If the sale is made during the: The CDSC percentage rate is:

First year 5%

Second year 4%

Third year 4%

Fourth year 3%

Fifth year 2%

Sixth year 1%

Seventh year 0%

<PAGE>

Example:

The CDSC on Class B shares will be waived on sales of shares:

o in the event of the shareholder's death,

o held in trust for an employee benefit plan, or

-- at least 59 1/2 years old AND

-- taking a retirement distribution (if the sale is part of a transfer to
an IRA or qualified plan, or a custodian-to-custodian transfer, the
CDSC will not be waived) OR

-- selling under an approved substantially equal periodic payment
arrangement.

<PAGE>

EXCHANGING/SELLING SHARES

Exchanges

You may make up to three exchanges (1 1/2 round trips) within any 30-day period.
These limits do not apply to scheduled exchange programs and certain employee
benefit plans. Exceptions may be allowed with pre-approval of the Fund.

Other exchange policies:

o Exchanges must be made into the same class of shares of the new fund.

o If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.

o Once we receive your exchange request, you cannot cancel it.

o Shares of the new fund may not be used on the same day for another
exchange.

o If your shares are pledged as collateral, the exchange will be delayed
until AECSC receives written approval from the secured party.

<PAGE>

Selling Shares

You can sell your shares at any time. The payment will be mailed within seven
days after accepting your request.

You can change your mind after requesting a sale and use all or part of the
proceeds to purchase new shares in the same account from which you sold. If you
reinvest in Class A, you will purchase the new shares at NAV rather than the
offering price on the date of a new purchase. If you reinvest in Class B, any
CDSC you paid on the amount you are reinvesting also will be reinvested. To take
advantage of this option, send a request within 90 days of the date your sale
request was received and include your account number.
This privilege may be limited or withdrawn at any time and may have tax
consequences.

The Fund reserves the right to redeem in kind.

For more details and a description of other sales policies, please see the SAI.

<PAGE>

Requests to sell shares of the Fund are not allowed within 30 days of a
telephoned-in address change.

Two ways to request an exchange or sale of shares

1 By letter:

Include in your letter:

o the name of the fund(s),

o the class of shares to be exchanged or sold,

o your mutual fund account number(s) (for exchanges, both funds must be
registered in the same ownership),

o your Social Security number or Employer Identification number,

o the dollar amount or number of shares you want to exchange or sell,

o signature(s) of all registered account owners,

o for sales, indicate how you want your money delivered to you, and

o any paper certificates of shares you hold.

Regular mail:

American Express Client Service Corporation
Attn: Transactions
P.O. Box 534
Minneapolis, MN 55440-0534

Express mail:

American Express Client Service Corporation
Attn: Transactions
733 Marquette Ave.
Minneapolis, MN 55402

2 By telephone:

American Express Client Service Corporation Telephone Transaction Service
800-437-3133

o The Fund and AECSC will use reasonable procedures to confirm authenticity
of telephone exchange or sale requests.

o Acting on your instructions, your financial advisor may conduct telephone
transactions on your behalf.

o Telephone privileges may be modified or discontinued at any time.

Minimum sale amount: $100 Maximum sale amount: $50,000

<PAGE>

Three ways to receive payment when you sell shares

1 By regular or express mail:

o Mailed to the address on record.

o Payable to names listed on the account.

NOTE: The express mail delivery charges you pay will vary depending on the
courier you select.

2 By wire or electronic funds transfer:

o Minimum wire: $1,000.

o Request that money be wired to your bank.

o Bank account must be in the same ownership as the American Express mutual
fund account.

NOTE: Pre-authorization required. For instructions, contact your financial
advisor or AECSC.

3 By scheduled payout plan:

o Minimum payment: $50.

o Contact your financial advisor or AECSC to set up regular payments on a
monthly, bimonthly, quarterly, semiannual or annual basis.

o Purchasing new shares while under a payout plan may be disadvantageous
because of the sales charges.

<PAGE>

Distributions and Taxes

DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS

REINVESTMENTS

Dividends and capital gain distributions are automatically reinvested in
additional shares in the same class of the Fund, unless:

o you request distributions in cash, or

o you direct the Fund to invest your distributions in the same class of any
publicly offered American Express mutual fund for which you have previously
opened an account.

We reinvest the distributions for you at the next calculated NAV after the
distribution is paid.

If you choose cash distributions, you will receive cash only for distributions
declared after your request has been processed.

TAXES

<PAGE>

Other Information

YEAR 2000

INVESTMENT MANAGER

<PAGE>

Financial Highlights

Fiscal period ended Nov. 30,

Per share income and capital changesa
<TABLE>
<CAPTION>
Class A

1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $4.18 $4.11 $4.01 $4.06 $3.54
Income from investment operations:
Net investment income (loss) .21 .21 .21 .20 .21
Net gains (losses) (both realized and unrealized) (.34) .07 .10 (.05) .52
Total from investment operations (.13) .28 .31 .15 .73

Less distributions:
Dividends from net investment income (.21) (.21) (.21) (.20) (.21)
Net asset value, end of period $3.84 $4.18 $4.11 $4.01 $4.06

Ratios/supplemental data
Net assets, end of period (in millions) $877 $984 $998 $1,067 $1,162
Ratio of expenses to average daily net assetsb .77% .73% .73% .73% .71%
Ratio of net investment income (loss) to average daily net assets 5.17% 4.96% 5.19% 5.15% 5.52%
Portfolio turnover rate (excluding short-term securities) 45% 18% 19% 62% 54%
Total returnc (3.22%) 6.96% 7.78% 4.01% 21.06%
</TABLE>

a For a share outstanding throughout the period. Rounded to the nearest cent.
b Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
c Total return does not reflect payment of a sales charge.

<PAGE>

Fiscal period ended Nov. 30,

Per share income and capital changesa
<TABLE>
<CAPTION>

Class B Class Y

1999 1998 1997 1996 1995b 1999 1998 1997 1996 1995b
<S>
Net asset value, <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $4.18 $4.11 $4.01 $4.06 $3.88 $4.18 $4.11 $4.01 $4.06 $3.88

Income from investment operations:
Net investment income (loss) .18 .18 .18 .17 .14 .21 .21 .21 .21 .16
Net gains (losses)
(both realized and unrealized) (.34) .07 .10 (.05) .18 (.35) .07 .10 (.05) .18
Total from investment operations (.16) .25 .28 .12 .32 (.14) .28 .31 .16 .34

Less distributions:
Dividends from net investment income (.18) (.18) (.18) (.17 ) (.14) (.21) (.21) (.21) (.21) (.16)
Net asset value, end of period $3.84 $4.18 $4.11 $4.01 $4.06 $3.83 $4.18 $4.11 $4.01 $4.06

Ratios/supplemental data
Net assets, end of period
(in millions) $39 $35 $25 $20 $14 $-- $-- $-- $-- $--
Ratio of expenses to
average daily net assetsc 1.53% 1.48% 1.49% 1.49% 1.52%d .67% .63% .60% .55% .58%d
Ratio of net investment
income (loss) to average
daily net assets 4.41% 4.21% 4.43% 4.40% 4.55%d 5.21% 5.05% 5.34% 5.33% 5.52%d
Portfolio turnover rate
(excluding short-term securities) 45% 18% 19% 62% 54% 45% 18% 19% 62% 54%
Total returne (3.97%) 6.18% 6.94% 3.23% 8.78% (3.32%) 7.06% 7.87% 4.19% 9.43%
</TABLE>

a For a share outstanding throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Effective fiscal year 1996, expense ratio is based on total expenses of the
Fund before reduction of earnings credits on cash balances.
d Adjusted to an annual basis.
e Total return does not reflect payment of a sales charge.

<PAGE>

APPENDIX

2000 federal tax-exempt and taxable equivalent yield calculation

These tables will help you determine your federal taxable yield equivalents for
given rates of tax-exempt income.

STEP 1: Calculating your marginal tax rate. Using your Taxable Income and
Adjusted Gross Income figures as guides, you can locate your Marginal Tax Rate
in the table below.

Adjusted gross income*

Taxable income** $0 $128,950 $193,400
to to to Over
$128,950(1) $193,400(2) $315,900(3) $315,900(2)

Married Filing Jointly

$0 - $ 43,850 15.00%
43,850 -105,950 28.00 28.84%
105,950 -161,450 31.00 31.93 33.32%
161,450 -288,350 36.00 37.08 38.69 37.08%
288,350 + 39.60 42.56*** 40.79

Adjusted gross income*

Taxable income** $0 $128.950

to to Over

$128,950(1) $251,450(3) $251,450(2)

Single

$ 0 - $ 26,250 15.00%

26,250 -63,550 28.00

63,550 -132,600 31.00 32.62%

132,600 -288,350 36.00 37.89 37.08%

288,350 + 39.60 40.79

* Gross income with certain adjustments before taking itemized deductions and
personal exemptions.
** Amount subject to federal income tax after itemized deductions (or standard
deduction) and personal exemptions.
*** This rate is applicable only in the limited case where your adjusted gross
income is less than $315,900 and your taxable income exceeds $288,350.

(1) No Phase-out -- Assumes no phase-out of itemized deductions or personal
exemptions.

(2) Itemized Deductions Phase-out-- Assumes a phase-out of itemized deductions
and no current phase-out of personal exemptions.

STEP 2: Determining your federal taxable yield equivalents. Using 31.93%, you
may determine that a tax-exempt yield of 4% is equivalent to earning a taxable
5.88% yield.

For these Tax-Exempt Rates:

3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%

Marginal Tax Rates Equal the Taxable Rates shown below:

15.00% 4.12 4.71 5.29 5.88 6.47 7.06 7.65 8.24

28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72

28.84% 4.92 5.62 6.32 7.03 7.73 8.43 9.13 9.84

31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14

31.93% 5.14 5.88 6.61 7.35 8.08 8.81 9.55 10.28

32.62% 5.19 5.94 6.68 7.42 8.16 8.90 9.65 10.39

33.32% 5.25 6.00 6.75 7.50 8.25 9.00 9.75 10.50

36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94

37.08% 5.56 6.36 7.15 7.95 8.74 9.54 10.33 11.13

37.89% 5.64 6.44 7.25 8.05 8.86 9.66 10.47 11.27

38.69% 5.71 6.52 7.34 8.16 8.97 9.79 10.60 11.42

39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59

40.79% 5.91 6.76 7.60 8.44 9.29 10.13 10.98 11.82

42.56% 6.09 6.96 7.83 8.70 9.58 10.45 11.32 12.19

<PAGE>

American Express Client Service Corporation P.O. Box 534, Minneapolis, MN
55440-0534 800-862-7919 TTY: 800-846-4852 Web site address:
http://www.americanexpress.com/advisors

Investment Company Act File #811-2686

TICKER SYMBOL

Class A: INTAX Class B: ITEBX Class Y: NA

AMERICAN
EXPRESS (logo)

S-6310-99 R (1/00)

<PAGE>

AXPSM TAX-EXEMPT SERIES, INC.

STATEMENT OF ADDITIONAL INFORMATION

FOR

AXPSM INTERMEDIATE TAX-EXEMPT FUND (the Fund)

Jan. 28, 2000

This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus and the financial statements contained in the
most recent Annual Report to shareholders (Annual Report) that may be obtained
from your financial advisor or by writing to American Express Client Service
Corporation, P.O. Box 534, Minneapolis, MN 55440-0534 or by calling
800-862-7919.

The Independent Auditors' Report and the Financial Statements, including Notes
to the Financial Statements and the Schedule of Investments in Securities,
contained in the Annual Report are incorporated in this SAI by reference. No
other portion of the Annual Report, however, is incorporated by reference. The
prospectus for the Fund, dated the same date as this SAI, also is incorporated
in this SAI by reference.

<PAGE>

TABLE OF CONTENTS

Mutual Fund Checklist...................................................p.3

Fundamental Investment Policies.........................................p.5

Investment Strategies and Types of Investments..........................p.6

Information Regarding Risks and Investment Strategies...................p.8

Security Transactions..................................................p.27

Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation.................................p.28

Performance Information................................................p.28

Valuing Fund Shares....................................................p.31

Investing in the Fund..................................................p.32

Selling Shares.........................................................p.35

Pay-out Plans..........................................................p.35

Capital Loss Carryover.................................................p.36

Taxes..................................................................p.36

Agreements.............................................................p.37

Organizational Information.............................................p.40

Board Members and Officers.............................................p.43

Compensation for Board Members.........................................p.45

Independent Auditors...................................................p.46

Appendix: Description of Ratings......................................p.47

<PAGE>

MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------

|X| Mutual funds are NOT guaranteed or insured by any bank or government
agency. You can lose money.

|X| Mutual funds ALWAYS carry investment risks. Some types carry more risk than
others.

|X| A higher rate of return typically involves a higher risk of loss.

|X| Past performance is not a reliable indicator of future performance.

|X| ALL mutual funds have costs that lower investment return.

|X| You can buy some mutual funds by contacting them directly. Others, like
this one, are sold mainly through brokers, banks, financial planners, or
insurance agents. If you buy through these financial professionals, you
generally will pay a sales charge.

|X| Shop around. Compare a mutual fund with others of the same type before you
buy.

OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:

Develop a Financial Plan

Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.

Dollar-Cost Averaging

An investment technique that works well for many investors is one that
eliminates random buy and sell decisions. One such system is dollar-cost
averaging. Dollar-cost averaging involves building a portfolio through the
investment of fixed amounts of money on a regular basis regardless of the price
or market condition. This may enable an investor to smooth out the effects of
the volatility of the financial markets. By using this strategy, more shares
will be purchased when the price is low and less when the price is high. As the
accompanying chart illustrates, dollar-cost averaging tends to keep the average
price paid for the shares lower than the average market price of shares
purchased, although there is no guarantee.

While this does not ensure a profit and does not protect against a loss if the
market declines, it is an effective way for many shareholders who can continue
investing through changing market conditions to accumulate shares to meet
long-term goals.

<PAGE>

Dollar-cost averaging:

- --------------------------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- --------------------------------------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4

Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)

Diversify

Diversify your portfolio. By investing in different asset classes and different
economic environments you help protect against poor performance in one type of
investment while including investments most likely to help you achieve your
important goals.

Understand Your Investment

Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.

<PAGE>

FUNDAMENTAL INVESTMENT POLICIES
- --------------------------------------------------------------------------------

Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).

Notwithstanding any of the Fund's other investment policies, the Fund may invest
its assets in an open-end management investment company having substantially the
same investment objectives, policies, and restrictions as the Fund for the
purpose of having those assets managed as part of a combined pool.

The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:

o Under normal market conditions, invest less than 80% of its net assets in
bonds and other debt securities issued by or on behalf of state or local
governmental units whose interest, in the opinion of counsel for the
issuer, is exempt from federal income tax. For purposes of the 80% policy,
the Fund will not include any investments subject to the alternative
minimum tax.

o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.

o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.

o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.

o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation. For
purposes of this policy, the terms of a municipal security determine the
issuer.

o Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.

o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.

o Lend Fund securities in excess of 30% of its net assets.

Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.

<PAGE>

INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------

This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It is intended to show the breadth of
investments that the investment manager may make on behalf of the Fund. For a
description of principal risks, please see the prospectus. Notwithstanding the
Fund's ability to utilize these strategies and techniques, the investment
manager is not obligated to use them at any particular time. For example, even
though the investment manager is authorized to adopt temporary defensive
positions and is authorized to attempt to hedge against certain types of risk,
these practices are left to the investment manager's sole discretion.

- ----------------------------------------------------- --------------------------
Investment strategies & types of investments: Allowable for the Fund?
Agency and Government Securities yes
Borrowing yes
Cash/Money Market Instruments yes
Collateralized Bond Obligations yes
Commercial Paper yes
Common Stock no
Convertible Securities yes
Corporate Bonds yes
Debt Obligations yes
Depositary Receipts no
Derivative Instruments yes
Foreign Currency Transactions yes
Foreign Securities yes
High-Yield (High-Risk) Securities (Junk Bonds) yes
Illiquid and Restricted Securities yes
Indexed Securities yes
Inverse Floaters yes
Investment Companies yes
Lending of Portfolio Securities yes
Loan Participations yes
Mortgage- and Asset-Backed Securities yes
Mortgage Dollar Rolls yes
Municipal Obligations yes
Preferred Stock no
Real Estate Investment Trusts yes
Repurchase Agreements yes
Reverse Repurchase Agreements yes
Short Sales no
Sovereign Debt yes
Structured Products yes
Variable- or Floating-Rate Securities yes
Warrants yes
When-Issued Securities yes
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes
- ----------------------------------------------------- --------------------------

<PAGE>

The following are guidelines that may be changed by the board at any time:

o At least 80% of the Fund's net assets will be invested in bonds and other
debt securities rated in the top four grades by Moody's Investors Service,
Inc., Standard & Poor's Corporation, Fitch Investors Service, Inc. or be of
comparable rating given by other independent rating agencies or in unrated
bonds or other debt securities which, in the investment manager's opinion,
are of investment grade quality.

o A portion of the Fund's assets may be invested in bonds whose interest is
subject to the alternative minimum tax computation. As long as the staff of
the SEC maintains its current position that a fund calling itself a
"tax-exempt" fund may not invest more than 20% of its net assets in these
bonds, the Fund will limit its investments in these bonds to 20% of its net
assets.

o The Fund may invest more than 25% of its total net assets in a particular
segment of the municipal securities market or in securities relating to a
particular state. Such markets may include electric revenue bonds, hospital
bonds, housing bonds, industrial bonds, airport bonds, or in securities the
interest on which is paid from revenues of a similar type of project. The
Fund also may invest more than 25% of its total assets in industrial
revenue bonds, but it does not intend to invest more than 25% of its total
assets in industrial revenue bonds issued for companies in the same
industry or state.

o The Fund may invest 20% of its assets in bonds rated or considered below
investment grade (less than BBB/Baa). The Fund will not invest in bonds
rated below BB/Ba or in unrated bonds of equivalent quality.

o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.

o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.

o Short-term tax-exempt debt securities rated in the top two grades or the
equivalent are used to meet daily cash needs and at various times to hold
assets until better investment opportunities arise. Under extraordinary
conditions where, in the opinion of the investment manager, appropriate
short-term tax-exempt securities are not available, the Fund may invest up
to 20% of its net assets in certain taxable investments for temporary
defensive purposes.

o The Fund will not buy on margin or sell short, except the Fund may use
derivative instruments.

o The Fund will not invest in voting securities or securities of investment
companies.

<PAGE>

INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------

RISKS

The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):

Call/Prepayment Risk

The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."

Correlation Risk

The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.

Credit Risk

The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.

Event Risk

Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.

Foreign/Emerging Markets Risk

The following are all components of foreign/emerging markets risk:

Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.

Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.

Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.

<PAGE>

Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.

Inflation Risk

Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.

Interest Rate Risk

Issuer Risk

The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.

Legal/Legislative Risk

Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.

Leverage Risk

Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.

Liquidity Risk

Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.

Management Risk

The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.

Market Risk

The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.

Reinvestment Risk

The risk that an investor will not be able to reinvest income or principal at
the same rate it currently is earning.

<PAGE>

Sector/Concentration Risk

Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).

Small Company Risk

Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.

<PAGE>

INVESTMENT STRATEGIES

The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.

Agency and Government Securities

The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.

Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.

Borrowing

The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.

Cash/Money Market Instruments

The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.

<PAGE>

See the appendix for a discussion of securities ratings.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.

Collateralized Bond Obligations

Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.

Commercial Paper

Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.

Common Stock

Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.

The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.

Convertible Securities

Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique

<PAGE>

investment characteristics in that they generally (i) have higher yields than
common stocks but lower yields than comparable non-convertible securities, (ii)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases.

The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.

Corporate Bonds

Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)

Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.

Debt Obligations

Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.

The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.

In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.

<PAGE>

As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)

All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.

See the appendix for a discussion of securities ratings.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.

Depositary Receipts

Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.

Derivative Instruments

Derivative instruments are commonly defined to include securities or contracts
whose values depend, in whole or in part, on (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.

A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.

<PAGE>

Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.

Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract to sell the security at the
set price when the buyer wants to exercise the option, no matter what the market
price of the security is at that time. A person who buys a put option has the
right to sell a security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price if the
purchaser wants to exercise the option during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.

The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.

When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.

One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.

Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.

Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.

Futures Contracts. A futures contract is a sales contract between a
buyer (holding the "long" position) and a seller (holding the "short" position)
for an asset with delivery deferred until a future date. The buyer agrees to pay
a fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.

<PAGE>

Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor would pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures contract is
closed out, a nominal commission is paid, which is generally lower than the
commission on a comparable transaction in the cash market.

Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.

Options on Futures Contracts. Options on futures contracts give the
holder a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.

One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.

Options on Stock Indexes. Options on stock indexes are securities
traded on national securities exchanges. An option on a stock index is similar
to an option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.

Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred on futures contracts and on underlying securities identified as
hedged positions.

Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.

The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.

<PAGE>

Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.

Other Risks of Derivatives.

The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.

Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.

When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.

Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.

Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.

(See also Foreign Currency Transactions.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.

<PAGE>

Foreign Currency Transactions

Since investments in foreign countries usually involve currencies of foreign
countries, the value of an investor's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, an investor may incur costs in connection
with conversions between various currencies. Currency exchange rates may
fluctuate significantly over short periods of time causing a fund's NAV to
fluctuate. Currency exchange rates are generally determined by the forces of
supply and demand in the foreign exchange markets, actual or anticipated changes
in interest rates, and other complex factors. Currency exchange rates also can
be affected by the intervention of U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments.
Many funds utilize diverse types of derivative instruments in connection with
their foreign currency exchange transactions.

(See also Derivative Instruments and Foreign Securities.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.

Foreign Securities

Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates for portfolio securities. In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures).

The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.

<PAGE>

The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.

High-Yield (High-Risk) Securities (Junk Bonds)

High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.

See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)

The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.

All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.

Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.

<PAGE>

An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.

Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.

Illiquid and Restricted Securities

The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.

To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time- consuming
negotiations and legal expense, and it may be difficult or impossible for the
Fund to sell such an investment promptly and at an acceptable price.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.

Indexed Securities

The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.

Inverse Floaters

Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.

<PAGE>

Investment Companies

The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.

Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.

Lending of Portfolio Securities

The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.

Loan Participations

Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.

Mortgage- and Asset-Backed Securities

Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.

Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities.

<PAGE>

The cash flows and yields on IOs and POs are extremely sensitive to the rate of
principal payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.

CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.

The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.

Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.

Mortgage Dollar Rolls

Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.

Municipal Obligations

Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia and Puerto Rico). The
interest on these obligations is generally exempt from federal income tax.
Municipal obligations are generally classified as either "general obligations"
or "revenue obligations."

<PAGE>

General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.

Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.

Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)

Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.

Preferred Stock

Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.

The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.

<PAGE>

Real Estate Investment Trusts

Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.

Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.

Repurchase Agreements

The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.

Reverse Repurchase Agreements

In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.

Short Sales

With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.

<PAGE>

Sovereign Debt

A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)

With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.

Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.

Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.

Structured Products

Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.

Variable- or Floating-Rate Securities

The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.

Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.

Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded.

<PAGE>

There generally is not an established secondary market for these obligations.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and may involve
heightened risk of default by the issuer.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.

Warrants

Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.

When-Issued Securities

These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund losing the opportunity to obtain a price and yield considered
to be advantageous.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.

Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities

These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.

<PAGE>

SECURITY TRANSACTIONS
- --------------------------------------------------------------------------------

Subject to policies set by the board, AEFC is authorized to determine,
consistent with the Fund's investment goal and policies, which securities will
be purchased, held, or sold. In determining where the buy and sell orders are to
be placed, AEFC has been directed to use its best efforts to obtain the best
available price and the most favorable execution except where otherwise
authorized by the board. In selecting broker-dealers to execute transactions,
AEFC may consider the price of the security, including commission or mark-up,
the size and difficulty of the order, the reliability, integrity, financial
soundness, and general operation and execution capabilities of the broker, the
broker's expertise in particular markets, and research services provided by the
broker.

AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund or trust for which it
acts as investment manager.

The Fund's securities may be traded on a principal rather than an agency basis.
In other words, AEFC will trade directly with the issuer or with a dealer who
buys or sells for its own account, rather than acting on behalf of another
client. AEFC does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase and sale
price for the security.

On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing AEFC to do so to the extent authorized by
law, if AEFC determines, in good faith, that such commission is reasonable in
relation to the value of the brokerage or research services provided by a broker
or dealer, viewed either in the light of that transaction or AEFC's overall
responsibilities with respect to the Fund and the other American Express funds
for which it acts as investment manager.

Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.

When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, AEFC must follow procedures
authorized by the board. To date, three procedures have been authorized. One
procedure permits AEFC to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits AEFC, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits AEFC, in order to obtain research and brokerage
services, to cause the Fund to pay a commission in excess of the amount another
broker might have charged. AEFC has advised the Fund that it is necessary to do
business with a number of brokerage firms on a continuing basis to obtain such
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but AEFC believes it may obtain better
overall execution. AEFC has represented that under all three

<PAGE>

procedures the amount of commission paid will be reasonable and competitive in
relation to the value of the brokerage services performed or research provided.

All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express funds even though it is not possible to relate the benefits to any
particular fund.

Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by AEFC or
any of its subsidiaries. When the Fund buys or sells the same security as
another portfolio, fund, or account, AEFC carries out the purchase or sale in a
way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.

On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.

The Fund paid total brokerage commissions of $0 for fiscal year ended Nov. 30,
1999, $0 for fiscal year 1998, and $0 for fiscal year 1997. Substantially all
firms through whom transactions were executed provide research services.

No transactions were directed to brokers because of research services they
provided to the Fund.

As of the end of the most recent fiscal year, the Fund held no securities of its
regular brokers or dealers or of the parent of those brokers or dealers that
derived more than 15% of gross revenue from securities-related activities.

The portfolio turnover rate was 9% in the most recent fiscal year, and 7% in the
year before. Higher turnover rates may result in higher brokerage expenses.

BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION

Affiliates of American Express Company (of which AEFC is a wholly-owned
subsidiary) may engage in brokerage and other securities transactions on behalf
of the Fund according to procedures adopted by the board and to the extent
consistent with applicable provisions of the federal securities laws. AEFC will
use an American Express affiliate only if (i) AEFC determines that the Fund will
receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar brokerage and other services
for the Fund and (ii) the affiliate charges the Fund commission rates consistent
with those the affiliate charges comparable unaffiliated customers in similar
transactions and if such use is consistent with terms of the Investment
Management Services Agreement.

No brokerage commissions were paid to brokers affiliated with AEFC for the three
most recent fiscal years.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.

<PAGE>

AVERAGE ANNUAL TOTAL RETURN

The Fund may calculate average annual total return for a class for certain
periods by finding the average annual compounded rates of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:

P(1+T)n = ERV

where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)

AGGREGATE TOTAL RETURN

The Fund may calculate aggregate total return for a class for certain periods
representing the cumulative change in the value of an investment in the Fund
over a specified period of time according to the following formula:

ERV - P
P

where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)

Annualized yield

The Fund may calculate an annualized yield for a class by dividing the net
investment income per share deemed earned during a 30-day period by the public
offering price per share (including the maximum sales charge) on the last day of
the period and annualizing the results.

Yield is calculated according to the following formula:

Yield = 2[(a-b + 1)6 - 1]
cd

Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends d = the maximum
offering price per share on the last day of the period

The Fund's annualized yield was 2.64% for Class A, 1.96% for Class B, and 3.09%
for Class Y for the 30-day period ended Nov. 30, 1999.

<PAGE>

Distribution yield

Distribution yield is calculated according to the following formula:

D divided by POPF equals DY
30 30

where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor DY = distribution yield

The Fund's distribution yield was 3.83% for Class A, 3.28% for Class B, and
4.22% for Class Y for the 30-day period ended Nov. 30, 1999.

Tax-equivalent yield

Tax-equivalent yield is calculated by dividing that portion of the yield (as
calculated above) which is tax-exempt by one minus a stated income tax rate and
adding the result to that portion, if any, of the yield that is not tax-exempt.
The following table shows the fund's tax equivalent yield, based on federal but
not state tax rates, for the 30-day period ended Nov. 30, 1999.

Marginal
Income Tax Tax-Equivalent Yield
Bracket Distribution Annualized
Class A
15.0% 4.51% 3.11%
28.0% 5.32% 3.67%
31.0% 5.55% 3.83%
36.0% 5.98% 4.13%
39.6% 6.34% 4.37%

Class B
15.0% 3.86% 2.31%
28.0% 4.56% 2.72%
31.0% 4.75% 2.84%
36.0% 5.13% 3.06%
39.6% 5.43% 3.25%

Class Y
15.0% 4.96% 3.64%
28.0% 5.86% 4.29%
31.0% 6.12% 4.48%
36.0% 6.59% 4.83%
39.6% 6.99% 5.12%

In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA

<PAGE>

Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger
Investment Companies Service. The Fund also may compare its performance to a
wide variety of indexes or averages. There are similarities and differences
between the investments that the Fund may purchase and the investments measured
by the indexes or averages and the composition of the indexes or averages will
differ from that of the Fund.

VALUING FUND SHARES
- --------------------------------------------------------------------------------

As of the end of the most recent fiscal year, the computation looked like this:

Net asset value
Net assets Shares of one share
outstanding
----------------- ------------ ------------- -----------------------
Class A $28,910,714 divided by 5,758,918 equals $5.02
Class B 8,943,633 1,781,802 5.02
Class Y 1,127 225 5.01

In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):

o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.

o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded and, if none exist, to the
over-the-counter market.

o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.

o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System are valued at the mean of the closing bid and asked prices.

o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.

o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.

o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.

<PAGE>

o Securities without a readily available market price and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.

INVESTING IN THE FUND
- --------------------------------------------------------------------------------

SALES CHARGE

Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, made on the last day of the most recent fiscal
year, was determined by dividing the NAV of one share, $5.02, by 0.95 (1.00-0.05
for a maximum 5% sales charge) for a public offering price of $5.28. The sales
charge is paid to American Express Financial Advisors Inc. (Distributor) by the
person buying the shares.

Class A - Calculation of the Sales Charge

Sales charges are determined as follows:
Within each
increment, sales
charge as a
percentage of:
---------------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00

Sales charges on an investment greater than $50,000 and less than $1,000,000 are
calculated for each increment separately and then totaled. The resulting total
sales charge, expressed as a percentage of the public offering price and of the
net amount invested, will vary depending on the proportion of the investment at
different sales charge levels.

For example, compare an investment of $60,000 with an investment of $85,000. The
$60,000 investment is composed of $50,000 that incurs a sales charge of $2,500
(5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x
$10,000). The total sales charge of $2,950 is 4.92% of the public offering price
and 5.17% of the net amount invested.

In the case of the $85,000 investment, the first $50,000 also incurs a sales
charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575
(4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public
offering price and 5.04% of the net amount invested.

<PAGE>

The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.

On total
investment, sales
charge as a
percentage of:
-------------------------------------
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- -------------------------------------------
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00

Class A - Reducing the Sales Charge

Your total investments in the Fund determine your sales charges. The amount of
all prior investments plus any new purchase is referred to as your "total amount
invested." For example, suppose you have made an investment of $20,000 and later
decide to invest $40,000 more. Your total amount invested would be $60,000. As a
result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales
charge that applies to investments of more than $50,000 and up to $100,000.

Class A - Letter of Intent (LOI)

If you intend to invest $1 million over a period of 13 months, you can reduce
the sales charges in Class A by filing a LOI. The agreement can start at any
time and will remain in effect for 13 months. Your investment will be charged
normal sales charges until you have invested $1 million. At that time, your
account will be credited with the sales charges previously paid. Class A
investments made prior to signing a LOI may be used to reach the $1 million
total, excluding AXP Cash Management Fund and AXP Tax-Free Money Fund. However,
we will not adjust for sales charges on investments made prior to the signing of
the LOI. If you do not invest $1 million by the end of 13 months, there is no
penalty, you will just miss out on the sales charge adjustment. A LOI is not an
option (absolute right) to buy shares.

Class Y Shares

Class Y shares are offered to certain institutional investors. Class Y shares
are sold without a front-end sales charge or a CDSC and are not subject to a
distribution fee. The following investors are eligible to purchase Class Y
shares:

o Qualified employee benefit plans* if the plan:

- - uses a daily transfer recordkeeping service offering participants daily
access to American Express mutual funds and has

- - 1st $10 million in plan assets or

- - 500 or more participants; or

- - does not use daily transfer recordkeeping and has

- - at least $3 million invested in American Express mutual funds or

- - 500 or more participants.

<PAGE>

o Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These institutions must have at least $10 million in American Express
mutual funds.

o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.

* Eligibility must be determined in advance. To do so, contact your financial
advisor.

SYSTEMATIC INVESTMENT PROGRAMS

After you make your initial investment of $100 or more, you must make additional
payments of $100 or more on at least a monthly basis until your balance reaches
$2,000. These minimums do not apply to all systematic investment programs. You
decide how often to make payments - monthly, quarterly, or semiannually. You are
not obligated to make any payments. You can omit payments or discontinue the
investment program altogether. The Fund also can change the program or end it at
any time.

AUTOMATIC DIRECTED DIVIDENDS

Dividends, including capital gain distributions, paid by another American
Express mutual fund subject to a sales charge, may be used to automatically
purchase shares in the same class of this Fund without paying a sales charge.
Dividends may be directed to existing accounts only. Dividends declared by a
fund are exchanged to this Fund the following day. Dividends can be exchanged
into the same class of another American Express mutual fund but cannot be split
to make purchases in two or more funds. Automatic directed dividends are
available between accounts of any ownership except:

o Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts
as custodian;

o Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from your IRA
to the IRA of your spouse); and

o Between different kinds of custodial accounts with the same ownership (for
example, you may not exchange dividends from your IRA to your 401(k) plan
account, although you may exchange dividends from one IRA to another IRA).

Dividends may be directed from accounts established under the Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA
or UTMA accounts with identical ownership.

The Fund's investment goal is described in its prospectus along with other
information, including fees and expense ratios. Before exchanging dividends into
another fund, you should read that fund's prospectus. You will receive a
confirmation that the automatic directed dividend service has been set up for
your account.

REJECTION OF BUSINESS

The Fund or AECSC reserves the right to reject any business, in its sole
discretion.

<PAGE>

SELLING SHARES
- --------------------------------------------------------------------------------

You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.

During an emergency, the board can suspend the computation of NAV, stop
accepting payments for purchase of shares, or suspend the duty of the Fund to
redeem shares for more than seven days. Such emergency situations would occur
if:

o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or

o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or

o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.

Should the Fund stop selling shares, the board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all shareholders.

The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of the Fund at the beginning of the period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make these payments in whole or in part in securities or other assets in case of
an emergency, or if the payment of a redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the board. In these
circumstances, the securities distributed would be valued as set forth in this
SAI. Should the Fund distribute securities, a shareholder may incur brokerage
fees or other transaction costs in converting the securities to cash.

PAY-OUT PLANS
- --------------------------------------------------------------------------------

You can use any of several pay-out plans to redeem your investment in regular
installments. If you redeem Class B shares you may be subject to a contingent
deferred sales charge as discussed in the prospectus. While the plans differ on
how the pay-out is figured, they all are based on the redemption of your
investment. Net investment income dividends and any capital gain distributions
will automatically be reinvested, unless you elect to receive them in cash. If
you are redeeming a tax-qualified plan account for which American Express Trust
Company acts as custodian, you can elect to receive your dividends and other
distributions in cash when permitted by law. If you redeem an IRA or a qualified
retirement account, certain restrictions, federal tax penalties, and special
federal income tax reporting requirements may apply. You should consult your tax
advisor about this complex area of the tax law.

Applications for a systematic investment in a class of the Fund subject to a
sales charge normally will not be accepted while a pay-out plan for any of those
funds is in effect. Occasional investments, however, may be accepted.

To start any of these plans, please consult your selling agent or write American
Express Client Service, Corporation, P.O. Box 534, Minneapolis, MN 55440-0534,
or call 800-437-3133. Your authorization must be received at least five days
before the date you want your payments to begin. The initial payment must be at
least $50. Payments will be made on a monthly, bimonthly, quarterly, semiannual,
or annual basis. Your choice is effective until you change or cancel it.

<PAGE>

The following pay-out plans are designed to take care of the needs of most
shareholders in a way AEFC can handle efficiently and at a reasonable cost. If
you need a more irregular schedule of payments, it may be necessary for you to
make a series of individual redemptions, in which case you will have to send in
a separate redemption request for each pay-out. The Fund reserves the right to
change or stop any pay-out plan and to stop making such plans available.

Plan #1: Pay-out for a fixed period of time

If you choose this plan, a varying number of shares will be redeemed at regular
intervals during the time period you choose. This plan is designed to end in
complete redemption of all shares in your account by the end of the fixed
period.

Plan #2: Redemption of a fixed number of shares

If you choose this plan, a fixed number of shares will be redeemed for each
payment and that amount will be sent to you. The length of time these payments
continue is based on the number of shares in your account.

Plan #3: Redemption of a fixed dollar amount

If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.

Plan #4: Redemption of a percentage of net asset value

Payments are made based on a fixed percentage of the net asset value of the
shares in the account computed on the day of each payment. Percentages range
from 0.25% to 0.75%. For example, if you are on this plan and arrange to take
0.5% each month, you will get $50 if the value of your account is $10,000 on the
payment date.

- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER

For federal income tax purposes, the Fund had total capital loss carryovers of
$21,695 at the end of the most recent fiscal year, that if not offset by
subsequent capital gains will expire in 2005.

It is unlikely that the board will authorize a distribution of any net realized
capital gains until the available capital loss carryover has been offset or has
expired except as required by Internal Revenue Service rules.

TAXES
- --------------------------------------------------------------------------------

If you buy shares in the Fund and then exchange into another fund, it is
considered a redemption and subsequent purchase of shares. Under the tax laws,
if this exchange is done within 91 days, any sales charge waived on Class A
shares on a subsequent purchase of shares applies to the new shares acquired in
the exchange. Therefore, you cannot create a tax loss or reduce a tax gain
attributable to the sales charge when exchanging shares within 91 days.

<PAGE>

For example:

You purchase 100 shares of one fund having a public offering price of $10.00 per
share. With a sales load of 5%, you pay $50.00 in sales load. With a NAV of
$9.50 per share, the value of your investment is $950.00. Within 91 days of
purchasing that fund, you decide to exchange out of that fund, now at a NAV of
$11.00 per share, up from the original NAV of $9.50, and purchase into a second
fund, at a NAV of $15.00 per share. The value of your investment is now
$1,100.00 ($11.00 x 100 shares). You cannot use the $50.00 paid as a sales load
when calculating your tax gain or loss in the sale of the first fund shares. So
instead of having $100.00 gain ($1,100.00 - $1,000.00), you have a $150.00 gain
($1,100.00 - $950.00). You can include the $50.00 sales load in the calculation
of your tax gain or loss when you sell shares in the second fund.

If you have a nonqualified investment in the Fund and you wish to move part or
all of those shares to an IRA or qualified retirement account in the Fund, you
can do so without paying a sales charge. However, this type of exchange is
considered a redemption of shares and may result in a gain or loss for tax
purposes. In addition, this type of exchange may result in an excess
contribution under IRA or qualified plan regulations if the amount exchanged
plus the amount of the initial sales charge applied to the amount exchanged
exceeds annual contribution limitations. For example: If you were to exchange
$2,000 in Class A shares from a nonqualified account to an IRA without
considering the 5% ($100) initial sales charge applicable to that $2,000, you
may be deemed to have exceeded current IRA annual contribution limitations. You
should consult your tax advisor for further details about this complex subject.

All distributions of net investment income during the year will have the same
percentage designated as tax-exempt. This annual percentage is expected to be
substantially the same as the percentage of tax-exempt income actually earned
during any particular distribution period.

Capital gain distributions, if any, received by shareholders should be treated
as long-term capital gains regardless of how long they owned their shares.
Short-term capital gains earned by the Fund are paid to shareholders as part of
their ordinary income dividend and are taxable. A special 28% rate on capital
gains may apply to sales of precious metals, if any, owned directly by the Fund.
A special 25% rate on capital gains may apply to investments in REITs.

Under federal tax law, by the end of a calendar year the Fund must declare and
pay dividends representing 98% of ordinary income for that calendar year and 98%
of net capital gains (both long-term and short-term) for the 12-month period
ending Nov. 30 of that calendar year. The Fund is subject to an excise tax equal
to 4% of the excess, if any, of the amount required to be distributed over the
amount actually distributed. The Fund intends to comply with federal tax law and
avoid any excise tax.

This is a brief summary that relates to federal income taxation only.
Shareholders should consult their tax advisor as to the application of federal,
state, and local income tax laws to Fund distributions.

AGREEMENTS
- --------------------------------------------------------------------------------

INVESTMENT MANAGEMENT SERVICES AGREEMENT

AEFC, a wholly-owned subsidiary of American Express Company, is the investment
manager for the Fund. Under the Investment Management Services Agreement, AEFC,
subject to the policies set by the board, provides investment management
services.

For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.

<PAGE>

Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.450%
Next 1.0 0.425
Next 1.0 0.400
Next 3.0 0.375
Over 6.0 0.350

On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.450% on an annual basis. The fee is calculated
for each calendar day on the basis of net assets as of the close of business two
business days prior to the day for which the calculation is made.

The management fee is paid monthly. Under the agreement, the total amount paid
was $143,819 for fiscal year 1999, $103,327 for fiscal year 1998, and $55,472
for fiscal year 1997.

Under the agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits and expenses
voluntarily reimbursed by AEFC, paid by the Fund were $42,363 for fiscal year
1999, $58,834 for fiscal year 1998, and $47,587 for fiscal year 1997.

Administrative Services Agreement

The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:

Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.040%
Next 1.0 0.035
Next 1.0 0.030
Next 3.0 0.025
Over 6.0 0.020

On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.040% on an annual basis. The fee is calculated
for each calendar day on the basis of net assets as of the close of business two
business days prior to the day for which the calculation is made. Under the
agreement, the Fund paid fees of $13,286 for fiscal year 1999, $6,613 for fiscal
year 1998, and $11,962 for fiscal year 1997.

Transfer Agency Agreement

The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC). This agreement governs AECSC's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under the
agreement, AECSC will earn a fee from the Fund determined by multiplying the
number of shareholder accounts at the end of the day by a rate determined for
each class per year and dividing by the number of days in the year. The rate for
Class A is $19.50 per year, for Class B is $20.50 per year and for Class Y is
$17.50 per year. The fees paid to AECSC may be changed by the board without
shareholder approval.

<PAGE>

DISTRIBUTION AGREEMENT

AEFA is the Fund's principal underwriter (distributor). The Fund's shares are
offered on a continuous basis.

Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to the distributor daily. These charges amounted to $234,838 for
fiscal year 1999. After paying commissions to personal financial advisors, and
other expenses, the amount retained was $(17,793). The amounts were $395,205 and
$61,576 for fiscal year 1998, and $457,446 and $(24,309) for fiscal year 1997.

Part of the sales charge may be paid to selling dealers who have agreements with
the distributor. The distributor will retain the balance of the sales charge. At
times the entire sales charge may be paid to selling dealers.

SHAREHOLDER SERVICE AGREEMENT

With respect to Class Y shares, the Fund pays a fee for service provided to
shareholders by financial advisors and other servicing agents. The fee is
calculated at a rate of 0.10% of average daily net assets. During the most
recent fiscal year, the Fund also paid a shareholder service fee with respect to
Class A and Class B shares at a rate of 0.175% of average daily net assets. The
Shareholder Service Agreement for Class A and Class B shares was converted to a
Plan and Agreement of Distribution effective July 1, 1999.

PLAN AND AGREEMENT OF DISTRIBUTION

For Class A and Class B shares, to help defray the cost of distribution and
servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and the Distributor entered into a Plan and Agreement of
Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund pays a fee up to actual expenses incurred at an annual rate of up to
0.25% of the Fund's average daily net assets attributable to Class A shares and
up to 1.00% for Class B shares.

Expenses covered under this Plan include sales commissions, business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express mutual funds.

The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board members is the responsibility of the other
disinterested board members. No board member who is not an interested person,
has any direct or indirect financial interest in the operation of the Plan or
any related agreement. For the most recent fiscal year, the Fund paid fees of
$25,344 for Class A shares and $67,551 for Class B shares. For Class A shares,
these fees were based on the 0.25% fee in effect as of July 1, 1999. The Plan
was not effective with respect to Class A shares prior to July 1, 1999. For
Class B shares, these fees were based on the 1.00% fee in effect as of July 1,
1999 and the 0.75% fee in effect prior thereto. The fee is not allocated to any
one service (such as advertising, payments to underwriters, or other uses).
However, a significant portion of the fee is generally used for sales and
promotional expenses.

<PAGE>

Custodian Agreement

The Fund's securities and cash are held by U.S. Bank National Association, 180
E. Fifth St., St. Paul, MN 55101-1631, through a custodian agreement. The
custodian is permitted to deposit some or all of its securities in central
depository systems as allowed by federal law. For its services, the Fund pays
the custodian a maintenance charge and a charge per transaction in addition to
reimbursing the custodian's out-of-pocket expenses.

ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------

The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.

The shares of the Fund represent an interest in that fund's assets only (and
profits or losses), and, in the event of liquidation, each share of the Fund
would have the same rights to dividends and assets as every other share of that
Fund.

VOTING RIGHTS

As a shareholder in the Fund, you have voting rights over the Fund's management
and fundamental policies. You are entitled to one vote for each share you own.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that you have as many votes as the number of shares you own,
including fractional shares, multiplied by the number of members to be elected.

Dividend Rights

Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.

AMERICAN EXPRESS FINANCIAL CORPORATION

AEFC has been a provider of financial services since 1894. Its family of
companies offers not only mutual funds but also insurance, annuities, investment
certificates and a broad range of financial management services.

In addition to managing assets of more than $95 billion for the American Express
Funds, AEFC manages investments for itself and its subsidiaries, IDS Certificate
Company and IDS Life Insurance Company. Total assets under management as of the
end of the most recent fiscal year were more than $244 billion.

AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,700 advisors.

<PAGE>

FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>

Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified
- -------------------------------------- -------------------- ----------------- ------------- --------- -----------
AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP International Equity Index No
Fund
AXP Mid Cap Index Fund No
AXP Nasdaq 100 Index Fund No
AXP S&P 500 Index Fund No
AXP Small Company Index Fund Yes
AXP Total Stock Market Index Fund No
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust****
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust****
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>

<PAGE>

* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small ap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.

** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.

*** Date merged into a Minnesota corporation incorporated on 4/7/86.

**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.

<PAGE>

BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------

Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.

The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express funds.

H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN

Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck and Co., Inc. and Darden Restaurants, Inc.

Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN

Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.

Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.

Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.

William H. Dudley'**
Born in 1932
2900 IDS Tower
Minneapolis, MN

Senior adviser to the chief executive officer of AEFC.

David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN

President, chief executive officer and director of AEFC.

Heinz F. Hutter'
Born in 1929
P.O. Box 2187
Minneapolis, MN

Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).

<PAGE>

Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD

Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).

William R. Pearce'+
Born in 1927
2050 One Financial Plaza
Minneapolis, MN

RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, American Express Funds.

Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY

Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, Biogen (bio-pharmaceuticals).

John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN

Senior vice president of AEFC.

C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN

Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).

+ Member of executive committee.
' Member of investment review committee.
* Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of AEFC or American Express.

The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, and Mr. Thomas, who is president, the Fund's other
officers are:

<PAGE>

Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN

President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.

Officers who also are officers and employees of AEFC:

Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN

Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.

Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN

Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.

John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN

Vice President - investment accounting of AEFC. Treasurer for the Fund.

COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------

During the most recent fiscal year, the independent members of the Fund board,
for attending up to 26 meetings, received the following compensation:

Compensation Table

Total cash compensation from
-------------------------- ----------------------------
Board member Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
H. Brewster Atwater, Jr. $1,225 $118,275
Lynne V. Cheney 907 102,225
Heinz F. Hutter 950 101,700
Anne P. Jones 982 106,625
William R. Pearce 742 74,475
Alan K. Simpson 907 102,225
C. Angus Wurtele 1,325 124,275

As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.

<PAGE>

INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------

The financial statements contained in the Annual Report were audited by
independent auditors, KPMG LLP, 4200 Norwest Center, 90 S. Seventh St.,
Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.

<PAGE>

APPENDIX

DESCRIPTION OF RATINGS

Standard & Poor's Debt Ratings

A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.

The ratings are based, in varying degrees, on the following considerations:

o Likelihood of default capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.

o Nature of and provisions of the obligation.

o Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.

Investment Grade

Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.

Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.

Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.

Speculative grade

Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.

<PAGE>

Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.

Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.

Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.

Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.

Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.

The rating CI is reserved for income bonds on which no interest is being paid.

Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

Moody's Long-Term Debt Ratings

Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.

A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.

Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

<PAGE>

Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.

Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

SHORT-TERM RATINGS

Standard & Poor's Commercial Paper Ratings

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.

Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.

B Issues are regarded as having only speculative capacity for timely
payment.

C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.

D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.

Standard & Poor's Note Ratings

An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.

<PAGE>

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.

SP-3 Speculative capacity to pay principal and interest.

Moody's Short-Term Ratings

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.

Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.

Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

Moody's & S&P's
Short-Term Muni Bonds and Notes

Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.

Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.

Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.

Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.

<PAGE>

Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.

Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.

Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.

Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.

<PAGE>

AXPSM TAX-EXEMPT SERIES, INC.

STATEMENT OF ADDITIONAL INFORMATION

FOR

AXPSM TAX-EXEMPT BOND FUND (the Fund)

Jan. 28, 2000

<PAGE>

TABLE OF CONTENTS

Mutual Fund Checklist..................................................p. 3

Fundamental Investment Policies........................................p. 5

Investment Strategies and Types of Investments.........................p. 6

Information Regarding Risks and Investment Strategies..................p. 8

Security Transactions...................................................p.27

Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation..................................p.28

Performance Information.................................................p.28

Valuing Fund Shares.....................................................p.31

Investing in the Fund...................................................p.32

Selling Shares..........................................................p.35

Pay-out Plans...........................................................p.35

Capital Loss Carryover..................................................p.36

Taxes...................................................................p.36

Agreements..............................................................p.37

Organizational Information..............................................p.40

Board Members and Officers..............................................p.42

Compensation for Board Members..........................................p.45

Independent Auditors....................................................p.45

Appendix: Description of Ratings.......................................p.46

<PAGE>

MUTUAL FUND CHECKLIST
- --------------------------------------------------------------------------------

|X|
Mutual funds are NOT guaranteed or insured by any
bank or government agency. You can lose money.
|X|
Mutual funds ALWAYS carry investment risks. Some
types carry more risk than others.
|X|
A higher rate of return typically involves a
higher risk of loss.
|X|
Past performance is not a reliable indicator of
future performance.
|X|
ALL mutual funds have costs that lower investment
return.
|X|
You can buy some mutual funds by contacting them
directly. Others, like this one, are sold mainly
through brokers, banks, financial planners, or
insurance agents. If you buy through these
financial professionals, you generally will pay a
sales charge.
|X|
Shop around. Compare a mutual fund with others of
the same type before you buy.

OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING:

Develop a Financial Plan

Have a plan - even a simple plan can help you take control of your financial
future. Review your plan with your advisor at least once a year or more
frequently if your circumstances change.

Dollar-Cost Averaging

<PAGE>

Dollar-cost averaging:

- -------------------------------------------------------------
Regular Market Price Shares
Investment of a Share Acquired
- -------------------------------------------------------------
$100 $6.00 16.7
100 4.00 25.0
100 4.00 25.0
100 6.00 16.7
100 5.00 20.0
----- -------- ------
$500 $25.00 103.4

Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5)
The average price you paid for each share: $4.84 ($500 divided by 103.4)

Diversify

Understand Your Investment

Know what you are buying. Make sure you understand the potential risks, rewards,
costs, and expenses associated with each of your investments.

<PAGE>

FUNDAMENTAL INVESTMENT POLICIES
- --------------------------------------------------------------------------------

o Under normal market conditions, invest less than 80% of its net assets in
bonds and other debt securities issued by or on behalf of state or local
governmental units whose interest, in the opinion of counsel for the
issuer, is exempt from federal income tax. This Fund does not intend to
purchase bonds or other debt securities the interest from which is subject
to the alternative minimum tax.

o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.

o Lend Fund securities in excess of 30% of its net assets.

Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.

<PAGE>

INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------

Investment strategies & types of investments: Allowable for the Fund?

Agency and Government Securities yes

Borrowing yes

Cash/Money Market Instruments yes

Collateralized Bond Obligations yes

Commercial Paper yes

Common Stock no

Convertible Securities yes

Corporate Bonds yes

Debt Obligations yes

Depositary Receipts no

Derivative Instruments yes

Foreign Currency Transactions yes

Foreign Securities yes

High-Yield (High-Risk) Securities (Junk Bonds) no

Illiquid and Restricted Securities yes

Indexed Securities yes

Inverse Floaters yes

Investment Companies no

Lending of Portfolio Securities yes

Loan Participations yes

Mortgage- and Asset-Backed Securities yes

Mortgage Dollar Rolls yes

Municipal Obligations yes

Preferred Stock no

Real Estate Investment Trusts yes

Repurchase Agreements yes

Reverse Repurchase Agreements yes

Short Sales no

Sovereign Debt yes

Structured Products yes

Variable- or Floating-Rate Securities yes

Warrants yes

When-Issued Securities yes

Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes

<PAGE>

The following are guidelines that may be changed by the board at any time:

o At least 75% of the Fund's investments in bonds and other debt securities
must be rated in the top four grades by Moody's Investors Service, Inc.,
Standard & Poor's Corporation, or Fitch Investors Services, Inc. or be of
comparable rating given by other independent rating agencies. Up to 25% of
the Fund's remaining investments may be in unrated bonds and other debt
securities which, in the investment manager's opinion, are of investment
grade quality. All industrial revenue bonds must be rated.

o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.

o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.

o The Fund will not buy on margin or sell short, except that the Fund may use
derivative instruments.

o The Fund will not invest in voting securities or securities of investment
companies.

<PAGE>

INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
- --------------------------------------------------------------------------------

RISKS

Call/Prepayment Risk

The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."

Correlation Risk

Credit Risk

Event Risk

Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.

Foreign/Emerging Markets Risk

The following are all components of foreign/emerging markets risk:

<PAGE>

not subject to independent evaluation. The less developed a country's securities
market is, the greater the likelihood of problems occurring.

Inflation Risk

Interest Rate Risk

Issuer Risk

Legal/Legislative Risk

Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.

Leverage Risk

Liquidity Risk

Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.

Management Risk

Market Risk

<PAGE>

Reinvestment Risk

The risk that an investor will not be able to reinvest income or principal at
the same rate it currently is earning.

Sector/Concentration Risk

Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).

Small Company Risk

<PAGE>

INVESTMENT STRATEGIES

Agency and Government Securities

Borrowing

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.

Cash/Money Market Instruments

See the appendix for a discussion of securities ratings.

<PAGE>

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.

Collateralized Bond Obligations

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.

Commercial Paper

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.

Common Stock

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.

Convertible Securities

<PAGE>

convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases.

Corporate Bonds

Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.

Debt Obligations

<PAGE>

See the appendix for a discussion of securities ratings.

Depositary Receipts

Derivative Instruments

A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable percentage gain or loss in the price of
the derivative instrument.

<PAGE>

Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day a buyer
would pay out cash in an amount equal to any decline in the contract's value or
receive cash equal to any increase. At the time a futures contract is closed
out, a nominal commission is paid, which is generally lower than the commission
on a comparable transaction in the cash market.

Futures contracts may be based on various securities, securities indices (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indices.

<PAGE>

Other Risks of Derivatives.

(See also Foreign Currency Transactions.)

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.

<PAGE>

Foreign Currency Transactions

(See also Derivative Instruments and Foreign Securities.)

Foreign Securities

<PAGE>

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.

High-Yield (High-Risk) Securities (Junk Bonds)

See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)

<PAGE>

Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.

Illiquid and Restricted Securities

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.

Indexed Securities

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.

Inverse Floaters

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.

<PAGE>

Investment Companies

The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.

Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.

Lending of Portfolio Securities

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.

Loan Participations

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.

Mortgage- and Asset-Backed Securities

<PAGE>

all or a portion of the principal of the underlying pool of mortgage loans or
mortgage-backed securities. The cash flows and yields on IOs and POs are
extremely sensitive to the rate of principal payments (including prepayments) on
the underlying mortgage loans or mortgage-backed securities. A rapid rate of
principal payments may adversely affect the yield to maturity of IOs. A slow
rate of principal payments may adversely affect the yield to maturity of POs. If
prepayments of principal are greater than anticipated, an investor in IOs may
incur substantial losses. If prepayments of principal are slower than
anticipated, the yield on a PO will be affected more severely than would be the
case with a traditional mortgage-backed security.

Mortgage Dollar Rolls

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.

<PAGE>

Municipal Obligations

Preferred Stock

<PAGE>

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.

Real Estate Investment Trusts

Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.

Repurchase Agreements

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.

Reverse Repurchase Agreements

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.

Short Sales

With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price at the time of replacement. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased between the date of the
short sale and the date on which the borrowed security is replaced, the investor
loses the opportunity to participate in the gain. A "short sale against the box"
will result in a constructive sale of appreciated securities thereby generating
capital gains to the Fund.

<PAGE>

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.

Sovereign Debt

Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.

Structured Products

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.

Variable- or Floating-Rate Securities

<PAGE>

between the lender and borrower, it is not contemplated that such instruments
generally will be traded. There generally is not an established secondary market
for these obligations. Accordingly, where these obligations are not secured by
letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and may involve heightened risk of default by the issuer.

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.

Warrants

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.

When-Issued Securities

Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.

Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities

<PAGE>

SECURITY TRANSACTIONS
- --------------------------------------------------------------------------------

<PAGE>

result of this arrangement, some portfolio transactions may not be effected at
the lowest commission, but AEFC believes it may obtain better overall execution.
AEFC has represented that under all three procedures the amount of commission
paid will be reasonable and competitive in relation to the value of the
brokerage services performed or research provided.

All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by AEFC in providing advice to all American
Express mutual funds even though it is not possible to relate the benefits to
any particular fund.

The Fund paid total brokerage commissions of $400 for fiscal year ended Nov. 30,
1999, $0 for fiscal year 1998, and $0 for fiscal year 1997. Substantially all
firms through whom transactions were executed provide research services.

No transactions were directed to brokers because of research services they
provided to the Fund.

The portfolio turnover rate was 45% in the most recent fiscal year, and 18% in
the year before.

BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL
CORPORATION
- --------------------------------------------------------------------------------

No brokerage commissions were paid to brokers affiliated with AEFC for the three
most recent fiscal years.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

<PAGE>

AVERAGE ANNUAL TOTAL RETURN

P(1+T)n = ERV

AGGREGATE TOTAL RETURN

ERV - P
P

Annualized yield

Yield is calculated according to the following formula:

Yield = 2[(a-b + 1)6 - 1]
cd

where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period

The Fund's annualized yield was 4.49% for Class A, 3.96% for Class B, and 4.88%
for Class Y for the 30-day period ended Nov. 30, 1999.

<PAGE>

Distribution yield

Distribution yield is calculated according to the following formula:

D divided by POPF equals DY
30 30

where: D = sum of dividends for 30-day period
POP = sum of public offering price for 30-day period
F = annualizing factor
DY = distribution yield

The Fund's distribution yield was 4.85% for Class A, 4.36% for Class B, and
5.26% for Class Y for the 30-day period ended Nov. 30, 1999.

Tax-equivalent yield

Marginal
Income Tax Tax-Equivalent Yield
Bracket Distribution Annualized
Class A
15.0% 5.71% 5.28%
28.0% 6.74% 6.24%
31.0% 7.03% 6.51%
36.0% 7.58% 7.02%
39.6% 8.03% 7.43%

Class B
15.0% 5.13% 4.66%
28.0% 6.06% 5.50%
31.0% 6.32% 5.74%
36.0% 6.81% 6.19%
39.6% 7.22% 6.56%

Class Y
15.0% 6.19% 5.74%
28.0% 7.31% 6.78%
31.0% 7.62% 7.07%
36.0% 8.22% 7.63%
39.6% 8.71% 8.08%

<PAGE>

Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's
Personal Finance, USA Today, U.S. News and World Report, The Wall Street
Journal, and Wiesenberger Investment Companies Service. The Fund also may
compare its performance to a wide variety of indexes or averages. There are
similarities and differences between the investments that the Fund may purchase
and the investments measured by the indexes or averages and the composition of
the indexes or averages will differ from that of the Fund.

VALUING FUND SHARES
- --------------------------------------------------------------------------------

As of the end of the most recent fiscal year, the computation looked like this:

Net asset value
Net assets Shares of one share
outstanding
-------------------------------------------------------------------
Class A $ 877,312,368 divided by 228,735,781 equals $ 3.84
Class B 39,461,183 10,286,812 3.84
Class Y 203,044 52,969 3.83

In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):

o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.

o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.

<PAGE>

INVESTING IN THE FUND
- --------------------------------------------------------------------------------

SALES CHARGE

Shares of the Fund are sold at the public offering price. The public offering
price is the NAV of one share adjusted for the sales charge for Class A. For
Class B and Class Y, there is no initial sales charge so the public offering
price is the same as the NAV. For Class A, the public offering price for an
investment of less than $50,000, made on the last day of the most recent fiscal
year, was determined by dividing the NAV of one share, $3.84, by 0.95 (1.00-0.05
for a maximum 5% sales charge) for a public offering price of $4.04. The sales
charge is paid to American Express Financial Advisors Inc.
(Distributor) by the person buying the shares.

Class A - Calculation of the Sales Charge

Sales charges are determined as follows:

Within each
increment, sales
charge as a
percentage of:
-----------------------------------------------
Public Net
Amount of Investment Offering Price Amount Invested
- -------------------- -------------- ---------------
First $ 50,000 5.0% 5.26%
Next 50,000 4.5 4.71
Next 400,000 3.8 3.95
Next 500,000 2.0 2.04
$1,000,000 or more 0.0 0.00

<PAGE>

The following table shows the range of sales charges as a percentage of the
public offering price and of the net amount invested on total investments at
each applicable level.
<TABLE>
<CAPTION>

On total
investment, sales
Charge as a
percentage of:
------------------------------------------------------------
<S> <C> <C>
Public Net
Offering Price Amount Invested
Amount of investment ranges from:
- ----------------------------------------------
First $ 50,000 5.00% 5.26%
Next 50,000 to 100,000 5.00-4.50 5.26-4.71
Next 100,000 to 500,000 4.50-3.80 4.71-3.95
Next 500,000 to 999,999 3.80-2.00 3.95-2.04
$1,000,000 or more 0.00 0.00
</TABLE>

Class A - Reducing the Sales Charge

Class A - Letter of Intent (LOI)

Class Y Shares

o Qualified employee benefit plans* if the plan:

- uses a daily transfer recordkeeping service offering participants
daily access to American Express mutual funds and has

- at least $10 million in plan assets or

- 500 or more participants; or

- does not use daily transfer recordkeeping and has

- at least $3 million invested in American Express mutual
funds or

- 500 or more participants.

<PAGE>

o Nonqualified deferred compensation plans* whose participants are included
in a qualified employee benefit described above.

* Eligibility must be determined in advance. To do so, contact your financial
advisor.

SYSTEMATIC INVESTMENT PROGRAMS

AUTOMATIC DIRECTED DIVIDENDS

o Between a non-custodial account and an IRA, or 401(k) plan account or other
qualified retirement account of which American Express Trust Company acts
as custodian;

o Between two American Express Trust Company custodial accounts with
different owners (for example, you may not exchange dividends from your IRA
to the IRA of your spouse); and

REJECTION OF BUSINESS

The Fund or AECSC reserves the right to reject any business, in its sole
discretion.

<PAGE>

SELLING SHARES
- --------------------------------------------------------------------------------

You have a right to sell your shares at any time. For an explanation of sales
procedures, please see the prospectus.

o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or

o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or

o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.

PAY-OUT PLANS
- --------------------------------------------------------------------------------

To start any of these plans, please consult your selling agent or write American
Express Client Service Corporation, P.O. Box 534, Minneapolis, MN 55440-0534, or
call 800-437-3133. Your authorization must be received at least five days before
the date you want your payments to begin. The initial payment must be at least
$50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or
annual basis. Your choice is effective until you change or cancel it.

<PAGE>

Plan #1: Pay-out for a fixed period of time

Plan #2: Redemption of a fixed number of shares

Plan #3: Redemption of a fixed dollar amount

If you decide on a fixed dollar amount, whatever number of shares is necessary
to make the payment will be redeemed in regular installments until the account
is closed.

Plan #4: Redemption of a percentage of net asset value

- --------------------------------------------------------------------------------
CAPITAL LOSS CARRYOVER

For federal income tax purposes, the Fund had total capital loss carryovers of
$18,682,892 at the end of the most recent fiscal year, that if not offset by
subsequent capital gains will expire as follows:

2002 2007
---- ----
$ 8,126,271 $ 10,556,621

TAXES
- --------------------------------------------------------------------------------

<PAGE>

For example:

AGREEMENTS
- --------------------------------------------------------------------------------

INVESTMENT MANAGEMENT SERVICES AGREEMENT

<PAGE>

For its services, AEFC is paid a fee based on the following schedule. Each class
of the Fund pays its proportionate share of the fee.

Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.450%
Next 1.0 0.425
Next 1.0 0.400
Next 3.0 0.375
Over 6.0 0.350

The management fee is paid monthly. Under the agreement, the total amount paid
was $4,412,804 for fiscal year 1999, $4,606,339 for fiscal year 1998, and
$4,632,571 for fiscal year 1997.

Under the agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees; audit and certain legal
fees; fidelity bond premiums; registration fees for shares; office expenses;
postage of confirmations except purchase confirmations; consultants' fees;
compensation of board members, officers and employees; corporate filing fees;
organizational expenses; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the board.
Under the agreement, nonadvisory expenses, net of earnings credits, paid by the
Fund were $200,357 for fiscal year 1999, $125,667 for fiscal year 1998, and
$92,050 for fiscal year 1997.

Administrative Services Agreement

The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:

Assets Annual rate at
(billions) each asset level
- --------- ----------------
First $1.0 0.040%
Next 1.0 0.035
Next 1.0 0.030
Next 3.0 0.025
Over 6.0 0.020

On the last day of the most recent fiscal year, the daily rate applied to the
Fund's net assets was equal to 0.040% on an annual basis. The fee is calculated
for each calendar day on the basis of net assets as of the close of business two
business days prior to the day for which the calculation is made. Under the
agreement, the Fund paid fees of $408,460 for fiscal year 1999, $422,070 for
fiscal year 1998, and $427,708 for fiscal year 1997.

Transfer Agency Agreement

<PAGE>

DISTRIBUTION AGREEMENT

American Express Financial Advisors Inc. is the Fund's principal underwriter
(distributor). The Fund's shares are offered on a continuous basis.

Under a Distribution Agreement, sales charges deducted for distributing Fund
shares are paid to the Distributor daily. These charges amounted to $1,278,794
for fiscal year 1999. After paying commissions to personal financial advisors,
and other expenses, the amount retained was $217,810. The amounts were
$1,386,673 and $258,851 for fiscal year 1998, and $909,275 and $174,267 for
fiscal year 1997.

Part of the sales charge may be paid to selling dealers who have agreements with
the Distributor. The Distributor will retain the balance of the sales charge. At
times the entire sales charge may be paid to selling dealers.

SHAREHOLDER SERVICE AGREEMENT

PLAN AND AGREEMENT OF DISTRIBUTION

Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of Class A and Class B
shares; and overhead appropriately allocated to the sale of Class A and Class B
shares. These expenses also include costs of providing personal service to
shareholders. A substantial portion of the costs are not specifically identified
to any one of the American Express mutual funds.

The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board members is the responsibility of the other
disinterested board members. No board member who is not an interested person,
has any direct or indirect financial interest in the operation of the Plan or
any related agreement. For the most recent fiscal year, the Fund paid fees of
$942,729 for Class A shares and $337,929 for Class B shares. For Class A shares,
these fees were based on the 0.25% fee in effect as of July 1, 1999. The Plan
was not effective with respect to Class A shares prior to July 1, 1999. For
Class B shares, these fees were based on the 1.00% fee in effect as of July 1,
1999 and the 0.75% fee in effect prior thereto. The fee is not allocated to any
one service (such as advertising, payments to underwriters, or other uses).
However, a significant portion of the fee is generally used for sales and
promotional expenses.

<PAGE>

Custodian Agreement

ORGANIZATIONAL INFORMATION
- --------------------------------------------------------------------------------

The Fund is an open-end management investment company. The Fund headquarters are
at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268.

VOTING RIGHTS

Dividend Rights

AMERICAN EXPRESS FINANCIAL CORPORATION

AEFA serves individuals and businesses through its nationwide network of more
than 180 offices and more than 9,700 advisors.

<PAGE>

FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Date of Form of State of Fiscal
Fund Organization Organization Organization Year End Diversified

AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes
AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes
AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes
AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes
AXP Global Series, Inc. 10/28/88 Corporation MN 10/31
AXP Emerging Markets Fund Yes
AXP Global Balanced Fund Yes
AXP Global Bond Fund No
AXP Global Growth Fund Yes
AXP Innovations Fund Yes
AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31
AXP Growth Fund Yes
AXP Research Opportunities Fund Yes
AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, Corporation NV/MN 11/30 Yes
6/13/86***
AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 Yes
AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30
AXP Diversified Equity Income Fund Yes
AXP Mutual Yes
AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30
AXP Managed Allocation Fund Yes
AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31
AXP Blue Chip Advantage Fund Yes
AXP International Equity Index No
Fund
AXP Mid Cap Index Fund No
AXP Nasdaq 100 Index Fund No
AXP S&P 500 Index Fund No
AXP Small Company Index Fund Yes
AXP Total Stock Market Index Fund No
AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31
AXP Cash Management Fund Yes
AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 Yes
AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No
AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes
AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes
AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP Equity Value Fund** Yes
AXP Small Cap Advantage Fund Yes
AXP Strategy Aggressive Fund** Yes
AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/31
AXP Intermediate Tax-Exempt Fund Yes
AXP Tax-Exempt Bond Fund Yes
AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes
AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
AXP California Tax-Exempt Trust 4/7/86 Business MA 6/30
Trust****
AXP California Tax-Exempt Fund No
AXP Special Tax-Exempt Series Trust 4/7/86 Business MA 6/30
Trust****
AXP Insured Tax-Exempt Fund Yes
AXP Massachusetts Tax-Exempt Fund No
AXP Michigan Tax-Exempt Fund No
AXP Minnesota Tax-Exempt Fund No
AXP New York Tax-Exempt Fund No
AXP Ohio Tax-Exempt Fund No
</TABLE>

<PAGE>

* At the shareholders meeting held on June 16, 1999, shareholders of the
existing funds (except for AXP Small Cap Advantage Fund) approved the name
change from IDS to AXP. In addition to substituting AXP for IDS, the
following series changed their names: IDS Growth Fund, Inc. to AXP Growth
Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series,
Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS
Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc.
** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund,
Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS
Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive
Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value
Fund.
*** Date merged into a Minnesota corporation incorporated on 4/7/86.
**** Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.

BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------

Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.

The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 58 American Express mutual funds.

H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN

Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc.

Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN

Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.

Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.

Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.

William H. Dudley'**
Born in 1932
2900 IDS Tower
Minneapolis, MN

Senior adviser to the chief executive officer of AEFC.

David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN

President, chief executive officer and director of AEFC.

<PAGE>

Heinz F. Hutter'
Born in 1929
P.O. Box 2187
Minneapolis, MN

Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).

Anne P. Jones
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD

William R. Pearce'+
Born in 1927
2050 One Financial Plaza
Minneapolis, MN

Alan K. Simpson
Born in 1931
1201 Sunshine Ave.
Cody, WY

Visiting Lecturer and Director of The Institute of Politics, Harvard University.
Former three-term United States Senator for Wyoming. Former Assistant Republican
Leader, U.S. Senate. Director, Biogen (bio-pharmaceuticals).

John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN

Senior vice president of AEFC.

C. Angus Wurtele'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN

Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).

<PAGE>

Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN

President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.

Officers who also are officers and employees of AEFC:

Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN

Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.

Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN

Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.

John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN

Vice president - investment accounting of AEFC. Treasurer for the Fund.

<PAGE>

COMPENSATION FOR BOARD MEMBERS
- --------------------------------------------------------------------------------

During the most recent fiscal year, the independent members of the Fund board,
for attending up to 26 meetings, received the following compensation:

Compensation Table

Total cash compensation from
Aggregate American Express Funds and
compensation from the Fund Preferred Master Trust Group
--------------------------------- ---------------------------------
<S> <C> <C>
Board member
H. Brewster Atwater, Jr. $ 1,617 $ 118,275
Lynne V. Cheney 1,325 102,225
Heinz F. Hutter 1,342 101,700
Anne P. Jones 1,402 106,625
William R. Pearce 992 74,475
Alan K. Simpson 1,325 102,225
C. Angus Wurtele 1,717 124,275
</TABLE>

As of 30 days prior to the date of this SAI, the Fund's board members and
officers as a group owned less than 1% of the outstanding shares of any class.

INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------

<PAGE>

APPENDIX

DESCRIPTION OF RATINGS

Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based, in varying degrees, on the following considerations:

o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.

o Nature of and provisions of the obligation.

o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.

Investment Grade

Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.

Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.

Speculative grade

<PAGE>

Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.

The rating CI is reserved for income bonds on which no interest is being paid.

Moody's Long-Term Debt Ratings

<PAGE>

Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

SHORT-TERM RATINGS

Standard & Poor's Commercial Paper Ratings

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.

Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.

A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.

B Issues are regarded as having only speculative capacity for
timely payment.

C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.

D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.

<PAGE>

Standard & Poor's Note Ratings

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.

SP-3 Speculative capacity to pay principal and interest.

Moody's Short-Term Ratings

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

<PAGE>

Moody's & S&P's
Short-Term Muni Bonds and Notes

Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.

Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.

Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.

Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.

<PAGE>

Independent Auditors' Report

THE BOARD AND SHAREHOLDERS
AXP TAX-EXEMPT SERIES, INC.

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Intermediate Tax-Exempt Fund
(a series of AXP Tax-Exempt Series, Inc.) as of November 30, 1999, and the
related statement of operations for the year then ended and the statements of
changes in net assets for each of the years in the two-year period ended
November 30, 1999 and the financial highlights for the three-year period ended
November 30, 1999, and for the period from November 13, 1996 (commencement of
operations) to November 30, 1996. These financial statements and the financial
highlights are the responsibility of fund management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP Intermediate Tax-Exempt
Fund as of November 30, 1999, and the results of its operations, changes in its
net assets, and the financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.

/s/KPMG LLP
KPMG LLP
Minneapolis, Minnesota
January 7, 2000
<PAGE>
<TABLE>
<CAPTION>

Financial Statements

Statement of assets and liabilities
AXP Intermediate Tax-Exempt Fund

Nov. 30, 1999

Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $38,665,183) $38,400,199
Cash in bank on demand deposit 59,039
Accrued interest receivable 456,447
-------
Total assets 38,915,685
----------

Liabilities
Dividends payable to shareholders 25,896
Payable for investment securities purchased 999,756
Accrued investment management services fee 465
Accrued distribution fee 442
Accrued transfer agency fee 63
Accrued administrative services fee 41
Other accrued expenses 33,548
------
Total liabilities 1,060,211
---------
Net assets applicable to outstanding capital stock $37,855,474
-----------

Represented by
Capital stock-- $.01 par value (Note 1) $ 75,409
Additional paid-in capital 38,065,974
Undistributed net investment income 770
Accumulated net realized gain (loss) (21,695)
Unrealized appreciation (depreciation) on investments (264,984)
--------
Total-- representing net assets applicable to outstanding capital stock $37,855,474
===========
Net assets applicable to outstanding shares: Class A $28,910,714
Class B $ 8,943,633
Class Y $ 1,127
Net asset value per share of outstanding capital stock: Class A shares 5,758,918 $ 5.02
Class B shares 1,781,802 $ 5.02
Class Y shares 225 $ 5.01

See accompanying notes to financial statements.
</TABLE>

Statement of operations
AXP Intermediate Tax-Exempt Fund

Year ended Nov. 30, 1999

Investment income
Income:
<S> <C>
Interest $1,492,849
----------
Expenses (Note 2):
Investment management services fee 143,819
Distribution fee
Class A 25,344
Class B 67,551
Transfer agency fee 18,754
Incremental transfer agency fee
Class A 1,532
Class B 997
Service fee
Class A 24,292
Class B 7,700
Administrative services fees and expenses 13,286
Compensation of board members 7,829
Custodian fees 7,461
Printing and postage 11,103
Registration fees 35,598
Audit fees 14,000
Other 7,179
-----
Total expenses 386,445
Less expenses voluntarily reimbursed by AEFC (Note 2) (38,639)
-------
347,806
Earnings credits on cash balances (Note 2) (2,168)
------
Total net expenses 345,638
-------
Investment income (loss) -- net 1,147,211
---------

Realized and unrealized gain (loss) -- net
Net realized gain (loss) on security transactions (Note 3) 16,737
Net change in unrealized appreciation (depreciation) on investments (771,094)
--------
Net gain (loss) on investments (754,357)
--------
Net increase (decrease) in net assets resulting from operations $ 392,854
==========

See accompanying notes to financial statements.

</TABLE>

Statements of changes in net assets
AXP Intermediate Tax-Exempt Fund

Year ended Nov. 30, 1999 1998

Operations and distributions
<S> <C> <C>
Investment income (loss)-- net $ 1,147,211 $ 913,715
Net realized gain (loss) on security transactions 16,737 111
Net change in unrealized appreciation (depreciation) on investments (771,094) 260,381
-------- -------
Net increase (decrease) in net assets resulting from operations 392,854 1,174,207
------- ---------
Distributions to shareholders from:
Net investment income
Class A (911,802) (722,204)
Class B (237,666) (191,469)
Class Y (44) (43)
--- ---
Total distributions (1,149,512) (913,716)
---------- --------

Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 23,083,141 17,789,645
Class B shares 5,504,477 4,471,658
Reinvestment of distributions at net asset value
Class A shares 686,510 559,558
Class B shares 213,690 177,771
Class Y shares 44 43
Payments for redemptions
Class A shares (14,944,355) (14,921,647)
Class B shares (Note 2) (3,608,039) (3,249,556)
---------- ----------
Increase (decrease) in net assets from capital share transactions 10,935,468 4,827,472
---------- ---------
Total increase (decrease) in net assets 10,178,810 5,087,963
Net assets at beginning of year 27,676,664 22,588,701
---------- ----------
Net assets at end of year $37,855,474 $27,676,664
=========== ===========
Undistributed net investment income $ 770 $ 3,071
----------- -----------

See accompanying notes to financial statements.
</TABLE>

<PAGE>

Notes to Financial Statements
AXP Intermediate Tax-Exempt Fund

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

AXP Intermediate Tax-Exempt Fund (a series of AXP Tax-Exempt Series, Inc.) is
registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. AXP Tax-Exempt Series, Inc.
has 10 billion authorized shares of capital stock that can be allocated among
the separate series as designated by the board. The Fund invests primarily in
bonds and other debt obligations.

The Fund offers Class A, Class B and Class Y shares.

o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge and
automatically convert to Class A shares during the ninth calendar year
of ownership.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.

All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differs among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.

The Fund's significant accounting policies are summarized below:

Use of estimates
Preparing financial statements that conform to generally accepted accounting
principles requires management to make estimates (e.g., on assets and
liabilities) that could differ from actual results.

Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.

Option transactions
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may write over-the-counter
options where completing the obligation depends upon the credit standing of the
other party. The Fund also may buy and sell put and call options and write
covered call options on portfolio securities as well as write cash-secured put
options. The risk in writing a call option is that the Fund gives up the
opportunity for profit if the market price of the security increases. The risk
in writing a put option is that the Fund may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an option
is that the Fund pays a premium whether or not the option is exercised. The Fund
also has the additional risk of being unable to enter into a closing transaction
if a liquid secondary market does not exist.

Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.

Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts. Risks of entering into futures contracts and
related options include the possibility of an illiquid market and that a change
in the value of the contract or option may not correlate with changes in the
value of the underlying securities.

Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.

Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.

Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of deferred losses on
certain futures contracts and losses deferred due to "wash sale" transactions.
The 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. Also, due to the timing of dividend distributions,
the fiscal year in which amounts are distributed may differ from the year that
the income or realized gains (losses) were recorded by the Fund.

Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, are
reinvested in additional shares of the Fund at net asset value or payable in
cash. Capital gains, when available, are distributed along with the last income
dividend of the calendar year.

Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.

2. EXPENSES AND SALES CHARGES

The Fund has agreements with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an Investment
Management Services Agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of the Fund's
average daily net assets in reducing percentages from 0.45% to 0.35% annually.

Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.04% to 0.02% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this agreement, the Fund also
pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by the Fund and approved by the board.

Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:

o Class A $19.50
o Class B $20.50
o Class Y $17.50

Under terms of a prior agreement that ended Jan. 31, 1999, the Fund paid a
transfer agency fee at an annual rate per shareholder account of $15.50 for
Class A and $16.50 for Class B. Under terms of a prior agreement that ended
March 31, 1999, the Fund paid a transfer agency fee at an annual rate per
shareholder account of $15.50 for Class Y.

The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution (the Plan), the Fund pays a distribution fee at an
annual rate up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B shares. The Plan went into effect
July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the
Prior Plan) that ended June 30, 1999, the Fund paid a distribution fee for Class
B shares at an annual rate up to 0.75% of average daily net assets. The Prior
Plan was not effective with respect to Class A shares.

Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares. Under terms of a prior agreement that
ended June 30, 1999, the Fund paid a shareholder service fee for Class A and
Class B shares at a rate of 0.175% of average daily net assets. Effective July
1, 1999, the agreement for Class A and Class B shares was converted to the Plan
and Agreement of Distribution discussed above.

Sales charges received by the Distributor for distributing Fund shares were
$225,886 for Class A and $8,952 for Class B for the year ended Nov. 30, 1999.

AEFC agreed to waive certain fees and to absorb certain other of the Fund's
expenses. Under this agreement, the Fund's total expenses, net of earnings
credits, could not exceed 0.90% for Class A, 1.66% for Class B and 0.83% for
Class Y of the Fund's average daily net assets. In addition, for the year ended
Nov. 30, 1999, AEFC further voluntarily agreed to waive certain fees and
expenses to 1.65% for Class B and 0.80% for Class Y.

During the year ended Nov. 30, 1999, the Fund's custodian and transfer agency
fees were reduced by $2,168 as a result of earnings credits from overnight cash
balances.

3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $8,270,761 and $2,867,485, respectively, for the year
ended Nov. 30, 1999. Realized gains and losses are determined on an identified
cost basis.

4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:

Year ended Nov. 30, 1999
Class A Class B Class Y
<S> <C> <C> <C>
Sold 4,539,072 1,080,474 --
Issued for reinvested distributions 135,012 42,053 9
Redeemed (2,934,808) (707,032) --
---------- -------- ---
Net increase (decrease) 1,739,276 415,495 9

Year ended Nov. 30, 1998
Class A Class B Class Y
Sold 3,481,871 874,848 --
Issued for reinvested distributions 109,456 34,779 9
Redeemed (2,919,889) (635,720) --
---------- -------- ---
Net increase (decrease) 671,438 273,907 9

</TABLE>
<PAGE>

5. CAPITAL LOSS CARRYOVER
For federal income tax purposes, the Fund has a capital loss carryover of
$21,695 as of Nov. 30, 1999, that if not offset by subsequent capital gains,
will expire in 2005. It is unlikely the board will authorize a distribution of
any net realized gain for the Fund until its capital loss carryover has been
offset or expires.

6. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express mutual funds, permits
borrowings up to $200 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or
the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to
90 days after such loan is executed. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.05%
per annum. The Fund had no borrowings outstanding during the year ended Nov. 30,
1999.

7. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 26 and 27 of the prospectus.

Investments in Securities

AXP Intermediate Tax-Exempt Fund
Nov. 30, 1999

(Percentages represent value of investments compared to net assets)

Municipal bonds (83.5%)
Name of issuer and Coupon Principal Value(a)
title of issue(b,c) rate amount

Alabama (1.0%)
Special Care Facilities Finance Authority
Revenue Bonds Lanier Memorial Hospital
Series 1997A
<S> <C> <C> <C> <C> <C>
11-01-01 5.50% $390,000 $392,886

Alaska (3.2%)
Anchorage Light & Power Senior Lien
Electric Utilities Refunding Revenue Bonds
Series 1996C (AMBAC Insured)
12-01-99 4.10 100,000 100,001
Anchorage Unlimited Tax General Obligation Bonds
Series 1992 (MBIA Insured)
08-01-01 5.85 425,000 435,336
Industrial Development & Exploration Authority
Electric Power Revenue Bonds
Upper Lynn Canal Regional Power
Series 1997 A.M.T.
01-01-02 5.00 705,000 693,368
Total 1,228,705

California (2.5%)
Lake Elsinore School Financing Authority
Revenue Bonds Series 1997
09-01-02 5.10 205,000 207,979
09-01-03 5.20 220,000 224,182
Long Beach Harbor Revenue Bonds Series 1993 A.M.T.
05-15-02 4.50 500,000 501,720
Total 933,881

Colorado (2.4%)
Arvada Urban Renewal Authority
Tax Allocation Refunding Revenue Bonds
Series 1997A (MBIA Insured)
09-01-02 5.25 200,000 204,124
Denver City & County Airport Revenue Bonds Series 1996
(MBIA Insured) A.M.T.
11-15-00 4.80 500,000 503,215
Highlands Ranch District 3 Douglas County
(ACA Insured)
12-01-01 4.30 200,000 198,948
Total 906,287

Connecticut (0.9%)
State Development Authority Refunding Revenue Bonds
Church Homes Incorporated 1st Mortgage
Gross Health Care Series 1997
04-01-00 4.65 200,000 200,004
State Unlimited General Obligation Bonds Series 1995A
03-15-00 5.00 130,000 130,415
Total 330,419

District of Columbia (1.3%)
Fixed Rate Revenue Bonds
National Academy of Sciences
Series 1999A (AMBAC Insured)
01-01-05 4.00 500,000 475,185

Florida (6.5%)
Grand Haven Community Development District
Special Assessment Bonds Flagler County
Series 1997A
05-01-02 6.30 300,000 300,513
Heritage Palms Community Development District
Capital Improvement Revenue Bonds
Series 1998
11-01-03 5.40 400,000 388,992
Hillsborough County Industrial Development Authority
Health Facilities Revenue Bonds
University Community Hospital Series 1999A
08-15-03 4.50 500,000 488,295
Lakewood Ranch Community Development District 1
Manatec County Benefit Special Assessment Bonds
Series 1998
05-01-17 7.30 250,000 242,333
North Springs Improvement Special Assessment
District Revenue Bonds Parkland Isles Series 1997B
05-01-05 6.25 500,000 494,779
State Ports Financing Commission Port District Revenue Bonds Series 1996 (MBIA
Insured) A.M.T.
06-01-03 4.60 100,000 100,224
Stoneybrook Community Development District
Capital Improvement Revenue Bonds
Lee County Series 1998B
05-01-08 5.70 500,000 478,400
Total 2,493,536

Georgia (0.7%)
Clarke County Hospital Authority Hospital Revenue
Certificates Series 1996 (MBIA Insured)
01-01-01 5.00 150,000 151,176
Dalton Development Authority Revenue Certificates
Series 1996 (MBIA Insured)
08-15-04 4.63 125,000 124,730
Total 275,906

Hawaii (0.5%)
State Housing Finance & Development
Single Family Mortgage Revenue Bonds
Series 1998A A.M.T.
07-01-01 4.25 195,000 194,226

Illinois (5.3%)
Chicago Unlimited General Obligation
Refunding Bonds Series 1996B (FGIC Insured)
01-01-00 5.00% 130,000 130,124
Chicago Unlimited Tax General Obligation
Refunding Bonds Series 1996B (FGIC Insured)
01-01-02 6.00 520,000 535,866
Dundee Township Open Space General Obligation Bonds
Series 1997 (FSA Insured)
12-01-02 4.40 250,000 248,695
Health Facility Authority Nursing Home
Refunding Revenue Bonds
Covenant Retirement Communities Series 1998
12-01-00 4.20 415,000 414,174
McDonough County Hospital District
Hospital Facility Refunding Revenue Bonds
Series 1998
07-01-01 4.35 200,000 198,154
North Chicago Unlimited General Obligation
Refunding Bonds Series 1996 (FGIC Insured)
01-01-01 4.60 200,000 200,624
State Educational Facilities Authority Revenue Bonds
Lewis University Series 1996
10-01-03 5.10 140,000 139,441
State Health Facilities Authority Hospital
Refunding Revenue Bonds Series 1996A
08-15-03 5.00 125,000 125,179
Total 1,992,257

Indiana (1.4%)
Ball State University Board of Trustees
Refunding Revenue Bonds
Student Fee Series 1999 (FGIC Insured)
07-01-04 4.00 320,000 307,651
Health Facility Finance Authority
Hospital Revenue Bonds
Jackson County Schneck Memorial Hospital
Series 1998
02-15-00 4.15 100,000 99,865
State Transportation Finance Authority Airport
Facility Lease Refunding Revenue Bonds
Series 1996A (AMBAC Insured)
11-01-03 4.50 125,000 124,818
Total 532,334

Kansas (0.5%)
State Development Finance Authority
Health Facilities Revenue Bonds Hays Medical Center
Series 1997B (MBIA Insured)
11-15-00 5.00 200,000 201,902

Louisiana (1.4%)
Jefferson Parish Home Mortgage Authority Single Family
Revenue Bonds Series 1997A
(GNMA & FNMA Insured) A.M.T.
06-01-07 4.90 230,000 225,759
State Public Facilities Authority
College Revenue Bonds Series 1997
02-01-03 5.10 100,000 101,335
State Unlimited Tax General Obligation
Refunding Bonds Series 1996A
08-01-02 6.00 200,000 207,748
Total 534,842

Maine (0.3%)
State Technical College System Certificates of Participation
Series 1997 (MBIA Insured)
01-01-02 4.80 100,000 100,666

Massachusetts (3.4%)
State Education Finance Authority
Student Loan Refunding Revenue Bonds
Issue E Series 1999A A.M.T.
07-01-05 4.10 500,000 476,360
State Health & Education Facilities Authority
Hospital Revenue Bonds
Caritas Christi Obligation Group
Series 1999A
07-01-04 5.25 500,000 496,405
State Health & Education Facilities Authority
Hospital Revenue Bonds
Milford-Whitinsville Regional Hospital
Series 1998C
07-15-01 5.00 300,000 300,396
Total 1,273,161

Michigan (5.1%)
Chippewa County Finance Authority
Hospital Refunding Revenue Bonds
Chippewa County War Memorial Hospital
Series 1997B
11-01-01 4.75 200,000 199,132
Concord Academy Certificate of Participation Series 1998
10-01-03 5.70 175,000 170,469
Countryside Charter School
Full Term Certificates of Participation
Berrien County Series 1999
04-01-04 5.70 145,000 141,301
Garden City Hospital Finance Authority
Hospital Revenue Bonds Series 1998
09-01-03 5.38 200,000 196,446
Livingston Developmental Agency
Certificates of Participation Series 1999
05-01-05 5.70 145,000 141,049
State Hospital Finance Authority
Refunding Revenue Bonds
Chelsea Community Hospital
Series 1998
05-15-01 4.50 200,000 198,892
State Hospital Finance Authority
Revenue Bonds Series 1997
01-01-00 5.60 135,000 135,085
Summit Academy Certificates of Participation
Junior High School Facility Series 1999
09-01-04 5.70 260,000 252,509
Summit Academy Certificates of Participation Series 1998
09-01-04 5.70 500,000 485,595
Total 1,920,478

Minnesota (3.4%)
Crow Finance Authority Tribal Purpose
Revenue Bonds Series 1998
10-01-02 5.00 315,000 315,721
Hastings Healthcare Tax-Exempt Nursing Home
Revenue Bonds Regina Medical Center (ACA Insured)
09-15-03 4.30 285,000 276,618
Minneapolis Community Development Agency Limited Tax Supported Development
Revenue Common Fund Bonds Series 1997 A.M.T.
06-01-00 5.10 215,000 215,991
State Higher Education Facilities Authority
Mortgage Revenue Bonds
Augsburg College Series 1999 4-Y
10-01-04 4.40 250,000 242,943
10-01-05 4.40 250,000 240,100
Total 1,291,373

Mississippi (0.8%)
Jackson Airport Authority Revenue Bonds
(AMBAC Insured) A.M.T.
12-01-01 6.25 135,000 139,455
12-01-02 6.25 145,000 151,474
Total 290,929

Missouri (1.3%)
Kansas City Water Revenue Bonds Series 1996B
12-01-99 5.75 100,000 100,006
State Health & Educational Facilities Authority
Hospital Revenue Bonds Series 1993A
05-15-02 4.50 125,000 124,911
West Plains Industrial Development Authority
Hospital Revenue Bonds Ozarks Medical Center
11-15-01 4.60 290,000 285,519
Total 510,436

Nevada (0.3%)
Washoe County Limited General Obligation
Refunding Bonds Series 1993B (AMBAC Insured)
09-01-00 4.80 100,000 100,628

New Hampshire (0.3%)
State Business Finance Authority Resource
Recovery Revenue Bonds (MBIA Insured)
07-01-01 4.65 100,000 100,436

New Mexico (3.4%)
Sandoval County Multi-family Housing
Refunding Revenue Bonds Meadowlark Apartments
Series 1998B A.M.T.
07-01-01 6.38 600,000 595,518
Santa Fe County Lifecare Revenue Bonds
El Castillo Retirement Series 1998A
05-15-04 5.00 200,000 194,864
Santa Fe Educational Facilities College
Improvement Refunding Revenue Bonds Series 1997
10-01-03 5.20 235,000 235,808
10-01-04 5.30 245,000 245,581
Total 1,271,771

New York (6.3%)
New York City Unlimited General Obligation Bonds
Series 1997G
10-15-00 5.00 100,000 100,910
08-01-02 5.00 300,000 299,979
10-15-02 5.00 200,000 202,961
New York City Unlimited Tax
General Obligation Bonds Series 1999F
08-01-04 4.00 500,000 476,975
State Dormitory Authority Federal Housing
Authority Insured Hospital Revenue Bonds
Series 1996 (AMBAC Insured)
02-01-01 5.00 125,000 125,918
State Dormitory Authority Health Care Revenue Bonds
Mental Health Services Facilities Series 1997B
08-15-02 5.00 500,000 504,244
State Environmental Facilities Corporation
Special Obligation Lease Refunding Revenue Bonds
Series 1996 (AMBAC Insured)
04-01-01 4.60 200,000 200,890
State Mortgage Agency Single Family Housing
Revenue Bonds Series 1998 A.M.T.
04-01-01 4.15 500,000 498,575
Total 2,410,452

North Carolina (0.3%)
Union City Unlimited General Obligation Bonds
Series 1996B (MBIA Insured)
05-01-01 5.25 100,000 101,456

North Dakota (1.5%)
State Housing Finance Agency Home Mortgage Finance
Revenue Bonds Single Family Housing
Series 1998A A.M.T.
01-01-01 4.20 195,000 194,025
07-01-01 4.20 270,000 268,056
Ward County Health Care Facilities
Revenue Bonds Series 1996A
07-01-03 5.40 100,000 100,860
Total 562,941

Ohio (5.3%)
Akron Bath Copley Joint Township Hospital District
Revenue Bonds Summa Hospital
Series 1998A
11-15-03 4.50 500,000 481,815
Carroll Water & Sewer District
Unlimited Tax General Obligation Bonds
12-01-10 6.25 235,000 235,432
Cleveland Cuyahoga County Port Authority
Refunding Revenue Bonds
Sub Rock & Roll Hall of Fame
12-01-02 5.10 300,000 301,026
Portage County Hospital Revenue Bonds
Robinson Memorial Hospital (AMBAC Insured)
11-15-04 4.75 500,000 500,865
Sandusky County Hospital Facilities Refunding
Revenue Bonds Memorial Hospital
01-01-00 4.40 500,000 499,869
Total 2,019,007

Oklahoma (0.7%)
Enid Municipal Authority Sales Tax & Utility
Refunding Revenue Bonds
Series 1996 (AMBAC Insured)
02-01-00 4.50 250,000 250,225

Oregon (2.6%)
State Department of Administrative Services
Lottery Revenue Bonds Series B (FSA Insured)
04-01-03 4.40 1,000,000 996,330

Pennsylvania (4.8%)
Clarion County Hospital Authority
Hospital Refunding Revenue Bonds
Clarion Hospital Series 1997
07-01-00 4.60 200,000 199,736
07-01-01 4.75 200,000 198,914
Commonwealth of Pennsylvania Unlimited General
Obligation Bonds 3rd Series 1993
09-01-00 4.50 150,000 150,620
Cumberland County Municipal Authority
Nursing Home Revenue Bonds Series 1996
12-01-03 5.35 125,000 125,371
Delaware County Industrial Development Authority
Pollution Control Refunding Revenue Bonds Series 1997A
01-01-01 5.30 500,000 498,465
New Wilmington Municipal Authority
College Revenue Bonds
Westminster College Series 1998
03-01-00 4.30 190,000 189,985
State Higher Educational Facilities Authority
Revenue Bonds UPMC Health System
Series 1999A
08-01-05 4.05 500,000 470,500
Total 1,833,591

Rhode Island (0.5%)
State Refunding Certificates of Participation
Series 1997 (MBIA Insured)
10-01-02 4.70 200,000 200,964

South Dakota (0.9%)
Sioux Falls Health Facilities
Hospital Revenue Bonds
Evangelical Lutheran Good Samaritan Society
Series 1998B (AMBAC Insured)
06-01-01 4.45 200,000 199,856
Sioux Falls Sales Tax Revenue Bonds
Series 1996A (AMBAC Insured)
11-15-04 5.00 150,000 152,232
Total 352,088

Tennessee (1.3%)
Knox County Unlimited Tax General
Obligation Bonds Series 1997
02-01-03 4.45 500,000 499,330

Texas (5.9%)
Denison Hospital Authority Revenue Bonds Series 1997
08-15-02 5.45 255,000 255,161
Harris County Municipal Utilities District 196
Water & Sewer Revenue Bonds Series 1998
09-01-03 4.40 140,000 136,896
09-01-04 4.50 155,000 150,471
Harris County Municipal Utilities District 230
Unlimited Tax General Obligation Bonds
Series 1999
09-01-03 4.20 140,000 136,006
09-01-04 4.30 150,000 144,443
09-01-05 4.40 160,000 152,744
Houston Water & Sewer System Junior Lien
Refunding Revenue Bonds Series 1992C (MBIA Insured)
12-01-99 5.10 100,000 100,004
Houston Water & Sewer System Prior Lien
Refunding Revenue Bonds Series 1992B (MBIA Insured)
12-01-02 5.75 500,000 518,254
Houston Water & Sewer System Refunding Revenue Bonds
Series 1992B
12-01-99 5.25 250,000 250,010
Hutto Independent School District Unlimited Tax
School Building & Refunding Bonds
Series 1997 (Permanent School Fund Guarantee)
02-01-00 4.40 100,000 100,076
Webb County Certificates of Participation
Series 1997A (Asset Guaranty)
10-01-00 4.45 300,000 300,717
Total 2,244,782

Utah (1.7%)
Granger & Hunter Improvement District
Water & Sewer Refunding Revenue Bonds
Series 1998 (FSA Insured)
03-01-00 4.00 300,000 300,024
Salt Lake City College Revenue Bonds
Westminster College Series 1997
10-01-00 4.50 185,000 185,050
Salt Lake City School District Unlimited General
Obligation Bonds Series 1995A
03-01-01 5.25 150,000 151,923
Total 636,997

Virginia (0.3%)
Chesapeake Individual Development Authority
Public Facility Lease Revenue Bonds
Series 1996 (MBIA Insured)
06-01-03 4.80 100,000 100,801

Washington (3.1%)
Spokane County Airport Revenue Bonds
Passenger Facilities Charge
Series 1999A (AMBAC Insured)
10-01-04 4.00 500,000 479,350
State Higher Education Facilities Authority
Refunding Revenue Bonds
University of Puget Sound
10-01-01 5.00 200,000 201,538
State Housing Finance Commission
Single Family Program Bonds
(FNMA Insured) A.M.T.
06-01-01 4.35 205,000 203,415
State Public Power Supply System Nuclear Project 3
Refunding Revenue Bonds Series 1993B
07-01-02 5.15 300,000 304,407
Total 1,188,710

West Virginia (0.3%)
State Facility Authority Community Building
Series 1997A (MBIA Insured)
07-01-02 5.00 100,000 101,375

Wisconsin (1.5%)
State Health & Educational Facilities Authority
College Revenue Bonds
Carroll College Series 1998
10-01-00 4.30 200,000 199,892
State Health & Educational Facilities Authority
Nursing Home Revenue Bonds
St. John's Home of Milwaukee & Sunrise Care Center
Series 1997
12-15-01 4.70 100,000 99,522
State Health & Educational Facilities Authority
Revenue Bonds Meriter Hospital Series 1996
12-01-99 4.65 100,000 100,002
State Health & Educational Facilities Authority
Revenue Bonds Series 1996 (MBIA Insured)
12-01-04 4.75 150,000 150,066
Total 549,482

Wyoming (0.5%)
Teton County School District 1 Public Facilities
Joint Powers
06-01-01 4.20 200,000 199,424

Total municipal bonds
(Cost: $31,865,183) $31,600,199

Municipal notes (18.0%)
Issuer(c,d) Effective Amount Value(a)
yield payable at
maturity

Clark County Cogeneration Revenue Bonds
Nevada Power A.M.T.
11-01-20 3.75% $300,000 $300,000
Cohasset Minnesota Revenue Bonds
(Minnesota Power & Light)
06-01-13 3.70 100,000 100,000
06-01-13 3.70 200,000 200,000
Louisville & Jefferson County
Kyregl Airport Authority Revenue Bonds
Series B V.R.
01-01-29 3.75 1,100,000 1,100,000
Massachusetts State Health & Educational Facility
Capital Assets V.R.
01-01-35 3.60 700,000 700,000
New York City General Obligation Bonds
08-15-05 3.65 100,000 100,000
New York City General Obligation Bonds
Series 1995B V.R.
08-15-22 3.65 200,000 200,000
New York City Series 1994B2
08-15-09 3.65 1,200,000 1,200,000
08-15-11 3.65 100,000 100,000
New York City Transit Finance Authority
Series C V.R.
05-01-28 3.60 1,200,000 1,200,000
Ohio State Air Quality Development Cincinnati Gas &
Electric Series 1995A V.R.
09-01-30 3.60 200,000 200,000
Uinta County Wyoming Pollution Control
Revenue Bonds (Chevron) Series 1993 V.R.
07-01-26 3.60 600,000 600,000
University of Michigan Hospital Refunding
Revenue Bonds Series 1992A V.R.
12-01-19 3.65 300,000 300,000
University of Michigan Hospital Refunding
Revenue Bonds Series 1995A V.R.
12-01-27 3.65 300,000 300,000
Valdez Alaska Marine Terminal
(Exxon Pipeline) Series 1985 V.R.
10-01-25 3.60 200,000 200,000

Total municipal notes
(Cost: $6,800,000) $6,800,000

Total investments in securities
(Cost: $38,665,183)(e) $38,400,199

See accompanying notes to investments in securities.

</TABLE>
<PAGE>

Notes to investments in securities

(a) Securities are valued by procedures described in Note 1 to the financial
statements.

(b) The following abbreviations may be used in portfolio descriptions to
identify the insurer of the issue:

ACA -- ACA Financial Guaranty Corporation
AMBAC -- American Municipal Bond Association Corporation
BIG -- Bond Investors Guarantee
CGIC -- Capital Guaranty Insurance Company
FGIC -- Financial Guarantee Insurance Corporation
FHA -- Federal Housing Authority
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
MBIA -- Municipal Bond Investors Assurance

A.M.T. -- Alternative Minimum Tax-- As of Nov. 30, 1999, the value of
securities subject to alternative minimum tax represented
13.90% of net assets.
B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note

(d) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on Nov. 30,
1999.

(e) At Nov. 30, 1999, the cost of securities for federal income tax purposes was
$38,665,183 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:

Unrealized appreciation $72,030
Unrealized depreciation (337,014)
--------
Net unrealized depreciation $(264,984)

<PAGE>
Independent Auditors' Report

THE BOARD AND SHAREHOLDERS
AXP TAX-EXEMPT SERIES, INC.

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Tax-Exempt Bond Fund, (a
series of AXP Tax-Exempt Series, Inc.) as of November 30, 1999, and the related
statement of operations for the year then ended and the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period ended
November 30, 1999. These financial statements and the financial highlights are
the responsibility of fund management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1999, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AXP Tax-Exempt Bond Fund as of
November 30, 1999, and the results of its operations, changes in its net assets
and the financial highlights for the periods stated in the first paragraph
above, in conformity with generally accepted accounting principles.

/s/KPMG LLP
KPMG LLP
Minneapolis, Minnesota
January 7, 2000
<PAGE>
<TABLE>
<CAPTION>

Financial Statements

Statement of assets and liabilities
AXP Tax-Exempt Bond Fund

Nov. 30, 1999

Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $851,112,130) $902,300,776
Cash in bank on demand deposit 213,955
Accrued interest receivable 14,733,140
Receivable for investment securities sold 689,241
-------
Total assets 917,937,112
-----------

Liabilities
Dividends payable to shareholders 915,744
Accrued investment management services fee 11,355
Accrued distribution fee 7,117
Accrued transfer agency fee 1,336
Accrued administrative services fee 1,009
Other accrued expenses 23,956
------
Total liabilities 960,517
-------
Net assets applicable to outstanding capital stock $916,976,595
============

Represented by
Capital stock-- $.01 par value (Note 1) $ 2,390,756
Additional paid-in capital 895,798,129
Undistributed net investment income 43,923
Accumulated net realized gain (loss) (Note 5) (32,444,859)
Unrealized appreciation (depreciation) on investments 51,188,646
----------
Total-- representing net assets applicable to outstanding capital stock $916,976,595
============
Net assets applicable to outstanding shares: Class A $877,312,368
Class B $ 39,461,183
Class Y $ 203,044
Net asset value per share of outstanding capital stock: Class A shares 228,735,781 $ 3.84
Class B shares 10,286,812 $ 3.84
Class Y shares 52,969 $ 3.83

See accompanying notes to financial statements.
</TABLE>

Statement of operations
AXP Tax-Exempt Bond Fund

Year ended Nov. 30, 1999

Investment income
Income:
<S> <C>
Interest $ 58,237,629
------------
Expenses (Note 2):
Investment management services fee 4,412,804
Distribution fee
Class A 942,729
Class B 337,929
Transfer agency fee 438,642
Incremental transfer agency fee
Class A 48,097
Class B 4,889
Service fee
Class A 965,289
Class B 39,617
Class Y 142
Administrative services fees and expenses 408,460
Compensation of board members 10,993
Custodian fees 56,872
Printing and postage 100,313
Registration fees 33,803
Audit fees 35,500
Other 2,581
-----
Total expenses 7,838,660
Earnings credits on cash balances (Note 2) (39,705)
-------
Total net expenses 7,798,955
---------
Investment income (loss) -- net 50,438,674
----------

Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) (779,509)
Financial futures contracts 149,200
-------
Net realized gain (loss) on investments (630,309)
Net change in unrealized appreciation (depreciation) on investments (82,776,271)
-----------
Net gain (loss) on investments (83,406,580)
-----------
Net increase (decrease) in net assets resulting from operations $(32,967,906)
============

See accompanying notes to financial statements.
</TABLE>

Statements of changes in net assets
AXP Tax-Exempt Bond Fund

Year ended Nov. 30, 1999 1998
Operations and distributions

<S> <C> <C>
Investment income (loss)-- net $ 50,438,674 $ 50,641,914
Net realized gain (loss) on investments (630,309) 4,029,875
Net change in unrealized appreciation (depreciation) on investments (82,776,271) 14,379,392
----------- ----------
Net increase (decrease) in net assets resulting from operations (32,967,906) 69,051,181
----------- ----------
Distributions to shareholders from:
Net investment income
Class A (48,693,601) (49,578,026)
Class B (1,749,233) (1,248,165)
Class Y (7,601) (547)
------ ----
Total distributions (50,450,435) (50,826,738)
----------- -----------

Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 77,321,566 66,212,026
Class B shares 15,967,680 13,408,510
Class Y shares 200,000 --
Reinvestment of distributions at net asset value
Class A shares 33,181,878 33,468,237
Class B shares 1,454,096 1,034,720
Class Y shares 7,401 547
Payments for redemptions
Class A shares (137,095,959) (131,187,960)
Class B shares (Note 2) (9,400,364) (4,607,635)
---------- ----------
Increase (decrease) in net assets from capital share transactions (18,363,702) (21,671,555)
----------- -----------
Total increase (decrease) in net assets (101,782,043) (3,447,112)
Net assets at beginning of year 1,018,758,638 1,022,205,750
------------- -------------
Net assets at end of year $ 916,976,595 $1,018,758,638
============== ==============
Undistributed net investment income $ 43,923 $ 54,104
-------------- --------------

See accompanying notes to financial statements.

</TABLE>
<PAGE>

Notes to Financial Statements

AXP Tax-Exempt Bond Fund

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AXP Tax-Exempt Bond Fund (a series of AXP Tax-Exempt Series, Inc.) is registered
under the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Tax-Exempt Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests primarily in
investment-grade bonds and other debt obligations whose interest is exempt from
federal income tax.

The Fund offers Class A, Class B and Class Y shares.

The Fund's significant accounting policies are summarized below:

Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Fund may buy and sell put and call options
and write covered call options on portfolio securities as well as write
cash-secured put options. The risk in writing a call option is that the Fund
gives up the opportunity for profit if the market price of the security
increases. The risk in writing a put option is that the Fund may incur a loss if
the market price of the security decreases and the option is exercised. The risk
in buying an option is that the Fund pays a premium whether or not the option is
exercised. The Fund also has the additional risk of being unable to enter into a
closing transaction if a liquid secondary market does not exist. The Fund may
write over-the-counter options where completing the obligation depends upon the
credit standing of the other party.

On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $1,580
and accumulated net realized loss has been increased by $1,580.

Other
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including level-yield amortization of premium and
discount, is accrued daily.

2. EXPENSES AND SALES CHARGES
The Fund has an agreement with American Express Financial Corporation (AEFC) to
manage its portfolio and provide administrative services. Under an Investment
Management Services Agreement, AEFC determines which securities will be
purchased, held or sold. The management fee is a percentage of the Fund's
average daily net assets in reducing percentages from 0.45% to 0.35% annually.

o Class A $19.50
o Class B $20.50
o Class Y $17.50

Sales charges received by the Distributor for distributing Fund shares were
$1,203,198 for Class A and $75,596 for Class B for the year ended Nov. 30, 1999.

During the year ended Nov. 30, 1999, the Fund's custodian and transfer agency
fees were reduced by $39,705 as a result of earnings credits from overnight cash
balances.

3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $427,101,791 and $470,927,926, respectively, for the
year ended Nov. 30, 1999. Realized gains and losses are determined on an
identified cost basis.

4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:

Year ended Nov. 30, 1999
Class A Class B Class Y
<S> <C> <C> <C>
Sold 19,188,962 3,915,484 48,438
Issued for reinvested distributions 8,246,331 362,034 1,871
Redeemed (34,114,242) (2,338,072) --
----------- ---------- -----
Net increase (decrease) (6,678,949) 1,939,446 50,309

Year ended Nov. 30, 1998
Class A Class B Class Y
Sold 15,936,719 3,225,410 --
Issued for reinvested distributions 8,065,228 249,252 130
Redeemed (31,574,929) (1,109,858) --
----------- ---------- ----
Net increase (decrease) (7,572,982) 2,364,804 130

</TABLE>

<PAGE>

5. CAPITAL LOSS CARRYOVER

For federal income tax purposes, the Fund has a capital loss carryover of
$18,682,892 as of Nov. 30, 1999 that will expire in 2002 through 2007 if not
offset by subsequent capital gains. It is unlikely the board will authorize a
distribution of any realized capital gains until the available capital loss
carryover has been offset or expires.

7. FINANCIAL HIGHLIGHTS
"Financial highlights" showing per share data and selected financial information
is presented on pages 27 and 28 of the prospectus.
<PAGE>
<TABLE>
<CAPTION>

Investments in Securities

AXP Tax-Exempt Bond Fund
Nov. 30, 1999

(Percentages represent value of investments compared to net assets)

Municipal bonds (94.9%)
Name of issuer and Coupon Principal Value(a)
title of issue(c) rate amount

Alaska (0.6%)
North Slope Borough General Obligation Bonds
Zero Coupon Series 1994B (CGIC Insured)
<S> <C> <C> <C> <C> <C>
06-30-04 7.05% $3,000,000(b) $2,397,660
06-30-05 7.15 3,000,000(b) 2,270,850
State Housing Finance Veterans Mortgage
Corporation Collateralized Bonds Series 1990
(GNMA/FNMA Insured)
12-01-30 7.50 470,000 478,789
Total 5,147,299

Arizona (4.4%)
Maricopa County Industrial Development Authority
Multi-family Housing Revenue Bonds Series 1996A
07-01-26 6.63 2,500,000 2,695,675
Phoenix Industrial Development Authority Refunding
Revenue Bonds Christian Care Apartments
01-01-16 6.25 2,000,000 1,918,700
Phoenix Industrial Development Authority Single
Family Mortgage Revenue Capital Appreciation Bonds
Zero Coupon Escrowed to Maturity
12-01-14 6.69 39,000,000(b) 16,491,930
Phoenix Junior Lien Street & Highway User
Refunding Revenue Bonds Series 1992
07-01-11 6.25 10,350,000 10,914,282
Tucson Street & Highway User Pre-refunded
Revenue Bonds Series 1991B
07-01-10 6.25 8,250,000 8,438,183
Total 40,458,770

California (8.3%)
Anaheim Public Finance Authority Capital
Appreciation Improvement Revenue Bonds
Zero Coupon Series 1997C (FSA Insured)
09-01-17 5.72 9,195,000(b) 3,252,731
Bakersfield Certificates of Participation
Zero Coupon Escrowed to Maturity
04-15-21 5.25 10,500,000(b) 2,731,365
Foothill/Eastern Transportation Corridor Agency
Toll Road Revenue Bonds Series 1995A (MBIA Insured)
01-01-35 5.00 12,000,000 10,200,000
Infrastructure & Economic Development Bank
Revenue Bonds American Center for Wine,
Foods & Arts (ACA Insured)
12-01-29 5.80 2,000,000 1,894,220
Los Angeles County Pre-refunded Certificates of
Participation
05-01-15 6.71 3,600,000 3,788,892
Los Angeles International Airport Regional Airports
Improvement Corporation Refunding
Revenue Bonds Delta Airlines
11-01-25 6.35 5,000,000 4,958,850
Orange County Certificates of Participation
Civic Center Facility Capital Appreciation
Refunding Bonds Zero Coupon (AMBAC Insured)
12-01-18 6.97 13,795,000(b) 4,469,304
Sacramento Cogeneration Authority
Pre-refunded Revenue Bonds Procter & Gamble Series 1995
07-01-14 6.50 5,000,000 5,538,000
San Jose Redevelopment Agency Merged Area
Redevelopment Tax Allocation Bonds
Series 1993 (MBIA Insured)
08-01-24 4.75 9,000,000 7,560,450
Southern California Public Power Authority Revenue
Bonds Mead Adelanto Series 1994A
(AMBAC Insured)
07-01-20 4.88 6,590,000 5,748,062
State Public Works Board California Community
Colleges Lease Pre-refunded Revenue Bonds
Series 1994B
03-01-19 7.00 3,900,000 4,347,408
State Public Works Board University of California
Lease Refunding Revenue Bonds
Series 1993A (AMBAC Insured)
06-01-14 5.50 7,275,000 7,354,807
06-01-23 5.00 6,000,000 5,235,600
Ukiah Unified School District
Mendocino County Certificates of Participation
Series 1993
09-01-10 6.00 3,790,000 3,943,343
West Covina Redevelopment Agency Community
Facilities District Special Tax Refunding Bonds
Series 1996
09-01-17 6.00 5,000,000 5,093,000
Total 76,116,032

Colorado (2.6%)
Arapahoe County Public Highway Authority Capital
Improvement Trust Fund E-470 Highway
Pre-refunded Revenue Bonds
08-31-26 7.00 5,685,000 6,457,876
Castle Rock Ranch Public Facility Improvement
Revenue Bonds Series 1996
12-01-11 6.38 5,750,000 6,033,015
Edgewater Redevelopment Authority
Tax Increment Refunding Revenue Bonds
Edgewater Redevelopment Series 1999
12-01-08 5.50 3,620,000 3,397,298
State Health Facilities Authority Hospital
Improvement Refunding Revenue Bonds
Parkview Episcopal Medical Center Series 1995
09-01-16 6.00 4,000,000 3,795,240
State Health Facilities Authority Retirement Facilities
Revenue Bonds Liberty Heights Zero Coupon
Escrowed to Maturity
07-15-22 5.54 4,925,000(b) 1,171,214
Trailmark Metropolitan District Limited General
Obligation Bonds Series 1999A
12-01-18 5.80 3,500,000 3,209,885
Total 24,064,528

Connecticut (0.9%)
State General Obligation Bonds Series 1992A
03-15-06 6.40 8,000,000 8,461,200

District of Columbia (2.5%)
District General Obligation Bonds Zero Coupon
Series 1994B (MBIA Insured)
06-01-13 6.63 23,945,000(b) 11,137,298
06-01-14 6.64 26,415,000(b) 11,446,677
Total 22,583,975

Florida (2.7%)
Duvall County Housing Authority Single Family
Mortgage Refunding Revenue Bonds
Series 1991 (FGIC Insured)
07-01-24 7.35 3,235,000 3,355,439
Hillsborough County Industrial Development
Authority Health Facilities Revenue Bonds
University Community Hospital Series 1999A
08-15-23 5.63 1,000,000 875,750
Jacksonville Excise Tax Refunding Revenue
Bonds Series 1992 (AMBAC Insured)
10-01-08 6.50 5,000,000 5,344,300
Lee County Industrial Development Authority
Health Care Facilities Refunding Revenue Bonds Alliance
Retirement Community Series 1999C
11-15-29 5.50 4,000,000 3,309,800
State Board of Education Administration Capital
Outlay Public Education Pre-refunded Bonds
Series 1991C
06-01-08 6.50 5,025,000 5,320,018
06-01-09 6.50 6,200,000 6,564,002
Total 24,769,309

Georgia (3.1%)
Americus-Sumter County Hospital Authority
Refunding Revenue Bonds South Georgia
Methodist Home for the Aging Obligated Group
Magnolia Manor Series 1999
05-15-19 6.25 2,000,000 1,817,200
Atlanta Water & Wastewater Refunding Revenue
Bonds Series 1999A (FGIC Insured)
11-01-38 5.00 5,000,000 4,178,700
Municipal Electric Authority Special Obligation
Bonds Project 1 4th Crossover Series 1997X
(Secondary MBIA Insured)
01-01-20 6.50 19,550,000 21,062,779
Richmond County Development Authority
Revenue Bonds Zero Coupon
Escrowed to Maturity
12-01-21 5.74 7,880,000(b) 1,752,591
Total 28,811,270

Hawaii (0.7%)
Honolulu City & County General
Obligation Bonds Series 1992A
03-01-06 6.30 5,880,000 6,224,156

Idaho (0.4%)
State Health Facilities Authority Revenue Bonds
Bannock Regional Medical Center Series 1995
05-01-17 6.38 1,450,000 1,434,137
05-01-25 6.13 2,250,000 2,130,908
Total 3,565,045

Illinois (10.8%)
Alton Madison County Hospital Facilities
Refunding Revenue Bonds
St. Anthony's Health Center Series 1996
09-01-10 6.00 2,975,000 2,846,450
09-01-14 6.00 1,765,000 1,655,623
Chicago Capital Appreciation Unlimited General
Obligation Bonds City Colleges Zero Coupon
(FGIC Insured)
01-01-15 5.90 20,000,000(b) 8,258,200
Chicago Limited General Obligation Refunding Bonds
Series 1999A (FGIC Insured)
01-01-29 5.13 9,000,000 7,801,650
Chicago Public Building Commission Building
Revenue Bonds Chicago Board of Education
Series 1990A Escrowed to Maturity
(MBIA Insured)
01-01-18 6.50 23,500,000 23,549,585
Cook & Will Counties Township High School
District 206 Capital Appreciation Bonds
Zero Coupon Series 1994C (AMBAC Insured)
12-01-10 6.55 2,605,000(b) 1,441,685
Cook County Unlimited General Obligation Bonds
Capital Improvement Series 1999A (FGIC Insured)
11-15-28 5.00 10,000,000 8,502,200
Cook County School District 170 Chicago Heights
Pre-refunded Capital Appreciation Bonds
Zero Coupon Series 1994C (AMBAC Insured)
12-01-09 6.50 2,155,000(b) 1,270,825
12-01-10 6.55 2,155,000(b) 1,192,642
Metropolitan Pier & Exposition Authority
Dedicated State Tax Capital Appreciation
Refunding Revenue Bonds McCormick Place
Expansion Zero Coupon Series 1993A
(FGIC Insured)
06-15-10 6.64 11,000,000(b) 6,202,240
06-15-16 6.80 9,000,000(b) 3,368,610
06-15-21 6.54 5,000,000(b) 1,336,350
Metropolitan Pier & Exposition Authority
Dedicated State Tax Capital Appreciation
Refunding Revenue Bonds McCormick Place
Expansion Zero Coupon Series 1994
(MBIA Insured)
06-15-20 5.70 3,070,000(b) 875,840
State Development Finance Authority Pollution Control
Refunding Revenue Bonds Illinois Power
Series 1991A
07-01-21 7.38 10,000,000 10,831,100
State Development Finance Authority Regency Park
Retirement Housing Revenue Bonds Zero Coupon
Series 1991B Escrowed to Maturity
07-15-25 6.50 10,000,000 1,833,800
State Development Finance Authority Retirement Housing
Revenue Bonds Zero Coupon Escrowed to Maturity
04-15-20 7.75 13,745,000(b) 3,567,927
State Educational Facilities Authority Pre-refunded
Revenue Bonds Columbia College
12-01-17 6.88 1,930,000 2,110,725
State Educational Facilities Authority Revenue Bonds
Columbia College
12-01-18 6.13 3,015,000 2,883,154
State Educational Facilities Authority Revenue Bonds
Lewis University Series 1996
10-01-16 6.10 2,005,000 1,932,960
State Educational Facilities Authority Unrefunded
Revenue Bonds Columbia College
12-01-17 6.88 830,000 865,350
State Health Facilities Authority Refunding Revenue Bonds
Edwards Hospital Series 1993A
02-15-19 6.00 3,055,000 2,933,686
State Health Facilities Authority Refunding Revenue Bonds
Masonic Medical Center Series 1993
10-01-19 5.50 5,000,000 4,461,900
Total 99,722,502

Indiana (1.6%)
Seymour Economic Development Revenue Bonds
Union Camp Series 1992
07-01-12 6.25 2,870,000 3,074,287
State Transportation Finance Authority Highway
Revenue Bonds Series 1990A
06-01-15 7.25 10,000,000 11,690,800
Total 14,765,087

Iowa (0.3%)
State Finance Authority Single Family
Mortgage-backed Securities Program Bonds
Series 1991A
07-01-16 7.25 2,295,000 2,363,827

Kentucky (0.8%)
Muhlenberg County Hospital Refunding Revenue Bonds
Muhlenberg Community Hospital Series 1996
07-01-10 6.75 3,600,000 3,535,560
Owensboro Electric Light & Power
Refunding Revenue Bonds
Zero Coupon Series 1991B (AMBAC Insured)
01-01-15 6.65 9,125,000(b) 3,795,453
Total 7,331,013

Louisiana (2.3%)
Bastrop Industrial Development Board
Pollution Control Refunding Revenue Bonds
International Paper Series 1992A
03-01-07 6.90 6,875,000 7,215,931
New Orleans Capital Appreciation General Obligation
Refunding Revenue Bonds Zero Coupon
(AMBAC Insured)
09-01-12 6.63 6,250,000(b) 3,086,375
New Orleans Home Mortgage Authority
Special Obligation Refunding Bonds
Series 1992 Escrowed to Maturity
01-15-11 6.25 9,000,000 9,770,580
State Public Facilities Authority Revenue Bonds
Centenary College Series 1997
02-01-17 5.90 1,000,000 1,062,210
Total 21,135,096

Maryland (2.8%)
State Community Development Administration
Department of Housing & Community
Development Single Family Program Bonds
1st Series 1991
04-01-17 7.30 10,500,000 10,781,715
State Health & Higher Education Facilities Authority
Revenue Bonds Anne Arundel Medical Center
(AMBAC Insured)
07-01-23 5.00 7,000,000 6,154,330
State Health & Higher Education Facilities Authority
Revenue Bonds Frederick Memorial Hospital
Series 1993 (FGIC Insured)
07-01-28 5.00 10,000,000 8,644,000
Total 25,580,045

Massachusetts (4.2%)
Municipal Wholesale Electric Power
Supply System Pre-refunded Revenue Bonds
Series 1992B
07-01-17 6.75 10,000,000 10,746,700
State Health & Education Facilities Authority
Pre-refunded Revenue Bonds Melrose-Wakefield
Hospital Series 1992B
07-01-16 6.38 1,430,000 1,522,006
State Health & Education Facilities Authority
Refunding Revenue Bonds Caritas Christi
Obligated Group Series 1999A
07-01-15 5.70 3,000,000 2,696,280
State Health & Education Facilities Authority
Revenue Bonds Valley Regional Health System
Series 1994C (Connie Lee Insured)
07-01-18 5.75 3,500,000 3,406,375
State Turnpike Authority Metro Highway System
Revenue Bonds Series 1999A (AMBAC Insured)
01-01-39 5.00 14,530,000 12,103,636
Water Resource Authority General
Revenue Bonds Series 1998A
(FSA Insured)
08-01-37 4.75 10,000,000 7,911,700
Total 38,386,697

Michigan (3.2%)
Battle Creek Calhoun County Downtown
Development Authority Pre-refunded Bonds
Series 1994
05-01-22 7.65 3,750,000 4,239,675
Detroit Downtown Development Authority
Development Area Project 1 Junior Lien
Tax Increment Refunding Bonds Series 1996D
07-01-25 6.50 6,000,000 6,621,779
Detroit Water Supply System Refunding
Revenue Bonds Series 1992 (FGIC Insured)
07-01-07 6.25 2,000,000 2,111,040
Marion County Independent Convention & Recreational
Facilities Authority Excise Tax Revenue Bonds
Series 1997A (MBIA Insured)
06-01-27 5.00 4,950,000 4,215,569
State Hospital Finance Authority Refunding Revenue
Bonds Central Michigan Community Hospital
10-01-16 6.25 2,225,000 2,230,741
State Hospital Finance Authority Refunding Revenue
Bonds Greater Detroit Sinai Hospital Series 1995
01-01-16 6.63 2,000,000 1,902,240
State Hospital Finance Authority Refunding Revenue
Bonds Presbyterian Villages Obligated Group
Series 1995
01-01-15 6.40 1,000,000 975,420
01-01-25 6.50 1,000,000 966,380
State Hospital Finance Authority Refunding Revenue
Bonds Presbyterian Villages Obligated Group
Series 1997
01-01-15 6.38 400,000 391,640
State Strategic Fund Limited Tax Obligation Refunding
Revenue Bonds Ford Motor
Series 1991A
02-01-06 7.10 5,000,000 5,572,350
Total 29,226,834

Minnesota (2.6%)
Minneapolis & St. Paul Housing & Redevelopment
Authority Health Care System Series 1990A
(MBIA Insured)
08-15-05 7.40 4,500,000 4,693,185
Rochester Health Care Facilities Revenue Bonds
Mayo Foundation Series 1992A
11-15-19 4.95 15,000,000 12,979,349
St. Paul Housing & Redevelopment Authority Health
Care Facilities Revenue Bonds Regions Hospital
Series 1998
05-15-28 5.30 4,125,000 3,361,628
Washington County Housing & Redevelopment
Authority Refunding Revenue Bonds Woodbury
Multi-family Housing Series 1996
12-01-23 6.95 2,425,000 2,383,363
Total 23,417,525

Missouri (1.4%)
St. Louis Regional Convention & Sports Complex Authority
Pre-refunded Revenue Bonds Series 1991C
08-15-21 7.90 395,000 418,977
St. Louis Regional Convention & Sports Complex Authority
Refunding Revenue Bonds Series 1991C
08-15-21 7.90 8,105,000 9,025,160
State Health & Education Facilities Authority
Revenue Bonds Park College Series 1999
06-01-19 5.88 4,000,000 3,751,000
Total 13,195,137

Nevada (0.5%)
Clark County Special Improvement District 108
Local Improvement Bonds Summerline
Series 1997
02-01-12 6.50 4,440,000 4,576,574

New Hampshire (0.1%)
State Higher Education & Health Facilities Authority
College Revenue Bonds
New Hampshire College Series 1997
01-01-27 6.38 1,000,000 963,540

New Jersey (1.8%)
State Turnpike Authority Revenue Bonds Series 1991C
01-01-05 6.50 16,000,000 16,544,320

New York (10.1%)
New York City Unlimited General Obligation
Pre-refunded Bonds Series 1992B
10-01-17 6.75 11,125,000 11,958,485
New York City Unlimited Tax General Obligation
Pre-refunded Bonds Series 1994B-1
08-15-16 7.00 8,850,000 9,802,703
New York City Unlimited General Obligation
Un-refunded Bonds Series 1992B
10-01-17 6.75 25,000 26,440
State Dormitory Authority New York City University System
Consolidated 2nd Generation Resource Revenue Bonds
Series 1994A
07-01-18 5.75 5,500,000 5,395,445
State Dormitory Authority State Courts
Facilities Lease Revenue Bonds Series 1993A
05-15-21 5.25 20,000,000 17,718,399
State Dormitory Authority State Department of
Health Refunding Revenue Bonds
07-01-20 5.50 3,060,000 2,822,636
State Medical Care Facilities Finance Agency
Mental Health Services Facilities Improvement
Refunding Revenue Bonds Series 1993F
02-15-14 5.38 7,510,000 7,147,417
State Mortgage Agency Homeowner Mortgage
Refunding Revenue Bonds Series 1991TT
04-01-15 7.50 15,945,000 16,552,983
State Urban Development Capital
Correctional Facilities Revenue Bonds
4th Series 1993
01-01-23 5.38 23,815,000 21,445,645
Total 92,870,153

North Carolina (1.9%)
Eastern Municipal Power Agency Power System
Revenue Bonds Series 1993D
01-01-16 5.60 6,500,000 5,897,125
Eastern Municipal Power Agency Power System
Revenue Bonds Series 1993G
12-01-16 5.75 12,750,000 11,750,018
Total 17,647,143

North Dakota (0.5%)
Ward County Health Care Facilities Refunding
Revenue Bonds Trinity Obligated Group
Series 1996B
07-01-21 6.25 4,365,000 4,230,165

Ohio (1.3%)
Akron Bath Copley Joint Township Hospital District
Revenue Bonds Summa Hospital Series 1998A
11-15-24 5.38 2,755,000 2,305,081
Carroll Water & Sewer District
Unlimited Tax General Obligation Bonds
12-01-10 6.25 895,000 896,647
Columbus Sewerage System
Refunding Revenue Bonds Series 1992
06-01-05 6.30 3,500,000 3,700,165
State Water & Air Quality Development Authority
Pollution Control Refunding Revenue Bonds
Cleveland Electric Illuminating Series 1995
08-01-25 7.70 300,000 322,164
State Water & Air Quality Development Authority
Pollution Control Refunding Revenue Bonds
Ohio Edison Series 1993A
05-15-29 5.95 5,000,000 4,562,050
Total 11,786,107

Oklahoma (0.4%)
Stillwater Medical Center Authority
Hospital Revenue Bonds Series 1997B
05-15-12 6.35 1,000,000 967,840
Valley View Hospital Authority
Refunding Revenue Bonds Series 1996
08-15-14 6.00 2,695,000 2,523,517
Total 3,491,357

Pennsylvania (3.5%)
Delaware County Industrial Development Authority
Pollution Control Refunding Revenue Bonds
Series 1997A
07-01-13 6.10 4,000,000 3,708,480
Philadelphia Hospital & Higher Education Facilities
Authority Hospital Revenue Bonds
Friends Hospital Series 1993
05-01-11 6.20 2,500,000 2,446,900
Philadelphia School District Unlimited General Obligation
Bonds Series 1998A (MBIA Insured)
04-01-23 4.50 4,000,000 3,204,440
Philadelphia Unlimited General Obligation Bonds
(MBIA Insured)
05-15-25 5.00 3,000,000 2,596,920
Pittsburgh & Allegheny County Public Auditorium
Hotel Room Revenue Bonds (AMBAC Insured)
02-01-29 4.50 9,500,000 7,385,965
Pittsburgh & Allegheny County Public Auditorium
Regional Asset District Sales Tax Revenue Bonds
(AMBAC Insured)
02-01-29 5.00 14,760,000 12,629,542
Total 31,972,247

Rhode Island (0.2%)
Providence Special Tax Increment Obligation Bonds
Series 1996D
06-01-16 6.65 1,500,000 1,544,085

South Carolina (0.9%)
Horry County Hospital Refunding Revenue Bonds
Conway Hospital Series 1992
07-01-12 6.75 3,665,000 3,865,695
Piedmont Municipal Power Agency Electric
Refunding Revenue Bonds Series 1998A
(MBIA Insured)
01-01-25 4.75 5,000,000 4,077,700
Total 7,943,395

South Dakota (0.3%)
State Health & Educational Facilities Authority
Refunding Revenue Bonds Prairie Lakes Healthcare
04-01-22 5.65 3,000,000 2,604,720

Tennessee (0.2%)
Nashville & Davidson Counties Health & Education
Facilities Board Revenue Bonds
Zero Coupon Escrowed to Maturity
06-01-21 5.71 7,500,000(b) 1,895,475

Texas (10.3%)
Austin Utility System Capital Appreciation
Refunding Revenue Bonds Zero Coupon
(AMBAC Insured)
11-15-10 6.51 5,055,000(b) 2,795,314
Austin Utility System Capital Appreciation
Refunding Revenue Bonds Zero Coupon
Series 1992A (MBIA Insured)
11-15-10 6.61 16,000,000(b) 8,847,680
Austin Utility System Combined Utility
Refunding Revenue Bonds
Series 1992 (AMBAC Insured)
11-15-06 6.25 10,500,000 11,148,375
Harris County Cypress-Fairbanks Independent
School District Unlimited Tax Schoolhouse Bonds
Series 1990 (FGIC Insured)
08-01-08 6.50 1,500,000 1,525,200
Harris County Health Facilities Development
Hermann Hospital Revenue Bonds (MBIA Insured)
10-01-24 6.38 8,820,000 9,538,124
Houston Water & Sewer System Junior Lien
Refunding Revenue Bonds Zero Coupon
Series 1991C (AMBAC Insured)
12-01-08 6.60 8,000,000(b) 4,982,240
Katy Independent School District Limited
General Obligation Bonds Series 1998A
(Permanent School Fund Guarantee)
02-15-27 4.75 1,500,000 1,230,915
Municipal Power Agency Capital Appreciation
Refunding Revenue Bonds
Zero Coupon (AMBAC Insured)
09-01-09 6.90 18,000,000(b) 10,704,960
Northwest Independent School District
Unlimited Tax General Obligation Capital
Appreciation Refunding Revenue Bonds Zero Coupon
Series 1997 (Permanent School Fund Guarantee)
08-15-17 6.23 3,000,000(b) 1,019,160
San Antonio Water Refunding Revenue Bonds
(FGIC Insured)
05-15-07 6.40 25,000,000 26,463,250
State Coastal Water Authority Water Conveyance
System Refunding Revenue Bonds Series 1991
Escrowed to Maturity (AMBAC Insured)
12-15-17 6.25 5,000,000 5,114,850
State Public Property Financial Corporation Lease
Revenue Bonds Mental Health Mental Retardation
Series 1996
09-01-16 6.20 2,340,000 2,252,554
Technical University Refunding Revenue Bonds
6th Series 1999 (AMBAC Insured)
02-15-29 5.00 11,500,000 9,839,170
Total 95,461,792

Vermont (0.6%)
University of Vermont & State Agricultural College
Revenue Bonds Series 1998 (MBIA Insured)
10-01-38 4.75 7,290,000 5,778,929

Virginia (0.3%)
Augusta County Industrial Development Authority
Refunding Revenue Bonds Augusta Hospital
Series 1993 (AMBAC Insured)
09-01-21 5.13 3,600,000 3,195,792

Washington (3.7%)
King County Housing Authority Pooled Housing
Refunding Revenue Bonds Series 1995A
03-01-26 6.80 2,500,000 2,571,550
King County Unlimited Tax General Obligation
Bonds Auburn School District 408
Series 1992A
12-01-06 6.38 8,000,000 8,657,920
King County Unlimited Tax General Obligation
Bonds Issaquah School District 411 Series 1992
12-01-08 6.38 16,675,000 18,119,388
State Public Power Supply System Nuclear Power
Project 3 Capital Appreciation Refunding Revenue
Bonds Zero Coupon Series 1989B (MBIA Insured)
07-01-13 6.61 10,360,000(b) 4,795,955
Total 34,144,813

West Virginia (1.5%)
Princeton Hospital Revenue Bonds
Community Hospital Association
Series 1999
05-01-29 6.10 4,000,000 3,624,480
State School Building Authority Capital Improvement
Pre-refunded Revenue Bonds Series 1990B
(MBIA Insured)
07-01-20 6.00 9,730,000 9,845,787
Total 13,470,267

Wisconsin (0.3%)
State Health & Educational Facilities Authority
Revenue Bonds Divine Savior Hospital
06-01-28 5.70 3,140,000 2,684,951

Wyoming (0.3%)
State Community Development Authority Single Family
Mortgage Bonds Series 1991B
(Federally Insured or Guaranteed Mortgage Loan)
06-01-31 7.40 2,280,000 2,369,604

Total municipal bonds
(Cost: $819,312,130) $870,500,776

</TABLE>

Municipal notes (3.5%)
Issuer(d,e) Effective Amount Value(a)
yield payable at
maturity

Farmington New Mexico Pollution Control Revenue Notes
(Arizona Public Service) Series 1994B V.R.
<S> <C> <C> <C> <C> <C>
09-01-24 3.60% $800,000 $800,000
Harris County Texas Health Facilities Development
Hospital Revenue Notes (Methodist Hospital) V.R.
12-01-25 3.80 1,200,000 1,200,000
Joliet Illinois Regional Port District Marine Terminal
Revenue Notes (Exxon) V.R.
10-01-24 3.60 1,600,000 1,600,000
Long Island New York Power Authority Electric
Revenue Notes 5th Series 1998 V.R.
05-01-33 3.60 700,000 700,000
Minneapolis & St. Paul Minnesota Housing & Redevelopment
Healthcare (Children's Hospital) Series 1995B V.R.
08-15-25 3.75 1,200,000 1,200,000
New York City Series 1994B2-B5 V.R.
08-15-11 3.65 3,400,000 3,400,000
New York City Transit Finance Authority Series C V.R.
05-01-28 3.60 2,300,000 2,300,000
Nueces River Texas Authority Pollution Control
Revenue Bonds V.R.
12-01-99 3.85 6,500,000 6,500,000
Ohio State Air Quality Development Authority
Revenue Notes (Cincinnati Gas & Electric) Series 1995A V.R.
09-01-30 3.60 1,800,000 1,800,000
Roanoke Virginia Hospital Revenue Notes
(Carilion Health Systems) Series 1997A V.R.
07-01-27 3.80 3,900,000 3,900,000
Sweetwater Wyoming Pollution Control Revenue Bonds
(Idaho Power) Series 1996C V.R.
07-15-26 3.65 3,900,000 3,900,000
University of Wisconsin Hospital & Clinics Authority
Revenue Notes V.R.
04-01-26 3.90 4,500,000 4,500,000

Total municipal notes
(Cost: $31,800,000) $31,800,000

Total investments in securities
(Cost: $851,112,130)(f) $902,300,776

</TABLE>
<PAGE>

Notes to investments in securities

(a) Securities are valued by procedures described in Note 1 to the financial
statements.

(b) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.

(d) The following abbreviations may be used in the portfolio descriptions:

B.A.N. -- Bond Anticipation Note
C.P. -- Commercial Paper
R.A.N. -- Revenue Anticipation Note
T.A.N. -- Tax Anticipation Note
T.R.A.N. -- Tax & Revenue Anticipation Note
V.R. -- Variable Rate
V.R.D.B. -- Variable Rate Demand Bond
V.R.D.N. -- Variable Rate Demand Note

(e) The Fund is entitled to receive principal amount from issuer or corporate
guarantor, if indicated in parentheses, after a day or a week's notice. The
maturity date disclosed represents the final maturity. Interest rate varies to
reflect current market conditions; rate shown is the effective rate on Nov. 30,
1999.

(f) At Nov. 30, 1999, the cost of securities for federal income tax purposes was
$851,112,130 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:

Unrealized appreciation $60,612,212
Unrealized depreciation (9,423,566)
Net unrealized appreciation $51,188,646

<PAGE>

PART C. OTHER INFORMATION

Item 23. Exhibits.

(a) Articles of Incorporation amended October 17, 1988, filed as Exhibit 1
to Post-Effective Amendment No. 23 to this Registration Statement, are
incorporated by reference.

(b) By-Laws as amended Feb. 14, 1991, filed as Exhibit 2 to Post-Effective
Amendment No. 20 to this Registration Statement, are incorporated by
reference.

(c) Stock certificate, filed as Exhibit 4 to Registrant's Registration
Statement No. 2-57382 on September 30, 1976, is incorporated by
reference.

(d)(1) Investment Management Services Agreement between Registrant and
American Express Financial Corporation, dated March 20, 1995, filed as
Exhibit 5 to Registrant's Post-Effective Amendment No. 42 to
Registration Statement 2-57328 is incorporated by reference.

(d)(2) Investment Management Services Agreement between Registrant on behalf
of IDS Intermediate Tax-Exempt Fund and American Express Financial
Corporation, dated Nov. 13, 1996, is incorporated by reference to
Exhibit 5(a) of Registrant's Post-Effective Amendment No. 43 filed
on or about Jan. 27, 1998.

(e) Distribution Agreement, dated July 8, 1999, between AXP Utilities
Income Fund, Inc. and American Express Financial Advisors Inc. is
incorporated by reference to Exhibit (e) to AXP Utilities Income Fund,
Inc. Post-Effective Amendment No. 22 to Registration Statement File No.
33-20872 filed on or about August 27, 1999. Registrant's Distribution
Agreement differs from the one incorporated by reference only by the
fact that Registrant is one executing party.

(f) All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes
each year an amount up to 15 percent of their annual salaries, the
maximum deductible amount permitted under Section 404(a) of the
Internal Revenue Code.

(g)(1) Custodian Agreement between Registrant and First National Bank of
Minneapolis, dated August 16, 1979, filed electronically as Exhibit 8
to Registrant's Post-Effective Amendment No. 42 to Registration
Statement 2-57328 is incorporated by reference.

(g)(2) Custodian Agreement between Registrant on behalf of IDS Intermediate
Tax-Exempt Fund and First Bank National Association, dated Nov. 13,
1996, is incorporated by reference to Exhibit 8(a) of Registrant's
Post-Effective Amendment No. 43 filed on or about Jan. 27, 1998.

(h)(1) Administrative Services Agreement between Registrant and American
Express Financial Corporation dated March 20, 1995, filed
electronically as Exhibit 9(c) to Registrant's Post-Effective Amendment
No. 42 to Registration Statement 2-57328 is incorporated by reference.

(h)(2) Administrative Services Agreement between Registrant on behalf of IDS
Intermediate Tax-Exempt Fund and American Express Financial
Corporation, dated Nov. 13, 1996, is incorporated by reference to
Exhibit 9(e) of Registrant's Post-Effective Amendment No. 43 filed on
or about Jan. 27, 1998.

(h)(3) License Agreement between Registrant and IDS Financial Corporation
dated Jan. 25, 1988 is incorporated by reference to Exhibit (h)(3) to
Registrant's Post-Effective Amendment No. 44 filed on or about Nov. 24,
1998.

<PAGE>

(h)(4) License Agreement, dated June 17, 1999 between the American Express
Funds and American Express Company, filed electronically on or about
September 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s
Post-Effective Amendment No. 98 to Registration Statement no. 2-11358,
is incorporated by reference.

(h)(5) Class Y Shareholder Service Agreement between IDS Precious Metals Fund,
Inc. and American Express Financial Advisors Inc., dated May 9, 1997
filed electronically on or about May 27, 1997 as Exhibit 9(e) to IDS
Precious Metals Fund, Inc.'s Post-Effective Amendment No. 30 to
Registration Statement No. 2-93745, is incorporated by reference.
Registrant's Class Y Shareholder Service Agreement differs from the one
incorporated by reference only by the fact that Registrant is one
executing party.

(h)(6) Transfer Agency Agreement between IDS Tax-Exempt Bond Fund, Inc. on
behalf of IDS Intermediate Tax-Exempt Fund and IDS Tax-Exempt Bond Fund
and American Express Client Service Corporation, dated February 1,
1999, is filed electronically herewith.

(i) Opinion and consent of counsel as to the legality of the securities
being registered is filed electronically herewith.

(j) Independent Auditors' Consent is filed electronically herewith.

(k) Omitted Financial Statements: None.

(l) Initial Capital Agreements: Not Applicable.

(m) Plan and Agreement of Distribution dated July 1, 1999 between AXP
Discovery Fund, Inc. and American Express Financial Advisors Inc. is
incorporated by reference to Exhibit (m) to AXP Discovery Fund, Inc.
Post-Effective Amendment No. 36 to Registration Statement File No.
2-72174 filed on or about July 30, 1999. Registrant's Plan and
Agreement of Distribution differs from the one incorporated by
reference only by the fact that Registrant is one executing party.

(n) Financial Data Schedules. Not applicable.

(o) Rule 18f-3 Plan, dated April 1999, is incorporated by reference to
Exhibit (o) to IDS Precious Metals Fund, Inc. Post-Effective
Amendment No. 33 to Registration Statement No. 2-93745 filed on or
about May 24, 1999.

(p)(1) Directors' Power of Attorney to sign amendments to this Registration
Statement, dated January 13, 2000, is filed electronically herewith.

(p)(2) Officers' Power of Attorney to sign amendments to this Registration
Statement, dated January 13, 2000, is filed electronically herewith.

Item 24. Persons Controlled by or Under Common Control with Registrant:

None.

Item 25. Indemnification

The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any

<PAGE>

threatened, pending or completed action, suit or proceeding, wherever brought,
and the Fund may purchase liability insurance and advance legal expenses, all to
the fullest extent permitted by the laws of the State of Minnesota, as now
existing or hereafter amended. The By-laws of the registrant provide that
present or former directors or officers of the Fund made or threatened to be
made a party to or involved (including as a witness) in an actual or threatened
action, suit or proceeding shall be indemnified by the Fund to the full extent
authorized by the Minnesota Business Corporation Act, all as more fully set
forth in the By-laws filed as an exhibit to this registration statement.

Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.

Item 26. Business and Other Connections of Investment Adviser (American Express Financial Corporation)

Directors and officers of American Express Financial Corporation who are
directors and/or officers of one or more other companies:

- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Name and Title Other company(s) Address Title within other
company(s)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Ronald G. Abrahamson, American Express Client IDS Tower 10 Director and Vice President
Vice President Service Corporation Minneapolis, MN 55440

American Express Financial Vice President
Advisors Inc.

Public Employee Payment Director and Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Peter J. Anderson, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President

American Express Asset Director and Chairman of
Management Group Inc. the Board

American Express Asset Director, Chairman of the
Management International, Board and Executive Vice
Inc. President

American Express Financial Senior Vice President
Advisors Inc.

IDS Capital Holdings Inc. Director and President

IDS Futures Corporation Director

NCM Capital Management 2 Mutual Plaza Director
Group, Inc. 501 Willard Street
Durham, NC 27701
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Ward D. Armstrong, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

American Express Service Vice President
Corporation

American Express Trust Director and Chairman of
Company the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

John M. Baker, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

American Express Trust Senior Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Timothy V. Bechtold, American Centurion Life IDS Tower 10 Director and President
Vice President Assurance Company Minneapolis, MN 55440

American Express Financial Vice President
Advisors Inc.

IDS Life Insurance Company Executive Vice President

IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

John C. Boeder, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President
Director, Corporate Senior Advisors Inc. Minneapolis, MN 55440
Vice President

American Express Financial Director
Advisors Japan Inc.

American Express Minnesota Director
Foundation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and
Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer

American Express Financial Vice President
Advisors Inc.

American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
President and Chief Marketing
Officer

IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

James E. Choat, American Centurion Life IDS Tower 10 Executive Vice President
Director and Senior Vice Assurance Company Minneapolis, MN 55440
President

American Enterprise Life Director, President and
Insurance Company Chief Executive Officer

American Express Financial Senior Vice President
Advisors Inc.

American Express Insurance Vice President
Agency of Idaho Inc.

American Express Insurance Vice President
Agency of Nevada Inc.

American Express Insurance Vice President
Agency of Oregon Inc.

American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.

IDS Insurance Agency of Vice President
Alabama Inc.

IDS Insurance Agency of Vice President
Arkansas Inc.

IDS Insurance Agency of Vice President
Massachusetts Inc.

IDS Insurance Agency of Vice President
New Mexico Inc.

IDS Insurance Agency of Vice President
North Carolina Inc.

IDS Insurance Agency of Vice President
Ohio Inc.

IDS Insurance Agency of Vice President
Wyoming Inc.

IDS Life Insurance Company P.O. Box 5144 Executive Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President
Vice President and General Minneapolis, MN 55440
Manager

American Express Financial Vice President and General
Advisors Inc. Manager

IDS Property Casualty 1 WEG Blvd. Director and President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Paul A. Connolly, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

Colleen Curran, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel

American Express Service Vice President and Chief
Corporation Legal Counsel
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Luz Maria Davis American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Douglas K. Dunning, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President,
Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief
President, General Counsel Compliance Officer
and Chief Compliance Officer

American Express Financial Vice President and Chief
Advisors Japan Inc. Compliance Officer

American Express Insurance Director and Vice President
Agency of Arizona Inc.

American Express Insurance Director and Vice President
Agency of Idaho Inc.

American Express Insurance Director and Vice President
Agency of Nevada Inc.

American Express Insurance Director and Vice President
Agency of Oregon Inc.

American Express Property Director and Vice President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Director and Vice President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Director and Vice President
Casualty Insurance Agency
of Pennsylvania Inc.

IDS Insurance Agency of Director and Vice President
Alabama Inc.

IDS Insurance Agency of Director and Vice President
Arkansas Inc.

IDS Insurance Agency of Director and Vice President
Massachusetts Inc.

IDS Insurance Agency of Director and Vice President
New Mexico Inc.

IDS Insurance Agency of Director and Vice President
North Carolina Inc.

IDS Insurance Agency of Director and Vice President
Ohio Inc.

IDS Insurance Agency of Director and Vice President
Wyoming Inc.

IDS Real Estate Services, Vice President
Inc.

Investors Syndicate Director
Development Corp.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Gordon M. Fines, American Express Asset IDS Tower 10 Senior Vice President and
Vice President Management Group Inc. Minneapolis, MN 55440 Chief Investment Officer

American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director
Vice President Assurance Company Minneapolis, MN 55440

American Express Financial Vice President
Advisors Inc.

American Express Financial Director, President and
Advisors Japan Inc. Chief Executive Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and
Vice President and Corporate Insurance Company Minneapolis, MN 55440 Controller
Controller

American Express Financial Vice President and
Advisors Inc. Corporate Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Harvey Golub, American Express Company American Express Tower Chairman and Chief
Director World Financial Center Executive Officer
New York, NY 10285

American Express Travel Chairman and Chief
Related Services Company, Executive Officer
Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

David A. Hammer, American Express Financial IDS Tower 10 Vice President and
Vice President and Marketing Advisors Inc. Minneapolis, MN 55440 Marketing Controller
Controller

IDS Plan Services of Director and Vice President
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440

American Centurion Life Vice President
Assurance Company

American Enterprise Life Vice President
Insurance Company

American Express Financial Vice President
Advisors Inc.

American Partners Life Director and Vice
Insurance Company President

IDS Certificate Company Vice President

IDS Life Insurance Company Vice President

IDS Life Series Fund, Inc. Vice President

IDS Life Variable Annuity Vice President
Funds A and B

Investors Syndicate Director and Vice
Development Corp. President

IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205

IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Scott A. Hawkinson, American Express Financial IDS Tower 10 Vice President and
Vice President and Controller Advisors Inc. Minneapolis, MN 55440 Controller
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Janis K. Heaney, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President
Vice President Company Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President and Corporate Minneapolis, MN 55440 and Assistant Secretary
Treasurer

American Centurion Life Vice President and
Assurance Company Treasurer

American Enterprise Vice President and
Investment Services Inc. Treasurer

American Enterprise Life Vice President and
Insurance Company Treasurer

American Express Asset Vice President and
Management Group Inc. Treasurer

American Express Asset Vice President and
Management International Treasurer
Inc.

American Express Client Vice President and
Service Corporation Treasurer

American Express Vice President and
Corporation Treasurer

American Express Financial Vice President and
Advisors Inc. Treasurer

American Express Financial Vice President and
Advisors Japan Inc. Treasurer

American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer

American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer

American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer

American Express Insurance Vice President and
Agency of Oregon Inc. Treasurer

American Express Minnesota Vice President and
Foundation Treasurer

American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.

American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.

American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.

American Partners Life Vice President and
Insurance Company Treasurer

IDS Cable Corporation Director, Vice President
and Treasurer

IDS Cable II Corporation Director, Vice President
and Treasurer

IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary

IDS Certificate Company Vice President and
Treasurer

IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer

IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer

IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer

IDS Insurance Agency of Vice President and
New Mexico Inc. Treasurer

IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer

IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer

IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer

IDS Life Insurance Company Vice President, Treasurer
and Assistant Secretary

IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer

IDS Life Series Fund Inc. Vice President and
Treasurer

IDS Life Variable Annuity Vice President and
Funds A & B Treasurer

IDS Management Corporation Director, Vice President
and Treasurer

IDS Partnership Services Vice President and
Corporation Treasurer

IDS Plan Services of Vice President and
California, Inc. Treasurer

IDS Real Estate Services, Vice President and
Inc. Treasurer

IDS Realty Corporation Vice President and
Treasurer

IDS Sales Support Inc. Vice President and
Treasurer

Investors Syndicate Vice President and
Development Corp. Treasurer

IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary

Public Employee Payment Vice President and
Company Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director, President and Chief Minneapolis, MN 55440
Executive Officer

American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer

American Express Service Director and President
Corporation

IDS Certificate Company Director

IDS Life Insurance Company Director

IDS Plan Services of Director and President
California, Inc.

IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Debra A. Hutchinson American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

James M. Jensen, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Life Insurance Company Vice President

IDS Life Series Fund, Inc. Director
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Nancy E. Jones, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

American Express Service Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Ora J. Kaine, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Linda B. Keene, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and Senior Vice Minneapolis, MN 55440
President

American Centurion Life Director and Chairman of
Assurance Company the Board

American Enterprise Life Director and Chairman of
Insurance Company the Board

American Express Director and President
Corporation

American Express Financial Senior Vice President
Advisors Inc.

American Express Insurance Director and President
Agency of Arizona Inc.

American Express Insurance Director and President
Agency of Idaho Inc.

American Express Insurance Director and President
Agency of Nevada Inc.

American Express Insurance Director and President
Agency of Oregon Inc.

American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.

American Express Service Vice President
Corporation

American Partners Life Director and Chairman of
Insurance Company the Board

IDS Certificate Company Director and Chairman of
the Board

IDS Insurance Agency of Director and President
Alabama Inc.

IDS Insurance Agency of Director and President
Arkansas Inc.

IDS Insurance Agency of Director and President
Massachusetts Inc.

IDS Insurance Agency of Director and President
New Mexico Inc.

IDS Insurance Agency of Director and President
North Carolina Inc.

IDS Insurance Agency of Director and President
Ohio Inc.

IDS Insurance Agency of Director and President
Wyoming Inc.

IDS Life Insurance Company Director and President

IDS Life Series Fund, Inc. Director and President

IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President

IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115

IDS Life Insurance Company P.O. Box 5144 Director and Chairman of
of New York Albany, NY 12205 the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

John M. Knight American Express Financial IDS Tower 10 Vice President
Advisors Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Life Insurance Company Director and Executive
Vice President

IDS Life Series Fund, Inc. Vice President and Chief
Actuary

IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Claire Kolmodin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President
President

Kurt A Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Lori J. Larson, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief
Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55440 U.S. Economist
Economist
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President

American Express Trust Director
Company

IDS Plan Services of Director
California, Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Mary J. Malevich, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Fred A. Mandell, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Timothy J. Masek American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Global Research
of Global Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Sarah A. Mealey, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Vice President Insurance Company Minneapolis, MN 55440

American Express Director
Corporation

American Express Financial Vice President
Advisors Inc.

American Partners Life Director and President
Insurance Company

IDS Certificate Company Director and President

IDS Life Insurance Company Director and Executive
Vice President

Investors Syndicate Director, Chairman of the
Development Corporation Board and President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

William P. Miller, Advisory Capital IDS Tower 10 Vice President
Vice President and Senior Strategies Group Inc. Minneapolis, MN 55440
Portfolio Manager

American Express Asset Senior Vice President and
Management Group Inc. Chief Investment Officer

American Express Financial Vice President and Senior
Advisors Inc. Portfolio Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Shashank B. Modak American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Pamela J. Moret, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

American Express Trust Vice President
Company

IDS Life Insurance Company Executive Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Senior Vice Service Corporation Minneapolis, MN 55440
President

American Express Financial Senior Vice President
Advisors Inc.

IDS Life Insurance Company Director and Executive
Vice President

Mary Owens Neal, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Life Insurance Company Vice President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Carla P. Pavone, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel

IDS Cable Corporation Vice President and
Assistant Secretary

IDS Cable II Corporation Vice President and
Assistant Secretary

IDS Management Corporation Vice President and
Assistant Secretary

IDS Partnership Services Vice President and
Corporation Assistant Secretary

IDS Plan Services of Vice President and
California, Inc. Assistant Secretary

IDS Realty Corporation Vice President and
Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

James M. Punch, American Express Financial IDS Tower 10 Vice President and Project
Vice President and Project Advisors Inc. Minneapolis, MN 55440 Manager
Manager
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Senior Vice President and
Director and Senior Vice Management Group Inc. Minneapolis, MN 55440 Senior Portfolio Manager
President

American Express Financial Senior Vice President
Advisors Inc.

Rollyn C. Renstrom, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Stephen W. Roszell, Advisory Capital IDS Tower 10 Director
Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55440
President

American Express Asset Director, President and
Management Group Inc. Chief Executive Officer

American Express Asset Director
Management International,
Inc.

American Express Asset Director
Management Ltd.

American Express Financial Senior Vice President
Advisors Inc.

American Express Trust Director
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President

American Express Insurance Vice President
Agency of Idaho Inc.

American Express Insurance Vice President
Agency of Nevada Inc.

American Express Insurance Vice President
Agency of Oregon Inc.

American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.

IDS Insurance Agency of Vice President
Alabama Inc.

IDS Insurance Agency of Vice President
Arkansas Inc.

IDS Insurance Agency of Vice President
Massachusetts Inc.

IDS Insurance Agency of Vice President
New Mexico Inc.

IDS Insurance Agency of Vice President
North Carolina Inc.

IDS Insurance Agency of Vice President
Ohio Inc.

IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Theresa M. Sapp American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Director, Senior Vice Minneapolis, MN 55440
President and Chief Financial
Officer

American Enterprise Life Executive Vice President
Insurance Company

American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer

American Express Trust Director
Company

American Partners Life Director and Vice President
Insurance Agency

IDS Certificate Company Director and President

IDS Life Insurance Company Executive Vice President
and Controller

IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President
Vice President Minneapolis, MN 55440

American Express Financial Vice President
Advisors Inc.

IDS Property Casualty 1 WEG Blvd. Senior Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440

American Centurion Life Vice President
Assurance Company

American Enterprise Life Vice President
Insurance

American Express Financial Vice President
Advisors Inc.

American Partners Life Vice President
Insurance Company

IDS Certificate Company Vice President

IDS Life Insurance Company Vice President

IDS Partnership Services Director and Vice President
Corporation

IDS Real Estate Services Chairman of the Board and
Inc. President

IDS Realty Corporation Director and Vice President

IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Bridget Sperl, American Express Client IDS Tower 10 Vice President
Vice President Service Corporation Minneapolis, MN 55440

American Express Financial Vice President
Advisors Inc.

Public Employee Payment Director and President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President and Assistant Insurance Company Minneapolis, MN 55440 General Counsel and
General Counsel Secretary

American Express Director, Vice President
Corporation and Secretary

American Express Financial Vice President and
Advisors Inc. Assistant General Counsel

American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary

IDS Life Insurance Company Vice President, General
Counsel and Secretary

IDS Life Series Fund Inc. General Counsel and
Assistant Secretary

IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

James J. Strauss, American Express Financial IDS Tower 10 Vice President
Vice President and General Advisors Inc. Minneapolis, MN 55440
Auditor
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Keith N. Tufte American Express Financial IDS Tower 10 Vice President and
Vice President and Director Advisors Inc. Minneapolis, MN 55440 Director of Equity Research
of Equity Research
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President

American Express Insurance Vice President
Agency of Arizona Inc.

American Express Insurance Vice President
Agency of Idaho Inc.

American Express Insurance Vice President
Agency of Nevada Inc.

American Express Insurance Vice President
Agency of Oregon Inc.

American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.

IDS Insurance Agency of Vice President
Alabama Inc.

IDS Insurance Agency of Vice President
Arkansas Inc.

IDS Insurance Agency of Vice President
Massachusetts Inc.

IDS Insurance Agency of Vice President
New Mexico Inc.

IDS Insurance Agency of Vice President
North Carolina Inc.

IDS Insurance Agency of Vice President
Ohio Inc.

IDS Insurance Agency of Vice President
Wyoming Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Michael L. Weiner, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440

IDS Capital Holdings Inc. Vice President

IDS Futures Brokerage Group Vice President

IDS Futures Corporation Vice President, Treasurer
and Secretary

IDS Sales Support Inc. Director, Vice President
and Assistant Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Jeffry F. Welter, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and
Vice President and Assistant Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel
General Counsel

American Express Financial Vice President and Chief
Advisors Japan Inc. Legal Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President
Vice President Management Group Inc. Minneapolis, MN 55440 and Senior Portfolio
Manager

American Express Financial Vice President
Advisors Inc.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------

Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President
Director and Senior Vice Advisors Inc. Minneapolis, MN 55440
President

American Express Insurance Vice President
Agency of Idaho Inc.

American Express Insurance Vice President
Agency of Nevada Inc.

American Express Insurance Vice President
Agency of Oregon Inc.

American Express Property Vice President
Casualty Insurance Agency
of Kentucky Inc.

American Express Property Vice President
Casualty Insurance Agency
of Maryland Inc.

American Express Property Vice President
Casualty Insurance Agency
of Pennsylvania Inc.

IDS Insurance Agency of Vice President
Alabama Inc.

IDS Insurance Agency of Vice President
Arkansas Inc.

IDS Insurance Agency of Vice President
Massachusetts Inc.

IDS Insurance Agency of Vice President
New Mexico Inc.

IDS Insurance Agency of Vice President
North Carolina Inc.

IDS Insurance Agency of Vice President
Ohio Inc.

IDS Insurance Agency of Vice President
Wyoming Inc.

IDS Life Insurance Company P.O. Box 5144 Director
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
Item 27. Principal Underwriters.

(a) American Express Financial Advisors acts as principal underwriter for the
following investment companies:

AXP Bond Fund, Inc.; AXP California Tax-Exempt Trust; AXP Discovery
Fund, Inc.; AXP Equity Select Fund, Inc.; AXP Extra Income Fund, Inc.;
AXP Federal Income Fund, Inc.; AXP Global Series, Inc.; AXP Growth
Series, Inc.; AXP High Yield Tax-Exempt Fund, Inc.; AXP International
Fund, Inc.; AXP Investment Series, Inc.; AXP Managed Series, Inc.; AXP
Market Advantage Series, Inc.; AXP Money Market Series, Inc.; AXP New
Dimensions Fund, Inc.; AXP Precious Metals Fund, Inc.; AXP Progressive
Fund, Inc.; AXP Selective Fund, Inc.; AXP Special Tax-Exempt Series
Trust; AXP Stock Fund, Inc.; AXP Strategy Series, Inc.; AXP Tax-Exempt
Series, Inc.; AXP Tax-Free Money Fund, Inc.; AXP Utilities Income Fund,
Inc., Growth Trust; Growth and Income Trust; Income Trust; Tax-Free
Income Trust; World Trust; IDS Certificate Company; Strategist Income
Fund, Inc.; Strategist Growth Fund, Inc.; Strategist Growth and Income
Fund, Inc.; Strategist World Fund, Inc. and Strategist Tax-Free Income
Fund, Inc.

(b) As to each director, officer or partner of the principal underwriter:

<S> <C> <C>
Name and Principal Business Address Position and Offices with Offices with Registrant
Underwriter
- -------------------------------------- ----------------------------------- -------------------------

Ronald G. Abrahamson Vice President-Service Quality None
IDS Tower 10 and Reengineering
Minneapolis, MN 55440

Douglas A. Alger Senior Vice President-Human None
IDS Tower 10 Resources
Minneapolis, MN 55440

Peter J. Anderson Senior Vice President-Investment Vice President-Investments
IDS Tower 10 Operations
Minneapolis, MN 55440

Ward D. Armstrong Vice President-American Express None
IDS Tower 10 Retirement Services
Minneapolis, MN 55440

John M. Baker Vice President-Plan Sponsor None
IDS Tower 10 Services
Minneapolis, MN 55440

Joseph M. Barsky III Vice President - Mutual Fund None
IDS Tower 10 Equities
Minneapolis, MN 55440

Timothy V. Bechtold Vice President-Risk Management None
IDS Tower 10 Products
Minneapolis, MN 55440

John D. Begley Group Vice President-Ohio/Indiana None
Suite 100
7760 Olentangy River Rd.
Columbus, OH 43235

Brent L. Bisson Group Vice President-Los Angeles None
Suite 900, E. Westside Twr Metro
11835 West Olympic Blvd.
Los Angeles, CA 90064

John C. Boeder Vice President-Nonproprietary None
IDS Tower 10 Products
Minneapolis, MN 55440

Walter K. Booker Group Vice President-New Jersey None
Suite 200, 3500 Market Street
Camp Hill, NJ 17011

Bruce J. Bordelon Group Vice President - San None
1333 N. California Blvd., Suite 200 Francisco Area
Walnut Creek, CA 94596

Charles R. Branch Group Vice President-Northwest None
Suite 200
West 111 North River Dr.
Spokane, WA 99201

Douglas W. Brewers Vice President-Sales Support None
IDS Tower 10
Minneapolis, MN 55440

Karl J. Breyer Corporate Senior Vice President None
IDS Tower 10
Minneapolis, MN 55440

Cynthia M. Carlson Vice President-American Express None
IDS Tower 10 Securities Services
Minneapolis, MN 55440

Mark W. Carter Senior Vice President and Chief None
IDS Tower 10 Marketing Officer
Minneapolis, MN 55440

James E. Choat Senior Vice President - Third None
IDS Tower 10 Party Distribution
Minneapolis, MN 55440

Kenneth J. Ciak Vice President and General None
IDS Property Casualty Manager-IDS Property Casualty
1400 Lombardi Avenue
Green Bay, WI 54304

Paul A. Connolly Vice President-Advisor Staffing, None
IDS Tower 10 Training and Support
Minneapolis, MN 55440

Henry J. Cormier Group Vice President-Connecticut None
Commerce Center One
333 East River Drive
East Hartford, CT 06108

John M. Crawford Group Vice President-Arkansas/ None
Suite 200 Springfield/Memphis
10800 Financial Ctr Pkwy
Little Rock, AR 72211

Kevin F. Crowe Group Vice None
Suite 312 President-Carolinas/Eastern
7300 Carmel Executive Pk Georgia
Charlotte, NC 28226

Colleen Curran Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440

Luz Maria Davis Vice President-Communications None
IDS Tower 10
Minneapolis, MN 55440

Arthur E. Delorenzo Group Vice President - Upstate None
4 Atrium Drive, #100 New York
Albany, NY 12205

Scott M. DiGiammarino Group Vice None
Suite 500, 8045 Leesburg Pike President-Washington/Baltimore
Vienna, VA 22182

Bradford L. Drew Group Vice President-Eastern None
Two Datran Center Florida
Penthouse One B
9130 S. Dadeland Blvd.
Miami, FL 33156

Douglas K. Dunning Vice President-Assured Assets None
IDS Tower 10 Product Development and Management
Minneapolis, MN 55440

James P. Egge Group Vice President-Western None
4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas
Sioux Falls, SD 57103

Gordon L. Eid Senior Vice President, General None
IDS Tower 10 Counsel and Chief Compliance
Minneapolis, MN 55440 Officer

Robert M. Elconin Vice President-Government None
IDS Tower 10 Relations
Minneapolis, MN 55440

Phillip W. Evans Group Vice President-Rocky None
Suite 600 Mountain
6985 Union Park Center
Midvale, UT 84047-4177

Gordon M. Fines Vice President-Mutual Fund Equity None
IDS Tower 10 Investments
Minneapolis, MN 55440

Douglas L. Forsberg Vice President - International None
IDS Tower 10
Minneapolis, MN 55440

Jeffrey P. Fox Vice President and Corporate None
IDS Tower 10 Controller
Minneapolis, MN 55440

William P. Fritz Group Vice President-Gateway None
Suite 160
12855 Flushing Meadows Dr
St. Louis, MO 63131

Carl W. Gans Group Vice President-Twin City None
8500 Tower Suite 1770 Metro
8500 Normandale Lake Blvd.
Bloomington, MN 55437

Peter A. Gallus Vice President-Investment None
IDS Tower 10 Administration
Minneapolis, MN 55440

David A. Hammer Vice President and Marketing None
IDS Tower 10 Controller
Minneapolis, MN 55440

Teresa A. Hanratty Senior Vice President-Field None
Suites 6&7 Management
169 South River Road
Bedford, NH 03110

Robert L. Harden Group Vice President-Boston Metro None
Two Constitution Plaza
Boston, MA 02129

Lorraine R. Hart Vice President-Insurance None
IDS Tower 10 Investments
Minneapolis, MN 55440

Scott A. Hawkinson Vice President and None
IDS Tower 10 Controller-Private Client Group
Minneapolis, MN 55440

Brian M. Heath Senior Vice President and General None
Suite 150 Sales Manager
801 E. Campbell Road
Richardson, TX 75081

Janis K. Heaney Vice President-Incentive None
IDS Tower 10 Management
Minneapolis, MN 55440

Jon E. Hjelm Group Vice President-Rhode None
319 Southbridge Street Island/Central-Western
Auburn, MA 01501 Massachusetts

David J. Hockenberry Group Vice President-Tennessee None
30 Burton Hills Blvd. Valley
Suite 175
Nashville, TN 37215

Jeffrey S. Horton Vice President and Treasurer None
IDS Tower 10
Minneapolis, MN 55440

David R. Hubers Chairman, President and Chief Board member
IDS Tower 10 Executive Officer
Minneapolis, MN 55440

Debra A. Hutchinson Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440

James M. Jensen Vice President and None
IDS Tower 10 Controller-Advice and Retail
Minneapolis, MN 55440 Distribution Group

Marietta L. Johns Senior Vice President-Field None
IDS Tower 10 Management
Minneapolis, MN 55440

Nancy E. Jones Vice President-Business None
IDS Tower 10 Development
Minneapolis, MN 55440

Ora J. Kaine Vice President-Financial Advisory None
IDS Tower 10 Services
Minneapolis, MN 55440

Linda B. Keene Vice President-Market Development None
IDS Tower 10
Minneapolis, MN 55440

G. Michael Kennedy Vice President - Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440

Richard W. Kling Senior Vice President-Products None
IDS Tower 10
Minneapolis, MN 55440

John M. Knight Vice President-Investment Treasurer
IDS Tower 10 Accounting
Minneapolis, MN 55440

Paul F. Kolkman Vice President-Actuarial Finance None
IDS Tower 10
Minneapolis, MN 55440

Claire Kolmodin Vice President-Service Quality None
IDS Tower 10
Minneapolis, MN 55440

David S. Kreager Group Vice President-Greater None
Suite 108 Michigan
Trestle Bridge V
5136 Lovers Lane
Kalamazoo, MI 49002

Steven C. Kumagai Director and Senior Vice None
IDS Tower 10 President-Direct and Interactive
Minneapolis, MN 55440 Group

Mitre Kutanovski Group Vice President-Chicago Metro None
Suite 680
8585 Broadway
Merrillville, IN 48410

Kurt A. Larson Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440

Lori J. Larson Vice President-Brokerage and None
IDS Tower 10 Direct Services
Minneapolis, MN 55440

Daniel E. Laufenberg Vice President and Chief U.S. None
IDS Tower 10 Economist
Minneapolis, MN 55440

Peter A. Lefferts Senior Vice President-Corporate None
IDS Tower 10 Strategy and Development
Minneapolis, MN 55440

Douglas A. Lennick Director and Executive Vice None
IDS Tower 10 President-Private Client Group
Minneapolis, MN 55440

Mary J. Malevich Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440

<PAGE>

Fred A. Mandell Vice President-Field Marketing None
IDS Tower 10 Readiness
Minneapolis, MN 55440

Daniel E. Martin Group Vice President-Pittsburgh None
Suite 650 Metro
5700 Corporate Drive
Pittsburgh, PA 15237

Timothy J. Masek Vice President and Director of None
IDS Tower 10 Global Research
Minnapolis, MN 55440

Sarah A. Mealey Vice President-Mutual Funds None
IDS Tower 10
Minneapolis, MN 55440

Paula R. Meyer Vice President-Assured Assets None
IDS Tower 10
Minneapolis, MN 55440

William P. Miller Vice President and Senior None
IDS Tower 10 Portfolio Manager
Minneapolis, MN 55440

Shashank B. Modak Vice President - Technology Leader None
IDS Tower 10
Minneapolis, MN 55440

Pamela J. Moret Vice President-Variable Assets None
IDS Tower 10
Minneapolis, MN 55440

Barry J. Murphy Senior Vice President-Client None
IDS Tower 10 Service
Minneapolis, MN 55440

Mary Owens Neal Vice President-Consumer Marketing None
IDS Tower 10
Minneapolis, MN 55440

Thomas V. Nicolosi Group Vice President-New York None
Suite 220 Metro Area
500 Mamaroneck Avenue
Harrison, NY 10528

Michael J. O'Keefe Vice President-Advisory Business None
IDS Tower 10 Systems
Minneapolis, MN 55440

James R. Palmer Vice President-Taxes None
IDS Tower 10
Minneapolis, MN 55440

Marc A. Parker Group Vice None
10200 SW Greenburg Road President-Portland/Eugene
Suite 110
Portland, OR 97223

Carla P. Pavone Vice President-Compensation None
IDS Tower 10 Services and ARD Product
Minneapolis, MN 55440 Distribution

Thomas P. Perrine Senior Vice President-Group None
IDS Tower 10 Relationship Leader/American
Minneapolis, MN 55440 Express Technologies Financial
Services

Susan B. Plimpton Vice President-Marketing Services None
IDS Tower 10
Minneapolis, MN 55440

Larry M. Post Group Vice President-Philadelphia None
One Tower Bridge Metro
100 Front Street 8th Fl
West Conshohocken, PA 19428

Ronald W. Powell Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440

Diana R. Prost Group Vice None
3030 N.W. Expressway President-Kansas/Oklahoma
Suite 900
Oklahoma City, OK 73112

James M. Punch Vice President and Project None
IDS Tower 10 Manager-Platform I Value Enhanced
Minneapolis, MN 55440

Frederick C. Quirsfeld Senior Vice President-Fixed Income Vice President - Fixed Income
IDS Tower 10 Investments
Minneapolis, MN 55440

Rollyn C. Renstrom Vice President-Corporate Planning None
IDS Tower 10 and Analysis
Minneapolis, MN 55440

R. Daniel Richardson III Group Vice President-Southern None
Suite 800 Texas
Arboretum Plaza One
9442 Capital of Texas Hwy N.
Austin, TX 78759

ReBecca K. Roloff Senior Vice President-Field None
IDS Tower 10 Management and Financial Advisory
Minneapolis, MN 55440 Service

Stephen W. Roszell Senior Vice None
IDS Tower 10 President-Institutional
Minneapolis, MN 55440

Max G. Roth Group Vice None
Suite 201 S IDS Ctr President-Wisconsin/Upper Michigan
1400 Lombardi Avenue
Green Bay, WI 54304

Erven A. Samsel Senior Vice President-Field None
45 Braintree Hill Park Management
Suite 402
Braintree, MA 02184

Theresa M. Sapp Vice President - Relationship None
IDS Tower 10 Leader
Minneapolis, MN 55440

Russell L. Scalfano Group Vice None
Suite 201 President-Illinois/Indiana/Kentucky
101 Plaza East Blvd.
Evansville, IN 47715

William G. Scholz Group Vice President-Arizona/Las None
Suite 205 Vegas
7333 E Doubletree Ranch Rd
Scottsdale, AZ 85258

Stuart A. Sedlacek Senior Vice President and Chief None
IDS Tower 10 Financial Officer
Minneapolis, MN 55440

Donald K. Shanks Vice President-Property Casualty None
IDS Tower 10
Minneapolis, MN 55440

F. Dale Simmons Vice President-Senior Portfolio None
IDS Tower 10 Manager, Insurance Investments
Minneapolis, MN 55440

Judy P. Skoglund Vice President-Quality and None
IDS Tower 10 Service Support
Minneapolis, MN 55440

James B. Solberg Group Vice President-Eastern Iowa None
466 Westdale Mall Area
Cedar RapIDS, IA 52404

Bridget Sperl Vice President-Geographic Service None
IDS Tower 10 Teams
Minneapolis, MN 55440

Paul J. Stanislaw Group Vice President-Southern None
Suite 1100 California
Two Park Plaza
Irvine, CA 92714

Lisa A. Steffes Vice President - Marketing Offer None
IDS Tower 10 Development
Minneapolis, MN 55440

Lois A. Stilwell Group Vice President-Outstate None
Suite 433 Minnesota Area/ North
9900 East Bren Road Dakota/Western Wisconsin
Minnetonka, MN 55343

William A. Stoltzmann Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440

James J. Strauss Vice President and General Auditor None
IDS Tower 10
Minneapolis, MN 55440

Jeffrey J. Stremcha Vice President-Information None
IDS Tower 10 Resource Management/ISD
Minneapolis, MN 55440

Barbara Stroup Stewart Vice President-Channel Development None
IDS Tower 10
Minneapolis, MN 55440

Craig P. Taucher Group Vice None
Suite 150 President-Orlando/Jacksonville
4190 Belfort Road
Jacksonville, FL 32216

Neil G. Taylor Group Vice None
Suite 425 President-Seattle/Tacoma/Hawaii
101 Elliott Avenue West
Seattle, WA 98119

John R. Thomas Senior Vice President Board Member
IDS Tower 10
Minneapolis, MN 55440

Keith N. Tufte Vice President and Director of None
IDS Tower 10 Equity Research
Minneapolis, MN 55440

Peter S. Velardi Group Vice None
Suite 180 President-Atlanta/Birmingham
1200 Ashwood Parkway
Atlanta, GA 30338

Charles F. Wachendorfer Group Vice President-Detroit Metro None
8115 East Jefferson Avenue
Detroit, MI 48214

Donald F. Weaver Group Vice President-Greater None
3500 Market Street, Suite 200 Pennsylvania
Camp Hill, PA 17011

Norman Weaver Jr. Senior Vice President - Alliance None
1010 Main St. Suite 2B Group
Huntington Beach, CA 92648

Michael L. Weiner Vice President-Tax Research and None
IDS Tower 10 Audit
Minneapolis, MN 55440

Jeffry M. Welter Vice President-Equity and Fixed None
IDS Tower 10 Income Trading
Minneapolis, MN 55440

Thomas L. White Group Vice President-Cleveland None
Suite 200 Metro
28601 Chagrin Blvd.
Woodmere, OH 44122

Eric S. Williams Group Vice President-Virginia None
Suite 250
3951 Westerre Parkway
Richmond, VA 23233

William J. Williams Group Vice President-Western None
Two North Tamiami Trail Florida
Suite 702
Sarasota, FL 34236

Edwin M. Wistrand Vice President and Assistant None
IDS Tower 10 General Counsel
Minneapolis, MN 55440

Michael D. Wolf Vice President-Senior Portfolio None
IDS Tower 10 Manager
Minneapolis, MN 55440

Michael R. Woodward Senior Vice President-Field None
32 Ellicott St Management
Suite 100
Batavia, NY 14020

Rande L. Zellers Group Vice President-Gulf States None
1 Galleria Blvd., Suite 1900
Metairie, LA 70001

</TABLE>

Item 27 (c). Not Applicable

Item 28. Location of Accounts and Records

American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440

Item 29. Management Services

Not Applicable.

Item 30. Undertakings

Not Applicable.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, AXP Tax-Exempt Series, Inc. certifies that
it meets all of the requirements for effectiveness under Rule 485(b) under
the Securities Act and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis and the State of Minnesota on the 26th
day of January, 2000.

AXP TAX-EXEMPT SERIES, INC.
AXP Intermediate Tax-Exempt Fund
AXP Tax-Exempt Bond Fund

By /s/ Arne H. Carlson*
Arne H. Carlson, Chief Executive Officer

By /s/John M. Knight
John M. Knight, Treasurer

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Statement has been signed below by the following persons in the
capacities indicated on the 26th day of January, 2000.

Signature Capacity

/s/ Arne H. Carlson** Chairman of the Board
Arne H. Carlson

/s/ H. Brewster Atwater, Jr.** Director
H. Brewster Atwater, Jr.

/s/ Lynne V. Cheney** Director
Lynne V. Cheney

/s/ William H. Dudley** Director
William H. Dudley

/s/ David R. Hubers** Director
David R. Hubers

/s/ Heinz F. Hutter** Director
Heinz F. Hutter

/s/ Anne P. Jones** Director
Anne P. Jones

/s/ William R. Pearce** Director
William R. Pearce

<PAGE>

Signature Capacity

/s/ Alan K. Simpson** Director
Alan K. Simpson

/s/ John R. Thomas** Director
John R. Thomas

/s/ C. Angus Wurtele** Director
C. Angus Wurtele

*Signed pursuant to Officers' Power of Attorney, dated January 13, 2000,
filed electronically herewith as Exhibit (p)(2), by:

/s/Leslie L. Ogg
Leslie L. Ogg

**Signed pursuant to Directors' Power of Attorney dated January 13, 2000,
filed electronically herewith as Exhibit (p)(1), by:

/s/Leslie L. Ogg
Leslie L. Ogg

<PAGE>

CONTENTS OF THIS
POST-EFFECTIVE AMENDMENT NO. 46
TO REGISTRATION STATEMENT NO. 2-57328

This post-effective amendment comprises the following papers and documents:

The facing sheet.

Part A.

The prospectus for AXP Intermediate Tax-Exempt Fund
The prospectus for AXP Tax-Exempt Bond Fund

Part B.

Statement of Additional Information for AXP Intermediate Tax-Exempt
Fund
Statement of Additional Information for AXP Tax-Exempt Bond Fund
Financial Statements for AXP Intermediate Tax-Exempt Fund
Financial Statements for AXP Tax-Exempt Bond Fund

Part C.

Other information.

The signatures.

AXP Tax-Exempt Series, Inc.
File No. 2-57328/811-2686

EXHIBIT INDEX

Exhibit (h)(6) Transfer Agency Agreement

Exhibit (i) Opinion and Consent of Counsel

Exhibit (j) Independent Auditors' Consent

Exhibit (p)(1) Directors' Power of Attorney

Exhibit (p)(2) Officers' Power of Attorney

TRANSFER AGENCY AGREEMENT

AGREEMENT dated as of February 1, 1999, between IDS Tax-Exempt Bond Fund, Inc.
(the "Company"), a Minnesota corporation, on behalf of its underlying series
funds (individually a "Fund" and collectively the "Funds"), and American Express
Client Service Corporation (the "Transfer Agent"), a Minnesota corporation.

In consideration of the mutual promises set forth below, the Company and the
Transfer Agent agree as follows:

1. Appointment of the Transfer Agent. The Company hereby appoints the
Transfer Agent, as transfer agent for its shares and as shareholder
servicing agent for the Company, and the Transfer Agent accepts such
appointment and agrees to perform the duties set forth below.

2. Compensation. The Company will compensate the Transfer Agent for the
performance of its obligations as set forth in Schedule A. Schedule A
does not include out-of-pocket disbursements of the Transfer Agent for
which the Transfer Agent shall be entitled to bill the Company
separately.

The Transfer Agent will bill the Company monthly. The fee provided for
hereunder shall be paid in cash by the Company to the Transfer Agent
within five (5) business days after the last day of each month.

Out-of-pocket disbursements shall include, but shall not be limited to,
the items specified in Schedule B. Reimbursement by the Company for
expenses incurred by the Transfer Agent in any month shall be made as
soon as practicable after the receipt of an itemized bill from the
Transfer Agent.

Any compensation jointly agreed to hereunder may be adjusted from time
to time by attaching to this Agreement a revised Schedule A, dated and
signed by an officer of each party.

3. Documents. The Company will furnish from time to time such
certificates, documents or opinions as the Transfer Agent deems to be
appropriate or necessary for the proper performance of its duties.

4. Representations of the Company and the Transfer Agent.

(a) The Company represents to the Transfer Agent that all
outstanding shares are validly issued, fully paid and
non-assessable by the Company. When shares are hereafter
issued in accordance with the terms of the Company's Articles
of Incorporation and its By-laws, such shares shall be validly
issued, fully paid and non-assessable by the Company.

(b) The Transfer Agent represents that it is registered under
Section 17A(c) of the Securities Exchange Act of 1934. The
Transfer Agent agrees to maintain the necessary facilities,
equipment and personnel to perform its duties and obligations
under this agreement and to comply with all applicable laws.

<PAGE>

5. Duties of the Transfer Agent. The Transfer Agent shall be responsible,
separately and through its subsidiaries or affiliates, for the
following functions:

(a) Sale of Fund Shares.

(1) On receipt of an application and payment, wired
instructions and payment, or payment identified as
being for the account of a shareholder, the Transfer
Agent will deposit the payment, prepare and present
the necessary report to the Custodian and record the
purchase of shares in a timely fashion in accordance
with the terms of the respective Fund's prospectus.
All shares shall be held in book entry form and no
certificate shall be issued unless the Fund is
permitted to do so by its prospectus and the
purchaser so requests.

(2) On receipt of notice that payment was dishonored, the
Transfer Agent shall stop redemptions of all shares
owned by the purchaser related to that payment, place
a stop payment on any checks that have been issued to
redeem shares of the purchaser and take such other
action as it deems appropriate.

(b) Redemption of Fund Shares. On receipt of instructions to
redeem shares in accordance with the terms of the Fund's
prospectus, the Transfer Agent will record the redemption of
shares of the Fund, prepare and present the necessary report
to the Custodian and pay the proceeds of the redemption to the
shareholder, an authorized agent or legal representative upon
the receipt of the monies from the Custodian.

(c) Transfer or Other Change Pertaining to Fund Shares. On receipt
of instructions or forms acceptable to the Transfer Agent to
transfer the shares to the name of a new owner, change the
name or address of the present owner or take other legal
action, the Transfer Agent will take such action as is
requested.

(d) Exchange of Fund Shares. On receipt of instructions to
exchange the shares of the Fund for the shares of another fund
in the IDS MUTUAL FUND GROUP or other American Express
Financial Corporation product in accordance with the terms of
the prospectus, the Transfer Agent will process the exchange
in the same manner as a redemption and sale of shares.

(e) Right to Seek Assurance. The Transfer Agent may refuse to
transfer, exchange or redeem shares of a Fund or take any
action requested by a shareholder until it is satisfied that
the requested transaction or action is legally authorized or
until it is satisfied there is no basis for any claims adverse
to the transaction or action. It may rely on the provisions of
the Uniform Act for the Simplification of Fiduciary Security
Transfers or the Uniform Commercial Code. The Company shall
indemnify the Transfer Agent for any act done or omitted to be
done in reliance on such laws or for refusing to transfer,
exchange or redeem shares or taking any requested action if it
acts on a good faith belief that the transaction or action is
illegal or unauthorized.
<PAGE>

(f) Shareholder Records, Reports and Services.

(1) The Transfer Agent shall maintain all shareholder
accounts, which shall contain all required tax,
legally imposed and regulatory information; shall
provide shareholders, and file with federal and state
agencies, all required tax and other reports
pertaining to shareholder accounts; shall prepare
shareholder mailing lists; shall cause to be printed
and mailed all required prospectuses, annual reports,
semiannual reports, statements of additional
information (upon request), proxies and other
mailings to shareholders; and shall cause proxies to
be tabulated.

(2) The Transfer Agent shall respond to all valid
inquiries related to its duties under this Agreement.

(3) The Transfer Agent shall create and maintain all
records in accordance with all applicable laws, rules
and regulations, including, but not limited to, the
records required by Section 31(a) of the Investment
Company Act of 1940.

(g) Dividends and Distributions. The Transfer Agent shall prepare
and present the necessary report to the Custodian and shall
cause to be prepared and transmitted the payment of income
dividends and capital gains distributions or cause to be
recorded the investment of such dividends and distributions in
additional shares of the Funds or as directed by instructions
or forms acceptable to the Transfer Agent.

(h) Confirmations and Statements. The Transfer Agent shall confirm
each transaction either at the time of the transaction or
through periodic reports as may be legally permitted.

(i) Lost or Stolen Checks. The Transfer Agent will replace lost or
stolen checks issued to shareholders upon receipt of proper
notification and will maintain any stop payment orders against
the lost or stolen checks as it is economically desirable to
do.

(j) Reports to Company. The Transfer Agent will provide reports
pertaining to the services provided under this Agreement as
the Company may request to ascertain the quality and level of
services being provided or as required by law.

(k) Other Duties. The Transfer Agent may perform other duties for
additional compensation if agreed to in writing by the parties
to this Agreement.

6. Ownership and Confidentiality of Records. The Transfer Agent agrees
that all records prepared or maintained by it relating to the services
to be performed by it under the terms of this Agreement are the
property of the Company and may be inspected by the Company or any
person retained by the Company at reasonable times. The Company and
Transfer Agent agree to protect the confidentiality of those records.

<PAGE>

7. Action by Board and Opinion of Counsel. The Transfer Agent may rely on
resolutions of the Board of Directors (the "Board") or the Executive
Committee of the Board and on opinion of counsel for the Company.

8. Duty of Care. It is understood and agreed that, in furnishing the Company
with the services as herein provided, neither the Transfer Agent, nor any
officer, director or agent thereof shall be held liable for any loss
arising out of or in connection with their actions under this Agreement so
long as they act in good faith and with due diligence, and are not
negligent or guilty of any willful misconduct. It is further understood and
agreed that the Transfer Agent may rely upon information furnished to it
reasonably believed to be accurate and reliable. In the event the Transfer
Agent is unable to perform its obligations under the terms of this
Agreement because of an act of God, strike or equipment or transmission
failure reasonably beyond its control, the Transfer Agent shall not be
liable for any damages resulting from such failure.

9. Term and Termination. This Agreement shall become effective on the date
first set forth above (the "Effective Date") and shall continue in effect
from year to year thereafter as the parties may mutually agree; provided
that either party may terminate this Agreement by giving the other party
notice in writing specifying the date of such termination, which shall be
not less than 60 days after the date of receipt of such notice. In the
event such notice is given by the Company, it shall be accompanied by a
vote of the Board, certified by the Secretary, electing to terminate this
Agreement and designating a successor transfer agent or transfer agents.
Upon such termination and at the expense of the Company, the Transfer Agent
will deliver to such successor a certified list of shareholders of the
Funds (with name, address and taxpayer identification or Social Security
number), a historical record of the account of each shareholder and the
status thereof, and all other relevant books, records, correspondence, and
other data established or maintained by the Transfer Agent under this
Agreement in the form reasonably acceptable to the Company, and will
cooperate in the transfer of such duties and responsibilities, including
provisions for assistance from the Transfer Agent's personnel in the
establishment of books, records and other data by such successor or
successors.

10. Amendment. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties.

11. Subcontracting. The Company agrees that the Transfer Agent may subcontract
for certain of the services described under this Agreement with the
understanding that there shall be no diminution in the quality or level of
the services and that the Transfer Agent remains fully responsible for the
services. Except for out-of-pocket expenses identified in Schedule B, the
Transfer Agent shall bear the cost of subcontracting such services, unless
otherwise agreed by the parties.

<PAGE>

12. Miscellaneous.

(a) This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable
without the written consent of the other party.

(b) This Agreement shall be governed by the laws of the
State of Minnesota.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers as of the day and year written above.

IDS TAX-EXEMPT BOND FUND, INC.

By: /s/Leslie L. Ogg
Leslie L. Ogg
Vice President

AMERICAN EXPRESS CLIENT SERVICE CORPORATION

By: /s/Barry J. Murphy
Barry J. Murphy
President

<PAGE>

Schedule A

IDS TAX-EXEMPT BOND FUND, INC.

FEE

The annual per account fee for services under this agreement, accrued daily and
payable monthly, is as follows:

Class A Class B Class Y
IDS Intermediate Tax-Exempt Fund $19.50 $20.50 $17.50
IDS Tax-Exempt Bond Fund $19.50 $20.50 $17.50

Until November 30, 1999, the Transfer Agent has agreed to waive certain fees and
to absorb certain fund expenses under this Agreement. If, at the end of any
month, the fees and expenses of Intermediate Tax-Exempt Fund exceed 0.90% the
Fund shall not pay fees and expenses under this Agreement to the extent
necessary to keep the Fund's expense ratio from exceeding the limitation. In any
month that the fees and expenses of Class A shares exceed this limitation all
fees and expenses in excess of that limit will be returned to that Fund. Any fee
waiver or elimination of expenses will apply to each class on a pro rata basis.

<PAGE>

Schedule B

OUT-OF-POCKET EXPENSES

The Company shall reimburse the Transfer Agent monthly for the following
out-of-pocket expenses:

o typesetting, printing, paper, envelopes, postage and return postage for
proxy soliciting material, and proxy tabulation costs

o printing, paper, envelopes and postage for dividend notices, dividend
checks, records of account, purchase confirmations, exchange confirmations
and exchange prospectuses, redemption confirmations, redemption checks,
confirmations on changes of address and any other communication required to
be sent to shareholders

o typesetting, printing, paper, envelopes and postage for prospectuses,
annual and semiannual reports, statements of additional information,
supplements for prospectuses and statements of additional information and
other required mailings to shareholders

o stop orders

o outgoing wire charges

o other expenses incurred at the request or with the consent of the Company

January 26, 2000

AXP Tax-Exempt Series, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010

Gentlemen:

I have examined the Articles of Incorporation and the By-Laws of AXP Tax-Exempt
Series, Inc. (the Company) and all necessary certificates, permits, minute
books, documents and records of the Company, and the applicable statutes of the
State of Minnesota, and it is my opinion that the shares sold in accordance with
applicable federal and state securities laws will be legally issued, fully paid,
and nonassessable.

This opinion may be used in connection with the Post-Effective Amendment.

Sincerely,

/s/Leslie L. Ogg
Leslie L. Ogg
Attorney at Law
901 S. Marquette Ave., Suite 2810
Minneapolis, Minnesota 55402-3268

Independent auditors' consent

The board and shareholders AXP Tax-Exempt Series, Inc.:
AXP Intermediate Tax-Exempt Fund
AXP Tax-Exempt Bond Fund

We consent to the use of our reports incorporated herein by reference and to the
references to our Firm under the headings "Financial highlights" in Part A and
"INDEPENDENT AUDITORS" in Part B of the Registration Statement.

KPMG LLP

/s/KPMG LLP
Minneapolis, Minnesota
January 27, 2000

DIRECTORS/TRUSTEES POWER OF ATTORNEY

City of Minneapolis

State of Minnesota

Each of the undersigned, as directors and trustees of the below listed
open-end, diversified investment companies that previously have filed
registration statements and amendments thereto pursuant to the requirements of
the Securities Act of 1933 and the Investment Company Act of 1940 with the
Securities and Exchange Commission:

1933 Act 1940 Act
Reg. Number Reg. Number

AXP Bond Fund, Inc. 2-51586 811-2503
AXP California Tax-Exempt Trust 33-5103 811-4646
AXP Discovery Fund, Inc. 2-72174 811-3178
AXP Equity Select Fund, Inc. 2-13188 811-772
AXP Extra Income Fund, Inc. 2-86637 811-3848
AXP Federal Income Fund, Inc. 2-96512 811-4260
AXP Global Series, Inc. 33-25824 811-5696
AXP Growth Series, Inc. 2-38355 811-2111
AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
AXP International Fund, Inc. 2-92309 811-4075
AXP Investment Series, Inc. 2-11328 811-54
AXP Managed Series, Inc. 2-93801 811-4133
AXP Market Advantage Series, Inc. 33-30770 811-5897
AXP Money Market Series, Inc. 2-54516 811-2591
AXP New Dimensions Fund, Inc. 2-28529 811-1629
AXP Precious Metals Fund, Inc. 2-93745 811-4132
AXP Progressive Fund, Inc. 2-30059 811-1714
AXP Selective Fund, Inc. 2-10700 811-499
AXP Special Tax-Exempt Series Trust 33-5102 811-4647
AXP Stock Fund, Inc. 2-11358 811-498
AXP Strategy Series, Inc. 2-89288 811-3956
AXP Tax-Exempt Series, Inc. 2-57328 811-2686
AXP Tax-Free Money Fund, Inc. 2-66868 811-3003
AXP Utilities Income Fund, Inc. 33-20872 811-5522

<PAGE>

hereby constitutes and appoints William R. Pearce, Arne H. Carlson and Leslie L.
Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for
her or him in her or his name, place and stead any and all further amendments to
said registration statements filed pursuant to said Acts and any rules and
regulations thereunder, and to file such amendments with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission, granting to either of them the full power and authority to do and
perform each and every act required and necessary to be done in connection
therewith.

Dated the 13th day of January, 2000.

/s/ H. Brewster Atwater, Jr. /s/ Anne P. Jones
H. Brewster Atwater, Jr. Anne P. Jones

/s/ Arne H. Carlson /s/ William R. Pearce
Arne H. Carlson William R. Pearce

/s/ Lynne V. Cheney /s/ Alan K. Simpson
Lynne V. Cheney Alan K. Simpson

/s/ William H. Dudley /s/ John R. Thomas
William H. Dudley John R. Thomas

/s/ David R. Hubers /s/ C. Angus Wurtele
David R. Hubers C. Angus Wurtele

/s/ Heinz F. Hutter
Heinz F. Hutter

Officers' Power of Attorney

City of Minneapolis

State of Minnesota

Each of the undersigned, as officers of the below listed open-end, diversified
investment companies that previously have filed registration statements and
amendments thereto pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940 with the Securities and Exchange
Commission:

1933 Act 1940 Act
Reg. Number Reg. Number

AXP Bond Fund, Inc. 2-51586 811-2503
AXP California Tax-Exempt Trust 33-5103 811-4646
AXP Discovery Fund, Inc. 2-72174 811-3178
AXP Equity Select Fund, Inc. 2-13188 811-772
AXP Extra Income Fund, Inc. 2-86637 811-3848
AXP Federal Income Fund, Inc. 2-96512 811-4260
AXP Global Series, Inc. 33-25824 811-5696
AXP Growth Series, Inc. 2-38355 811-2111
AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901
AXP International Fund, Inc. 2-92309 811-4075
AXP Investment Series, Inc. 2-11328 811-54
AXP Variable Portfolio-Investment Series, Inc. 2-73115 811-3218
AXP Variable Portfolio-Managed Series, Inc. 2-96367 811-4252
AXP Variable Portfolio-Money Market Series, Inc. 2-72584 811-3190
AXP Variable Portfolio-Income Series, Inc. 2-73113 811-3219
AXP Managed Series, Inc. 2-93801 811-4133
AXP Market Advantage Series, Inc. 33-30770 811-5897
AXP Money Market Series, Inc. 2-54516 811-2591
AXP New Dimensions Fund, Inc. 2-28529 811-1629
AXP Precious Metals Fund, Inc. 2-93745 811-4132
AXP Progressive Fund, Inc. 2-30059 811-1714
AXP Selective Fund, Inc. 2-10700 811-499
AXP Special Tax-Exempt Series Trust 33-5102 811-4647
AXP Stock Fund, Inc. 2-11358 811-498
AXP Strategy Series, Inc. 2-89288 811-3956
AXP Tax-Exempt Series, Inc. 2-57328 811-2686
AXP Tax-Free Money Fund, Inc. 2-66868 811-3003
AXP Utilities Income Fund, Inc. 33-20872 811-5522

hereby constitutes and appoints the other as his attorney-in-fact and agent, to
sign for him in his name, place and stead any and all further amendments to said
registration statement filed pursuant to said Acts and any rules and regulations
thereunder, and to file such amendments with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting to either of them the full power and authority to do and perform each
and every act required and necessary to be done in connection therewith.

Dated the 13th day of January, 2000.

/s/ Arne H. Carlson /s/ Leslie L. Ogg
Arne H. Carlson Leslie L. Ogg

/s/ John R. Thomas /s/ Peter J. Anderson
John R. Thomas Peter J. Anderson

/s/ Frederick C. Quirsfeld /s/ John M. Knight
Frederick C. Quirsfeld John M. Knight