IDS MONEY MARKET SERIES INC
497, 1999-12-17
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<PAGE>

AXPSM Cash
Management
Fund
ROSPECTUS
Sept. 29, 1999

American
Express(R)
Funds

AXP Cash Management Fund seeks to provide
shareholders with maximum current income
consistent  with  liquidity and  stability of  principal.

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                       7p
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
Exchanging/Selling Shares             16p
Distributions and Taxes               22p
Financial Highlights                  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 Cash Management Fund (the Fund) seeks to provide  shareholders  with maximum
current income consistent with liquidity and stability of principal. Because any
investment involves risk, the Fund cannot guarantee this goal.

INVESTMENT  STRATEGY The Fund's  assets  primarily  are invested in money market
instruments,  such as marketable debt obligations issued by the U.S.  government
or its agencies, bank certificates of deposit, bankers' acceptances,  letters of
credit,  and  commercial  paper.  The Fund may invest more than 25% of its total
assets in U.S.  banks,  U.S.  branches  of  foreign  banks  and U.S.  government
securities.  Additionally,  the Fund may invest up to 35% of its total assets in
U.S. dollar-denominated foreign investments.

Because  the Fund  seeks to  maintain a  constant  net asset  value of $1.00 per
share, capital appreciation is not expected to play a role in the Fund's return.
The Fund's yield will vary from day-to-day.

<PAGE>

The selection of short-term debt obligations is the primary decision in building
the investment portfolio. The Fund restricts its investments to instruments that
meet certain maturity and quality standards required by the SEC for money market
funds. For example, the Fund:

o    limits its average portfolio maturity to ninety days or less;

o    buys obligations with remaining maturities of 397 days or less; and

o    buys only  obligations  that are  denominated  in U.S.  dollars and present
     minimal credit risk.

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  given  current  interest  rates and
     anticipated interest rates.

o    Purchasing  securities  based on the timing of cash flows in and out of the
     Fund.

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

- --   the issuer's credit rating declines or AEFC expects a decline (the Fund, in
     certain cases,  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 identifies a more attractive opportunity, and

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

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.
Although  the Fund's  share price has  remained  constant in the past,  THE FUND
CANNOT  GUARANTEE  THAT IT WILL  ALWAYS BE ABLE TO  MAINTAIN  A STABLE NET ASSET
VALUE.  An  investment  in the Fund is not  insured  or  guaranteed  by the U.S.
government. Principal risks associated with an investment in the Fund include:

   Credit Risk
   Foreign Risk
   Interest Rate Risk
   Market Risk
   Sector/Concentration Risk

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).

Foreign Risk
The following are all components of foreign 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.

<PAGE>

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.

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 debt obligation,  the higher its
yield and the greater the sensitivity to changes in interest rates.

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.

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). For example, if the Fund concentrates its investments
in banks, the value of these  investments may be adversely  affected by economic
or regulatory developments in the banking industry.

<PAGE>

PAST PERFORMANCE

The  following  bar chart  and table  indicate  the  risks  and  variability  of
investing in the Fund by showing how the Fund's  performance has varied for each
full calendar year shown.

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)

- -------------------------------------------------------------------------------
+8.77%  +7.73%  +5.52%  +2.91%   +2.28%  +3.43%  +5.45%  +4.96%  +5.18%   +5.14%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1989    1990    1991    1992     1993    1994    1995    1996    1997     1998
- -------------------------------------------------------------------------------

During the  period  shown in the bar chart,  the  highest  return for a calendar
quarter  was +2.28%  (quarter  ending  June  1989) and the  lowest  return for a
calendar quarter was +0.54% (quarter ending September 1993).

The Fund's year to date return as of June 30, 1999 was +2.28%.

<PAGE>

Average  Annual Total  Returns (for the  calendar  year periods  ending Dec. 31,
1998)

<TABLE>
<CAPTION>
<S>                     <C>             <C>               <C>            <C>
                        1 year          5 years           10 years       Since inception
- ---------------------------------------------------------------------------------------------------------------------------
 Cash Management:
- ---------------------------------------------------------------------------------------------------------------------------
   Class A              +5.14%             +4.83%          +5.12%               --%
   Class B              +0.36%                --%             --%            +3.77%a
- ---------------------------------------------------------------------------------------------------------------------------
   Class Y              +5.14%                --%             --%            +5.25%a
</TABLE>

a Inception date was March 20, 1995.

This table shows total returns from  hypothetical  investments  in shares of the
Fund.

For purposes of this calculation we assumed:

o    no sales charge for Class A and Class Y shares,

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

o    conversion of Class B shares to Class A shares in the ninth  calendar years
     of ownership, and

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

Yield Information
For current 7-day yield information, call 1-800-862-7919, select option #2.

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.
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------
 Shareholder Fees (fees paid directly from your investment)
<S>                                                              <C>               <C>               <C>
                                                                 Class A           Class B           Class Y
Maximum sales charge (load) imposed on purchasesa
- --------------------------------------------------------------------------------
(as a percentage of offering price)                              none              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  expensesb  (expenses that are deducted
from Fund assets) As a percentage of average daily net assets:   Class A           Class B           Class Y
- ---------------------------------------------------------------------------------------------------------------------------
 Management fees                                                 0.31%             0.31%             0.31%
 Distribution (12b-1) fees                                       0.00%             0.75%             0.00%
- ---------------------------------------------------------------------------------------------------------------------------
 Other expensesc                                                 0.31%             0.32%             0.29%
- ---------------------------------------------------------------------------------------------------------------------------
 Total                                                           0.62%             1.38%             0.60%
</TABLE>

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 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:
<TABLE>
<CAPTION>
<S>                     <C>              <C>               <C>              <C>
                        1 year           3 years           5 years          10 years
- ---------------------------------------------------------------------------------------------------------------------------
 Class A                $  63              $199              $346           $  778
- ---------------------------------------------------------------------------------------------------------------------------
 Class Ba                $641              $837              $956           $1,453c
- ---------------------------------------------------------------------------------------------------------------------------
 Class Bb                $141              $437              $756           $1,453c
- ---------------------------------------------------------------------------------------------------------------------------
 Class Y                $  61              $192              $335           $  753
</TABLE>

a Assumes you sold your Class B shares at the end of the period and incurred the
  applicable  CDSC.
b Assumes  you did not sell your Class B shares at the end of the  period.
c 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 April 1993. He also serves as portfolio  manager of AXP  Intermediate
Tax-Exempt  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 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  Standard  Time (CST),  each  business day (any day the New York
Stock Exchange is open).

The Fund's investments are valued at amortized cost, which  approximates  market
value,  as  explained  in the SAI.  Although  the Fund cannot  guarantee it will
always be able to maintain a constant  net asset value of $1 per share,  it will
use its best efforts to do so.

<PAGE>

INVESTMENT OPTIONS

New  investments  must be made in Class A shares  of the Fund.  The Fund  offers
Class B and Class Y shares only to facilitate exchanges between classes of these
shares in other American Express mutual funds. The primary differences among the
classes are in the sales charge structures and in their ongoing expenses.  These
differences are summarized in the table below.

- --------------------------------------------------------------------------------
 Investment options summary:

Class A               No initial sales charge

                      No annual distribution fee
- -------------------------------------------------------------------------------

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 0.75% of average daily net
                      assets*

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

Class Y               No initial sales charge

                      No annual distribution fee

                      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  fees for the sale of 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>

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.  Your
application  will be  accepted  only when  federal  funds  (funds of the Federal
Reserve System) are available to the Fund, normally within three days of receipt
of your  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 requires us to do so
because you failed to report required interest or dividends on your tax return.

<PAGE>

<TABLE>
<CAPTION>
<S>                                     <C>
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 individuals 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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

For details on TIN requirements, consult your financial advisor to obtain a copy
of  federal  Form  W-9,   "Request  for  Taxpayer   Identification   Number  and
Certification."

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:          $1,000

If your account balance falls below $1,000,  you will be asked to increase it to
$1,000 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:        $2,000

Additional investments:    $100/each payment

Account balances:          $1,000 (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

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.   When  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 prospectus.

<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%

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 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 New  investments of Class A shares may be exchanged for either Class A
or Class B shares of any other publicly  offered  American  Express mutual fund,
except that  exchanges  into AXP  Tax-Free  Money Fund must be made from Class A
shares. If you exchange shares from this Fund to another American Express mutual
fund,  any  further  exchanges  must be between  shares of the same  class.  For
example,  you may not exchange from Class B shares of another  American  Express
mutual fund into Class A shares of this Fund.  Exchange rules are illustrated in
the following tables:

Exchanges:
FROM                                  TO
- -------------------------------------------------------------------------------
AXP Cash
Management               Other American Express mutual funds*
                           Class A          Class B
- -------------------------------------------------------------------------------
Class A                      Yes              Yes
Class B                      No               Yes


Exchanges:
FROM                                  TO
- -------------------------------------------------------------------------------
Other
American Express           AXP Cash Management Fund
mutual funds*              Class A          Class B
- -------------------------------------------------------------------------------
Class A                      Yes              No
Class B                      No               Yes

*AXP Tax-Free Money Fund has only a single class. Therefore,  exchanges into AXP
Tax-Free Money Fund must be made from Class A shares.

Note:  Exchanges  from  Class A to  Class B are not  permitted  within  AXP Cash
Management Fund.

If your initial  investment  was in this Fund, and you exchange into a non-money
market fund,  you will pay an initial  sales charge if you exchange into Class A
and be  subject  to a CDSC  if you  exchange  into  Class  B.  If  your  initial
investment  was in Class A shares of a non-money  market  fund and you  exchange
shares into this Fund, you may exchange that amount,  including dividends earned
on that amount,  without paying a sales charge. 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 (1 1/2 round trips) within any 30-day period.
These limits do not apply to certain employee  benefit plans.  Exceptions may be
allowed with pre-approval of the Fund.

<PAGE>

Other exchange policies:

o    Except as otherwise  noted,  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.

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.

<PAGE>

You can change your mind after  requesting  a sale of Class B shares 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 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.)

Three 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 TIN, 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

- --------------------------------------------------------------------------------
3 By draft:

For Class A only, free drafts are available and can be used just like a check
to withdraw $100 or more from your account. The shares in your account
earn dividends until they are redeemed by the Fund to cover your drafts.

Most accounts will automatically receive free drafts. However, to receive drafts
on qualified or custodial business  accounts,  you must contact AECSC. A request
form will be supplied and must be signed by each  registered  owner.  Your draft
writing  privilege may be modified or discontinued  at any time.  Drafts are not
available for accounts set up in a brokerage account.

Minimum amount
Redemption:                $100

<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 be paid monthly in cash, or

o    you direct the Fund to invest your  distributions  monthly in any  publicly
     offered American  Express mutual fund for which you have previously  opened
     an account. Your purchases may be subject to a sales charge.

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

Distributions  are subject to federal income tax and may be subject to state and
local taxes in the year they are declared. You must report distributions on your
tax returns, even if they are reinvested in additional shares.

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).

Selling shares held in an IRA or qualified retirement account may subject you to
federal  taxes,  penalties and reporting  requirements.  Please consult your tax
advisor.

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>

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 0.27% 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

<TABLE>
<CAPTION>

Fiscal period ended July 31,

- ---------------------------------------------------------------------------------------------------------------------------
 Per share income and capital changesa
- ---------------------------------------------------------------------------------------------------------------------------
                                                        Class A
<S>                                    <C>       <C>       <C>        <C>        <C>

                                       1999      1998      1997       1996       1995

Net asset value, beginning of period   $1.00     $1.00     $1.00      $1.00      $1.00
- ---------------------------------------------------------------------------------------------------------------------------

Income from investment operations:

Net investment income (loss)             .05       .05       .05        .05        .05
- ---------------------------------------------------------------------------------------------------------------------------

Less distributions:

Dividends from net investment income    (.05)     (.05)     (.05)      (.05)      (.05)
- ---------------------------------------------------------------------------------------------------------------------------

Net asset value, end of period         $1.00     $1.00     $1.00      $1.00      $1.00

- ---------------------------------------------------------------------------------------------------------------------------
 Ratios/supplemental data

Net assets, end of period
(in millions)                          $5,032    $3,926    $3,094     $2,335     $1,707
- ---------------------------------------------------------------------------------------------------------------------------

Ratio of expenses to average daily net
assetsb                                  .57%       .56%      .58%       .63%      .73%

Ratio of net investment income (loss)
- ---------------------------------------------------------------------------------------------------------------------------

to average daily net assets             4.65%     5.15%     4.96%      4.97%      4.99%

Total return                            4.71%     5.34%     5.06%      5.12%      5.02%
- ---------------------------------------------------------------------------------------------------------------------------
</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.

<PAGE>
<TABLE>
<CAPTION>

Fiscal period ended July 31,
- ---------------------------------------------------------------------------------------------------------------------------
 Per share income and capital changesa

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

                                   1999  1998   1997   1996  1995b     1999   1998   1997  1996   1995b

Net asset value,
beginning of period               $1.00 $1.00  $1.00  $1.00 $1.00     $1.00  $1.00  $1.00 $1.00  $1.00
- ---------------------------------------------------------------------------------------------------------------------------

Income from investment operations:

Net investment
income (loss)                       .04   .04    .04    .04   .02       .05    .05    .05   .05    .02
- ---------------------------------------------------------------------------------------------------------------------------

Less distributions:

Dividends from net
investment income                  (.04) (.04)  (.04)  (.04) (.02)     (.05)  (.05)  (.05) (.05)  (.02)

- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period                     $1.00 $1.00  $1.00  $1.00 $1.00     $1.00  $1.00  $1.00 $1.00  $1.00
- ---------------------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data

Net assets, end of
period (in millions)               $192  $98    $147   $273   $98      $124    $72    $62   $57    $86
- ---------------------------------------------------------------------------------------------------------------------------

Ratio of expenses
to average daily
net assetsd                       1.32% 1.32%  1.34%  1.38%  1.41%c     .56%   .56%   .58%  .62%   .65%c
- ---------------------------------------------------------------------------------------------------------------------------

Ratio of net investment
income (loss) to average
daily net assets                  3.88% 4.38%  4.14%  4.15% 4.73%c     4.64%  5.16%  4.96% 4.97%  5.53%c
- ---------------------------------------------------------------------------------------------------------------------------

Total return                      3.94% 4.53%  4.27%  4.33% 2.00%      4.72%  5.33%  5.06% 5.11%  2.31%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

a For a share outstanding  throughout the period. Rounded to the nearest cent.
b Inception date was March 20, 1995.
c Adjusted to an annual basis.
d Effective  fiscal year 1996,  expense ratio is based on total  expenses of the
Fund before reduction of earnings  credits on cash balances.

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>

American
Express(R)
Funds

This Fund,  along with the other  American  Express  funds,  is  distributed  by
American Express  Financial  Advisors Inc. and can be purchased from an American
Express  financial  advisor or from  other  authorized  borker-dealers  or third
parties.  The Fund 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 #811-2591

TICKER SYMBOL
Class A: IDSXX     Class B: N/A     Class Y: IDYXX

AMERICAN
EXPRESS (logo)
S-6320-99 N (9/99)

<PAGE>

                                     AXPSM MONEY MARKET SERIES, INC.

                                   STATEMENT OF ADDITIONAL INFORMATION

                                                   FOR

                                  AXPSM CASH MANAGEMENT FUND (the Fund)

                                              Sept. 29, 1999

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.  7

Security Transactions............................................p. 16

Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation...........................p. 18

Performance Information..........................................p. 18

Valuing Fund Shares..............................................p. 20

Investing in the Fund............................................p. 20

Selling Shares...................................................p. 21

Pay-out Plans....................................................p. 22

Taxes............................................................p. 23

Agreements.......................................................p. 24

Organizational Information.......................................p. 27

Board Members and Officers.......................................p. 29

Compensation for Board Members...................................p. 32

Independent Auditors.............................................p. 32

Appendix:  Description of Money Market Securities................p. 33

<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    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    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.

o    Buy on margin, sell short or deal in options to buy or sell securities.

o    Buy or sell real estate,  commodities or commodity contracts.  For purposes
     of this policy, real estate includes real estate limited partnerships.

o    Lend Fund securities in excess of 30% of its net assets, at market value.

o    Purchase  common  stocks,   preferred   stocks,   warrants,   other  equity
     securities, corporate bonds or debentures, state bonds, municipal bonds, or
     industrial revenue bonds.

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 also  lists  certain  percentage
guidelines that are generally  followed by the Fund's investment  manager.  This
table 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.
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------ ------------------------------------
Investment strategies & types of investments:                                 AXP Cash Management Fund
<S>                                                                            <C>
                                                                               Allowable for the Fund?
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Agency and Government Securities                                                         yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Borrowing                                                                                yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Cash/Money Market Instruments                                                            yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Commercial Paper                                                                         yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Debt Obligations                                                                         yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------

Foreign Investments                                                                      yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------

Illiquid and Restricted Securities                                                       yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Lending of Portfolio Securities                                                          yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Mortgage- and Asset-Backed Securities                                                    yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Repurchase Agreements                                                                    yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Reverse Repurchase Agreements                                                            yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Sovereign Debt                                                                           yes
- ------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------ ------------------------------------
Variable- or Floating-Rate Securities                                                    yes
- ------------------------------------------------------------------------ ------------------------------------
</TABLE>

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

o    The Fund will not invest more than 10% of its net assets in securities that
     are illiquid  whether or not  registration  or the filing of a notification
     under the  Securities  Act of 1933 or the  taking of similar  action  under
     other  securities  laws relating to the sale of  securities is required.  A
     risk of any  such  investment  is that is  might  not be able to be  easily
     liquidated.  For the purpose of this  policy,  repurchase  agreements  with
     maturities greater than seven days and  non-negotiable  fixed time deposits
     will be treated as illiquid securities.

o    The Fund may  invest  in  commercial  paper  rated  in the  highest  rating
     category  by  at  least  two  nationally   recognized   statistical  rating
     organizations  (or by one, if only one rating is  assigned)  and in unrated
     paper  determined by the board to be of comparable  quality.  The Fund also
     may invest up to 5% of its total assets in commercial  paper  receiving the
     second  highest  rating or in unrated paper  determined to be of comparable
     quality.

o    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.

o    Depending on market  conditions and the  availability of other  securities,
     the Fund may invest more than 25% of its total assets in U.S.  Banks,  U.S.
     branches of foreign banks and U.S. government securities.

o    The Fund may invest up to 35% of its total assets in foreign investments.

<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:

<PAGE>

         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.

         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

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 debt obligation,  the higher its
yield and the greater the sensitivity to changes in interest rates.

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.

<PAGE>

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 their income or principal
at the same rate as 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

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 money market securities.

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.

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.

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.

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 rating as standards for selecting investments.

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.

<PAGE>

Foreign Investments

Investments  in foreign banks and branches of domestic  banks outside the United
States involve certain risks.  Domestic banks are required to maintain specified
levels  of  reserves,  are  limited  in the  amounts  they  can loan to a single
borrower  and are subject to other  regulations  designed  to promote  financial
soundness.  Not all of these laws and regulations  apply to the foreign branches
of domestic  banks.  Domestic bank  regulations  do not apply to foreign  banks.
Eurodollar CDs and non-U.S.  fixed-time deposits may be subject to political and
economic risks of the countries in which the investments are made, including the
possibility of seizure or  nationalization  of foreign  deposits,  penalties for
early  withdrawal of time deposits,  imposition of withholding  taxes on income,
establishment of exchange controls or adoption of other  restrictions that might
affect an investment adversely.

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.

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.

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

<PAGE>

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.

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. 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.)

<PAGE>

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.

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.

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.

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.

<PAGE>

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.  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.

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

<PAGE>

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.

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 July 31 ,
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  securities of its
regular  brokers  or dealers  of the  parent of those  brokers  or dealers  that
derived more than 15% of gross  revenue from  securities-related  activities  as
presented below:


                                                        Value of Securities
                    Name of Issuer                  owned at End of Fiscal Year
                    --------------                  ---------------------------
                   Bank of America                          $29,764,876
                   Bear Stearns                             207,741,542
                   Fleet Funding                            127,366,619
                   Goldman Sachs Group                      187,351,389
                   Merrill Lynch                             30,000,000
                   Morgan Guaranty                           29,999,999
                   Morgan Stanley                            19,946,444
                   Salomon Smith Barney                     131,263,291

<PAGE>

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.

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)

<PAGE>

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 calculates annualized simple and compound yields for a class based on a
seven-day period.

The simple yield is calculated by  determining  the net change in the value of a
hypothetical  account  having a  balance  of one share at the  beginning  of the
seven-day  period,  dividing the net change in account value by the value of the
account at the beginning of the period to obtain the return for the period,  and
multiplying  that return by 365/7 to obtain an annualized  figure.  The value of
the  hypothetical  account  includes the amount of any declared  dividends,  the
value of any shares  purchased  with any dividend paid during the period and any
dividends  declared  for such  shares.  The Fund's  yield does not  include  any
realized or unrealized gains or losses.

The Fund calculates its compound yield according to the following formula:

        Compound Yield = (return for seven-day period + 1) x (365/7) - 1

The Fund's simple  annualized yield was 4.56% for Class A, 3.81% for Class B and
4.57% for Class Y and its compound  yield was 4.66% for Class A, 3.88% for Class
B and 4.68 for Class Y on July 30, 1999, the last day of the Fund's fiscal year.

Yield,  or rate of  return,  on Fund  shares  may  fluctuate  daily and does not
provide a basis for determining  future yields.  However,  it may be used as one
element  in  assessing  how the Fund is  meeting  its goal.  When  comparing  an
investment   in  the  Fund  with  savings   accounts   and  similar   investment
alternatives,  you must consider that such alternatives  often provide an agreed
to or  guaranteed  fixed yield for a stated  period of time,  whereas the Fund's
yield  fluctuates.  In comparing  the yield of one money market fund to another,
you should  consider  the Fund's  investment  policies,  including  the types of
investments permitted.

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 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.

<PAGE>

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

All of the securities in the Fund's  portfolio are valued at amortized cost. The
amortized  cost  method  of  valuation  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. It
does not take into consideration unrealized capital gains or losses.

The board has established  procedures designed to stabilize the fund's price per
share for  purposes  of sales and  redemptions  at $1, to the extent  that it is
reasonably  possible to do so.  These  procedures  include  review of the Fund's
securities by the board,  at intervals  deemed  appropriate  by it, to determine
whether the Fund's net asset value per share computed by using available  market
quotations  deviates  from a share value of $1 as computed  using the  amortized
cost  method.  The board must  consider  any  deviation  that  appears and if it
exceeds 0.5% it must  determine what action,  if any, needs to be taken.  If the
board  determines a deviation  exists that may result in a material  dilution of
the  holdings  of  current  shareholders  or  investors,   or  in  other  unfair
consequences for such persons,  it must undertake  remedial action that it deems
necessary  and  appropriate.  Such  action may  include  withholding  dividends,
calculating  net asset  value per share for  purposes  of sales and  redemptions
using  available  market  quotations,  making  redemptions  in kind, and selling
securities  before  maturity in order to realize  capital  gains or losses or to
shorten average portfolio maturity.

While the amortized cost method provides  certainty and consistency in portfolio
valuation,  it may result in valuations of securities  that are either  somewhat
higher or lower  than the  prices at which the  securities  could be sold.  This
means that  during  times of  declining  interest  rates the yield on the Fund's
shares may be higher than if valuations of securities  were made based on actual
market  prices  and  estimates  of  market  prices.  Accordingly,  if using  the
amortized cost method were to result in a lower  portfolio  value, a prospective
investor  in the Fund  would be able to obtain a somewhat  higher  yield than he
would get if portfolio  valuation were based on actual market  values.  Existing
shareholders,  on the other hand, would receive a somewhat lower yield than they
would  otherwise  receive.  The opposite  would happen during a period of rising
interest rates.

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

The minimum  purchase for directors,  officers and employees of the Fund or AEFC
and AEFC  financial  advisors is $1,000 for the Fund (except  payroll  deduction
plans), with a minimum additional purchase of $25.

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, may be used to  automatically  purchase  shares in the same
class  of the  Fund.  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;

<PAGE>

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 reserves the right to reject any business, in its sole discretion.

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.

<PAGE>

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.

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.

<PAGE>

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

If you buy  shares in the Fund and then  exchange  shares,  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 is  treated  as if it  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.

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.

Net investment  income  dividends  received should be treated as dividend income
for federal income tax purposes.  Corporate  shareholders are generally entitled
to a  deduction  equal to 70% of that  portion  of the Fund's  dividend  that is
attributable to dividends the Fund received from domestic (U.S.) securities. For
the most recent fiscal year, none of the Fund's net investment  income dividends
qualified for the corporate deduction.

The Fund may be subject  to U.S.  taxes  resulting  from  holdings  in a passive
foreign investment  company (PFIC). A foreign  corporation is a PFIC when 75% or
more of its gross income for the taxable  year is passive  income or 50% or more
of the average  value of its assets  consists  of assets  that  produce or could
produce passive income.

Income  earned by the Fund may have had foreign taxes imposed and withheld on it
in foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate  such taxes.  If more than 50% of the Fund's total assets at
the close of its fiscal year consists of securities of foreign corporations, the
Fund will be eligible  to file an election  with the  Internal  Revenue  Service
under which shareholders of the Fund would be required to include their pro rata
portions of foreign taxes withheld by foreign countries as gross income in their
federal  income tax returns.  These pro rata portions of foreign taxes  withheld
may be taken as a credit or deduction in computing  federal income taxes. If the
election is filed, the Fund will report to its shareholders the per share amount
of such foreign taxes withheld and the amount of foreign tax credit or deduction
available for federal income tax purposes.

<PAGE>

Capital gain distributions, if any, received by corporate shareholders should be
treated as  long-term  capital  gains  regardless  of how long they owned  their
shares.  Capital gain  distributions,  if any, received by individuals should be
treated as long-term if held for more than one year.  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 the Internal Revenue Code of 1986 (the Code), gains or losses attributable
to  fluctuations  in exchange rates that occur between the time the Fund accrues
interest  or  other  receivables,  or  accrues  expenses  or  other  liabilities
denominated in a foreign  currency and the time the Fund actually  collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss.  Similarly,  gains or losses on  disposition  of debt  securities
denominated in a foreign  currency  attributable to fluctuations in the value of
the foreign  currency  between the date of  acquisition  of the security and the
date of disposition also are treated as ordinary gains or losses. These gains or
losses,  referred  to under  the Code as  "section  988"  gains or  losses,  may
increase or decrease the amount of the Fund's investment  company taxable income
to be distributed to its shareholders as ordinary income.

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 Oct. 31 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.

For purposes of the excise tax  distributions,  "section 988" ordinary gains and
losses are  distributable  based on an Oct. 31 year end. This is an exception to
the general rule that ordinary income is paid based on a calendar year end.

If a mutual  fund is the  holder of  record of any share of stock on the  record
date for any dividend payable with respect to such stock, such dividend shall be
included in gross  income by the Fund as of the later of (1) the date such share
became  ex-dividend  or (2) the date the Fund acquired  such share.  Because the
dividends on some foreign equity investments may be received some time after the
stock goes  ex-dividend,  and in certain rare cases may never be received by the
Fund,  this rule may cause the Fund to take into income  dividend income that it
has not received and pay such income to its shareholders. To the extent that the
dividend  is never  received,  the  Fund  will  take a loss at the  time  that a
determination is made that the dividend will not be received.

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.

<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       $1.00                  0.360%
Next         0.50                  0.343
Next         0.50                  0.325
Next         0.50                  0.308
Next         1.00                  0.290
Next         3.00                  0.270
Over         6.50                  0.250

On the last day of the most recent  fiscal  year,  the daily rate applied to the
Fund's net assets was equal to 0.306% 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  $12,747,131  for fiscal year 1999,  $9,928,579  for fiscal  year 1998,  and
$8,354,016 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 $2,071,446 for fiscal year 1999,  ($367,393) for fiscal year 1998, and
$1,045,237 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
(billions)                   each asset level
- ---------                    ----------------
First       $1.00                  0.030%
Next         0.50                  0.027
Next         0.50                  0.025
Next         0.50                  0.022
Over         2.50                  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 0.023% 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 $1,174,621 for fiscal year 1999,  $942,396 for
fiscal year 1998, and $799,667 for fiscal year 1997.

<PAGE>

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 and dividing by the number of days in the year.  The rate for Class A
is $24.00 per year, for Class B is $25.00 per year and for Class Y is $22.00 per
year.  The fees paid to AECSC may be  changed by the board  without  shareholder
approval.

DISTRIBUTION AGREEMENT

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

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.

PLAN AND AGREEMENT OF DISTRIBUTION

For 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 AEFA 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 0.75% of the Fund's  average daily
net assets attributable to Class B shares.

Expenses covered under the Plan include sales  commissions,  business,  employee
and financial  advisor expenses  charged to distribution of Class B shares;  and
overhead  appropriately  allocated to the sale of 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 Fund's Class B 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, under the agreement,  the Fund paid
fees  of  $1,163,215.  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 American Express Trust Company,  1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, 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.

SHARES

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 $90 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 $220 billion.

AEFA serves  individuals and businesses  through its nationwide  network of more
than 180 offices and 9,300 advisors.

<PAGE>

<TABLE>
<CAPTION>

FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS*
<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 Small Company Index Fund                                                                          Yes
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>

*    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.
<PAGE>


***  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 53 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. 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.

<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

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, Board Services Corporation.

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, PacifiCorp (electric power) and 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.

<PAGE>

* 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:

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 27 meetings, received the following compensation:
<TABLE>
<CAPTION>

                                            Compensation Table

                                                                          Total cash compensation from
                                       ---------------------------------  ---------------------------------
<S>                                    <C>                                <C>

Board member                           Aggregate                          American Express Funds and
                                       compensation from the Fund         Preferred Master Trust Group
H. Brewster Atwater, Jr.                         $3,300                                $117,900
Lynne V. Cheney                                  3,032                                   96,900
Heinz F. Hutter                                  2,975                                   98,400
Anne P. Jones                                    3,302                                  112,400
William R. Pearce                                1,067                                   34,800
Alan K. Simpson                                  3,032                                   96,900
C. Angus Wurtele                                 3,400                                  123,900
</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
- --------------------------------------------------------------------------------

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 A

                                  DESCRIPTION OF MONEY MARKET SECURITIES

The types of instruments that form the major part of the Fund's  investments are
described below.

Certificates  of Deposit -- A  certificate  of deposit is a  negotiable  receipt
issued by a bank or savings and loan  association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited, plus interest, on the date
specified on the certificate.

Time Deposit -- A time deposit is a non-negotiable deposit in a bank for a fixed
period of time.

Bankers'  Acceptances -- A bankers'  acceptance  arises from a short-term credit
arrangement  designed to enable businesses to obtain funds to finance commercial
transactions.  It is a time draft  drawn on a bank by an exporter or an importer
to obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date.

Commercial  Paper  --  Commercial  paper  is  generally   defined  as  unsecured
short-term  notes  issued in bearer form by large  well-known  corporations  and
finance  companies.  Maturities on  commercial  paper range from one day to nine
months.

Commercial  paper rated A by  Standard & Poor's  Corporation  has the  following
characteristics:   Liquidity  ratios  are  better  than  the  industry  average.
Long-term senior debt rating is "A" or better. The issuer has access to at least
two  additional  channels of  borrowing.  Basic  earnings  and cash flow have an
upward trend with  allowances  made for unusual  circumstances.  Typically,  the
issuer's industry is well  established,  the issuer has a strong position within
its industry and the  reliability  and quality of  management  is  unquestioned.
Issuers  rated  A are  further  rated  by use of  numbers  1, 2 and 3 to  denote
relative strength within this highest classification.

A Prime  rating is the  highest  commercial  paper  rating  assigned  by Moody's
Investors  Services Inc. Issuers rated Prime are further rated by use of numbers
1, 2 and 3 to denote relative strength within this highest classification. Among
the factors  considered  by Moody's in  assigning  ratings for an issuer are the
following:  (1)  management;  (2)  economic  evaluation  of the  industry and an
appraisal of speculative  type risks which may be inherent in certain areas; (3)
competition and customer acceptance of products;  (4) liquidity;  (5) amount and
quality of long-term debt; (6) ten year earnings trends;  (7) financial strength
of a parent company and the relationships  which exist with the issuer;  and (8)
recognition by management of obligations  which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.

Letters of Credit -- A letter of credit is a  short-term  note  issued in bearer
form with a bank letter of credit which provides that the bank pay to the bearer
the amount of the note upon presentation.

U.S.  Treasury Bills -- Treasury bills are issued with  maturities of any period
up to one year.  Three-month  and six-month  bills are currently  offered by the
Treasury on 13-week and 26-week cycles  respectively and are auctioned each week
by the Treasury.  Treasury bills are issued in book entry form and are sold only
on a discount  basis,  i.e., the  difference  between the purchase price and the
maturity value  constitutes  interest income for the investor.  If they are sold
before  maturity,  a portion of the income received may be a short-term  capital
gain.

U.S.  Government  Agency  Securities  --  Federal  agency  securities  are  debt
obligations  which  principally   result  from  lending  programs  of  the  U.S.
government.  Housing  and  agriculture  have  traditionally  been the  principal
beneficiaries  of Federal credit  programs,  and agencies  involved in providing
credit to agriculture and housing account for the bulk of the outstanding agency
securities.

<PAGE>
Repurchase  Agreements -- A repurchase  agreement  involves the  acquisition  of
securities by the Fund,  with the concurrent  agreement by a bank (or securities
dealer if permitted by law or  regulation),  to reacquire the  securities at the
Fund's cost, plus interest, within a specified time. The Fund thereby receives a
fixed rate of return on this  investment,  one that is insulated from market and
rate  fluctuations  during  the  holding  period.  In  these  transactions,  the
securities  acquired by the Fund have a total value equal to or in excess of the
value of the  repurchase  agreement and are held by the Fund's  custodian  until
required.

Floating rate instruments -- These instruments pay interest at a rate tied to an
external  interest  rate.  The rate  changes  whenever  there is a change in the
external interest rate.

If AEFC becomes aware that a security owned by the Fund is downgraded  below the
second  highest  rating,  AEFC will either sell the security or recommend to the
Fund's board why it should not be sold.



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